Destination XL Group Inc (DXLG) 2005 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Casual Male fiscal year-end 2005 and fourth quarter 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 hand your conference over to your host, Mr. Jeff Unger. Mr. Unger, you may begin.

Jeff?

Mr. Levin, his line seems to be disconnected. He got disconnected somehow.

Okay, why don't we continue with the call, and Jeff will give us his statement towards the end of the call instead of the beginning of the call.

Okay.

So this is Dennis Hernreich, the Chief Operating Officer and Chief Financial Officer at Casual Male Retail Group, Inc. Good morning and welcome to our Company's earnings call for the fourth quarter and the year of 2005.

We have a lot to go over, as the Company had a very exciting fourth quarter that not only demonstrated the depth of the Company's turnaround, but soon after the quarter end we closed on a financing transaction that solidified the health of its balance sheet.

Some of the key highlights of CMRG's performance in 2005 are as follows. Ninth consecutive quarter of positive comparable sales; 4.6% increase in quarter four -- for the year, rather, for 2005, closing the year with a 7.9% fourth-quarter comp.

Gross margin increase of 200 basis points for the year, and 340 basis points for the fourth quarter. Operating margin increase of 200 basis points for the year to 4.2%. Operating income increased by 37% in the fourth quarter, and a very large increase of 120% for the year.

[Depth of] profitability improvements supporting a partial reversal of the Company's valuation allowance reserve against deferred tax assets. Finally, reduced year-end debt by 30%; added $12 million of cash; and expected 2006 interest reduced by 50% with the sale leaseback transaction.

Needless to say, we're very pleased about the accomplishments of 2005 and enthusiastic about the prospects for 2006.

Subsequent to the end of the year, the Company entered into a sale-leaseback transaction with a Phoenix Arizona based company, Spirit Finance, whereby, in the first instance, Spirit acquired the Company's own corporate headquarters and sole distribution center, a 755,000 square feet facility in Canton, Massachusetts, for $57 million; and we lease back the facility for an initial annual rent of $4.6 million per annum.

As a result of this transaction, the Company reduced long-term debt by $44 million and added $12 million to cash. Realized a gain on sale after transaction costs of approximately $29 million to be amortized over the life of the lease. We will incur no tax payments associated with the gain. Entered into a 20-year lease on the building facility with rents of $4.6 million during the initial five-year term of lease, with rents escalating to no greater than 7% every five years.

The transaction is accretive to earnings in 2006 by approximately $0.02 per share after-tax, while cash flow after interest savings reduced by only approximately $500,000 per year. Lastly, the sale-leaseback transaction has delevered the balance sheet to the point where the only sizable debt remaining is the Company's $95 million in convertible notes with interest at 5% per annum and no principal payment requirements. The Company's free cash flow can be utilized for further convertible note retirements or growth activities.

Related to this transaction and incurred in 2005 was a net charge of $1 million with respect to early debt retirements. The Company in the first instance prepaid its then existing mortgage of approximately $9 million and incurred a prepayment penalty of $1.2 million. In the second, the Company purchased $5.3 million of its convertible notes on the open market and incurred a gain of approximately net $200,000.

This approximate $1 million net charge is reflected in other expense, classified below operating income, and represents an approximate $0.02 per share after-tax amount.

The other unusual item on the Company's results of operations for the year that requires separate consideration concerns the treatment of taxes. As you know, the Company went into 2005 with over $100 million of net tax operating loss carryforwards, which along with other tax attributes represents net deferred tax assets of approximately $43 million.

Due to the Company's previous history of showing losses, the net tax-deferred assets were not reflected on the Company's balance sheet, as they had been fully reserved for. After the end of 2005 and with the Company's significantly improved operating results, the Company reversed a portion of the valuation allowance against its net tax-deferred assets, and benefited by approximately $2.8 million or $0.08 per share, and will begin reporting taxes like a normal company starting in quarter one of 2006.

Regardless of the accounting for income taxes, after the sale-leaseback transaction, the Company has over $70 million of tax loss carryforwards to offset any future tax liabilities.

As CMRG's profitability improves, the balance of the reserved deferred tax assets of approximately $40 million will also be reversed. In 2006 and until much of the tax loss carryforwards are utilized, the Company will be using an effective tax rate starting in quarter one of approximately 39.5%, which is then expected to drop to approximately 37.5%.

