Destination XL Group Inc (DXLG) 2002 Q4 法說會逐字稿

Welcome to the Casual Male Retail Group fourth quarter conference. During the presentation all participants will be in a listen-only mode. Afterwards you will be invited to participate in a question and answer session. At that time if you have a question you will press star one on your touch tone phone to register for a question. As a reminder this conference is being recorded on March 28, 2003.

I would now like to turn the call over to Melissa Myron of Morgen-Walke. Please go ahead.

Good morning and thank you for joining us on the Casual Male Retail Group conference call. We are here to discuss the company's fourth quarter results reported this morning. If you have not yet received a copy of today's release please call FD Morgen-Walke at (212)850-5776.

This morning's call will begin with management making some formal remarks. When they have concluded a question and answer period will follow. The operator will instruct you on the procedure at that time.

I would also like to remind participants that remarks made by management during the course of this conference call may contain certain forward-looking statements. The discussion of forward-looking information requires management of the company to make certain estimates and assumptions regarding the company's strategic direction and the effect of such plans on the company's financial results. The company's actual results and implementation of its plans and operations may differ materially from forward-looking statements made by the company. The company encourages readers of forward-looking information concerning the company to refer to its prior filings with the Securities and Exchange Commission that set forth certain risks and uncertainties that may have an impact on future results and direction of the company. The company does not report on its progress during a quarter until after the quarter has been completed and appropriately discloses its results.

Joining me on this morning's calling for management are Seymour Holtzman, Chairman of the Board, David Levin, President and CEO, and Dennis Hernreich, EVP, COO and CFO. With these formalities out of the way, I would like to turn the call over to Seymour Holtzman. Seymour, you may begin.

Thank you, Melissa. Good morning, ladies and gentlemen. I'm Seymour Holtzman, the Chairman and largest shareholder of the company. I just wanted to make a few brief opening remarks. As I'm sure when you look at our financials they are not quite simple to understand because we are exiting one business and concentrating, obviously, on our Casual Male business. You should feel very comfortable about asking any questions at all. Our intention is to exit the Levi's business and sometimes the cost associated with it are not as certain as we'd like it to be because Levi's Dockers has been helpful in terms of our exit being as efficient as possible.

The one thing I want to tell you for sure is that we have a great management team. They are talented, they are committed and they put their money where their mouth is at. Anyhow, with that in mind, I'd like to turn over the meeting to David Levin, our President and CEO.

Thanks, Seymour. Good morning. Thank you for joining us today as we are going to discuss our results for the fourth quarter and year that ended February 1, 2003. I will begin with an overview of the quarter and then update you on our strategy to strengthen our merchandising and driving traffic. Then I will turn the call over to Dennis who will discuss some of our operating initiatives and our financials in detail. Then we will open the call open to questions.

As you know, this past year has been an incredible year of change and growth for the company, primarily due to our acquisition of Casual Male, which gave us entry into an exciting, growing and largely untapped market. There is great opportunity to gain market share in the highly fragmented Big and Tall men's category and we intend to make Casual Male the household name for Big and Tall menswear.

Since we acquired Casual Male we've been very focused on building a solid foundation for sustainable future growth. The three areas we continue to focus on are optimizing the cost structure of our Casual Male business, exiting our Levi's Dockers business and driving top line growth in the Casual Male business. I am pleased to report that we've made significant progress in each of these areas.

I am going to spend the majority of my time reviewing our initiatives to build stronger relationships with our customers to drive store traffic and to raise awareness of Casual Male as a premiere multi-channel retailer of Big and Tall men's apparel. While Dennis will discuss our strategy to optimize Casual Male's cost structure and exit our Levi's Dockers business.

First a few thoughts on the fourth quarter. I'm very pleased with our 250 basis point year over year improvement in operating margin. As we stated when we acquired Casual Male, our first priority was to right size its operating structure and I think the results we announced today demonstrate that our team is doing an excellent job of quickly identifying and correcting these issues. And I look forward to reporting continued improvements to you next quarter.

On the other hand, our top line is not yet where we would like it to be. As we discussed when we purchased Casual Male, the basic sportswear that dominates our store is not subject to fashion trends to the same degree as other retailers. And therefore Casual Male's historical comp sales have not fluctuated to the degree of other specialty chains. The statement still holds true. We continue to offer fashion neutral casual wear such as basic jeans, khakis, T-shirts and polo shirts and we believe that in a normalized environment our comps will revert to their historical levels.

However, two outside forces negatively affected our top line in the fourth quarter, which resulted in comparable sales that were below our historical levels.

First, the holiday season was impacted by a significant decline in consumer spending that negatively affected all retailers. While our merchandise is generally not subject to fashion trends, we are still vulnerable along with all retailers to dramatic drops in consumer spending.

Second, based on long lead times for our import program, the merchandising strategy for the holiday season was already in place when we purchased Casual Male. Due to the fact that Casual Male was operating in bankruptcy, sufficient resources were not directed toward implementing a well thought out holiday merchandising strategy. We are looking forward to this year and optimistic that our comp store sales can return to historical levels, particularly in the second half of the year when the effects of our new strategies will be evident on the shelves and perhaps the world's economic picture will be clearer.

