Destination XL Group Inc (DXLG) 2004 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Casual Male 2004 earnings and Rochester Big and Tall acquisition 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). I would now like to introduce your host for today's conference, Mr. Jeff Unger, Investor Relations. Mr. Unger, you may begin your conference.

Good morning. Welcome to today's call. David Levin, our CEO and President, will be on the call, as well as Dennis Hernreich, our CFO and Chief Operating Officer. I would like to read the forward-looking statements. Forward-looking statements contained in this and other written 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 that 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 within purchases by or from major customers or suppliers including delays or cancellations in shipments, uncertainties surrounding timing, successful completion of integration of acquisitions, events associated with an effort to combat terrorism, competitive market conditions and resulting effect 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 obligation to update them. Now I would like to introduce Dennis Hernreich, CFO and COO of Casual Male.

Thank you Jeff, and good morning everybody and thank you for joining us on this morning's call to discuss Casual Male Retail Group's earnings and performance for the second quarter of 2004, and also to go over some of the particulars of this morning's announced acquisition of Rochester Big and Tall. I will first be brief in my comments about the earnings and performance of the second quarter and then I will turn the call over to David for his further thoughts.

I will go over, by describing earnings performance at Casual Male Retail Group 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. Finally I will briefly describe the extraordinary gains and losses recorded in the second quarter. First the Casual Male business. Sales. Casual Male sales increased 3.3 percent for the second quarter from 78.5 million from last year's to 81.5 million during this year's second quarter. Breaking down Casual Male's multichannels, its direct to consumers sales decreased by 11.7 percent to 6.1 million while its revenue per catalog book, however, distributed increased to $5.30 per book for a 7 percent increase from last year.

For the first half of the year, revenue per catalog generated $4.85 in sales, an increase in over 20 percent from year ago levels. Overall, sales in our direct to consumer business though dropped as a result of the discontinuance of the Repp Tall which generated approximately $2.5 million in sales during last year's second quarter. We are experiencing an approximate 25 percent conversion rate of our former rep customers to Casual Male. Also, the e-commerce business continues its strong growth with an approximate 60 percent increase on the CasualMale.com site. The Casual Male stores' sales increased 4.9 percent overall to $75 million from $71.5 million during last year's second quarter.

During the quarter, Casual Male opened two new stores, raising its store count to 489 stores, and increasing its square footage to 1,667,000 square feet, an increase of 2.8 percent from last year's ending second quarter. The Company ended second quarter of 2003 with 477 stores. Also, during the second quarter, 33 stores were remodeled, bringing the total for the year to 65 stores being remodel. Casual Male's overall comparative store sales increased 4.8 percent, of which approximately 2.1 percentage points was generated from the direct-to-consumer business and the balance directly from the stores with respect to Casual Male's gross margin rate, which increased 120 basis points to 42.0 percent. As we anticipated, Casual Male's growing markups along with a good inventory position aiding and keeping its markdown rate at lower levels than a year ago, produced a solid gross margin rate for the quarter.

We are expecting to continue to exceed last year's gross margin rates by between 50 and 100 basis points for the balance of the year, with a significant improvement expected in quarter four of this year from year ago levels. Casual Male's SG&A increased an approximate $2.5 million or 9.5 percent during the second quarter of 2004. Much of this increase was associated with Casual Male's national marketing campaign of George Foreman and the Comfort Zone line of clothing continued from the first quarter.

The investment made in the campaign added approximately $4.5 million to Casual Male's SG&A, representing about two-thirds of its SG&A increase during the first half of the year. After excluding the incremental marketing expenses, Casual Male's SG&A on an average store basis during the first half actually increased less than one percent. During the second half of this year we are expecting Casual Male's SG&A expenses to drop between 2 percent to 3 percent on an average store basis. The SG&A trends of Casual Male in the second half are expected to change partially due to the successful implementation of Casual Male's new merchandising, distribution and supply chain systems that we completed a short time ago on July 1, 2004.

The other branded apparel businesses of CMRG for the second quarter of 2004, those businesses generated an operating loss of $800,000 as compared to an operating loss of $500,000 from a year ago in both cases, excluding any losses from closed stores shown under discontinued operations. Sales of our other branded apparel businesses was 25.1 million compared to 21.6 million from a year ago. The Levi's/Dockers outlet stores generated sales of approximately 18.5 million compared to 17.9 million from a year-ago. During the second quarter, seven stores were closed, and there were 48 stores opened at the end of the quarter compared to 81 stores at the end of the quarter to a year-ago. There are expected to be another 17 stores closing during the balance of the year, with 31 stores operating at the end of the year compared to 58 stores at the end of last year.

