Destination XL Group Inc (DXLG) 2004 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to your Casual Male 2004 quarter-end, year-end fiscal results. 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. If anyone should require assistance during today's program, please press star then zero on your touch-tone phone.

I would now like to introduce your host for today's conference call, Mr. David Levin. And now Jeff Unger will be reading the forward-looking statement. You may proceed, sir.

Good morning. 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 to -- subject in the future to unforeseen uncertainties and risks. All statements regarding forward-looking performance, earnings projections, events or developments are forward-looking statements.

It is possible the Company's future performance and earnings projection 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 and 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 obligation to update them.

I'd like to introduce Dennis Hernreich, Executive Vice President, Chief Operating Officer, and Chief Financial Officer to discuss our release. Dennis, it's all yours.

Thank you, Jeff, and good morning, and thank you for joining us this morning to listen to Casual Male Retail Group's fourth quarter earnings call. This is the first quarter since the acquisition in 2002 that the Company has reporting where its only business segment is its core men's Big & Tall apparel business.

During the fourth quarter of 2004, the Company sold its Levi's/Dockers Outlet business for an amount which approximated book value, or about $18 million including just over 13 million in cash, and the assumption of operating liabilities. Just prior to closing the Levi's sale transaction, the Company acquired Rochester Clothing, a men's Big & Tall specialty apparel multichannel business, with approximately 65 million annual sales from 22 stores and its direct-to-consumer channel.

You may recall that in the second quarter of 2004, the Company sold its interest in the Ecko Outlet joint venture for $8 million in cash. Overall during the year, cash proceeds from the divestiture of these businesses approximated $21 million, while the acquisition of Rochester required approximately $20 million in cash to consummate the transaction. Approximately 30 months subsequent to the Casual Male transaction, the transformation to a men's specialty apparel business has finally been completed. David will discuss in more detail on the Rochester business and acquisition.

During the fourth quarter of 2004, the income from continuing operations includes the results of the Company's men's Big & Tall apparel business of Casual Male and Rochester. In comparison, last year's income from continuing operations not only includes the Company's men's Big & Tall apparel business, but also contains the operating results of Ecko Outlet business.

The fourth quarter results. Income from continuing operations was $8.3 million or $0.15 per fully-diluted share, after assuming a normalized tax rate of 37%, compared to last year's fourth quarter net loss of 7.3 million or $0.13 per fully-diluted share after tax. The Company's net income for the fourth quarter of 2004, after a loss from discontinued operations of $386,000, was 7.9 million compared to last year's fourth quarter net loss of $8.8 million. During last year's fourth quarter you might recall the Company incurred a $13.1 million charge associated with the early retirement of long-term debt.

The Company's operating income during the fourth quarter improved to $10.3 million from last year's $8.5 million level. In last year's fourth quarter, approximately 300,000 of operating income was generated from the Company's divested Ecko Outlet business. The Company's men's Big & Tall apparel business generated 10.3 million of operating income this year in comparison to last year's 8.2 million, an improvement of over 25%.

I will now discuss the components of the Company's men's Big & Tall apparel business, operating income for the fourth quarter. Sales during the quarter improved by almost $24 million to 118.2 million, from last year's 94.5 million, partially due to the contributed sales from the Rochester acquisition, and partially from the Company's comparable store sales for the quarter of 2.8% increase.

For the year, the Company's men's Big & Tall apparel business produced a comparable store sales increase of 4.4%, after experiencing a 1.3% decrease in the prior year. In addition, the productivity of the direct-to-consumer business improved by 25% with sales per book increasing from $4.20 in 2003 to $5.21 in 2004. Gross margin improved by approximately 30 basis points from the prior year's fourth quarter, primarily due to the leveraging effect of occupancy costs. Merchandise margins were flat in the quarter.

The Company's SG&A costs increased by over $7 million from 30 million last year to 37.4 million this year. The increase due entirely to the operating cost increase related to the Rochester acquisition. Overall results for the fourth quarter generated approximately 20% by Rochester and 80% Casual Male.

Looking ahead into the 2005 new year, the Company expects to continue its growth in sales and profitability due in part to the profitability trends established in the fourth quarter. Also, I expect on an average store basis the SG&A cost of the Casual Male business will remain flat, and thus the Company should experience significant leveraging effect from a growing top line.

In particular, I am most enthusiastic about the many important facets of our business, which will help us very significantly improve the Company's operating margin in 2005, closer to its initial goal of 10%. Such as, multichannel customer traffic continues to improve, and turning positive in response to the Company's merchandising and marketing programs. Ed David will discuss in a few moments.

System infrastructure improvements made in 2004 will improve inventory control methods and in-stock positions in the stores with resulting significant gross margin improvement expected during 2005.

Full integration of the recently acquired Rochester business, by leveraging upon Casual Male's infrastructure and corporate resources together with the tremendous talents of Rochester sales and merchandising organization, will quickly drive Rochester performance to levels we anticipated when acquired.

Continued enhancements in the Company's infrastructure will move Casual Male's capabilities toward personalized service in its stores, making more meaningful guest visits to its stores.

Micro-merchandising its assortments by areas such that optimizing the market share potential of each location becomes possible. And further sophistication in its direct mail communication programs witnesses customers.

These important enhancements to its systemic applications, together with previous investments, will help Casual Male become the very best operator in the men's specialty apparel sector.