While we continue to manage through this difficult retail and economic environment, we have been very actively planning and executing the merchandising, marketing and advertising strategies that will positively impact our future performance. We've been very focused on reaching out to our core customer and working to build a strong relationship with him. We have several initiatives under way designed to offer our customer product and service offerings that are specifically tailored to his unique needs.

Beginning in the third quarter we will drive store traffic through our key item strategy. This promotional strategy will be highlighted through 28 events throughout the year. During each of these events we'll feature relevant key items. For example, denim for back-to-school, fleece for fall, and sweaters for holiday at the lowest prices Casual Male has ever offered. We'll have significant ownership in these items and prominent displays in the stores. Last year, we were over sorted, lacked depth in key items and were not competitively priced. We have corrected these issues going forward.

Importantly, we will not have to sacrifice gross margin to execute this strategy as our buying staff has been able to negotiate significant savings, especially with Kellwood Industries, our sourcing partner.

As I have stated before, one way we intend to grow our market share is by attracting a younger man, namely customers in their late teens up to age 30, who have more discretionary income when it comes to buying apparel. Today about 100 of our stores carry youth-oriented brands, such as Rocawear, Sean John and [Peli-Peli]. It's important to note that within these brands our assortment still focus around our core product, not the fashion risk areas, simply T-shirts, fleece and jeans.

I'm happy to say that comp sales in youth wear are up 55% this month and getting stronger every week and this week we launched EcKo Unlimited in Big and Tall sizes. And EcKo is a strong youth wear brands whose company also is our retail joint venture partner in retail outlet malls. We are going to be introducing EcKo with a direct mail piece, letting our customers know we are now carrying the line.

Another initiative we are focusing on improving is our performance in active wear. Active wear is a very important category for the Big and Tall customer because it offers them a high level of comfort due to the baggy unstructured cuts that come in breathable fabrics such as cotton.

Now, this is a category where brand identification is meaningful yet we are 100% private label at this time. In the next several weeks, we will be testing Adidas apparel. We will also be the first company to introduce NBA apparel for Big and Tall, which will also be tested in the spring. Active wear as a category was also over sorted and we are narrowing the number of SKUs and building bigger inventories in the key items.

Furthermore, we are very excited about our custom pant program that we are launching on this our Internet site next week and at our retail stores at the end of April. We initially decided to explore the custom offerings because we believe it would be a particularly attractive to the Big and Tall customer, who generally has more difficulty than the average consumer finding pants that fit properly. And we were encouraged by the success of Lands End, who in their first year after launching custom made bottoms on their website, generated almost 40% of jean and chino orders from their custom program. We felt this was something our customers would also embrace.

In order to gauge our customers' attitudes toward such a program, 13,000 e-mail surveys were sent out to our database file and the response was overwhelming. 3,500 of our customers responded and they responded positively. These pants will be branded under our private label brand, Harbor Bay, and will be priced at $65 compared to $45 for our off the shelf pants, a price that found no resistance from the survey.

In addition to providing a desirable service to our customer, the custom pant program requires zero inventory on our part and offers us margins that are close to our private label items. We'll be communicating our new program through both in-store promotions as well as direct mailing and also in the next several weeks we'll be launching our custom offering on shirts.

Another important component of making ourselves more relevant and impactful to our customer base is by reaching them where they prefer to shop. Our customer who often doesn't like to shop and is somewhat uncomfortable in a traditional shopping environment is more likely to make purchases via catalog and the Internet. We have made gathering e-mail addresses from our store customers a priority and have grown our e-mail database from 100,000 to 700,000 on file in just six months.

As such, we have focused on providing a superior Internet shopping experience by launching a new updated Internet site this week that is more consumer friendly. Casual Male web sales were up 90% last year, over the prior year and we are doing even better in the first quarter of this year. We anticipate we will exceed over $10m of sales this year.

And we are also very proud to announce that CMRG has signed an agreement with Amazon.com to launch Casual Male Big and Tall on Amazon.com apparel shops prior to this fall's back to school. We feel that this is an excellent partnership since Casual Male is the largest retailer of Big and Tall and Amazon.com is the biggest Internet seller of general merchandise. This association with Amazon can only help further advance this growth in sales and also bring new customers to the brand.

On the catalog front, we'll be shipping catalogs to our database of retail store customers for the first time. Our database of store customers is over 2m, while our catalog base is only 300,000. Previously catalogs were never shipped to our retail customers for fear that the catalog channel could cannibalize our retail store sales. However, our philosophy is that of a multi-channeled retailer, we believe it is most important to build a relationship with the customer and get give the customer as many options as possible to view and purchase our product.

Finally, the systems tools that will have the most dramatic impact on our top line sales and gross margin improvements are being implemented over the next year. Our current planning and allocations systems are not close to industry standards and have prevented the stores to optimize their sales potential. Once these systems are up and running, our in-stock position by style, by color and by size will improve dramatically and in effect raising our inventory turn and lowering unnecessary mark downs.