Levi's/Dockers operating income during the second quarter generated $200,000 and after considering depreciation charges of 800,000, produced an EBITDA of approximately $1 million, which was used to fund the closing of the stores in the second quarter. The Ecko outlet and full priced stores generated sales in the second quarter of $6.6 million, but produced an operating loss of over $1 million, although with the sale of CMRG's interest in the Ecko outlet stores to Ecko, there will be a lower sales pace from which to absorb the portion of our corporate overhead. The company eliminated yet another non-core business which caused the volatility in the second quarter earnings.

At the end of the second quarter, the Company completed the sale of its 50.5 percent joint venture interest in the Ecko Unltd. stores to its partner, Ecko.Complex LLC. In connection with this sale and other merchandising considerations associated with Casual Male, the proceeds were $8 million generating a onetime gain of approximately $3.1 million. Other onetime transactions occurring during the second quarter include the completion of the redemption of the remaining subordinated Notes of approximately $7 million which produced a loss of approximately $1.9 million. Lastly, the Company recorded a write-off of approximately $1 million from previously incurred costs associated with the preparation of the spinoff transaction of its subsidiary LP Innovations Inc. I will come back to LPI in a moment.

These three onetime transactions resulted in other income of $300,000 for the quarter, not impacting CMRG's operating income or bottom-line results. LPI, a subsidiary of CMRG, is a loss prevention service business with annual sales volume of approximately $10 million, of which 70 percent of its sales is generated from its core service business and 30 percent from sales of its security related equipment business. LPI represents an important strategic asset of the Company in that LPI is responsible for maintaining its nationwide loss prevention network, and keeping Casual Male's inventory loss rate at less than 50 basis points on sales per year, which is an extremely low shrink rate for the industry.

We have been planning to spinoff LPI to CMRG shareholders as part of the Company's overall strategic effort to focus on its core Big & Tall business. However, LPI performance has been at disappointing levels and therefore the spinoff has been postponed. During the second quarter, LPI generated an operating loss of approximately $400,000, the resultant of lost equipment sales contracts with some larger customers. Immediate steps are being taken to downsize LPI's non-core equipment business further, so that it's operating and marketing efforts can be focused entirely on its core business.

We do not anticipate any further write-offs or significant operating losses going forward and expect to maintain, at the same time, Casual Male's very low shrink rates. Overall, CMRG net income was approximately $100,000 compared to $650,000 of income from a year ago. The differentiating factors again from a year ago, include the $1 million operating loss at Ecko stores, now sold, and the $400,000 loss on LPI, both non-core businesses. Those are my brief remarks regarding the second quarter results. Now let me turn the call over to Mr. David Levin.

Thank you Dennis. With our comp sales up 4.8 percent for the second quarter, I would like to highlight the metrics that surround that performance. Our conversions, which is a measurement of those who came in the stores and actually made a purchase, were up 3 percent, our average unit retail was up 7 percent, our average ticket was up 5 y percent, and traffic while improving from first quarter was still down 5 percent. Traffic has been our greatest challenge for this year because had our traffic been at least flat to last year's, our comps would have approached 10 percent instead of the 4.8 percent level we just reported. Our direct-mail marketing has historically been the key driver when it comes to generating traffic.

This spring, we strategically changed this approach enable to fund the launch of our exclusive George Foreman apparel line. We spent $4.5 million on a television campaign to help transition our current private-label business to a branded George Foreman label. The commercial had no call to action and was not strategically intended to bring in traffic to our stores as much as it was to create value for what I would refer to as, branding a private-label. In regards to this endeavor, we were successful. The George Foreman product continues to outperform our high expectations and as we increase the percent of total business to 25 percent of sales from 15 percent of sales from first half of the year, we will have more of an impact on our total performance. For the first six-months the markdown rate on Forman product was only 8 percent versus the Company rate of 21 percent.

