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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

(Mark One)

 

☒ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended July 29, 2017 or

 

☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the transition period from                   to                  

 

Commission file number 1-16097

 

TAILORED BRANDS, INC.

(Exact Name of Registrant as Specified in its Charter)

 

Texas		47-4908760
(State or Other Jurisdiction of		(I.R.S. Employer
Incorporation or Organization)		Identification Number)
6380 Rogerdale Road
Houston, Texas		77072-1624
(Address of Principal Executive Offices)		(Zip Code)

 

(281) 776-7000

(Registrant's telephone number, including area code)

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes ☒. No ☐.

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes ☒. No ☐.

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See definition of "large accelerated filer", "accelerated filer" and "smaller reporting company" in Rule 12b-2 of the Exchange Act. (Check one):

 

Large accelerated filer  ☒		Accelerated filer  ☐
Non-accelerated filer  ☐	(Do not check if a smaller reporting company)	Smaller reporting company  ☐

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.  ☐

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).Yes ☐. No ☒.

 

The number of shares of common stock of the Registrant, par value $.01 per share, outstanding at August 26, 2017 was 49,195,390.

 

 

 

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REPORT INDEX

 

 

 

 

 

 

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Forward-Looking Statements

 

Certain information included in this report or in other materials we have filed or will file with the Securities and Exchange Commission ("SEC") (as well as information included in oral statements or other written statements made or to be made by us) contains or may contain forward-looking statements (as defined in the Private Securities Litigation Reform Act of 1995), including, but not limited to, statements regarding our future financial performance and financial condition. Words such as "expects," "anticipates," "envisions," "targets," "goals," "projects," "intends," "plans," "believes," "seeks," "estimates," variations of such words and similar expressions are intended to identify such forward-looking statements. Forward-looking statements reflect our current views regarding certain events that could affect our financial condition or results of operations and may include, but are not limited to, references to future sales, comparable sales, margins, costs, earnings, number and costs of store openings, closings, remodels, relocations and expansions, capital expenditures, potential acquisitions, synergies from acquisitions, business strategies, demand for clothing or rental product, market trends in the retail and corporate apparel clothing business, currency fluctuations, inflation and various political, legal, regulatory, social, economic and business trends.  Forward-looking statements are based upon management's current beliefs or expectations and are inherently subject to significant business, economic and competitive risks, uncertainties and contingencies and third party approvals, many of which are beyond our control.

 

Any forward-looking statements that we make herein and in future reports are not guarantees of future performance, and actual results may differ materially from those in such forward-looking statements as a result of various factors.  Factors that might cause or contribute to such differences include, but are not limited to: actions by governmental entities; domestic and international macro-economic conditions; inflation or deflation; the loss of, or changes in, key personnel; success, or lack thereof, in formulating or executing our internal strategies and operating plans including new store and new market expansion plans, cost reduction initiatives, store rationalization plans, profit improvement plans, revenue enhancement strategies; the impact of the termination of our tuxedo rental license agreement with Macy's; changes in demand for clothing or rental product; market trends in the retail business; customer confidence and spending patterns; changes in traffic trends in our stores; customer acceptance of our merchandise strategies; performance issues with key suppliers; disruptions in our supply chain; severe weather; foreign currency fluctuations; government export and import policies; advertising or marketing activities of competitors; and legal proceedings. Please also see "Item 1A. Risk Factors" in Part I of our Annual Report on Form 10-K for the year ended January 28, 2017, as the same may be updated from time to time in our subsequent filings with the SEC, for a more complete discussion of these and other factors that might affect our performance and financial results.

 

Forward-looking statements are intended to convey the Company's expectations about the future, and speak only as of the date they are made.  We undertake no obligation to publicly update or revise any forward-looking statements that may be made from time to time, whether as a result of new information, future developments or otherwise, except as required by applicable law.  However, any further disclosures made on related subjects in our subsequent reports on Forms 10-K, 10-Q and 8-K should be consulted. This discussion is provided as permitted by the Private Securites Litigation Reform Act of 1995, and all written or oral forward-looking statements that are made by or attributable to us are expressly qualified in their entirety by the cautionary statements contained or referenced in this section.

