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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
(Mark One)
þ
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended October 27, 2012
OR
o
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 0-23874
Jos. A. Bank Clothiers, Inc.
(Exact Name of Registrant as Specified in Its Charter)
Delaware
 
36-3189198
(State or Other Jurisdiction of Incorporation or Organization)
 
(I.R.S. Employer Identification No.)
 
 
 
500 Hanover Pike, Hampstead, MD
 
21074-2095
(Address of Principal Executive Offices)
 
(Zip Code)
410-239-2700
(Registrant’s Telephone Number, Including Area Code)
None
(Former Name, Former Address and Former Fiscal Year,
if Changed Since Last Report)
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 þ No o
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(§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes þ No o
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 the definitions of “large accelerated filer”, “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check One):
Large accelerated filer þ
 
Accelerated filer o
Non-accelerated filer o
 
Smaller reporting company o
(Do not check if smaller reporting company)
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act), Yes o No þ
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date:
Class
 
Outstanding as of November 21, 2012
Common Stock, $.01 par value
 
27,944,672
 
 
 
 
 








JOS. A. BANK CLOTHIERS, INC. AND SUBSIDIARIES
 
Page No.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 


2







Cautionary Statement

This Quarterly Report on Form 10-Q includes and incorporates by reference certain statements that may be deemed to be forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. The Private Securities Litigation Reform Act of 1995 provides a “safe harbor” for certain forward-looking statements so long as such information is identified as forward-looking and is accompanied by meaningful cautionary statements identifying important factors that could cause actual results to differ materially from those projected in the information. When used in this Quarterly Report on Form 10-Q, the words “estimate,” “project,” “plan,” “will,” “anticipate,” “expect,” “intend,” “outlook,” “may,” “believe,” “assume,” and other similar expressions are intended to identify forward-looking statements and information.

Actual results may differ materially from those forecasted due to a variety of factors outside of our control that can affect our operating results, liquidity and financial condition. Such factors include risks associated with economic, weather, public health and other factors affecting consumer spending, including negative changes to consumer confidence and other recessionary pressures, higher energy and security costs, the successful implementation of our growth strategy, including our ability to finance our expansion plans, the mix and pricing of goods sold, the effectiveness and profitability of new concepts, the market price of key raw materials such as wool and cotton, seasonality, merchandise trends and changing consumer preferences, the effectiveness of our marketing programs, including compliance with relevant legal requirements, the availability of suitable lease sites for new stores, doing business on an international basis, the ability to source product from our global supplier base, legal and regulatory matters and other competitive factors. The identified risk factors and other factors and risks that may affect our business or future financial results are detailed in our filings with the Securities and Exchange Commission, including, but not limited to, those described under “Risk Factors” in our Annual Report on Form 10-K for fiscal year 2011 and subsequent Quarterly Reports on Form 10-Q ("Form 10Q"), including this Form 10Q, and in “Management's Discussion and Analysis of Financial Condition and Results of Operations” in this Form 10-Q. These risks should be carefully reviewed before making any investment decisions. These cautionary statements qualify all of the forward-looking statements we make herein. We cannot assure you that the results or developments anticipated by us will be realized or, even if substantially realized, that those results or developments will result in the expected consequences for us or affect us, our business or our operations in the way we expect. We caution you not to place undue reliance on these forward-looking statements, which speak only as of their respective dates. We do not undertake an obligation to update or revise any forward-looking statements to reflect actual results or changes in our assumptions, estimates or projections.



3







PART I. FINANCIAL INFORMATION

Item 1.
Unaudited Condensed Consolidated Financial Statements

JOS. A. BANK CLOTHIERS, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Income
(Unaudited)

 
Three Months Ended
 
Nine Months Ended
 
October 29, 2011
 
October 27, 2012
 
October 29, 2011
 
October 27, 2012
 
(In thousands, except per share information)
Net sales
$
209,635

 
$
232,851

 
$
633,567

 
$
694,548

Cost of goods sold
78,383

 
100,205

 
233,095

 
281,255

Gross profit
131,252

 
132,646

 
400,472

 
413,293

Operating expenses:
 
 
 
 
 
 
 
Sales and marketing, including occupancy costs
86,917

 
94,354

 
253,889

 
276,306

General and administrative
20,118

 
17,124

 
58,731

 
54,295

Total operating expenses
107,035

 
111,478

 
312,620

 
330,601

Operating income
24,217

 
21,168

 
87,852

 
82,692

Other income (expense):
 
 
 
 
 
 
 
Interest income
45

 
117

 
260

 
286

Interest expense
(290
)
 
(4
)
 
(311
)
 
(21
)
Total other income (expense)
(245
)
 
113

 
(51
)
 
265

Income before provision for income taxes
23,972

 
21,281

 
87,801

 
82,957

Provision for income taxes
8,990

 
7,976

 
34,455

 
31,662

Net income
$
14,982

 
$
13,305

 
$
53,346

 
$
51,295

Per share information:
 
 
 
 
 
 
 
Earnings per share:
 
 
 
 
 
 
 
Basic
$
0.54

 
$
0.48

 
$
1.92

 
$
1.84

Diluted
$
0.54

 
$
0.47

 
$
1.91

 
$
1.83

Weighted average shares outstanding:
 
 
 
 
 
 
 
Basic
27,828

 
27,933

 
27,733

 
27,883

Diluted
27,972

 
28,017

 
27,953

 
28,005

See accompanying notes.


4







JOS. A. BANK CLOTHIERS, INC. AND SUBSIDIARIES
Condensed Consolidated Balance Sheets

 
January 28, 2012
 
October 27, 2012
 
(In thousands)
 
(Audited)
 
(Unaudited)
ASSETS
 
 
 
CURRENT ASSETS:
 
 
 
Cash and cash equivalents
$
87,230

 
$
28,932

Short-term investments
240,252

 
246,485

Accounts receivable, net
15,906

 
17,869

Inventories:
 
 
 
Finished goods
288,182

 
366,415

Raw materials
16,473

 
13,210

Total inventories
304,655

 
379,625

Prepaid expenses and other current assets
20,886

 
30,492

Total current assets
668,929

 
703,403

NONCURRENT ASSETS:
 
 
 
Property, plant and equipment, net
144,392

 
152,033

Other noncurrent assets
291

 
289

Total assets
$
813,612

 
$
855,725

LIABILITIES AND STOCKHOLDERS’ EQUITY
 
 
 
CURRENT LIABILITIES:
 
 
 
Accounts payable
$
66,664

 
$
53,019

Accrued expenses
92,937

 
97,564

Deferred tax liability — current
8,479

 
8,472

Total current liabilities
168,080

 
159,055

NONCURRENT LIABILITIES:
 
 
 
Deferred rent
47,600

 
46,158

Deferred tax liability — noncurrent
11,973

 
11,065

Other noncurrent liabilities
1,025

 
1,536

Total liabilities
228,678

 
217,814

COMMITMENTS AND CONTINGENCIES


 


STOCKHOLDERS’ EQUITY:
 
 
 
Common stock
277

 
278

Additional paid-in capital
91,766

 
93,447

Retained earnings
493,022

 
544,317

Accumulated other comprehensive income (loss)
(131
)
 
(131
)
Total stockholders’ equity
584,934

 
637,911

Total liabilities and stockholders’ equity
$
813,612

 
$
855,725

See accompanying notes.


5







JOS. A. BANK CLOTHIERS, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Cash Flows
(Unaudited)
 
Nine Months Ended
 
October 29, 2011
 
October 27, 2012
 
(In thousands)
Cash flows from operating activities:
 
 
 
Net income
$
53,346

 
$
51,295

Adjustments to reconcile net income to net cash (used in) operating activities:
 
 
 
Depreciation and amortization
19,173

 
20,910

Loss on disposals of property, plant and equipment
221

 
207

Non-cash equity compensation
2,040

 
1,688

Increase (decrease) in deferred taxes
3,141

 
(915
)
Net (increase) in operating working capital and other components
(84,837
)
 
(102,821
)
Net cash (used in) operating activities
(6,916
)
 
(29,636
)
Cash flows from investing activities:
 
 
 
Capital expenditures
(26,215
)
 
(22,423
)
Proceeds from maturities of short-term investments
348,768

 
352,522

Payments to acquire short-term investments
(283,605
)
 
(358,755
)
Net cash provided by (used in) investing activities
38,948

 
(28,656
)
Cash flows from financing activities:
 
 
 
Income tax benefit from equity compensation plans
1,883

 
72

Net proceeds from issuance of common stock
546

 
556

Tax payments related to equity compensation plans


(634
)
Net cash provided by (used in) financing activities
2,429

 
(6
)
Net increase (decrease) in cash and cash equivalents
34,461

 
(58,298
)
Cash and cash equivalents — beginning of period
80,979

 
87,230

Cash and cash equivalents — end of period
$
115,440

 
$
28,932

See accompanying notes.