After excluding these special items, the Company showed improvement in earnings to $0.21 per share after-tax for the fourth quarter, and $0.16 per share for the year, again, both after taxes.

The Company's operating income increased 37% to $14.1 million in the fourth quarter and by almost 120% for the year to $17.6 million. There are a number of contributing factors to this performance.

CMRG's, as I said before, comparable sales increased 7.9% in quarter four and were up 4.6% for 2005 as a year. A very significant change in Casual Male's traffic patterns into its stores improving during the year, with a strong increase in traffic during the fourth quarter.

A big part of CMRG's sales increase during the year came from its direct business at Casual Male which increased 21%. Catalog circulation in 2005 was increased almost 50%, and we're planning a further increase in circulation by another 50% in 2006.

The increased circulation is having an impact in all channels, particularly in our website, where the number of visits to the sites and sales demand both increased 30% during 2005, and these trends are accelerating in early 2006.

In total, CMRG's sales increased 20% for the year; and of course, this was the first full year in which CMRG has owned Rochester, and that added 15% to the Company's sales base during 2005.

Gross margin improvement of 200 basis points during 2005, and 340 basis point increase in fourth quarter, also had a big impact on the Company's improved profitability. This dramatic increase was partially driven by the Company's inventory management capabilities, made possible by its new systems infrastructure, and a lessening of promotional pricing to drive traffic.

To illustrate the impact upon gross margin, Casual Male's markdown rate in the fourth quarter dropped by almost 500 basis points. Also, CMRG's SG&A for 2005 increased just under 15% for the year. Much of this increase resulted from owning Rochester for the full year. As a percentage of sales, SG&A dropped by 30 basis points during the year, and ordinarily we would expect greater leverage after comparable sales increase of 4.6%.

In quarter four, relative to quarter one through quarter three levels, the incremental SG&A approximated 15% of the incremental sales also in the fourth quarter. Ordinarily, we would expect the incremental SG&A rate to approximate 10% of incremental sales. But in addition in quarter four was an investment made in catalog circulation costs for both Casual Male and Rochester.

The cumulative effect of these performance metrics was a doubling, in effect, of CMRG's operating margins for the year. Just as important, we have established a level of success and momentum to build upon this in 2006.

Continued gross margin improvements, together with SG&A percentage of sales leveraging with the growing top line, should render 2005's operating margin level not only sustainable, but a level on which we should be able to continue to grow margins towards our ultimate goal of 10% operating margin.

CMRG's store count at the end of the quarter was 518 stores, which included 481 Casual Male stores, 13 Casual Male stores within Sears Canada, and 24 Rochester stores. At the end of the quarter, the total square footage approximated 1,840,000 square feet. During the quarter CMRG closed 10 Casual Male stores, opened one Rochester store, relocated one Casual Male store, and finally renovated one other Casual Male store.

For 2005, total store activity was the opening of nine Casual Male stores and two Rochester stores; closing of 20 Casual Male stores; relocation of two Casual Male stores; and finally, the renovation of 40 Casual Male stores.

During 2005, the Company generated $22.3 million in cash flow, used approximately $5.5 million of that in working capital, and used another $15.6 million in capital expenditures, resulting in free cash flow of approximately $1.1 million, an increase of approximately $10 million in free cash flow from 2004.

With increasing profitability, together with the fact that much of CMRG's infrastructure rebuild and store remodeling programs is primarily completed, capital expenditure levels will subside to a 10 to $12 million level, except for in 2006 when we currently are rebranding Casual Male stores to the XL logo. More on that in a minute. That will add approximately $8 million of capital expenditures in 2006.

A couple of comments about the Company's balance sheet. Inventories show an increase of approximately 15% from the prior year, not unlike the prior quarters during 2005, increasing due to our commitment to core inventory. And with a reduction in fashion inventory, the mix of our inventory is much fresher with less clearance than a year ago.

CMRG's balance sheet at the end of the year should be adjusted for the sale-leaseback transaction consummated subsequent to year-end. Essentially, the balance sheet disclosed in this morning's press release changes by simply the reduction of $43 million of debt and the addition of $13 million in cash. A pro forma balance sheet will be available in the Company's 10-K filing, which we plan to file tomorrow morning, on Friday.