Results for the year, for the first time since 2000, the Company produced net income for the year in the amount of $1.6 million compared to a net loss of 12.1 million in the prior year. One important note about the Company's results for the year, for the nine months this year, the Company reported a loss from continued operations of $0.08 loss per share after applying a normalized tax rate. For 2004, the Company's earnings per share were $0.02 per share after tax.

Normally, when you add the nine months results to the fourth quarter results, most models would produce the results for the year. Not so this time. Because of the divestiture of Levi's/Dockers business in the fourth quarter, all results associated with this business in prior periods were re-classed to discontinued operations, including $0.05 per share of the business generated during the first nine months of the year.

In a week or so the Company will be filing its Form 10-K for 2004, and you will see that the Company's results of operations statement for periods prior to the acquisition are very easy to read. There is one line item called "income or loss from discontinued operations."

The Company's men's -- the Company's men's Big & Tall business for the year generated operating income, dropped from last year's 16.5 million to this year's 9.6 million in spite of an increase in sales from 319.2 million to 352.4 million. Although gross margins for the year improved slightly by 20 basis points and produced incremental gross margin dollars of 14.5 million, the Company's SG&A costs increased by over 19 million due partially in the -- to the operations in the newly-acquired Rochester clothing, and the balance related primarily to the Company's investment in marketing associated with the launch of the George Foreman Comfort Zone line of clothing during the first half of 2004.

During the fourth quarter the Company generated over $20 million in cash flow from operations, reducing the Company's debt level to $137 million, which was $11 million higher than a year ago. The Company's capital expenditure level of approximately 20 million exceeded its cash flow from operations by 7 million, due primarily to the urgent need to remodel many of the Company's stores during the year.

In 2005 capital expenditure levels are planned to be less than $15 million and expected to drop further in future years after the Company's -- Company largely completes its systemic infrastructure improvements with the installation of the new POS CRM systems in 2005. Therefore, the Company believes its free cash flow in 2005 will be positive, such that long-term debt should be reduced by between 10 and 15% during the year. Furthermore, the Company's $98 million in tax loss carry-forwards will allow for further debt reductions as the Company's free cash flow accelerates.

At the end of the year, the Company was very pleased with its inventory levels, finishing the year at approximately $80 million. These levels are flat to last year, although overall inventories dropped from $99 million a year ago, a result of the divestitures in the other branded business during the years. The company also finished the year with 528 total stores, with 1,857,000 square feet of space, of which 493 were Casual Male stores, 22 Rochester Clothing stores, and 13 Casual Male Sears Canada stores.

Thank you for your attention. I look forward to sharing with you what should be a very exciting year here at Casual Male Retail Group in 2005. And now let me turn the call over to our Chief Executive Officer and President, Mr. David Levin.

Thank you, Dennis. The year-end performance that Dennis shared with you is a result of many of the initiatives that we've been implementing over the last two-and-a-half years. Most of the heavy lifting is behind us now. Over the last three years, we've transformed ourselves from a retailer with a troubled brand into the preeminent Big & Tall specialty retail that we are today.

In addition to the restructuring of CMRG's businesses, as Dennis spoke to, we've had other significant accomplishments this year. The launching of a two-year project of installing a whole new merchandising replenishment and warehouse system went extremely well. Now that the systems are operating, our ability to better manage our inventory is coming to fruition. We also had a successful launch of our own George Foreman brand at Casual Male. In one year we sold $57.3 million of apparel and accessories from nothing. This represents a 23.3% of our total sales.

In addition, we've added Izod, Reebok, Calvin Klein, Polo jeans, and we'll soon be introducing Nautica jeans to our assortments. And it's important to note that overall our markup, including these brands, is 300 basis points higher than when we were almost exclusively private label in 2002.

We also did a makeover of 170 stores. These locations hadn't had new carpet, paint, and updated fixtures since the day they opened, five to 15 years. New carpet alone is about half of the cost associated with one of our store makeovers. And as I've said repeatedly, this is not the fix to improve our store comps as much as it is necessary that we be perceived as a quality retailer by our customers.

And finally, most important, we have now had comp-store increases for five consecutive quarters following two years of negative comps. It's also important to note that we're getting much stronger as a multi-channeled retailer. Casual Male Internet sales for the last three years grew at 94%, then 87%, and last year an additional 62%. And the Internet growth has not just been trade-off from our catalog business. Last year we discontinued our rep catalog, focused our energies into Casual Male catalog, and those sales continue to grow at a steady rate, and as Dennis mentioned, our productivity per book has gone up 25%.

And with this commitment to be a premier multi-channel retailer, we have recently hired Ron Ramsayer [ph] in the new position of Chief Marketing Officer. Ron brings tremendous experience as a multi-channel marketing executive. Ron was the head of marketing at Talbot's for several years, spearheaded the launch of Macy's.com and most recently headed marketing at Bass Pro.

Our emphasis this year is to improve our direct mail response by being more sophisticated in micro-marketing to our diverse customer base. In addition, we will continue to reactivate customers who haven't shopped the new Casual Male. So far in the first several months, we've reactivated 80,000 customers through this program who haven't shopped us in over a year.

