Destination XL Group Inc (DXLG) 2005 Q3 法說會逐字稿

Good day, ladies and gentlemen and welcome to Casual Male's third-quarter fiscal 2005 earnings conference call. At this time, all participants are in a listen-only mode. Later, there will be a question-and-answer session and instructions will follow at that time. (OPERATOR INSTRUCTIONS). I would now like to introduce your host for today's conference, Mr. Jeff Unger, Investor Relations. Sir, you may begin your conference.

Good morning. I would like to read our forward-looking statements and then you will hear comments from both Dennis Hernreich, our Chief Operating Officer and Chief Financial Officer and David Levin, our President and CEO.

Forward-looking statements contained in this and other written and oral reports are made based upon known events and circumstances at the time of release and as such, are subject in the future to unforeseen uncertainties and risks. All statements regarding future performance, earnings projections, events or developments are forward-looking statements. It is possible the Company's future performance and earnings projection may differ materially from current expectations depending upon economic conditions within both this 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 made 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, correct (ph) and 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. Now Dennis -- I would like to introduce Dennis Hernreich, Chief Financial Officer and Chief Operating Officer.

Thank you, Jeff and good morning. Thank you, everyone for joining us on this morning's call to discuss Casual Male Retail Group's earnings and performance for the third quarter of this 2005. On this morning's call, I will highlight for you what I believe to be the important components of the results for the quarter in comparison to a year ago. A highlight for the quarter though is that on a continuing basis, CMRG's EBITDA for the third quarter improved this year from last year by over $2.5 million on a sales increase of 1.9 million, after excluding certain one time SG&A adjustments. I will explain the details of this improvement on this call.

One very important fact to note is that the results for this year's third quarter and nine months are pure as to the Company's only business segment, that being men's specialty apparel for the Big & Tall market. In comparison to last year, CMRG still had the Ecko outlet business until 2004, July 2004, which generated last year sales of 12.6 million and an operating loss from continued operations of 660,000, all contained within the results of operations for the nine months ended October 30, 2004.

In addition, CMRG sold its Levi's outlet business in last year's fourth quarter and therefore, last year's third quarter and nine months results for this business are reflected as discontinued operations, which was income from discontinued operations of 2.1 million and 900,000 for last year's third quarter and nine months ended October 30, 2004 respectively.

On an overall basis, after-tax, this morning's release report for the third quarter of $0.05 per share loss in comparisons to last year's $0.03 per share loss and for the nine months, an $0.08 per share loss compared to last year's $0.18 per share loss. However, after considering the income from discontinued operations associated with the divested Levi's Dockers stores, one time SGA adjustments and the divested Ecko business, the more appropriate and representative comparison of CMRG's ongoing business is that third quarter was a $0.06 per share loss this year in comparison to a $0.09 per share loss last year and for the nine months, a $0.06 per share loss this year and a $0.15 share loss last year. Again, all after-tax numbers.

Let's now go over the components of CMRG's performance. The Company sales increased approximately 25% overall for the third quarter and 18% for the nine months so far this year. Much of this increase is associated with the acquisition of the Rochester clothing business done on October 29, 2004. However, Casual Male sales for each of the periods this year have increased approximately 3%. As previously announced, CMRG's comparative sales from a year ago increased 3.7% for the third quarter and 3.1% for the nine months this year, which includes a 20% increase in its direct to consumer business.

For purposes of reporting comparative store sales, the Company includes Rochester's business on the basis that it was acquired at the beginning of last year. At approximately 22% of total year sales, the third quarter represents CMRG's lowest sales quarter for the year. During the third quarter, CMRG opened one new store and closed two other stores. At the end of the quarter, store count stood at 530 stores with 1,870,000 square feet of leased space.

For the year so far, CMRG has opened nine new stores and closed six others. In addition, for the year, 40 stores have been renovated and two stores have been relocated. For the balance of the year, CMRG intends to open one new store and close 10 others with an ending of the year store count of 521 stores. The stores to be closed are generally lesser productive stores located in higher density markets where Casual Male has other stores within those markets, where the impact of closing these stores is expected to improve the productivity of the go forward stores.