In the first six-months we only had George Foreman product on sale for a total of ten days. This has been a key factor in the second quarter gross margin improvement over last year and we anticipate similar improvement to the balance of the year. Now based on the accelerated pace of getting George product branded, we have revamped our marketing efforts for the fall season to focus more on traffic. This year, we had allocated $10 million to the television campaign. That also meant we had to cut our direct-mail marketing by $4 million from a year ago. We have now eliminated television for fall, upped our direct-mail spend by 2.5 million and reduced the overall budget by 2.5 million.

This will result in an increase of circulation of 46 percent to our original fall budget and actually a 15 percent increase over last year. This marketing shift starts in September, and we anticipate improvement in traffic at that time. On another note, next week we start the rollout of our 13 store test with Sears Canada. We will have an official launch date of September 23rd, with George Foreman appearing at Sears' flagship store in Toronto. As I have stated before this project is a low-cost test for us in our first venture outside of the United States, and Sears' management has been outstanding in guiding us in the launch. Now, I would like to address what we believe to be our most significant opportunity since we purchased Casual Male two years ago.

Today we have announced that we purchasing the Rochester Big and Tall chain. Rochester has 21 stores in major metropolitan markets in the U.S. and one store in London. The purchase price is 15 million in cash, the assumption of current debt of approximately $5 million, and the possibility of an additional $4 million subject to an earnout agreement payable over a three-year period. The transaction is subject to our due diligence and other customary closing conditions, and we're targeting to close by October 31st of this year. We believe the acquisition will be accretive to CMRG's 2004 earnings. Historically, Rochester's earnings by quarter are similar to Casual Male, and yet most of the profit comes in what we could call our Q4.

For the year ending June 30, 2004, Rochester had unaudited EBITDA in the $3 million to $3.5 million range. Although Casual Male dominates the moderate segment of the Big & Tall men's apparel business with 489 stores, Rochester has no equal in the high-end segment of the business. Rochester's average price point is $100 versus Casual Male at $30. The average transaction at Rochester exceeds $400 compared to Casual Male at $75. The average sales of a Rochester store is close to $2.3 million compared to a Casual Male at $650,000. This acquisition reinforces our strategic plan to be the dominant player in men's Big & Tall worldwide.

Rochester generates over $65 million a year in revenue and combined with Casual Male, total sales will now represent over a 65 percent market share of specialty Big & Tall sales. The incremental topline sales is equivalent to 100 new Casual Male stores. We anticipate opening between five to six Rochester stores per year for the next several years. It is also important to note that within the last two years, Rochester launched a catalog and Internet business. With very little marketing behind it, sales are already 20 percent of their business.

We have seen incredible growth for these channels. A high-end customer in smaller markets has limited options for their wardrobe, plus Casual Male has a database of over 200,000 dormant customers from our discontinued rep catalog which did not cater to a higher end customer than Casual Male and we anticipate mailing into that database once the acquisition takes place. Bob Sockolov, the CEO and President of Rochester, his sons, and valued employees, will continue to operate the business. We believe we found the perfect match. Rochester will be able to benefit from our new best of breed systems that we just implemented in Casual Male, our sourcing strength and our established corporate functions, and Casual Male will benefit from Rochester's merchandising, selling and customer based knowledge.

The good news is that this is not a turnaround or troubled business that we are acquiring. We will play to our management strengths in terms of looking for efficiencies and synergies that will improve upon the profitability of the combined entities. Bob Sockolov and his management team will bring a wealth of Big & Tall experience to Casual Male and we couldn't be more thrilled than to join forces with them in dominating this niche business of Big & Tall. We will now be the premier retailer in the high-end and at value prices.

And upon closing of the transaction, we welcome the Rochester employees with open arms to our retail family. We see the opportunity on the core Big & Tall business. We are restructuring the Company to eliminate our other businesses. Our Ecko venture is now behind us, and our Levi's/Dockers entity will be gone by December '05. Our future is becoming much clearer and we still have a lot of upside opportunities in this final year of our turnaround story. On that note, I would now like to open the call to Q&A discussion.

(OPERATOR INSTRUCTIONS). Rusty Hoss.

Good morning. Actually sitting in for Paula. Just on the Rochester gross margin, you guys have kind of guided to a 1,500 basis point improvement on the back half. Does that include the accretive nature of the acquisition?

No, it does not Rusty.

Just the Casual Male business?

That is correct.

Okay. Got it. On the SG&A expense line, so it sounds like the incremental spend related to Foreman is going to be flat year-over-year on the back half, and then you're going to get the benefit from the new systems. So SG&A expense on the back half on a year-over-year basis should be down slightly? Did I get that right?