6







JOS. A. BANK CLOTHIERS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

1.
BASIS OF PRESENTATION

Jos. A. Bank Clothiers, Inc. is a nationwide designer, manufacturer, retailer and direct marketer (through stores, catalog and Internet) of men’s tailored and casual clothing and accessories and is a retailer of tuxedo rental products. The unaudited condensed consolidated financial statements include the accounts of Jos. A. Bank Clothiers, Inc. and its wholly-owned subsidiaries (collectively referred to as “we”, “our” or “us”). All intercompany balances and transactions have been eliminated in consolidation.

The results of operations for the interim periods shown in this report are not necessarily indicative of results to be expected for the fiscal year. In the opinion of management, the information contained herein reflects all adjustments necessary to make the results of operations for the interim periods a fair statement of the operating results for these periods. These adjustments are of a normal recurring nature.

We operate on a 52-53 week fiscal year ending on the Saturday closest to January 31. The following fiscal years ended or will end on the dates indicated and will be referred to herein by their fiscal year designations:
Fiscal year 2007
February 2, 2008
Fiscal year 2008
January 31, 2009
Fiscal year 2009
January 30, 2010
Fiscal year 2010
January 29, 2011
Fiscal year 2011
January 28, 2012
Fiscal year 2012
February 2, 2013
Each fiscal year noted above consists of 52 weeks except fiscal year 2012, which consists of 53 weeks.
The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with generally accepted accounting principles in the United States of America (“GAAP”) for interim financial information and with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X and therefore do not include all of the information and footnotes required by GAAP for comparable annual financial statements. Certain notes and other information have been condensed or omitted from the interim financial statements presented in this Quarterly Report on Form 10-Q. Therefore, these financial statements should be read in conjunction with our Annual Report on Form 10-K for fiscal year 2011.
2.
SIGNIFICANT ACCOUNTING POLICIES
Cash and Cash Equivalents - Cash and cash equivalents include bank deposit accounts, money market accounts and other highly liquid investments with original maturities of 90 days or less. At October 27, 2012, substantially all of the cash and cash equivalents were invested in U.S. Treasury bills with original maturities of 90 days or less and overnight federally-sponsored agency notes.

Short-term Investments - Short-term investments consist of investments in securities with remaining maturities of less than one year, excluding investments with original maturities of 90 days or less. At October 27, 2012, short-term investments consisted solely of U.S. Treasury bills with remaining maturities ranging from less than one month to six months. These investments are classified as held-to-maturity and their market values approximate their carrying values.

Inventories - We record inventory at the lower of cost or market (“LCM”). Cost is determined using the first-in, first-out method. We capitalize into inventory certain warehousing and freight delivery costs associated with shipping our merchandise to the point of sale. We periodically review quantities of inventories on hand and compare these amounts to the expected sales of each product. We record a charge to cost of goods sold for the amount required to reduce the carrying value of inventory to estimated net realizable value.


7







Landlord Contributions - We typically receive reimbursement from landlords for a portion of the cost of leasehold improvements for new stores and, occasionally, for renovations and relocations. These landlord contributions are initially accounted for as an increase to deferred rent and as an increase to prepaid expenses and other current assets when the related store is opened. When collected, we record cash and reduce the prepaid expenses and other current assets account. The collection of landlord contributions is presented in the Condensed Consolidated Statements of Cash Flows as an operating activity. The deferred rent is amortized over the lease term in a manner that is consistent with our policy to straight-line rent expense over the term of the lease. The amortization is recorded as a reduction to sales and marketing expense, which is consistent with the classification of lease expense.

Gift Cards and Certificates - We sell gift cards and gift certificates to individuals and companies. Our incentive gift certificates are used by various companies as a reward for achievement for their employees. We also redeem proprietary gift cards and gift certificates marketed by third-party premium/incentive companies. We record a liability when a gift card/certificate is purchased. As the gift card/certificate is redeemed, we reduce the liability and record revenue. Substantially all of our gift cards/certificates do not have expiration dates and they are all subject to state escheatment laws. Based on historical experience, gift cards/certificates redemptions after the escheatment due date are remote and we recognize any income (also referred to as “breakage”) on these unredeemed gift cards/certificates on a specific identification basis on the escheatment due date.

Tuxedo Rental Products - Revenues from tuxedo rental products are recognized on a gross basis upon delivery of rental products to customers. When a customer orders a tuxedo rental from us, an order is placed with a national distributor who delivers the product to our stores, typically within several days of intended use. The national distributor owns the rental product and charges the Company a rental cost for each rental and delivery which is recorded to "Costs of goods sold".

Equity Compensation -We account for our equity awards in accordance with FASB ASC 718, “Share-Based Payment” (“ASC 718”), which requires the compensation cost resulting from all share-based awards to be recognized in the financial statements. The amount of compensation is measured based on the grant-date fair value of the awards and is recognized over the vesting period of the awards. The vesting of awards to both the officers and directors is subject to service conditions being met, currently ranging from one to three years. Additionally, the vesting of awards to officers is subject to performance conditions being met in the fiscal year that the awards are granted such as, among other things, the attainment of certain annual earnings and performance goals. For these officer awards, we estimate the probability that such goals will be attained based on results-to-date at each interim quarter-end and record compensation cost to "General and administrative expense" for these awards based on the awards projected to vest. Share-based compensation expense recognized for the third quarter and first nine months of fiscal year 2012 related to equity awards issued under the Jos. A. Bank Clothiers, Inc. 2010 Equity Incentive Plan (“Equity Incentive Plan”) was $0.2 million and $1.6 million, respectively, and the tax benefit recognized related to this compensation was $0.1 million and $0.6 million, respectively. Share-based compensation expense recognized for the third quarter and first nine months of fiscal year 2011 was $0.7 million and $2.0 million, respectively, and the tax benefit recognized related to this compensation was $0.3 million and $0.8 million, respectively.

Recently Issued Accounting Standards - In May 2011, the FASB issued ASU 2011-04, “Fair Value Measurement” (“ASU 2011-04”). ASU 2011-04 is intended to create consistency between GAAP and International Financial Reporting Standards (“IFRS”) on the definition of fair value, the guidance on how to measure fair value, and on what to disclose about fair value measurements. ASU 2011-04 was effective for financial statements issued for fiscal periods beginning after December 15, 2011, with early adoption prohibited for public entities. The adoption of ASU 2011-04 for fiscal year 2012 did not have a material impact on our consolidated financial statements.
Recently Proposed Amendments to Accounting Standards - In August 2010, the FASB issued an exposure draft, “Leases” (the “Exposure Draft”), which would replace the existing guidance in ASC 840, “Leases.” Under the Exposure Draft, a lessee's rights and obligations under all leases, including existing and new arrangements, would be recognized as assets and liabilities, respectively, on the balance sheet. In July 2011, the FASB made the decision to issue a revised exposure draft; however, deliberations are still ongoing and the FASB currently plans to issue a revised exposure draft for comment during 2013. The timing of the issuance of a final standard is uncertain at this time. If this lease guidance becomes effective on the terms currently proposed by FASB, it will likely have a significant impact on our consolidated financial statements. However, as the standard-setting process is still ongoing, we are unable to determine at this time the impact this proposed change in accounting may have on our consolidated financial statements.

