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Tailored Brands, Inc. (NYSE:TLRD)
Q3 2019 Earnings Call
Dec 11, 2019, 5:00 p.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Greetings, and welcome to the Tailored Brands Third Quarter 2019 Results Conference Call. [Operator Instructions]

I would now like to turn the conference over to our host, Julie MacMedan, Vice President of Investor Relations. Thank you. You may begin.

Julie MacMedan -- Vice President of Investor Relations

Thank you, and good afternoon, everyone. Welcome to Tailored Brands third quarter 2019 results conference call. This call is being webcast and a replay will be available on the Company's Investor Relations website ir.tailoredbrands.com.

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

Please refer to today's earnings release, our annual report on Form 10-K and quarterly reports on Forms 10-Q to understand these risks and uncertainties. You could access all of these reports on the Tailored Brands' IR website. In addition, the information on this call speaks only as of today December 11, 2019, and we assume no obligation to publicly update or revise our forward-looking statements.

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

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

Dinesh Lathi -- President and Chief Executive Officer

Thank you, Julie, and good afternoon, everyone. Earlier today, we released our results for the third quarter of 2019 that underscore the progress we are making on our transformation and the impact it is having on the top line, the bottom line and the balance sheet.

On the bottom line, our earnings per share of $0.53 exceeded the high end of the guidance range we provided in September of $0.40 to $0.45. On the top line, we exceeded the high end of the comp guidance range we provided at three of four brands and were within guidance on the fourth, specifically Men's Wearhouse comp to minus 2.8%, Jos. A. Bank comp to positive 0.5%, K&G comp minus 1.5%, and finally, Moores comp to minus 5.5%.

The results at Men's Wearhouse represent a sequential acceleration in comp of 150 basis points, while the results of Joseph A. Bank represent a sequential acceleration in comp of 380 basis points and the first positive comp since Q3 2018.

Finally, on the balance sheet, we ended the quarter with total inventory up 1% versus last year with finished goods down 3%. Our inventories have never been cleaner from an age perspective. In addition, we decreased our debt by $56 million versus Q3 2018. These results are not a fluke. They reflect the customer obsession and execution focus of our nearly 20,000 colleagues. And importantly, they reflect the customer response to those efforts.

While we are pleased with the progress we are making, we know our work is not done. On our last call, I shared that we are in the midst of a transformation. That transformation take time and we are executing our transformation in the challenging retail environment. None of that has changed, which means we'll continue to approach our customer-facing and cost-saving execution with the same rigor and urgency that we have over the last 12 months.

Before turning it over to Jack, who will cover the financials in more detail, I'm going to quickly highlight a few areas where our strategic initiatives are starting to bend the comp trajectory. As a reminder, we have been and continue to be focused on three customer-facing strategic pillars, that we believe are critical to transforming the customer experience.

The first is personalized products and services under, which we have been focused on our custom business and our polished casual assortment. Our custom business continues to perform well. In Q3, we averaged roughly $5.5 million per week in custom clothing sales, representing double-digit growth year-over-year. While we are still seeing healthy growth in the custom business, at this scale, we expected to see and are starting to see the growth in our custom suiting business moderate and track in line with overall business seasonality as we approach a healthy equilibrium in the eyes of our customers between custom and off the rack clothing. The custom business now represents roughly 30% of all sleeves sold at Men's Wearhouse and over 35% of all sleeves sold at Joseph A. Bank.

On the polished casual side, we saw encouraging strength across multiple merchandise categories at both Joseph A. Bank and Men's Wearhouse. At Joseph A. Bank, we saw positive comps in slacks, shoes, dress shirts and sportswear. The breadth of comp growth reflected strength in performance fabric across the dress shirts, pants and shoes categories, as well as Merino and cotton sweaters featuring two new silhouettes mark and turtleneck, and our eco-friendly made matter [Phonetic] dress shirts. The comps were also helped by improved visual merchandising that built on the completer piece approach that we started in Q2 and that is particularly well suited to polished casual looks.

At Men's Wearhouse, we saw positive comps in sport coats, shoes, dress shirts, and sportswear. Prior to Q3, sportswear had not comped positive since Q2 of 2016. The strong comp performance in sportswear was driven by earlier receipts and store floor set dates for our long sleeve wovens, improved sides curve allocations and strong consumer response for mix and match promotions across divisions.

