Destination XL Group Inc (DXLG) 2004 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Casual Male Retail Group first-quarter 2004 earnings results conference call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session, and instructions will follow at that time. (OPERATOR INSTRUCTIONS). As a reminder, this (technical difficulty).

I would now like to introduce your host for today's conference, Mr. Jeff Unger. Sir, you may begin your conference.

Good morning. I would like to read our forward-looking statements. Forward-looking statements contained in this and other written and oral reports are made based on known events and circumstances at the time of release, and as such are subject in the future to unforeseen uncertainties and risks. All statements regarding future performance, earnings projections, events or developments are forward-looking statements. It is possible the Company's future performance and earnings projections may differ materially from current expectations, depending upon economic conditions within both its industry and the country as a whole, and its ability to achieve anticipated benefits associated with announced cost reductions and strategic initiatives to improve operating margins.

Among the other factors which may affect future performance are changes in business relationships with and purchases by or from major customers or suppliers, including delays or cancellations in shipments; uncertainties surrounding timing, successful completion or integration of acquisitions; threats associated with efforts to combat terrorism; competitive market conditions and resulting effects on sales and pricing; increases in raw material costs that cannot be recovered in product pricing and global economic factors, including currency exchange rates; difficulties entering new markets; and general economic conditions such as interest rates. The company makes these statements as of the date of this disclosure, and undertakes no obligations to update them.

I would not like to introduce Dennis Hernreich, our Chief Financial Officer and Chief Operating Officer. Dennis, the call is yours.

Thank you, Jeff, and good morning, and thank you for joining us on this morning's call to discuss Casual Male Retail Group's earnings and performance for the first quarter of 2004. I will go over this morning's press release by describing the earnings performance of Casual Male Retail Group's two business segments, focusing first on the Company's primary business, Casual Male Big & Tall, and then go over the other branded businesses of Ecko joint venture and Levi/Dockers outlet stores.

Casual Male sales increased 7.3 percent for the quarter, from 72.8 million for last year's first quarter to 78.1 million during this year's first quarter. Breaking down Casual Male's multichannels, its direct-to-consumer sales decreased by 8.6 percent to 7.4 million, while its revenue per catalog book distributed increased to $4.90 per book, or a 60 percent increase from last year. Sales in our direct-to-consumer business dropped as a result of the discontinuance of the rep title (ph), which generated last year first quarter 3.3 million in sales. We are experiencing an approximate 25 percent conversion rate of our former rep customers to Casual Male. The e-commerce business continues its strong growth, with an approximate 65 percent increase in the first quarter on the CasualMale.com site.

The Casual Male store sales increased 9.6 percent overall, to 70.8 million from 64.7 million during last year's first quarter. Also during the quarter, Casual Male opened six new stores, raising its store count to 487 stores at the end of the quarter, and increasing its square footage to 1,657,000 square feet, an increase of 3.5 percent from the end of last year's first quarter. The Company ended the first quarter of 2003 with 471 stores. Casual Male's overall comparative store sales increased 9.2 percent in the first quarter, of which approximately 2.2 percentage points was generated from the direct-to-consumer business, and the balance directly from the stores.

Casual Male's gross margin rate during the quarter dropped 80 basis points to 40.7 percent, of which 60 basis points dropped from the merchandise margin. During the first quarter, our merchandise group was working towards analyzing the performance of one of our Casual Male's newest lifestyle assortment groups, Young Men's, and determined that, although a very strong performer, the merchandise assortment needed to be narrowed in many stores. David will elaborate a bit further, but the Company incurred excess markdowns to maintain an appropriate inventory level. In addition, in preparation for Casual Male's newest merchandise assortment in the activewear lifestyle, the Company took additional markdowns in activewear to work down its inventory for these new offerings expected to be arriving at the end of the second quarter. In total, these excess markdowns resulted in a loss in gross margin rate of approximately 80 basis points. Merchandise margins in all other lifestyles were trending strongly, and inventory levels are at anticipated amounts. We're also anticipating that with the margin strength in most of our merchandise lifestyles, together with the inventory issues in Young Men's and activewear moderating, that the Company's merchandise margins will be increasing from last year's level, on a quarterly basis, and result in an overall 2004 improvement of between 75 and 100 basis points for the year.

As to occupancy margin, although occupancy costs as a percentage of sales increased by 20 basis points, primarily as a result of new store costs and natural rental increases, we are expecting occupancy costs to rise 3 percent on an average-store basis for the year, and therefore should gain occupancy leverage for the balance of the year, and ending with an improved occupancy margin of 25 to 50 basis points for the year.