8







3.
SUPPLEMENTAL CASH FLOW DISCLOSURE
The net changes in operating working capital and other components consist of the following:
 
Nine Months Ended
 
October 29, 2011
 
October 27, 2012
 
(In thousands)
(Increase) in accounts receivable
$
(3,264
)
 
$
(1,963
)
(Increase) in inventories
(96,246
)
 
(74,970
)
(Increase) in prepaids and other assets
(12,267
)
 
(9,604
)
Increase (decrease) in accounts payable
32,485

 
(13,645
)
(Decrease) in accrued expenses
(4,981
)
 
(1,708
)
(Decrease) in deferred rent and other noncurrent liabilities
(564
)
 
(931
)
Net (increase) in operating working capital and other components
$
(84,837
)
 
$
(102,821
)
Interest and income taxes paid were as follows:
 
Nine Months Ended
 
October 29, 2011
 
October 27, 2012
 
(In thousands)
Interest paid
$
310

 
$
21

Income taxes paid
$
49,476

 
$
43,223

As of October 29, 2011 and October 27, 2012, included in “Property, plant and equipment, net” and “Accrued expenses” in the Condensed Consolidated Balance Sheets are $12.4 million and $13.1 million, respectively, of accrued property, plant and equipment additions that have been incurred but not invoiced by vendors, and therefore, not paid by the end of the respective periods. The net increase in accrued property, plant, and equipment additions of $10.6 million for the first nine months of fiscal year 2011 and the net increase in accrued property, plant, and equipment additions of $6.3 million for the first nine months of fiscal year 2012 are excluded from payments for capital expenditures and changes in accrued expenses in the Condensed Consolidated Statements of Cash Flows, as these changes are non-cash items.
4.
EARNINGS PER SHARE
Basic earnings per share (“EPS”) is calculated by dividing net income by the weighted average number of common shares outstanding for the period. Diluted EPS is calculated by dividing net income by the diluted weighted average common shares, which reflects the potential dilution of common stock equivalents. The weighted average shares used to calculate basic and diluted EPS are as follows:
 
Three Months Ended
 
Nine Months Ended
 
October 29, 2011
 
October 27, 2012
 
October 29, 2011
 
October 27, 2012
 
(In thousands)
Weighted average shares outstanding for basic EPS
27,828

 
27,933

 
27,733

 
27,883

Dilutive effect of common stock equivalents
144

 
84

 
220

 
122

Weighted average shares outstanding for diluted EPS
27,972

 
28,017

 
27,953

 
28,005


We use the treasury method for calculating the dilutive effect of common stock equivalents. For the third quarter and the first nine months of fiscal years 2011 and 2012, there were no anti-dilutive common stock equivalents.

9







5.
INCOME TAXES

Income taxes are accounted for under the asset and liability method in accordance with FASB ASC 740, “Income Taxes,” (“ASC 740”). Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and tax credit carry forwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in the Condensed Consolidated Statements of Income in the period that includes the enactment date.

We account for uncertainties in income taxes pursuant to ASC 740, which clarifies the accounting for uncertainty in income taxes recognized in financial statements. We recognize tax liabilities for uncertain income tax positions (“unrecognized tax benefits”) where an evaluation has indicated that it is more likely than not that the tax positions will not be sustained in an audit. We estimate the unrecognized tax benefits as the largest amount that is more than 50% likely to be realized upon ultimate settlement. We re-evaluate these uncertain tax positions on a quarterly basis or when new information becomes available to management. The re-evaluations are based on many factors, including, but not limited to, changes in facts or circumstances, changes in tax law, settled issues as a result of audits, expirations due to statutes of limitations, and new federal or state audit activity. We also recognize accrued interest and penalties related to these unrecognized tax benefits. Changes in these accrued items are included in the provision for income taxes in the Condensed Consolidated Statements of Income.

The effective income tax rate for the third quarter of fiscal years 2012 and 2011 was 37.5%. For the first nine months of fiscal year 2012, the effective tax rate was 38.2% compared with 39.2% for the same period of fiscal year 2011. The rate decrease for the first nine months of fiscal year 2012 was primarily driven by lower state income taxes.

Significant changes to U.S. federal or state income tax rules could occur as part of future legislation. Such changes could influence our future income tax expense and/or the timing of income tax deductions. The impact of such changes on our business operations and financial statements remains uncertain. However, as the possibility of any enactment progresses, we will continue to monitor current developments and assess the potential implications of these tax law changes on our business and consolidated financial statements.

We file a federal income tax return and state and local income tax returns in various jurisdictions. The Internal Revenue Service (“IRS”) has audited tax returns through fiscal year 2008, including its examination of the tax returns for fiscal years 2007 and 2008, which was finalized in October 2010. No material adjustments were required to these tax returns as a result of the examination by the IRS. For the years before fiscal year 2009, the majority of our state and local income tax returns are no longer subject to examinations by taxing authorities.

6.
SEGMENT REPORTING
We have two reportable segments: Stores and Direct Marketing. The Stores segment includes all Company-owned stores excluding Outlet and Factory stores (“Full-line Stores”). The Direct Marketing segment includes our catalog call center and Internet operations. While each segment offers a similar mix of men’s clothing to the retail customer, the Stores segment also provides complete alterations, while the Direct Marketing segment provides certain limited alterations.
The accounting policies of the segments are the same as those described in the summary of significant accounting policies. We evaluate performance of the segments based on “four wall” contribution, which excludes any allocation of overhead from the corporate office and the distribution centers (except order fulfillment costs, which are allocated to Direct Marketing), interest and income taxes.
Our segments are strategic business units that offer similar products to retail customers by two distinctively different methods. Stores segment customers travel to Company stores to purchase merchandise and/or alterations and typically take their purchases with them from the Stores. Most of our Direct Marketing segment customers visit one or more of our Internet web sites and order online. Some of our Direct Marketing customers order through our catalog by phone, mail or fax. Direct Marketing purchases are shipped to the customer.


10







Segment data is presented in the following tables:
Three months ended October 27, 2012
 
Stores
 
Direct Marketing
 
Corporate and
Other
 
Total
 
(In thousands)
Net sales (a)
$
199,937

 
$
23,446

 
$
9,468

 
$
232,851

Depreciation and amortization
5,827

 
187

 
1,150

 
7,164

Operating income (loss) (b)
33,292

 
5,558

 
(17,682
)
 
21,168

Capital expenditures (c)
8,073

 
286

 
2,234

 
10,593

Three months ended October 29, 2011
 
Stores
 
Direct Marketing
 
Corporate and
Other
 
Total
 
(In thousands)
Net sales (a)
$
184,047

 
$
18,637

 
$
6,951

 
$
209,635

Depreciation and amortization
5,360

 
130

 
1,088

 
6,578

Operating income (loss) (b)
39,164

 
6,430

 
(21,377
)
 
24,217

Capital expenditures (c)
7,635

 
141

 
4,400

 
12,176

Nine months ended October 27, 2012
 
Stores
 
Direct Marketing
 
Corporate and
Other
 
Total
 
(In thousands)
Net sales (a)
$
598,686

 
$
69,823

 
$
26,039

 
$
694,548

Depreciation and amortization
16,986

 
540

 
3,384

 
20,910

Operating income (loss) (b)
118,695

 
19,208

 
(55,211
)
 
82,692

Capital expenditures (c)
17,292

 
387

 
4,744

 
22,423

Nine months ended October 29, 2011
 
Stores
 
Direct Marketing
 
Corporate and
Other
 
Total
 
(In thousands)
Net sales (a)
$
558,712

 
$
57,340

 
$
17,515

 
$
633,567

Depreciation and amortization
15,843

 
479

 
2,851

 
19,173

Operating income (loss) (b)
126,851

 
20,702

 
(59,701
)
 
87,852

Capital expenditures (c)
17,955

 
229

 
8,031

 
26,215

_________________________________________
(a)
Stores net sales represent all Full-line Store sales. Direct Marketing net sales represent catalog call center and Internet sales. Net sales from operating segments below the GAAP quantitative thresholds are attributable primarily to our two other operating segments — Outlet and Factory stores and Franchise stores. These operating segments have never met any of the quantitative thresholds for determining reportable segments and are included in “Corporate and Other.”

11








(b)
Operating income (loss) for the Stores and Direct Marketing segments represents profit before allocations of overhead from the corporate office and the distribution centers (except order fulfillment costs which are allocated to Direct Marketing), interest and income taxes (“four wall” contribution). Total Company shipping costs to customers of approximately $3.1 million and $3.6 million for the third quarter of fiscal years 2011 and 2012 , respectively, and approximately $10.4 million and $11.4 million for the first nine months of fiscal years 2011 and 2012, respectively, were recorded to “Sales and marketing, including occupancy costs” in the Condensed Consolidated Statements of Income. Operating income (loss) for “Corporate and Other” consists primarily of costs included in general and administrative costs and operating income or loss related to the Outlet and Factory stores and the Franchise stores operating segments. Total operating income represents profit before interest and income taxes.
(c)
Capital expenditures include payments for property, plant and equipment made for the reportable segment.