Also for the first time, we delivered our catalog to our retail customers who haven't received our catalog in the past. While we don't have a detailed analysis of the results yet, we're very optimistic with the response rate and we'll continue this program in the fall season. In fact, we're raising our planned circulation in the fall season based on the positive results we've seen so far in the first quarter.

Finally, on the marketing front, our new POS cash registers will be installed in the chain over the next several months and we are still on schedule to launch our Customer Loyalty Program by October.

As far as this year, we're quite pleased with our start to the first quarter. Last year, with the launch of George Foreman and national television campaign to support it, we delivered a 9% comp in the first quarter. That withstanding, we are still forecasting that we will have a comp increase, and we're still seeing now the flattening of our negative store traffic performance in the quarter. And that is in spite of unfavorable weather we've had in the Northeast where we have the largest concentration of our stores.

This year it's all about execution. If we continue on our trend of positive comps, maintain our SG&A levels from last year, and see our anticipated improvement in gross margin, we will deliver the performance that we have always believed CMRG is capable of. The opportunity for improvement in gross margin this year will be a result of our inventory management systems implementation.

Our core product, which by definition is year-round replenishment items like our five-pocket jeans, the George Foreman waist-relaxer pant, pocket T-shirts, underwear and so on, will now represent 44% of our sales this year. But since our E3 replenishment system went live mid-year, we've seen the demand has been outweighing supply, leaving us with our core items being out of stock at levels of around 25%.

In the holiday period we tested 20 stores, gave them the increased level of sizes and sales to maximize the business, and their sales in these items increased 20%. Now, these top seven styles that are dependent on this replenishment system, represent 18% of our total sales. By being in a better stock position, and increasing the percent of core product to our total sales plan, not only will we see top-line improvement, but because the gross margin on core product is planned at 62.7% versus 53.5% on what I would call fashionable seasonal product, we also anticipate gross margin improvement of 150 to 200 basis points as the mix changes to more core.

Our stock position in these seven key items is improving monthly. By the beginning of June and in time for Father's Day, we will have over 50% more inventory on hand than a year ago in these items. We'll also create a marketing position on this initiative with a guaranteed in-stock program later in the year. "Guaranteed in-stock" means that if we don't have the customer's size in the store, we'll guarantee it within five business days. In the waist-relaxer pant, for example, that means we're going to be protecting 49 sizes. And last year we sold 163,000 pair of this pant, had a 53% increase in dollar sales over the previous year, and still missed business opportunities.

We're also seven months into our long-range plan of improving our gross margins through direct sourcing, which we do not do today. This fall we'll be receiving our first test orders of product sourced through Li & Fung, one of the largest sourcing apparel companies in the world. It will not have an impact on our margins this year, but we do anticipate gross margin improvement over the next three years as we are seeing savings of 5 to 15% on cost of goods in these test items.

On a final discussion point, it's been five months since we purchased Rochester, and I'm happy to say we're more excited about the prospects with this franchise than we were going into the transaction. We couldn't be more pleased with Rochester's management group in terms of running the business and their open mindedness to change. We all know the obstacles when a family business is bought by a public corporation, but their team has been terrific in adapting to our corporate culture. They're also great merchants and Casual Male can learn a lot from their expertise in customer service.

Also, as I have visited about half the stores so far, the consistent message I hear from the managers is that, if we are in a better stock position, we can do a lot more business. And that plays so well into our investment in our inventory systems. Stores will get replenished up to twice a week as opposed to vendor shipments of once a month. And as I have said many times, we are a size management company, and as we start to harness the size information and replenishment by store, it's going to have a strong impact on our sales and profitability.

And finally, we see several years of strong growth in Rochester's catalog and Internet business. In two years, it's already 20% of their total sales. With Rochester being a niche within a niche, there's an opportunity for us to maximize catalog and Internet sales to high-end customers when we only have 22 stores to service this luxury end of the business.

In addition to the ten Casual Male stores that we'll open this year, we plan on opening two to three new Rochester stores in the fall season. The fact that Rochester stores average four times a Casual Male, we see an emphasis in that division's growth for the next several years, and we've already identified 40 cities that can support a Rochester Big & Tall.

In summing things up, when we purchased Casual Male at a bankruptcy auction in May 2002, we said it was a three-year turnaround story. Reality is, it's a four-year turnaround story. We're probably one year behind the earnings plan that we laid out when we took control, but the good news is that our strategy is working, traffic is improving, we're delivering consistent comp sales increases, our gross margins look to improve this year, and we're optimistic that our marketing initiatives are going to pay off. And as I said earlier, now it's all about execution.

One final note. Our investor presentation will be updated on our website next Wednesday. At this time, Dennis and I will field any questions that you may have.

[OPERATOR INSTRUCTIONS] Our first question comes from David Campbell from Thompson, Davis.

Thank you. Good morning.

Good morning.

Can you elaborate on the traffic that you said seems to be flattening out, and talk about how that's progressed on month-to-month basis?

Yes. If we take traffic through the last five quarters, a year ago second quarter we were down five, down five in the third quarter, down four in the fourth quarter. And even though it's difficult for us to fully lay out the first quarter because of the shift of Easter that just happened in March, and it's not until April, we've flattened out the traffic in Q1. So that's probably the best news that we have to report today, is our traffic is definitely improved in the first quarter.

Okay. Are you still seeing ASPs increasing as well?

