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Tailored Brands, Inc. (TLRD) Q4 2018 Earnings Conference Call Transcript

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Tailored Brands, Inc.  (NYSE: TLRD)
Q4 2018 Earnings Conference Call
March 13, 2019, 5:00 p.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Greetings and welcome to Tailored Brands' Fourth Quarter 2018 Results Conference Call. (Operator Instructions) As a reminder, this conference is being recorded. I would now like to turn the conference over to you Julie MacMedan, Vice President of Investor Relations. Thank you. Please begin.

Julie MacMedan -- Vice President, Investor Relations

Thank you and good afternoon, everyone. Welcome to Tailored Brands' fourth quarter 2018 results conference call. This call is being webcast and a replay will be available on the Company's Investor Relations website ir.tailoredbrands.com.

Please note that comments made during the conference call contain forward-looking statements within the meaning of the United States federal securities laws. These statements are subject to significant business, economic and competitive risks, uncertainties and contingencies, many of which are beyond our control. Any forward-looking statements are not guarantees of future performance and actual results may differ materially from those in such forward-looking statements. Please refer to today's earnings release, our annual report on form 10-K and quarterly reports on forms 10-Q to understand these risks and uncertainties. You can access all these reports on the Tailored Brands' IR website. In addition, the information on this call speaks only as of today, March 13, 2019, and we assume no obligation to publicly update or revise our forward-looking statements.

Throughout this conference call, management will be discussing results on an adjusted basis. A reconciliation of non-GAAP financial measures to the most directly comparable GAAP financial measures and our explanation of why the non-GAAP financial measures may be useful are discussed in today's earnings release.

With me today are our Executive Chairman, Dinesh Lathi and our CFO, Jack Calandra. I would now like to turn the call over to Dinesh.

Dinesh Lathi -- Executive Chairman of the Board of Directors

Thank you, Julie, and good afternoon, everyone. Earlier today we released our results for the fourth quarter and full year of 2018. While our full year earnings per share of $2.31 came in above our revised guidance, our comp sales trends in Q4 were disappointing and unacceptable relative to our view of the potential of this business. While uncontrollable macro factors like stock market volatility and the temporary government shutdown undoubtedly played some role in that softness, my comp level observation six months after the Board asked me to step in is that the softness has roots in a degree of historical under investment in keeping pace with an evolving customer.

Creating a business that can consistently generate positive profitable comps will not happen overnight. It will be a process and we have already started taking decisive action to move us in that direction. We think it's important that investors know the following, that the process will necessarily be characterized by meaningful changes in investment, that thanks to the hard work of this team, we have an improved balance sheet and strong cash generation that provides investment flexibility. And finally, that we have a Board and a leadership team that is committed to the process because they passionately believe in the potential of this business and what we do for the customer.

In a moment Jack will cover in detail our results for the fourth quarter and full-year 2018. But before he does, I wanted to take you deeper on my observations about our Company as context for what we will be working on. While the search committee has been and continues to be busy executing a search for a permanent CEO, I've been focusing my energy on better understanding, first, our customer; second, how we are performing against that customer's needs and wants; and third, how we can more rapidly change as a company to meet those needs and wants.

My thinking in these three areas has been shaped by extensive time in the field, whether that's visiting our overseas or domestic factories, our distribution centers, our corporate offices and of course, considerable time in our stores with our wardrobe consultants and customers at all of our consumer brands. I've even been through store associate training and passed my certification for fitting custom suits. While we will spend time on this call discussing the considerable challenges and opportunities ahead of us, having seen firsthand the magical transformation and how a guy carries himself after one of our customer-obsessed wardrobe consultants has styled him, gives me incredible confidence that what we do for men is both needed and valued, and that we can win our customers' lifetime loyalty and advocacy.

While I'm highly optimistic about our potential, I have also done my best to look with the critical eye of an outsider and how we currently perform against the increasingly high expectations of a rapidly evolving customer. To put those observations, our actions and our plans into context, we will first lay out our informed view of what is important to today's customer. I'll then offer my critical view of how we are performing against those customer expectations. And along the way, I'll share information on some of the investments we've made to-date and how we plan to invest for our future.

Let's start with our view of what is important to today's customer. We believe that men are increasingly becoming more style-aware. We see evidence of this everywhere we look, including industry research, customer research, social media trends and assortment performance in our own stores. In a world of increasing style awareness, we think there will be a large cross section of men that will want a trusted partner that helps them look and feel their best. For those men, we aim to be that trusted partner.

There are three things that these men will look for in that trusted partner. One, personalized products and services; two, inspiring and seamless experiences in and across every channel; and three, brands that stand for something more than just price. When I met my observations of the last six months against these three customer needs, I think we do some things well, but that we have considerable work to do in order to be considered great and all three buckets, there are examples where we have simply not kept pace with the consumer and the industry, and have relied on instead of investing to build on our leading position in the category.

I have shared these observations with our leadership team and we are all in agreement that the rapidly evolving customer and competitive context requires that we act with urgency and conviction and addressing these gaps. When it comes to personalized products and services, we have a strong custom suit offering whose rapid growth in scale clearly indicates that we have tapped into a customer opportunity. In fiscal 2018, we more than doubled our custom suit business to over $220 million as a result of our highly competitive pricing, breadth of selection, speed of delivery, convenient footprint and personalized service.