7.
LEGAL MATTERS

On March 16, 2012, Neil Holmes, a former employee of the Company, individually and on behalf of all those similarly situated, filed a Complaint (the "Holmes Complaint") against the Company in the Superior Court of California, County of Santa Clara, Case No. 112CV220780, alleging various violations of California wage and labor laws. The Holmes Complaint seeks, among other relief, certification of the case as a class action, injunctive relief, monetary damages, penalties, restitution, other equitable relief, interest, attorney's fees and costs. We intend to defend this lawsuit vigorously.
On April 5, 2012, James Waldron and Matthew Villani, on their own behalf and on behalf of all others similarly situated, filed a putative class action against the Company in the United States District Court for the District of New Jersey (Case 2:33-av-00001). On August 6, 2012, the named plaintiffs filed an Amended Class Action Complaint (the "Waldron Complaint") alleging, among other things, that the Company’s merchandise is perpetually on sale and the sale price is actually the price at which the merchandise is regularly offered. As a result, the Waldron Complaint alleges the Company’s advertising practices violate the New Jersey Consumer Fraud Act and constitute unjust enrichment. The Waldron Complaint seeks, among other relief, certification of the case as a national (or New Jersey only) class action, injunctive relief, declaratory relief, disgorgement of profits, monetary damages (including treble damages), restitution, costs and attorneys’ fees, statutory pre-judgment interest and other legal and equitable relief. We intend to defend this lawsuit vigorously.
On August 29, 2012, Patrick Edward Camasta, individually and as the representative of a class of similarly situated persons, filed a putative class action complaint (the “Camasta Complaint”) against the Company in the Circuit Court of the Nineteenth Judicial Circuit, Lake County, Illinois (Case No. 12CH4405). The Company removed the case to the United States District Court for the Northern District of Illinois, Eastern Division (Case No. 12 CV 7782). The Camasta Complaint alleges, among other things, that the Company's pattern and practice of advertising its normal retail prices as temporary price reductions violate the Illinois Consumer Fraud and Deceptive Business Practices Act and the Illinois Uniform Deceptive Trade Practices Act. The Camasta Complaint seeks, among other relief, certification of the case as a class action, actual and punitive damages, attorney fees and costs and injunctive relief. We intend to defend this lawsuit vigorously.
In addition to the litigation discussed above, we are a party to routine litigation matters that are incidental to our business and are currently not expected to be material. From time to time, additional legal matters in which we may be named as a defendant are expected to arise in the normal course of our business activities.
The resolution of our litigation matters cannot be accurately predicted and we have not estimated the costs or potential losses, if any, associated with these matters. Accordingly, we cannot determine whether our insurance coverage, if any, would be sufficient to cover such costs or potential losses, if any, and we have not recorded any provision for cost or loss associated with these actions. It is possible that our consolidated financial statements could be materially impacted in a particular fiscal quarter or year by an unfavorable outcome or settlement of any of these actions.

12







Item 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations

The information that follows should be read in conjunction with the unaudited consolidated financial statements and notes thereto included in this Quarterly Report on Form 10-Q and with our audited financial statements and notes thereto included in our Annual Report on Form 10-K for fiscal year 2011.

Overview - For the third quarter of fiscal year 2012, our net income was $13.3 million, a decrease of 11.2% as compared with $15.0 million for the third quarter of fiscal year 2011. We earned $0.47 per diluted share in the third quarter of fiscal year 2012 as compared with $0.54 per diluted share in the third quarter of fiscal year 2011. As such, diluted earnings per share decreased 13.0% as compared with the prior year period. The results of the third quarter of fiscal year 2012, as compared to the third quarter of fiscal year 2011, were primarily driven by:

11.1% increase in net sales, driven by an 8.6% increase in the Stores segment sales, which includes the impact of new stores opened, and a 25.8% increase in the Direct Marketing segment sales;

4.8% increase in comparable store sales;

560 basis point decrease in gross profit margins as a result of higher mark-downs due to increased promotional activity and lower initial mark-ups due primarily to higher sourcing costs;

100 basis point decrease in sales and marketing costs as a percentage of net sales driven primarily by lower Stores and Direct Marketing payroll, other variable selling and occupancy costs as a percentage of net sales, partially offset by higher advertising and marketing costs as a percentage of net sales; and

220 basis point decrease in general and administrative costs as a percentage of net sales driven primarily by lower corporate compensation (which includes total company performance-based incentive compensation other than commissions), distribution center and other corporate overhead costs as a percentage of net sales.

As of the end of the third quarter of fiscal year 2012, we had 587 stores, consisting of 542 Company-owned Full-line Stores, 30 Company-owned Outlet and Factory stores and 15 stores owned and operated by franchisees. We opened 31 stores in the first nine months of fiscal year 2012. In the past five completed fiscal years, we have opened 191 stores. Specifically, there were 48 new stores opened in fiscal year 2007, 40 new stores opened in fiscal year 2008, 14 new stores opened in fiscal year 2009, 36 new stores opened in fiscal year 2010 and 53 new stores opened in fiscal year 2011. The lower number of store openings in fiscal year 2009 compared to the other years was due primarily to the impact of the national economic crisis that occurred during late 2008 and into 2009, which included, but was not limited to, slowed development of malls and retail centers which restricted our ability to find suitable locations for new stores.

Including the 31 stores opened in the first nine months of fiscal year 2012, we expect to open approximately 45 to 47 stores in fiscal year 2012. This range includes approximately 10 Factory stores. Currently, we believe that the chain can be grown to approximately 800 stores consisting of approximately 700 Full-line Stores and approximately 100 Factory stores in the United States. In addition to our store opening plans for fiscal year 2012, we expect to open approximately 45 to 50 stores in fiscal year 2013, including approximately 10 Factory stores.

Capital expenditures in fiscal year 2012 are expected to be approximately $37 million to $38 million, primarily to fund the opening of approximately 45 to 47 new stores, the renovation and/or relocation of several stores, the expansion and maintenance of our distribution space and the implementation of various systems and infrastructure projects. The capital expenditures include the cost of the construction of leasehold improvements for new stores and several stores to be renovated or relocated, of which approximately $6.0 million to $6.5 million is expected to be reimbursed through landlord contributions.

From the end of the third quarter of fiscal year 2011 to the end of the third quarter of fiscal year 2012, inventory increased $50.1 million or 15.2% due primarily to new store openings, higher inventory sourcing costs and a buildup of core product inventory levels (which we started in the second half of fiscal year 2011). By the end of fiscal year 2012, we expect that inventory will have increased approximately 15% to 20%, compared to the end of fiscal year 2011, depending on sales and other factors in fiscal year 2012.


13







Critical Accounting Policies and Estimates - In preparing the consolidated financial statements, a number of assumptions and estimates are made that, in the judgment of management, are proper in light of existing general economic and company-specific circumstances. For a detailed discussion of the application of these and other accounting policies, see Note 1 to the Consolidated Financial Statements in our Annual Report on Form 10-K for fiscal year 2011.

While we have taken reasonable care in preparing these estimates and making these judgments, actual results could and probably will differ from these estimates. Management believes any difference in the actual results from the estimates will not have a material effect upon our financial position or results of operations. These estimates, among other things, were discussed by management with our Audit Committee.

Inventory. We record inventory at the lower of cost or market (“LCM”). Cost is determined using the first-in, first-out method. The estimated market value is based on assumptions for future demand and related pricing. We reduce the carrying value of inventory to net realizable value where cost exceeds estimated selling price less costs of disposal.

Management’s sales assumptions regarding sales below cost are based on our experience that most of our inventory is sold through our primary sales channels, with virtually no inventory being liquidated through bulk sales to third parties. Our LCM estimates for inventory that have been made in the past have been very reliable as a significant portion of our sales (approximately two-thirds in fiscal year 2011) are of classic, traditional products that are part of on-going programs and that bear low risk of write-down below cost. These products include items such as navy and gray suits, navy blazers, white and blue dress shirts, etc. To limit the need to sell significant amounts of product below cost, all product categories are closely monitored in an attempt to identify and correct situations in which aging goals have not been, or are not reasonably likely to be, achieved. In addition, our strong gross profit margins enable us to sell substantially all of our products above cost.

To calculate the estimated market value of our inventory, we periodically perform a detailed review of all of our major inventory classes and stock-keeping units and perform an analytical evaluation of aged inventory on a quarterly basis. Semi-annually, we compare the on-hand units and season-to-date unit sales (including actual selling prices) to the sales trend and estimated prices required to sell the units in the future, which enables us to estimate the amount which may have to be sold below cost. Substantially all of the units sold below cost are sold in our Outlet and Factory stores, through our Internet websites and catalog call center or on clearance at the Full-line Stores, typically within 24 months of purchase. Our costs in excess of selling price for units sold below cost totaled $1.8 million and $1.6 million in fiscal year 2010 and fiscal year 2011, respectively. We reduce the carrying amount of our current inventory value for products in inventory that may be sold below cost. If the amount of inventory which is sold below cost differs from the estimate, our inventory valuation adjustment could change.

