Destination XL Group Inc (DXLG) 2005 Q2 法說會逐字稿

Good day, ladies and gentlemen. Welcome to the Casual Male Retail Group second-quarter earnings 2005 conference call. (OPERATOR INSTRUCTIONS) As a reminder, this conference is being recorded. I would now like to introduce your host for today's conference, Mr. Jeff Unger. Sir, you may begin the conference.

Good afternoon. Thank you for participating today. I'd like to read our forward-looking statements.

Contained in this (technical difficulty) and other written and oral communications are made based on known events and circumstances at the time of the 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 with and purchases by or from major customers or suppliers, including delays or cancellations in shipments; uncertainties surrounding timing, successful completion or integrations of acquisitions; threats associated with and efforts to combat terrorism; competitive markets; conditions and the resulting effects on sales and pricing; increasing in raw material costs that can not be recovered in product pricing; and global economic factors, including currency exchange rates affecting 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, Senior Vice President, Chief Financial Officer and Chief Operating Officer.

Thank you, Jeffrey, and good afternoon, everybody, and thank you for joining us on this afternoon's call to discuss Casual Male Retail Group's earnings and performance for the second quarter of 2005. I will go over today's 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 second quarter and six months are pure as to the Company's only business segment, that being men's specialty apparel for the Big & Tall. In comparison to last year, CMRG still had the Ecko outlet business which generated last year's sales of 6.6 million and 12.6 million respectfully in the second quarter and six months and accumulated last year operating losses of 362,000 and 600,000 in the second quarter and six months respectively. The Company sold this business, as you all know, at the end of last year's second quarter.

In addition, the Company sold its Levi's outlet business in last year's fourth quarter, and therefore last year's second quarter and six months results are all shown as discontinued with income in the second quarter of 515,000 and a loss of 1.1 million for the six months.

Overall Casual Male Retail Group continued to show dramatic improvement in operating results, with an almost $5 million improvement in operating income for the first six months, of which 3.2 million of this improvement was generated during the second quarter. Although the operating results of this year includes the Company's Rochester clothing stores and direct-to-consumer business acquired in October of last year, much of the Company's improved earnings performance was generated by Casual Male. A growing top line, improved gross margins, and a stingy cost structure is a recipe for raising earnings performance, which is what we're showing in the second quarter and six months.

Now I will review the components. In terms of sales, the Company's sales increased approximately 15% overall for both the second quarter and six months so far this year. As previously announced, CMRG's comparative sales from a year ago increased 2.5% for the second quarter and 2.4% for the six months this year, which includes a 20% increase in its direct-to-consumer business. Just over 15% of the Company's overall sales in the quarter and approximately 17% for the year so far were generated by the Rochester clothing division.

A noteworthy trend during the second quarter, with the un-spring-like weather patterns in May CMRG's comps were down, but since during June and July comp store sales have been trending in the mid-single digit levels.

During the second quarter, CMRG opened 2 stores and closed 1 store, raising the total store count to 531 stores, with 1,882,000 square feet of leased space. So for the year, CMRG has opened 7 stores, closed 3 others. In addition, for year 37 stores have been renovated and 1 store was relocated.

Casual Male Retail Group's overall second-quarter gross margins rose 230 basis points to 43.4% from 41.1% from a year ago, and so far this year for the six months gross margins have jumped 180 basis points to 42.4% from the 40.6% level we saw last year. The gross margin improvement largely stems from the Company's systemically enhanced inventory management methods of better controlling core versus fashion inventories and better size and stock positions. David will speak more to these important capabilities.

With respect to Casual Male's current inventory position, although Casual Male's inventories have increased just over 10% from year-ago levels, its seasonally fashion oriented inventories have dropped by several million dollars, therefore reducing Casual Male's markdown risk. At the same time its core businesses have been vitalized with robust inventory levels supporting its in-stock size commitments to our customers and raising its initial mark-up levels. We expect that Casual Male's improved gross margins will continue, perhaps a slightly less improvement than we have seen so far, and therefore positively impacting our earnings performance in the second half of the year.