 

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PART I – FINANCIAL INFORMATION

 

ITEM 1 – CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

 

TAILORED BRANDS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands)

(Unaudited)

 

		July 29,			July 30,			January 28,
		2017			2016			2017
ASSETS
CURRENT ASSETS:
Cash and cash equivalents		$	112,741		$	11,430		$	70,889
Accounts receivable, net			71,900			84,348			65,714
Inventories			944,783			1,023,603			955,512
Other current assets			55,432			81,113			73,602
Total current assets			1,184,856			1,200,494			1,165,717
PROPERTY AND EQUIPMENT, net			459,530			510,520			484,165
RENTAL PRODUCT, net			139,397			171,469			152,610
GOODWILL			119,880			118,307			117,026
INTANGIBLE ASSETS, net			170,113			174,752			171,659
OTHER ASSETS			5,948			9,012			6,695
TOTAL ASSETS		$	2,079,724		$	2,184,554		$	2,097,872
LIABILITIES AND SHAREHOLDERS' DEFICIT
CURRENT LIABILITIES:
Accounts payable		$	140,156		$	169,820		$	177,380
Accrued expenses and other current liabilities			276,616			295,707			267,899
Income taxes payable			6,310			1,150			1,262
Current portion of long-term debt			8,750			14,000			13,379
Total current liabilities			431,832			480,677			459,920
LONG-TERM DEBT, net			1,532,255			1,600,402			1,582,150
DEFERRED TAXES, net AND OTHER LIABILITIES			162,313			192,125			163,420
Total liabilities			2,126,400			2,273,204			2,205,490
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' DEFICIT:
Preferred stock			—			—			—
Common stock			491			486			487
Capital in excess of par			478,174			461,143			470,801
Accumulated deficit			(497,160)			(519,068)			(538,823)
Accumulated other comprehensive loss			(28,181)			(31,211)			(40,083)
Total shareholders' deficit			(46,676)			(88,650)			(107,618)
TOTAL LIABILITIES AND SHAREHOLDERS' DEFICIT		$	2,079,724		$	2,184,554		$	2,097,872

 

See Notes to Condensed Consolidated Financial Statements.

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TAILORED BRANDS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS

(In thousands, except per share data)

(Unaudited)

 

		For the Three Months Ended						For the Six Months Ended
		July 29, 2017			July 30, 2016			July 29, 2017			July 30, 2016
Net sales:
Retail clothing product		$	594,994		$	615,946		$	1,178,579		$	1,231,614
Rental services			151,978			165,009			246,798			264,840
Alteration and other services			46,026			49,226			92,926			99,969
Total retail sales			792,998			830,181			1,518,303			1,596,423
Corporate apparel clothing product			57,760			79,503			115,361			142,083
Total net sales			850,758			909,684			1,633,664			1,738,506
Cost of sales:
Retail clothing product			248,630			277,882			501,509			548,237
Rental services			23,957			27,101			40,125			42,985
Alteration and other services			35,076			34,409			69,548			70,559
Occupancy costs			103,326			108,615			208,415			218,750
Total retail cost of sales			410,989			448,007			819,597			880,531
Corporate apparel clothing product			43,073			51,373			84,931			95,830
Total cost of sales			454,062			499,380			904,528			976,361
Gross margin:
Retail clothing product			346,364			338,064			677,070			683,377
Rental services			128,021			137,908			206,673			221,855
Alteration and other services			10,950			14,817			23,378			29,410
Occupancy costs			(103,326)			(108,615)			(208,415)			(218,750)
Total retail gross margin			382,009			382,174			698,706			715,892
Corporate apparel clothing product			14,687			28,130			30,430			46,253
Total gross margin			396,696			410,304			729,136			762,145
Advertising expense			39,888			44,963			82,140			92,891
Selling, general and administrative expenses			248,343			305,709			507,529			578,628
Operating income			108,465			59,632			139,467			90,626
Interest income			98			37			165			50
Interest expense			(25,167)			(25,876)			(50,788)			(52,377)
Gain (loss) on extinguishment of debt, net			3,281			(71)			3,996			(71)
Earnings before income taxes			86,677			33,722			92,840			38,228
Provision for income taxes			28,206			8,747			32,530			11,616
Net earnings		$	58,471		$	24,975		$	60,310		$	26,612
Net earnings per common share allocated to common shareholders:
Basic		$	1.19		$	0.51		$	1.23		$	0.55
Diluted		$	1.19		$	0.51		$	1.23		$	0.55
Weighted-average common shares outstanding:
Basic			49,107			48,609			48,958			48,527
Diluted			49,172			48,639			49,162			48,630
Cash dividends declared per common share		$	0.18		$	0.18		$	0.36		$	0.36