Yes, we've had six quarters where our average transaction per customer has been up in the low single digits. And our conversion has been up for five -- for six consecutive quarters. So now we're starting to get those results. Again, we always said if we could flatten out traffic, we're confident on the comp side because of the increased conversion and the average spend per customer. So that seems to be working for us.

What is driving that increase in the transaction values?

Well, I think it's mostly on the fact that we've moved -- as we've moved from Harbor Bay into George Foreman, into these brands, we've been able to raise our prices 5, 6, 7% with no resistance from the customer. They're seeing that an Izod shirt at $40 is a better value than a Harbor Bay shirt at, let's say, $36. So our customers are viewing our movement into brands as very positive.

And one of the interesting results we had from a recent study on our demographics is that, surprisingly, the average income of our customer is $71,000, which is higher than we thought, but it is playing well into our branding strategy.

Okay. Are there any lease accounting issues or adjustments that need to be made, and have you reviewed that?

Yes, we've reviewed that, and there are no adjustments as a result of lease accounting here.

Thank you very much.

Yes.

Our next question comes from Gary Giblen from C.L. King.

Hi, good morning. So when you say flattening traffic, do you mean approaching 0%? In other words, approaching equal traffic from a year ago?

Yes.

Okay. Great. And can you give us a sense of how much of that might be driven by the -- by the gift cards that are going into the mailer, the high-value gift cards which you may not continue indefinitely there?

Really, in the first quarter, we didn't really have much of that going on. I mean, we're talking about February and March. We really didn't have -- we did a test in three cities on a gift card that looked promising. But we really haven't had anything out there, other than the reactivation, which again, in the scheme of our traffic is relatively -- that's not even measurable. So we don't see that as the driver.

I think the other thing that we're analyzing, that we're up against is, as we talked about this negative traffic in our stores, we're clearly seeing a good part of this traffic is coming from the growth of the Internet. We are tracking these customers and we will try in the next few months be more definitive, but they're moving channels. And it's very clear and I think very obvious that because we're destination and because we also discovered through a analysis that the average drive time of our customers is 20 minutes, and we're seeing the further out the drive time is, the higher the rate they're moving to the Internet. I think we could all understand that makes a lot of sense.

So our traffic is partly a result of multi-channeled marketing that's being very effective. And we're fine with that. But I think we're going to try and show going forward the total traffic of our stores, including the Internet traffic that we're getting also.

Okay. But, I mean, your measure of traffic is apples to apples in terms of its definition?

Yes. We haven't changed it. Like I said, so far this quarter, we have flattened our traffic patterns. Again, we won't know until the end of the quarter how it all lays out because of the switch of Easter, but right now traffic has been very good.

Okay. I mean, I'm sorry to belabor this, but I guess people -- everybody wants to know about traffic. Do you think, is it realistic that you will have approximately flat traffic when you end up totaling up the whole quarter, including April where you have the negative Easter swing?

If you ask me to bet on it today, I'd say yes. Things could happen, but right now I would say yes. We've got 4.5 weeks to go, but right now, if things hold, we're in good shape. And I did say that we are -- we feel pretty strongly that we're going to deliver a positive comp in the first quarter based on where we are today, which we're very pleased about considering this was the big hurdle quarter for us against last year.

Sure. Okay. Then a couple more. Was SG&A a tad -- it was a tad higher, at least than our model, in the fourth quarter. And I guess I'm confused as to what I heard is that there are some extra expense for completing and absorbing Rochester, but was it that, or was there also George Foreman advertising expenditures in the quarter, or that was just for the year?

That was just for the year, Gary. In the fourth quarter, the increase in the SG&A from your model is really all Rochester operating expense. Nothing having to do with the acquisition.

Yes. Okay. Can you hazard an approximate number of what was nonrecurring in terms of dollars spent in SG&A for the quarter?

I would say nothing nonrecurring in nature, Gary.

Okay. You mean that's just the cost of having Rochester in the --?

Yes, labor and marketing like Casual Male does.

I understand. Is it reasonable, just roughly, to the -- use the quarter's results for D&A and interest and annualize that, although bearing in mind that you said you would be reducing interest, but, in other words, is that a run rate apart from interest reductions? Just because it takes half the Levi's/Dockers aspect, so it's a little bit of a cleaner number to model off of.

Certainly that's the best numbers we produced to model off of, yes. They're relatively cleansed of anything else but the Big & Tall business.

So reasonable to annualize those before taking into account your other factors.

Yes.

Okay. Then is the cost of honoring the -- or I guess as David said, protecting the large number of sizes to be in stock in the store, or to get them to the store in five days, is that costly, in terms of shipping, et cetera?

No, not costly in terms of shipping. The only potential impact that you will see, perhaps, is our inventory levels in our core merchandise assortments will tend to rise during the year somewhat. But again, this is the kind of inventory that doesn't have any gross margin exposure to it. It might lower our turns a tad, but that's the kind of investment that we like to make because we believe the return will be very good.

Okay. Last question, I guess, as a follow-up on one of your remarks, Dennis, you said that -- well, I couldn't tell exactly what you were approximating in terms of operating margin expectations for '05. You said it would move strongly toward the 10% goal, but does that mean getting close to 10% or just progress toward it?

I didn't mean to say getting close. Certainly on its way to it. Improved from this year, but we still have some distance to go before we get to that 10%.