As you all know by now, Casual Male's SG&A increased an expected $4.6 million or 17.5 percent during the first quarter of 2004. Much of this increase was associated with Casual Male's carefully planned national marketing campaign of George Foreman and the introduction of the Comfort Zone line of clothing. This successful launch resulted in incremental marketing expenditures of approximately $3.4 million during the first quarter of 2004, as compared to the first quarter of 2003. Although the Company intends to continue with its marketing plan featuring George Foreman during the balance of 2004, not any one quarter will show an increase in marketing expenditures of more than $1.5 million. Also, during last year's first quarter, the Company reflected a positive insurance claim experience, and recorded insurance recoveries to correct its accruals by approximately $800,000. After considering the marketing campaign costs and insurance recoveries, the Company's SG&A expenses on an average-store basis actually declined quarter over quarter by almost 2 percent. Overall, during the year, we are expecting a year-over-year increase of SG&A of between 5 and 7 percent, but on an average-store basis, we will be between flat to 2 percent increase. Except for the incremental marketing expenditures for 2004, our average store base would actually show an approximate 2 to 4 percent point decrease in SG&A during 2004. Therefore, Casual Male produced and operating loss for the first quarter of $1 million, as compared to operating income of $2.4 million for the first quarter of last year.

Now, over to our other branded apparel businesses. For the first quarter of 2004, the Company's other branded apparel businesses generated an operating loss of $1.3 million, as compared to an operating loss of $2.2 million from a year ago -- in both cases, excluding any losses from closed stores shown under discontinued operations. Sales of other branded apparel businesses were 25.7 million, compared to 19.5 million from a year ago. The Levi's/Dockers outlet stores generated sales of approximately 19.6 million, compared to 17.5 million from a year ago, while the Ecko stores produced sales of $6.1 million, compared to 2 million a year ago. At the end of the first quarter, there were 25 Ecko outlet and full-price stores operating, as compared to nine stores operating at the end of the first quarter last year.

David will speak to the recent sale transaction of our interest in the Ecko joint venture in a moment, but we expect the sale to be completed during the second quarter, and therefore the only other branded apparel business remaining thereafter will be the Company's Levi's/Dockers outlet business.

At the end of the quarter, there were 55 Levi's/Dockers outlet stores in operation, of which three stores were in liquidation. There were three stores closed during the quarter. We expect to close four stores in quarter two, four stores in quarter three and another 16 stores in quarter four, with approximately 29 stores in operation at the end of the year. During the quarter, the Company also recorded a charge of approximately $1 million related to the closing of these Levi's/Dockers outlet stores, and although there remains approximately $4 million in inventory and store closing reserves at the end of the quarter, unanticipated acceleration of closing certain stores prevented the usage of those reserves in the quarter. Having said that, we anticipate that through the course of the year, and by the end of the year, that any losses from closing these additional 24 stores will be funded by either operating income from the Levi's/Dockers outlet stores or the usage of a portion of these remaining reserves.

Before turning the call over to David, I wanted to update you all on two other items. On May 2nd, just a short few weeks ago, we started operating the Casual Male outlet business on our new systems platform that we had been working towards for the past 18 months. The conversion to the new systems went extremely well, and the applications are operating just as we planned and anticipated, without disruption to the business, but not without the hard work a lot of Casual Male associates, and for that we thank them. At the same time, we are now sitting our sights on converting the rest of the Casual Male chain to the new systems in early July, on schedule and as planned.

On the topic of earnings and performance guidance to the investment community, we understand and appreciate the need for the investment community to have some transparency into the Company's performance expectations. The management team at Casual Male has been working diligently in the Company's three-year turnaround plan, of which we are in the third year of that plan that David and I laid out almost two years ago. We are extremely pleased with the progress of the turnaround, including the tremendous progress made with respect to the Company's SG&A base, overhauling its systems support and, most recently, updating its merchandising strategies featuring the Comfort Zone by George Foreman launched this spring, and we're still working towards an efficient and effective marketing strategy for the long term.

During the first quarter of 2004, sales have convincingly responded to David's and the merchandising and marketing teams' strategies, but it is only one quarter. Although we are confident that these trends will continue into subsequent quarters, we would like a few more quarters to firmly validate and fine-tune these strategies, and complete our third year of the turnaround plan before further considering the topic of providing earnings and performance guidance to the investment community.