From a product perspective, we saw strong results from French rib long-sleeve knits, cotton-cashmere wovens, and new woven fabrication, such as our construct branded program. At both of these brands, the customers responding favorably to continue to editing of the polished casual assortment better in-stock availability and competitive pricing and promotion depth.

Our second strategic initiative is to create inspiring and seamless omni-channel experiences. E-com is a critical piece of the omni-channel experience and Q3 marked another quarter of solid growth in e-commerce sales at both Men's Wearhouse and Joseph A. Bank. E-com growth has been driven by a combination of traffic gains, feature enhancements and elevated merchandising. We've seen a clear and distinct positive inflection in our e-commerce sales starting in Q2 and gaining momentum in Q3, where we posted double-digit increases at both brands. This exciting growth reflects the investments we are making and accelerating our e-commerce capabilities and the agile development model we've created that continues to generate new revenue opportunities.

During Q3, our agile development teams executed over 60 feature tests. Examples of some of the more successful tests that we pushed into production include the following, providing customers with information on what products were trending and their specific geography prove to actually be more compelling than traditional product recommendation algorithms. Also, customers responded favorably to seeing badges that highlighted fabric performance features on the product detail page.

And finally, we are mindful of the fact that a majority of our site traffic is occurring on mobile devices. And that mobile has its own unique navigation needs. Accordingly, we've been leaning in on mobile-specific features and are seeing meaningful revenue gains from simple enhancements like better exposure of filters and the mobile web experience. In addition to website features, we also started experimenting more aggressively with site merchandising to drive stronger traffic conversion, while supporting our assortment evolution.

Our Q3 Men's Wearhouse polished casual event, which drove a significant increase in homepage traffic conversion was a great example of how we are achieving both objectives. We believe elevated site merchandising represents a ripe opportunity for both Men's Wearhouse and Joseph A. Bank. Our excitement around and investment in e-commerce is now supported by the momentum and results we are seeing in this part of the business. E-com will continue to remain an important investment area and growth driver in the coming quarters.

Our third strategic initiative is evolving our marketing so that our brand stand for something more than just price. To do this, we said we'd both engage our customers in the media channel quite frequent and tell the stories of our brands, so that our customers better understand what they are getting for their dollar.

On the channel shift, we continue to move to spend from offline to online. At Men's Wearhouse, the working media spend mix increased 10 percentage points in favor of online versus Q3 2018. At Joseph A. Bank, the mix increased 8 percentage points in favor of online versus Q3 2018. While we are rapidly shifting marketing investments to more efficient programs to increase conversion, loyalty, and advocacy among existing customers, we will continue to invest in building awareness and consideration among potential customers, and test our way into the optimal marketing mix that will maximize profitable growth in both sales and new customer acquisition.

On the creative shift, our creative across all brands continue to improve quarter-over-quarter and is increasingly more relevant to our existing consumer and more effective in attracting a new customer. We're more consistently showcasing age and ethnic diversity in moments that customers can relate to them with our polished casual assortment playing an increasingly prominent role.

The channel and creative evolution is driving performance on three different fronts. First, we are seeing growth in new customer acquisition at the aggregate level and specifically within the important younger generations. In Q3 2019, we saw both Joseph A. Bank and Men's Wearhouse shift their new customer mix younger. We were also encouraged by the contribution to sales growth for both brands from Gen Z. Particularly exciting was the Gen Z growth we saw at Joseph A. Bank showing the broad demographic potential of the brand.

Second, as I just discussed, we are also seeing significant year-over-year increases in e-commerce traffic. And third, utilizing some of the more sophisticated digital media platforms, we are seeing increasingly compelling data that our investments in online spend are driving improvements in-store traffic. Given these results, we'll continue to aggressively test and learn how to efficiently shift increasing amounts of our working spend into performance-oriented digital channels.

Finally, before turning the call over to Jack, I wanted to speak to a few important organizational changes. Earlier today, we announced that Mary Beth Blake, President of Joseph A. Bank is resigning from Tailored Brands. Under her leadership, Joseph A. Bank delivered positive comps in nine of the last 12 quarters, including this most recent quarter. She has been an impactful leader and she will be missed. We wish her the best of luck in her next endeavor. Mary Beth's resignation comes as we are developing a deeper understanding of our core customers across all our brands.

