TAILORED BRANDS, INC. Executive Overview
Background
We are a leading omni-channel specialty retailer of menswear, including suits, formalwear, and a broad selection of polished and business casual offerings. We help our customers look and feel their best by delivering personalized products and services through our convenient network of stores and e-commerce sites. Our brands includeMen's Wearhouse , Jos. A. Bank, Moores Clothing for Men ("Moores") and K&G. OurU.S. stores operate underthe Men's Wearhouse ,Men's Wearhouse and Tux, Jos. A. Bank, and K&G brand names and are located in 50 states and theDistrict of Columbia . Our Canadian stores operate under the Moores brand name and are located in 10 Canadian provinces. As ofFebruary 1, 2020 , the Company operated 1,450 stores throughout theU.S. andCanada . See Note 2 of the consolidated financial statements for information concerning the divestiture of our corporate apparel business onAugust 16, 2019 . Subsequent to this divestiture, we reassessed our segment presentation and determined that the results of our four retail brands,Men's Wearhouse , Jos. A. Bank, Moores and K&G are separate operating segments that should continue to be aggregated into a reportable segment and, as a result, we have only one reportable segment.
All fiscal years for which financial information is included herein had 52 weeks
with the exception of fiscal 2017, which ended on
Summary of Fiscal 2019 Financial Performance
During fiscal 2019, we focused our efforts to position the Company for long-term success by executing on our three key strategic initiatives: (1) offering personalized products and services, (2) providing inspiring and seamless experiences in and across every channel and (3) telling the stories of our brands in the digital channels where our customers are increasingly spending their time. Although we believe we are making progress on these initiatives, we experienced lower than anticipated full year net sales and gross margins in fiscal 2019, primarily related to a 3% decrease in comparable sales and increased promotional activities. From a balance sheet and liquidity perspective, we took several actions intended to accelerate debt reduction and provide additional financial flexibility to invest in our customer-facing transformation strategies. These actions included: 1) the sale of our corporate apparel business with the proceeds used to repurchase approximately$55 million of our senior notes, 2) suspension of our quarterly cash dividend, which will make available approximately$36.5 million of cash on an annualized basis and 3) an agreement to sell the Joseph Abboud trademarks for$115 million , which closed onMarch 4, 2020 . Per the provisions of our term loan, we plan to reinvest these proceeds in our business.
Recent Developments
Fiscal 2020 got off to a solid start, with total retail comparable sales up 2.4% for the month of February and all brands positive. However, beginning in earlyMarch 2020 , a major global health pandemic related to the outbreak of the novel coronavirus ("COVID-19") resulted in a significant decrease in store traffic and comparable sales as well as cancellations of high school proms and other special events, coinciding with heightened actions taken by governments and citizens to curb the spread of virus. In response, we are taking aggressive and prudent actions to reduce expenses, and defer discretionary capital expenditures and inventory purchases to preserve our cash. OnMarch 16, 2020 , in an abundance of caution and as a proactive measure, we executed a borrowing of$260.0 million under our ABL Facility. Furthermore, after assessing the remaining availability under the ABL Facility and determining that additional borrowings were prudent to maximize cash on hand, onMarch 19, 2020 and onMarch 31, 2020 , respectively, we borrowed an additional$25.0 million under the ABL Facility. OnMarch 17, 2020 , we announced the temporary closure of our retail locations in theU.S. andCanada startingMarch 17, 2020 throughMarch 28, 2020 . OnMarch 19, 2020 , we announced the closure of our e-commerce fulfillment centers startingMarch 20, 2020 throughMarch 28, 2020 . OnMarch 26, 2020 , we extended the temporary closing of our retail stores until at leastMay 4, 2020 . In conjunction with our decision to extend the temporary closure of our stores, we also furloughed all of ourU.S. store employees as well as a significant portion of employees in ourU.S. distribution network 30
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and offices, and we implemented the temporary layoff of all Canadian store employees and a significant portion of Canadian employees in our Canadian distribution network and offices. Furthermore, in light of our store closures, we have taken certain actions with respect to some or all of our existing leases, including engaging with landlords to discuss rent reductions and/or rent deferrals, or discontinuing payment. EffectiveMarch 29, 2020 , the base salary of our Chief Executive Officer will be reduced by 50%. The base salary of all other named executive officers and other executives directly reporting to our Chief Executive Officer will be reduced by 25%. In addition, the base salaries of other members of our senior management team will be also be reduced. The Board of Directors has also agreed to a 50% reduction in its retainer fees. EffectiveApril 5, 2020 , all employees with a base salary in excess of$100,000 will have their salaries reduced by 10%. OnMarch 31, 2020 , we announced that, after instituting enhanced social distancing and sanitation protocols that meet or exceed those recommended by theCenters for Disease Control and Prevention ("CDC"), our e-commerce fulfillment centers were reopened. We will continue to monitor this ongoing situation, relying on recommendations from theCDC , theWorld Health Organization ("WHO") and government officials to regularly evaluate the renewed operations at our e-commerce fulfillment centers and determine when currently closed facilities will reopen. While we cannot reasonably estimate the impact of COVID-19 on our financial position, results of operations and cash flows, we do expect such impact to be significantly negative. The extent to which COVID-19 impacts our operations will depend on future developments, which are highly uncertain, including, among others, the duration of the outbreak, new information that may emerge concerning the severity of COVID-19 and the actions, especially those taken by governmental authorities, to contain the pandemic or treat its impact. As events are rapidly changing, additional impacts may arise that we are not aware of currently.
Key Performance Indicators
We consider a variety of operational and financial measures in assessing the performance of our business. The key measures we use to determine how our business is performing are net sales, comparable sales, gross margin, operating income and earnings per share. Comparable sales is defined as net sales (excluding alteration and other services sales) from stores open at least 12 months at period end, excluding stores where the square footage has changed by more than 25% within the past year, and includes e-commerce sales. While our customers may engage with us through multiple channels, we operate our business using an omni-channel approach and do not differentiate e-commerce sales from our other channels. We believe that comparable sales is a useful measure as it allows management and investors to evaluate the sales performance of our business while eliminating the impact of new and closed stores. Management uses comparable sales to evaluate the effectiveness of our selling and merchandising strategies and to compare our performance against that of other peer companies using similar measures. Definitions and calculations of comparable sales differ among companies in the retail industry; therefore comparable sales metrics disclosed by us may not be comparable to similar data disclosed by other retailers.
Key Metrics for Fiscal 2019
Key operating metrics for continuing operations for the year ended
Net sales decreased 4.1% primarily due to a decrease of 3.0% in comparable
? sales and the impact of a
liability as a result of changes made to our loyalty programs during the fourth
quarter of 2018.
? Total comparable sales decreased 3.0% with
Jos. A. Bank decreasing 2.3%, Moores decreasing 5.4% and K&G decreasing 0.3%.
As a percentage of sales, gross margin decreased 300 basis points primarily as
? a result of increased promotional activities and deleveraging of occupancy
costs.