Those are my comments about the Company's performance in 2005, and I will turn the call over now to our Chief Executive Officer and President, David Levin.

Thank you, Dennis. The strong fourth-quarter results that Dennis reviewed were the best numbers we have delivered since acquiring the Company in 2002. The combination of a 7.9 comp sales increased and an increase of 340 basis points in gross margin has been a direct result of the initiatives we put in place over the last several quarters.

The comp sales performance was driven by the improvement in the content of the private-label programs of Harbor Bay, George Foreman Comfort Zone, and 626 Blue. Our strongest categories were knits and sweaters.

In addition, our in-stock position on our core product improved dramatically over last year's holiday season. Our guaranteed in stock program, which is now a year-round marketing strategy, guarantees that if we don't have the customer's size in stock, or cannot deliver it to their residence in five business days, we will give it to them for free. I don't believe any retailer has ever delivered a commitment like this.

We're guaranteeing our highest SKU item, the George Foreman Waist-Relaxer pants, which comes in 49 sizes and in three colors. The in-stock program consists of our top seven items, representing close to 20% of our total sales.

In the fall season, we ended up with a 25% increase in unit sales in these items. We sold close to 0.5 million units, and only 1% of our customers required a direct shipment. Even more amazing is the fact that we only gave away 13 pieces in about five months of selling; and those were due to shipping errors. Our capital investment in the inventory management systems is finally starting to pay off.

Our gross margin improvement of 340 basis points was the result of several initiatives. The in-stock program certainly was a major factor as that product has the highest markup and the lowest markdown performance. The balance of our inventory mix of core product versus seasonal fashion shifted more towards core, which has a much higher maintained gross margin.

The result was we came into the spring season with $12 million less in clearance inventory than a year ago. Because of that, we were also able to attack our aged inventory, and it's been reduced by 30% from last year.

Our margin is also being positively impacted as we're becoming less promotional. We're relying on more full-price selling on our floor as our sellthroughs continue to improve. We are also eliminating costly promotional events, like bounce-back coupons, that may give us a slight lift in sales but really hurt us on the margin line.

By concentrating on promoting at peak traffic times, like Easter, Father's Day, and Thanksgiving, we will continue to have sale events when traffic in our stores is at its optimum level, and not waste markdowns promoting when demand is not there.

While on the subject of marketing, I am pleased to announce that Jim Frain, who recently retired as the Chief Marketing Officer at Chico's, will be consulting for CMRG on an ongoing basis. Jim has been a valuable member of our Board and will now take a more active role in our key marketing initiatives, the first being the launch of our loyalty program, and the second being executing a more efficient market approach into our diverse database. Ron Ramseyer, CMRG's head of marketing, has left the Company.

Getting back to the margin, we foresee continued gross margin improvement over the next several quarters as well. Besides a better margin mix and less clearance in the stores, this spring we are receiving our first orders through direct sourcing. Roger Mayerson, our VP of Global Sourcing, has done an outstanding job in accelerating direct sourcing. This spring, 20% of our private-label receipts will be coming in through direct sourcing, which was coming from a base of 0%, and it will be 40% by fall.

The quality and deliveries are exceeding our expectations for spring. And we have managed to put more into the product and still net out with cost savings of approximately 15%.

We are also excited about developing a private-label business for Rochester Clothing, something that does not exist today. That will add to our ability to grow the bottom line for Rochester over the next several years.

Another highlight of the fourth quarter has been the continued growth of our Internet and catalog for both Casual Male and Rochester. These channels now represent about 13% of our sales. Sales in the fourth quarter increased 26%.

Key contributing factors have been through search engine optimization, affiliate programs, and our alliance with Sears in the U.S. and Canada. Recently, we launched in the Sears-Canada Big Book, which is the old 1400-page telephone book size catalog, late in the fourth quarter; and we have been extremely pleased with the results.

In the United States, last fall we became the exclusive Big & Tall men's retailer for Sears.com; and it has helped contribute to our market share growth. I am pleased to announce that we will be launching a 92-page cobranded catalog with Sears U.S. that will be in homes on April 10. The initial drop will be reaching 234,000 Big & Tall customers who do not currently shop Casual Male. Based on the success of the dot-com, this could have a lot of upside potential for us in the future.