However, personalized products and services is about far more than just custom suits and shirts. It is also about ensuring that our assortments continue to reflect the way men want to dress for moments that matter, whether that be for work, dinner dates, proms, weddings or other special occasions. We have all known for some time now that traditional suits have been giving way the more casual workplace attire trends. Consolidation in the suit category may provide some degree of top line support, but we believe that if we are to deliver sustainable and profitable long term growth, we will have to deliver a business casual assortment that is as compelling as our suiting assortments have historically been.

Evolving the assortment to a more relevant balance between formal and casual business wear will be a meaningful shift for the Company. But we've seen positive results from some early actions in this area that give us confidence. For example, at the Men's Wearhouse, we are seeing strong performance in soft shoulder construction, sport coats and high sell-through in Quarter-Zip Merino pullovers.

At Joseph A. Bank, our traveler and reserve sport coats are performing very well. Customers love the texture, performance features and details like elbow patches. Finally, casual is not sloppy, which means style and fit advice from a trusted partner will continue to be important and potentially even more important in an increasingly style-conscious world. In June of 2018, recognizing that a core element of a personalized product and service was a truly personalized fit, we rolled out a fit certification program to our 6,400 wardrobe consultants. As of February 28, nearly 80% had achieved that certification.

Our wardrobe consultants working hand-in-hand with over 2,300 full and part time in-store tailors are focused exclusively on men and delivering them a personalized, fit and style that helps them look and feel their best.

When it comes to an inspiring and seamless omnichannel experience, our physical stores continue to be a valuable asset. While digitally native competitors are at the early stages of starting to appreciate the critical importance of physical stores and are just starting to build out brick and mortar locations, we already possess a convenience store footprint that puts us within 10 miles of 70% of the men in the US and Canada. This footprint enhances our ability to deliver core elements of the customer proposition such as fit, tactile customer interactions with our high quality fabrics and in-person styling advice from a professional wardrobe consultant.

However, after visiting a broad representation of our store suite and gaining feedback from our sales associates and our customers, it's exceedingly clear to me that the location, look, feel and functioning of many of our stores has not kept up with what today's customer expects and that this has contributed to our store traffic headwinds.

Given the dramatic improvements in our balance sheet and cash flow generation over the last two years, we can invest more in our fleet. We've already made some investments such as rolling out 580 custom selling fixtures, upgrading fleet wide Wi-Fi and point-of-sale, and refreshing over 300 Joseph A. Bank stores, including the upcoming March 19th grand reopening of our Joseph A. Bank flagship store on Madison Avenue.

Going forward, we'll need to make more dramatic changes in our store fleet and we plan to accelerate the pace at which we do it. To that end, over the last four months we've been preparing tests of a variety of more substantial enhancements to the store experience such as remerchandizing the stores to make it easier for customers to shop and creating visual displays, featuring LED graphics that reflect our customers' lifestyle needs. We will be rolling out the test to roughly 80 Men's Wearhouse and Joseph A. Bank stores combined during March and April. This is the first in what will be a continuing stream of ongoing store experience testing and innovation.

Evolving shopping habits dictate a need to rethink not only what our stores look like on the inside, but also where our stores are located. We're in the process of evaluating advanced analytic applications that operate on state-of-the-art third-party data sets to ensure that we're making data based real estate decisions. So far, I've only talked about the physical store experience. But in a world of slow or declining foot traffic, a strong e-commerce business will be an essential driver of growth. Digitally native players have demonstrated that this is true even in the suiting category.

Our relatively low e-comm penetration is unfortunately evidence of a historic lack of strategic emphasis and investment (inaudible) at a time when the customer increasingly expects to be inspired and be able to transact seamlessly across all channels. Our first order of business with e-comm will be shoring up some of the basics like site speed, navigation and visual merchandizing. We know from experience that these can be meaningful drivers of conversion and can deliver near-term impact, and we've already started work to improve them.

Beyond stores and e-comm, we think marketing is also an important element of the omnichannel experience. We've been talking to you for some time now about the need to amplify our online marketing efforts, given that the customer is spending increasing amounts of time online and decreasing amounts of time in broadcast TV. We're bullish on our initial foray into this -- into paid social, given some of the early responses we've seen with both new and existing customers. Specifically in paid social, we are seeing customer acquisition costs that are significantly lower than what we need to achieve healthy channel economics. This gives us confidence in the potential for profitably scaling this channel and more generally the opportunity to move marketing dollars into broad reach digital channels that are more relevant, more easily personalized and whose performance is more easily measured. We look forward to continuing to share our progress on paid social and other online performance marketing channels.

Finally, when it comes to brands that stand for something more than just price, we have such amazing stories to tell about our brands. Every day we help tens of thousands of men look and feel their best by building confidence with value through a personalized experience and an unbeatable selection of styles and sets. Unfortunately, many of these messages have been crowded out in the consumers mind, given the heavy historical emphasis the Company's placed on promotional pricing. Our research tells us this emphasis has confused the consumer when it comes to our quality and relative value. However, thanks to some email testing that we executed in the fourth quarter, we know that it doesn't have to be this way and that our customer is interested in engaging with us on brand and editorial oriented content.