? Operating income was
of
? Diluted earnings per share were
earnings per share of$1.94 in fiscal 2018. 31 Table of Contents
Key liquidity metrics for the year ended
Cash and cash equivalents at the end of fiscal 2019 were
decrease of
? the decrease in sales and the use of cash on hand for costs related to our
multi-year cost savings and operational excellence programs, and debt reduction.
Cash provided by operating activities was
to
? net earnings after adjusting for non-cash items other than non-cash lease
expense and timing fluctuations in accounts payable, accrued liabilities and
other current liabilities.
? Capital expenditures were
Total debt at the end of fiscal 2019 was approximately
million compared to the end of fiscal 2018. During fiscal 2019, we repurchased
? and retired
("Senior Notes") and repaid
Loan").
? We had
of
? We repurchased 2.4 million shares for a total of
price of
Items Affecting Comparability of Results from Continuing Operations
The following table depicts the effect on pretax income from continuing operations related to certain items that have impacted the comparability of our results in 2019, 2018 and 2017 (dollars in millions):
Fiscal Year
2019 2018 2017
Costs related to multi-year cost savings and
operational excellence programs (1) $ 27.1 $ - $ -
Costs related to the agreement to sell the Joseph
Abboud trademarks(2) 17.4 - -
Loss on extinguishment of debt (3) - 29.4 -
Loyalty program changes(4) - (17.6) -
CEO retirement costs - 6.4 -
Closure of rental product distribution center(5) - 5.0 -
Loss on divestiture of MW Cleaners(6) - 3.8 -
Costs to terminate Macy's agreement(7) - - 16.0
Goodwill impairment charge - - 1.5
Asset impairment charges related to tuxedo shops
within Macy's - - 1.2
Total $ 44.5 $ 27.0 $ 18.7 (1) Consists of
costs,
distribution center in
(2) Consists of a
the Joseph Abboud store and e-commerce site,
impairment/accelerated depreciation charges for the Joseph Abboud store and
(3) Consists of
million related to the repricing of the Term Loan, and
to the partial redemption of our Senior Notes. See Note 6 of the
consolidated financial statements for additional information.
(4) Consists of a favorable non-cash adjustment to net sales totaling
million reflecting the impact of changes made to our loyalty programs in the
fourth quarter of 2018. See Note 7 of the consolidated financial statements
for additional information.
(5) Consists of
severance costs,
accelerated depreciation.
(6) See Note 3 of the consolidated financial statements for additional
information.
(7) See Note 4 of the consolidated financial statements for additional
information.
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The following table summarizes the items in the above table by line item in our statements of (loss) earnings:
Fiscal Year
2019 2018 2017
Net sales $ - $ (17.6) $ -
Cost of sales 16.5 4.1 1.4
Selling, general and administrative expenses 28.0 11.1 15.8
- - 1.5
Loss on extinguishment of debt - 29.4 -Total$ 44.5 $ 27.0 $ 18.7 Store Information
During fiscal 2019, we opened twoMen's Wearhouse stores and one K&G store and closed 17 stores (ten Jos. A. Bank stores, fiveMen's Wearhouse stores, and twoMen's Wearhouse and Tux stores).
Results of Operations
The following table sets forth our results of operations expressed as a percentage of net sales for the periods indicated:
Fiscal Year(1)
2019 2018 2017
Net sales:
Retail clothing product 81.9 % 81.7 % 79.9 %
Rental services 13.3 13.3 14.0
Alteration and other services 4.8 5.0 6.1
Total net sales 100.0 % 100.0 % 100.0 %
Cost of sales(2):
Retail clothing product 47.0 44.6 44.5
Rental services 14.8 14.8 16.3
Alteration and other services 94.9 88.0 75.7
Occupancy costs 14.4 13.5 13.6
Total cost of sales 59.4 56.4 56.1
Gross margin(2):
Retail clothing product 53.0 55.4 55.5
Rental services 85.2 85.2 83.7
Alteration and other services 5.1 12.0 24.3
Occupancy costs (14.4) (13.5) (13.6)
Total gross margin 40.6 43.6 43.9
Advertising expense 5.5 5.5 5.6
Selling, general and administrative expenses 31.6 30.6 31.2
Goodwill impairment charge - - 0.0
Operating income 3.4 7.5 7.1
Interest income 0.0 0.0 0.0
Interest expense (2.5) (2.6) (3.3)
(Loss) gain on extinguishment of debt, net (0.0) (1.0) 0.2
Earnings before income taxes 0.9 3.9 4.0
Provision for income taxes 0.1 0.6 1.1
Net earnings from continuing operations 0.9 3.3 2.9
(Loss) earnings from discontinued operations, net of tax (3.7) (0.5) 0.3
Net (loss) earnings (2.9) % 2.8 % 3.2 %
(1) Percentage line items may not sum to totals due to the effect of rounding.
(2) Calculated as a percentage of related sales.
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2019 Compared with 2018
The following discussion of our results of operations relates to our continuing
operations. See Note 2 to the consolidated financial statements for information
concerning discontinued operations.
Total net sales decreased$123.3 million , or 4.1%, to$2,881.3 million for fiscal 2019 as compared to fiscal 2018 primarily due to a$96.4 million decrease in clothing product revenues primarily due to the decrease in comparable sales and anniversarying last year's$17.6 million favorable adjustment related to changes to our loyalty programs. In addition, rental services revenue decreased$15.6 million primarily reflecting a decrease in rental transactions, while alterations and other services revenue decreased$11.3 million . The decrease in total net sales is further described below: (in millions) Amount attributed to$ (55.8) 3.5% decrease in comparable sales atMen's Wearhouse . (15.7) 2.3% decrease in comparable sales at Jos. A. Bank. (0.9) 0.3% decrease in comparable sales at K&G. (10.9) 5.4% decrease in comparable sales at Moores(1). (6.4) Decrease in non-comparable sales. Decrease in net sales resulting from change in
(3.3) exchange rate.
Other (primarily due to the impact of changes to our loyalty
(30.3) programs in 2018 and a decrease in alterations revenue).
$ (123.3) Decrease in total net sales.
(1) Comparable sales percentages for Moores are calculated using Canadian
dollars.
The decrease in comparable sales atMen's Wearhouse resulted primarily from a decrease in average unit retail (net selling prices) while both transactions for clothing and units per transaction were essentially flat. AtMen's Wearhouse , rental service comparable sales decreased 3.1% primarily due to a decrease in number of rentals. The decrease in comparable sales at Jos. A. Bank resulted primarily from decreases in both average unit retail and transactions partially offset by an increase in units per transaction. The decrease in comparable sales at K&G resulted primarily from a decrease in both units per transaction and transactions partially offset by an increase in average unit retail. The decrease in comparable sales at Moores resulted primarily from a decrease in transactions while both average unit retail and units per transaction were essentially flat.
Gross Margin
Procurement and distribution costs are included in determining our retail
clothing product gross margins. Our gross margin may not be comparable to other
specialty retailers, as some companies exclude costs related to their
distribution network from cost of sales while others, like us, include all or a
portion of such costs in cost of sales and exclude them from selling, general
and administrative expenses ("SG&A"). Distribution costs are not included in
determining our rental services gross margin as these costs are included in SG&A
expenses.
