Tailored Brands, Inc. (TLRD) Q2 2018 Earnings Conference Call Transcript

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Tailored Brands, Inc. (NYSE:TLRD)
Q2 2018 Earnings Conference Call
Sept. 12, 2017, 5:00 p.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Greetings and welcome to Tailored Brands’ Second Quarter 2018 Results Conference Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. If anyone should require operator assistance during the conference, please press “*0” on your telephone keypad. As a reminder, this conference is being recorded.

I would now like to turn the conference over to your host, Julie MacMedan.

Julie MacMedanVice President of Investor Relations

Thank you and good afternoon, everyone. Welcome to Tailored Brands’ Second Quarter 2018 Results Conference Call. This call is being webcast and a replay will be available on the company’s Investor Relations website, ir.tailoredbrands.com.

Please note that comments made during the conference call contain forward-looking statements within the meaning of the United States federal securities laws. These statements are subject to significant business, economic and competitive risks, uncertainties, and contingencies, many of which are beyond our control. Any forward-looking statements are not guarantees of future performance and actual results may differ materially from those in such forward-looking statements.

Please refer to today’s earnings release, our annual report on Form 10-K, and quarterly reports on Form 10-Q to understand these risks and uncertainties. You can access all of these reports on Tailored Brands’ IR website. In addition, the information on this call speaks only as of today, September 12, 2018, and we assume no obligation to publicly update or revise our forward-looking statements.

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

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

Doug EwertChief Executive Officer

Thank you, Julie, and good afternoon, everyone. Before I get into a review of our quarterly results, since this is my last quarterly call as CEO, I want to say that it’s been my pleasure to speak to you on behalf of Tailored Brands all these years. The past two decades I’ve spent with the company have been extremely rewarding and I’ll miss working with my amazing colleagues. I’m very proud of all that we’ve accomplished together to position Tailored Brands for long-term success.

Today we have a solid foundation in place, with a compelling business, brands that can win in today’s market, and the potential to create value for our shareholders. That’s why it’s a good time for me to retire from Tailored Brands and turn over the reins to new leadership. I’m confident that our board will select a highly qualified CEO who will take our company to new heights.

I’d like to introduce Dinesh Lathi, our Executive Chairman, to say a few words about the transition. Dinesh has a strong track record of building high-performing teams who deliver customer-focused innovation. He’ll help us achieve a seamless transition and continue to strengthen our leadership position in the marketplace. Dinesh?

Dinesh LathiExecutive Chairman of the Board of Directors

Thanks, Doug. As Doug mentioned, Tailored Brands’ business is strong and we have an experienced executive management team in place to execute our strategic priorities. I am honored and excited to lead the team during the transition process.

The Board has begun a comprehensive search for a new CEO. Our top priority is identifying the best person to lead the company. The Board will move forward thoughtfully and will take the time it needs to find the right leader for Tailored Brands.

In the meantime, starting at the end of September, I will be overseeing Tailored Brands’ day-to-day operations to ensure a smooth transition. I am focused on working with the executive team to accelerate the pace of execution and innovation in our core growth strategies of: meeting consumers’ demand for personalization by growing our custom business; strengthening our brands through transformative marketing campaigns; and enhancing our omnichannel capabilities to deliver a superior shopping experience.

On behalf of the Board, I want to thank Doug for his 23 years of service at Tailored Brands. Under Doug’s leadership, this team has accomplished great things and I’m confident we will continue to deliver on our top strategic priorities.

With that, I will now turn it back to Doug to review the second quarter and our plans to grow the business.

Doug EwertChief Executive Officer

Thanks, Dinesh. Today I’d like to recap second quarter highlights and trends in our business and share with you progress on our key growth strategies. In Q2, we posted positive retail comp sales of 1.7%, with positive comps at all brands.

I’m also pleased to report solid progress on our growth strategies. For the second quarter of 2018, custom sales averaged over $4 million per week, doubling from $2 million from the same period a year ago. We continued to strengthen our brands through fresh marketing campaigns that drove increases in new-to-file customers and transactions at Men’s Wearhouse, Jos. A. Bank, and Moores, and we continued to enhance the omnichannel experience by scaling our live e-commerce service that connects our online customers with in-store wardrobe consultants.

We also made good progress reducing inventory across our brands, which is increasingly important as custom clothing becomes a greater percentage of our business. We’re moving toward a more efficient inventory model that will unlock cash and improve the customer experience in our stores.