Asset Valuation. Long-lived assets, such as property, plant and equipment subject to depreciation, are reviewed for impairment to determine whether events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to estimated undiscounted future cash flows expected to be generated by the asset. If the carrying amount of an asset exceeds our estimated future cash flows, an impairment charge is recognized in the amount by which the carrying amount of the asset exceeds the estimated fair value of the asset. The asset valuation estimate is principally dependent on our ability to generate profits at both the Company and store levels. These levels are principally driven by the sales and gross profit trends, which we closely monitor. While we perform a quarterly review of our long-lived assets to determine if impairment exists, the fourth quarter is typically the most significant quarter to make such a determination since it provides the best indication of performance trends in the individual stores. There were no asset valuation charges in either the first nine months of fiscal year 2012 or the first nine months of fiscal year 2011.

Lease Accounting. We use a consistent lease period (generally, the initial non-cancelable lease term plus renewal option periods provided for in the lease that can be reasonably assured) when calculating amortization of leasehold improvements and in determining straight-line rent expense and classification of a lease as either an operating lease or a capital lease. The lease term and straight-line rent expense commence on the date when we take possession and have the right to control the use of the leased premises. Funds received from the lessor intended to reimburse us for the costs of leasehold improvements are recorded as a deferred rent resulting from a lease incentive and are amortized over the lease term as a reduction to rent expense.





14







Recently Issued Accounting Standards. In May 2011, the FASB issued ASU 2011-04, “Fair Value Measurement” (“ASU 2011-04”). ASU 2011-04 is intended to create consistency between GAAP and International Financial Reporting Standards (“IFRS”) on the definition of fair value, the guidance on how to measure fair value, and on what to disclose about fair value measurements. ASU 2011-04 was effective for financial statements issued for fiscal periods beginning after December 15, 2011, with early adoption prohibited for public entities. The adoption of ASU 2011-04 for fiscal year 2012 did not have a material impact on our consolidated financial statements.
Recently Proposed Amendments to Accounting Standards. In August 2010, the FASB issued an exposure draft, “Leases” (the “Exposure Draft”), which would replace the existing guidance in ASC 840, “Leases.” Under the Exposure Draft, a lessee's rights and obligations under all leases, including existing and new arrangements, would be recognized as assets and liabilities, respectively, on the balance sheet. In July 2011, the FASB made the decision to issue a revised exposure draft; however, deliberations are still ongoing and the FASB currently plans to issue a revised exposure draft for comment during 2013. The timing of the issuance of a final standard is uncertain at this time. If this lease guidance becomes effective on the terms currently proposed by FASB, it will likely have a significant impact on our consolidated financial statements. However, as the standard-setting process is still ongoing, we are unable to determine at this time the impact this proposed change in accounting may have on our consolidated financial statements.
Results of Operations
The following table is derived from our Condensed Consolidated Statements of Income and sets forth, for the periods indicated, the items included in the Condensed Consolidated Statements of Income expressed as a percentage of net sales.
 
Percentage of Net Sales
 
Percentage of Net Sales
 
Three Months Ended
 
Nine Months Ended
 
October 29, 2011
 
October 27, 2012
 
October 29, 2011
 
October 27, 2012
Net sales
100.0
 %
 
100.0
%
 
100.0
 %
 
100.0
%
Cost of goods sold
37.4

 
43.0

 
36.8

 
40.5

Gross profit
62.6

 
57.0

 
63.2

 
59.5

Sales and marketing expenses
41.5

 
40.5

 
40.1

 
39.8

General and administrative expenses
9.6

 
7.4

 
9.3

 
7.8

Total operating expenses
51.1

 
47.9

 
49.3

 
47.6

Operating income
11.6

 
9.1

 
13.9

 
11.9

Total other income
(0.1
)
 

 

 

Income before provision for income taxes
11.4

 
9.1

 
13.9

 
11.9

Provision for income taxes
4.3

 
3.4

 
5.4

 
4.6

Net income
7.1
 %
 
5.7
%
 
8.4
 %
 
7.4
%
Net Sales — Net sales increased 11.1% to $232.9 million in the third quarter of fiscal year 2012 as compared with $209.6 million in the third quarter of fiscal year 2011. Net sales for the first nine months of fiscal year 2012 increased 9.6% to $694.5 million as compared with $633.6 million in the first nine months of fiscal year 2011.
The total net sales increase includes increases in the Stores segment sales of 8.6% and 7.2% for the third quarter and first nine months of fiscal year 2012, respectively, as compared to the same periods in 2011, driven primarily by increases in comparable store sales and sales from new stores. Comparable store sales increased 4.8% and 3.5% for the third quarter and first nine months of fiscal year 2012, respectively, as compared to the same periods in 2011. This increase in comparable store sales for the third quarter of fiscal year 2012 was primarily due to increased traffic (as measured by number of transactions), partially offset by lower dollars per transaction, while the first nine months of fiscal year 2012 was primarily due to increased dollars per transaction, partially offset by lower traffic. Comparable store sales include merchandise and tuxedo rental sales generated in all Company-owned stores that have been open for at least 13 full months.
Direct Marketing segment sales increased 25.8% and 21.8% for the third quarter and first nine months of fiscal year 2012, respectively, as compared to the same periods in fiscal year 2011, driven primarily by an increase in the Internet channel, which represents the primary portion of this reportable segment. Catalog call center sales also contributed to the growth for the third quarter of fiscal year 2012, but were down for the nine month period. The increases in the Internet channel for the third quarter and the first nine months of fiscal year 2012 were primarily the result of higher website traffic and conversion rates, partially offset by lower average order values.

15








Of the major product categories, other tailored clothing (which includes sportscoats, blazers, and dress pants), dress shirts, and sportswear generated strong unit sales growth, while suits generated moderate unit sales growth, during the third quarter of fiscal year 2012. For the first nine months of fiscal year 2012, dress shirts generated strong unit sales growth, suits and sportswear generated moderate unit sales growth, while other clothing unit sales increased slighty.

The following table summarizes store opening and closing activity during the respective periods.
 
Three Months Ended
 
Nine Months Ended
 
October 29, 2011
 
October 27, 2012
 
October 29, 2011
 
October 27, 2012
 
Stores
 
Square
Feet*
 
Stores
 
Square
Feet*
 
Stores
 
Square
Feet*
 
Stores
 
Square
Feet*
Stores open at the beginning of the period
526

 
2,369

 
568

 
2,530

 
506

 
2,282

 
556

 
2,474

Stores opened
20

 
85

 
19

 
86

 
41

 
176

 
31

 
142

Stores closed
(2
)
 
(25
)
 

 

 
(3
)
 
(29
)
 

 

Stores open at the end of the period
544

 
2,429

 
587

 
2,616

 
544

 
2,429

 
587

 
2,616


*Square feet are presented in thousands and exclude the square footage of our franchise stores.

Gross profit - Our gross profit represents net sales less cost of goods sold. Cost of goods sold primarily includes the cost of merchandise, tailoring and freight from vendors to the distribution center and from the distribution center to the stores. This gross profit classification may not be comparable to the classification used by certain other entities. Some entities include distribution (including depreciation), store occupancy, buying and other costs in cost of goods sold. Other entities (including us) exclude such costs from gross profit, including them instead in general and administrative and/or sales and marketing expenses.

Gross profit totaled $132.6 million or 57.0% of net sales in the third quarter of fiscal year 2012, as compared with $131.3 million or 62.6% of net sales in the third quarter of fiscal year 2011, an increase in gross profit dollars of approximately $1.4 million and a decrease in the gross profit margin (gross profit as a percent of net sales) of 560 basis points. Gross profit totaled $413.3 million or 59.5% of net sales in the first nine months of fiscal year 2012, as compared with $400.5 million or 63.2% of net sales in the first nine months of fiscal year 2011, an increase in gross profit dollars of $12.8 million and a decrease in gross profit margin of 370 basis points. The decrease in gross profit margin for the third quarter and the first nine months of fiscal year 2012 was due to higher mark-downs as compared to the prior year period due to increased promotional activity and lower initial mark-ups due primarily to higher sourcing costs.

As stated in our Annual Report on Form 10-K for fiscal year 2011, we are subject to certain risks that may affect our gross profit, including risks of doing business on an international basis, increased costs of raw materials and other resources and changes in economic conditions. We expect to continue to be subject to these gross profit risks in the future. Specifically, with respect to the costs of raw materials, our products are manufactured using several key raw materials, most notably wool and cotton. The prices on these commodities, as well as other costs in the supply chain, remain volatile and have a significant impact on our product costs which could potentially have a negative impact on our gross profit in fiscal year 2012. Additionally, our gross profit margin may be negatively impacted during the development phase of some of our new business initiatives such as the tuxedo rental business and the Factory store concept.