Don't forget to include store count growth on top of that, but on an average store basis.

On an average store basis?

Yes, down 2 percent to 3 percent.

Last question, D&A in the quarter?

Yes.

Why was it? That is a pretty substantial increase.

As the Company has invested back into the infrastructure and incurred some store growth, our D&A naturally is going to rise to those levels. As we anticipated our depreciation charges is approaching close to the $10 million level, right for Casual Male? Perhaps next year will rise by another 15 percent.

Okay, but that is way ahead of square footage growth.

Because a lot of our capital expenditure growth has been taking place in the infrastructure systems.

So there are systems -- is there remodel in there too?

Remodel, of course, absolutely is part of the depreciation base.

Okay. Great. Thank you.

Christina de Marval.

Good morning everybody. Just a few more questions on the SG&A guidance. First of all, I think at the last conference call, Dennis, I think you said you expected about 100 to 150 basis point drop I think for the year. Is that still your expectation, SG&A?

SG&A?

At the Casual Male business?

That is approximately correct. Our EBITDA to say it another way, we are expecting our EBITDA to grow from year ago levels by 200, 150 basis points.

200 to 250 for fiscal '04?

On the Casual Male business.

Okay.

Some of that is coming from gross margin, and some of that is coming from SG&A of course.

Right. Okay. That's helpful. I am wondering with respect to your comments about systems, now that you have the implementation or a large part of it done, what would you, and I think you said before you expected annual savings of about $5 million annualized?

Yes.

When do you expect to see that kick in or start to kick in?

That is going to kick in slowly as we go through the learning curve of our new systems and begin to optimize our efficiencies, we should start to see much of that occurring as throughout the fall period. Some of that is already baked in. We have been reducing our MIS staff, we have been reducing some of our operating overhead in anticipation of kicking over to the new systems, but the rest of the cost will start to come out in the fall.

Okay. So, you're saying that is baked into that EBITDA forecast?

Yes.

Okay. What kinds of capabilities do these systems add, if you could just refresh my memory?

A lot of it is in on the distribution side where we expect to become much more efficient both from a capacity point of view and a cost point of view. Our corporate overhead, with respect to our IS department, will be much more efficient under AS/400 platform as opposed to our mainframe platform. Not to mention, all of the softer benefits of having more up-to-date supply chain systems that we just installed, particularly on the replenishment side of being able to better manage our size inventories, store-by-store which we are getting better at now than we were before.

Just moving to the remodeling program, can you remind me what the goal is for this year? Is it still 360 stores that you expect to improve by year end and do you --?

30.

Oh, it's 30?

No, it was 300 over the course of two years, and our goal was to get half of them done this year. We are saying somewhere between 120 to 150. It is still too early for us to get that final number in.

Okay.

As I said, we're at 65 now at the end of the second quarter.

It doesn't sound like you are planning to do that chain-wide. Is that because you have determined some stores really don't need it?

No, of the 400 we're not doing the outlets, so there are really are about 400 of them and 100 of them were built in the last few years, several years, that didn't need them. We went store by store and analyzed every store, not every store needed a remodel. We have always been on that number. We haven't changed it.

Okay. Switching gears with the Rochester Big and Tall acquisition, that sounds like a nice fit. I am wondering what you see as the ultimate growth potential of the chain given its higher end focus? And related to that, its operating profitability potential, I imagine, is probably somewhat above -- when it hits a critical mass it's probably somewhat above the Casual Male chain. I am just wondering if you could give us a little insight about your thinking there?

First of all in terms of growth, there's a lot of opportunity. They have been somewhat stymied around that 22 store number for several years because they just haven't had the capital sources. But they are in major cities, New York, L.A., San Francisco, Chicago, Detroit, Boston, but they are not in a lot of markets such as Kansas City, St. Louis. And if you look at their strongest area, New York, we anticipate something needed in Long Island, Connecticut, and New Jersey. There is no store in Philadelphia. I think this chain will probably mature maybe at 60 stores in the U.S. It is a little premature for us to say that. We certainly could see reaching that number, but we think the catalog has tremendous potential because, again, they cannot support a store in a lot of the smaller markets where you do have a high income customer that really doesn't have any options.

