Destination XL Group Inc (DXLG) 2005 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to your Casual Male Retail Group first-quarter earnings 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 call, Mr. Jeff (technical difficulty) sir.

Good morning. I'd like to read the forward-looking statements. Forward-looking statements contained in this and other written and oral reports (technical difficulty) 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 (technical difficulty), events or developments are forward-looking statements. It is possible the Company's future performance and earnings projections may differ materially from current expectations depending upon economic conditions within both the 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 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 disclosure and undertakes no obligations to update them. Now I'd like to introduce Dennis Hernreich, Chief Operating Officer and Chief Financial Officer of Casual Male to begin the conference.

Thank you Jeffrey, and (technical difficulty).

Good morning and thank you all for joining us on this morning's call to discuss Casual Male Retail Group's earnings and performance for the first quarter of 2005. I will go over this morning press release by reviewing the specific components of the significantly improved earnings and performance. One very important fact to note is that the results for this year's first quarter are pure as to the Company's only business segment of men's specialty apparel for the big and tall. In comparison to last year, CMRG still had the Ecko outlet business, which generated $6.1 million in sales in the first quarter and accumulated a $300,000 loss for the quarter. The Company sold this business in last year's second quarter. In addition, CMRG sold its Levi's outlet business in last year's fourth quarter. Last year's fourth-quarter results all shown as discontinued operations with a loss of 1.6 million.

Overall though, the Company showed a $0.10 EPS -- earnings per share -- improvement from last year's first quarter to this year's first quarter with a $3.2 million boost from last year to a net loss of 1.9 million for this year's quarter. The operating results for the quarter include the Company's Rochester clothing stores and direct-to-consumer business acquired in October of last year.

Let's go over the components. The Company's sales increased 15% overall and a 25% increase in its core big and tall business to 97.3 million from a year ago. As previously mentioned, CMRG's comparative sales from a year ago increased 2.3% in the quarter, which includes a 19% increase in its direct-to-consumer business. The retail stores whose sales were essentially flat for the quarter had its average unit retail increase by 4% while traffic declined slightly by 1.5% with the flat conversion rate and its items per guest decline by approximately 2%. It should be noted that traffic into CasualMale.com was up almost 20% during the quarter as the Company continues to market its multi-channeled capabilities and allowing our consumer to choose his most convenient channel.

Approximately 18% of CMRG's total sales in the first quarter were generated by the Rochester clothing division. During the quarter, CMRG opened five stores and closed two other stores, increasing its total store count to 530 stores at the end of the quarter, with 1,878,000 square feet of leased space. In addition, seven stores were renovated during the quarter with another 29 stores to be renovated before the important Father's Day selling period. It is important to note that the Company's sales per square foot improved by almost 10% during the quarter from a year ago.

CMRG's overall gross margins improved to 41.4% during the quarter from 40.1% from a year ago. Although CMRG's occupancy cost rate was flat to last year, its merchandise margins improved by almost 130 basis points from last year's first quarter. At Casual Male only, merchandise margins improved by 80 basis points. Another 50 basis point improvement in gross margins is related to the improvement in Rochester gross margins in comparison to the Ecko outlet business.

CMRG's inventory position is well positioned in both its core as well as fashion product lines with a much improved in-stock by size on hands in the stores. This Father's Day, the Company will be in excellent shape by size in all stores. Inventory levels of 92.2 million are down from a year ago levels of 109.8 million at the Company level. For Casual Male only, inventory levels at quarter end were 77 million compared to a year ago, when they were 76 million, while its fashion inventory levels are down from 11% from year-ago levels. We expect to generate similar gross margin improvements in future quarters throughout the year, particularly in the important fourth quarter.

CMRG's SG&A expense base, although increased in total dollars by just under 4 million, was more productive as a percentage of sales going to 38.1% of sales in this year's first quarter in comparison to a year ago's 39.4%. In addition, on an average store basis, SG&A expenses at Casual Male only actually dropped by approximately 6%, partly due to more efficient marketing expenditures during the quarter from a year ago. Like gross margin, CMRG expects to continue to show similar productivity improvements in SG&A expense levels as a percentage of sales throughout this year.