Okay. I was looking for 9.9%. I was trying to clarify what you were getting at. Okay. Good job. Thanks.

Thank you, Gary.

Our next question is from Rob Wilson from Tiburon Research.

Thank you. Dennis does, your same-store sales calculation still include stores and catalog?

Yes, absolutely, multi-channel.

Can you help us with page counts in your catalog? Is that one of the rationales for sales per book going up, or is it just improved performance there?

It's many things. Obviously, we did increase the page count in certain books but we did drop the distribution and saw our sales productivity rise to those levels.

Also, the average customer is spending significantly more than they did per transaction than a year ago also. The numbers are getting up there. I think some books are $140 per customer transaction as opposed to 120 a year ago. So the customers that are shopping are spending more themselves.

Okay.

I think much of that, Rob has a lot to do with Linda Carlo and her team. They've done a tremendous job on upgrading the look of the book and the -- obviously, too, the assortments you see in the stores are also doing well in the catalog.

Right. Can you touch -- staying on this topic, the Gold Club you plan on launching in September '04? And how much impact Jim Frane has had on guiding you in this program?

Yes, well, Jim was very instrumental in us getting this whole project initiated, going with the -- we're using the same company NSB that Chico's uses. The program is -- we're going to go through some test phases of the program before we go 100% full bore. Once we commit to life-time membership with our consumer, that's it. We can't go back and make adjustments, so we're going to be testing some different models of -- to see what kind of response rate we get, what kind of incremental sales we get.

With Ron coming on board with a lot of experience in this loyalty program, too, he's really getting his arms behind it. So we're not specific as to exactly what the Gold Club means yet. We do know we're going to be launching it this year, but we're going through a lot of testing on it. But Jim's been a big help and Ron and Jim are communicating now on a basis where we're really just trying to make sure we get it right. We can't come out of the box and not meet our expectations.

We're very excited about it. We've got a lot of bells and whistles in technology behind it. And again, it's going to be a big growth for us in the future.

Can we assume that come October it will be fully tested then and will be completely rolled out at that point?

No, we're not giving a date on it because we have to make sure we can analyze all the tests before we roll it out.

I thought you had mentioned earlier that it would be rolled out in October.

Certainly the systemic rollout, Rob, will be completed.

Got it.

Yes. The registers will be in place, we will be gathering that information. But in terms of the program itself, we're not committing to a date yet. We'll be ready fort, but we're not committing to it.

Okay. And one last question, Dennis. Can you help me understand the Sears Canada accounting? How those sales are booked? Are those wholesale sales, or is there an actual store within a store up in Canada?

Yes, we treat the stores in Sears Canada as we would treat any Casual Male store. Except we do convert the Canadian dollars we collect into U.S.

Right. So when you give a square footage number that you gave earlier, that includes square footage in Canada?

Yes. Of which is about 15,000 square feet, Rob.

15,000, okay. All right. Well, thank you.

Thanks, Rob.

The next question comes from Dan Weisskopf [ph] of UBS. Our next question comes from Susan Sandsbury of Miller Tabak.

Hi, good morning. It's Susan Sandsbury of Miller Tabak. Going back to traffic, just as a point of clarification, the flattening trend that you're expecting in traffic is for CMRG only or does it include Rochester?

That's only Casual Male. We have not yet even put in the traffic counters into the Rochester stores yet, so that's strictly Casual Male.

Second question is, when do you expect to be in stock on this core replenishment program? And you mentioned that your inventory investment was only going to increase somewhat. Is it possible to be more specific about what the inventory invest ment is going to be and/or what you expect inventories to be at year end?

Well, it's not all incremental. We're shifting our dollars from what we would call more seasonal fashionable product into a more core product.

Got it.

There's going to be a blip in May because all that product is coming in, but when we -- what we've done is we've actually split our merchandising plans into two plans. There's a core business model and a non-fashion -- and a fashion business model. And when we rolled the numbers up, we get a tremendous lift on our gross margin because, as I mentioned, we make almost 10% higher margin dollars on our core than our fashion, because fashion is stuff that we have to take the markdowns on, and we don't get any higher mark-up on fashion than we do on core. Our mark-up on core is quite high also.

So we're just -- what happens when we put the two plans together our mark-down rate went down, so our margins went up. But we don't anticipate by the end of the year really carrying much more inventory than we carried today.

Let me just go back. So your new merchandise planning systems are telling you that you carried too heavy a fashion mix historically? Is that why you're changing the mix?

It really told us the opposite. It really told us we're not devoting enough of our inventory into our bread and butter. And while we thought we were in pretty good inventory shape, the system, which is unemotional, is telling us something different. When we would receive -- let's say we receive 5,000 pair of a black waist-relaxer George Foreman pant. When it would come in the system sucked it out in 24 hours. That was supposed to last us a month.

And it's happening time and time again, so the system is telling us these stores demand more product than we're giving it to them, and when we actually went in and looked at these stores, on any given day there are probably 15 to 25% out of stock, but, again, there's 49 sizes that we have to stock. It's not easy to do. So we're really making a commitment to pump up these inventories in these items so we could maximize our business. So it's really core is dictating -- core dictates to us to take less fashion.

Okay. I appreciate it. Thanks very much.

Our next question comes from Christina de Marval with Sidoti.