Now I’d like to review our second quarter results by brand. Men’s Wearhouse comp sales increased 1%. We continued to deliver positive transactions at our largest brand and we were pleased with increases in new-to-file customers. We also delivered higher average unit retail. Higher average unit retail was driven primarily by increased custom suit sales, which more than offset a deeper discount in seasonal merchandise to achieve our inventory goals.

The combination of higher transactions and higher average unit retail drove strong clothing comps that more than compensated for an 11.5% decline in rental comps. The decrease in rental comps primarily reflected timing shifts versus last year that Jack will explain in more detail. For the full year, we still expect rental comps to be down mid-single digits, as consumers continue to shift from rental to retail for special occasions. As a reminder, we view this shift as a positive for our business. The retail business drives higher average order value and more gross margin dollars, which is accretive to operating margin.

Jos. A. Bank posted positive comps of 2%, marking our third consecutive quarter of lapping a positive comp. Q2 was the toughest quarterly comparison for Jos. A. Bank this year, given that we posted a positive 7.8% comp last year. Comps were driven by higher transactions and increases in new-to-file customers. Average unit retail was flat. This reflected strong growth in custom suit sales that offset deeper discounts on seasonal merchandise to achieve our inventory reduction targets.

I’m pleased to report K&G comps increased 3.5%, marking a positive inflection at this brand. We generated higher units per transaction and higher average unit retail that more than offset a slight decrease in transactions. Suits and accessories were the top performing categories. We were pleased with the consumer response to strategic price increases on a range of merchandise. K&G saw growth across the country and across all three categories — men’s, women’s, and children’s — which gives us confidence to raise our full-year outlook.

Moores comps increased 3.7%, driven by increased transactions and average unit retail. This was driven by increased suit sales, including custom, and dress shirts. We’re pleased to see strengthening of economic activity and consumer confidence in Western Canada and are raising our full-year outlook for this brand as well.

Corporate apparel net sales decreased roughly 4% in the second quarter due to lower sales in the UK that were partially offset by the stronger British pound this year. Uncertainties around Brexit continue to weigh on the minds of our UK customers, which is resulting in lower replenishment demand from existing accounts.

Now turning to our strategic priorities, I’m pleased with the progress we’re making on our key growth initiatives, which are: expand our custom business by making a custom suit as easy and affordable to buy as a suit off the rack; strengthen our brands to drive new customer acquisition and grow market share; and enhance our omnichannel experience to delight our customers with a seamless, convenient shopping experience.

First, I’d like to talk about our custom business. Growing our custom business is a top priority for our company. Custom represents a key sustainable competitive advantage for Tailored Brands. We can solve a man’s desire to own a suit that is made just for him and we can do it better than anyone else. We believe we are the largest and fastest-growing retailer of custom suits. Our custom sales are now trending above $4 million per week, which is double the $2 million per week we reported last year. Year to date, custom is penetrating at over 20% of all suit sales across our Men’s Wearhouse, Jos. A. Bank, and Moores stores. The 20% marks continued growth from the 15% we reported last quarter, yet our top-performing stores are averaging over 50% penetration, so we see room for higher average penetration across the fleet.

We’re focused on the following multi-pronged approach to grow our custom business: offering industry-leading delivery speed; enhancing the customer experience; launching new products; and building awareness and attracting new customers. I’m excited to report progress in each of these areas.

We’re leveraging our scale and vertical supply chain to speed delivery times. We know that speed matters to our customers. We know the faster we can deliver a custom suit, the more customers will give it a try. In Q2, we launched two-week delivery for our custom Abboud and Jos. A. Bank Reserve custom clothing, which are crafted in our domestic factory, and we’ve seen positive results from this new accelerated delivery capability. I’m pleased to announce that as of September 1, we’re now offering standard 3-4 week delivery for our popular-priced Joe and 1905 custom suits, which are crafted overseas. We believe two-week delivery for our premium custom offering and 3-4 week delivery for our popular-priced custom suits represents best-in-class speed.

During Q2, we also tested a new custom offering called Custom Express, which is available in just seven days. Custom Express is available in three of our most popular fabrics and early results have been very encouraging. We’re in the process of rolling this new offering out to all Men’s Wearhouse, Jos. A. Bank, and Moores stores this fall.

We continue to innovate custom with new product launches. In addition to rolling out Custom Express, this month we are also launching Kenneth Cole Awareness custom suits at Men’s Wearhouse and Moores, and Traveler and Travel Tech custom suits and dress shirts at Jos. A. Bank. These are some of our most popular off-the-rack products due to their performance and comfort features and we’re excited to expand our custom offerings to include these differentiated products.