In addition to implementing these initiatives into our existing store base, we are targeting to open seven new full price, nine outlets and six relocations in the first half of the year. We are also seeing and anticipate continue to see strong incremental growth from our EcKo joint venture. Currently we are targeting to open 16 to 17 new EcKo outlet stores in fiscal 2004, with about 10 to 12 of those opening by June. The gross margins at EcKo are extremely strong because of our joint venture relationship with the manufacturer. The four-wall profitability for the stores that we have opened exceeds 20%.

Also, new EcKo stores are very low cost to open because EcKo is putting in the inventory at their expense and we are paying for the build out, which is a relatively minimal cost of approximately $150,000 per store. We have been able to pay out the investment in less than one year, which is quite remarkable.

Overall, we are pleased with our progress in terms of cost rationalization, merchandising and marketing activities in our Casual Male business. Also we are pleased to have the exit strategy for our Levi's Dockers business in place, which will provide us additional resources to direct to our Casual Male business.

Looking ahead, we are focusing on growing all three channels of our Casual Male business, retail, catalog and Internet, and we look forward to reporting back to you on our progress next quarter.

And now I'd like to turn the call over to Dennis, who will walk you through our operating initiatives, financials and outlook for the year. Dennis?

Thank you, David. And good morning, everybody.

I am going to take you through the financial statements and the results for the quarter and the year, which you saw this morning. And take you through, as David said, our operating initiatives and explain a bit more about our restructuring charges and exiting the Levi's Dockers business, talk to our balance sheet and cash flow and then open it up for a Q&A session.

But first, for the fourth quarter of this year on a consolidated basis, Casual Male Retail Group Inc. reported a net loss of $23.8m, or $0.67 per share, on sales of $143.9m. As compared to the fourth quarter of last year, which showed a loss of $7.8m, $0.53 per share on sales of $53.7m. That's what the financials showed this morning.

Now let me try and strip it down for you to explain what's happening on an operating basis.

The fourth quarter results include a restructuring charge of $30.2m related to CMRG’s decision to exit this Levi's Dockers and Candie's outlet businesses, which I'll discuss in greater detail in a few moments. After excluding the impact of this restructuring charge, CMRG's operating income was $9.3m, and net income was $6.4m before the effects of normalized taxes. After tax, CMRG's EPS was $0.11 per share on a fully diluted shares outstanding of 36.4m shares.

Again, without the effects of the restructuring charge, the components of CMRG's operating income was gross profit of approximately $51m, or 35.4% of sales. Its SG&A expenses were approximately $37.6m, or 26.1% of sales. And its depreciation and amortization charges for the quarter was $4.1m.

During the fourth quarter, the Casual Male business of CMRG, its primary business focus, produced an operating income of $10.3m, or 10.9% of sales of $94.9m, in spite of Casual Male's comparative store sales decrease of 5% for the quarter. These results compares to Casual Male's operating income of $8.3m, or 8.4% on sales of $98.9m a year ago fourth quarter, for an improvement this quarter in operating income performance of 25%.

Now for the year. On a consolidated basis, Casual Male Retail Group results for the fiscal year 2003 was a net loss of $38.8m, or $1.54 per share on sales of $420.8m. As compared to last year of $7.9m, or $0.54 per share on sales of $195.1m. That's what the statements show.

Again, breaking it down, the fiscal year results include a restructuring charge of $41.3m related to CMRG's, a decision to exit Levi's Dockers and Candie's outlet businesses. After excluding the impact of these restructuring charges, CMRGs operating income was $11.7m, and net income was $2.5m before the effects of normalized taxes. After tax CMRG’s EPS for the year on the same fully diluted shares was $0.04 per share.

Again, without the effects of the restructuring charge, the components of CMRG's operating income was gross profit of $141.3m, or 33.5% of sales. SG&A expenses were approximately $118.8m, or 28.2% of sales. And its depreciation and amortization was $10.8m.

During the fiscal year and assuming CMRG owned the Casual Male business for the full year, the Casual Male business produced an operating income of $15.5m, or 4% of sales of $329m, a comparative store sales decrease of approximately 1%. These results compare to Casual Male's operating income of $11.5m, or a 3.5% of sales of $332.4m of a year ago, or for an improvement this year in operating income at Casual Male of approximately 35%.

As you know, CMRG acquired the Casual Male business on May 15, 2002, and has since reduced its operating expenses by $20m on an annualized basis, of which approximately $8m are reflected in the fiscal year 2003 results. Although the integration plan and cost reductions are not complete, we are extremely pleased with the progress to date and are highly confident that the ultimate cost savings to be achieved will be in excess of $25m.

We expect that the integration plan, infrastructure improvements and cost reduction initiatives should be completed within the next 12 to 18 months. As David elaborated upon a few moments ago, these infrastructure and improvements will not only bring cost and operating efficiencies to the business, but also significant benefits in terms of merchandising and in stock, in-store inventory positions to enhance sales.