CMRG's overall third-quarter gross margins have risen by 70 basis points to 41.2% from 40.5% from a year ago. So far for the nine months this year, jumped 150 basis points to 42.0% this year from the 40.5% last year. Only focusing on Casual Male's merchandise margin without the burden of occupancy costs, the margin's improvements have been 110 basis points in the third quarter and 150 basis points for the nine months.

The gross margin improvement largely stems from the Company's systemically enhanced inventory management methods, a better controlling core versus fashion inventories and better size and stock positions. Somewhat higher occupancy costs resulted in the 40 basis drop in gross margins for the third quarter but little effect for the nine months.

With respect to Casual Male's current inventory position, although its inventory has increased just over 4% from year ago levels, its seasonally fashion-oriented inventories dropped by several million dollars or 15% from year ago levels and therefore reducing Casual Male's markdown risk while at the same time its core business has been vitalized with robust inventory levels supporting its in stock size commitment and raising its initial markup levels.

Going into the holiday season, Casual Male's in-stock positions at the size level of its core assortments are well into its targeted mid 90% compared to under 80% a year ago. We expect that Casual Male's improved gross margins will continue into the fourth quarter.

CMRG's SG&A expense-base, although increased in total dollars, was more productive as a percentage of sales going to 38.6% in the third quarter from 39.2% last year and 37.7% for the first nine months of the year compared to 38.6% last year. On an average store basis, Casual Male's, excluding Rochester this year, SG&A on average store basis decreased by over 2% during the third quarter and essentially flat for the first nine months of the year.

In computing Casual Male's SG&A base largely flat during each of the first three quarters of the year has been adjusted for certain one time SG&A reductions in the amount of 1.7 million from last year's third quarter related to accrued liability adjustments and this year in the amount of $700,000 for the benefit of the Visa/MasterCard credit card settlement for past overcharges.

CMRG's quarterly SG&A expenses, inclusive of operating costs associated with Rochester, have averaged $36.6 million this year on a quarterly basis and it was $37.2 million, $36.6 million and $36.1 million for the first, second and third quarters respectively. As reflected in last year's fourth quarter, CMRG typically incurs an incremental 10% increase in SG&A related to the almost 40% lift in fourth-quarter sales.

Therefore, earnings before interest, taxes, depreciation and amortization overall for the Company, known as EBITDA, increased in the third quarter from a year ago to $2.4 million this year from $1 million last year's third quarter. Further, after considering these one time SG&A reductions in both years' third quarters, the improvement is even more substantial. For the nine months leading into the important and very profitable fourth quarter, EBITDA has increased by 155% from $4.9 million last year to $12.6 million this year. After considering depreciation and amortization, which edged upward by 1.9 million for the nine months from a year ago, CMRG's operating income went up to 3.5 million compared to an operating loss of 2.3 million last year.

The Company's capital expenditures for the nine months this year are approximated 10.6 million compared to 15.4 million a year ago. CMRG's total debt has decreased by $14 million from year ago levels. The Company's liquidity available under its revolving line of credit is at a very healthy level approaching $40 million and is expected to end the year at approximately $60 million. Also, although fully disclosed in our public documents, CMRG does have a tax loss carryforward of approximately $100 million, which will add significant Company cash flow over the next several periods.

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 catalog and Web operations, distributional logistics and most corporate functions. We expect operating income performance to over double from levels experienced at the time of the acquisition. Many of the cost synergies expected from the Rochester acquisition have been factored in throughout the year and will be more impactful to CMRG earnings performance next year when CMRG will benefit from these synergies on a full twelve months basis.

The integration effort will be fully complete by the end of the year waiting until after the important fourth-quarter selling season to convert our POS and merchandising systems. At Casual Male, we have completed the rollout of its new store systems and expect to complete the installation of high-speed DSL to most stores in the fourth quarter. These new store systems adds a number of capabilities to CMRG, a few of which include greater transaction speeds, all retail pricing now systemically supported eliminating the need for any store pricing discretion and providing critical customer profiling information to our sales associates to improve customer servicing and finally eliminating many tedious tasks giving our store associates more focus towards merchandising and selling activities are just some of the few benefits of these new systems.