Finally, we’re making investments in our store experience with new expanded custom shops that feature comfortable spaces for our customers to work with our consultants to create their custom suit. We’re increasing the number of shops we’ll install this year, from 400 to 500, across Men’s Wearhouse, Jos. A. Bank, and Moores. This will bring the total number of custom shops to 560.

Now I’d like to talk about our strategy to strengthen our brands and grow market share. We’re focusing a greater percent of our marketing spend on custom clothing and brand storytelling, and it’s working. In Q2, we launched new custom clothing campaigns across all marketing channels and we launched a new branding campaign at Jos. A. Bank called “The Bank Way” that emphasizes the care and quality we put into every garment. Our efforts are paying off. We’re seeing increases in transactions and new customers at Men’s Wearhouse, Jos. A. Bank, and Moores.

During July, we held our 10th annual suit drive, where we invite customers to donate a gently used suit in exchange for a discount on a new one. This was our most successful suit drive ever, as we collected over 400,000 suits which will get a second life through 200 nonprofit organizations that help men transition back into the workforce.

Turning now to our third growth strategy, deliver a superior customer experience by strengthening and enhancing our omnichannel capabilities. Our goal is to combine the high-touch service we offer in our stores with the convenience of shopping online. We also want to make it as easy as possible for customers to shop with us whenever and wherever they prefer.

Last quarter I shared with you the official beta launch of a groundbreaking customer service experience on our e-commerce sites called “Live.” Through Live, online customers connect to our in-store wardrobe consultants, who use their mobile phones to text and share imagery and video to provide the same expert guidance to online shoppers that we’re known for in the store. Live is a true omnichannel experience that marries the reach of our websites, which see about 65 million customer visits per year, with the world-class service we provide in-store. We’re continuing to scale Live. Today, we have over 1,600 wardrobe consultants actively providing this online service across both Men’s Wearhouse and Jos. A. Bank, up from about 1,000 at the end of Q1.

While we’re still early in the program, we’re encouraged by the customer feedback and the results, which to date show significantly higher conversion rates and average order values compared to our unaided e-commerce experience. Live represents a true omnichannel approach to serving our customers.

In summary, in Q2 we posted positive comps at all of our brands. Our growth strategies are working. We doubled our custom sales. We’re generating increased transactions and attracting new customers by communicating the tremendous value we provide our customers, and we’re scaling a groundbreaking omnichannel service called Live. Each of our growth initiatives is designed to deliver a personalized, convenient, and superior experience to our customers. I’m proud of all of our employees across the Tailored Brands family for their dedication and commitment to our customers. I’m confident and optimistic about our ability to further accelerate our market leadership and to position Tailored Brands for sustainable long-term growth and shareholder value creation.

With that, I’ll turn it over to Jack to review the financials.

Jack CalandraChief Financial Officer

Thanks, Doug. Good afternoon, everyone. Today I’ll review the financial results for the second quarter and our full-year guidance for 2018. I will also share with you the continued progress we are making to strengthen our balance sheet and unlock cash in the business. But before I do so, Doug, I just wanted to thank you again for the opportunity to join Tailored Brands. I’m very proud of what we’ve accomplished over the past 18 months, investing in our growth strategies, unlocking cash in the business, improving profitability, and strengthening the balance sheet, and have greatly appreciated your partnership and commitment in making this happen. And, Dinesh, I’ve always valued your support and counsel as a member of, and more recently as Chairman of, the Board and look forward to working with you more closely in your role as Executive Chairman.

Turning to the quarterly results and guidance, I’d like to make sure everyone knows that I will be discussing adjusted numbers today, which eliminates certain costs that are not indicative of core business results.

Starting with second quarter results, total sales were $823 million, down $27 million or 3.2%. In the retail segment, we posted positive 1.7% comp sales growth with all brands delivering a positive comp. Total retail segment sales were down 3.2%. The negative spread between comp and total sales was as expected and was largely due to the calendar shift as a result of last year’s 53rd week. The sale of the retail dry cleaning business in Q1 this year also contributed to the negative spread.

The impact of the calendar shift was most evident in our rental business and unfavorably affected both comp and non-comp sales. Let me go into a little more detail here. First, the earlier Easter this year, which typically kicks off prom and wedding season, pulled rental revenue into Q1 in the form of comp sales. Second, the calendar shift due to last year’s 53rd week also pulled rental revenue into Q1 in the form of non-comp sales, as it included the first week of May this year, an important week in the business.