As we transition into fall merchandise assortments in the month of August, our stores have less clearance on the floor, allowing for better merchandising with new product, which we would hope translates to enhance full-price selling in the fall season.

CMRG's SG&A expense base, although increased in total dollars, was more productive as a percentage of sales going to 36.4% in the second quarter from 37.2% last year, and so far this year overall 37.3% compared to 38.3% last year. On an average store basis, Casual Male's SG&A on an average store basis decreased by over 2% during the second quarter, and has dropped slightly for the six months so far from last year.

The Company intends to continue to carefully manage its SG&A base such that as continued top-line and gross margin performance improvements are made it's operating performance will increase further with the leveraging impact from an efficient SG&A base. Therefore, earnings before interest, taxes, depreciation and amortization overall for the Company -- known as EBITDA -- increased in the second quarter by 107% from a year ago to 7.1 million, and by 155% for the six months from a year ago to 10.2 million.

After considering depreciation and amortization, which edged upward by 500,000 in the second quarter and 1.2 million for the six months from a year ago, CMRG's operating income went up to 4.1 million compared to 900,000 last year, and 4.2 million for the six months, up from a loss last year of $750,000.

On a pretax earnings per share basis, the Company improved by $0.14 per share for the six months from a year ago, and $0.06 per share in the second quarter from a year ago. On an after-tax basis EPS was $0.04 per share in the second quarter compared to break even last year, and for the six months break even this year compared to a loss of $0.09 per share last year.

The Company's capital expenditures for the six months this year approximated 6.6 million compared to 9.4 million a year. Although Casual male Retail Group's debt increased by 6.2 million so far this year, as expected to support core product inventory levels, this increase was significantly less than last year's debt increase during the first six months of the year of 22 million. The Company's liquidity availability under its revolving line of credit stands at a healthy just above $30 million, and is expected to range in the second half of the year to between current levels to close to $50 million.

As an update on the Company's major strategic initiatives, the integration of Rochester Clothing has been going very well, having achieved the partial integration in the areas of marketing, direct-to-consumer business including all its catalog and Web operations, distribution, logistics and most corporate functions. Many of the cost synergies that we expected from the Rochester acquisition have been accomplished and will be more impactful to CMRG's overall earnings performance in the second half and into next year. The integration effort will be fully complete by the end of the year, waiting until after the important fourth-quarter selling season to convert POS and merchandise systems.

Important and meaningful strides are being accomplished in identifying direct sourcing opportunities for Rochester, as well as direct-to-consumer merchandising and marketing potential, all of which have important gross margin implications that David will speak in a few moments.

At Casual Male we're just about to complete the rollout of its new store systems, and as a result our 496 stores will have updated capabilities during the second half of the year. In addition, and at the same time, Casual Male's CRM application will be available in the third quarter, arming our marketing team with an exciting and important new tool, enabling us to more effectively manage our customer base, be more responsive to customer trends, more timely interpret our direct-mail campaigns, and otherwise become more sophisticated in communicating directly with our consumers. For example, the Company will be testing new loyalty programs during the second half of the year in certain markets with our rollout planned for next spring. It is these types of marketing initiatives that we expect will be more impactfully communicate our value proposition and message to our customers going forward.

Also with the CRM capability, Casual Male will make available to our store associates the customer profiles providing important data to make more effective the personalized selling efforts and shopping experience of our customers.

There are a number of other initiatives in progress to improve either operational efficiencies or merchandising capabilities, but those are some of the highlights.

This concludes my remarks about the second-quarter result, and now I will turn the call over to David.

Thank you, Dennis. I am glad to report that this is the seventh consecutive quarter that we have reported positive comps. With only a 2.5% comp sales increase, our earnings out reflect the bad increase, and this was due to a combination of the increase in top-line performance, our continued ability to manage our expenses, and most important, the improvement in gross margin over last year.