Our total gross margin decreased $142.0 million , or 10.8%, to $1,168.6 million
for fiscal 2019 as compared to fiscal 2018 primarily due to the decrease in
sales and the write-off of $13.4 million of inventory related to the closure of
our Joseph Abboud store and e-commerce site. Total gross margin as a percentage
of sales decreased to 40.6% in fiscal 2019 from 43.6% in fiscal 2018 primarily
due to increased promotional activities, deleveraging of occupancy costs and the
aforementioned write-off of Joseph Abboud inventory.
Occupancy costs increased $9.9 million primarily due to increased lease costs
and the impact of store refreshes and other enhancements of our store fleet.
Occupancy costs include store related operating lease costs, utilities, repairs
and maintenance, security, property taxes and depreciation and, as a percentage
of sales, increased to 14.4% in fiscal 2019 from 13.5% in fiscal 2018 primarily
due to deleveraging from lower sales.
Advertising Expense
Advertising expense decreased to$159.1 million in fiscal 2019 from$165.2 million in fiscal 2018, a decrease of$6.2 million or 3.7%. The decrease in advertising expense was driven primarily by reductions in television advertising reflecting a shift to more efficient online advertising. As a percentage of total net sales, advertising expense was flat at 5.5% in fiscal 2019 compared to fiscal 2018. 34
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Selling, General and Administrative Expenses
SG&A expenses decreased to$911.7 million in fiscal 2019 from$919.8 million in fiscal 2018, a decrease of$8.1 million or 0.9%. As a percentage of total net sales, these expenses increased to 31.6% in fiscal 2019 from 30.6% in fiscal 2018. The components of this 1.0% increase in SG&A expenses as a percentage of total net sales and the related dollar changes were as follows: % in millions Attributed to 0.6$ 16.9 In fiscal 2019, we incurred certain costs that impact the comparability of our results totaling$28.0 million including$24.0 million related to our multi-year cost savings and operational excellence programs and$4.0 million relating to the agreement to sell the Joseph Abboud trademarks. In fiscal 2018, costs that impacted the comparability of our results totaled$11.1 million including$6.4 million related to the retirement of our former CEO, a$3.8 million loss on divestiture of our MW Cleaners business and$0.9 million related to the closure of a rental product distribution center. As a percentage of sales, these costs increased to 1.0% in fiscal 2019 from 0.4% in fiscal 2018. 0.2 (9.5) Store salaries decreased$9.5 million and increased as a percentage of sales to 13.7% in fiscal 2019 from 13.5% in fiscal 2018 primarily due to deleveraging from lower sales. 0.2 (15.5) Other SG&A expenses decreased$15.5 million primarily due to lower incentive and share-based compensation costs as well as lower employee-related benefit and travel and entertainment costs. As a percentage of sales, other SG&A expenses increased to 16.9% in fiscal 2019 from 16.7% in fiscal 2018 due to deleveraging from lower sales. 1.0$ (8.1) Total Interest Expense Interest expense decreased to$71.3 million in fiscal 2019 from$79.6 million in fiscal 2018, a decrease of$8.3 million or 10.4%, due to repayment of our indebtedness including repurchase and retirement of$54.8 million face value of our Senior Notes and$9.4 million of payments on our Term Loan.
Net Loss on Extinguishment of Debt
Net loss on extinguishment of debt was$0.1 million in fiscal 2019 compared to a net loss on extinguishment of$30.3 million in fiscal 2018. The net loss on extinguishment in fiscal 2019 relates to open market repurchases of our Senior Notes. The$30.3 million net loss on extinguishment in fiscal 2018 consists of the elimination of unamortized deferred financing costs and original issue discount ("OID") related to the refinancing and repricing of our Term Loan totaling$21.4 million and an$8.9 million loss on extinguishment related to our Senior Notes. Provision for Income Tax In fiscal 2019, our effective income tax rate from continuing operations was 6.1% and is lower than theU.S. statutory rate primarily due to benefit from foreign tax credits offset by a net increased valuation allowance. Our foreign jurisdictions in which we operate had taxable income, which requires us to provide for income tax, specifically, our operations inCanada andHong Kong . For fiscal 2019, the statutory tax rates were approximately 26% inCanada and 16.5% inHong Kong . For fiscal 2019, tax expense for our operations in foreign jurisdictions totaled$4.1 million .
In future periods, our income tax expense from continuing operations and related effective income tax rate may be impacted by many factors, including our geographic mix of earnings and changes in tax laws.
In addition, if our financial results in fiscal 2020 generate a loss or certain deferred tax liabilities decrease, we may need to establish a valuation allowance on ourU.S. deferred tax assets, which could have a material impact on our financial condition and results of operations. Lastly, we are currently undergoing several federal, foreign and state audits; however, we currently do not believe these audits will result in any material change to tax expense in the future.
Net Earnings from Continuing Operations
Net earnings from continuing operations were
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2018 Compared with 2017
The following discussion of our results of operations relates to our continuing
operations. See Note 2 to the consolidated financial statements for information
concerning discontinued operations.
Total net sales decreased$48.5 million , or 1.6%, to$3,004.5 million in fiscal 2018 as compared to fiscal 2017 due to a$29.2 million decrease in rental services revenue primarily reflecting a decrease in units rented and a$34.2 million decrease in alteration and other services revenue primarily reflecting the divestiture of MW Cleaners. These decreases were offset by a$14.9 million increase in clothing product revenues primarily due to the increase in comparable sales and the$17.6 million adjustment related to the changes to our loyalty programs, partially offset by the impact of the 53rd week in 2017. The decrease in total net sales is further described below: (in millions) Amount Attributed to $ 13.2 0.8% increase in comparable sales atMen's Wearhouse . 9.7 1.4% increase in comparable sales at Jos. A. Bank. 4.4 1.5% increase in comparable sales at K&G. 4.9 2.4% increase in comparable sales at Moores(1). Decrease in non-comparable sales (primarily due to the impact of the (66.3) 53rd week and closed stores). Decrease in net sales resulting from change in
(2.1) exchange rate.
Other (primarily due to divestiture of MW Cleaners offset by the
(12.3) impact of changes to our loyalty programs).
$ (48.5) Decrease in total net sales.
(1) Comparable sales percentages for Moores are calculated using Canadian
dollars.
The increase in comparable sales atMen's Wearhouse resulted primarily from increases in both average unit retail (net selling prices) and transactions for clothing, partially offset by a decrease in units per transaction. AtMen's Wearhouse , rental service comparable sales decreased 4.9% primarily due to a decrease in number of rentals. The increase in comparable sales at Jos. A. Bank resulted primarily from an increase in transactions partially offset by a decrease in units per transaction, while average unit retail was flat. The increase in comparable sales at K&G resulted primarily from increases in both units per transaction and average unit retail, partially offset by a decrease in transactions. The increase in comparable sales at Moores resulted primarily from increases in both average unit retail and transactions partially offset by a decrease in units per transaction.