We are also seeing more rental demand in the back half this year, in part due to the vanity wedding dates 8/18/18 and 1/19/19. It was reported that August 18 was the biggest wedding day of the year. Approximately 60,000 weddings were held and January 1, 2019 is shaping up to be a big day as well. The impact of these calendar shifts to the business is significant. For example, while our Men’s Wearhouse rental business saw a negative 11.5% comp in Q2, we expect a roughly flat comp in Q3 based on the reservation book.

Also impacting the rental business is the continued customer shift from rental to retail for special occasions. We want to be the place where customers go for whatever their special occasion preferences are and believe we are uniquely positioned with our product offering, service model, and national fleet of stores. This shift from rental to retail is also good for our bottom line. While retail is at a lower gross margin rate, it generates substantially higher gross margin dollars and is operating margin accretive. Of course, with this shift in customer preference, we need to actively manage the fixed cost infrastructure of the rental business, which is why we announced the closing of one of our rental DCs in June.

Sales for our corporate apparel business decreased $2 million or 3.9%. The lower sales were partially offset by a $1 million benefit due to the stronger British pound this year. As Doug mentioned, uncertainties around Brexit continue to weigh on the minds of our UK customers. Given what we are seeing, combined with the fact that we expect foreign exchange to be a headwind in the second half, we expect corporate apparel sales to be down low single digits this year.

Moving to gross margin, consolidated gross margin of $373 million was down $24 million, largely due to the decrease in net sales. As a percent of sales, consolidated gross margin decreased 130 basis points to 45.3%, primarily due to a decrease in retail segment gross margin rate.

Retail segment gross margin rate was down 160 basis points to 46.6%. The 160 basis point decline was comprised of a 70 basis point reduction due to lower rental revenue and a 30 basis point deleveraging of occupancy costs, both of which were associated with the calendar shifts I discussed earlier. The remaining 60 basis points was primarily due to deeper discounts on seasonal merchandise as we continue to execute our strategy to move toward a more efficient inventory model. Given our full-year target for inventory reduction and what we delivered in the first half, we expect less pressure on retail segment selling margin in the back half associated with clearance of seasonal merchandise.

Turning to expenses, advertising expense decreased $1 million and was flat as a percentage of sales. SG&A decreased $7 million, primarily due to the sale of the retail dry cleaning business, as well as the receipt of insurance proceeds related to last year’s hurricanes. As a percent of sales, SG&A increased 20 basis points to 29.4%. Just as our SG&A to sales ratio benefited in Q1 from the calendar shift, SG&A as a percentage of sales was unfavorably impacted by the calendar shift in Q2. We estimate the deleverage from the calendar shift in Q2 was 40 basis points.

Operating income was $93 million, compared to $108 million last year, and operating margin decreased 150 basis points to 11.2%. Net interest expense was $21 million, down $4 million compared to last year, reflecting the year-over-year reduction in our total debt. Last year, we recorded a $3 million gain on extinguishment of debt through our recurring open market repurchases of our senior notes. There were no such gains or losses realized this quarter. Given the size and nonrecurring nature of our $175 million partial redemption of senior notes, the one-time costs associated with that transaction are not included in our adjusted results this quarter.

Our effective tax rate was 23.9% compared to 32.5% last year. This year’s rate primarily reflects the benefit of tax reform. We ended the quarter with a diluted share count of 50.9 million. Second quarter EPS was $1.07 compared to $1.19 last year.

Moving on to the balance sheet and cash flow, we are pleased with the continued progress we are making to reduce debt and generate cash flow from operations. During the quarter, we completed $175 million partial redemption of our senior notes, which was funded by a combination of cash on hand and borrowings on our credit facility. At the end of the quarter, we have $68 million of cash, down $45 million versus last year. We also had $105 million of borrowings outstanding on our revolving credit facility.

We made good progress on reducing inventories, which were down $158 million or 17% below last year. Retail inventories were down $140 million, also 17%.

During the second quarter, we reduced total debt by $70 million, bringing the year-to-date reduction to $180 million. Debt at quarter end was approximately $1.2 billion, down $325 million from Q2 last year. On a trailing 12-month basis, our debt to EBITDA ratio was 3.5 and we remain focused on using excess free cash flow to further reduce our debt.

Cash flow from operations for the first half was $198 million, up $57 versus last year. This was primarily driven by favorable working capital changes from lower inventory, as well as higher net earnings. CapEx spend was $25 million, approximately $9 million lower than last year. CapEx this year is more back half-weighted, given the timing of our investments in store, IT, and supply chain to support our growth strategies.