The margin improvement had several factors behind. First and foremost, we're starting to see the payback from our investment and implementation of our inventory management systems. Our improved allocation of products by style and size to our different profiles of stores has improved our in-stock positions and reduced unnecessary markdowns in the transferring of inventory between stores. We ended the spring season with several million dollars less of seasonal product, and the amount of clearance we had in the stores was significantly less than last year. As you may remember, last year we had a great deal of inventory dedicated to young men's urban apparel.

In addition to that factor, our new replenishment system demanded more core product, which in turn improved our in-stock position in key items. When the compare the gross margin performance between our core -- meaning our year-round, always in stock products -- and our fashion seasonal, which does require timely markdowns, the spread is about 1000 basis point higher. By rebalancing our purchasing strategy this past spring and also for this fall season, it will drive our margin performance. We expect that gross margin should increase by 100 basis points each quarter for the foreseeable future.

I believe one critical problem with Casual Male's traffic since the bankruptcy in 2001 has been the inability to manage the in-stock performance of its bread-and-butter items. Customers expect that we have their size in key items such as our pocket T-shirts, (indiscernible) polos, basic five pocket jeans. That expectation level becomes even more demanding at Casual Male where the customer is a destination shopper traveling over 20 minutes on average to our stores.

With that in mind, we have created a guaranteed in-stock program for our top seven items which represent close to 20% of our total sales. Our guarantee is that if we don't have your size and color in one of those items and can't get it to your home within five business days, it's free. That commitment adds up to several hundred SKUs in size and color per store.

This is a year-round program for Casual Male. We started the advertisement and promotion on August 10 with a direct-mail piece, e-mail and advertising on our website. So far I'm glad to say we've not given away a single item.

This capability to substantially increase customer satisfaction would never have been conceivable without the time and capital investment we committed to over the last two years starting to pay off as our in-stock position has increased to over 90%. And I don't believe there's another retailer in America that can live up to our guaranteed in-stock program.

We also envision gross margin improvement to continue next year with our strategic move to direct sourcing. Our private-label brands of George Foreman, Harbor Bay, and our upcoming launch of 626 Blue. We recently hired Roger Mayerson for the new position of Vice President of Global Sourcing and Product Development. Roger joins us from heading up sourcing at Kohl's.

We also established a relationship with Li & Fung, the largest agent for apparel which does over $6 billion a year in revenue. We recently went to the Far East and our first program started delivering in spring '06, and our savings have been averaging about 15%. That savings will go right to our bottom line.

In addition, we're starting to develop a private-label business for Rochester Clothing which has tremendous upside for our margin performance in that division. We also plan on sourcing those programs on a direct basis.

In terms of merchandising issues, one of our long-term objectives is to draw a younger customer into our stores. The average age of our customer is 39. One of our problems last year is that we tried to take an urban influence lifestyle for the chain and we ended up with a substantial amount of markdowns which have now been cleaned up. What we needed, in fact, was a younger lifestyle look that caters to a broader market, one influenced by Abercrombie & Fitch and American Eagle. So we developed a line called 626 Blues, which is comprised of premium washed denim, casual wovens and T-shirts. Our initial reads have been strong and we will introduce the line with a direct-mail piece at the end of the month.

We also had a successful launch with the Calvin Klein jean line. It's currently in 50 doors and will be expanding the brand over the next year.

Also, after Labor Day we're anticipating a strong performance from our NFL product from Reebok. We introduced the category in October of last year, midway through the football season. And the program was very successful and we have built the assortment for growth this year.

For Rochester, they have the exclusive launch for Tommy Bahama, which is being delivered to the stores this month and was the most requested brand from our customers. We believe this will be a great addition to their assortment.

As far as marketing is concerned, our comp increases over the last several quarters have not come from marketing initiatives. That, hopefully, will start to have an impact in the back half of this year. We're very excited about our August 24 52 page retail catalog that will be sent to 500,000 customers. It was designed and developed to drive traffic to our stores with the secondary goal of moving our store customers to shop the catalog or Internet.

Our key messages from the marketing department this fall are that we have selection, brands, comfort. Remember that I've often said the 65% of our customers select comfort as the most important reason for making a purchase at Casual Male.