Now I would like give an update on our most exciting project of the year. We are in the process of rebranding the Casual Male stores from Casual Male Big & Tall to Casual Male XL. The intent of the rebranding is to gain market share. NPD states that the Big & Tall market is a $6 billion industry. Based on that number -- and even though we have 520 stores, plus the catalog, plus the Internet -- that only would give us a 7.2% market share.

That is because $4 billion of the $6 billion in sales comes from guys who are specifically 42 and 44-inch waists. Few of those guys in those specific sizes are shopping in Casual Male today. They view the word Big & Tall as a negative. Don't believe we even carry their size. Don't believe we have the brands. And definitely don't believe we have fashionable clothes. Yet they are a frustrated group who do believe they are underserved in the assortment of product available in their size.

In October of 2005, we converted six test markets into the full rebranding strategy with exterior and interior changes, the most significant being changing the name.

What we had anticipated happening came to fruition. Traffic went up. Averaged transactions went up. We had a younger customer come in the store. We sold more sizes to the left of the size curve. Most importantly, comp sales exceeded the chain average.

Based on the success of the test, we have begun changing the chain to the new look. Also, we have increased the receipts in the smaller sizes for spring based on the demand in the test markets. In terms of the rollout, we will be completely made over by the end of May in all our full-price stores.

Our direct marketing mail campaign on the rebranding will coincide with this completion date. In addition, we will be doing some cable network advertising to see if we can efficiently drive new customers to the new and improved Casual Male XL.

Finally, we are pleased with the early sales results of spring '06. Knits continue to overperform. We are seeing the ongoing success of our young men's 626 Blue private-label; and we're having our strongest branch launch ever with Caribbean Joe, which is basically a Tommy Bahama look at half the retail.

Based on our January and February sales in our Southern markets, we have been able to react and move up receipts to improve our stock positions for Q2 in these outperforming categories. Thank you for that; and now we will open the call to any questions.

(OPERATOR INSTRUCTIONS) Line 275.

Hi, it's Gary Giblen. Are you finding that as you convert to XL there is a pretty predictable set of results per area? Or is there some variability?

Well, what was interesting in the six test markets, which we really tried to get a good slice of the Company's profile, because we were in Phoenix and San Antonio, and then Indianapolis, Rochester, New York, Columbus, Ohio, it was amazing how consistent the performances were in all six markets. There was not one market that did not have an increase in those metrics that I talked about earlier.

The rollout that is going on now is happening daily. It will come in waves, but literally signs started to go up last week. We don't have any information to check on the current rollout. Again, it is going to take us the next two months to get this done.

Okay, and then a couple more. What is going to be the message of the cable advertising? Is it institutional to explain to people what XL is about? Or is it any price item in there?

The message is -- it is kind of a play on, we are not your average Joe. It really is aspirational that to be an XL guy is a cool thing. It's a powerful thing to present, that big guys will look cool, too. That is kind of the driving message.

It will be tied to some call of action, so we could monitor traffic into the stores. We will have our website and catalog requests going on also.

Okay, that sounds like an interesting approach there; good. Then what is your initial take on the Wal-Mart young men's launch? They're making a lot of noise about it. But what do you think will really happen?

Well, first of all, they said it is going to be hip-hop, which to us is -- we have 75 stores that I would call our urban market, that carry the brands of Ecko, Rocawear, Sean John. I mean, if there is any category that is aspirational, that is the guy. He will spend twice as much money because he is extremely brand conscious.

When Wal-Mart says they are getting in this business because there is a void, I think there is a reason there is a void. No retailer that I know of has tried to do a private-label hip-hop line. I think we're not very concerned about that.

Okay, great. Then just finally, can you shed some light more, Dave, on the departure of Ron Ramseyer? Are there any programs that are going to be not proceeding because of that?

No, not at all. We have a very strong marketing group. Ric Della Bernarda, who has been with us for several years, who is the Vice President of Marketing. We don't see ourselves dropping the ball at all.

Again, to me Chico's loss will be somewhat of our gain. Jim has been on our Board for the last year. He adds tremendous insight when we bring up our marketing issues. He has really helped us along the way. With the launch of the loyalty program coming up -- which I always call Jim the godfather of loyalty -- it plays well to our advantage.

Having him, his input, his reviewing of our strategy will ensure our success in the marketing line. Again, Jim is an unbelievable talent, and we are glad that he is willing to give us some time.