However, so that we can keep the investment community well informed as to the Company's topline progress, we will be commencing reporting of monthly Casual Male sales in the second quarter and, when appropriate, to disseminate other information about the Company's sales trends and other important details, we will hold investor conference calls in between our quarterly earnings calls, if necessary.

Now, let me turn the call over to David.

Thank you, Dennis. Our three-year strategic plan for the turnaround of Casual Male is right on track and on schedule. This week happens to be the two-year anniversary of our purchase of Casual Male out of bankruptcy, and within the next year, we anticipate that all of our strategic initiatives will come to fruition. All segments of our business have been retooled in the turnaround.

I would now like to review the merchandising, marketing and real estate performance for the first quarter. We reported a 9.2 percent comp for the first quarter. This is the biggest quarterly improvement in the last decade. Casual Male comps historically move maybe 1 to 3 points at best. We're not a Company that fluctuates by being fashion right or fashion wrong. Our improvements that we are showing are the results of merchandising initiatives that I have spoken to over the last several months, in conjunction with the successful launch of the George Foreman product in our stores.

First, let's talk about George. We spent an incremental $3.4 million in the first quarter, which is 70 percent of our total incremental spend for the year. This was a one-time expense event that helped bring Casual Male to the forefront, and at the same time brand George Foreman Big & Tall apparel. The results have been outstanding, and we continue to outperform our merchandising forecasts. Currently, the Foreman product represents 15 percent of total Company sales, and will increase to 25 percent for fall. All four months of our sales of George have been at full retail. That in itself is incredible in a retail environment where if it's not on sale, forget it. We'll have our first promotion for Father's Day, and with a $150 purchase, our customers will get a free George Foreman Grill that has Casual Male's logo embossed on it. We tested this promo in Texas in April, and it was a huge success for us.

It's also important to note that we have been off television for over a month, and the Foreman product continues to perform strongly. An example is the performance is the George Foreman Waist-Relaxer pant, one of our key items. It was featured during the television ad campaign, and in that time period, the Waist-Relaxer pant had a 52 percent increase in units and an 82 percent increase in dollars, compared to last year's Harbor Bay pant, which was our private-label pant.

And currently, this month alone, with no ad support, unit sales are now up 62 percent and dollars are up 86 percent. We never believed, and did not build into our plan, that we would change the spending habits of our customers. Men will continue to shop based upon need. The marketing dollars we spent in the first quarter were to bring brand awareness, and not necessarily ring the register the day the ad ran. We did not buy (ph) our comp sales. The institutional campaign was an investment for the future, and four weeks after our ads finished, customers are still coming in and asking for the George Foreman product.

And on another note, on our George Foreman launch, Weber Shandwick, our public relations firm, spearheaded an incredible media blitz, and through a combination of television, radio and print, Casual Male had over 100 million impressions in the media in the first quarter alone. Needless to say, George's presence is a magnet for good publicity, and his commitment to Casual Male has far exceeded our expectations.

Moving onto our other initiatives, we have also had some stellar results. With the expansion of our suit separates to all stores for this spring, our sales are up 168 percent to last year, and up 20 percent to our plan. And, as we anticipated, our dress shirt and tie business have also improved dramatically. We reinvested in adding more tall sizes to our assortment. An example of a tall size would be a 34-inch waist, a 38-inch inseam. These are clearly slower-turning sizes for us, but we made this commitment to the tall business, and those sizes in the first quarter now total 11.8 percent of our sales, versus 4.3 percent of our sales a year ago.

We are overstored (ph) in our selections. And this spring, we reduced our style count by 21 percent, which has improved our in-stock position. And now, also, our key items now represent 22 percent of our sales, versus 15 percent of our sales last year. Our initiatives to move our assortment to exclusive brands versus our in-house labels have been very successful. Our customers are clearly perceiving a better value proposition with names like Geoffrey Beene and Perry Ellis, compared to our house brand, the Harbor Bay. Including George Foreman, brands now represent 70 percent of our assortments versus 40 percent a year ago. And to reiterate again, these selections are exclusive to Casual Male. And most important, our initial markup has actually gone up to the transition to branding. We have been able to conservatively raise our retails with no customer resistance.

One initiative, however, that has not met our planned expectations -- this spring we expanded our Young Men's more what I would describe as urban brands to all stores, and added more styles to our assortments. And while our sales in the first quarter were up 118 percent, we missed our plan by 25 percent. We have since adjusted our on-order, and our inventories will be in line for the fall season, and to keep these inventories current, we took accelerated markdowns in this category. And as Dennis stated, our gross margin dropped 40 basis points percent (ph) to last year. We will, however, finish the spring season ahead of last year's by making significant gains in the second quarter.