In terms of its profitability, currently their margins are in the similar range to ours, and of course they do get more leverage because they do a higher sales per square foot than a Casual Male. So, we see their growth will be congruent with the type of numbers we're looking at, and as I said before, today we just are accelerating where we would have been on anybody's model because this volume would have taken us 100 new Casual Male stores to get there, which would be three or four years down the road.

Okay.

Just a footnote on the operating margins, Christina. As you see, Rochester is running at about 3.5 percent on an EBIT basis on its sales. Our expectations for Casual Male -- talking about EBITDA, Casual Male is moving from just below 5 percent last year to something between 7 percent, 8 percent this year, is our expectation in that range, next year entering the double-digit numbers on an EBITDA margin basis.

I believe that likewise, as you point out, Rochester has the same potential in terms of its EBITDA margin rates where today it is hovering about 5 percent, we believe that they will be in double-digits quickly. If nothing else, just on the basis of improved operating synergies, we'll get to that level, putting aside some of the natural synergies of putting the two businesses together that cater to the same Big & Tall customer.

Okay. That's very helpful. That will help me work through the model when I get off the call. Best of luck with everything. Thank you.

Jeffrey (indiscernible).

Hi guys. Just a question. Can you kind of take us through where you guys are right now with the systems? I know you turned them on and so forth a little over a month ago now, just what you guys are capable of now in using the new inventory systems and what the capabilities will look like six months from now?

Good question. As you know, we've been working on changing out our entire supply chain infrastructure which we started, we turned it over to our outlet stores in May, felt good about that and turned it to the chain early July. What that now has impacted our business on is primarily distribution, as I said before, making that much more efficient and effective; and number two, on the inventory management side. We now are more able to better manage our inventories by size, by store than we were able to before. Plus we have come over to JDA's Planning and Allocation Systems, which makes us more effective from a planning point of view from where we were before.

Where we are driving now too, is now installing more advanced planning methodologies given now that we have the base infrastructure in place, which will better able to manage the assortment down to the store level, which is a very important strategic initiative for us. Number two, we're turning our attention to enhancing our marketing capabilities by installing NSB's marketing capability, the CRM module, a la Chico's, the same system Chico's uses. That will enable us to personalize our service to our customers, number one, and number two, manage a companywide loyalty program which we think our customers would enjoy.

Let me ask you this, is it fair to assume that you are not going to have to do anything with the Rochester Big and Tall systems? You're going to just operate those systems as they are and so forth. You're not going to have to make any changes to their inventory methods, etc. Is that a fair assumption?

We see one of the significant synergies bringing Rochester's back office3 systems onto Casual Male's infrastructure to help them on distribution, inventory management, planning and fulfillment. All of those, we believe, will make Rochester operate much more efficiently than they are able to today.

When do you see those systems changes taking place?

We'll obviously be planning that starting on Monday, and it is our hope that occurs during the first half of next year, if not earlier than that.

Okay. I guess my final question to stick on this subject, how many stores at this point are you able to inventory at a store level and where do you see that number growing to in the back half of the year?

Inventory?

In other words, you can ship the specific product to that store. My understanding was one of the great benefits to this inventory system is that you are able to -- these new systems, is that you are able to ship products store specific. I am wondering how many stores you're shipping product to that are store specific right now?

We're doing all of that today, shipping store specific based upon that store's specific inventory needs down to the SKU level. That we're doing today.

Okay, great. Thanks guys.

Margaret Whitfield.

Just two data points on Rochester, if you could. What is the average size of the box and do you see that changing once you take control? What are the gross margins currently on Rochester on an annual basis? Regarding Casual Male, I wondered if you could amplify on the inventories what is was like year-over-year, inventory per square foot? And any comment you could make on August sales to date, and what effect the urban business might have had on your Q2 and the outlook of that business going forward? Thanks.

I will start the first one. The average size of a Rochester store is around 6,000, 7,000 square feet. We anticipate that type of box for the major metro markets. They currently have two prototypes, smaller versions called Rochester Sport that are 3,500 square feet that don't carry the expensive line of suits. We do see that type of store populating in some smaller suburban markets where we have affluent customers. Dennis, you could talk about the margin issue.