We'll continue in Q1 and beyond to use fast response, measurable media like email and social to thoughtfully step our way into a more appropriate balance between brand stories and price promotions, to reassert our brand promise and value in the minds of existing and prospective customers. In order to successfully execute on our three customer facing strategies of personalized products and services, inspiring and seamless omnichannel experiences, and telling the emotional stories of our brands, we'll need to invest in human capital and how we work as a team.

On the human capital side, we recently strengthened our executive team with the addition of Carrie Ask as Brand President for Men's Wearhouse and Moores. Carrie came to us from Levi's and has led retail operations for major brands, including Nike and Target. We also created a new Head of Strategy & Analytics role, hiring Rich Hansen, a veteran from Wal-Mart and eBay to build out analytics capabilities that will be a critical component of our future competitiveness. Each of these executives has a proven track record of delivering omnichannel solutions and insights that enable value-creating customer experiences.

Beyond the executive team, we have some fantastic talent within the organization that will want to continue to invest in so that we're well armed to innovate and execute in a customer-obsessed manner at modern day customer clock speeds. However, we also recognize that in areas where the Company has not kept up, bringing in additional and external talent will help accelerate the needed changes. As such, we recently strengthened our marketing and digital teams and plan to continue to add talent in marketing, e-commerce, merchandizing, technology and, insights and analytics.

The upgrades to our talent pool are critical, but these types of changes can take an amount of time that is inconsistent with our sense of urgency around the customer opportunity. Accordingly, we anticipate investment in 2019 associated with leveraging third-party domain-specific operating experts that will help us accelerate these efforts. When it comes to how we work as a team, one of my observations over the last six months was that the Company had not implemented or embraced many modern enterprise technologies in core areas of the business, until very recently we've been operating with a legacy enterprise architecture that made it challenging to deploy customer facing and enterprise applications, gathered data about our business, and both formulate and distribute actionable analytic insights.

Since joining us nearly two years ago, our Chief Technology Officer, Boris Sherman, has been strengthening our technology team while retooling our enterprise architecture. Recent deployments that are example of the progress he has made include the Company's first cloud-based data warehouse platforming, first consolidated 360-degree view of the customer, and first implementation of forecasting and replenishment of technology. Whether it's an inventory turns or our significantly enhanced ability to do segmented marketing campaigns, these investments are showing promising signs and we plan to continue to invest in both enterprise and consumer facing technologies.

To help fund these important customer facing people and infrastructure investments, we are looking to drive greater efficiency in how we run our business. We see a significant opportunity to apply analytical rigor to large areas of spend like marketing to unlock substantial savings and/or top line growth as for example, those marketing dollars get redeployed in a more productive manner. We also see continued opportunities to leverage SG&A and we've made real progress here. On an adjusted basis, SG&A, including advertising as a percentage of sales, is down 80 basis points over the past two years, but we need to further increase operating efficiency. Our goal is to create a sustainable operating structure that enables continued funding of growth initiatives to address a rapidly changing retail environment.

While we've clearly made some progress in key areas, our Board and our teams know, and I want to make sure that our investors know as well that building the business we want will be a process and that we still have lots of work to do. When it comes to personalized products and services, we've got to continue to grow our custom business and evolve the assortment to reflect changes in the way men want to look for work and special occasions.

When it comes to inspiring and seamless omnichannel experiences, we've got to revitalize our stores, ignite our e-commerce sites and evolve to a more modern marketing channel mix. When it comes to brands that stand for more than just price, we've got to continue to evolve to a more sensible balance between price promotions and brand storytelling.

And finally, to fund these investments in the improvements we'll need to make and people and tools to effectively execute, we'll work to create a best-in-class operating model. As we embark on this journey, the mandate for the team is to be anchored in and obsessed with the customer, invest for long term and sustainable value creation, use data and analysis to guide your decisions and move with an urgency that reflects our conviction and confidence in our ability to own the customers loyalty and advocacy.

I'll now turn the call over to Jack to review our Q4 and full year results. I'll be back to wrap up before we open the line for Q&A.

Jack Calandra -- Executive Vice President, Chief Financial Officer and Treasurer

Thanks, Dinesh, and good afternoon, everyone. Today I'll review the financial results for the fourth quarter and full-year 2018 and provide our outlook for the first quarter of 2019. I'd like to make sure everyone knows that I will be discussing adjusted numbers today, which eliminates certain items that are not indicative of core business results. Please refer to our press release for more details.

Turning now to the results, as you know, fourth quarter and full-year 2018 comparisons to last year are unfavorably impacted by the 53rd week in 2017. We estimate the impact of sales and EPS was $46 million and $0.05, respectively. Total sales for the fourth quarter were $768 million, down 10.7%. Fourth quarter retail sales were down 9.5%, with comp sales down 1.5%. The non-comp spread was largely explained by the impact of last year's 53rd week, which accounted for roughly $41 million of retail sales and a $12 million decrease in alterations and other services revenue, primarily due to the sale of the dry cleaning business in Q1 2018.

With regard to fourth quarter comp sales, Men's Wearhouse was down 3.2%. Clothing comps decreased primarily due to lower transactions and units per transaction, which were partially offset by higher average unit retail. Rental was positive 0.7% and benefited from the January 19, 2019 vanity wedding date.