For those of you who remember, last spring we had a negative 5 percent comp, and missed our sales plan by $15 million, and took a lot of markdowns in the second quarter as a result. This year, being ahead of sales plans, our markdowns are still forecasted in line and within our plans. Overall, these merchandising strategies have paid off. At our last Webcast, I commented that our customer conversions -- meaning the percent of customers who walk in our stores and actually make a purchase -- were up over 10 percent, that our store traffic was down an equivalent 10 percent. As we had hoped, we are seeing improvement in our traffic every week. It is now down 5 percent, and conversions remain healthy and a plus 8 percent rate. So we are getting the movement that we had anticipated. Our average transactions are up 4 percent. Our average unit retail is up 6 percent. Our average sale per customer is up 4 percent, and our average item per customer is down 2 percent, and that one does not bother me because we were more promotionally driven last year.

These metrics support the fact that our customers like the direction that Linda Carlo (ph), our head merchant, has taken in terms of styles and assortments. Also, since the addition of Bill Huller (ph), who joined us from the Limited, and is heading up our planning and allocation group, we have been able to improve our size distribution and our in-stock position.

As to an update with real estate, we opened eight stores this year, with an additional seven to open by year end. As far as a remodel update, season to date, we have finished 37 locations. 16 are in progress, and seven more are on the schedule. Our plan is to finish between 125 and 175 stores this year. As I have previously stated, we're modeling these stores because they have not been touched in as many as 10 years. We are not doing this as a solution to comp improvement. Recently, these stores' comps have been outperforming the chain average. It's a little too early for us to make any definitive statement about their impact on their long-term business.

In other related business updates, we announced today that we sold our 50.5 percent interest in our Ecko joint venture to Ecko. Prior to our purchase of Casual Male, we strategically positioned ourselves as an operator of brands for manufacturers. However, with the Casual Male acquisition, we acquired a great niche business. We are now, for the first time, in control of our own destiny. With the exiting of the Levi's and Candie's business, it became evident that the joint venture with Ecko was not in our long-term best interest. The Casual Male enterprise has tremendous opportunity, and we need to stay focused at this juncture. Therefore, we're selling our interest in the venture for $8 million, which is about double our investment. We will support Ecko operationally through a transition period, and it's also important to note that Ecko has been a strong brand for Casual Male, and we look forward to a strong long-term relationship with them.

Also, we previously announced that we would be opening Casual Male license shops in Sears Canada department stores. Our plans are to test 12 locations for September. The stores within the stores will average about 1,000 sq. ft., will be managed by Casual Male employees and will be cobranded as Sears Casual Male Big & Tall. If we meet our goals, we will roll out a total of 80 locations by next year. In addition, Casual Male product will be available through the Sears Canada catalog and Internet. Because these channels are a significant part of Sears Canada's business, due to the vast geography of its consumers, we believe catalog and Internet could big plays for us. This opportunity is an ability for us to enter Canada with a low cost of entry, basically putting in fixtures, and it's our first step towards international growth.

In summary, we are right on track in terms of our turnaround timetable. If we continue with our successes and performances, we still believe we will have a Company with operating margins of 11 to 12 percent in the next few years.

And on that note, we will take any questions you may have at this time.

(OPERATOR INSTRUCTIONS). Christina De Marval.

First question, David -- I'm interested in your comments about the relative improvement in traffic trends with the advertising support. When do you think that might actually turn positive? And I'm wondering if you could also address the traffic of women in stores, if you're seeing a continued improvement on that front?

Yes. It was interesting; in part of the television campaign, we had some DirecTV, so we were able to monitor women calling in, and we've seen an improvement of about 5 to 6 percent, as a percentage of sales, coming through our women shoppers. In terms of traffic, again, it's improving every week. And as I said before, if we just get our traffic to flat, we become big winners because, again, all those other components about conversions, average price ticket -- those are all going up. But again, it's a slow process. There's a lot of word-of-mouth. We have another two weeks of television coming up before Father's Day, so my answer would be we would hope, over the next couple of quarters, we get that traffic piece resolved.

Andy, Dennis, for you, I'm wondering if you could decompose the decline in the merchandise margin a little bit more, and just flush out what was IMU versus markdown?

Of course, we don't report our IMU and markdowns. The incremental change from our first quarter of last year is purely markdown-related. The markups were slightly ahead of last year at this point, and we expect, as I said, our markdowns will moderate going forward and the markups, although I didn't say this, will continue to edge up slightly for the balance of the year.