In terms of store growth, we're focused on the potential for expansion with Rochester Big & Tall. We will be opening our first store since the acquisition in mid-September in Boca Raton, Florida. The second store will be opening in November in Manhasset, Long Island. We believe these are two strong markets to kick off our expansion. We're also diligently looking to secure a premium outlet location as soon as possible.

Next year we're looking to open around five new stores. Buxton, our consulting company in real estate development, will have an expense report available in a few weeks that will guide us to the best demographic locations based on our customer base. One interesting statistic that we now know is that the average drive time to a Rochester store is 37 minutes versus 20 minutes for Casual Male. We're very optimistic that we have several years of solid store growth ahead of us for Rochester.

On the other hand, our focus for Casual Male will be on relocating existing stores where the market has shifted from our current locations. We have about 10 stores per year whose term is coming up that we plan on relocating instead of renewing existing leases. Relocations have overall out-performed our comp sales trends, so we see this as a logical strategy going forward.

In conclusion, as I have been saying throughout the year, it's all about execution. Our good, better, best strategy of balancing our private labels with national brands is working. We believe our marketing initiatives will be more efficient and drive customers to all our channels, stores, catalog and Internet. And our goal is to move our quarterly comps from the 2% range to 4% range, along with increasing our gross margin by 200 basis points over a two-year period and by managing our overhead, the opportunity to operate at that 10% margin that we've been working for will be within our reach.

On that note, we will now open the phones to a Q&A session.

(OPERATOR INSTRUCTIONS) Margaret Whitfield, Ryan Beck.

Given that August is a turning point in terms of an indication of the fall season, I wonder if you have any preliminary comments on how business has been thus far in August.

August is off to a -- we're off to a good start. We don't really have the back-to-school push that the other specialty retailers have. In fact, we tend to get the consumer in after back-to-school is over when the guy is coming back to shop for himself.

But indications are good. Our knit top business is excellent. Our denim business is coming on strong. Again, as we start to get the 626 Blue product out there, it's certainly been responding very well. So we feel pretty good about this quarter.

I wondered if you could comment on the contribution to earnings of Rochester if at all in the quarter.

Very minimal in the second quarter.

I wonder -- David, you mentioned you're mailing to customers in August -- what's your forward marketing plans are for Casual Male, as well as Rochester, later in the fall?

We're really working on this concept of a retail catalog as opposed to a 12 page pamphlet that we've done in the past. It's really price driven. We're really starting to develop a bigger lifestyle presentation, bigger books that's really talking about the brands that we have. We haven't really gotten that word out that we have all these department store brands with Calvin Klein and Nautica and Polo, Perry Ellis and Reebok. So it's really gearing towards -- a lot more towards that.

And the other part is the efficiency of marketing. And Ron Ramseyer, who joined since the last several months, is really starting to hone in on giving more touches to our better customers and not spreading our marketing out so far to where it becomes an efficient. But we do have a lot of good pieces coming up in the next quarter.

The 626 Blue program, I take it you have tested it. And just could you give us the results? And when will it be available throughout the chain? I think you said at the end of the month.

Yes, I would say by Labor Day the floor set should be complete. It's coming in now. We have pieces that are on the floor. There are still pieces of the collection that are coming in daily. We have the premium denim in three washes. We have the casual pant that's in. The T-shirts are performing extremely well. And we have some wovens and knits and track jackets that are yet to come in.

But we have a specific lifestyle set up for it, we have a visual presentation. And again, we're very excited about it. It's just been something that we really haven't addressed in a meaningful way, and it really took a new merchandising group that came in that really understood this segment of the market to get us where we want be.

It sounds very good. Thanks again.

Scott Krasik, CL King.

I guess first, David, what do you think by the end of the year branded product will be as a percent of total sales?

It seems to be around 50-50 almost. What is happening is that as we were building the brand, at the same time the private-label program was really coming on strong with the guaranteed in-stock because that's all of our house brand. I would say a year ago we would have predicted brands was going to be a bigger percent, but now with the launch of 626 and the guaranteed in-stock program, it seems to be moving more towards an even balance between branded and private-label, which is good. We're quite comfortable in getting it balanced that way.