 

See Notes to Condensed Consolidated Financial Statements.

 

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TAILORED BRANDS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(In thousands)

(Unaudited)

 

		For the Three Months Ended						For the Six Months Ended
		July 29,			July 30,			July 29,			July 30,
		2017			2016			2017			2016
Net earnings		$	58,471		$	24,975		$	60,310		$	26,612
Currency translation adjustments			14,773			(19,600)			16,114			(3,171)
Unrealized (loss) gain on cash flow hedges, net of tax			(746)			206			(4,212)			446
Comprehensive income		$	72,498		$	5,581		$	72,212		$	23,887

 

See Notes to Condensed Consolidated Financial Statements.

 

 

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TAILORED BRANDS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

(Unaudited)

 

		For the Six Months Ended
		July 29,			July 30,
		2017			2016
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings		$	60,310		$	26,612
Adjustments to reconcile net earnings to net cash provided by operating activities:
Depreciation and amortization			53,407			60,275
Rental product amortization			21,205			23,176
(Gain) loss on extinguishment of debt, net			(3,996)			71
Amortization of deferred financing costs and discount on long-term debt			3,661			3,798
Loss on disposition of assets			1,381			49
Asset impairment charges			2,867			3,864
Share-based compensation			8,095			8,739
Deferred tax (benefit) expense			(242)			1,890
Deferred rent expense and other			309			(637)
Changes in operating assets and liabilities:
Accounts receivable			(4,832)			(22,955)
Inventories			15,701			(2,223)
Rental product			(8,521)			(35,952)
Other assets			16,112			64,513
Accounts payable, accrued expenses and other current liabilities			(28,444)			(29,412)
Income taxes payable			4,964			1,150
Other liabilities			(1,448)			(2,654)
Net cash provided by operating activities			140,529			100,304
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures			(33,973)			(55,912)
Acquisition of business, net of cash			(457)			—
Proceeds from sales of property and equipment			2,157			605
Net cash used in investing activities			(32,273)			(55,307)
CASH FLOWS FROM FINANCING ACTIVITIES:
Payments on term loan			(8,129)			(38,951)
Proceeds from asset-based revolving credit facility			181,550			305,549
Payments on asset-based revolving credit facility			(181,550)			(305,549)
Repurchase and retirement of senior notes			(45,167)			(5,546)
Cash dividends paid			(18,033)			(17,676)
Proceeds from issuance of common stock			927			932
Tax payments related to vested deferred stock units			(1,644)			(1,258)
Net cash used in financing activities			(72,046)			(62,499)
Effect of exchange rate changes			5,642			(1,048)
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS			41,852			(18,550)
Balance at beginning of period			70,889			29,980
Balance at end of period		$	112,741		$	11,430

 

See Notes to Condensed Consolidated Financial Statements.

 

 

 

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1. Significant Accounting Policies    

 

Basis of Presentation — The condensed consolidated financial statements herein include the accounts of Tailored Brands, Inc. and its subsidiaries (the "Company") and have been prepared without audit, pursuant to the rules and regulations of the Securities and Exchange Commission (the "SEC").  As applicable under such regulations, certain information and footnote disclosures have been condensed or omitted.  We believe the presentation and disclosures herein are adequate to make the information not misleading, and the condensed consolidated financial statements reflect all elimination entries and normal recurring adjustments which are necessary for a fair presentation of the financial position, results of operations and cash flows at the dates and for the periods presented. Certain prior period amounts have been reclassified to conform to the current period presentation.