From a category perspective, custom suits, custom sport coats, dinner jackets and dress shirts performed well, while off the rack suits, sportswear and slacks were down. Comps improved after we adjusted our promotional strategies in late November, but remained negative in December and January. Joseph A. Bank was down 0.5%, primarily due to lower transactions and units per transaction that were somewhat offset by higher average unit retail.

Custom suits performed the best with off the rack suits, sportswear and slacks down versus last year. Our TravelTech and (inaudible) performance fabrics did well across categories. (inaudible) Joseph A. Bank was strong early in the quarter, but the challenges we started to see in mid-December continued into January. These declines were somewhat offset by a positive 2.8% comp at Moores and a positive 0.9% comp at K&G.

Fourth quarter corporate apparel sales decreased $17 million due to lower replenishment demand in both the UK and the US, roughly $5 million in sales for the 53rd week and $2 million due to a weaker British pound. For the full year, sales were $3.2 billion, down 2.5%. Retail sales decreased 2.2%. However, comp sales grew by 1.2% and all brands were positive. For the full year, corporate apparel sales were down 6.3%, in line with previous guidance.

Moving to gross margin, fourth quarter consolidated gross margin was $283 million, a decrease of $38 million. As a percent of sales, consolidated gross margin decreased 50 basis points to 36.8%, primarily due to deleveraging of occupancy costs. Q4 retail segment gross margin rate was down 110 basis points to 37.3%, also driven by deleveraging of occupancy costs. For the full year, consolidated gross margin was $1.4 billion, a decrease of $46 million. As a percent of sales, consolidated gross margin was 42.3%, down 40 basis points. Retail gross margin was $1.3 billion and retail gross margin rate decreased 50 basis points to 43.5%.

Turning to expenses, fourth quarter advertising expense decreased $3 million and was up 30 basis points as a percent of sales to 6.4%. For the full year, advertising expense decreased $7 million and as a percent of sales was flat at 5.2%.

Fourth quarter SG&A decreased $18 million, largely from the impact of the 53rd week and the sale of the retail dry cleaning business. As a percent of sales, fourth quarter SG&A increased 120 basis points to 30.6%. For the full year, SG&A decreased $22 million for the same reasons that drove the fourth quarter decrease. As a percent of sales, SG&A increased 10 basis points to 29.9%.

For the fourth quarter, we reported an operating loss of $2 million compared to operating income of $15 million last year, which benefited from the 53rd week. For the full year, operating income was $233 million. As a percent of sales, operating income decreased 30 basis points to 7.2%. Fourth quarter net interest expense was $18 million, down $7 million compared to last year, reflecting the year-over-year reduction in our total debt. For the full year, net interest expense was $79 million, down $21 million from last year.

Fourth quarter effective tax rate was 27% compared to 99.3% last year. The rate decrease was primarily due to a drop in the federal statutory rate and favorable true-up adjustments in 2017, mostly related to tax credits. For the full year, the effective tax rate was 23.7% compared to 29.3% last year as this year's rate benefited from tax reform.

Fourth quarter diluted loss per share was $0.28 compared to break even EPS last year. For the full year, diluted EPS was $2.31 versus $2.20 last year.

Turning now to the balance sheet and cash flow, we continue to strengthen our balance sheet and generate strong cash flow from operations. We repaid $10 million on our revolving credit facility during Q4, leaving $49 million of borrowings outstanding on the facility and ended the quarter with $55 million of cash. At year end, inventories were down $22 million or 3% versus last year, with corporate apparel inventories down 11% and retail inventories down 1%. Of the $22 million decrease, $9 million was attributable to foreign exchange.

The overall decrease was less than our expectation and was largely due to the timing of retail inventory purchases for core programs, driven by our new forecasting and replenishment technology. We are starting to see positive results from using this system in the form of faster returns and better sell-through rates.

In 2018, we refinanced and favorably repriced our term loan, extending its maturity to 2025 and reducing the interest rate by 25 basis points. We also redeemed $175 million of our senior notes. At year end, debt was approximately $1.2 billion, down $232 million versus a year ago and our debt-to-EBITDA ratio was 3.5 compared to 3.9 at the end of last year. Paying down debt continues to be a high priority.

Cash flow from operations was $323 million, down $28 million versus last year. The decrease was primarily driven by higher inventory purchases, partially offset by higher net earnings after adjusting for non-cash items as well as favorable working capital changes.

CapEx spend was $82 million, $13 million lower than last year and below our guidance of approximately $90 million, reflecting a timing shift of certain project cash outflows to 2019. With respect to real estate, during the quarter we closed one Men's Wearhouse store, one Joseph A. Bank store and three Men's Wearhouse and Tux stores. The total number of stores at year end was 1,464.

Turning now to 2019, we plan to invest to accelerate progress in addressing the three customer needs that Dinesh highlighted, specifically, one, personalized products and services; two, inspiring and seamless experiences in and across every channel; and three, brands that stand for something more than just price. This will require incremental investments in people, analytics and technology. These investments are critical and we plan to rationalize our expense base so that we can redeploy some of that cash toward the areas that will drive our long term growth.