Gross Margin
Procurement and distribution costs are included in determining our retail clothing product gross margins. Our gross margin may not be comparable to other specialty retailers, as some companies exclude costs related to their distribution network from cost of sales while others, like us, include all or a portion of such costs in cost of sales and exclude them from SG&A expenses. Distribution costs are not included in determining our rental services gross margin as these costs are included in SG&A expenses. Our total gross margin decreased$30.8 million , or 2.3%, to$1,310.6 million for fiscal 2018 as compared to fiscal 2017 primarily due to the aforementioned decreases in rental services and alteration and other services revenue partially offset by the impact of the changes to our loyalty programs. Total gross margin as a percentage of sales decreased to 43.6% in fiscal 2018 from 43.9% in fiscal 2017. The decrease was primarily due to the mix shift from rental services to retail clothing sales and the divestiture of the MW Cleaners business. Occupancy costs decreased$9.9 million primarily due to the impact of the MW Cleaners divestiture and the closure of our tuxedo shops within Macy's in 2017. Occupancy costs include store related rent, utilities, repairs and maintenance, security, property taxes and depreciation and, as a percentage of total net sales, decreased to 13.5% in fiscal 2018 from 13.6% in fiscal 2017. 36 Table of Contents Advertising Expense Advertising expense decreased to$165.2 million in fiscal 2018 from$172.0 million in fiscal 2017, a decrease of$6.8 million or 3.9%. The decrease in advertising expense was driven primarily by reductions in television advertising reflecting a shift to digital advertising. As a percentage of total net sales, advertising expense decreased to 5.5% in fiscal 2018 from 5.6% in fiscal 2017.
Selling, General and Administrative Expenses
SG&A expenses decreased to$919.8 million in fiscal 2018 from$951.8 million in fiscal 2017, a decrease of$32.0 million or 3.4%. As a percentage of total net sales, these expenses decreased to 30.6% in fiscal 2018 from 31.2% in fiscal 2017. The components of this 0.6% decrease in SG&A expenses as a percentage of total net sales and the related dollar changes were as follows: % in millions Attributed to (0.1)$ (4.6) In fiscal 2018, we incurred certain costs that impact the comparability of our results totaling$11.1 million including$6.4 million related to the retirement of our former CEO, a$3.8 million loss on divestiture of our MW Cleaners business and$0.9 million related to the closure of a rental product distribution center. In fiscal 2017, costs that impacted the comparability of our results totaled$15.7 million and primarily related to costs to terminate the Macy's agreement. As a percentage of sales, these costs decreased to 0.4% in fiscal 2018 from 0.5% in fiscal 2017. - (6.6) Store salaries decreased$6.6 million primarily due to the impact of the 53rd week in 2017 as well as the divestiture of MW Cleaners. As a percentage of sales, store salaries were flat at 13.5% for both fiscal 2018 and fiscal 2017. (0.5) (20.8) Other SG&A expenses decreased$20.8 million primarily due to the impact of the 53rd week in 2017, lower operating costs resulting from the divestiture of MW Cleaners and lower share-based and incentive compensation expense. As a percentage of sales, other SG&A expenses decreased to 16.7% in fiscal 2018 from 17.2% in fiscal 2017. (0.6) %$ (32.0) Total Interest Expense Interest expense decreased to$79.6 million in fiscal 2018 from$100.5 million in fiscal 2017, a decrease of$20.9 million or 20.8%, due to repayment of our indebtedness including repurchase and retirement of$192.6 million face value of our Senior Notes and$102.4 million of payments on our Term Loan.
Net (Loss) Gain on Extinguishment of Debt
Net loss on extinguishment of debt was$30.3 million in fiscal 2018 compared to a net gain on extinguishment of$5.4 million in fiscal 2017. The$30.3 million net loss on extinguishment of debt in fiscal 2018 consists of the elimination of unamortized deferred financing costs and OID related to the refinancing and repricing of our Term Loan totaling$21.4 million and an$8.9 million loss on extinguishment related to our Senior Notes.
The net gain on extinguishment in fiscal 2017 relates to open market repurchases of our Senior Notes.
Provision for Income Tax InDecember 2017 , theU.S. enacted comprehensive tax legislation commonly referred to as the Tax Cuts and Jobs Act (the "Tax Reform Act"). The changes included in the Tax Reform Act are broad and complex, which impacted our consolidated financial statements in both fiscal 2018 and 2017 including, but not limited to: reducing theU.S. federal corporate tax rate from 35% to 21% effectiveJanuary 1, 2018 and requiring a one-time transition tax on certain unrepatriated earnings of non-U.S. subsidiaries that may electively be paid over eight years. The transition tax resulted in certain previously untaxed non-U.S. earnings being included in theU.S. federal and state 2017 taxable income. The Tax Reform Act also enacted new tax laws which include, but are not limited to: a Base Erosion Anti-abuse Tax ("BEAT"), which is a new minimum tax, generally eliminatingU.S. federal income taxes on dividends from foreign subsidiaries, a provision designed to tax currently global intangible low taxed income ("GILTI"), a provision that may 37
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limit the amount of currently deductible interest expense, the repeal of the
domestic production incentives, limitations on the deductibility of certain
executive compensation, and limitations on the utilization of foreign tax
credits to reduce the
Shortly after the Tax Reform Act was enacted, theSecurities and Exchange Commission issued Staff Accounting Bulletin No. 118, Income Tax Accounting Implications of the Tax Cuts and Jobs Act ("SAB 118") which provides guidance on accounting for the Tax Reform Act's impact.SAB 118 provides a measurement period, which in no case should extend beyond one year from the Tax Reform Act enactment date, during which a company acting in good faith may complete the accounting for the impacts of the Tax Reform Act. In accordance withSAB 118, a company must reflect the income tax effects of the Tax Reform Act in the reporting period in which the accounting is complete. To the extent that a company's accounting for certain income tax effects of the Tax Reform Act is incomplete, a company can determine a reasonable estimate for those effects and record a provisional estimate in the financial statements in the first reporting period in which a reasonable estimate can be determined. As a result, in fiscal 2017, we recorded a provisional discrete net tax benefit of$0.3 million related to the Tax Reform Act, which consisted of a benefit from deferred tax remeasurement offset by additional provision for transition tax. During the fourth quarter of fiscal 2018, we completed our accounting for the effects of the Tax Reform Act and recorded a discrete net tax benefit of$6.1 million , including finalization of deferred tax remeasurement, transition tax and a rate change for foreign exchange remeasurement on previously taxed earnings and profits. In fiscal 2018, our effective income tax rate from continuing operations was 15.2% and is lower than theU.S. statutory rate primarily due to the impact of the Tax Reform Act and usage of tax credits, which are partially offset by state income tax changes related to the Tax Reform Act and foreign earnings with higher tax rates in these jurisdictions. Our foreign jurisdictions in which we operate had taxable income, which requires us to provide for income tax, specifically, our operations inCanada andHong Kong . For fiscal 2018, the statutory tax rates were approximately 26% inCanada and 16.5% inHong Kong . For fiscal 2018, tax expense for our operations in foreign jurisdictions totaled$8.0 million .