First, a couple of housekeeping questions. Dennis, can you give us what the fourth quarter comp would have been on a retail-only basis if you took out the direct business contribution?

That was about, Christina, 2.8, I believe. Pull out the retail direct to consumer would have been about a point and a half.

Okay. That's helpful. Then can you clarify what you said about tax loss carry forward? I didn't catch that number.

$97 million in tax losses.

That's a healthy amount, okay.

Yes.

Okay. And any restrictions on that?

There's about 41 million is somewhat restricted to an annual rate, but the other -- the balance is unrestricted.

Okay.

I mean, therefore, I don't think the unrestricted, plus the restricted, is going to interfere with our annual usage.

Okay. That's helpful. Wondering about the gross margin, or more specifically, the merchandise margin in the fourth quarter. I thought you had expected a 50 basis point or so improvement in IMU. Just wondering what actually happened and if you could --.

Sometimes what we expect doesn't happen.

I know how that goes.

We were expecting an increase. We didn't experience it. Part of which --.

In the IMU you mean?

Not so much the IMU. It was more in the markdown area that cost us the margin that we were expecting. And David's new management program on the inventory side, along with our systemic capabilities, is why we're now confident going into this year that we're going to achieve the goal that we set out for margin.

Okay. Can you throw a few numbers around that, just order of magnitude, how much IMU improved versus markdown?

Our expectations over the year, merchandise margin improvement in the range of 100 to 200 basis points, what we're managing to.

Looking forward with respect to SG&A, can you clarify your guidance there? You said it's flattish.

On an average store basis, flattish SG&A.

So if we look at it in terms of same-store sales, what sort of same-store sales growth do you need to be flat in SG&A on a percentage basis?

On a percentage basis?

Right. Or can you give me a sense of as a percentage of sales? In other words, where do you break even? What kind of comp do you need to break even on SG&A as a percentage of sales?

If we had no new stores, okay? And what's happening to gross margin in your example? Is that flat as well?

I have to review my estimates. No, I think I've built in some improvement.

So maybe we should take this off-line, but if gross margin were flat and no new stores, basically, we maintain things at a flat comp.

Okay. Let me see if there was anything else. Just wondering marketing budget for the current year, what you might be reallocating relative to last year and how is the budget shaping up overall as a percentage of sales?

Well, as a percentage of sales, marketing is down slightly. We are intensifying our direct-mail campaign and catalog distribution, but certainly not to the level of matching the dollars that we incurred a year ago.

Okay.

So in terms of percent of sales marketing is down on our plan by some 50 to 70 basis points

And then just wondering if maybe David could give us a little bit of insight in terms of the March reactivation mailer? I know you're probably still collecting results from that, but just wondering if there are any incremental insights from that?

We've tested a new program, which was the $20 gift certificate. And, again, it outperforms our normal promotional vehicles because it's a -- there's no strings attached. You can come in and spend $20, and buy $20 worth of product and virtually walk out with it free. So we like that one. Again, I don't have it in front of me broken out, but again we're up to 80,000 reactivations right now. We have two or three more coming throughout the year. We're getting ready for a -- I believe we have a May 1 coming up.

We're going to continue to do it. It's very cost-effective to us to try and get these customers back in the store. What we continue to find encouraging is that when they do come in, they're spending more money than they used to spend. That's really good for us. So reactivation is going to be continuing on, and I don't think we're ever going to quit it, because over time, we do have -- we do have customers who fall off the cliff, and we want to get them back in the stores.

Okay. Great. Thanks a lot. Best of luck, everybody.

Thank you.

Our next question comes from Paula Kalandiak from Roth Capital.

Good morning. Nice quarter. My first question is with regards to real estate, I was wondering if you've been evaluating your real-estate locations and if you plan on doing any relocations or changing your strategy going forward.

We are very deep in that project right now. We brought in an outside consultant, Buxton [ph] who specializes in evaluating our current real estate plus the opportunities for future real estate. We've been going with them for several months and they took 1.7 million customers and segmented them into different buckets of their lifestyle, and, again, that's where the number came up that our average customer's household income is $71,000. But they have identified for us a -- another 100 locations throughout -- that we should populate at Casual Male. We're also going to be doing this for Rochester, because they're getting on a [inaudible]. But we're very deep in them. We're now -- it's giving us insight as to where we need to put stores. For example, they gave us a street intersection in L.A. of, whatever it is, 6th and Flowers, or something like that, and said, if you put a store in that location it's going to do $1 million, based on the demographics. So we're very excited about how we are going to be looking at our stores.

We tend to look at populations, and what we learn is that one market may have 200,000 customers within a five-mile radius and one other location may have 100,000 customers in that same five-mile radius. But we will do better in that smaller market because more -- there's a higher percent of potential strong customers in that market. So I'm glad you brought that up because we're going to be sharing this information over the next several months as we -- with everybody because there are some fascinating things that we're learning about real estate.

Is this company making any recommendations regarding relocations of existing stores?

Well, obviously, where they're giving us locations where we're underperforming, they took every one of our locations and projected out what our sales should be in that market. And there are locations where we are 25, 30% under their projected numbers. So we have to go in and look at that location, is it the right location? Do we need to move it a mile or two away? But we are in the process of evaluating all our locations as they come to terms and continue to relocate them as needed.