In addition at the same time, implementation of Casual Male's CRM application has been completed arming our marketing team with an exciting and important new tool enabling us to more effectively manage our customer database, 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 fourth quarter of the year in certain markets with rollouts planned for next spring. It is these types of marketing initiatives that we expect will be more impact as we communicate our value proposition and message to our customers.

We are also busy setting up our supply chain of logistics infrastructure to support our drive towards direct sourcing, which is expected to significantly reduce supply chain of product costs providing CMRG with important gross margin enhancements over the next few years. 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 third quarter results and now I will turn the call over to David.

Thank you, Dennis. Casual Male Retail Group's 3.7 comparable sales for the third quarter represents eight consecutive quarters of positive comps. This is also our third consecutive quarter of delivering a gross margin improvement of 100 basis points or more. We anticipate the improvement in gross margin this year will continue at this pace for the next several quarters. This is a result of the effect of our inventory management system's performance. We came into the third quarter with several million dollars left of spring summer carryover, which positively impacted our clearance markdowns.

In addition, our ability to improve our in-stock positions on core product has improved our margin. Core product, which is all private label, carries a higher net margin of 1000 basis points higher than our seasonal fashion goods. We also are forecasting that we will end the fall season with considerably less carryover than last year. Our commitment and ability to improve our stock position on core product led to our launch in August of our guaranteed in-stock program on the top seven items in the chain, which represents almost 20% of our total sales.

We now guarantee our customers that if we don't have their size in stock or can't deliver it to their home in five business days, it is free. And this includes the George Foreman waist relaxer pant, which we now guarantee in 49 sizes. The results for the quarter were outstanding. We sold 369,000 units, which was a 27% increase over last year. And less than 1% of the units had to be fulfilled through our direct delivery and more incredible than that we only gave away seven items. None of this would have been possible had we not implemented state-of-the-art replenishment system.

The anticipated gross margin improvement over the next several quarters will come not only from a better inventory management system but also from our strategic initiative to directly source our private label brands, which are Harbor Bay, George Foreman, our very successful new young men's brand called 626 Blue, which we introduced this August and for next fall, Synergy, for our more contemporary customer. We will be receiving direct shipments starting in spring '06 and our savings have ranged between 10 and 15%.

In addition, we're developing a private label program for our Rochester division that also will be sourced direct. We believe there is a lot of upside for gross margin improvement from Rochester Big & Tall in the future.

Also of note in this quarter, we continue to have strong increases as a multichanneled retailer. Internet and catalog sales in both Casual Male and Rochester increased over 20%. We are also very pleased with the launch of Casual Male on Sears.com in the US. This has been incremental to our sales without any additional cost to our overhead to operate the business. In this quarter, we also launched Sears.com in Canada and in December we will launch on Sears Canada's billion dollar catalog division.

Moving on to stores, we are focused on the expansion of Rochester. In September, we opened in Boca Raton, Florida and last Friday in Manhasset, Long Island. With Rochester stores averaging $400 a foot compared to Casual Male at less than $200 a foot and with Rochester stores averaging 2.3 million in sales versus Casual Male at 650,000 and the fact that there are only 25 stores today, our growth clearly is to open more stores in that division.

In addition, we will be opening next fall in Woodbury Commons, the premium center in the United States, which will be Rochester's first store in an outlet mall.

Going forward, we look to open five to six new stores per year for the next several years. Our strategy for the Casual Male is to relocate about 30 stores over the next several years as their leases come to term. These are stores in strong markets where the retail landscape has changed over the years. We have had success in the relocations we have done so far. In addition, we will most likely close 5 to 10 stores a year where the sales per square foot have been somewhat anemic and even though they do kickoff some cash, we need to move those stores.

We anticipate a good portion of these sales will transfer to another location and improve our overall sales per square foot performance. This year, Casual Male stores will net out with a drop of eight stores at the end of the fiscal year. Also, currently, we have four stores that are still closed from hurricane damage. One will open next week and the other three will open over the next several months.