Net Earnings from Continuing Operations
Net earnings from continuing operations were
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Liquidity and Capital Resources
Our primary sources of working capital are cash flows from operations and available borrowings under our revolving credit agreement, as described below.
The following table provides details on our cash and cash equivalents and working capital position as ofFebruary 1, 2020 andFebruary 2, 2019 (in thousands): February 1, February 2, 2020 2019 Cash and cash equivalents$ 14,420 $ 32,671 Working capital$ 206,388 $ 359,696
The decrease in working capital fromFebruary 1, 2020 compared toFebruary 2, 2019 is primarily due to the adoption of new accounting guidance related to leases, specifically the current portion of operating lease liabilities which totals$186.3 million as ofFebruary 1, 2020 . See Note 17 for additional information. We hold cash and cash equivalents at various foreign subsidiaries, which totaled$12.0 million atFebruary 1, 2020 . As a result of reductions to theU.S. taxation of dividends from foreign subsidiaries under the Tax Reform Act, in future years, we may decide to repatriate amounts from our foreign subsidiaries. Although the cash and cash equivalents held by our foreign subsidiaries may be more readily available to meet domestic cash requirements, they would continue to be subject to applicable foreign withholding tax that would be incurred upon repatriation. In 2014,The Men's Wearhouse entered into a term loan credit agreement that provided for a senior secured term loan in the aggregate principal amount of$1.1 billion (the "Original Term Loan") and a$500.0 million asset-based revolving credit agreement (the "ABL Facility", and together with the Original Term Loan, the "Credit Facilities") with certain of ourU.S. subsidiaries and Moores the Suit People, one of our Canadian subsidiaries, as co-borrowers. 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"). InOctober 2017 ,The Men's Wearhouse amended the ABL Facility in part to increase the principal amount available to$550.0 million and extend the maturity date toOctober 2022 . InApril 2018 ,The Men's Wearhouse refinanced its Original Term Loan, and, inOctober 2018 , amended its term loan to reduce the interest rate margin. See Credit Facilities section below for additional information.
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. Should our total leverage ratio and secured leverage ratio exceed certain thresholds specified in the agreements, we would be subject to certain additional restrictions, including limitations on our ability to make significant acquisitions and incur additional indebtedness. As ofFebruary 1, 2020 , our total leverage ratio is below the maximum specified in the agreements, however, our secured leverage ratio is above the maximum level. As a result, we are now subject to additional restrictions, primarily related to the size of any incremental term loan facilities being limited to a maximum of$250 million . In addition, as a result of the refinancing of the Term Loan and amending of our ABL Facility, our ability to pay dividends on our common stock has increased from a maximum of$10.0 million per quarter to a maximum of$15.0 million per quarter. See Note 13 for additional information on the suspension of our dividend in 2019.
Credit Facilities
InApril 2018 , we refinanced our Original Term Loan. Immediately prior to the refinancing, the Original Term Loan consisted of$593.4 million in aggregate principal amount with an interest rate of LIBOR plus 3.50% (with a floor of 1.0%) and$400.0 million in aggregate principal amount with a fixed rate of 5.0% per annum. Upon entering into the refinancing, we made a prepayment of$93.4 million on the Original Term Loan using cash on hand. As a result, we refinanced$900.0 million in aggregate principal amount of term loans then outstanding with a new Term Loan totaling$900.0 million (the "New Term Loan"). Additionally, we may continue to request additional term loans or incremental equivalent debt borrowings, all of which are uncommitted, in an aggregate amount up to the greater of (1)$250.0 million and (2) an aggregate principal amount such that, on a pro forma basis (giving effect to such borrowings), our senior secured leverage ratio will not exceed 2.5 to 1.0. 39
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The New Term Loan will amortize in an annual amount equal to 1.0% of the principal amount of the New Term Loan, payable quarterly commencing onMay 1, 2018 . The New Term Loan extends the maturity date of the Original Term Loan fromJune 18, 2021 untilApril 9, 2025 , subject to a springing maturity provision that would accelerate the maturity of the New Term Loan toApril 1, 2022 if any of the Company's obligations under its Senior Notes remain outstanding onApril 1, 2022 . The New Term Loan bears interest at a rate per annum equal to an applicable margin plus, at the Company's option, either LIBOR (with a floor of 1.0%) or the base rate (with a floor of 2.0%). InOctober 2018 , we amended the New Term Loan resulting in a reduction in the interest rate margin of 25 basis points. As a result of the amendment, the margins for borrowings under the New Term Loan are 3.25% for LIBOR and 2.25% for the base rate. The maturity date for the New Term Loan remainsApril 9, 2025 , and all other material provisions of the New Term Loan remain unchanged. The interest rate on the New Term Loan is based on 1-month LIBOR, which was 1.66% atFebruary 1, 2020 , plus the applicable margin of 3.25%, resulting in a total interest rate of 4.91%. We have two interest rate swap agreements where the variable rates due under the New Term Loan have been exchanged for a fixed rate. AtFebruary 1, 2020 , the total notional amount under these interest
rate swaps is$705.0 million . See Note 19 for additional information on our interest rate swaps.