A lot of obvious things happen. We're in centers that are 75% occupied now and a new strip center opened up two miles down the road, all the traffic moved in that direction and we need to move accordingly. But that is an ongoing process for us.

Okay. Then I was curious as to why Levi's and Dockers is considered discontinued operations but not Ecko?

That's a good question. I think when we first acquired Casual Male we had announced our intention of exiting the Levi's/Dockers stores. We didn't really do that with Ecko at that particular time. If you remember, we were actually growing Ecko at that time, and I think that one nuance between the two created a difference in the accounting between discontinued and -- not to mention Ecko, of course, was a lot less significant in terms of its overall impact. But, again, because of our announced intention to exit the business, that created the accounting for the Levi's/Dockers stores.

And then finally, I was just wondering if there's been any change over the last year in units per transaction.

Units per transaction have been relatively flat, down two, up two, down a half, up a quarter. Nothing significant.

Great. Thank you and good luck.

Our next question comes from Margaret Whitfield of Ryan Beck.

Good morning. I know it's early, but I wondered if you could share any thoughts your new Chief Marketing Officer has on some new initiatives or where he sees some low-hanging fruit, David.

Yes, he's found a lot of low-hanging fruit. Again, he's only been here several weeks. It's premature for to us go in that direction, but the overall assumption is that we're not efficient in how we spend our marketing dollars, and we're just generic, we're shotgunning promotions out there. So we're, in fact, sending a suit promotion to an 18-year-old customer who likes to where Sean John, and he's not a George Foreman customer and we're mailing into that customer. These are the kind of things that Ron clearly sees right out of the box that we're not efficient.

And we understood that going in, but because we have so many diverse customers, this is the biggest challenge we have, because in one store we could have an 18-year-old walk in one minute, then a 70-year-old guy walks in the next minute and we've got 3,500 square feet to get them to enjoy a shopping experience. So that's why we're really trying to segment our customers into clusters of whether they like branded goods or George Foreman goods, then only market into them.

One of the things in the presentation, I have a page in the presentation that's going up on the website next week, is a year ago, we mailed 1 million postcards about Polo Jeans, and this year we're still mailing 1 million postcards but there are six different post cards. Some are getting a George Foreman postcard, some are getting a Reebok, some are getting a New Balance, some are getting Polo. But we're going to get a much higher return rate and increased traffic if we're targeting to the customers that are going to respond to that specific promotion.

So that's the general overriding statement of what Ron is going to bring to us. But he's deep in it now. He's very excited, like we get very excited when we look at the other areas of business for opportunity, but marketing is probably our biggest potential bang to really get this thing to the levels we want it to get to.

I wondered if the improving traffic that you've been citing was visible in February or did it more likely appear in March when you had some mailings to your customer base?

Week to week it's been fairly consistent. Now, again, last week we had Easter, and this week it's -- this year it changes, so now we're seeing major shifts in the last couple of weeks.

What would you cite as your Easter benefit in March, in terms of comps or any way you slice it?

Again, it's been kind of consistent for the first seven weeks out there. We made our plan for Easter, which is, there were obviously significant comps last week for a company like ourselves. We're on our plan, but then we give it back in the next two weeks. And hopefully when it all washes out in the end, we'll be -- we'll be where we've been trending for the last few months.

And within the store itself I'm sure there are pockets of strength and weakness. Where would you say your strong areas are currently and where do you think you are not making plan?

Our strong areas are definitely clothing. We've thought because last year we introduced a lot of suit separates into the stores and got a tremendous lift. We're doing even better this year between suits, dress shirts and ties. Very healthy business. On the upside, surprising to us, is our [inaudible] business which has been bad [inaudible] years, is coming on quite strong significantly. So, again, this trend towards [inaudible] this low-cost movement, with Tigra [ph] movement [inaudible] very well, and in the fashion colors, the greens, the yellows, the oranges, the pinks. Very positive.

Our denim business is finally coming back in a good way. On the flip side, I'd have to say, our woven business -- our short-sleeve woven business has not been strong and our short business has been terrible. That's strictly weather. Even though we're up, we dropped hundreds of thousands of dollars in shorts because we haven't had a break in the weather yet. We anticipate we'll get that back when the weather breaks. So those I would say are the highs and lows so far.

Just another follow-up for Dennis, I missed it if you said it. How many Casual Male stores will be open this year and what is the square-footage increase that's likely, including Rochester?

We're planning ten stores this year of Casual Male.

Right.

Which should give us there abouts another 35,000 or so square feet, Margaret.

Okay.

And Rochester two to three stores.

Right.

In that range, which should generate another 10,000 -- I'm sorry, 15,000 or so.

15,000 to 20,000.

15,000 to 20,000 square feet.

Any remodel costs this year?

We're planning on doing 50.

5-0, okay.

5-0 this year, along the same vintage that we were remodeling last year.

Will you report your quarterly comps in conjunction with earnings, or on the same day that other retailers report April comps?

We're going to do same day that retailers do reporting of comps and then followed by another three weeks with the earnings.

Okay. Thank you. Congratulations.

Thank you.

Our next question is a follow-up question from Gary Giblen from C.L. King.

On the topic of remodels, are you -- what would you characterize as the sales lift now from the average remodel, realizing that they range all over the lot?