That improved understanding is revealing what we believe could be financially significant opportunities to execute on behalf of our customers in more effective and efficient ways. To ensure that we are tightly coordinated as we go after these opportunities, I'm pleased to announce that we've created the new role of Chief Customer Officer and we've appointed Carrie Ask, who is currently the President of Men's Wearhouse and Moores to that position. Part of this change, we are eliminating the Joseph A. Bank, Men's Wearhouse and Moores brand President roles.

In her new role, Carrie will oversee all marketing, merchandising, planning and allocation and e-commerce activities for Joesph A. Bank, Men's Wearhouse, and Moores. Carrie's customer obsession, intellectual curiosity, analytical rigor, and execution prowess are just a few of the reasons that the pace of learning and innovation at Men's Wearhouse is accelerated that the trajectory of our comps is starting to bend. And that she is the right person for this new and critically important role.

With that strategy and people context, I'll now turn the call over to Jack who in addition to discussing the financials for the quarter in more detail will also cover our guidance for Q4 2019.

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

Thanks, Dinesh, and good afternoon, everyone. Today, I'll review third quarter financial results and guidance for the fourth quarter.

Before I begin, I'd like to make sure everyone knows that I will be discussing adjusted numbers today, which eliminates certain items that are not indicative of core business results. Also as a reminder, on August 16, we completed the sale of the corporate apparel business and have reported the disposal as discontinued operations. Therefore, my remarks today will be related to continuing retail operations. Please refer to our press release for more details.

Turning now to results for the quarter. Total sales for the third quarter were $729 million, down 3% with comp sales down 2.2%. Notably, we saw improved performance each month of the quarter and delivered a positive comp in October. The non-comp spread of negative 0.8% was largely explained by closed stores and lower alterations revenue.

Gross margin was $308 million, a decrease of $37 million. As a percent of sales, gross margin decreased 380 basis points to 42.2%. About 280 basis points of the decline was primarily due to higher promotional activity, increased penetration of e-commerce sales and lower alterations revenue. The balance came from occupancy deleverage of 100 basis points.

Turning to expenses. Advertising expense decreased $3 million and was down 20 basis points as a percent of sales to 4.7%, reflecting a shift from offline to more effective online spend as we continue to optimize advertising mix across channels, as well as some marketing, spend moving to Q4. SG&A decreased $4 million largely due to lower employee-related benefit costs. As a percent of sales, SG&A increased 40 basis points to 30.5%.

Operating income was $52 million compared to $82 million last year. As a percent of sales, operating income decreased 380 basis points to 7.1%. Net interest expense was $17 million, down $1 million to last year, reflecting the year-over-year reduction in total debt. The effective tax rate was 23.1% compared to 24.4% last year, and diluted earnings per share were $0.53 versus $0.95 last year.

Turning now to the balance sheet and cash flow. We ended the quarter with total liquidity of $477 million, which includes $456 million available on the revolving credit facility and $21 million of cash. At quarter-end, inventories were up $6 million or just under 1% versus last year, a significant improvement from the 9% increase we reported for Q2 and ahead of our expectations. We expect continued improvement in inventory levels in Q4.

As Dinesh mentioned, we also continue to improve the quality of finished goods inventory as measured by inventory age at Men's Wearhouse, Joseph A. Bank, and Moores. Debt at quarter-end was approximately $1.1 billion, down $56 million versus a year ago. During the third quarter, we repurchased and retired $55 million in face value of senior notes at a discount to par. On a trailing 12-month basis, debt to EBITDA was 4.4 times.

Paying down debt continues to be a high priority. Over the past three years, we have made significant progress on debt reduction, reducing total debt by approximately $475 million with a focus on the 7% senior notes that mature in July 2022. We also extended the maturity on the term loan, our largest tranche of debt to 2025. Although our debt to EBITDA ratio has increased this year due to business performance, we remain committed to reducing debt to EBITDA to 3 times over the medium term.

Year-to-date cash flow from operations was $66 million compared to $278 million last year. The decrease primarily reflects lower net earnings and changes in accounts payable and accrued expenses primarily due to timing. We also received a $15 million income tax refund in the third quarter of last year.

Capital expenditures through the first nine months were $63 million, up $16 million versus last year. We now expect capital expenditures for fiscal 2019 of $90 million to $95 million. During the third quarter, we repurchased 2.3 million shares, nearly 5% of shares outstanding through open market repurchases for a total of $10 million at an average price of $4.28 per share. We have $38 million remaining under our Board's share repurchase authorization.

With respect to real estate, during the quarter, we closed a net four stores, opening one K&G store and closing four Men's Wearhouse and one Joseph A. Bank store. The total number of stores at quarter-end was 1,451.