Rochester's gross margin rate is just about 200 basis points less than that of Casual Male at this point. We believe there is opportunity within Rochester's gross margin rate primarily from putting the two sourcing capabilities together. The inventory -- coming to your question Margaret on the inventory average per square foot at Casual Male, it is up about 7 percent from a year ago at the store level on Casual Male. We expect that will continue into the fall. Part of the inventory increase is resulting from the retail increase in the average unit as opposed to the unit itself increase from a year ago. That will, as I said continue into the fall. I think between David and I, we have answered --.

August sales in the urban business, and if you could amplify the changes in sourcing which could elevate the Rochester gross margins, where they are sourcing now and how that could change?

I think -- we just have a direct sourcing group here that can help them to develop better pricing on private-label. There is certainly strength in numbers by using some combined buying power. In our catalog business, we have a lot of similar product out there. And again we think we will get the margin improvements from the system side that we're starting to experience from Casual Male. The sales for August seem to be in the similar zone of where we have been running, that low mid-single range. We think that September we have the impact of some increased marketing going on, so it is early to tell, but we think September is a much stronger marketing prep month than August has been.

We have been -- one of the things is we're definitely less promotional this month than we were a year ago. In terms of the urban business, we see that is an ongoing liability as it's no longer growth for us. We have dramatically cut our on-orders to a comfortable position that we are in today. We got very aggressive in building that business and we are very aggressive in getting it to a manageable level again. We do see there that that category does not have the strength that it had a year ago for back-to-school, but that has been a focus for second quarter. We cleaned up a lot with the existing inventory with a lot of permanent markdowns that we don't anticipate going forward. We really believe it's probably valuable for about 75 to 85 of our stores. And again as I said before, we had taken it to the chain level and we have corrected that since.

Booked. Thank you.

Grace Hossick (ph).

Good morning. Most of my questions have been answered, but I did have a couple. The $65 million in run rate revenues, what was that compared to the prior year? Specifically, how did they comp, and more specifically, what was their traffic like? Are they experiencing the same type of traffic issue that the Casual Male stores have?

First of all, they do not have the traffic counters in their stores, so that is hard to quantify. However, Rochester had the 911 impact in most of their chain and experienced 2 years of difficult business. However, last year which ended June was quite good for them. In fact, they finished the year with low teen comps.

Low teen, I'm sorry?

Low teen and positive comps. So, again, we are quite encouraged, and I think that kind of goes hand-in-hand with the luxury business that has experienced good growth.

Thank you. The 5 million in debt, what is that and can you do anything with that?

We expect to pay that off at closing. Some of the existing Rochester's bank debt and subordinated note debt.

Then I know you said it would be accretive to the full year, although that is the fourth quarter. Would you anticipate it would be accretive for the full year of '05?

Absolutely.

All right. Thank you.

Kyle Stults.

Good morning. How many net new stores do you plan to open in the second half at this point?

In the second half, just a couple, Kyle, two or three net new.

Okay. Thanks. On a percentage basis, what is your same-store sales outlook for the rest of the year?

I'm sorry on a -- could you repeat that?

What is your same-store sales growth outlook for the rest of the year?

We have kind of been trying to be consistent at low, mid-single digit number.

Okay. Is that more or less consistent with your outlook at the start of the year?

Yes, pretty similar. First quarter was stronger. A lot of that had to do with weather impact, but we are at over six percent for the year, and we hope to keep that pace for the rest of the year.

So far, Kyle, we're at 4.8 percent through the first half of the year.

Thanks Dennis. One more question. You talked about the gross margin in the second half. I think Dennis, you said you expect Q4 to be significantly higher. Is this above and beyond the 50 to 100 basis points?

No, that is captured within. I was trying to point out that fourth quarter will be very impactful as compared to a year ago. In contrast to perhaps what you might expect to happen in the third quarter.

Okay, so as far as year-over-year gross margin improvement, in Q4, we would still look for that to be in that 50 to 100 basis point range?

Yes, it could actually exceed that in the fourth quarter, and in the third quarter, it could be just below that. Overall, the second half will be in that range.

I see.

Much more heavily weighted in the fourth quarter than the third quarter.

Okay. Thanks for clarifying. Thank you.

Gary Giblen.

Hi. A few more questions on Rochester, but I will give them to you one at a time. How specifically can they help you in your Casual Male suit business? I mean, they sell a lot more suits, but they're upscale?