Okay, one more just detail question is, I noticed in my last store check that there is now a minimum order of $75 to receive free shipping from the catalog to the store. So how did that arise? Was that -- were you really losing some money on small shipments to stores?

We always had a minimum, Gary, in place. I think last year it was at $50, and we raised it to $75.

Okay, well I have been getting away with it, but --

No, I mean, obviously, we look at that constantly. It is a balance between the financial considerations and incentivizing, increasing the spend with our customers. It has been done very successfully.

Okay, great. Thank you so much.

(OPERATOR INSTRUCTIONS) Line 742.

Hi, this is Scott Krasik. Dennis, I guess, are you saying that the entire reason for the SG&A deleveraging in the quarter was due to the investment in the catalog?

That is a big part, Scott.

Okay, then were there additional Rochester sales that might be coming out, going forward? Or what were the other variances?

What do you mean, other sales coming out?

Not sales, I'm sorry; expenses from Rochester, maybe integration.

I see, you mean from the prior fourth quarter, or just looking forward?

No, looking forward.

Yes, partially. Look, our SG&A with Rochester, we did not get a full year, as you know, of expense savings. The infrastructure turnover transition wasn't completed till the end of the year. Rochester's SG&A will subside somewhat in 2006.

Now there's other dynamics, though, that are impacting SG&A. Not only a growing top line which will add to SG&A; store count changes in Rochester which will impact SG&A; and we are, as I said, as we did in quarter four, we are making a marketing investment in further catalog circulation increases in 2006.

So whereas we typically would see on an average store basis a 1 to 2 point increase in SG&A, perhaps that amount is slightly higher, 3%, 3.5%, in that range on an average store basis in 2006.

So as a percent of total sales, should you see leverage?

Yes, definitely we should see leverage, again, with the growing top line into 2006 and beyond.

Okay. David, do you have a number for what percent of your spring inventory is going to be in the smaller sizes, the 42, 44, and how that compares to a year ago?

In terms of percent to the total, I would have to get back to you. We have bought a couple hundred thousand bottoms and some tops in that size. That's something that we have to work our way into over time. We don't want to get caught into an inventory balance problem, because it is all growth from us from this point on.

But we have made a substantial investment to get our core product up first in those sizes. Again, that product is just going to be hitting the stores over the next several weeks. We watch it daily. As we see movement, we rebalance our sizes going forward.

Is it primarily in 626, or are you doing it in the -- ?

Well, we're doing it more, certainly more, in the young man's area and more in the commodity areas. Because all our customers buy our basics.

The basics?

Yes.

Okay.

Also, one other thing to add to that, Scott, is that that’s our initial inventory that we purchased of small sizes. Of course, once they are in the stores and sales start to get impacted, of course we will continue to replenish those small sizes. So it could become a larger purchase throughout the year.

Do you need to do anything? Are there changing lead-times as you go to the direct source on merchandise? Or is it basically the same timing as you were getting before?

No, it the same timing. In fact on our core product, why we have been able to keep that high in-stock position is because we have a program called [locker stock], where we have a few months of production that is actually finished, that we can maneuver within weeks, as opposed to within months, into our warehouse to cover any deficiencies we have in specific sizes.

Okay, then just lastly, when do you expect to launch Rochester's private-label?

Actually, our first dress shirts are in the stores right now. We have some more shirts coming in for Father's Day. But it really will start to have some product assortment for the fall season.

Okay; thanks, guys.

Line 41.

This is [John Kurdy] from Principal Global Investors. What percentage of your Casual Male business is private-label?

It is in the mid 50%. We anticipate it growing to about 70% over the next couple years. We are launching our new brand called Synergy, which will be in the stores for our August floor set. Synergy is a contemporary line that would mirror pretty much what Kenneth Cole, Claiborne, Calvin Klein Sportswear has out there. Again they will be at our affordable prices, $40 to $50 for tops and bottoms.

Very excited about that. We had our national sales meeting this week in Orlando. The field organization was very bullish on getting this product into their stores as soon as possible.

On the Rochester side, would that percentage be somewhere in the 10% to 20% range, where you would probably ultimately be, since these are higher price point items for the Rochester brand?