Turning now to guidance for the fourth quarter. We expect fourth quarter loss per share of $0.50 to $0.55, which implies full-year 2019 earnings per share of $0.97 to $1.2. Our fourth quarter guidance assumes the following. For comp sales, we expect Men's Wearhouse down 1% to up 1%. Joseph A. Bank down 1% to up 1%. K&G flat to up 2%, and Moores down 6% to 8%. We expect an effective tax rate of 22% to 23%. With respect to real estate, we expect net closures of five stores.

With regard to the List 4A tariffs that went into effect on September 1, we expect no material impact to Q4. As a reminder, most of our imports from China were subject to tariff with the implementation of List 4A. And finally, this outlook excludes expected costs for third-party domain experts and other actions associated with our cost savings and operational excellence programs.

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

Dinesh Lathi -- President and Chief Executive Officer

Thanks, Jack. On our last call, I indicated that we were seeing early signs of customer response to our strategic initiatives. Our Q3 results are yet another sign that we are focused on the right things. Things that are starting to bend the trend in comp sales because they're addressing the evolving needs of today's consumer.

The results are also an indication of the Tailored Brands team is working in a way that recognizes that our transformation is not business as usual. And that we will not be satisfied with the status quo. We are changing with the way the Company executes for the better by being anchored in and obsessed with the customer, by investing for long-term and sustainable value creation, by focused execution that allows us to continue to generate cash and meet our financial commitments, by using data and analysis to guide decisions, and by moving with an urgency that reflects our conviction and confidence and our ability to own the customer's loyalty and advocacy.

I'm incredibly proud of the progress the team has made in the face of a challenging retail environment. And while we still have plenty of work ahead of us, the continued positive customer response we are seeing is fueling our excitement for the journey ahead.

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

Questions and Answers:

Operator

Thank you. At this time, we'll be conducting a question-and-answer session. [Operator Instructions] Our first question comes from Susan Anderson with B. Riley FBR. Please state your question.

Susan Anderson -- B. Riley FBR -- Analyst

Hi. Good evening. Thanks for taking my question. And Jack, I was wondering if you could talk a little bit about the gross margin puts and takes for fourth quarter versus third quarter. And then also what you're seeing so far from the promotional environment, do you expect it to be similar year-over-year versus last year? Thanks.

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

Yes. Hi, Susan, thanks for the question. So as I mentioned in Q3, the decline in our gross margin was due to higher promotional activity and that was particularly at Men's Wearhouse, higher shipping costs associated with the increased penetration of e-commerce sales, the lower alterations revenue associated with the continued growth of custom, and then some deleverage of occupancy.

We don't guide to gross margin Q4, but that'll be helpful. I would expect gross margin rate to be down versus last year, but certainly, I would expect to see sequential improvement versus what we saw in Q3. In terms of occupancy, that should be relatively neutral to gross margin in Q4, and I would also expect to see some improvement in selling margin given where we ended the third quarter with pretty clean inventories and the continued progress on the strategic initiatives that Dinesh discussed.

Dinesh Lathi -- President and Chief Executive Officer

And Susan, it's Dinesh, and I'll speak to your question...

Susan Anderson -- B. Riley FBR -- Analyst

Hi, Dinesh.

Dinesh Lathi -- President and Chief Executive Officer

...on -- hi. I'll speak to your question on promotions. From where we sit, the retail environment was and remains heavily promotional. As far as our frequency of promotions, it was similar to last year. Let's say, the difference is, we are a lot better about reading and responding to the competitive environment than we were last year, which means, in some cases, even though the frequency was similar promotion depth may have been deeper than it was last year. So we'll continue to experiment with handles and depth, and making sure we're optimizing for relevance with the customer, and of course, margin dollars.

Susan Anderson -- B. Riley FBR -- Analyst

Great, that's helpful. And then maybe if you could talk a little bit about your capital allocation priorities. I guess with the repurchase of debt this quarter, but then also some share repurchases, how should we think about the balance between those two, as we look forward?

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

Sure, Susan. This is Jack again. So capital allocation priorities are to first invest in our strategic initiatives, where we can get an attractive return on our investments. Secondly, to pay down debt and then third to repurchase stock on an opportunistic basis. And you can see the alignment of our actions with those priorities in the third quarter where we invested $24 million in capex, $34 million toward debt paydown, and we bought back the 2.3 million shares of stock for $10 million.