With respect to real estate, during the quarter we closed seven stores, including four Jos. A. Bank stores, one Men’s Wearhouse store, one Men’s Wearhouse and Tux store, and one K&G store. The total number of stores at the end of Q2 was 1,469.

Now I will review our fiscal 2018 full-year outlook. We are reaffirming the full-year EPS guidance of $2.35 to $2.50. Our 2018 guidance assumes the following: we continue to expect full-year comp sales from Men’s Wearhouse and Jos. A. Bank to be positive low single digits and we’ve raised our outlook of full-year comp sales from Moores and K&G. For Moores, we now expect comp sales to be up low single digits versus previous guidance of flat to up slightly. For K&G, we now expect comp sales to be flat to up slightly versus previous guidance of flat to down slightly.

All other guidance metrics remain unchanged. Specifically, we expect an effective tax rate of approximately 25%. We expect to reduce inventories by a high single digit percentage. We expect capital expenditures of about $100 million. We expect depreciation and amortization expense of about $100 million. And with respect to real estate, we expect to close a net ten stores.

In closing, I’m pleased with the progress we made in the second quarter on our strategic and financial priorities. All brands delivered a positive comp and our custom business continued to accelerate. We lowered inventories as we transition to a more efficient model, continued to unlock cash in the business, and reduced debt by an additional $70 million.

Thank you and now I’ll turn the call back to the operator who will open the lines for your questions.

Questions and Answers:

Operator

Thank you. At this time, we will be conducting a question-and-answer session. If you would like to ask a question, please press “*1” on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press “*2” if you would like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the “*” keys.

Our first question comes from the line of Randy Konik from Jefferies. Please proceed with your question.

Randal KonikJefferies — Analyst

Yeah, thanks a lot. Doug, congrats on your retirement. Dinesh, welcome. And I just have a few questions. I want to start with, I guess, Jack. Can you elaborate a little bit more on the inventory model? How you guys are thinking about differences in procedural or process changes on the inventory. I assume that probably by the year end, you’ll be comfortable with inventory levels per store.

And then, as we kind of go forward, how are you gonna think about managing that inventory differently? Because it seems like, on a go-forward, more medium term basis, the idea here is we should expect to see continued improvement in inventory turns, less markdowns in seasonal, and then higher probably AUR as markdowns — higher AUR opportunity ahead, especially with custom penetration going up. So, I’m just trying to kind of think about, for the listeners on the call, the leaner inventory model and how it impacts the business.

Jack CalandraChief Financial Officer

Yeah, sure, Randy. Thanks for the question. So, in terms of the process, I would say we’ve implemented, I’d say, new procedures both on the upfront buying process as well as the in-season selling process. So, in terms of the upfront buys, we are buying our inventory tighter upfront and that’s in part just because we feel like we can run the business with less inventory. But also, as our custom business continues to grow, we sort of want to leave open-to-buy room for that business. So, that’s on the upfront or open-to-buy piece.

On the other end, we are being more aggressive in terms of clearing seasonal merchandise. And in the past, we would sometimes carry that inventory into a future season. We haven’t eliminated that practice because there are certainly times when it makes sense for a basic product, to continue to hold that and sell that. But I would say, as we look to unlock cash in the business any pay down debt, certainly inventory and inventory turns is a big opportunity for unlock and that has certainly helped us deliver some of the debt reduction that we’ve done to date.

Randal KonikJefferies — Analyst

Got you. I guess my next question — this one is probably for Dinesh. Dinesh, now that you’re kind of moving at the end of September, going to be moving into this day-to-day role, getting even closer into the business, maybe give us some perspective on — you gave the little high-level of what you’re focused on, but maybe go a little deeper, what you think are some immediate opportunities. And maybe also give us some perspective on what the Board’s thinking about in terms of the replacement for Doug and not really timing but what you’re kind of looking for in that role going forward. Thanks.

Dinesh LathiExecutive Chairman of the Board of Directors

Yeah. Maybe let’s start with the second question, which is about the Board search. And obviously we’re not gonna get into the details of the search. The one thing I can say, and really the most important thing, is that the Board is focused on finding the best candidate for the company. And until that actually happens, I’m not only able to but I am excited to be leading the company. That’s gonna afford the Board the time it needs to do the search properly.

On your first question, as far as what my priorities will be as Executive Chairman, listen, we’ve got a solid foundation in place, as Doug talked about. Compelling business, brands that can win, and the potential to create value for our shareholders. My focus is going to be to continue with those core growth strategies of meeting consumer demand for personalization, strengthening our brands through transformative marketing, and enhancing our omnichannel capabilities. That will remain the focus of the company and I’ll just continue to work with the team to make sure we’re executing and innovating in all three of those areas.