As a result of our interest rate swaps, 80% of the variable interest rate under
the New Term Loan has been converted to a fixed rate and, as of
InOctober 2017 , we amended our ABL Facility, which now provides for a senior secured revolving credit facility of$550.0 million , with possible future increases to$650.0 million under an expansion feature that matures inOctober 2022 , and is guaranteed, jointly and severally, byTailored Brands, Inc. and certain of ourU.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, theNew York Federal Reserve Bank ("NYFRB") rate plus 0.5% or adjusted LIBOR for a one-month interest 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 1.75%. The ABL Facility also provides for fees applicable to amounts available to be drawn under outstanding letters of credit which range from 1.25% to 1.75%, and a fee on unused commitments of 0.25%. As ofFebruary 1, 2020 ,$50.0 million in borrowings were outstanding under the ABL Facility at a weighted average interest rate of approximately 3.2%. During fiscal 2019, the maximum borrowing outstanding under the ABL Facility was$100.0 million . We utilize letters of credit primarily as collateral for workers compensation claims. AtFebruary 1, 2020 , letters of credit totaling approximately$26.6 million were issued and outstanding. Borrowings available under the ABL Facility as ofFebruary 1, 2020 were$400.5 million . The obligations under the Credit Facilities are secured on a senior basis by a first priority lien on substantially all of the assets of the Company, certain of itsU.S. subsidiaries and, in the case of the ABL Facility,Moores The Suit People . The Credit Facilities and the related guarantees and security interests granted thereunder are senior secured obligations of, and will rank equally with all present and future senior indebtedness of the Company, the co-borrowers
and the respective guarantors. Senior Notes The Senior Notes are guaranteed, jointly and severally, on an unsecured basis byTailored Brands, Inc. and certain of ourU.S. subsidiaries. The Senior Notes and the related guarantees are senior unsecured obligations ofThe Men's Wearhouse, Inc. and the guarantors, respectively, and will rank equally with all ofThe Men's Wearhouse, Inc.'s and each guarantor's present and future senior indebtedness. The Senior Notes will mature inJuly 2022 . Interest on the Senior Notes is payable onJanuary 1 andJuly 1 of each year. We may redeem some or all of the Senior Notes at any time on or afterJuly 1, 2017 at the redemption prices set forth in the indenture governing the Senior Notes. As ofFebruary 1, 2020 , the redemption price is 101.75% of the face value and steps down to 100% of the face value onJuly 1, 2020 . Upon the occurrence of certain specific changes of control, we may be required to offer to purchase the Senior Notes at 101% of their aggregate principal amount plus accrued and unpaid interest thereon to the date of purchase. 40
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Cash Provided by Operating Activities
Net cash provided by operating activities was$99.6 million and$322.7 million for 2019 and 2018, respectively. The adoption of new lease accounting guidance in 2019 resulted in the recognition of non-cash lease expense totaling$194.5 million and a corresponding use of cash totaling approximately$195.8 million related to operating lease liabilities included in other liabilities. As the adoption of the lease accounting guidance did not materially impact our cash flow from operations for 2019, our explanation of the year-over-year decrease excludes these amounts. The$223.0 million decrease in cash flow from operations was driven primarily by a$123.7 million decrease in our net earnings, after adjusting for non-cash items other than non-cash lease expense, primarily driven by the decrease in our operating income this year compared to last year and an$83.0 million change in accounts payable, accrued expenses and other current liabilities primarily related to fluctuations in accounts payable due to timing of inventory receipts and related vendor payments, vendor payment terms and capital expenditure projects. In addition, cash flow from operations was negatively impacted by an increase in net cash paid for taxes totaling$26.6 million primarily due to a$15.0 million tax refund received last year and an approximate$14.3 million planned increase in purchases of rental product. These unfavorable impacts were partially offset by a$30.7 million decrease in inventories related to our strategies to evolve our inventory offerings. Net cash provided by operating activities was$322.7 million and$350.8 million for 2018 and 2017, respectively. The$28.1 million decrease was driven by higher inventory purchases compared to last year. The increase in inventory purchases was partially offset by higher net earnings, after adjusting for certain items primarily related to extinguishment of debt and goodwill impairment as well as favorable fluctuations in accounts payable, accrued expenses and other current liabilities primarily due to timing.
Cash Used in Investing Activities
Net cash used in investing activities was$43.2 million and$64.5 million for 2019 and 2018, respectively. The$21.4 million decrease was primarily driven by a$27.3 million increase in net proceeds from business divestitures. Net cash used in investing activities was$64.5 million and$89.9 million for 2018 and 2017, respectively. The$25.4 million decrease was primarily driven by$17.8 million of net proceeds from the divestiture of MW Cleaners as well as a timing shift of certain capital expenditure projects to fiscal 2019.
Cash Used in Financing Activities
Net cash used in financing activities was$100.0 million and$302.7 million for 2019 and 2018, respectively. The$202.7 million decrease primarily reflects the impact of a decrease in debt repayments in 2019 compared to 2018. Net cash used in financing activities was$302.7 million and$236.9 million for 2018 and 2017, respectively. The$65.8 million increase primarily reflects the impact of additional debt repayments in 2018 compared to 2017. Capital allocation policy update - OnSeptember 11, 2019 , after extensive review, the Company announced an update to the Company's capital allocation policy. Effective in the fourth quarter of 2019, our quarterly cash dividend was suspended and the cash was redeployed for accelerated debt reduction and opportunistic share repurchases. Suspending the quarterly cash dividend of$0.18 per share is expected to make available approximately$36.5 million on an annualized basis. Share repurchase program- InMarch 2013 , the Board approved a share repurchase program for our common stock. During fiscal 2019, we repurchased 2,336,852 shares through open market repurchases at a cost of$10.0 million for an average price of$4.28 per share. During fiscal 2018 and 2017, no shares were repurchased in open market transactions under the Board's authorization. AtFebruary 1, 2020 , the remaining balance available under the authorization was$38.0 million . Dividends- Cash dividends paid were approximately$28.1 million ,$36.9 million and$35.8 million during fiscal 2019, 2018 and 2017, respectively. In fiscal 2019, a dividend of$0.18 per share was declared in each of the first two quarters, for an annual dividend of$0.36 per share. In fiscal 2018 and 2017, a dividend of$0.18 per share was declared in each quarter, for an annual dividend of$0.72 per share, respectively. 41
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Future sources and uses of cash
Our primary uses of cash are to finance working capital requirements of our operations and to repay our indebtedness. In addition, we will use cash to fund capital expenditures, income taxes, operating leases, opportunistic share repurchases and various other commitments and obligations, as they arise.
Beginning in
In addition to these efforts, in an abundance of caution and as a proactive measure, onMarch 16, 2020 , we executed a borrowing of$260.0 million under our ABL Facility. Furthermore, after assessing the remaining availability under the ABL Facility and determining that additional borrowings were prudent to maximize cash on hand, onMarch 19, 2020 and onMarch 31, 2020 , respectively, we borrowed an additional$25.0 million under the ABL Facility. Although we have not yet finalized our outlook for capital expenditures in fiscal 2020, we currently expect capital expenditures to decrease substantially compared to fiscal 2019, primarily as a result of actions taken in response to the COVID-19 outbreak. Capital expenditures for 2020 will include costs for store refreshes and other enhancements of our store fleet and investments in technology. As described more fully in Item 1A, current and future domestic and global economic conditions, including the impact of COVID-19, could negatively affect our future operating results as well as our existing cash and cash equivalents balances and availability under our ABL Facility. In addition, conditions in the financial markets could limit our access to further capital resources, if needed, and could increase associated costs. Because of the COVID-19 pandemic, there is significant uncertainty surrounding the potential impact on our results of operations and cash flows. We are proactively taking measures to increase available cash on hand including, but not limited to, significant reductions in discretionary operating expenses, reducing inventory purchases and capital expenditures, extension of vendor payment terms, employee furloughs, salary reductions, discussions with our landlords regarding rent reductions and/or rent deferrals and, as described above, borrowings under our ABL Facility.
Contractual Obligations
As ofFebruary 1, 2020 , we are obligated to make cash payments in connection with our long-term debt, operating leases and other contractual obligations in the amounts listed below. In addition, we utilize letters of credit primarily as collateral for workers compensation claims. AtFebruary 1, 2020 , letters of credit totaling approximately$26.6 million were issued and outstanding. Payments Due by Period (In millions) Contractual obligations Total <1 Year 1 - 3 Years 4 - 5 Years > 5 Years Long-term debt(1)$ 1,393.9 $ 72.0 $ 362.0 $ 111.4 $ 848.5 Operating leases(2) 1,053.7 228.9 434.3 256.3 134.2 Other contractual obligations(3) 50.0 30.2 18.1 1.7 -
Total contractual obligations(4)
(1) Includes interest payments of
between one and three years,
impact of our interest rate swaps. The payments due by period do not consider
amounts which may become payable under the excess cash flow provision of our
New Term Loan. Interest on our ABL borrowings is excluded from the amounts
presented in the table due to our inability to predict the timing and
settlement of our ABL borrowings. See Notes 6 and 19 of the consolidated
financial statements for additional information.