 

Our business results historically have fluctuated throughout the year and, as a result, the operating results of the interim periods presented are not necessarily indicative of the results that may be achieved for the full year. These condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and accompanying notes included in our Annual Report on Form 10-K for the year ended January 28, 2017.

 

Unless the context otherwise requires, "Company", "we", "us" and "our" refer to Tailored Brands, Inc. and its subsidiaries.

 

The preparation of the condensed consolidated financial statements in conformity with accounting principles generally accepted in the United States ("U.S. GAAP") requires management to make estimates and assumptions that affect the reported amounts and related disclosures.  Actual amounts could differ from those estimates.

 

Recent Accounting Pronouncements — We have considered all new accounting pronouncements and have concluded there are no new pronouncements that may have a material impact on our financial position, results of operations, or cash flows, based on current information, except for those listed below. 

 

In February 2016, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") No. 2016-02, Leases.  ASU 2016-02 increases transparency and comparability among organizations by recognizing lease assets and lease liabilities on the balance sheet and disclosing key information about leasing arrangements.  The main difference between previous U.S. GAAP and ASU 2016-02 is the recognition of lease assets and lease liabilities by lessees for those leases classified as operating leases under previous U.S. GAAP. ASU 2016-02 is effective for public companies for annual reporting periods beginning after December 15, 2018, and interim periods within those fiscal years.  Early adoption of ASU 2016-02 is permitted.  The guidance is required to be adopted using the modified retrospective approach.  We are currently evaluating the impact ASU 2016-02 will have on our financial position, results of operations and cash flows but expect that it will result in a significant increase in our long-term assets and liabilities given we have a significant number of leases.

 

In May 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers, to clarify the principles used to recognize revenue for all entities.  In August 2015, the FASB issued ASU No. 2015-14 which deferred the effective date of ASU 2014-09 by one year.  As a result of this deferral, ASU 2014-09 is effective for annual and interim periods beginning after December 15, 2017 and early adoption is permitted for annual reporting periods beginning after December 15, 2016.  The guidance allows for either a full retrospective or a modified retrospective transition method.  Based on our preliminary assessment, we determined that the adoption of ASU 2014-09 will impact the timing of revenue recognition related to our customer loyalty program and gift cards. Upon adoption, for our customer loyalty program, we will no longer use the incremental cost method approach, rather we will use a deferred revenue model.  For income from breakage of gift cards, which is currently recognized as a reduction of selling, general and administrative expenses ("SG&A") when the redemption of the gift card is remote, the new guidance requires classification within net sales with breakage recognized proportionately over the expected redemption period. Additionally, under the new guidance, we expect to recognize allowances for estimated sales returns on a gross basis rather than net basis on the consolidated balance sheets. We are continuing our   assessment for ASU 2014-09, which may identify other impacts, and evaluating the transition methods for adoption and additional disclosure requirements.

 

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2.  Termination of Tuxedo Rental License Agreement with Macy's

 

During the first quarter of fiscal 2017, we reached an agreement with Macy's to wind down operations under the tuxedo rental license agreement established between Macy's and The Men's Wearhouse, Inc. ("The Men's Wearhouse") in 2015. The winding down of our tuxedo shops within Macy's is complete and all tuxedo shops within Macy's closed in the second quarter of 2017. 

 

As a result of the agreement, during the first quarter of fiscal 2017, we incurred $17.2 million of termination-related costs, of which $14.6 million are cash charges.  These costs include $12.3 million related to contract termination, $1.4 million of rental product write-offs, $1.2 million of asset impairment charges and $2.3 million of other costs, all of which relate to our retail segment. Of the $17.2 million in termination-related costs, $15.8 million is recorded in SG&A and $1.4 million is included in cost of sales in the condensed consolidated statement of earnings.  At July 29, 2017, $1.7 million of such costs are included in accrued expenses and other current liabilities in the condensed consolidated balance sheet.