Restructuring charges. As we discussed in great detail in the press release and conference call on February 13, CMRG's decision to exit the Levi's Dockers outlet business will enable CMRG to focus its attention toward optimizing the Casual Male business and utilizing its full resources in expanding upon Casual Male's already dominant market share. As a result, CMRG intends to close up the 50 to 55 stores over the next 24 months, thus reducing the sales volume of Levi's and Dockers outlet business to less than 10% of CMRG's total sales. The remaining stores, approximately 30 stores, will either be closed at the end of their respective lease terms, or otherwise be divested in a sales transaction.

At the same time CMRG discontinued the Candie's outlet business by transferring seven of the stores to Candie's and closing the remaining five stores.

Consequently, CMRG recorded a restructuring charge of $30.2m during the fourth quarter which together with the $11m restructuring charges recorded in the second quarter, resulted in the total restructuring charges of $41.3m for the year. These restructuring charges allows for the closing of approximately 55 stores, of which 17 stores have been closed to date.

Although the restructuring charges recorded allow for only the closing of approximately 35 to 40 of the total existing 82 stores in accordance with SEC and GAAP requirements, the stores to be closed over the next 12 months represent the poorest performing stores with the balance of the Levi's Dockers outlet stores generating meaningful cash flow. Consequently, we anticipate that going forward that either through the usage of established restructuring reserves, or through cash flow generated from the remaining productive stores, and through the traction gained from the expansion of the EcKo joint venture stores, that the profitability of CMRG should be unaffected by the exiting of the Levi's Dockers outlet business going forward.

Excluding the effects of the restructuring charges, the former Designs businesses for the fourth quarter produced an operating loss of approximately $1m in the fourth quarter on sales of $49m, compared to operating income during the last years fourth quarter of approximately $900,000 on sales of $53.7m.

For the year the former Designs businesses generated an operating loss of $6m on sales of $178.5m, as compared to last year's operating income of $2.1m on sales of $195m. We anticipate again that the former Designs businesses will again generate positive operating income during fiscal year 2004, partially on the strength of the EcKo joint venture performance and expansion, and partially on gross margin improvements resulting from its newly initiated private label top program for the remaining Levi's Dockers outlet stores.

A note on the balance sheet and cash flow. The company enters fiscal year 2004 with net operating tax losses of $50m, which will help supplement cash flow going forward and reduce the company's tax liabilities over the next several years. All unimpacted by the restructuring charges.

As expected during the fourth quarter, CMRG generated free cash flow of approximately $25m, which was used to reduce its borrowings under its revolving line of credit. We anticipate that this year's free cash flow will approximate between $10-15m during fiscal year 2004 and that although CMRG revolving line of credit peaked last year at approximately $85m, we anticipate this year's revolving line of credit will peak at approximately $70m. And liquidity should remain in a strong position throughout the year of fiscal year 2004.

Those are my remarks with respect to the financial performance of the company and now we'll open it up, turn it over to the operator for a Q&A session.

If you would like to ask a question at this time, press star one on your phone. To withdraw yourself from the queue, press the pound key. Again, to ask a question, press star one on your phone. Our first question will come from John Reilly of CJS Securities.

Good morning. You gave us an update on the new roll-out for the EcKo stores. Could you give us an update on your planned roll-out for the new Casual Male stores over the next 12 months?

Yeah, in fact two stores opened yesterday. We are going to be opening 16 stores by June. Plus an additional six relocations, which should give us comp improvements because we are moving from some tired centers in the same area to new locations. And the back half of the year we can't quantify yet because there's a lot of negotiations going on to get the right locations. But the first half of the year is locked and loaded at 16 new stores.

John, this is Seymour Holtzman. Just to add to what David said. You have to remember that we have a partner, so that 16 stores is somewhat illusionary in terms of a commitment because our partner actually owns half of it obviously.

Seymour, that was in reference to Casual Male.

I'm sorry, oh, excuse me. I was talking about the EcKo, I'm sorry.

No problem. Also, you didn't give official guidance on the call but you said you expected continued margin improvement. Just to clarify is that continued margin improvement from Q4’s operating margins or the year over year comparisons?

The year over year comparisons. We expect, as we said improvement in operating margins throughout this coming year, the year that we just started.

In the same range of 250 basis points or --?

I think over the course of the year, that's correct.

Okay. And also just speaking about the tough comps you had in Q4, are you seeing any improving trends in the first quarter? Can you update us anything on what you are seeing in the first quarter?

The facts are as follows. 60% of our stores, 65% of our sales come out of the north. And as everybody knows, February was extremely difficult month with weather. In fact, on President's Day alone we had 180 stores that never got open and that was the biggest day of the fourth quarter. So we are kind of following that same pattern as other retails reported this year February and 1st week of March sales.

However, the important thing to note is that when the weather has been nice, our business has been quite good, and our spring assortments are selling at full price right now. And, again, I can say this week has been quite good because the weather worked in our favor. So take the weather factor out, I think we are doing okay. Who knows with the uncertainty day-to-day with the War and the economic conditions. But, again, it's not necessarily our assortments that aren't working, it's more some of these external forces that we are trying to live with right now.

Great. Thanks.

Our next question comes from Christina de Marval of Sidoti.