Overall, the Company is reporting operating income of $99,000 as compared to an operating loss of 1,648,000 in last year's fourth quarter. CMRG's net loss overall then for the quarter was 1,881,000 in comparison to a year ago net loss of 5 million in $94,000, an improvement, as I said, of approximately $3.2 million. On a per-share basis, the Company had a net loss of a nickel compared to last year's $0.15. But after applying a 37% tax rate, the Company's loss for the quarter is $0.03 compared to last year's $0.09 loss. The Company's capital expenditures for the quarter approximated $1.8 million compared to $3.9 million a year ago. Although CMRG's debt increased by 6.7 million during the quarter as expected to support the seasonal inventory levels, this increase was significantly less than last year's debt increase in the first quarter of $12.5 million.

The Company's liquidity available under its revolving line of credit is at a very healthy level, in the mid-40 million range, and is expected to improve throughout the year.

This concludes my remarks about the first-quarter results and now I will turn the call over to David.

Thank you, Dennis. With the first quarter comp of 2.3%, we've now reported six consecutive quarters of comp sales increases. And we're pleased with the first-quarter top-line growth, considering we were up against the launch of George Foreman apparel last year and a 9% comp. We're also pleased to see that the traffic in our stores is starting to stabilize. We were actually flat going into the last two weeks of the quarter, but unfavorable weather, as many of you have heard, impacted our sales and traffic in the last two weeks of April.

In terms of merchandising, several categories performed very well. The George Foreman Comfort Zone line continues to be very strong. This quarter, sales of George were up over 30% compared to last year. The George Foreman waste relaxer pants, our signature pants, had a sales increase in excess of 50% over last year. And I would also like to note that last night, our PR firm, Weber Shandwick, won the retail PR campaign of the year for Casual Male's launch of George Foreman, beating out Home Depot, Southwest Airlines, and 7-Eleven.

Additional strong categories were suit separates and in sportswear, the fashion influence of the polo shirt has also proved to be relevant in our stores. In one category that is planned down significantly this year is in urban streetwear. Our sales are planned down substantially. However, last year, our gross margin on this product was less than half of our overall gross margin rate, so we should see some margin improvement in sportswear this year as we offset those sales with sales for more robust margin categories.

As far as our branding proposition, this year, we launched with two outstanding brands on an exclusive basis for Big & Tall. Nautica Jeans Co., launched in March, and Calvin Klein jeans will be launching in July. And at the end of the quarter, we're now 51% branded and that's excluding George Foreman. And our IMU, or markup in the quarter, was 60 basis points higher than a year ago, even though we have added more brands versus private label. And finally, on the topic of merchandising, on that last call, I spoke about building our inventory levels on core product.

Since our replenishment systems went live, it exposed heavy out-of-stock positions in our key items, like the waste relaxer pants, pocket t-shirts, polos, etc. We've been in the process of increasing our inventory on seven key items and going into Father's Day, we'll be in a fully-stocked position for the first time. And by fall, we'll launch our new marketing initiative of our guaranteed in-stock program, where if we don't have the customer's size available in the store and we can't deliver it in five days, it's free. And in the pants, for example, we'll be advertising that it's available in 49 sizes.

Our capital and resource investment over the last two years in systems is now providing the expected benefits. And we're now beginning to fully manage the incredible number of SKUs, which are required to operate our business today.

Our strategic plan to grow our business as a full-fledged multi-channeled retailer is happening. For the quarter, Internet sales rose 26% and Internet traffic was up almost as much. And to help illustrate our growth of Internet sales, our sales in February, the weakest month of the year, exceeded our sales two years ago in December. And also, our catalog sales had an increase of almost 20% for the quarter.

Also, this quarter, we mailed our spring catalog to our retail customer file for the first time in a meaningful way and we generated a wealth of information that will guide us in our fall marketing. Circulation will be more targeted to customers, more likely to respond, based on the spring sale. And for fall, for our retail customers, we'll have at least two smaller 44- to 48-page catalog, which will replace our traditional 132-page spring catalog, which goes to our true catalog shopper.

We're also continuing on our reactivation program. Our June offer is timed with the peak selling event of the season, Father's Day, and again, we'll mail to our customers who haven't shopped us in the last 12 months. And so far, the results from the prior four mailings have been outstanding and we'll continue to cultivate this program throughout the rest of the year.

One of the keys to our future success will be based on our marketing and micro-managing our customer database. The implementation of our CRM program will provide a platform for testing and creating extremely advanced marketing strategies. So at this time, it's not prudent to make this information available to the public. And therefore, we'll not be providing much of the statistical information that we have provided in the past.