 

3.  Restructuring and Other Charges

 

During the fourth quarter of fiscal 2015, we began implementing initiatives intended to reduce costs and improve operating performance.  These initiatives included a store rationalization program as well as a profit improvement program to drive operating efficiencies and improve our expense structure. These programs were substantially completed in fiscal 2016 and resulted in the closure of 75 Jos. A. Bank full line stores, the closure of 56 factory and outlet stores at Jos. A. Bank and Men's Wearhouse and the closure of 102 Men's Wearhouse and Tux stores.

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No charges were incurred under these initiatives for the three and six months ended July 29, 2017.  A summary of the charges incurred in the three and six months ended July 30, 2016 incurred under these initiatives since inception is presented in the table below (amounts in thousands):

		For the Three Months Ended		For the Six Months Ended
		July 30, 2016		July 30, 2016
Lease termination costs		$	26,446	$	28,337
Store asset impairment charges and accelerated depreciation, net of deferred rent			1,164		3,174
Consulting costs			6,825		11,777
Severance and employee-related costs			406		4,162
Other costs			174		726
Total pre-tax restructuring and other charges (1)		$	35,015	$	48,176

 

(1) Consists of $36.4 million in SG&A offset by a $1.4 million reduction in cost of sales for the three months ended July 30, 2016.  Of the total amount recorded for the three months ended July 30, 2016, $27.9 million relates to our retail segment and $7.1 million relates to shared services. Consists of $49.4 million included in SG&A offset by a $1.2 million reduction in cost of sales for the six months ended July 30, 2016.  Of the total amount recorded for the six months ended July 30, 2016, $33.6 million relates to our retail segment and $14.6 million relates to shared services.

 

The following table is a rollforward of amounts included in accrued expenses and other current liabilities in the condensed consolidated balance sheet related to the pre-tax restructuring and other charges (amounts in thousands):

 

		Severance and			Lease
		Employee-			Termination			Consulting			Other
		Related Costs			Costs			Costs			Costs			Total
Beginning Balance, January 28, 2017		$	986		$	4,834		$	60		$	25		$	5,905
Charges, excluding non-cash items			—			—			—			—			—
Payments			(504)			(3,434)			(60)			(25)			(4,023)
Ending Balance, July 29, 2017		$	482		$	1,400		$	—		$	—		$	1,882

 

In addition to the restructuring costs described above, for the three months ended July 30, 2016, we incurred integration and other costs related to Jos. A. Bank totaling $2.0 million, of which $1.5 million are included in SG&A and $0.5 million are included in cost of sales in the condensed consolidated statement of earnings. 

 

For the six months ended July 30, 2016, we incurred integration and other costs related to Jos. A. Bank totaling $5.6 million, of which $4.6 million are included in SG&A and $1.0 million are included in cost of sales in the condensed consolidated statement of earnings.

 

4.  Earnings Per Share    

 

Basic earnings per common share allocated to common shareholders is computed by dividing net earnings by the weighted-average common shares outstanding during the period.  Diluted earnings per common share reflect the more dilutive earnings per common share amount calculated using the treasury stock method or the two-class method.  For the three and six months ended July 29, 2017, the treasury stock method is used to calculate diluted earnings per common share while the two-class method was used for the three and six months ended July 30, 2016.