(2) We lease retail business locations, office and warehouse facilities and
equipment under various operating leases. See Note 17 of the consolidated
financial statements for additional information.
(3) Other contractual obligations consist primarily of commitments for products
and services used in the normal course of business as well as minimum
payments under our agreement with
to "Black by
Cole.
(4) Excluded from the table above is
positions. These amounts are not included due to our inability to predict the
timing of the settlement of these amounts. See Note 9 of the consolidated
financial statements for additional information.
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In the normal course of business, we issue purchase orders to suppliers for merchandise. The purchase orders represent executory contracts requiring performance by the suppliers, including the delivery of the merchandise prior to a specified cancellation date and compliance with product specifications, quality standards and other requirements. In the event of the supplier's failure to meet the agreed upon terms and conditions, we may cancel the order.
Off-Balance Sheet Arrangements
Other than other contractual obligations and letters of credit discussed above, we do not have any off-balance sheet arrangements that are material to our financial position or results of operations.
Inflation
We believe the impact of inflation on the results of operations during the periods presented has been minimal. However, there can be no assurance that our business will not be affected by inflation in the future.
Critical Accounting Policies and Estimates
The preparation of our consolidated financial statements requires the appropriate application of accounting policies in accordance with generally accepted accounting principles. In many instances, this also requires management to make estimates and assumptions about future events that affect the amounts and disclosures included in our financial statements. We base our estimates on historical experience and various assumptions that we believe are reasonable under our current business model. However, because future events and conditions and their effects cannot be determined with certainty, actual results will differ from our estimates and such differences could be material to our financial statements. Our accounting policies are described in Note 1 of the consolidated financial statements. We consistently apply these policies and periodically evaluate the reasonableness of our estimates in light of actual events. Historically, we have found our accounting policies to be appropriate and our estimates and assumptions reasonable. Our critical accounting policies, which are those most significant to the presentation of our financial position and results of operations and those that require significant judgment or complex estimates by management, are discussed below. Revenue Recognition- For retail clothing product revenue, we transfer control and recognize revenue at a point in time, upon sale or shipment of the merchandise, net of actual sales returns and an accrual for estimated sales returns. For rental and alteration services, we transfer control and recognize revenue at a point in time, upon receipt of the completed service by the customer. Revenue is measured as the amount of consideration we expect to receive in exchange for transferring goods or providing services. Sales, use and value added taxes we collect from our customers and are remitted to governmental agencies are excluded from revenue. Loyalty Program Accounting-EffectiveFebruary 4, 2018 , we adopted ASC 606, Revenue from Contracts with Customers and all related amendments ("ASC 606"). As a result, we no longer use the incremental cost method approach but record our obligation for future point redemptions using a deferred revenue model. We maintain a customer loyalty program for ourMen's Wearhouse ,Men's Wearhouse and Tux, Jos. A. Bank and Moores brands in which customers receive points for purchases. Points are generally equivalent to dollars spent on a one-to-one basis, excluding any sales tax dollars, and do not expire. Upon reaching 500 points, customers are issued a$50 rewards certificate which they may redeem for purchases at our stores or online. Generally, reward certificates earned must be redeemed no later than six months from the date of issuance. When loyalty program members earn points, we recognize a portion of the transaction as revenue for merchandise product sales or services and defer a portion of the transaction representing the value of the related points. The value of the points is recorded in deferred revenue on our consolidated balance sheet and recognized into revenue when the points are converted into a rewards certificate and the certificate is used.
We account for points earned and certificates issued that will not be redeemed by loyalty members, which we refer to as breakage. We review our breakage estimates at least annually based upon the latest available information regarding redemption and expiration patterns.
During the fourth quarter of 2018, we redeemed certain loyalty members'
cumulative outstanding points into reward certificates prior to them reaching
500 total points, and these certificates expired on
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fiscal 2019, which was completed. As a result of these changes in the loyalty programs, during the fourth quarter of 2018, we recorded a decrease to our deferred revenue liability related to outstanding loyalty program points of$17.6 million ,$14.3 million net of income taxes, or$0.28 earnings per diluted share.
Our estimate of the expected usage of points and certificates requires significant management judgment. Current and future changes to our assumptions or to loyalty program rules may result in material changes to the deferred revenue balance as well as recognized revenues from our loyalty programs.
Inventories-Our inventory is carried at the lower of cost and net realizable value. Cost is determined based on the average cost method. Our inventory cost also includes estimated procurement and distribution costs (warehousing, freight, hangers and merchandising costs) associated with the inventory, with the balance of such costs included in cost of sales. Procurement and distribution costs are generally allocated to inventory based on the ratio of annual product purchases to inventory cost. If this ratio were to change significantly, it could materially affect the amount of procurement and distribution costs included in cost of sales. We make assumptions, based primarily on historical experience, as to items in our inventory that may be damaged, obsolete or salable only at marked down prices to reflect the net realizable value of these items. If actual damages, obsolescence or market demand is significantly different from our estimates, additional inventory write-downs could be required. Impairment of Long-Lived Assets-Long-lived assets, such as property and equipment, operating lease right-of-use assets and identifiable intangibles with finite useful lives, are periodically evaluated for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Assets are grouped and evaluated for impairment at the lowest level of which there are identifiable cash flows, which is generally at a store level. Assets are reviewed using factors including, but not limited to, our future operating plans and projected cash flows. The determination of whether impairment has occurred is based on an estimate of undiscounted future cash flows directly related to the assets, compared to the carrying value of the assets. If the sum of the undiscounted future cash flows of the assets does not exceed the carrying value of the assets, full or partial impairment may exist. If the asset carrying amount exceeds its fair value, an impairment charge is recognized in the amount by which the carrying amount exceeds the fair value of the asset. See Notes 1 and 4 to the consolidated financial statements for additional information. Fair value is determined using an income approach, which requires discounting the estimated future cash flows associated with the asset. Estimating future cash flows requires management to make assumptions and to apply judgment, including forecasting future sales, costs and useful lives of assets. Significant judgment is also involved in selecting the appropriate discount rate to be applied in determining the estimated fair value of an asset. Changes to our key assumptions related to future performance, market conditions and other economic factors can significantly affect our impairment evaluation and result in future impairment charges. Unanticipated long-term adverse market conditions may cause individual stores to become unprofitable and can result in an impairment charge for the long-lived assets in those stores. For example, as a result of our temporary store closures in response to the outbreak of COVID-19, we may incur impairments to certain long-lived assets in our stores during fiscal 2020.Goodwill and Other Indefinite-Lived Intangible Assets-As ofFebruary 1, 2020 , goodwill totaled$79.3 million , with$58.3 million allocated to ourMen's Wearhouse reporting unit and$21.0 million allocated to our Moores reporting unit.Goodwill and other indefinite-lived intangible assets are initially recorded at their fair values. Identifiable intangible assets with an indefinite useful life, including goodwill, are not amortized but are evaluated annually for impairment. A more frequent evaluation is performed if events or circumstances indicate that impairment could have occurred. Such events or circumstances could include, but are not limited to, significant negative industry or economic trends, unanticipated changes in the competitive environment, decisions to significantly modify or dispose of operations and a significant sustained decline in the market price of our stock.