And now I'd like to give an update on our Rochester Big & Tall division. The integration of Rochester is moving along on schedule. By August 28th, our merchandising platform system, distribution, catalog fulfillment, the call center and POS systems, will all be fully integrated into Casual Male. The Atlanta fulfillment center will be closed and the San Francisco operations will be downsized dramatically and with these synergies and accompanying cost reductions, we anticipate savings of $3 million on an annualized basis. Today, we are receiving about a-third of Rochester's inventory through our pants (ph) facility and we are now shipping to stores twice a week as opposed to once a month. And we're seeing healthy increases in sales of core product, as Rochester's in-stock position continues to improve. And also for fall, we'll launch Tommy Bahama in Rochester, offering our Big & Tall customers a much requested brand. And we'll also be opening our first two new Rochester stores since the acquisition during the third quarter of this year.

The Casual Male division also has on its schedule the launch with Sears-Canada, Internet and catalog in the coming fourth quarter. We've been allotted 12 pages in their pre-spring catalog, which comes out in December. And on that note, we will start the Q&A.

(OPERATOR INSTRUCTIONS). Justin Smiley, Thompson Davis.

Hey, guys. Congratulations on a good quarter. Can you guys maybe quantify how much of the inventory increase might be related to the Rochester inventory and how much is related to just building up your inventory in the core products? The increase from last year's. I might have missed the last year's number earlier.

Last year was 109 million.

You guys did better.

We actually dropped 17 million.

Okay. And how much of that 92 million this year is related to Rochester inventory?

That's about 15 million.

Okay. And do you guys have a plan that you could talk about for maybe what gross margin could be this year and how high it might be able to get in the fourth quarter?

Well it's our expectations, as we said, that we believe 100, 150 basis point improvement really throughout the year is what we should be seeing.

Okay. Sounds very positive, guys. Congratulations and I might hop back on later.

Gary Giblen, GMG Capital.

Hi. Good morning, everybody. Are you on plan or ahead of plan in terms of margin expansion plans due to margin mix that you talked about last time going to more --

Oh, our margin rates, they're pretty close to plan, Gary.

So all of the sales mix and margin mix things are coming in comfortably, according to the plan that you laid out last time?

Yes, I would say that's right, yes.

Great. And thanks for the additional detail on the Rochester integration. Just as you proceed with it, any surprises on the positive or negative side on synergies?

Well you know the team here on both sides, Rochester and on the Casual Male side, our support group here had been terrific, working very well together. They're actually in our offices as we speak, working on the aspects of it. And it's going extremely well.

Talking -- this is anecdotally -- talking to some of the seasoned veterans of Rochester, they've commented that the stock positions are the best they've ever seen in the Company's history. So the systems that we put in for Casual Male, that's going to be the big payoff for Rochester down the road, because we're putting them on the same platform and it's the same issue about size management. If we could keep their sizes in stock, they're very happy. Because they firmly believe they've got the customer out there that wants to buy and if we could keep them in-stock, the sales are going to go up. And we've actually monitored some of the core programs. And again, we're seeing significant increases in some very basic products that they've had for years, just based on our inventory levels that we have this year for them.

Okay, great. And then just finally, how bad is the condition of the lower to mid income customer? And is it getting better or stable or getting worse? Is it just a function of where gas prices go in a given week or --?

Well, that's very speculative. But one interesting point that we found, which makes us feel very good about our coming in with a good, better, best strategy with bringing in brands, we put 2.7 million of our customers into a demographic database. And the average income of our customer is $71,000, which is higher than we had thought. And that's good news for us as we have a higher-income customer, hopefully these economic problems won't impact us as much as we thought they could have.

Okay great. Thanks. Good luck.

Paula Kalandiak, Roth Capital.

Hi, nice quarter. My first question has to do with your POS rollout. How is that progressing?

We are today in tests in a few stores locally around our Canton headquarters here. Things are on schedule, going very well. And the schedule looks to be intact for completing it during the summer months, before Labor Day.

Okay. And I'm not sure if this is part of the information that you're no longer going to give out, but can you let us know how many customers you think you've reactivated since the program rolled out, I think it was in September, or what percent response rate you guys are seeing?