 

Basic and diluted earnings per common share allocated to common shareholders are computed using the actual net earnings allocated to common shareholders and the actual weighted-average common shares outstanding rather than the rounded numbers presented within our condensed consolidated statement of earnings and the accompanying notes.  As a result, it may not be possible to recalculate earnings per common share allocated to common shareholders in our condensed

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consolidated statement of earnings and the accompanying notes. The following table sets forth the computation of basic and diluted earnings per common share allocated to common shareholders (in thousands, except per share amounts):

 

		For the Three Months Ended						For the Six Months Ended
		July 29,			July 30,			July 29,			July 30,
		2017			2016			2017			2016
Numerator
Net earnings		$	58,471		$	24,975		$	60,310		$	26,612
Net earnings allocated to participating securities (restricted stock and deferred stock units)			—			(31)			—			(31)
Net earnings allocated to common shareholders		$	58,471		$	24,944		$	60,310		$	26,581
Denominator
Basic weighted-average common shares outstanding			49,107			48,609			48,958			48,527
Dilutive effect of share-based awards			65			30			204			103
Diluted weighted-average common shares outstanding			49,172			48,639			49,162			48,630
Net earnings per common share allocated to common shareholders:
Basic		$	1.19		$	0.51		$	1.23		$	0.55
Diluted		$	1.19		$	0.51		$	1.23		$	0.55

 

For the three and six months ended July 29, 2017, 2.5 million and 2.0 million anti-dilutive shares of common stock were excluded from the calculation of diluted earnings per common share, respectively.  For the three and six months ended July 30, 2016, 2.0 million and 1.6 million anti-dilutive shares of common stock were excluded from the calculation of diluted earnings per common share, respectively.

 

5.  Debt    

 

In 2014, The Men's Wearhouse entered into a term loan credit agreement that provides for a senior secured term loan in the aggregate principal amount of $1.1 billion (the "Term Loan") and a $500.0 million asset-based revolving credit agreement (the "ABL Facility", and together with the Term Loan, the "Credit Facilities") with certain of our U.S. subsidiaries and Moores the Suit People Inc., one of our Canadian subsidiaries, as co-borrowers. Proceeds from the Term Loan were reduced by an $11.0 million original issue discount ("OID"), which is presented as a reduction of the outstanding balance on the Term Loan on the balance sheet and will be amortized to interest expense over the contractual life of the Term Loan. In addition, in 2014, The Men's Wearhouse issued $600.0 million in aggregate principal amount of 7.00% Senior Notes due 2022 (the "Senior Notes").

 

The Credit Facilities and the Senior Notes contain customary non-financial and financial covenants, including fixed charge coverage ratios, total leverage ratios and secured leverage ratios, as well as a restriction on our ability to pay dividends on our common stock in excess of $10.0 million per quarter. Since entering into these financing arrangements, our total leverage ratio and secured leverage ratio have been above the maximums specified in the agreements, which was anticipated when we entered into these arrangements. As a result, we were subject to certain additional restrictions, including limitations on our ability to make significant acquisitions and incur additional indebtedness. As of July 29, 2017, our total leverage ratio and secured leverage ratio were below the maximums specified in the agreements but these ratios may increase above the maximums specified in the agreements during the remainder of fiscal 2017. Currently, we believe our total leverage ratio and secured leverage ratio will remain below the maximums specified in the agreements during fiscal 2018 and beyond, which will result in the elimination of these additional restrictions. In addition, in accordance with the terms of the Credit Facilities, we made a mandatory excess cash flow prepayment offer of $4.6 million to the Term

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Loan lenders prior to April 28, 2017.  On May 2, 2017, the entire $4.6 million prepayment was made together with normal principal and interest payments on the Term Loan.

 

Credit Facilities

 

The Term Loan is guaranteed, jointly and severally, by Tailored Brands, Inc. and certain of our U.S. subsidiaries and will mature in June 2021.  The interest rate on the Term Loan is based on 1-month LIBOR, which was approximately 1.23% at July 29, 2017, plus the applicable margin which is currently 3.50%, resulting in a total interest rate of 4.73%.  In January 2015, we entered into an interest rate swap agreement, in which the variable rate payments due under a portion of the Term Loan were exchanged for a fixed rate.  In April 2017, we entered into an additional interest rate swap agreement to exchange variable rate payments under a portion of the Term Loan for a fixed rate.  At July 29, 2017, the total notional amount under our interest rate swaps is $540.0 million.  See Note 14 for additional information on our interest rate swaps.