I know you have done some testing on the direct source product before you were going to commit to first quarter rollout. Does that mean all the testing went as planned and you're really set to go for this spring?

Pretty much. We've given a green light on a lot of categories. Some categories will move a little slower because we still don't have everything to the degree we wanted to. But a general statement would be tops are moving much quicker than bottoms. Bottoms is just a more difficult process. It requires perfection to get it right. But they're all scheduled to be moving over a time period. And we couldn't be more pleased to have Roger on board because he's very familiar with Li & Fung. Kohl's was their direct agent. He knows the players, and it's allowed us to accelerate that play.

So is there anything right now you could say that would delay some of those -- all of the categories from the first quarter of next year?

No. It will take us through 2006 to get fully everything that we want on the direct basis. But the programs do start with the first quarter. It is going to come in stages. We are not going to jeopardize our business with production problems.

Sure. That's smart. And then just timing for the Rochester private-label to introduce?

We're looking at some testing them in spring '06 also. We have a couple programs -- a couple programs of dress shirts and a few other things that we're working on right now. That will be more gradual than Casual Male because it's really a start up. They really don't have any type of private-label today.

Dennis, if I look back, the second quarter of 2004 I think SG&A just for the Casual Male stores was about 29 million. Do you have that number for just the Casual Male stores ex-Rochester for this quarter?

It was -- keep in mind that last year there was some overhead allocated to the other businesses that we had at the time. So you have to be careful in looking at that number. But this year that Casual Male only, which includes all of our corporate overhead incidentally, not allocated, approximates about 30 million for the quarter. And the proper comparison after stripping out the allocations, if you will, from the prior year was about 30.5 million a year ago.

30.5 million. And do you have -- so is 6 million or so a good run rate for Rochester SG&A just thinking about -- not to model it, but just in thinking about what the impact is?

Generally, that's right.

Thanks guys.

Gary Giblen, Brean Murray.

The Men's Wearhouse noted some slowdown in suits and dress clothing. And I know that's not a major part of your business, but are you experiencing the same thing?

No, I can't really say that. We had a very strong year last year, so it's stabilized a little bit. But we really haven't seen any dip in that category. But we had a big jump last year because we introduced suits into a lot of stores that didn't have it at all. But that business seems to be quite healthy. No concerns there.

Okay good. Looking at the results from BJ's and Wal-Mart from a couple of days ago, it looks like there's renewed pressures on that lower to mid income customer. And I know that's not necessarily the majority of your customer base, but there is some contingent of that in the Casual Male customer base. So is that something that could be a swing factor, that could --?

I hope not. Again, we had a difficult May because the weather, but if you take June, July and how we're trending, we have had nine weeks of mid-single digit comps. So we can only hope is not going to be (indiscernible) but we haven't seen anything obvious yet.

Okay. And then can you -- usually you provide some updates on the online sales and catalog sales with (indiscernible) metrics there. Can you give us some color on that, because that's a good growth area?

I did say that has increased 20% in the second quarter and six months so far. (multiple speakers) the consumer business.

Is that growth rate going to accelerate, or is it just coming off of an increasingly normal base so that's the kind of growth rate we're going to see on that, on the non-store business?

Yes. We would like to see it accelerate, but realistically we think it's going to be running at those levels.

Do you think -- is there room for further support at store level of the catalog, or is that pretty well -- I mean, it's very consistent and impressive to see that at the store level when you go to the stores, but --

We definitely think we have opportunity to further make penetration inroads into having our stores utilize our catalog capabilities to their benefit supplementing their merchandise assortments. (multiple speakers) progress so far, and we think we have ample opportunity for further improvements going forward.

Okay terrific. Okay, that's my questions. Thanks so much.

Mark Cooper, Wells Capital.

I didn't hear what the cash flow from operations was in the quarter.

(inaudible) cash flow from operations was up $5.5 million.

Up 5.5, so that makes it about 10 million, is that right?

That's cash from operating activities.