Good morning, gentlemen. One question I want to focus on first was the SG&A expense reductions on the Casual Male side of the business. It looks like you are certainly well ahead of your plan, which as I understood it was to cut $20-25m in annualized expenses by the ends of fiscal 2004?

That's right, Christina.

And now you've basically taken out $20m so far, right?

That's correct.

So do you think you are being a little bit conservative on the ultimate, either the magnitude or the timing, since you're saying over the next if I understand it, over the next 12 to 18 months you are looking for the incremental $5m?

Again, I think we are very confident on achieving another $5m more. But keep in mind, too, in terms of timing, that the next round of cost reductions has to do with infrastructure improvements, primarily system-related enhancements to the company, which, of course, takes time. We have to do it very carefully. We are in there changing the nerve center of the company so perhaps we are being a bit conservative as to the cost and as to the timing. But we are handling it in a very careful way.

Okay. Can you elaborate a little bit on the timing of the systems? You might have mentioned it before, but I didn't catch it.

It goes along with the same 12 to 18-month time frame, Christina.

Okay. Fair enough. I appreciated your comments about the merchandising improvements that you are planning for the second half and the multi-channel initiatives as well. I'm just wondering what kind of marketing support you plan in conjunction with that? Namely the television advertising you've been doing and some of the feedback that you might have had with the test at the end of last year?

The direct marketing that we did last fourth quarter as a test, we learned every day and we got better at it every day so we've come back with round two with a new marketing campaign on Direct TV, and our cost to reach each customer is initially after the first few weeks was about half of what it started out in the fall. So we are doing quite well on that.

The only issue we had was we were advised once the war started was to pull our Direct TV off because of the economics of marketing during this time. So we only got about a few weeks in before we had to stop it. But as soon as things settle down we are going to go back and hit it again. But we are more encouraged than we were before.

And, again, we are learning that off the TV a lot of these customers are going directly into the Internet as opposed to even requesting a catalog. So, again, we are getting it many ways right now.

I guess that brings up a question with respect to the Internet, it sounds like that's been a real success. I'm just wondering if you or if Dennis can break out what the specific numbers were for 2000, well, for last year and the prior year in terms of revenue.

In terms of the Internet, last year sales were approximately $6m on the Internet, the catalog as a whole was approximately $26m. The prior year, numbers basically were flat but the Internet grew from approximately $3.5m to $6m, the shortfall came from the catalog business, primarily resulting from the old [Rep title] which today still exists but is in decline as a result of little support because there are no stores behind it, of course.

That makes sense. I guess now that I have you here, Dennis, I wonder if you could break out by division what the SG&A and gross margin percentages were both for the fourth quarter and the year?

One more note, also, too, on the Internet business, Christina, we do expect the Internet business to, I think David mentioned, do $10m this year as we continue to see explosive growth in that channel.

Getting back to your gross margin question. As to Casual Male, our gross margins were 44.1% for the fourth quarter and that compares to last year's about flat to a year ago. For the year, Casual Male's gross margins were approximately $42.9m compared to $42.8m. As to the Designs business, gross margins for the quarter improved by approximately 200 basis points from about 23% to about 24%.

From 23% to 24%?

I'm sorry, 25% in the fourth quarter.

Okay.

For the year we were down approximately 7/10 of a point where last year gross margins were approximately 24% for the year. This year they were about 23% for the year. That's Designs.

On SG&A, can you?

SG&A for Casual Male, I think I mentioned that, but SG&A total for the fourth quarter is approximately, I'm sorry, let me go back to my notes on that. SG&A expense for the quarter was about $38m for Casual Male's business versus about $43m a year ago. And for the year, Casual Male's SG&A approximated $155m compared to $162m from last year's full year.

I will give somebody else a chance here. Thanks very much.

Thanks.

Our next question comes from Marybeth Holland (ph) of Goldsmith & Harris.

Hi, its Marybeth Holland. Good morning. What are your inventory expectations for where they might level out by the end of this year?

I think we expect our inventory levels to track somewhat below last year's levels throughout the year. We are running today about two or three points below last year's levels and we expect to continue that throughout this year.

Okay. What's your total sales assumptions for the current year?

In terms of a range, we are expecting total sales to be in the range of $480-510m, that's the kind of range that we are working from today.

What assumptions do you have for catalog sales and circulation increases?

Well, I already mentioned Internet business. The catalog sales are expected to be relatively flat or slightly up. On circulation, increases of approximately 20%.

The reason is again we are transitioning down our Rep catalog business as those stores have gone away and moving those customers into the Casual Male catalog. So the catalog is in a transition year.

What did that represent on the Rep catalog segment?

It's about $16m dropping to this year estimate of approximately $12-13m, is what our Rep catalog today represents, before we transition it.

I was wondering, you mentioned about comps in the second half reaching historical levels. Could you quantify that for us, please?

Historically Casual Male is not a very up and down type sales performance. So we are talking about low single-digit type performance. Whereas historically it’s been up one, up two, up one, up two type performance.

In other words you feel by the second half there would be a more consistent top line growth?

Yes.

Okay. Great. Then just about where capital expenditures came in for the year just reported and where you see them trending to for the current year?