Sales and Marketing Expenses - Sales and marketing expenses consist primarily of a) Full-line Store, Outlet and Factory store and Direct Marketing occupancy, payroll, selling and other variable selling costs (which include such costs as shipping costs to customers and credit card processing fees) and b) total Company advertising and marketing expenses. Sales and marketing expenses increased to $94.4 million or 40.5% of net sales in the third quarter of fiscal year 2012 from $86.9 million or 41.5% of net sales in the third quarter of fiscal year 2011. Sales and marketing expenses increased to $276.3 million or 39.8% of net sales in the first nine months of fiscal year 2012 from $253.9 million or 40.1% of net sales in the first nine months of fiscal year 2011. The decreases as a percentage of sales for the third quarter and the first nine months of fiscal year 2012 were driven primarily by the sales increases which provided leverage on the Stores and Direct Marketing payroll, other variable selling and occupancy costs. The favorable impact of this leverage was partially offset by advertising and marketing

16







costs increasing at a higher growth rate than sales due primarily to increased promotional activity and online advertising as compared to last year.

The increase in sales and marketing expenses relates primarily to the opening of 43 new stores since the end of the third quarter of fiscal year 2011 and sales growth. For the third quarter of fiscal year 2012, the net increase of approximately $7.5 million compared with the third quarter of fiscal year 2011 consists of a) $2.6 million related to additional occupancy costs, b) $2.5 million related to advertising and marketing expenses, c) $1.8 million related to additional Stores and Direct Marketing payroll and benefits costs, and d) $0.6 million related to other variable selling costs. For the first nine months of fiscal year 2012, the increase of approximately $22.4 million consists of a) $7.9 million related to advertising and marketing expenses, b) $7.6 million related to additional occupancy costs, c) $5.8 million related to additional Stores and Direct Marketing payroll and benefits costs, and d) $1.1 million related to other variable selling costs. We expect sales and marketing expenses to increase for the remainder of fiscal year 2012 as compared to fiscal year 2011 primarily as a result of our anticipated opening of 45 to 47 new stores in fiscal year 2012, the full year operation of stores that were opened during fiscal year 2011, an increase in advertising expenditures, driven both by volume and price increases, and costs related to new business initiatives.
General and Administrative Expenses - General and administrative expenses (“G&A”), which consist primarily of corporate and distribution center costs, were $17.1 million and $20.1 million for the third quarter of fiscal years 2012 and 2011, respectively. G&A expenses were $54.3 million for the first nine months of fiscal year 2012 compared to $58.7 million for the first nine months of fiscal year 2011. As a percent of net sales, G&A expenses were 7.4% and 9.6% for the third quarter of fiscal years 2012 and 2011, respectively, and 7.8% and 9.3% for the first nine months of fiscal years 2012 and 2011, respectively. The lower level of expenses as a percentage of net sales for the third quarter and the first nine months of fiscal year 2012 was driven primarily by lower corporate compensation (which includes total company performance-based incentive compensation other than commissions), other corporate overhead and distribution center costs as a percentage of net sales.

For the third quarter of fiscal year 2012, the decrease of approximately $3.0 million in G&A expenses compared with the third quarter of fiscal year 2011 was due to a) lower corporate compensation (which includes total company performance-based incentive compensation other than commissions) and group medical costs of $2.3 million, b) lower distribution costs of $0.3 million, c) lower professional fees (including outsourced services) of $0.3 million, and d) lower other corporate overhead of $0.1 million. For the first nine months of fiscal year 2012, the decrease of approximately $4.4 million in G&A expenses compared with the first nine months of fiscal year 2011 was due to a) lower corporate compensation and group medical costs of $4.2 million, b) lower other corporate overhead of $0.3 million, and c) lower corporate professional services (including outsourced services) of $0.1 million, partially offset by higher distribution center costs of $0.2 million. We expect G&A expenses to increase for the remainder of fiscal year 2012 as compared to fiscal year 2011 primarily as a result of growth in the business.

Other Income (Expense) - Other income (expense) for the third quarter and the first nine months of fiscal year 2012 was $0.1 million and $0.3 million of income, respectively, compared to $0.2 million and $0.1 million of expense, respectfully, for the third quarter and first nine months of fiscal year 2011. The improvement over fiscal year 2011 was primarily due to lower interest expense and higher average cash and short-term investment balances. Our net interest income is primarily a result of earnings from investments in short-term treasury bills and overnight federally-sponsored agency notes.
    
Income Taxes - The effective income tax rate for the third quarter of fiscal years 2012 and 2011 was 37.5%. For the first nine months of fiscal year 2012, the effective tax rate was 38.2% compared with 39.2% for the same period of fiscal year 2011. The rate decrease for the first nine months of fiscal year 2012 was primarily driven by lower state income taxes.

Significant changes to U.S. federal or state income tax rules could occur as part of future legislation. Such changes could influence our future income tax expense and/or the timing of income tax deductions. The impact of such changes on our business operations and financial statements remains uncertain. However, as the possibility of any enactment progresses, we will continue to monitor current developments and assess the potential implications of these tax law changes on our business and consolidated financial statements.

We file a federal income tax return and state and local income tax returns in various jurisdictions. The Internal Revenue Service (“IRS”) has audited tax returns through fiscal year 2008, including its examination of the tax returns for fiscal years 2007 and 2008, which was finalized in October 2010. No material adjustments were required to these tax returns as a result of the examination by the IRS. For the years before fiscal year 2009, the majority of our state and local income tax returns are no longer subject to examinations by taxing authorities.

Seasonality - Our net sales, net income and inventory levels fluctuate on a seasonal basis and therefore the results for one quarter are not necessarily indicative of the results that may be achieved for a full fiscal year.

17







The increased customer traffic during the holiday season and our increased marketing efforts during this peak selling season have resulted in sales and profits generated during the fourth quarter being the largest quarter of annual sales and profits as compared to the other three quarters. Seasonality is also impacted by growth as more new stores have historically been opened in the second half of the year. During the fourth quarters of fiscal years 2009, 2010 and 2011, we generated approximately 36%, 37% and 35%, respectively, of our annual net sales and approximately 50%, 48% and 45%, respectively, of our annual net income.
Liquidity and Capital Resources - Our principal sources of liquidity are our cash from operations, cash and cash equivalents and short-term investments. These sources of liquidity are used for our ongoing cash requirements.

The following table summarizes our sources and uses of funds as reflected in the Condensed Consolidated Statements of Cash Flows:
 
Nine Months Ended
 
October 29, 2011
 
October 27, 2012
 
(In thousands)
Cash provided by (used in):
 
 
 
Operating activities
$
(6,916
)
 
$
(29,636
)
Investing activities
38,948

 
(28,656
)
Financing activities
2,429

 
(6
)
Net increase (decrease) in cash and cash equivalents
$
34,461

 
$
(58,298
)

Our cash and cash equivalents consist primarily of U.S. Treasury bills with original maturities of 90 days or less and overnight federally-sponsored agency notes. Our short-term investments consist of U.S. Treasury bills with remaining maturities of less than one year, excluding investments with original maturities of 90 days or less. The following table summarizes our cash and cash equivalents and short-term investments and debt balances as of the respective period ends:
 
October 29, 2011
 
January 28, 2012
 
October 27, 2012
 
(In thousands)
Cash and cash equivalents
$
115,440

 
$
87,230

 
$
28,932

Short-term investments
124,626

 
240,252

 
246,485

Total
$
240,066

 
$
327,482

 
$
275,417

 
 
 
 
 
 
Long-term debt
$

 
$

 
$

 
The significant changes in sources and uses of funds through October 27, 2012 are discussed below.