Areas where we see opportunities for savings include further marketing efficiencies, additional store consolidation, more efficient e-commerce fulfillment and leaner general and administrative expenses, among others. As a result, we are kicking off a multi-year cost savings program that will allow us to make much needed investments in the business while continuing to leverage our expense structure in future years.

We are working with third-party domain experts to accelerate our growth initiative work streams and we are in the process of selecting an external partner to help us refine and execute our cost savings program. Given the early stage of these initiatives, we are only providing Q1 guidance on this call. We plan to provide more details about these initiatives, their impact on full year EPS and their annualized benefit to 2020 on our Q1 conference call in June.

Now I will review our outlook for Q1. Our guidance reflects significant headwinds, including the Easter shift and foreign exchange impacts, as well as current business trends. Taking into account these factors, we expect first quarter EPS of $0.10 to $0.15. Our guidance assumes the following. For comp sales, we expect Men's Wearhouse to be down 3% to 5%; Joseph A. Bank to be down 3% to 5%; Moores to be down 5% to 7%; and K&G to be flat to up 2%. This year, Easter is April 21st versus April 1st last year. The later Easter generally means three fewer weeks of prom activity in Q1, which translates into lower rental revenue. As a result, we expect our rental comp to be down 10% to 12%.

Based on current spot rates, we expect foreign exchange to be unfavorable to sales by about $5 million. In addition, last year's first quarter included one month of sales from the retail dry cleaning business totaling $2.6 million. For corporate apparel, we expect sales to be down 10% to 12% with about half of the decline from a weaker British pound. We expect an effective tax rate in the range of 30% to 33%, primarily as a result of an increase in tax expense related to the accounting for employee share based awards. With respect to real estate, we expect to close three Joseph A. Bank stores. While reducing leverage continues to be a high priority, our guidance assumes only the required principal payments of $5 million on our term loan.

And finally, this outlook excludes expected costs for third-party domain experts associated with accelerating our growth initiatives and cost savings program. I look forward to sharing more details and our full year outlook on our next call.

In closing, in fiscal 2018 we generated strong free cash flow and significantly reduced our debt. In 2019, we are moving quickly to invest behind critical growth drivers and to streamline our cost structure. Given our strengthened balance sheet and ample liquidity, we are confident in our ability to support our strategic growth initiatives and drive shareholder value creation over the long term.

Thank you. And now I'll turn the call back to Dinesh to wrap up.

Dinesh Lathi -- Executive Chairman of the Board of Directors

Thanks, Jack. We've spent a considerable amount of time on this call talking about changes that we plan to make and the sense of urgency with which we plan to make them. Just as our Board and team have come to appreciate, I hope all of you now also appreciate that this is not business as usual and we are not accepting the status quo. We are clear about what our customer expects and we are being intellectually honest about our gaps to those expectations and what we need to do to address them.

Thanks to the hard work of Jack and his team on our balance sheet over the last few quarters, our investment posture for 2019 can match our ambitions. Our leverage ratio has been reduced. Our maturities have been extended. We've lowered our financing costs. We've increased our liquidity and our business generates healthy, free cash flow.

And while our financial posture gives me comfort, it is the moments of magic we help create that gives me confidence. I referenced these moments of magic at the beginning of the call. Magic is the transformation that happens when a nervous teenager stands up tall as he tries on his first suit for a college interview. Magic is the fly smile on a guy's face when he trades out his dad jeans and sweatshirt for slim fit denim and a deconstructed sport coat. Magic is the tear a father sheds as he tries on a tuxedo for his daughter's wedding. We currently help create that magic, tens of thousands of times every day, and we'll be creating that magic many times more as we get increasingly sharp about delivering personalized products and services, inspiring and seamless experiences across every channel and brands that stand for more than just price. That magic is the foundation of great brands. And it is upon that foundation that I am confident that we can build an enduring and valuable business.

With that, let's open the line for questions. Operator?

Questions and Answers:

Operator

Thank you. (Operator Instructions) Our first question comes from the line of Susan Anderson with B. Riley. Please proceed.

Susan Anderson -- B. Riley -- Analyst

Hi, good evening. Thanks for taking my question. I guess I was kind of curious just on your thoughts with the stepped down in the comp now for first quarter from fourth quarter and it seems like it's really kind of stepped down across all of the formats. And I think back in early January you thought at least, Joseph A. Bank maybe there's some product issues, but it sounds like you think it's maybe a little bit more of a macro issue now. So, I guess just curious on your thoughts there and when you would expect to see stabilization.

Dinesh Lathi -- Executive Chairman of the Board of Directors

Hi, Susan, it's Dinesh. Thanks for the question. Our Q1 guide reflects the trends that we're currently observing in the business and those trends are really a continuation of trends we first discussed on our Q3 earnings call and again in early January with our guidance revision. And you'll recall that toward the end of Q3 we had started to see some softness in the Men's Wearhouse and that continued into Q4 and at Joseph A. Bank business we started to see some softness in the second half of Q4. We talked about some of the corrective actions we took in Q4, particularly around promotional pricing. And there's no doubt that current trends are influenced in part by some macro factors, whether that be the delay and/or size of tax refunds or weather in certain parts of the country.