Exactly. We think it has the potential of 20%; and we will move that in at a moderate level till it seeks its own level. But 20% seems like a reasonable number.

And then, wondering if you could give us some information with respect to store openings, closings, and relocations and renovations for '06.

For '06, Rochester, our goal was to open 5 or 6. I believe we will be on that track starting in '07. The pipeline seems to the filling for the next year. This year, I think we may only get three opened. Again, very challenging finding the right type of real estate.

With Casual Male, we will open several, we will close several. But our major initiative in Casual Male is a relocation program. We have done extremely well relocating stores that are in a good market, but the location we are in the demographics of retail have changed over the last 15 years, where the business moved 4 miles down the road, where a new supercenter opened up, and we are in a space that is 30% vacant.

We have identified 40 stores for that program. We will do probably 10 or so a year. That is probably that situation. But we don't see much net store growth coming out of Casual Male.

In terms of remodeling the existing store base, is that largely going to be completed with the transformation to the XL?

Our remodel program, which took place over the last few years, was really getting the interiors done. We call them makeovers. They cost us about $33,000 a store.

These stores have never been touched since their opening. Ripped up, stained carpet, chipped fixtures, needed a paint job. That project is behind us.

All that is left for us to do is the exterior sign -- which, with intent, we never changed, knowing we were going to go to XL -- and an interior sign package. The cost of that is about $20,000 per store; about $15,000 of that is from the exterior signage; and that comes out to the cost of about $8 million.

Then the relocations of, say, 10 a year, are those costs basically the same as opening a new store?

No, they're about 40 or $50,000 less because there are [key] components that we can move over there. So whereas a new store costs us about $150,000, a relo may be about $110,000.

Then lastly, on the debt situation, after the sale and leaseback of the property, you are essentially just left with the convertible notes, is that it?

Yes, that's it, John.

Okay, thank you very much.

Line 85.

Hey, it's Filandro of Susquehanna. A couple of questions. First, on the catalog circulation, I think you said 50% increase in '06. I was curious what percent of that increase was related to prospecting.

The second component of that is -- can you give us a better understanding of what is happening on the Sears opportunity? Does that circulation increase incorporate the, I think you said, 234,000 from that Sears cobranded deal? Those questions and then I have a couple more.

Yes, the Sears circulation, Tom, that is really our initial launch expected, coming up in April. But our catalog circulation at Casual Male, the number I cited of 50%, probably half of that, more than half of that increase has to do with prospecting.

The company Casual Male has not really done a lot of new customer prospecting in the past. We're moving this way because of not only the responses that we have seen in our testing, but also because of the response that we see in our website visits.

So for the first time in probably a number of years, Casual Male, we're doing a sizable amount of prospecting in 2006. Also, the Sears catalog is adding to that circulation increase, besides just our new customer increases that we have seen throughout 2005.

Did I hear this correctly; you said 234,000 and those are customers who have yet to shop a Casual Male store?

Yes, we took their list against our list, and got all the dups out of there. So these customers were nowhere in our active file. That means they have not shopped or purchased in Casual Male for over five years. So it is a fairly fresh list.

But the issue is they had a Big & Tall catalog, prior to us getting this catalog, that has not been circulated for over a year. So we don't know how many active customers are still on the list. That is why we're starting with the 234,000.

Going forward, they will start to give us active names from their retail database that they can identify as Big & Tall customers. And we will start shipping into -- circulating into that database in the fall season.

Had they previously partnered with another Big & Tall operator?

Yes, they previously partnered with KingSize, who is our competitor. Apparently, that relationship ended for various reasons. Because of the strength and conviction that we are the player of choice, that contract was ended and we are picking that up.

Sounds like a tremendous opportunity. Great. A question on the markdown rates. I think, Dennis, you had said that the markdown rates approached a 500 basis point drop in the fourth quarter. Can you just give us a little sense on how we should view markdown rates and the rate of decline, if there is going to be a decline in 2006?

Maybe to add to that, any -- I think you kind of gave a pretty good rundown of how SG&A should play out for the year. Maybe give us a little handle on the gross margin line as well.

The markdown rates made a substantial dramatic move downward, again, because of our cadence towards how we are managing our fashion inventory relative to our core inventory. That is having a big impact on the amount of clearance inventory, therefore, that we have to clear out under clearance prices.