Randal KonikJefferies — Analyst

And maybe could you just — maybe for those that are on the call that don’t know your background and your prior perspectives on looking at consumer brands and stuff like that, can you give us maybe some perspective on your background? Just for those on the call who may not know.

Dinesh LathiExecutive Chairman of the Board of Directors

Absolutely. So, been with Tailored Brands, onboard for about two and a half years now. Became Chairman last year, non-Executive Chairman, and obviously been Executive Chairman recently here. Prior to that, time in consumer internet as the CEO of One Kings Lane and over seven-plus years at eBay where I was focused on eBay’s North American business. Before that, investment banking and private equity.

Randal KonikJefferies — Analyst

Helpful. Last question. I guess back to Jack. Look, you guys have done a great job of really kind of fortifying the balance sheet and paying down debt, harnessing improved cash flow. Just give us maybe your perspective on where you kind of want to see the optimal leverage ratio to be in the business, how you think about CapEx needs maybe on a medium term basis — if you don’t want to guide, just how you think about it. And just again on the inventory side, should we expect that gains on working capital — that should be net inflow through the balance of the year but then will start to normalize inventory levels? Is that how we should be thinking about it as we think about cash flow prospects into 2019 related to working capital? Thanks.

Jack CalandraChief Financial Officer

Sure, Randy, thanks for the question. So, in terms of your first question around investing in the business and paying down debt, I would say our capital allocation priorities have not changed. So, first we’re gonna invest in the business where we can deliver a good return. And certainly, as you know, we’ve maintained our guidance for CapEx this year at $100 million. We want to then maintain our $0.72 per year dividend and use all excess free cash flow beyond that for debt reduction. This is an ongoing conversation, a regular conversation with our Board, but that’s what we are all aligned around at this point.

I would say in terms of a target, we’ve achieved the interim target that I talked about, which was a debt to EBITDA ratio of 3.5 times, but we definitely want to be marching to something lower than that and I had talked about a more medium to longer term target of 3 times debt to EBITDA. And so that is something that we’re still working toward.

I think the other question you had was around working capital going forward in 2019. Obviously, I’m not gonna get too into 2019 at this point, but I would say we’ve taken a lot of inventory out of the business over the past two years. I certainly think that the custom business and the growth in the custom business continues to give us an opportunity to be more efficient with our inventory. But certainly probably the pace of inventory reduction that we’ve seen over the past two years that will carry through this year, probably won’t continue to that magnitude going forward. But part of this will be how fast our custom business grows because that’s obviously a very inventory efficient business.

Randal KonikJefferies — Analyst

Super helpful. Thanks, guys.

Jack CalandraChief Financial Officer

Thank you.

Operator

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

Paul TrussellDeutsche Bank — Analyst

Good afternoon. Thanks for taking my question. You don’t give quarterly guidance, so I just wanted to, in circling back to the second quarter, just have a better understanding of how the top line and margin performance was versus your internal expectations. Also, just given the calendar swings taking place, what should we keep in mind as we think about modeling out the third quarter? And just lastly on that front, just given the first half performance and the debt pay down, just curious why there hasn’t been an adjustment to full-year guidance.

Jack CalandraChief Financial Officer

Yeah, sure, Paul. This is Jack. I’ll take that. So, as you rightly pointed out, we don’t give quarterly guidance but I would say we were pleased with the comp performance that we delivered this quarter, obviously having all four brands deliver a positive comp, being able to raise the full-year comp outlook for Moores and K&G. We talked about — Doug mentioned how Jos. A. Bank was able to positive comp on last year’s 7.8% and really how Men’s Wearhouse was able to positive comp despite the fact that the shift in the calendar had a big impact on our rental business and even though that business had a negative 11.5% comp. Obviously the clothing part of that business more than compensated for it to give us a 1% comp. So, I would say we were pleased with the quarter.

Looking forward into the third quarter, not a lot of calendar shifts. The real calendar shifts were primarily in the first two quarters. The third quarter is much more normal from that perspective. I would just remind you, of course, and you know this, that the fourth quarter, we will be lapping last year’s 53rd week so that will certainly have an impact, not in terms of comp performance but in terms of spread and some of the ability to leverage expenses.

Operator

Our next question comes from the line of William Reuter from Bank of America. Please proceed with your question.