But our guidance also reflects some of the more fundamental opportunities discussed in my opening remarks and -- whether it's Joseph A. Bank or the Men's Wearhouse, in many ways we've just not kept pace with an evolving customer and their demands for personalized products and services, inspiring and seamless omnichannel experiences and brand propositions that are about more than just price.

And with the benefit of hindsight, I'd say it seems inevitable that this historic lack of investment would eventually start to negatively impact store traffic and ultimately comps. And we recently gained the ability to look at store traffic data and we certainly see evidence of that. I think the good news is we're not standing still. We're working with a great sense of urgency to address this situation. And while it will be a journey and a process, as we said on the call, we've already begun the difficult work of evolving our assortments. We're testing, innovating and analyzing both the location and the look and the feel of our store fleet.

We also talked about we're shoring up the basics in e-commerce. We're finally starting to spend in relevant channels like paid social. And then finally, we're increasingly talking to our customers about the stories that make our brands so special. And so lots of work to do. It will be a process. It is a journey. But we're excited that we have kicked it off and we're excited about what the future holds.

Susan Anderson -- B. Riley -- Analyst

Got it. Okay, that's helpful. And then maybe if you just have one follow-up on inventory, it looks pretty clean. I know you guys had talked about, even though there was going to be some increased promotions in fourth quarter, you thought you could in the quarter clean. So I guess going into first quarter, how should we think about kind of the breakdown in the decline between March margin and then, I guess, occupancy deleverage? And, you know, I guess are you going to have a step-up promotions further from fourth quarter into the first quarter to really come in that quarter clean?

Dinesh Lathi -- Executive Chairman of the Board of Directors

Yeah, Susan, I'll start with the discussion around promotional level for Q1, certainly as it relates to inventory levels and then Jack can address some of your other questions around leverage points. But we feel good about the way we've exited Q4, certainly in terms of of aging in absolute levels. And Jack referenced, the forecasting and replenishment technology that we've put in place, and that's certainly driving some of the variances from what we had expected and seasonally what we'd normally see at this time of year. But as we dig in and look at the inventories in more detail, we don't see a dramatic need at this time to engage in any sort of unnatural promotional activities to get clean through the quarter.

Jack Calandra -- Executive Vice President, Chief Financial Officer and Treasurer

Yeah. Susan, this is Jack. So just to add to Dinesh's comment, so in terms of thinking about the first quarter gross margin, I think that's absolutely right. I wouldn't expect to see pressure on merchandise margin from our inventory position. But remember that given the the shift of rental volume from Q1 to Q2 with the later Easter, our rental business has a high gross margin. So some of that will be pushed into the second quarter. And then we also have some continued FX headwinds in the first quarter. Both the Canadian dollar and the and the British pound are about 5% weaker than they were last year. So I think we will see some gross margin pressure from those two factors. And so my expectation is gross margin will be down in the first quarter versus last year, but not because of merchandise margin or having too much inventory.

Susan Anderson -- B. Riley -- Analyst

Got it. Okay, that's very helpful. I'll let someone else hop on. Thanks so much. Good luck, next quarter.

Dinesh Lathi -- Executive Chairman of the Board of Directors

Thanks, Susan.

Operator

Thank you. Our next question comes from the line of Paul Trussell with Deutsche Bank. Please proceed.

Damon -- Deutsche Bank -- Analyst

Hi, this is Damon on for Paul. Thanks for taking our questions. First, just looking at the last couple of quarters with the reduction in sales, does your data suggests kind of the market is going down or are you guys losing share?

Dinesh Lathi -- Executive Chairman of the Board of Directors

Hi, Damon. I'll take that. It's -- we're not going to get into market share data on this call. What I would point you to though is sort of the opening remarks we made around just the broader trends that are going on in the business and the most pronounced of those being the shift toward more casual business attire. And that's something that we absolutely see in the trends in our business. And it's one of the reasons we are so focused on striking a more appropriate balance between suiting and business casual looks as we think about our go-forward strategy.

Damon -- Deutsche Bank -- Analyst

Okay. And then just a follow-up, what are you looking at for SG&A in 1Q kind of the levers and where you expect that to be and then kind of looking at the full year, where do you expect for growth there?

Jack Calandra -- Executive Vice President, Chief Financial Officer and Treasurer

Yeah. We will -- Damon, this is Jack. So, we will hold off on the full year conversation because a lot of that will be influenced by the cost restructuring plan that we put into place that we'll share later. I mean -- I guess what I would say is, given the comp sales guidance that we've given with the three brands, the three big brands being sort of down, 3% to 5% during -- in the case of Moores 5% to 7%, plus some of the additional investment that Dinesh mentioned that we need to make in the business, I would not expect SG&A to leverage in the first quarter. That said, it's very important for us to be building a sustainable operating model where we can be investing in the business the way we need to, but still deliver leverage over the longer term.

Damon -- Deutsche Bank -- Analyst

Okay. I appreciate it. Thank you.

Jack Calandra -- Executive Vice President, Chief Financial Officer and Treasurer

Thanks.

Operator

Thank you. Our next question comes from line of William Reuter with Bank of America Merrill Lynch. Please proceed.

Mike -- Bank of America Merrill Lynch -- Analyst

This is Mike on for Bill. Two questions. First, you guys mentioned that your e-commerce competitors are starting to open brick and mortar locations. Are you seeing anything in the markets that you compete in there? And secondly, how should we think of CapEx for the first quarter? Thanks.