 

In 2015, The Men's Wearhouse entered into Incremental Facility Agreement No. 1 (the "Incremental Agreement") resulting in a refinancing of $400.0 million aggregate principal amount of the Term Loan from a variable rate to a fixed rate of 5.0% per annum.  The Incremental Agreement did not impact the total amount borrowed under the Term Loan, the maturity date of the Term Loan, or collateral and guarantees under the Term Loan. 

 

As a result of our interest rate swaps and the Incremental Agreement, we have converted a significant portion of the variable interest rate under the Term Loan to a fixed rate and, as of July 29, 2017, the Term Loan had a weighted average interest rate of 5.14%.

 

The ABL Facility provides for a senior secured revolving credit facility of $500.0 million, with possible future increases to $650.0 million under an expansion feature that matures in June 2019, and is guaranteed, jointly and severally, by Tailored Brands, Inc. and certain of our U.S. subsidiaries. The ABL Facility has several borrowing and interest rate options including the following indices:  (i) adjusted LIBOR, (ii) Canadian Dollar Offered Rate ("CDOR") rate, (iii) Canadian prime rate or (iv) an alternate base rate (equal to the greater of the prime rate, the federal funds effective rate plus 0.5% or adjusted LIBOR for a one-month period plus 1.0%). Advances under the ABL Facility bear interest at a rate per annum using the applicable indices plus a varying interest rate margin of up to 2.00%.  The ABL Facility also provides for fees applicable to amounts available to be drawn under outstanding letters of credit which range from 1.50% to 2.00%, and a fee on unused commitments which ranges from 0.25% to 0.375%. As of July 29, 2017, there were no borrowings outstanding under the ABL Facility.  During the six months ended July 29, 2017, the maximum borrowing outstanding under the ABL Facility was $34.7 million.

 

We utilize letters of credit primarily as collateral for workers compensation claims and to secure inventory purchases.  At July 29, 2017, letters of credit totaling approximately $33.4 million were issued and outstanding. Borrowings available under the ABL Facility as of July 29, 2017 were $466.6 million.

 

Senior Notes

 

The Senior Notes are guaranteed, jointly and severally, on an unsecured basis by Tailored Brands, Inc. and certain of our U.S. subsidiaries. The Senior Notes and the related guarantees are senior unsecured obligations of the Company and the guarantors, respectively, and will rank equally with all of the Company's and each guarantor's present and future senior indebtedness. The Senior Notes will mature in July 2022.  Interest on the Senior Notes is payable in January and July of each year. 

 

Long-Term Debt

 

During the second quarter of 2017, we repurchased and retired $42.6 million in face value of Senior Notes through open market transactions, which were consummated via borrowings on our ABL Facility.  As a result, we recorded a net gain on extinguishment totaling $3.3 million, which is included as a separate line in the condensed consolidated statement of

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earnings.  The net gain on extinguishment reflects a $4.0 million gain upon repurchase partially offset by the elimination of unamortized deferred financing costs totaling $0.7 million related to the Senior Notes. 

 

For the six months ended July 29, 2017, as a result of the repurchase and retirement of a total of $50.0 million in face value of Senior Notes and our excess cash flow prepayment, we recorded a net gain on extinguishment totaling $4.0 million, which reflects a $4.8 million gain upon repurchase partially offset by the elimination of unamortized deferred financing costs of $0.8 million, which is included as a separate line in the condensed consolidated statement of earnings.

 

The following table provides details on our long-term debt as of July 29, 2017, July 30, 2016 and January 28, 2017 (in thousands):

		July 29,			July 30,			January 28,
		2017			2016			2017
Term Loan (net of unamortized OID of $3.6 million at July 29, 2017, $4.6 million at July 30, 2016, and $4.1 million at January 28, 2017)		$	1,035,030		$	1,045,686		$	1,042,660
Senior Notes			525,000			593,500			575,000
Less: Deferred financing costs related to the Term Loan and Senior Notes			(19,025)			(24,784)			(22,131)
Total long-term debt, net			1,541,005			1,614,402			1,595,529
Current portion of long-term debt			(8,750)			(14,000)			(13,379)
Total long-term debt, net of current portion		$	1,532,255		$	1,600,402		$	1,582,150