Kyle Stults.

Can you just remind us how much incrementally are you planning on spending this year for the George Foreman campaign?

We have budgeted and incremental $5 million to our budget. And again, we spent $3.4 million in the first quarter, so become somewhat neutralized as we go along. We in fact had budgeted in the second quarter to run television for three weeks, and we have cut that to two weeks, so that is a savings of about $500,000 above our budget, and the reason is our sales are very healthy right now, and it's kind of like putting it in our pocket if we need it down the road.

But again, in the back half of the year, our total marketing spend is fairly equal to a year ago. I was trying to really emphasize the fact that this is a front-loaded plan, because we had a launch involved (ph), and anybody that is going to try and launch a brand, you have to -- the spend does come in the front side of it.

Understood. So in the back half of the year, and continuing on beyond that, it will probably be slightly lower levels of marketing going into the George Foreman as you start to build momentum with the campaign?

I have always felt we have always had a fairly healthy budget. It's never been an issue that we needed to spend more money. I think we need to utilize it better, and one of the strategic advantages we have just incurred was putting -- and we hired -- we didn't hire; we had Jim Frain from Chico's is now on our board, and he is going to be a tremendous asset to us, and help guiding us to a better allocation of how we are spending our money. But again, from Jim's assessment, it's not that we need more money; we just need to refine that. And again, in our turnaround story, I think that the marketing piece is still the one that is not finished, and needs to be retooled for maximum return on what we are spending out there.

Okay. Can you talk a little bit about the strategic rationale for your Sears Canada deal, and where you're headed with that?

Well, first and foremost, this is to gain growth. There's not going to be any cannibalization by going into Canada. We always thought Canada would be a natural launching pad. If we did it on our own, it would have been much more expensive. And having Sears Canada, which is really the -- it's the number one retailer in Canada, joining us, we're going to get a lot of leverage. The fact that we can open these stores with strictly the cost of fixtures, the fact that the terms are really based on a percentage of sales basis, so the profitability will fluctuate up as we (inaudible) sales. It was a natural for us to do that. Also, we are very excited about George Foreman in their stores; George has a strong presence there. And it also leads us to our first test of stores within stores. As I've mentioned before, several department store chains have come to us for bringing in Casual Male into their space, because it's a very difficult business to handle; there is more requests for Big & Tall sizes constantly, and this could be a potential strategic growth plan for us. We don't know how successful this will be. We do believe that there is tremendous opportunity, as I said, with the Internet and catalog; Sears in Canada has a lot of remote sites, satellite stores where we would be operating through the catalog and Internet in those locations. So there is a lot of potential in those channels.

This is Seymour Holtzman. I just wanted to add one thing, because I think that question was very, very important, and that is our arrangement with George Foreman has certain foreign rights to it. And we have a period of time to expand the sale of George Foreman apparel into foreign countries, and if we don't do it, then we lose it. And we also have a similar opportunity with regard to George Foreman in regular sizes that has certain conditions attached to it, as well. So if this program goes well in Canada, if there are additional opportunities, perhaps, with regard to the Foremen line, so that we can expand this business internationally, Foreman is extremely well-known in Germany, Japan, France and several other countries, and this is sort of our test, which is nearest to our base here.

Thanks, Seymour. Is the merchandise mix, then -- it's primarily George Foreman that you are looking to go into Sears Canada with?

No. It will be a very balanced line of what we have here. There are a few brands that we don't have the exclusivity in Canada, but overall it will look like a Casual Male store. The advantage we will have is we will put our best product in because, again, we only have 1,000 square feet to deal with. So we are not putting footwear, and we are not putting some other categories in there; we just don't have that kind of space.

Okay. But it sounds like there's an opportunity for you to leverage the George Foreman product in these store-in-a-store concepts, as well as some of this --

It's a great launch vehicle. Again, we anticipate a couple things happening in the department store environment. We certainly think we're going to get more tall customers, because we've heard the statistics of the amount of tall's they spend (ph) that shop department stores versus our stores. The only big advantage for us is the growth on the women's side. Our men's -- our stores are pure destination. You have to get in your car, travel; we are not a browsing store, and we think being in the department store environment, we're going to get a lot more women to shop our stores. And if you look at the success of the 60 million grills that have been bought, it has really been the female consumer that has been buying the grills. They love George as much as the male does; they do not look at him as the heavyweight champion of the world. They look at him as a credible sales guy out there, and they believe if he believes in a product, then it must be good.