William ReuterBank of America Merrill Lynch — Analyst

Good afternoon. My first question is you talked about continued growth of your e-commerce business. I was wondering if you could comment at all about what you’re seeing in the competitive landscape, either from online-only competitors or from omnichannel retailers, in terms of custom suits.

Doug EwertChief Executive Officer

Thanks, William. We’re happy with the improvements that we’re making to our online customer experience. We have upgraded our customer experience who want custom on our websites as well as putting a lot more information and brand-building experiences into that website. We continue to monitor what the competitive set is doing. We don’t see any major changes from what we have seen. There are certainly some start-ups trying to get into the pure play e-commerce custom suit business and they’re starting to open stores. We find that this business is a very tactile business. The customer wants to feel the product, they want to feel the fabric, they want to try on a garment. Self-measurement is something that we continue to explore but is not there yet to deliver the quality in fit that our customers would expect. So we’re not currently going down the self-measurement path but there is certainly a number of competitors out there trying to solve for that.

So, not a big update on what’s going on in the competitive set but we’re pretty excited about what we’re seeing in our custom business and the new innovative products and experiences that we’re delivering. And the delivery speed, which we can’t talk enough about how important it is. we’re still getting about 80% of our custom business from existing customers trading up to custom and the speed that we can deliver a custom suit, really leveraging our domestic factory and the efficiencies in our supply chain, is opening the door to a lot of additional customers who are gonna consider custom.

William ReuterBank of America Merrill Lynch — Analyst

That’s helpful. And then I know historically you didn’t want to comment a whole lot on margins at the custom business, I think largely when it was smaller. I think at times you had said that maybe you would comment when it got to be a larger business and it just keeps getting bigger and bigger. Is there anything you can talk about the margins of that business currently versus the rest of your mix?

Doug EwertChief Executive Officer

Well, I can reiterate what we’ve shared in the past, which is that, from a margin rate perspective, custom is a little lower than off-the-rack, though we are seeing some margin improvements in custom. As we get larger scale and more efficiencies in our supply chain, we’re seeing those margins start to lift and see opportunity to keep doing that. With the scale that we have, it just helps reduce costs overall and creates a more efficient supply chain.

William ReuterBank of America Merrill Lynch — Analyst

Okay. And then just lastly, you talked about, in terms of leverage targets, longer term, 3 times. You’re not that far from it now. I guess, should we assume when you get to 3 times that all cash at that point would be put toward some shareholder-friendly activities or investments and that you would want to basically keep a leverage target around 3 times? Or would you potentially want to reduce it past your target that you’ve laid out?

Jack CalandraChief Financial Officer

Yeah. This is Jack. So, I think getting to a leverage ratio of 3 just creates more optionality in the business. So I’m not certainly excluding the possibility that we would continue to bring the leverage down further than that. We just feel like, at that point, it really opens up a number of different options to us, which we would then consider and discuss with our Board and come to some sort of alignment around. But it doesn’t exclude the possibility that we would continue down the path of further debt reduction.

William ReuterBank of America Merrill Lynch — Analyst

Great. I’ll pass to others. Thank you.

Jack CalandraChief Financial Officer

Thank you.

Operator

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

Janet KloppenburgJJK Research –Analysis

Hi, everybody. Just a couple of questions. I think you had talked about AUR trends lifting at Jos. A Bank in the second quarter, or maybe anticipating that, because you had had such meaningful inventory reduction there in the first quarter. It looks like AUR trends are a little bit flat. And it also seems like seasonal clearance was higher for both brands, Jos. A Bank and the Men’s Wearhouse. Maybe you could talk a little bit about that and maybe any tail on that as we go into the back half of the year.

And then further, on gross margin guidance, if the rental business flattens out and maybe the vanity wedding dates help to improve the top line outlook in the rent business, is there reason to believe that both gross margins can improve year-over-year and that comps can accelerate? I have a follow-on after that. Thanks.

Doug EwertChief Executive Officer

Thank you, Janet. I’ll take a shot at that. Yeah, we saw a flat AUR at Jos. A. Bank. The growth of the custom business, and it’s growing very nicely at Jos. A. Bank, has offset some of the decline in AUR that we experienced by clearing out the seasonal product and getting to a healthier, cleaner inventory position. We see that margin pressure easing in the back half of the year, because we’re still guiding to a high single digit inventory decrease on the full-year. And certainly with the reductions that we have made in the first half of the year, there’s less pressure in the back half of the year and custom will continue to grow. Another help to overall margin portfolio as we move into the back half of the year is we won’t have the tuxedo rental headwind because, as we shared in our remarks, we’re forecasting that business to be flat. But tux, overall, is still being forecasted to end the year at a mid-single digit decline, which is what the guidance was at the beginning of the year. Based on the visibility we have in that business, and certainly as we’ve now worked through a lot of the calendar shifts, we’re confident that we can reaffirm that mid-single digit decline on the full year.