Dinesh Lathi -- Executive Chairman of the Board of Directors

Sure. So, why don't I speak to what's going on in e-commerce and Jack, you can speak to CapEx. Absolutely, call it the digitally native players are starting to open brick and mortar stores and they're targeting mainly, let's call it, the major MSAs. We look at that in part as validation of the need or the criticality, if you will, for a physical store fleet. The ability to interact with fabric, the ability to get properly fit and the ability to work in person with a professional wardrobe consultant, we think those are all of critical importance. And still today, given the state of the technology, are best delivered through an in-store experience. That being said, we continue to keep a close eye on that competition both evaluating sort of the product quality that we're seeing from them, as well as the service quality. And we feel good about the way we are positioned relative to them. And -- but we'll continue to keep an eye on them.

Jack Calandra -- Executive Vice President, Chief Financial Officer and Treasurer

Yeah. And just to follow up, this is Jack, just to follow up on the CapEx question, so as I mentioned in my comments, we came in below our 2018 guidance of $90 million, we came in at $82 million. And some of that delta was really just due to the timing of project cash flows that will push into '19 and some of that will push into Q1 of 2019. We're not giving guidance on CapEx at this point, but what I would say is, as we think about CapEx more broadly for the year, over the past two years our CapEx relative to depreciation, we've been spending CapEx below the rate of depreciation, and I would think that this year we're probably going to be looking to get that ratio more into a one-to-one relationship. So more to come on that in our next call. But there definitely will be a little bit of stepped-up CapEx versus probably what you saw in Q1 last year.

Operator

Thank you. Our next question comes from the line of Janet Kloppenburg with JJK Research. Please proceed.

Janet Kloppenburg -- JJK Research -- Analyst

Hi, everybody, I was wondering if you could talk a little bit about this repositioning and merchandizing, and maybe what percentage of the business casual, how you think that will increase and how long you think that will take, and maybe just if you could elaborate with some more detail about the personalized service and product presentation, that will help me understand maybe how long this could take before the assortments and the messaging are in line with your vision?

Dinesh Lathi -- Executive Chairman of the Board of Directors

Yeah, happy to do that, Janet. I would characterize us as being in the earliest stages of landing a balance between suits and business casual, that really better reflects how the customer is dressing for work and special occasions. I want to be careful that you're not reading this as a sort of dramatic swing of any sort. And I think I only need to point to the rapid growth we continue to see in our custom suiting business as evidenced that suits will continue to play an important role in the men's closet. But that being said, we do recognize sort of broader shifts going on and we just want to make sure we're keeping pace with how the customer is thinking about how they want to dress for their special occasions.

I'd say even if we were further along in this evolution, we wouldn't be talking about sort of a specific target mix. Similar to the way we've talked to in the past about how we think about off the rack and custom, this is going to be another one of those situations where we are really going to let the customer guide the appropriate balance between more formal and casual merchandise. And so we'll continue to keep you updated on that evolution as we're making it. But back to your question around timing, again, I'd recognize and ask you to recognize that we are on a journey and this will take some time. And then as far as the -- sorry go ahead.

Janet Kloppenburg -- JJK Research -- Analyst

No, go ahead. Finish and then I'll ask another question. Thank you.

Dinesh Lathi -- Executive Chairman of the Board of Directors

Yeah. You're going to ask about the stores and some of the things that we were doing in there and just provide you, yeah, a little more detail there. Maybe just a quick review of some of the investments we have made. And, you know, we've talked about the custom fixtures that we've put in place and some of the enhancements we've made in the Joseph A. Bank fleet and in both of those with respect to the custom units, we're seeing that those custom fixtures do drive positive unit comps or positive unit growth, I should say, in the stores that have those fixtures. And then we're also seeing a lift in the Joseph A. Bank stores where we've made some some degree of refreshment.

And so we feel encouraged about the linkages between investment and the store fleet and the business unit or the business measure outcomes. As we think about making these -- the investments for 2019 and specifically around the tests that I referenced in my opening remarks, the areas that we'll be experimenting with include remerchandizing, the stores and just to get more specific for you there, this is everything from more mannequins, face outs, inventory spacing and total outfit display tables, we're rethinking the finish of the stores, whether that's lighting fixtures, but also enhancing the use of in-store technology. And so think about that as these LED displays that we talked about, but also things like digital tools for custom suit visualization and mobile checkout and client telling tools. And so those are again investments in the store that will also take some time. But as I referenced in my opening remarks, we have already started the process of testing those in some of our stores.

Janet Kloppenburg -- JJK Research -- Analyst

Okay. I just wanted to ask a couple of more questions. In terms of the business casual, will that -- will it primarily be with your your owned brands, your vertically integrated brands, or do you think the brand matrix will change? And I wonder, what impact that may have on margins. And just, Jack, if you could talk about when do you think the inventory levels will be best aligned. I guess you said maybe at the end of the first quarter, I'm not sure.