That is our biggest growth category. Our clothing business in that category on a comp basis is up over 20 percent this year as we have populated our stores with suits, and it's also enhanced our dress shirt and tie business. It remains to be seen how they can help us. What will certainly help us is, in the catalog business, again a lot of that is transparent common inventory, and it's not to say that we won't be able to show some of those more high-priced suits in our catalog business without carrying any incremental inventory. Those are the types of synergies we see between the two groups, but it is a different business. Their stores have tailors, where we do not, and we really -- our suit, pants and jacket, is $225, which is not the business that they are in.

Okay. If they are such a good business, why are they selling out for 7 times EBITDA? Good for you, you got a reasonable price, but what is kind of the background there?

I think that when you look at other natural buyers, Gary, there aren't too many. The Big & Tall business is a specific niche within the men's apparel business. I think that we were the natural -- the natural transaction was between the two largest in the business, that being us and Rochester. I think that is what led to the transaction.

Again, they were looking for a partner to grow their business, and we have the resources to do that. They have been chomping at the bit to really start to expand their business, and they have not have the financial sources to do it on their own. But, I will tell you, in the end, at all comes down to how you feel about each other. Their business, in 2006, they will be celebrating their 100th year of business, and one of the key things for us was part of our purchase price was their management group. We want them to run the business, they're incentivized to run the business, they're specialists at it, and it's the -- the personalities have to mesh to make this transaction work, for sure.

So you think there is a reasonable expectation that beyond the three-year earnout, that the management would -- the bulk of the management would stay on?

We would love that. We see that, even though they both say Big & Tall, they are different businesses and require different levels of service and merchandising skills.

Okay. Just a couple of non-Rochester questions. I know that when I was talking with the recently you said you might consider advertising or promoting the active remodels, so are you maybe going to do that?

Yes, we actually are. I didn't spend a lot of time repeat -- going over the marketing again, but we have made -- we are just not mailing into more homes to get the traffic back. We have a very concentrated effort to do a few things, let the customers know that their store has been remodeled, and we are mailing into all the zip codes that have a remodeled store, offering them an incentive to come in the store, and one of our big campaigns is to reactivate customers in our database that haven't shopped us for a year, and in September, we are mailing out 600,000 direct-mail pieces with a catalog. It's a personal letter from myself. It comes in a silver envelope, hand-scripted with a special gift card for them to come visit the new Casual Male, and it's all talking about our new brands. A lot of this -- of our directional change was helped by Jim Frain from -- the Chief Marketing Officer from Chico's, who is on our board. While he is not active day to day, he has been mentoring and guiding us to how to really get traffic back in the stores. He knows it better than anybody, and I think those of you who are on our mailing list will start to see a whole new look in what we are delivering to the homes.

Okay. So that is a general change in your mailing. It also is applicable to targeting customers in remodel areas?

Yes, and it's a different message. It is not just a bunch of boxes talking about "save 25 percent on all sweaters or buy 2 socks and get 1 free". It is imaging what the new Casual Male is from a branding point of view. It just has -- I don't want to say that we are not -- that we are giving more of a Chico's look, but when you see it, you'll sense that it is a lifestyle presentation, full-page pieces on each brand. A page on Izod, a page on Reebok, a page on Perry Ellis, a page on Geoffrey Beene, and of course George Foreman pages in there, and it just is a whole different look, and honestly, less promotional. We don't need to give the stuff away, we just need to get people to see the price points that this stuff sells for day-in and day-out, and we believe this will be the new approach to marketing for us.

Okay. Do you have your customer database such that you can target market the Repp customers or maybe former Repp customers so that you can hit them with Rochester stuff once --?

That is the best thing that we could say. Rochester is very excited. They will be very excited to get their hands on this Repp mailing list. It is a big deal. We were only able to convert 25 percent of them into Casual Male. They resisted, and again, they are just not -- it's not their cup of tea. Now we will start mailing them with Rochester catalogs, and the cost of acquisition is through the roof to try and find new customers. This list has tremendous value to them, and with over 200,000 names, we think we are going to get a very strong spike in those businesses for them.

Okay. That's great.

(OPERATOR INSTRUCTIONS) Cliff Beanburg (ph).

Congratulations. A couple of questions if I may. Is there a private-label business at Rochester, and is Foreman appropriate for that?

Yes, they do have private-label. Again it's not very developed because they don't have the infrastructure and the buying power to have that really developed. Yes, we think that the signature line at Casual Male, which is the higher end, has been doing phenomenal. In fact, it has gone from 60 stores for spring to 140 stores for fall. Signature could play a very good role in their stores because that is their opening price point. We think that would be a natural for them.