Yeah, our capital expenditures this past year were approximately $14m. Much of that was infrastructure related, particularly in the fourth quarter. And next year we are, again a range, we are planning for capital expenditures of between $12-17m.

Thank you very much.

Our next question comes from Dick Ettelman (ph) of Sanders Morris.

Good morning, gentlemen. It was from my way of looking at it a very good year and you had a lot of difficulties you had to go through, a lot of cleaning up. A couple questions here. Are you going to be going out at all into the world at large to tell your story this year realizing that you haven't had a lot of time this past year? Do you have any plans there?

We definitely have plans. We plan on as we have been in the past and we will continue to visit the investment community throughout the year. In fact, our first visit is in New York during the week of April 7 where we are visiting with Christina at the Sidoti conference.

Of course, we want you other places in New York, obviously. In other words, is there going to be any kind of a plan to get out the tell the story around the country? Dennis, I know you are under a lot of duress and work very hard.

No, we are very excited to visit and look forward to visits throughout the year.

Next question, could you go into the Kendall relationship again? Refresh my memory on what does that mean, when does that drop into the strategy and so on?

Yes, Kellwood Industries.

Kellwood, I'm sorry.

They are a $2.5 billion manufacturer and they are making strides now in the men's side of the business. We have a contractual relationship with them where they manufacture for us at a certain cost plus percentage, which is significantly lower than we could have obtained in the open market and we committed to a, the original contract was for $50m. And the start up is more intensive than either side anticipated because to find factories that can make Big and Tall you have to go outside your normal structure. So we have not reached the accelerated pace that we planned on over the next couple of years but in fact the first Kellwood goods are hitting our stores this quarter.

These are all fashion goods for the most part, standard goods?

Yeah, if you look at the numbers, 60% of our business is core.

Right, that's what I was getting at.

They are doing our basic core but they are doing quite a bit of our top business, also.

This is obviously a piece of the margin improvement you are looking for?

Yeah, and what was nice is it had an impact globally because the other manufacturers obviously didn't want to lose their sales position and came back with competitive prices. So had a rippling effect and we have significant mark up improvement already. That's where the gross margin improvement is coming from.

What portion of your total inventory needs will Kellwood amount to, then, do you think?

I think that the long term goal would be about 30%.

Okay. And the bulk of the Kellwood addition will be beginning in the second quarter of your fiscal year, somewhere along those lines?

Every quarter.

Get better and better?

Right.

Next question, are there any additional restructuring thoughts that you may, I am going to presume you are going to say no, there aren't. But are there any additional costs that might come forward that you've been thinking about?

No, Dick, we don't anticipate that. Not at all.

Okay. The merchandising, the marketing additions, the excitement that I would see among other things is the same as you see, is that you bought a situation out of bankruptcy that had probably been under-undered everything they did and that you've got the chance to make all these changes. I am going to presume that this also required some internal personnel changes, merchandisers and things of that nature. Can you give me your thoughts there?

Yeah, it was an interesting merger of two retailers and the benefit we got was, we weren't anything but wanted the best of the best and the top management team is the combination of some of our best people that were at Designs and there were quite a bit, we were very surprised with the management talent at this company that a lot of the initiatives that we are doing were endorsed by management but the layer of management above them suppressed it and didn't give them the capital that we are giving them.

So the middle management was there in place to a great degree but didn't have the wherewithal to overcome the top guys that were holding them back?

The middle management here is very good, very good.

What's the number of employees you've got, roughly?

We have, well, including store associates we were in the approximately 4,000 people but here at headquarters when we walked in there were approximately 800 personnel and after rightsizing certain areas, now we have about a head count of 600 people here at corporate.

About 200 people have been laid off.

That's all I've got. Congratulations and good luck going forward.

Thank you.

Our next question comes from Richard Schuester (ph) of Weiss, Peck & Grier.

Hi, guys, it's been pretty exhaustive. You've answered most of the questions. Dennis, can you go into the systems upgrade a little bit more, what the timetable is? Specifically what are some of the systems and what savings are we looking for and what potential risks can happen on implementation?

Well, first let me say that the first system that has been completed with the outstanding efforts of our finance group and furthermore it gives us excellent abilities to better manage the company from what the tools were here before, but we converted our financial systems over to our Lawson financial system, which was just completed here in February.

We are now tackling the more grandiose of the projects and that is our merchandising and distribution systems which entails, as David was mentioning, not only our replenishment systems for inventory, but also merchandising as a whole. And we are also converting our distribution systems to Manhattan Associates [BKMS Systems].

That effort has been going on for the last six months, in terms of defining requirements, changes in processes necessary, we diagramed how we are going to operate under the new system. There were some gaps identified that we are working through with our partner JDA, and those are being made as we speak and we anticipate testing the systems in the fall with implementation in the early spring to perhaps late spring next year.

Dennis, would you mind mentioning the people from Canada, the consulting firm, and what they've identified?