Let me rephrase that. On your cash flow statement cash from operating activities, last year it was 5.1 in the quarter. What was it this quarter?

This year 5.5.

In just the quarter. Thank you.

Quarter two.

Thank you.

Raffe Calide (ph), Roth Capital.

This is Raffe for Paula Kalandiak. Can you comment on store traffic for the quarter? Was it trending positively?

We definitely had the traffic flatten out. After quite a few quarters of -5 we got it to -2, and then this quarter we got it flattened out.

Can you also talk about the rollout of the loyalty program? It sounds like it's been pushed back.

The Rochester integration, yes, it was -- given our efforts on the store systems and marketing applications that we're installing it was getting a bit tight to at the same time before we get close to the important selling season for the fourth quarter to implement putting Casual Male's POS merchandising systems onto its platform at Rochester. So we decided because of that to push that off until January so as not interfere with its business.

That's probably a good idea. Can you also talk about additional color on the guaranteed in-stock program? How's that running? I know it's only been about a week.

Like I say, it's remarkable, but we haven't given one free item away, which means our backup system is working quite well. The backup system is obviously -- if it's not available at the store, we have to pull it out of our warehouse and get it to the customer in five days. So we're batting 1000 right now, which is great. We haven't had all that many shipments to our customers. But we have seen significant increases in our sell-through. Again, we're not going to share a lot of information on that. We think we have a competitive advantage there. And we will just kind of give general statements there. We're very excited about it. The customers love it. It's doing well.

Great, thank you.

Greg Montana (ph), Brook Path Capital (ph).

I have got a couple of follow-up, and of the call questions. First, I would like to say I think it's just phenomenal the amount of tech change that is being implemented at that Company in such a short period time. I think you guys are going to be the most technologically savvy company retailer out there beginning of next year.

But if you look at the -- I think you have said before you have about eight new customers a month that come into each store, which the change that has been taking place through this year, I wonder if you can tell us anecdotally what these customers are doing or saying in terms of their frequency since they've visited, the check, the basket, that kind of thing to start.

And the other question was if you have any comments if there's any impact at all with the Reebok acquisition.

First, we don't think the Reebok acquisition really will have any impact on us. Adidas isn't really in that business. I think they're going to let Reebok do what they -- the way they want to run the business. I'm not overly concerned about that.

Thank you for that complement on technology, but I think in the business we're in we didn't have a choice. We are so SKU driven, so diversified in our stores that if we didn't have technology I don't think we ever would have gotten to where we're going in the future.

And the third thing was anecdotally what we see is the customers are coming in and they're surprised. They're surprised to see a few things. They're surprised to see brands that they've lost over the years. As they grew in size they lost these brands, and they're happy to see that now again they could get back and buy Calvin Klein jeans and buy Reebok and all these brands.

In terms of the basket, we're seeing a little changes in the last quarter because we were very promotional last year. So there are more items per guest going out the door, but at a lower cost per item. So there's little changes going on.

But overall the most important thing we have to do is deliver the product when they come in. 80% of our customers have predetermined what they are coming in for before they even make a trip to our stores (inaudible). So they know what they're looking for, and it's a big disappointment if we don't have it for them. So having these basics in stock has been a real win for us.

That's a typical guy that's going to buy rather than just shop.

That's what we are.

I guess it all comes down to the metric of traffic. Going from a negative comp there to flat probably tells it that as customers have been coming in and seeing the changes the erosion has been stemmed and now we need to see a lift.

While I am on that topic, going into the fall I wonder if you can quantify how much money was left on the table from the football season and the implementation of the Reebok product halfway through.

That's kind of an unknown because we have nothing to anniversary until October. But we do know that the bulk of the NFL sales come early. And I guess the best way to put it is week one every team is undefeated. By week seven or eight you can see what happens when your team starts losing. You're not going to be buying as much product. It's really critical that you're out there at the launch of the season, and we will be ready to go.

Great.

At this time I show no further questions.

Thank you all for joining us on this call, and we look forward to continued results in the next few quarters. Thank you very much.

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