They do range all over the lot. Again, it's not significant. It's not impacting our overall comps at all. What we are experiencing is that our customers are very -- they're very appreciative. We think it's going to allow us to keep us from losing these customers on their first visit and being disappointed.

It has not been significant to our comps, and we're not backing off on getting these stores cleaned up. Gary, you've been in some of these stores. You know how depressing they can be. It's just something we need to do. It's catching up to what should have been done over the years, and by this year we'll be caught up, and then it will be normalized. Every five years we'll put in the paint and the carpet again. But it's just -- it's an investment that we've had to make because it hadn't been made in the last 15 years.

Okay. And on the ten or so Casual Male stores this year, is that a change in prior-store development plans by the Company?

Yes, I think that number certainly came down because we wanted to move -- we moved some CapEx into the remodel. And, again, we're positioning ourselves for next year to put more CapEx into Rochester. We've got 500 Casual Males. We're going to continue to open them, but certainly not to the extent before we had the Rochester acquisition.

Okay. That's helpful clarification. Thanks, David.

Our next question comes from Greg Fontana from Brook Pass Capital.

Hey, guys, there's a lot of great opportunities here, and I'm looking forward to seeing the traction over the next couple of years. But one of the things that hasn't been mentioned yet, I'm wondering if you could give us an update on kind of the status of new merchandising opportunities among apparel and footwear manufacturers. I know you've got Izod to a greater extent. If you don't want to go into detail with what might be in the pipeline, but give us kind of a sense of -- in another way.

Yes, a couple of things. In terms of this year's opportunity, starting with Reebok, we launched the NFL product, which is proprietary to Reebok, mid-season. And it was very successful. We were off in the amount of big, big sizes we needed in that business. We put out a circular and sold out within a week of the 5 X and 6 X's. And we were late, but that's when we could launch it. We have a very aggressive plan this fall season for NFL products in a lot of markets. It's a great business for us to be in. The customer really was excited that they could get their teams and our Internet and catalog did extremely well on it also. So that's one thing.

We're continuing -- we launched Calvin Klein in our dress shirts. It's done extremely well, and we're going to be putting Calvin Klein jeans in our stores this year. These are roll-outs. It starts in 50 stores, then we get to 100, then we start to see where it matures. And for fall, we're launching the Nautica Jean line. So those are the big ones. And Izod has been wonderful. I mean, our customers jumped on it since the day we put it in. They really love the brand.

And an interesting one in dress -- in the dress category, we brought in some Henry Grethel suits recently, and in two weeks we sold -- we had the highest sell-through I think in the history of the Company on some suits. We were literally blown away. So Henry Grethel, a little upgraded suit for a little more money, our customer responded extremely well.

So we're getting pretty well branded out there, and at the same time we're -- where I will correct myself, I said Harbor Bay is going away. We are not taking Harbor Bay away. We still have a percent of our customers who aren't brand conscious, who are price conscious, who want the value, so in some of our basic fleece programs and our jean programs, we're going to continue with Harbor Bay because that was a mistake to totally abandon it , because we got a lot of customers contacting us saying they still want their Harbor Bay. So that will be a percent of our business. So we're really moving into a good, which would be Harbor Bay; a better, which would be George Foreman; and a best, which would be our premier brands.

Great. I just also wanted to check one other thing you didn't mention, but I think you're slotted to be in the Sears catalog in Canada this spring. Has that happened or is that happening?

That will not happen until the fourth quarter.

Oh, okay.

Yes.

Was that supposed to be in the spring and has now shifted to the fourth quarter, or did I just --.

At one point I may have said that, but it's moved because it is -- the logistics of doing it is much more complicated than, let's say we did a deal with Amazon.com. This is a lot of grunt work to get this up, because of how we have to move the product and logistically do it. But we are scheduled right now to be in their pre-spring catalog which comes out late in the fourth quarter.

Okay. Thanks.

Our next question is a follow-up question from Rob Wilson from Tiburon Research.

Yes, thank you. Do you plan on any more Sears Canada locations this year?

Not any physical locations. We are continuing to use this as a test, trying to get the right sizes in these stores and the brands that work in this market. Neither -- Sears and ourselves, we talk regularly. We want this to work. We're not pressuring -- neither side is pressuring us to open more until we feel comfortable that it's time to roll out more.

And as I said before, our upside opportunity is really in the catalog. It's over $1 billion. It's still that 1,000 page telephone book-size catalog that is very significant in Canada. It works very well for our Big & Tall customer, and we see a lot of opportunity. I believe we're getting 12 pages in the catalog, which is quite significant.

Has this test in Canada encouraged you to look at a similar sort of arrangement here in the U.S.?

Not at this time. We have enough growth right now that we're not looking to cannibalize our existing stores. Not that we won't go there, but nothing on the plate at this time.

Fair enough. And, Dennis, you've given us no guidance. Do you plan on being profitable in all four quarters?

Do we plan on being profitable? No, not all four quarters, Rob.

Okay. Q1?

Our first three quarters are generally not terribly exciting. I think that we'll be profitable in and out really until the fourth quarter when we'll be obviously squarely positive.

All right. Thank you.

Our last question comes from Dan Weisskopf from UBS.

And I have no questions.

We have no further questions at this time.

Okay. Well, thank you all for joining us, and we look forward to reporting first quarter in May.

Ladies and gentlemen, this concludes today's presentation. You may now disconnect.