Perfect. Secondly, when do you rollout customer loyalty program that you made reference to?

We are planning that now, Cliff. It is our expectation that we will be chain-wide around Father's Day of next year.

And any details that you can share with that, Dennis, or is that still in development now?

It is still in development, Cliff.

What will be the approximate debt on the company at the end of this year, assuming your rollout expenditures for sales, for your upgrades in the back half of this year and the acquisition of Rochester?

Without Rochester for a moment, we would expect our debt levels to approximate 120 million.

So we should add 20 million or so?

Add 20 million for the Rochester.

Right, which is 140 million or so?

Yes.

Got you. Have you discussed what your store rollout for -- or figured what your store rollout for Casual Male is next year? You talked a little bit about Rochester and their redo program, but how about new square footage for Casual Male next year?

We have talked previously that we thought we were going to work at about 30 stores per year. I think for next year, we are going to keep that number in total. Probably take Casual Male down 5 or 6, put in 5 or 6 Rochesters, which are -- again one Rochester store equals 3 or 4 Casual Males.

Thanks very much. That's terrific. Congratulations on the deal.

Jean Venechay (ph).

Hi, it's Jean Venechay with SEC Capital. You guys last quarter stated a target of being free cash flow positive for the full year. I was wondering if you could give me a little guidance as to your free cash flow for the quarter, and then it looks like your net debt went up, so despite the payment from Ecko, so I am assuming it was a negative free cash flow, although I know there was some share buyback at the beginning of the quarter, but then secondly, whether you still think that the full year positive free cash flow target is within range?

Yes, during the second quarter, Jean, we did execute that stock buyback. The Ecko --.

That was about 6 million, 6.5 million?

That is correct. Also, too, the Ecko sale did not result in a receipt of 8 million in cash.

Right, it was one million about.

Rather -- correct, and a big portion of it is a note that is payable over 12 months. However, with respect to free cash flow for the year, we do expect to be slightly positive free cash flow, by a couple million dollars, which we see increasing significantly as we get into next year.

Okay. So for the quarter, can you give me any guidance as to your free cash flow?

Our cash flow in the second quarter was approximately flat, Jean.

That's free cash flow or operating cash flow?

Operating cash flow take away the stock buyback.

Okay. And then, how much did you spend on CapEx?

We spent approximately $3 million.

Okay, so roughly -3 million free cash flow, and the first quarter you were roughly minus, I think, 13 million free cash flow? So, you think in the second half you could be 28 million positive? Does that sound right?

Free cash flow is, to me, EBITDA less interest, less --.

Taxes?

Less capital expenditures. We are not a taxpayer.

So operating cash flow minus CapEx. What about working capital?

Working capital has been relatively flat when you take into account some growth in Casual inventories less the declining inventories from Levi's.

Okay, so let me clarify though. When you say free cash flow, do you -- that you will be free cash flow positive for the full year by a couple million, does that include any changes in working capital?

Yes.

Okay, so your definition of free cash flow will be operating cash flow minus CapEx? Right? Operating cash flow being the GAAP operating cash flow that you report on your cash flow statement minus CapEx? So, the two of those combined, it sounds to me, for the first half were -26 million, so --?

I don't see it that way. I mean, for the second quarter? I see, as I said, free cash flow was about breakeven.

You said operating cash flow was breakeven, and then you spent 3 million on CapEx.

We generated EBITDAs of 5.2 less interest of 2, that is $3 million, we spent about $3 million capital expenditures.

Okay. And then what about -- and working capital changes were flat?

Working capital changes were approximately flat.

So your operating cash flow in the quarter was about 3 million positive, and were free cash flow was about flat?

That is what I said.

Okay. That wasn't what you said, but, okay --.

Let me say that is what I intended to say.

That's clear. So that would imply to me since your first quarter free cash flow was -13 million, that you would expect to be for the second half about 13 million positive. Is that right?

I have to go back and look at the first quarter, but my recollection of the first quarter was, we were negative cash flow of about 3 or $4 million.

I don't want to hold everyone up, so I can follow up later. Okay. Thank you.

There are no further questions at this time.

Thank you all for joining us today and again we look towards improved earnings for the back half of the year, and again very excited about the upcoming acquisitions, once we get that closed. Thank you all for joining us today.

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