Dinesh Lathi -- Executive Chairman of the Board of Directors

Yeah, Janet, on the degree of vertical integration for the business casual piece of the assortment, obviously, at Joseph A. Bank it'll continue to be a vertically integrated business as it has been. On the Men's Wearhouse side, we work with some great brand partners there. They have done a great job of helping us continue to evolve the assortment in all divisions to better evolve or meet the changing customer needs and so we anticipate continuing to work with a wide variety of brand partners at the Men's Wearhouse. Jack, if you want to speak to the margin outlook implied by that?

Jack Calandra -- Executive Vice President, Chief Financial Officer and Treasurer

Yeah. Well, I guess it was getting back to when we think inventory is going to be more in line with the sales. And Janet, what I would say is, while that reduction at the end of the year was less than we expected, I think it's important to note that the quality of the inventory is actually quite a bit better than it was last year. And again, as we've mentioned, some of this is due to the new forecasting and replenishment technology that we've put in place. So we'll start to see the benefit and we are starting to see the benefit of that in terms of higher sell-throughs and fast returns. So I think that'll be something that we'll see improve as we go through the first half.

Janet Kloppenburg -- JJK Research -- Analyst

Okay, good. Thanks so much, you guys. Good luck.

Jack Calandra -- Executive Vice President, Chief Financial Officer and Treasurer

Thank you, Janet.

Operator

Thank you. Our next question comes from the line of Carla Casella with J.P. Morgan. Please proceed.

Carla Casella -- J.P. Morgan -- Analyst

Hi, lot of my questions have been answered, but you did talked about increasing some of your advertising marketing. I'm wondering if that's something, we could see something earlier in the year or we could see your ad spend trend up or is this something would phase in over the years, can you give us any kind of shift in advertising based on your programs as well as the Easter shift?

Dinesh Lathi -- Executive Chairman of the Board of Directors

Yeah. I can certainly start off with that. As far as major shifts in advertising spend, Jack referenced that we think there's an opportunity there, we're actually running some tests right now where we're toggling both national and local advertising to better understand how the different DMAs respond to changes in the broadcast frequency. And that's the study which is showing some initial promising results.

And so that's something that could be a fairly quick turn in terms of delivering some bottom line impact. And -- or helping us think about how to reallocate those marketing dollars. It really then points to other -- the other major initiative or effort under way under marketing, it's continuing to think about how we shift more of our spend into digital channels that are more relevant to today's customer because they're spending more time in those digital channels.

And we're starting to see some really encouraging results there. We talked about what was going on with paid social and thanks to some of our technology investments like our Customer 360 database, we're now starting to be able to send segmented emails. We're finding that our customer is willing to engage with us on some of our branded content in those digital channels. And so, I think it's -- it is not necessarily about just looking to cut marketing spend, it is looking about ways to be more efficient with our marketing spend. And we'll use a combination of technology, analytics and access to new marketing channels to drive that.

Carla Casella -- J.P. Morgan -- Analyst

Okay, great. And then I guess just wondering if it's the timing of it is going to shift at all because you mentioned the Easter shift. Should we see more of it pulled forward into first quarter, second quarter just for your general advertising?

Jack Calandra -- Executive Vice President, Chief Financial Officer and Treasurer

No, I don't think so, Carla. this is Jack. So, I mean, the Easter shift, obviously, it's the three week shift. It's still all in April. There may be some shift in some of the prom messaging that we do, which will probably shift a little bit more into Q2. But again, as Dinesh said, I wouldn't expect. I think we're going to be -- we're targeting this area for efficiency. And so I wouldn't expect that marketing is something we're going to be investing more in as a percentage of sales than we have in the past.

Carla Casella -- J.P. Morgan -- Analyst

Okay, great. And then just your thoughts, I know your bonds are callable and that call steps down later this year. Do you think you would need to access the markets to refinance or would you have enough -- would you expect to have enough liquidity between cash and revolver availability to do that?

Jack Calandra -- Executive Vice President, Chief Financial Officer and Treasurer

Yeah. So as you noted, Carla, the bonds due step down, the call premium steps down to 10175 (ph) from the current 10350 (ph). We'll be looking at, you know, how our cash from operations comes in over the coming months. But to your point, we have a lot of capacity on our revolver. And so, as that call date approaches, we'll figure out what's the best way to fund some of that continued reduction in our senior notes.

Carla Casella -- J.P. Morgan -- Analyst

Ok, great. Thank you.

Jack Calandra -- Executive Vice President, Chief Financial Officer and Treasurer

Thank you.

Operator

Thank you. We have reached the end of our Q&A session. Allow me to hand the floor back over for closing remarks.

Dinesh Lathi -- Executive Chairman of the Board of Directors

I just wanted to thank you all again for joining us on today's call and for your questions. We appreciate your support and we really look forward to updating you on our future progress. Thank you.

Operator

Thank you. This concludes today's conference. You may disconnect your lines at this time. And thank you for your participation.

Duration: 62 minutes

Call participants:

Julie MacMedan -- Vice President, Investor Relations

Dinesh Lathi -- Executive Chairman of the Board of Directors

Jack Calandra -- Executive Vice President, Chief Financial Officer and Treasurer

Susan Anderson -- B. Riley -- Analyst

Damon -- Deutsche Bank -- Analyst

Mike -- Bank of America Merrill Lynch -- Analyst

Janet Kloppenburg -- JJK Research -- Analyst

Carla Casella -- J.P. Morgan -- Analyst

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