For free cash flow, we will continue our primary focus on paying down debt and utilize share repurchases on an opportunistic basis. And so that's going to be the plan -- the continued plan going forward.

Susan Anderson -- B. Riley FBR -- Analyst

Great, that's helpful. And then if I could just add one more Dinesh, it sounds like some of the initiatives are starting to bear some fruit. I guess, maybe if you could talk about kind of where you're at with mixing in the casual wear, in the stores, in the penetration, sequentially in kind of where you're at or versus where you look to go in the future?

Dinesh Lathi -- President and Chief Executive Officer

Yes. I'd say, similar to the way we've talked about custom, we don't necessarily have a target penetration rate with the polished casual. And specifically, we just -- as we did with custom, we'll continue to let the customer guide us as to what the right mix is between polished and tailored clothing. And that being said, I want to emphasize, just the strong growth that we saw across multiple polished casual categories at both the Joseph A. Bank brand and the Men's Wearhouse brand. And we think those are being driven by specific actions that we're taking, whether it's the earlier receipts and the store set dates and improvements in size curve allocations, continuing edited of the assortment and then again the strong consumer response we're seeing from mix and match promotions. So we're making good progress on continuing to lead that in and meet the customers' needs when it comes to a polished casual assortment.

Susan Anderson -- B. Riley FBR -- Analyst

Great, that's helpful. Thanks so much. Good luck with holiday.

Dinesh Lathi -- President and Chief Executive Officer

Thank you.

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

Thank you.

Operator

Thank you. Our next question comes from Paul Trussell with Deutsche Bank. Please state your question.

Damon Polistina -- Deutsche Bank -- Analyst

Hi. This is Damon Polistina on for Paul. Good evening. Thanks for taking our questions. First, can you talk about the improvement at Men's Wearhouse and Joseph A. Bank on the comp and traffic, just delve into the drivers of that? And specifically at Joseph A. Bank, what's kind of driving the outperformance versus Men's Wearhouse on a sequential improvement basis?

Dinesh Lathi -- President and Chief Executive Officer

Yes. Thanks, Damon for the question. The drivers of that sequential improvement in comp, there's really three big ones that we think about here. The first is what we just talked about with Susan, which is the strength across these polished casual categories, and we've just talked about the things that were driving that. And the second is our growth, e-commerce growth. E-commerce growth was really strong and that was being driven by improvements in traffic and the feature enhancements and the site merchandising that we referenced. And then obviously the marketing shifts that we've made are helping to drive growth in transactions and new customer acquisition, as we continue to shift spend in the digital. And so those three things, all of which are directly aligned to the strategic initiatives that we've been talking about for nearly nine months now were the main drivers of the comp improvement Q2 versus Q3.

On the second part of your question as far as Bank relative to the Men's Wearhouse, and just emphasizing both brand saw strong performance in multiple non-suiting categories and in e-commerce. And really the major difference between Joseph A. Bank and the Men's Wearhouse was that Joseph A. Bank had a stronger performance in suiting and specifically benefiting from stronger growth in custom suits and which more than offset decreased sales of off the rack.

Damon Polistina -- Deutsche Bank -- Analyst

Thanks. And just a follow-up on online, where do you see kind of what in your as far as the enhancements to that business? And then do you have the percentage kind of penetration for both Men's Wearhouse and Joseph A. Bank with online?

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

Yes. We don't give out the penetration rates. But what I can tell you is that we are seeing solid growth and that given the relatively low penetration at both of those brands, we do think it can continue to be for some period of time a meaningful driver of comp growth.

And Damon, I didn't get the first part of your question, so if you could repeat that?

Damon Polistina -- Deutsche Bank -- Analyst

Yes. Just on kind of the inning of the enhancements do you think you have at your disposal in that business, as far as how many -- how much more ability you have to improve that business with more features and things like that.

Dinesh Lathi -- President and Chief Executive Officer

Sorry, I was -- inning, I got you. What inning are we are in?

Damon Polistina -- Deutsche Bank -- Analyst

Yes.

Dinesh Lathi -- President and Chief Executive Officer

Baseball analogy. Got it.

Damon Polistina -- Deutsche Bank -- Analyst

Yes.