Well, we brought in, this was obviously an opportunity to make sure that we were adopting best practice here at the company since we are changing so many of the support systems here, and we brought in an excellent firm out of Canada, [Caribous Management], very experienced in retail so we reviewed our process that we are looking to adopt, to review our cost reduction efforts that we have made not only so far but we have planned in the future. They've made obviously some further recommendations to us which were helpful. But in whole, in large part, they validated and verified the direction that we are going.

This was done through a lot of peer group analysis that they were privy to, to tell us where we are, ahead of the curve, behind the curve, where we can't go. And the cost savings were identified department by department.

That's correct.

Thank you, guys.

Thank you.

Our next question comes from Steve Denault (ph) of Craig Hallum Capital.

Good morning, guys.

Good morning.

You mentioned something about a branded initiative and I think it entailed somewhat I would consider to be pretty strong youth brands, Rocawear, Sean John, and then you provided a statistic. Can you provide that a little more color about what you are thinking about?

Well, we had these items at about 100 of our stores, the more what we would call metro urban stores. And for EcKo we are rolling it out to 200 stores and as we get success we will continue to move through the layers to try and see what the threshold for this product will be. But, again, and I said the sales for the month are up 55%, but if I took you week to weak, this week they are up 100% because the product was hitting the stores, the product is selling at full price, we are getting 10-15% sell-throughs on this stuff. EcKo hit the stores on Monday and we are getting excellent sell-throughs.

So these, this was a very underdeveloped area for us and once the younger guy knows that we have these sizes and these brands they are going to come in. Again, if you look at the strong retailers today, Pac Sun, Quick Silver, there is a lot of discretionary income with the younger consumer and we are already know about the success of EcKo that we are having in the outlet stores. It's not a big piece of our business but it's growth. We are not going to go crazy with it. We are not doing the fringe items on these brands. We are not on the outer edge. We are talking about a lot of logos, logo T-shirts, logo shorts and things like that. But it's very exciting that we have a customer who wants to buy this stuff.

I would agree with you. If I could just mention another of thing in many of the stores I visited recently there seems to be an opportunity that you guys are taking advantage of as relates to further targeting the tall man. It seems as though the tall man was a bit under-represented and you've sort of expanded your mix. What do you see there?

We were out, it's one of these interesting things, the merchandising group and the planning and allocation group within this company I'm embarrassed to say, never went to our stores. They were operating in a vacuum in this building and it's now mandatory that everybody is out in the field on a regular basis. So we just finished a round of trips and get to your point we found tremendous request at all stores for longer inseams in pants. We always catered to more of the wide guy with the shorter inseam.

Now there's a lot of demand for the tall guy and we are going to be adjusting our sizes to get more of those tall guys in. Especially as we get into something these things like Adidas again we are going to be attracting the guy that's more tall than wide. That was a good observation and that's exact where we are looking for some more growth.

That's great. Thanks a lot.

Our next question comes from Kevin Casey (ph) of Casey Capital.

Hi, guys. A question on the cash cost. Did you break out how much the charges were going to be cash and how much aren't?

The charge taken in the fourth quarter, Kevin, about $5.5m we expect is going to affect our liquidity and that will take place really primarily in the second half of the year.

Then the rest is just all non-cash charges?

Correct.

Then going forward, as you slowly exit the business you think recurring or operating cash flow of that, of the old Designs business can pay for any other restructuring?

That's correct. The only other restructuring we have is the cost of closing a store which is cash flow should be able to absorb. We don't expect beyond the $5.5m. The impact on liquidity whatsoever on a go forward basis, other than the $5.5m.

Then going forward, since you were able to get the $20mm cost savings so quickly, is that $20-25, is that increased at all or is it too early to tell?

We said, I think we said today and in the past that we are confident now that with will do at least $25m, perhaps in excess of that.

Okay. And then the decrease over Q4 in the Designs business, is there a way to break that down to what's attributable to the slow retail environment, what's attributable to change in management and probably also since they didn't properly stock the stores with good retail for the Christmas season since they were in bankruptcy, can you break that down or is it tough to say?

We brought in a new merchant with a lot of experience with the discount world, Bill Hirsch came from TJ Maxx. He's a seasoned guy that we really needed in there to get a better value proposition, negotiate some better deals so we could be more competitive. As was stated on Tuesday, Levi's said that their domestic sales were down 14%. Well, we are a dealer and we've got a brand that continues to have erosion. But our intent is that we are cleaning up a lot of our aged inventory in the next month and Levi's is working with us to get us better deals so we can be more competitive. It's very difficult for us to sell a basic commodity price and make any money today. And so we are really moving more towards the close out type of the business where the margins are much more robust.

Okay. Then on the Casual Male side, you're improving, your buying, can we spent slight increases in gross margin throughout the year?

Again, I believe in the third quarter we'll start to feel some of the impact of a lot of the better pricing with some of the promotional events. We are really going to drive item promotion versus generic 25 off type sales which to me they are a yawn today, they don't mean much. We are going to have the lowest prices we've ever offered for our customer because we are ahead of the curve, we've already made the buys and we've got very favorable pricing based on buying bigger quantities and better planning. So we have built in the promotions for the rest of the year already and have bought those goods.

All right. Thanks a lot.

Next question from Rob Wilson (ph) of Tiburon Research.