And just to amplify again -- this is Seymour speaking -- this transaction was very interesting. George Porter, who is one of our directors, introduced this concept to the President of Sears in Canada, which is the largest retailer up there, 5 billion in sales Canadian. And David is dealing with the President of the Company, the CEO, not with any underlings, so that if this thing goes well, based on David's relationship, who also knew the President from some previous experience, I think that there might be some good opportunities for expanding the relationship.

Rob Wilson.

Dennis, what was the catalog circulation in Q1 this year versus Q1 last year?

This 1.6 million catalog circulation this past quarter, Rob. And last year, we were at about 2 to 2.5 million catalogs, and this, along with our strategy to make more profitable our direct-to-consumer business.

Okay. And also, Ecko -- that was their option, to buy back the other half, was it not?

Well, they had an option; but really, both parties amicably sat down at the table and decided that this was best for Ecko and their brand, and best for Casual Male and our efforts and resources.

And the $8 million you will receive when?

That is expected to occur, Rob, in the second quarter, at the end of this quarter.

And one other question. On the monthly comps that you expect to release forthcoming, are you going to break out the store comps, or is it going to the a combination, again, of store and direct-to-customer?

No. We will continue to report as we have, and at the same time, we will continue to comment as well as we have. Again, we do firmly believe, as you know, that the way we market and operate our business as a multichannel -- it's important to combine the sales from all channels. Otherwise, we would be unduly penalizing or advantaging one channel over the other.

So the 9.2 was 6.6 percent on a comp-store basis?

Well, on purely store only, it's closer -- it's about 7 percent, Rob.

And what was that versus last year?

Oh, last year in the first quarter, my recollection, was down about 7 percent.

It was down about 7.

On a store-only basis.

Gary Giblen.

I was just wondering how George Foreman merchandise is tracking in the non-Texas stores, because you might have higher recognition in Texas, where he lives. Is it similar, or is it a slower ramp?

I know you're going to find this rather odd, but Texas, if I put it on a market-by-market area, is probably underperforming. The fact that he lives in Texas had no material impact on the business, because as we prelaunched in the Texas market to get a feel for it, and actually our numbers are better now that we are in other parts of the country than in Texas. If we look at our comps sales by area, our strength right now is coming a lot out of the Florida and the California markets. New York is starting to come on very strong. It's an interesting question, but no, he has not had any material impact greater in Texas than anywhere else.

That's impressive. You mentioned how strongly your suit business and suit separates was doing, and clearly that is because you have more stores with them, but do you think that the underlying consumer demand is still growing because, for instance, Men's Wearhouse was raving about the strength of their suit business in their earnings call last night. So are you finding underlying demand strong, too?

Absolutely. We really sense that there is a movement for guys to dress up again. We had an aggressive plan, and we are beating that plan. We have been reordering and chasing goods in our -- probably the only area where we are short on inventory has been in dress shirts. We continue to try and plug up that inventory. It's been very good, at very healthy margins. Our margins in that category are the highest in the Company, and we have been really doing it at regular price. We have a very strong forecast in for Father's Day, because it will be the first time we are going to be promoting the George Foreman suit on sale. The other point is we only introduced two colors in the suit; we had a black and a navy, and we just had so much demand from our customers for the third and fourth swatches that we are adding two more for the fall season, and we are building a suit business. We never really anticipated that our customer would come to us for this, but it's growing as a percentage of our total sales. So out of anything I could tell you today, we're most bullish about our clothing business.

David, would you tell them about the stretching, and as you were telling me the other day, underneath the shoulders, how well that has been received.

Yes; we put in some new technology. And it's a suit relaxer where, underneath the arms, we put in some stretch panels. I can only tell you -- and I only hear this when I visit the stores. I ask them, "How are things going?" And they say, "Anybody who tries the suit on buys it." They love it. These guys have not been able to cross their arms. In fact, George demonstrated that very well on the CBS morning show, in front of millions of people, where he crossed his arms and said, "I've never been able to do this before."

So, again, these technology features have been incredible. The wicking shirt, the polo shirt that is one of our featured items -- we are now up to 140,000 units that we have purchased of this shirt. These are off-the-chart numbers for our Company to be buying something to that degree. We have it in I think eight or nine colors right now, and we continue to replenish it. And they buy one or two, and then they come back and they buy three or four more, because it actually works; it's keeping these guys dry, and they love this technology.