Dinesh Lathi -- President and Chief Executive Officer

We are in the early innings, Damon. And you can see that in some of the features that we're releasing right now, I'd characterize as some pretty basic e-commerce functionality, which is exciting on two fronts. One, it's exciting because we're harvesting some of that low-hanging fruit. And number two, it's exciting, because it just points to the fact that we still got a lot of runways left in terms of the features sophistication we can bring to the site to drive sustained conversion and traffic improvements. So early innings.

Damon Polistina -- Deutsche Bank -- Analyst

Got you. And then last one from me. You mentioned Gen Z growth. Do you have any kind of details as to what's -- what might be driving that?

Dinesh Lathi -- President and Chief Executive Officer

Yes. I mean a big factor in that it's going to relate to the marketing shift that we've talked about. And as you remember, one of the big efforts there was around shifting from offline to online. And the strategy is bearing fruit. We did that because that's where we felt the customer was spending their time and so we've amped up the amount of investment and the percentage of media on the digital and online side. And that's attracting a new kind of customer for us, all of which is good.

Damon Polistina -- Deutsche Bank -- Analyst

Thank you.

Operator

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

William Reuter -- Bank of America Merrill Lynch -- Analyst

Good afternoon. The first is, I just want to make sure I heard this correctly. Was it $55 million of bonds that were repurchased or was that -- did that include some term loan reduction?

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

Hi, Bill. It's Jack. So that was all on the bonds, so $55 million face value of the bonds that we purchased -- repurchased at a slight discount to par.

William Reuter -- Bank of America Merrill Lynch -- Analyst

Okay. And then you had laid out your capital priorities, second, continuing to be debt reduction. I guess, will you continue to be opportunistic with regard to bond repurchases in the open market over the next handful of quarters as you generate cash?

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

Yes. I would say, as we look at the opportunities to reduce debt, both via the term loan and the bonds, we'll continue to look at both of those options and we'll consider Bill among other things relative maturity dates of those debt instruments, but current pricing and effective yield on each of those, any specific covenants in our term loan agreement regarding sources of cash that we unlock in the business, and then certainly the required mechanics and cost associated with paying down each type of that debt. So definitely continued to focus on debt reduction as you know we've been primarily or entirely focused on the senior notes. But we'll continue to look at opportunities in both of those instruments and make the best decision accordingly.

William Reuter -- Bank of America Merrill Lynch -- Analyst

Okay. And then, I appreciate your commentary on tariffs in terms of fiscal year '19 impact. In the event that List 4 tariffs are implemented the List 4B this Sunday, do you have a sense for what the aggregate impact on fiscal year '20 will be at this point?

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

Yes. So we're not guiding yet on 2020. But List 4B really doesn't have a material impact on the business. Most of our goods imported from China were part of the list 4A. Our sourcing team has been doing a lot of good work in terms of continuing to reduce our reliance on China for those imports as well as negotiating with the vendors in China, where we plan to stay.

What I would say, just a little bit of an update is, I think you know in 2017, 30% of our imported goods came from China. In 2018, that was 23%. And I had previously guided that we will be between 18% and 20% for 2019. And that number will now beyond the low end of that will be closer to 18%. And I would expect continued reduction in that percentage in 2020, but more to come on our next earnings call.

William Reuter -- Bank of America Merrill Lynch -- Analyst

Okay. And then just lastly from me. I noted, you mentioned the cost savings program, which you brought up on the second quarter call, I don't think I heard a target on that. Did I miss miss that or I guess will you lay out some sort of a target at some point?

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

We will. I would say, let me just give you an update on where our cost rationalization efforts are to date. This year, we focused on advertising efficiencies, sourcing, and supply chain and non-merchandise procurement, and we've seen some good progress in each of those. In advertising, as Dinesh talked about we've continued to shift the mix to more efficient online spend. In sourcing, as I mentioned, we continue to lower our exposure to China pretty dramatically. In the supply chain, this year we consolidated our distribution centers in Canada from two to one. Now that's not a big opex savings because the facility we closed is an owned facility. But that facility is currently for sale, and the proceeds from that sale will be applied to our capital allocation framework. And then in non-merge procurement, we've had some wins in international air freight as well as print production expense.

I would say the big opportunity for profit improvement and cost reduction is the store fleet review that is currently under way, and the results for that we expect to share on our fourth quarter earnings call in March. And there is a potential there for both primary and derivative benefits associated with that work.

And then finally, I would just say as Dinesh mentioned in his prepared remarks, as we're developing a deeper understanding of our core customers across all our brands, as Dinesh said, we believe there could be financially significant opportunities to execute more effective and efficient way, so more to come on that in future earnings calls.