Those are the kinds of numbers that we're going to try and keep to ourselves. We just got a report from another retailer that will remain nameless, but they are suddenly doing a reactivation program (multiple speakers) from the CEO. And again, we're feeling like this is a competitive world out there. We want to hold some things tight to the vest. It's a strong program for us. We're going to continue it throughout the rest of the year and next year. But those are the kind of statistical numbers we're not going to be delivering right now.

Okay, thanks.

Scott Krasik, C.L. King.

High guys. I think it's Scott Krasik. Good quarter. I just had a couple of questions. Can you say where the two Rochester stores are going to be?

Yes, Boca Raton, right across the street from the Boca Town Center, which we're very excited about. And the second one is going to be in New York, Long Island area. We have not signed the lease yet. We're very close, but that is still scheduled for a third-quarter opening.

Have you guys thought about sort of longer-term in terms of store opening? Are you going to be just filling out existing trade locations? Or are you really going to hit new markets in a big way?

Well, strategically, I could say we're going to put a lot more of our CapEx and strategy into Rochester for the next few years. We do have 500 Casual Male stores. We will pick some choice locations in the next few years. But again, Rochester only has 22 locations. We believe there's 40 more stores to open at least. Again, the payback of a Rochester doing four times the volume of a Casual Male with twice the sales per square foot, we're going to put a lot of emphasis on getting them built out over the next few years.

What does that mean? If we said five to seven stores a year, today, maybe we would say that, but again, it's all a matter of finding the right real estate. So it's a little premature, but there's definitely going to be a swing to building out Rochester.

If this is repetitive, I apologize, but have you thought about or talked about converting any Casual Male stores?

It really doesn't work because of the size. Our stores are 3500 square feet. It's too small for a Rochester. And again, the ones that we would want to convert tend to be the ones that are strong for us anyway. We don't see that happening.

Okay. And Tommy Bahama is obviously a good brand to have in there. Any other launches, either for this year or next year that you want to talk about?

Not that we could say at this time, but we continue to get a lot of calls. It's funny, where we were pounding the doors trying to get brands in, it seems to be going the other way right now. We have more brands coming to us than we could physically put in our stores. So that's a good thing. I think this is part of a reaction to Casual Male's making its name. Plus there's obviously concern from these brands about their future with the consolidation of the department stores, they're looking for new opportunities. So it's going to play well into our hands. We just have to figure out which ones do we want to align ourselves up with.

Okay. On Tommy Bahama, is that a full top and bottom rollout? Full sportswear line?

Yes, in Rochester, it will be the full line.

Okay. Thanks, guys.

Justin Smiley, Thompson Davis.

Hey, guys. With Internet sales continuing to grow at a pretty healthy rate, do you guys see that maybe potentially eating into the revenue from the store base anytime soon?

Yes, I think that's a reflection of our traffic. And we can, again, without giving statistics, there's a pattern. Obviously the further the distance our customer lives from the store, the higher propensity they are to moving to the Internet, which makes sense. The average drive time to our stores is 20 minutes. But that means we have customers that drive 45 minutes to an hour. And we're actually encouraging that, because what we find is that a customer who multi-channel shops spends almost three times the annual purchases of a customer who only shops our store. So that's good for us. And we're willing to give up some store sales if that customer is going to spend more money annually.

And do the Internet sales count in your comp store sales?

We put our Internet sales in our comps.

Okay. And can you guys comment maybe on how traffic or the sales have been throughout May so far?

Well, as -- we are a very top-heavy, Northern-based Company. And as everybody knows, the weather in May has been difficult. However, we look at our business nationally and we would have the same comment that we're hearing out there. Our business in our Southern stores is doing very well. And the only problems we're having is in the seasonal pieces in the North, which would be short-sleeved shirts and shorts. Our suit business, our jean business, our active business, they're all pretty healthy. But yes, we are, like everybody else, we need some warm weather. However, our big gun is the month of June. So barring any major problems, we feel okay.

And one more. What do you guys expect CapEx might be for the remainder of the year?

Well we think for the year, Justin, we'll be in the range of 12 to $14 million.

All right. Thank you, guys.

(OPERATOR INSTRUCTIONS). There are no further questions at this time.

Thank you very much for joining us on this and we look forward to reporting second quarter.

Ladies and gentlemen, that does conclude today's presentation. You may now disconnect.