The zipper tie -- I know it sounds funny, but since we put George Foreman's name on the zipper tie, our sales have skyrocketed. And again, everything that we have converted over -- and we're converting things like now our briefs program will have George Foreman for fall. And we just keep adding categories, and as we change than, our sales improve.

That's helpful. And the final question is, you mentioned that your initial systems implementation has gone successfully. Are there a lot of things that you can't do, merchandising- and allocation- and marketing-wise, because of the fact that you are still enhancing your systems? Because there seems to be that perception out there, that you're doing a lot of things, so what is it that you can't do, and is that minor stuff or major stuff?

I think that, during this transition, it's a little awkward, because our outlet business is run over here, and our anchor, full-price business is run over there. As we combine and get onto our new system, total Company, in July, some of those awkward things that we are sitting in today will go away. I think that everything that we expected from our systems to do for us is doing for us. And we're looking very much forward to getting the entire Company on the platform. We decided to break it up so that we would move only a smaller part of our business onto the new systems, in the event that we did run into some on anticipated hiccups. But that has not occurred, and so we should be on schedule to get us up, as I said before, in July, Gary.

Dennis, would you also mention the software, that loyalty program and when that is going to be implemented?

Yes. We previously announced, Seymour, the Company signed a contract with NSB out of Montreal, Canada. They are the former -- they are the acquirer (ph) Company of STS, who markets the MarketWorks program, the same CRM module that is used by Chico's and many other specialty companies. We intend on replacing our old register and POS systems, and install the CRM module starting late this year, to be completed early to mid next year.

And that capability, not so much the registers or the POS, both those applications that we acquired is simply to get us to utilize the CRM module, which will put us on the map in terms of bringing our marketing program to a much more advanced level, and being able to personalize our service with our customer base.

Okay. Well, does it also save store labor, or free up selling time from the store people?

Not in this case.

Okay. So it's an information, decision-making process --

Simply (ph) to make our sales associates much more effective during the sales cycle with interacting with our customer base.

Russell Hoss.

Good morning. A question on the SG&A. With the sale of Ecko, what does that do to the SG&A there?

Well, certainly, we won't have, obviously, the Ecko part of our SG&A. One of the main reasons why we have been breaking out the two segments is so that you can easily track the two businesses. I think that the Company's overall SG&A this year, consolidated with -- will change, obviously, from last year. Just one second, Russell.

What was the amount of the volume of Ecko for last year, the trailing 12 months or whatever?

I think, like $6 million. And as I stated, Russell, Ecko's sales in the first quarter was $6 million, compared to last year's first quarter of $2 million. But overall, SG&A from a year ago, without regard to Ecko, will obviously drop by some approximately ranging from 3 to 6 percent from a year ago.

And then, getting back to the Young Men's business, although sales were up 118 percent, and you said they still missed your plan, can you kind of elaborate on what you attribute the miss to?

Yes, I think, when you go back a year ago, when this was probably the only thing that was working, from a merchandising point of view, a lot of these initiatives weren't there, and we were doing extremely well, and we were getting these big increases. But we were only in 100 stores, let's say. This spring, we went to chain, and clearly, we have stores that this product was not meaningful to. We pushed it too far out, and we added some more brands, and we caught it early on that it wasn't registering; we canceled where we could, and we have retrenched, and now it's on a very tight schedule. All stores will have some Ecko T-shirts and a couple sweatshirts and a jean, and that's all they are going to have, and that's all they really need. Yet some stores were this product could be 30 percent of their sales, we will continue to fund those stores, but we just pushed the throttle too far, and we have to make a correction. And we really were -- again, being up 118 percent sounds pretty good, but when you miss your plan by 25 percent, that's what we look at. So we have made the adjustment, and we will clean up what's left this quarter, and for fall, our on-orders back in line with where they need to be.

And a final question. In terms of markup, it sounds like -- you mentioned that markup, at least in the branded business was up. So am I to assume that the merchandise margins basically are down because of the markdown, and that is mostly the private-label business, and that is related to just trying to clear that out in preparation of the Foreman and the other branded stuff?

Well, that reason and the Young Men's reason that we described.

Jean Vindis (ph).

This is probably just the fact that I wasn't following the Company some time ago, but your guidance is based on numbers for full year last year, and I am just not sure exactly what the right numbers to use as a base for. So I was wondering if you could just clarify that for me. You said 5 to 7 percent increase in SG&A. What is the base number that you are working off? Is that just Casual Male, or is that the whole group?

This is Casual Male only.

Okay. And so what was the number for Casual Male only, for 2003 SG&A?