William Reuter -- Bank of America Merrill Lynch -- Analyst

Great. That's all from me. Thank you very much.

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

Thank you.

Operator

Thank you. Our next question comes from Carla Casella with J.P. Morgan. Please state your question.

Sarah Clark -- J.P. Morgan -- Analyst

Hi. This is Sarah Clark on for Carla Casella. Will you talk a little bit more about the use of proceeds from your corporate apparel sale? And to that end, after buying back some debt, how much debt reduction is needed to achieve your three times target leverage?

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

Yes. So the proceeds from the corporate apparel sale were used for per the agreement of the term loan. We're able to reinvest those proceeds into the business and that freed up cash for reduction that we applied toward our senior notes. And so that's what basically helped fund the $55 million face value reduction in our bonds that we saw in Q3.

Obviously, the -- to get to the 3X target that will be a combination of both continuing to work down the quantum of debt that we have on the books, but also continuing from the initiatives that Dinesh just talked about, to improve the EBITDA contribution of the business. So I see us getting to that 3X multiple through a combination of those two levers.

Sarah Clark -- J.P. Morgan -- Analyst

Got it. Thank you. And then one more from me. Can you talk a little bit more about any promotional disruption that you saw that might have confused customers in 3Q that you're also seeing in 2Q, or any tones of promotions going into holiday?

Dinesh Lathi -- President and Chief Executive Officer

Hi. It's Dinesh. And I wouldn't characterize anything as a disruption. And I think the retail environment was and remains heavily promotional based on what we see. And -- but particularly around Q3, and we were similar and the frequency of our promotion depth are similar in our frequency promotion, sorry, and we were opportunistic in our depth. And that's essentially what we're seeing, as we continue into Q4 here.

Sarah Clark -- J.P. Morgan -- Analyst

Great. Thank you so much. That's all from me.

Operator

Thank you. Our next question comes from Hale Holden with Barclays. Please state your question.

Hale Holden -- Barclays -- Analyst

Thank you for taking my call. I just had two clarifications. The younger demographics or the younger aging of the customer vile that you called out, that was primarily online and not in store, is that the way to think about how that age down?

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

We look at the business on an omni-channel basis. And the reason we do that is we recognize -- and as I referenced in my prepared remarks, even as we're shifting the mix of digital or advertising to online and digital spend, and we also recognize that even store-based transactions very often result as a -- or they start with an online journey. And so those investments in digital marketing are driving younger generations to both the website and to our stores.

Hale Holden -- Barclays -- Analyst

Great. Thank you. And then the second question I had was on the tariff, I heard everything that you answer to Bill's question. But for 2020, you will have a full year of impacts from 4B in terms of inventory terms, sourcing on the rest of it, which wasn't the case in '19. And I was wondering if we should think about any potential impact there or if you thought you had the pricing capability to kind of offset assuming nothing changes?

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

Yes. So getting back to the tariffs, we are continuing to look for opportunities to reduce the exposure to China further. So as I mentioned, this year about 18% of our imports will come from China. I would expect that that number will continue to fall as we talk about 2020. That in combination with the negotiations with the specific vendors that we will continue within China, at this point, we think those are two big mitigating items in terms of any gross margin rate exposure for tariffs in 2020. But more to come on that in our next earnings call.

Hale Holden -- Barclays -- Analyst

Great. Thank you so much and best of luck over the last 15 days of holidays here.

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

Thank you.

Operator

Thank you. Ladies and gentlemen, there are no further questions at this time. I will turn it back to Dinesh Lathi for closing remarks. Thank you.

Dinesh Lathi -- President and Chief Executive Officer

Hi. Thanks. And just to wrap up, I'm incredibly proud of the progress the team made and as you saw what showed up in our Q3 results. And we have a lot more work to do, obviously, but we're excited about the progress we're seeing. We appreciate your support through our transformation and we look forward to keeping you posted on our ongoing progress.

Operator

[Operator Closing Remarks]

Duration: 46 minutes

Call participants:

Julie MacMedan -- Vice President of Investor Relations

Dinesh Lathi -- President and Chief Executive Officer

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

Susan Anderson -- B. Riley FBR -- Analyst

Damon Polistina -- Deutsche Bank -- Analyst

William Reuter -- Bank of America Merrill Lynch -- Analyst

Sarah Clark -- J.P. Morgan -- Analyst

Hale Holden -- Barclays -- Analyst

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