Yes, thank you. Dennis, you threw out a number of $10-15m of free cash flow. Can you give us your definition of free cash flow so I'm not confused here?

Operating activity cash flow less capital expenditures, Rob. Cash flow otherwise available to reduce debt.

Okay. Can you give us an expectation of interest expense in 2003?

Approximately $10m.

$10m. Great. You also throughout a number of plus 250 basis points and operating profit in the Casual Male business. Was that 250 in Casual Male or 250 for the company as a whole?

I would expect both but of course it's emanating from the Casual Male business.

Okay. Finally, when I look at your press release and I try to understand where the $20m, the $25m in SG&A savings is coming from, if I look at your sales, sales are about even versus last year, gross margin percentage is about even, operating income is up, I guess $4m, $5m there, where would I see the savings in SG&A in Casual Male this past year versus the prior year? Or is that a going forward savings?

I had mentioned in my remarks that approximately $8m of the reduction is shown in this year's FY 2003 results.

$8m?

Yes.

Okay.

The $20m is on an annualized basis for a full year.

Okay.

So within our SG&A categories, we’re experiencing approximately $8m in reductions. Of course some of that is going to be offset by the fact that we did beef up for testing our marketing expenses in the fall of, FY 2003 which is somewhat masking perhaps on a P&L basis, the full savings of the $8m that I'm citing.

Got it. That helps. Also you said your catalog circulation is going to increase 20% this year. Are you doing anything different as far as store trade area circulation versus non store trade area and prospecting?

I think one of our big changes being done there is we are not only mailing into our historical catalog database customers but also our retail database of customers. David and I really and the company don't have any preference as to how our shopper comes to us. We are trying to make it as convenient for our customer to shop us. Whether that be through Internet, catalog and/or retail stores, we want our customers to realize and understand all the different ways they have to shop Casual Male.

So the increased circulation is really for the first time going into our store database, the customer.

Got it. And last question, I'm sorry, this has gone on a long time here, but you said 100 stores have youth oriented brands, is that what you said earlier?

The specific, yeah, these brands that I mentioned, yes, they are in about 100 stores today.

And how long have they been there, approximately?

They've been there for a few years, but we changed the merchandise mix, we put in a new buyer and it was a category that just wasn't a whole lot enough attention placed on it. So it's a lot of little things that are making these increases happening right now.

So this wasn't necessarily a test that you were going to pick out 100 stores and try this merchandise, they've been there for years?

Yeah, it was a terrible profitable performance behind it. And now we are getting the right brands in there at the right time of the year and, again, with great success. A brand like EcKo is going to allow us to really start to push out there and get beyond the 100 store base and then we will move from there. But we have to be careful not to get crazy because you can make a lot of mistakes in that type of business. So we are moving wisely, let me say.

Is it fair to say that these 100 stores are performing at least on a same store sales basis at a higher level than the other stores?

In the last several weeks, yes, because this stuff has a high ticket compared to our private label. So their average out the door price is up and that's helping their sales performance. Yes, these stores are now doing some out-performing.

Well, great call. I appreciate it.

Our next question is from John Curti (ph) of Principal (ph) Global.

Good morning, I have three questions for you. First, are there opportunities for further restructuring the balance sheet a little bit on the debt side, stringing out maturities, lowering interest rates, et cetera?

Yeah, we think there are perhaps at the right time, yes.

Then secondly, as you wind down the Dockers Levi's business, that will continue to be reported as a continuing operation?

Yes.

Okay. Then, thirdly, I had to jump off for a second, and you might have already said this but, estimated CAPEX for '03 and estimated D&A for '03?

Yeah, our estimated capital expenditures for the year we just started, FY 2004, is $12-17m. And our D&A, we are expecting to approximate $12-13m.

Okay. Thank you very much.

Our final question is a follow up from Christina de Marval.

I'm sorry to keep this dragging this out. I just had a couple housekeeping things. One question is about the EcKo stores, what is the square footage of those stores?

It's interesting, when we opened the first six the square footage was about 3,000 square feet, which you never know what's the right footprint, and now we've upped that to 3,500 square feet. It's getting the categories in there and it's turning a little too quick for us and we couldn't stay on top of it. So 3,500 square feet is the ideal square footage right now.

With the seven Candie's stores that are being operated by Candie's Inc, are those still in the P&L?

No.

Okay.

I mean, whatever remnants were left, Christina, in the fourth quarter, of course, but not on a going forward basis.

Okay. That's it. Thanks.

Thank you.

We have no further questions. I'd like to turn the call back over to management for concluding comments.

I would just like to thank you all. It was a lot of good questions and, again, as Seymour started out, it's a little complicated when Dennis goes through the numbers, to make sense of it, we hope you did and if not, of course we are available to take one on one phone calls for any further clarification.

We are really getting excited here. We are on to something great. We have a lot of work ahead of us but we are seeing that we do have an incredible franchise here. Casual Male was a phenomenal acquisition for us and hopefully you have a taste of what's yet to come for the rest of the year. And thank you all.

That concludes today's conference. You may now disconnect your lines.