Finally, I would like to give an update on our plan to reposition the brand from Casual Male Big & Tall to Casual Male XL. We have been working on this project for over a year. Through surveys and focus groups, Big & Tall is perceived negatively by current and potential customers, especially the younger customer. In fact, almost half of our customers today call us the Big & Tall. In six test markets; San Antonio, Phoenix, Grand Rapids, Michigan, Columbus, Ohio, Indianapolis and Rochester, New York, we have changed the exterior to read Casual Male XL and have visually changed the interior presentation so that it highlights our various merchandising lifestyles and brands.

The stores were complete with the changes by October 15th and we're monitoring their metrics daily; traffic, transactions average ticket, and conversion. In addition, we are getting weekly comments back from each stores' customers about these changes. It is too early for us to share the performance of the test markets but we have no indicators out there at this time that will change our plans to implement the strategy on a chain level. Right now, our schedule would be to be completed by the end of May and if there are any snafus along the way, we will keep you up-to-date. For those of you who are interested in seeing the changes we have made, you can view the pictures of the XL stores at CasualMale.com/investor and it will be right up front. And on that note, we will now open the call to any questions.

(OPERATOR INSTRUCTIONS). Margaret Whitfield, Ryan Beck.

Good morning, everyone. I'm wondering if you still believe you can improve gross margins in the Q4 by the 100 basis points that has been the target? That's the first question.

We're very confident on that one.

Okay. And I'm wondering -- I know you don't give guidance, but if you could comment on your comfort level with the current Q4 consensus, which I think is $0.22 I believe.

We have no comment on that.

Okay. Any comment on how sales are trending thus far in November?

They seem to be going with the daily weather right now. First week started out a little sluggish. I think we heard a lot about that all over the country. This week, it is picking up again. So we know last weekend in most of our major markets there was a 20 degree variance warmer in those stores than last year. Again, this week seems to be neutralizing. But I think that really gets back to why we report quarterly. If we reported monthly comps, I think people would be very concerned about the swings we get. But within the quarter, the weather neutralizes it. Outside of the weather, we're very comfortable that we would be continuing on the same pace we have for the last several quarters.

And will you be reporting comps right after the holiday or waiting until the full quarter is in?

We anticipate reporting our comps as we normally so, which would be the first Thursday after the quarter.

Okay. On Rochester, it sounds like things are going well there. Could you comment on how the comps have been trending and give us the metrics for the comps, average ticket and so forth, for Casual Male and Rochester?

Well Rochester's average transaction is over $400 versus Casual Male at $75. We don't have the historical from last year to see how those metrics are against last year. Their comps have been outperforming Casual Male's but they don't move the needle a whole lot since their store sales are 20% of the total Company sales. But they have been performing consistently quite well. We are making their plan and again very good performance coming out of their stores.

You don't have any information on Casual Male the number of transaction units sold and so forth?

Our traffic has flattened out clearly. I know we used to say we had problems with the traffic. The traffic has flattened out. Our average transaction at the register is up. Our units per transaction is slightly down and our average item out the door is about -- again, it is up slightly.

And finally on Rochester, it sounds like things will come together more next year than this year for accretion. Could you comment on what the accretion might be this year and what it might be in '06?

Well, as we discussed previously when we acquired the business, the business was doing about a $3 million EBITDA on an annual basis. As I said, we expect to more than double that this year and would expect continued improvements into next year on about a similar type dollar level.

Okay. And outlets. How many outlets do you think that Rochester could open at? How many outlet malls?

We are really going to stay in the premium centers. So our goal is -- we got our number one choice getting Woodbury and then we need one on the West Coast and then probably one in the Midwest. We don't see a strategic plan to open many Rochester outlets at this point in time. We need more what we call anchor stores, full price stores.

Scott Krasik.

What were Rochester sales in the quarter?

Rochester sales, total sales in the quarter approximated -- one sec -- about $17 million in the third quarter.

And then on the last call you said that the SG&A at Rochester would be running about 6.5 million. Is that generally --?

That's in the neighborhood. Correct.

And we can pencil that in for next year as well or it should come down a little bit?