Fiscal 2019 Annual Impairment Assessment Results
Our goodwill assessment consists of either using a qualitative approach to determine whether it is more likely than not that the fair value of the assets is less than their respective carrying values or a quantitative impairment test, if necessary. In performing the qualitative assessment, we consider many factors in evaluating whether the carrying value of the asset may not be recoverable, including macroeconomic conditions, retail industry considerations, recent financial performance and declines in stock price and market capitalization.
For our annual 2019 impairment tests, we applied the quantitative approach test for all reporting units.
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We estimated the fair values of each of our reporting units using a combined
income and market comparable approach. Our income approach uses projected
future cash flows that are discounted using a weighted-average cost of capital
analysis that reflects current market conditions. The market comparable
approach primarily considers earnings multiples of comparable companies and
applies those multiples to certain key drivers of the reporting unit.
Management judgment is a significant factor in the goodwill impairment
evaluation process. The computations require management to make estimates and
assumptions. Actual values may differ significantly from these judgments,
particularly if there are significant adverse changes in the operating
environment for our reporting units. Critical assumptions that are used as part
of these evaluations include:
The potential future cash flows of the reporting unit. The income approach
relies on the timing and estimates of future cash flows. The projections use
? management's estimates of economic and market conditions over the projected
period, including growth rates in revenue, gross margin and expense. The cash
flows are based on our most recent business operating plans and various growth
rates have been assumed for years beyond the current business plan period.
Selection of an appropriate discount rate. The income approach requires the
selection of an appropriate discount rate, which is based on a weighted-average
cost of capital analysis. The discount rate is affected by changes in
short-term interest rates and long-term yield as well as variances in the
? typical capital structure of marketplace participants. Given current economic
conditions, it is possible that the discount rate will fluctuate in the
near-term. The weighted-average cost of capital used to discount the cash
flows for the annual goodwill impairment test for the reporting units that have
goodwill ranged from 9.0% to 10.0%.
Selection of comparable companies within the industry. For purposes of the
market comparable approach, valuations were determined by calculating average
earnings multiples of relevant key drivers from a group of companies that are
comparable to the reporting unit being tested and applying those earnings
? multiples to the key drivers of the reporting unit. While the market earnings
multiple is not an assumption, a presumption that it provides an indicator of
value of the reporting unit is inherent in the valuation. The determination of
the market comparable also involves a degree of judgment. Earnings multiples
used in the market comparable approach for the annual goodwill impairment test
for the reporting units that have goodwill ranged from 6.3 to 7.5. We believe these two approaches are appropriate valuation techniques, and we weighted the two values equally as an estimate of reporting unit fair value for the purposes of our impairment testing. In addition, we compared the total fair values of our reporting units to our market capitalization and noted that the implied control premium was within what we consider to be a reasonable range.
As the reporting units have fair values that significantly exceed their
carrying values, as of
If the current market price of our stock further decreases or does not increase from current levels in the near future, or if other events or circumstances change (such as the impact of COVID-19) that would more likely than not reduce the fair value of our reporting units below their respective carrying values, all or a portion of our goodwill may be impaired in future periods and such an impairment charge could have a material effect on our results of operations
and financial condition.
As of
Indefinite-lived intangible assets are not subject to amortization but are
reviewed at least annually for impairment. The indefinite-lived intangible asset
impairment evaluation is performed by comparing the fair value of the
indefinite-lived intangible assets to their carrying values. Similar to the
goodwill approach described above, our annual impairment assessment for
indefinite-lived intangible assets contemplates the use of either a qualitative
approach to determine whether it is more likely than not that the fair value of
the assets is less than their respective carrying values or a quantitative
impairment test. In 2019, we applied the quantitative approach test to our Jos.
A. Bank tradename.
We estimated the fair value of the Jos. A. Bank tradename based on an income
approach using the relief-from-royalty method. This approach is dependent upon
a number of factors, including estimates of future growth and trends, royalty
rates, discount rates and other variables. We base our fair value estimates on
assumptions we believe to be reasonable, but which are unpredictable and
inherently uncertain. If the carrying value exceeds its estimated fair value,
an impairment loss is recognized in the amount by which the carrying amount
exceeds the estimated fair value of the asset.
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As ofFebruary 1, 2020 , we determined that there is no impairment of our Jos.A. Bank tradename. However, if events or circumstances change that would more likely than not reduce the fair value of the Jos. A. Bank tradename below its carrying value, we may be required to record an impairment charge, which could have a material effect on our results of operations and financial condition. For example, as a result of our temporary store closures in response to the outbreak of COVID-19, we may incur an impairment charge during fiscal 2020 related to the Jos. A. Bank tradename as revenue attributable to the Jos. A. Bank brand is a significant input to the relief-from-royalty method.
Income Taxes-Income taxes are accounted for using the asset and liability method. Deferred tax liabilities or assets are established for temporary differences between financial and tax reporting bases and are subsequently adjusted to reflect changes in enacted tax rates expected to be in effect when the temporary differences reverse. The deferred tax assets are reduced, if necessary, by a valuation allowance if the future realization of those tax benefits is not more likely than not.
Significant judgment is required in determining the provision for income taxes, related taxes payable and deferred tax assets and liabilities since, in the ordinary course of business, there are transactions and calculations where the ultimate tax outcome is uncertain. Additionally, our tax returns are subject to audit by various domestic and foreign tax authorities that could result in material adjustments or differing interpretations of the tax laws. Although we believe that our estimates are reasonable and are based on the best available information at the time we prepare the provision, actual results could differ from these estimates resulting in a final tax outcome that may be materially different from that which is reflected in our consolidated financial statements. The changes included in the Tax Reform Act are broad and complex and, in the future, theU.S. Treasury Department , theIRS , and other standard-setting bodies could interpret or issue guidance on how provisions of the Tax Reform Act will be applied or otherwise administered. Any new interpretations or guidance on the Tax Reform Act could have a material impact on our results of operations, financial position and cash flows. The tax benefit from an uncertain tax position is recognized only if it is more likely than not that the tax position will be sustained on examination by the taxing authorities, based on the technical merits of the position. The tax benefits recognized in the consolidated financial statements from such positions are then measured based on the largest benefit that has a greater than 50% likelihood of being realized upon settlement. Additionally, interest and/or penalties related to uncertain tax positions are recognized in income tax expense. Significant judgment is required in determining our uncertain tax positions. We have established reserves for uncertain tax positions using our best judgment and adjust these reserves, as warranted, due to changing facts and circumstances. A change in our uncertain tax positions, in any given period, could have a significant impact on our financial position, results of operations and cash flows for that period.
Recent Accounting Pronouncements
Except as discussed in Note 1 of the consolidated financial statements, we have considered all new accounting pronouncements and have concluded that there are no new pronouncements that may have a material impact on our results of operations, financial condition, or cash flows, based on current information.
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