Cash used in our operating activities of $29.6 million in the first nine months of fiscal year 2012 was primarily the result of an increase in operating working capital and other components of $102.8 million, partially offset by net income of $51.3 million and depreciation and amortization and other non-cash items of $21.9 million. The increase in operating working capital and other components included the following:
an increase in inventory of $75.0 million primarily as a result of the replenishment of units sold in fiscal 2011, higher inventory sourcing costs and a buildup of core product inventory levels (which we started in the second half of fiscal year 2011);
a decrease in accounts payable of $13.6 million due primarily to the timing of payments to vendors;
an increase in prepaid and other assets of $9.6 million due primarily to an increase in prepaid income taxes;
a reduction in accrued expenses totaling $1.7 million (excluding accrued property, plant and equipment) related primarily to the payment of incentive compensation and income taxes that had been accrued at the end of fiscal year 2011; and

18







an increase in accounts receivable of $2.0 million due primarily to higher credit card receivables from transactions through American Express, MasterCard and Visa as a result of increased sales near the end of the third quarter of fiscal year 2012 as compared with the end of fiscal year 2011.
Accounts payable represent all short-term liabilities for which we have received a vendor invoice prior to the end of the reporting period. Accrued expenses represent all other short-term liabilities related to, among other things, vendors from whom invoices have not been received, employee compensation, federal and state income taxes and unearned gift cards and gift certificates.
From the end of the third quarter of fiscal year 2011 to the end of the third quarter of fiscal year 2012, inventory increased $50.1 million or 15.2% due primarily to new store openings, higher inventory sourcing costs and a buildup of core product inventory levels (which we started in the second half of fiscal year 2011). By the end of fiscal year 2012, we expect that inventory will have increased approximately 15% to 20%, compared to the end of fiscal year 2011, depending on sales and other factors in fiscal year 2012.
Cash used in investing activities of $28.7 million for the first nine months of fiscal year 2012 relates to $6.2 million of net payments to acquire short-term investments and $22.4 million of payments for capital expenditures, as described below.

Cash used in financing activities of less than $0.1 million relates primarily to tax payments associated with equity compensation plans, offset by proceeds from the issuance of common stock (including the related tax benefits).

For fiscal year 2012, we expect to spend approximately $37 million to $38 million on capital expenditures, primarily to fund the anticipated opening of approximately 45 to 47 new stores, the renovation and/or relocation of several stores, the expansion and maintenance of our distribution space and the implementation of various systems and infrastructure projects.

The capital expenditures include the cost of the construction of leasehold improvements for new stores and several stores to be renovated or relocated, of which approximately $6.0 million to $6.5 million is expected to be reimbursed through landlord contributions. These amounts are typically paid by the landlords after we complete construction and receive the appropriate lien waivers from contractors.

We spent approximately $22.4 million on capital expenditures in the first nine months of fiscal year 2012 primarily related to payments for the stores opened or being constructed during the first nine months of the fiscal year. In addition, capital expenditures for the period include payments for property, plant and equipment additions accrued at fiscal year-end 2011 related to stores opened and the expansion of our distribution capacity in fiscal year 2011. For the stores opened, renovated and relocated in the first nine months of fiscal year 2012, we negotiated approximately $4.6 million of landlord contributions. The table below summarizes the landlord contributions that were negotiated and collected related to the stores opened, renovated and relocated in fiscal years 2012 and 2011.
 
Negotiated
Amounts
 
Amounts
Collected in
Fiscal Year
2011
 
Amounts
Collected in
 Fiscal Year
2012
 
Amounts
Outstanding
October 27,
2012
 
(In thousands )
Full Fiscal Year 2011 Store Openings (53 Stores), Renovations and Relocations
$
6,758

 
$
3,901

 
$
2,857

 
$

First Nine Months of Fiscal Year 2012 Store Openings (31 Stores), Renovations and Relocations
4,644

 

 
1,618

 
3,026

 
$
11,402

 
$
3,901

 
$
4,475

 
$
3,026


The outstanding amounts of the landlord contributions for the stores opened, renovated and relocated in fiscal year 2012 are primarily expected to be received within the next 12 months.

Management believes that our cash from operations, existing cash and cash equivalents and short-term investments will be sufficient to fund our planned capital expenditures and operating expenses through at least the next 12 months.

Off-Balance Sheet Arrangements - We have no off-balance sheet arrangements other than our operating lease agreements.


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Effects of Inflation and Changing Prices

Inflation and changing prices could have a material adverse impact on our operations, financial condition and results of operations, especially with respect to our product costs which are largely driven by cotton and wool prices and other production inputs such as labor costs which are largely tied to the labor markets and economies of the various countries in which our vendors are located. In general, we will attempt, over time, to increase prices to largely counteract the increasing costs due to inflation. However there is no assurance that our customers will accept such higher prices, especially over a short-term period.

Tabular Disclosure of Contractual Obligations

Our principal commitments are non-cancelable operating leases in connection with our retail stores, certain tailoring facilities and equipment and inventory purchase commitments. Under the terms of certain of the retail store leases, we are required to pay a base annual rent, plus a contingent amount based on sales (“contingent rent”). In addition, many of these leases include scheduled rent increases. Base annual rent and scheduled rent increases are included in the contractual obligations table below for operating leases, as these are the only rent-related commitments that are determinable at this time.

The following table reflects a summary of our contractual cash obligations and other commercial commitments for the periods indicated, including amounts paid in the first nine months of fiscal year 2012 unless otherwise indicated.
Contractual Obligations and Commercial Commitments
Payments Due by Period
 
(In thousands)
 
2012
 
2013-2015
 
2016-2017
 
Beyond 2017
 
Total(f)
Operating lease obligations (a) (b)
$
70,362

 
$
194,703

 
$
88,163

 
$
101,777

 
$
455,005

Inventory purchase commitments (c)
111,033

 
151,955

 

 

 
262,988

Related party agreement (d)
825

 
825

 

 

 
1,650

License agreement (e)
165

 
495

 

 

 
660

Total
182,385

 
347,978

 
88,163

 
101,777

 
720,303

___________________________
(a)
Includes various lease agreements signed prior to October 27, 2012 for stores to be opened and equipment placed in service subsequent to October 27, 2012.
(b)
Excludes contingent rent and other lease costs.
(c)
Represents the value of expected future inventory purchases for receipts through fiscal year 2013 for which purchase orders have been issued or other commitments have been made to vendors as of October 27, 2012.
(d)
Relates to a consulting agreement with our current Chairman of the Board to consult on matters of strategic planning and initiatives.
(e)
Relates to an agreement with David Leadbetter, a golf professional, which allows us to produce golf and other apparel under his name.
(f)
The total does not include obligations for unrecognized tax benefits and related penalties and interest of $0.6 million which have been excluded from the above table as the amount to be settled in cash and the specific payment dates are not known.


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Item 3.
Quantitative and Qualitative Disclosures About Market Risk

At October 27, 2012, we were not a party to any derivative financial instruments. We do business with all of our product vendors in U.S. currency and do not have direct foreign currency risk. However, a devaluation of the U.S. dollar against the foreign currencies of our suppliers could have a material adverse effect on our product costs and resulting gross profit. We currently invest substantially all of our excess cash in short-term investments, primarily in U.S. Treasury bills with original maturities of less than one year, overnight federally-sponsored agency notes and money market accounts, where returns effectively reflect current interest rates. As a result, market interest rate changes may impact our net interest income or expense. The impact will depend on variables such as the magnitude of rate changes and the level of excess cash balances. A 100 basis point change in interest rates would have changed interest income by approximately $2.8 million in fiscal year 2011.
Item 4.
Controls and Procedures

Limitations on Control Systems. Because of their inherent limitations, disclosure controls and procedures and internal control over financial reporting (collectively, “Control Systems”) may not prevent or detect all failures or misstatements of the type sought to be avoided by Control Systems. Also, projections of any evaluation of the effectiveness of our Control Systems to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. Management, including our Chief Executive Officer (the “CEO”) and Chief Financial Officer (the “CFO”), does not expect that our Control Systems will prevent all errors or all fraud. A Control System, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the Control System are met. Further, the design of a Control System must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all Control Systems, no evaluation can provide absolute assurance that all control issues and instances of fraud, if any, within the Company have been detected. Reports by management, including the CEO and CFO, on the effectiveness of our Control Systems express only reasonable assurance of the conclusions reached.
Disclosure Controls and Procedures. We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed in our reports under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), is recorded, processed, summarized, and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to management, including the CEO and CFO, as appropriate, to allow timely decisions regarding required disclosure.
Management, with the participation of the CEO and CFO, has evaluated the effectiveness, as of October 27, 2012, of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act). Based on that evaluation, the CEO and CFO have concluded that our disclosure controls and procedures were effective as of October 27, 2012.
Changes in Internal Control over Financial Reporting. There were no changes in our internal control over financial reporting identified in connection with the evaluation required by paragraph (d) of Section 240.13a-15 of the Exchange Act that occurred during our last fiscal quarter that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