No comment on that, Scott. We look at the business from a reporting point of view. It's really the Big & Tall market segment that of course we are catering to. Rochester obviously caters to a certain portion of the market, Casual Male to another portion of the market. But we really look at it as one segment and don't intend on reporting segments.

And you hinted on it a little bit in your analyst day but could you breakdown the rollout of direct sourcing for next year, what you are going to have in the stores in the spring and then for the fall and holiday? Will it be a complete rollout of all private label stuff by holiday?

No. It's a two to three-year process before we would get everything rolling. We are starting with the high-volume, very predictable core products, which is easier. Then, as we transition down the road, we will do more of the seasonal onetime buys. Really we are attacking the big guns first. The receipts start coming in January, February. But for example, if we own 100,000 pique polos, we own those hundred thousand at our previous price and we will be receiving let's just say 10,000 a month or whatever of the new ones. So the margin improvement doesn't happen day one. It's a building process over time. But we are not giving numbers as to how many dollars are going direct but it certainly is an aggressive plan that we have for the next few years.

Did you say what you thought private label at Rochester could become as a percentage of sales?

No. We have to work our way up and it will seek its level. But they will be really starting to see their product for the fall season, fall '06.

And that is both Rochester in 1906 and the more Italian --?

Yes. Both those -- both those brands will start to show on the floor around August.

Dan Visker (ph).

My question has been answered. Thank you.

Paula Kalandiak.

A couple of questions. First of all, the 626 Blue line you have described as being akin to maybe an Abercrombie & Fitch line. Is there anything you could compare the Synergy line to so we could visualize it better?

Yes. I would say it would be similar to like a Perry Ellis Portfolio, a Calvin Klein sportswear line, more contemporary, microfibers, a lot of linens and little classier looks versus the more traditional Harbor Bay, which would be micro suedes and flannels, basic cotton. It is a good business for us that we think is the one missing element in our lifestyle segmentation. We don't have anything under our own brand for contemporary.

At your analyst day when you went through, I think there were nine different customer segmentations that you had, there were about four that accounted for the lion's share. Is this contemporary customer one of those larger groups?

I wouldn't say it is one of the largest groups. Traditional is such a big chunk of it. But then, yes, contemporary would fall behind that and then 626. 626, we are planning a significant increase in our penetration for next back to school. We think we can start to become a third-quarter business that could be profitable if we start getting into that back-to-school zone. We continue to have very strong sell throughs on the 626 product that has been coming in in the fourth quarter also and it will build in spring and be even more significant next fall. And Synergy will start coming in next fall and replacing some of the brands that we have had before. We could put it out there under our own label of course higher margins and better value.

But it wouldn't replace Perry Ellis for Calvin Klein, would it?

It wouldn't replace it but it would -- actually it would replace some of the George Foreman signature collection business that we're doing.

And then with regard to the Casual Male XL test, you said it was too early to give an indication at this point and yet if you move forward with it you would probably roll it out by May. Under normal circumstances we probably wouldn't hear from you guys again until the end of March. Can we get some kind of intra-quarter update on how the test is progressing or do we have to wait until you report fourth quarter?

Well throughout the fourth quarter and early on, we do have some investor days out there where we tend to give everybody more of an update and those are webcast. So I anticipate there will be comments made prior to our next earnings call.

And then do you have any special gift items this year for holiday that you didn't have last year?

Gift items? Pretty much the same assortments that we have had in the past. One of the areas that we have made a good concentrated effort on -- we used to have a leased area for fragrances, men's fragrances, and now we have taken that on ourselves and really upgraded the brands with Calvin Klein and Burberry, Kenneth Cole. So we anticipate we will get a nice little bump in fourth quarter on the fact that we're in the fragrance business now on our own.

And then finally, can you talk about your marketing plans for the fourth quarter as they compare to last year's plans?

They are a little different this year. We have cut back two events and we've replaced it with a three-day sale. We did a one day sale this year in the third quarter. It was very successful. So in December, we are going to be running a three day sale. Outside of that, things are pretty much the same. We have a very strong campaign, week three in December with the $20 No Strings Attached coupon where there is no minimum spend. It is a gift to our best customers out there. Again, we did that in some markets in the spring and that was very successful. We have lined up pretty good. It is a change from what we have done in the past but we think we have got a stronger direct marketing plan this quarter than we did a year ago.