 

 

6.  Supplemental Cash Flows 

 

Supplemental disclosure of cash flow information is as follows (in thousands):

		For the Six Months Ended
		July 29,			July 30,
		2017			2016
Cash paid for interest		$	51,052		$	48,746
Cash paid (refunded) for income taxes, net		$	14,591		$	(52,547)

 

We had unpaid capital expenditure purchases included in accounts payable and accrued expenses and other current liabilities of approximately $6.9 million and $11.8 million at July 29, 2017 and July 30, 2016, respectively.  Capital expenditure purchases are recorded as cash outflows from investing activities in the condensed consolidated statement of cash flows in the period they are paid.  Cash dividends declared of $9.4 million and $9.0 million at July 29, 2017 and July 30, 2016, respectively, are included in accrued expenses and other current liabilities.

 

7.  Inventories 

 

The following table provides details on our inventories as of July 29, 2017, July 30, 2016 and January 28, 2017 (in thousands):

 

		July 29,			July 30,			January 28,
		2017			2016			2017
Finished goods		$	841,101		$	929,428		$	846,585
Raw materials and merchandise components			103,682			94,175			108,927
Total inventories		$	944,783		$	1,023,603		$	955,512

 

 

 

 

 

 

 

8.  Income Taxes 

 

Our effective income tax rate increased to 32.5% for the second quarter of 2017 from 25.9% for the second quarter of 2016 primarily due to higher U.S. income as compared to income earned in foreign jurisdictions this year compared to last year.

 

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Our effective income tax rate increased to 35.0% for the first six months of 2017 from 30.4% for the first six months of 2016 primarily due to higher U.S. income as compared to income earned in foreign jurisdictions this year compared to last year.  In addition, the effective income tax rate for the first six months of 2017 was impacted by $2.2 million of tax deficiencies related to the vesting of stock-based awards resulting from the adoption of new accounting guidance related to stock-based compensation.  See Note 11 for additional information.

 

Additionally, we are currently undergoing several federal, foreign and state audits; however, we currently do not believe these audits will result in any material charge to tax expense in the future.

 

9.  Other Current Assets, Accrued Expenses and Other Current Liabilities and Deferred Taxes, net and Other Liabilities 

 

Other current assets consist of the following (in thousands):

 

		July 29,			July 30,			January 28,
		2017			2016			2017
Prepaid expenses		$	45,718		$	47,088		$	47,057
Tax receivable			2,428			21,037			15,794
Other			7,286			12,988			10,751
Total other current assets		$	55,432		$	81,113		$	73,602

 

Accrued expenses and other current liabilities consist of the following (in thousands):

 

		July 29,			July 30,			January 28,
		2017			2016			2017
Accrued salary, bonus, sabbatical, vacation and other benefits		$	61,431		$	64,580		$	72,589
Customer deposits, prepayments and refunds payable			54,043			47,993			28,384
Unredeemed gift cards			36,245			36,217			40,865
Sales, value added, payroll, property and other taxes payable			33,472			34,589			31,188
Accrued workers compensation and medical costs			27,009			30,786			31,609
Accrued interest			12,477			16,067			15,457
Accrued dividends			10,456			9,307			9,842
Loyalty program reward certificates			9,226			9,963			9,840
Accrued royalties			4,515			7,545			3,720
Lease termination and other store closure costs			3,135			20,918			4,834
Other			24,607			17,742			19,571
Total accrued expenses and other current liabilities		$	276,616		$	295,707		$	267,899

 

Deferred taxes, net and other liabilities consist of the following (in thousands):

 

		July 29,			July 30,			January 28,
		2017			2016			2017
Deferred and other income tax liabilities, net		$	90,957		$	115,735		$	92,079
Deferred rent and landlord incentives			60,467			63,367			61,215
Unfavorable lease liabilities			3,760			6,141			4,693
Other			7,129			6,882			5,433
Total deferred taxes, net and other liabilities		$	162,313		$	192,125		$	163,420