PART II. OTHER INFORMATION

Item 1.
Legal Proceedings

On March 16, 2012, Neil Holmes, a former employee of the Company, individually and on behalf of all those similarly situated, filed a Complaint (the "Holmes Complaint") against the Company in the Superior Court of California, County of Santa Clara, Case No. 112CV220780, alleging various violations of California wage and labor laws. The Holmes Complaint seeks, among other relief, certification of the case as a class action, injunctive relief, monetary damages, penalties, restitution, other equitable relief, interest, attorney's fees and costs. We intend to defend this lawsuit vigorously.
On April 5, 2012, James Waldron and Matthew Villani, on their own behalf and on behalf of all others similarly situated, filed a putative class action against the Company in the United States District Court for the District of New Jersey (Case 2:33-av-00001). On August 6, 2012, the named plaintiffs filed an Amended Class Action Complaint (the "Waldron Complaint") alleging, among other things, that the Company’s merchandise is perpetually on sale and the sale price is actually the price at which the merchandise is regularly offered. As a result, the Waldron Complaint alleges the Company’s advertising practices violate the New Jersey Consumer Fraud Act and constitute unjust enrichment. The Waldron Complaint seeks, among other relief, certification of the case as a national (or New Jersey only) class action, injunctive relief, declaratory relief, disgorgement of profits, monetary damages (including treble damages), restitution, costs and attorneys’ fees, statutory pre-judgment interest and other legal and equitable relief. We intend to defend this lawsuit vigorously.

21







On August 29, 2012, Patrick Edward Camasta, individually and as the representative of a class of similarly situated persons, filed a putative class action complaint (the “Camasta Complaint”) against the Company in the Circuit Court of the Nineteenth Judicial Circuit, Lake County, Illinois (Case No. 12CH4405). The Company removed the case to the United States District Court for the Northern District of Illinois, Eastern Division (Case No. 12 CV 7782). The Camasta Complaint alleges, among other things, that the Company's pattern and practice of advertising its normal retail prices as temporary price reductions violate the Illinois Consumer Fraud and Deceptive Business Practices Act and the Illinois Uniform Deceptive Trade Practices Act. The Camasta Complaint seeks, among other relief, certification of the case as a class action, actual and punitive damages, attorney fees and costs and injunctive relief. We intend to defend this lawsuit vigorously.
In addition to the litigation discussed above, we are a party to routine litigation matters that are incidental to our business and are currently not expected to be material. From time to time, additional legal matters in which we may be named as a defendant are expected to arise in the normal course of our business activities.
The resolution of our litigation matters cannot be accurately predicted and we have not estimated the costs or potential losses, if any, associated with these matters. Accordingly, we cannot determine whether our insurance coverage, if any, would be sufficient to cover such costs or potential losses, if any, and we have not recorded any provision for cost or loss associated with these actions. It is possible that our consolidated financial statements could be materially impacted in a particular fiscal quarter or year by an unfavorable outcome or settlement of any of these actions.

Item 1A.
Risk Factors

In addition to the other information set forth in this report, you should carefully consider the factors discussed under the caption “Item 1A. Risk Factors” in our Annual Report on Form 10-K for fiscal year 2011, which could materially affect our business, financial condition or future results. The risks described in our Annual Report on Form 10-K for fiscal year 2011 are not the only risks facing us. Additional risks and uncertainties, including those not currently known to us or that we currently deem to be immaterial also could materially adversely affect our business, financial condition and/or operating results. There have been no material changes in our risk factors from those disclosed in our Annual Report on Form 10-K for fiscal year 2011 except for the following:
Our advertising, marketing and promotional activities are highly regulated.
Our operations are subject to various federal and state consumer protection laws and regulations related to our advertising, marketing and promotional activities. We continue to be subject to a consent decree entered into in 2004 mandating certain advertising practices relating to sales promotions in the state of New York (the “Existing Assurance”). We received from the New York Office of the Attorney General (the "New York OAG") a letter dated April 25, 2011, requesting certain documents needed to evaluate our compliance with New York state law and the Existing Assurance. By letter dated November 15, 2011, the New York OAG proposed to resolve its investigation by having the Company enter into a new assurance of discontinuance (the "Proposed Assurance") which would, among other things, mandate certain more specific advertising practices relating to sales promotions in the state of New York. We have communicated to the New York OAG our response to the Proposed Assurance.

On August 4, 2011, the State of Georgia Governor's Office of Consumer Protection (the “Georgia OCP”) issued an investigative demand directing that we produce certain items in connection with an investigation being conducted on behalf of the Administrator of the Georgia Fair Business Practices Act (the “FBPA”). On June 27, 2012, the Georgia OCP issued a Notice of Contemplated Legal Action for alleged violations of the FBPA. The Notice stated that the Administrator of the FBPA may accept an Assurance of Voluntary Compliance in lieu of initiating any legal action. We subsequently met with the Georgia OCP and are producing additional information at its request.

In July 2012, we received a subpoena from the Florida Attorney General requiring the production of certain information relating to our advertising and sales promotion practices. We are in the process of complying with the subpoena.

We endeavor to monitor and comply with all applicable laws and regulations (including the Existing Assurance) to ensure that our advertising, marketing and promotional activities comply with all applicable legal requirements, many of which involve subjective judgments. It is possible that any resolution which we may reach with any governmental authority may materially impact our current marketing program. Any changes in such laws or regulations or how such laws or regulations are enforced (including resolution of any existing or future governmental action), or any failure to comply with such laws or regulations could have a material adverse effect on our business, financial condition and results of operations. Additionally, inconsistent or conflicting regulations among states relating to advertising, marketing and promotional activities could make it difficult to craft and implement national advertising and promotional campaigns.


22







Item 6.
Exhibits
Exhibits
31.1
 
Certification of Principal Executive Officer Pursuant to Section 302 of the Sarbanes‑Oxley Act of 2002.
31.2
 
Certification of Principal Financial Officer Pursuant to Section 302 of the Sarbanes‑Oxley Act of 2002.
32.1
 
Certification of Principal Executive Officer Pursuant to Section 906 of the Sarbanes‑Oxley Act of 2002.
32.2
 
Certification of Principal Financial Officer Pursuant to Section 906 of the Sarbanes‑Oxley Act of 2002.
101.INS
 
XBRL Instance Document. **
101.SCH
 
XBRL Taxonomy Extension Schema Document. **
101.CAL
 
XBRL Taxonomy Extension Calculation Linkbase Document. **
101.DEF
 
XBRL Taxonomy Extension Definition Linkbase Document. **
101.LAB
 
XBRL Taxonomy Extension Label Linkbase Document. **
101.PRE
 
XBRL Taxonomy Extension Presentation Linkbase Document. **

**
Pursuant to Rule 406T of Regulation S-T, these interactive data files are deemed not filed or part of a registration statement or prospectus for purposes of Sections 11 or 12 of the Securities Act of 1933, as amended, are deemed not filed for purposes of Section 18 of the Securities and Exchange Act of 1934, as amended, and otherwise are not subject to liability under those sections.


23







SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 
 
Jos. A. Bank Clothiers, Inc.
(Registrant)
 
Dated:
November 28, 2012
/s/ DAVID E. ULLMAN  
 
 
David E. Ullman 
 
 
Executive Vice President,
Chief Financial Officer
(Principal Financial and Accounting Officer and Duly Authorized Officer) 


24







Exhibit Index
Exhibits
31.1
 
Certification of Principal Executive Officer Pursuant to Section 302 of the Sarbanes‑Oxley Act of 2002.
31.2
 
Certification of Principal Financial Officer Pursuant to Section 302 of the Sarbanes‑Oxley Act of 2002.
32.1
 
Certification of Principal Executive Officer Pursuant to Section 906 of the Sarbanes‑Oxley Act of 2002.
32.2
 
Certification of Principal Financial Officer Pursuant to Section 906 of the Sarbanes‑Oxley Act of 2002.
101.INS
 
XBRL Instance Document. **
101.SCH
 
XBRL Taxonomy Extension Schema Document. **
101.CAL
 
XBRL Taxonomy Extension Calculation Linkbase Document. **
101.DEF
 
XBRL Taxonomy Extension Definition Linkbase Document. **
101.LAB
 
XBRL Taxonomy Extension Label Linkbase Document. **
101.PRE
 
XBRL Taxonomy Extension Presentation Linkbase Document. **

**
Pursuant to Rule 406T of Regulation S-T, these interactive data files are deemed not filed or part of a registration statement or prospectus for purposes of Sections 11 or 12 of the Securities Act of 1933, as amended, are deemed not filed for purposes of Section 18 of the Securities and Exchange Act of 1934, as amended, and otherwise are not subject to liability under those sections.


25