Janet KloppenburgJJK Research –Analysis

And on the comp outlook for acceleration?

Doug EwertChief Executive Officer

Well, we feel good about the back half of the year. I mean, we have announced now some new changes in custom, some acceleration of our delivery times. Custom Express is an exciting new product that our customers are responding well to. The new brands that are going live right now, the 500 custom shops that we’re gonna be installing in the back half of the year are all going to help accelerate that custom growth. As I said before, the lack of tux headwind will certainly help and the strengthening that we’re seeing at both K&G and Moores also give us confidence to reaffirm our overall guidance for the year.

Janet KloppenburgJJK Research –Analysis

Okay. And, Jack, can you talk a little bit about the SG&A? It’s been pretty well-controlled. You’ve had some advantages on the advertising side, both in the first and the second quarter. How should we be thinking about that for the back half of the year?

Jack CalandraChief Financial Officer

Yeah, sure, Janet. So, in the second quarter, we deleveraged SG&A about 20 basis points, but that included about —

Janet KloppenburgJJK Research –Analysis

That was because of the sales decline.

Jack CalandraChief Financial Officer

Yeah, that included about a 40 basis point unfavorability due to the calendar shift. So, but for that, we would have leveraged. As you know, we’ve leveraged SG&A in the first half. The only thing I would call out in the second half, and particularly in Q4, is, again, that 53rd week, which will obviously make it a little more difficult to leverage SG&A in that quarter. But just kind of stepping back a little bit, what we’ve said previously is that we need a positive low single digit comp to leverage SG&A and our comp sales guidance supports that.

Janet KloppenburgJJK Research –Analysis

Great. And then just lastly, I think August of last year started out pretty slow. It was a sluggish month. And this year you had the benefit of the new marketing campaigns as well as the vanity wedding date. And I’m just wondering if you guys can give us a picture on how trends came out — what trends look like right now given those advantages year-over-year.

Jack CalandraChief Financial Officer

Yeah, Janet, I don’t want to go into too much detail on August. We’ll look forward to sharing that with you on the Q3 call. What I will say, though, is that we exited Q2 with momentum. So, the nice thing about the second quarter was that the months got sequentially stronger. So, June was stronger than May and July was stronger than June. And obviously in holding the comp sales guidance for two of the brands and raising it for the other two, obviously we’re taking into account the third quarter to date trends that we’re seeing.

Janet KloppenburgJJK Research –Analysis

Great. Thanks so much.

Jack CalandraChief Financial Officer

Thank you.

Operator

Our next question comes from the line of Carla Casella from JP Morgan. Please proceed with your question.

Carla CasellaJP Morgan — Analyst

Hi. Just one last one. On the corporate apparel side of the business, how much of that business today is in the UK versus other markets? And do you have an opportunity outside of the UK for that business?

Doug EwertChief Executive Officer

I don’t have the exact breakdown for you, Carla, but it’s about 80%-ish, 75% to 80%, in the UK, 20% to 25% in the U.S. And our UK business is based in the UK, however we have customers and service customers through a broader geography in Europe than that.

Carla CasellaJP Morgan — Analyst

Okay, great. The rest of mine have been answered. Thank you.

Doug EwertChief Executive Officer

Thank you.

Jack CalandraChief Financial Officer

Thank you.

Operator

Ladies and gentlemen, we have reached the end of the question-and-answer session and I would like to turn the call back to Doug for closing remarks.

Doug EwertChief Executive Officer

Okay. Well, thank you very much for your interest in our company and these guys are gonna look forward to updating you on our business next quarter.

Operator

This concludes today’s conference. You may disconnect your lines at this time. Thank you for your participation and have a wonderful day.

Duration: 50 minutes

Call participants:

Julie MacMedanVice President of Investor Relations

Doug EwertChief Executive Officer

Dinesh LathiExecutive Chairman of the Board of Directors

Jack CalandraChief Financial Officer

Randal KonikJefferies — Analyst

Paul TrussellDeutsche Bank — Analyst

William ReuterBank of America Merrill Lynch — Analyst

Janet KloppenburgJJK Research –Analysis

Carla CasellaJP Morgan — Analyst

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