Jean, I will guide you to our 10-K, which has the segments broken out, including Casual Male. Through that, you're dealing with an SG&A base of last year for Casual Male only of $110 million.

Okay. And then on the gross margin line, the increase of 100 to 150 beds (ph) -- is that also Casual Male only?

Clearly, Casual Male only.

And then one other question. Your net debt this quarter increased by 10 million, and it looks like I can split out the cash flow statement and sort of figure out where it comes from.

Yes. Basically, inventory seasonal needs.

Okay. So that was my question. The 7 -- it was, I think, roughly a $7 million increase in working capital, just judging from your balance sheet. What would you expect to be roughly the working capital investment for the whole year? Would you expect it to go down from there, or stay about flat, meaning --?

There's two -- three things, actually, now happening, right? We're building our store base in Casual Male, we're dropping our store base in Levi's/Dockers, and we're selling Ecko. Overall, we will have a source of capital from dropping our working capital during the year of some ranging $10 to $15 million, I expect.

And on the CapEx side, what was your CapEx for the quarter, and what would you expect it to be for the year?

Our quarter was approximately $3 million, and for the year, we should be trending at somewhere now between 17 and 18 million, which incorporates our remodeling program that you might have heard us (ph) speak to.

Dennis, did you contemplate in that equation the -- there's some additional redemption of the debt. Did you factor that in, the remaining 12 percent debt?

Yes.

Sri Nadasan (ph).

My question relates to the charges for closing the Levi's/Dockers business. Could you provide some additional color on why you had to -- you couldn't tap the reserves for that additional 1 million or whatever the additional cost were for the quarter?

Yes. GAAP and SEC -- they are very stingy on how we use those reserves, almost allocated down to the store-to-store level. At points in time when we accelerated certain stores we did not anticipate, which is what's happening here in many cases. They don't let us use one store's reserves against another store's reserves. Therefore, what you're advocating is sort of a pool of reserves used for the sole purpose of closing a chain of stores. It's not how GAAP and SEC allow you to use those reserves. So therefore, it resulted in that kind of discontinued charge for the quarter.

Would there be any sort of offset for the rest of the year, for that unexpected closure charge?

Yes. As I said, I expect operating income from the ongoing stores and/or the usage of those reserves we do have to help offset that through the course of the year.

Do you have any specific guidelines on the operating line for the other businesses, other than the Casual Male business for the year? Is it going to be positive or negative or flat or zero?

Casual Male only?

No, the other businesses.

We're looking for about a neutral number, breakeven-ish.

And can you tell us what the remaining amount of the reserves are?

Right now, they stand at about $4 million.

Rob Wilson.

Dennis, did you change the tax rate this year?

We updated the tax rate, yes. As we have done our state tax planning and looked into strategies being employed by our various state taxing authorities, we adjusted that and will go with 37 percent going forward.

And should we expect a gain on sale from the Ecko transaction in Q2?

Yes, we will have a gain on sale. I'm not sure how we are going to show that just yet, but how we do show it -- it will be shown as a one-time gain, in one way or the other. We also -- just to remind you, we do expect a one-time loss from completing the redemption of our subordinated notes. We expect to have a one-time loss of $2 million in the second quarter. So this Ecko gain will go a long way towards -- or more so neutralizing that one-time loss.

And you guys gave out some metrics earlier -- transaction average (indiscernible). Could you run through those quickly again? I apologize; I didn't get those.

I know; there was a lot of them. So let me go through those. Our traffic was down 5 percent, our conversion rate was up -- this is current trends. Our conversion rates are up 8 percent. The number of transactions are up 4 percent. The average unit retail is up 6 percent. The average ticket per customer out the door is up 4 percent. And our average number of items per customer's purchase is down 2 percent.

And that's current trends; that's not Q1. Is that what you mean when you say current trends?

This is what we have been unable -- Dennis just was able to pull --

This is right up through -- this is year to date, Russell.

Rob.

OH, Rob, I'm sorry.

And lastly, Dennis, do you expect to make money in Q2, or should we be expecting something less than last year?

We expect to make money in Q2.

At this time, I show no further questions.

Again, thank you all for joining us. Morale here is -- in the stores and the office are very high. We're very excited. We're doing what we need to get done. And again, I think, looking at the second quarter, we're going to see a lot different picture on the horizon. So thank you all for joining us, and we look forward to speaking to you again.

Ladies and gentlemen, thank you for participating in today's conference. This does conclude the program, and you may now disconnect.