Is the three day sale being promoted with direct marketing or how are you getting the word out?

We have been very successful by using voicemail plus our store managers actually call the stores plus we will have a direct-mail postcard to customers who don't get the voicemail. Again, we have had a run at this in the third quarter and it was very successful. We are really counting on this to be pretty strong.

Thanks and good luck.

Gary Giblen.

Hi. It's been a whole two days since we've seen each other. Can you roughly quantify the forgone sales that occurred from having 626 sellout successfully and not having the inventory for the fall to support the sales levels?

Do what? I'm sorry.

The lost opportunity.

Lost opportunity on 626.

It's pretty hard for us to quantify lost sales on a new program. What we do is we look at the weekly sell throughs and then we kind of forecast out how many we could have sold, deeper penetration in the bottoms. That was probably our biggest miss was in the denim side. Our position on tops was pretty good but to quantify it, the lost sales, I couldn't help you with that right now.

Okay. Was it a lot or a little?

It's not a huge amount because that's a developing piece of our business. But again, we are coming off a small base and we plan on doubling our position for next fall.

It's an exciting development. That's good. When you say that you could be complete in implementing XL by May '06 if you go ahead with that decision, would that be implemented in all the details in terms of bags and credit card, replacing credit cards and all that? Would it just be the basic name and banner change in the stores?

That's talking about 100% conversion.

Of all the details. Wow.

We have got it geared up to implement. We just haven't pulled the trigger yet on when we do it. Actually the most challenging process is getting the signs changed. We have 400 full price stores. We have 400 landlords and we have to get approvals from each landlord for sign changes. That is the part that takes the longest.

That's the part that's not complete yet? In other words, you would have to get those approvals, some of them still?

Yes. But we anticipate we will make -- with the time frame we need to get those approvals, the stores still will all be done by the end of May.

Okay. Great. And then when would you expect to make a decision about whether to go more toward the EDLP continuum or some pricing philosophy adjustment?

We haven't talked about any changes on that.

Well in the slides it says that you are thinking about that, that that's out there to consider.

Say it again. Maybe I didn't understand the question.

I thought that there was a thought about going to more everyday prices, let's say, instead of -- less promotion and more everyday pricing. So is that something that is just a gradual movement or it doesn't sound like it's a --

Our strategy is to get more of a branding identity to become less promotional certainly. But that again is going to be a process that won't take place until -- the soonest would be probably fall '06.

That's helpful. Okay. That's what I've got. Thanks so much.

Stewart Fulberg (ph), C Unterberg (ph).

Hello, guys. A quick question for you. Did you guys quantify any of the impacts from the hurricane or was it de minimis that you didn't quantify it?

Yes, we did not quantify it because it was relatively de minimis. I mean the biggest impact to us is the fact that we have had four stores offline. Other than that, the damage with our insurance coverages we have in place, the impact on us is very small.

And is that insurance coverage going to be for damage plus business interruption?

That's correct, Stewart.

And you will book that when you receive the funds?

Yes, or at least when we quantify the overall claim, which of course is still ongoing. And so we are several, probably several -- the way this works, particularly with business interruption, as I'm sure you know, could take several quarters to get resolved.

How many stores do you have in Florida? Wilma wasn't so much a damage issue as much as you had people who didn't have lights and couldn't get gasoline. Can you quantify how many stores you had in Florida and if you noticed any business that might have been off there?

Obviously, there was that week, week and a half time period when we had probably six to eight stores that were most impacted by it where electricity -- we couldn't open the store for several days in one instance. Customer traffic was disturbed in other instances. But the business quickly bounced back though when everything got a little bit back more to normal. So over the quarter period, I think the impact was very de minimis.

Thanks, guys.

I am showing no further questions at this time.

Well thank you all for joining us and again, we are very excited about our new rollout and we'll do our best to keep you informed on an as-need basis. Thank you all for joining us today. Talk to you later.

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