At the same time, the level of our promotional markdown cadence is beginning to subside, as we believe the product continues to improve; traffic into the stores is on the increase; and you know, we're turning more towards branding type of communication and marketing, as opposed to promotional.

I think that what we are seeing in the fourth quarter -- of course, to have that kind of increase throughout next year, we're not expecting quite that level. But we do see our markdown rates dropping in 2006, not quite as dramatically; but that will have some improvement on gross margin during 2006 as well, along with the costs resulting from direct sourcing helping to drive our gross margin rates.

Our gross margin rates, looking ahead into next year, we are thinking, we have been continuously saying, and we will say again that we expect that to continue to grow at about 100 basis point improvement for the next few years, including 2006.

Terrific. One final question. I thought, and maybe I am wrong about this, but I thought you guys were actually already testing some loyalty programs. It sounds like you're saying you're going to launch one. Does that mean that Jim has come to the conclusion that one of the tests have worked? Or am I mistaking; have there not been --?

He will be involved in the decision-making process and the launching of; it is still in test phase. We need more history now that the points program is in place; we have to watch the reaction as customers build points versus the 5% life discount.

We have not made that decision; we do not have a launch date. But that is where Jim's -- one of his priorities is now to help us analyze the two programs and make a definitive statement on which way we are going to go. When we are ready to launch, we're ready to go. We just have to decide when we're going to pull that trigger.

Nice job. Congratulations and good luck.

Line 595.

It is Marc Bettinger of Stanford Group. Dave and Dennis, congratulations on a great quarter. It sounds like things are going along really very well. I wanted to know, are you seeing any resistance for the sizes 42 and 44, for those people to be coming into what is perceived as either an XL store or a Big & Tall store?

It's interesting you asked that. I do want to relate a story, because we did have our national sales meeting this week. And the theme of the whole meeting was based around the XL, so there's a lot of excitement.

But I had lunch the other day with the six district managers who each have had the XL program since October. They were so encouraged. They are so excited, and their feeling was they have -- these other store district managers have no idea what is going to happen to their sales.

But they were relating stories of regular size customers coming in, trying to fit into our small size clothes because they liked what we had to offer. They said once we get the sizes in, business is going to get even stronger.

So we have been getting these increases without really having those styles available. It's funny, one of these -- I went up to one of the district managers who won a lot of awards for performance, and I said congratulations. She said, it was a no-brainer; I was an XL market.

So very positive things came out of that, out of our session. They clearly are saying smaller size guys are coming in every day looking at the product. So it is what we thought would happen based on our focus groups, and it is happening.

Okay. Also, can you see expanding the in-stock program at all?

We may be expanding the color selections within the in-stock program. But those are really the key items. Once we get into seasonal product, it becomes a little more challenging, because we do have to wind down inventory. So we do have some basic shorts, but to commit to that year-round would be challenging.

But right now, we don't have anything on the drawing board to add anymore styles, but we are going to add more depth into color spreads of some of these items.

Okay. Dennis, when did you say the tax rate drops to 37%?

After we work through a lot of our tax losses, Marc.

Okay, then it would be consistent after that?

Yes.

Got it. Okay, thank you and congratulations again.

Line 696.

Good morning, this is Paula Kalandiak from Roth Capital. My first question relates to the XL. How many new stores have been converted since the test?

It has just started in the last two weeks. So those being converted are being converted in stages. We are getting the interior, some of the interior painting done; we have light fixtures that are going up in windows. The exterior signs are going up.

It is not like one day it's Casual Male Big & Tall and the next day it is 100% converted. It is coming in pieces that will be completed over the next 30 days in each market. So it is not an overnight thing.

But, again, it is very -- we are in the very early stage right now. Obviously, we have to keep a very heavy pace going to get 420 stores done by the end of May. Again we are on schedule to meet that. But again, I would give it a few weeks before you want to make some store visits to see the impact.

Okay. If my memory serves me correctly, when you did cable advertising related to the George Foreman launch, you were not really happy with that medium as a means of communicating. I am wondering, what is the reason for going back to cable? And how much do you intend to spend on it?

That is a good question. We thought about that a lot, going back. I think the difference is we did not have a call to action. That was really -- what our previous campaign did was it branded George Foreman as a brand, and the whole Comfort Zone worked well. What it did not do is drive traffic. We had no message to drive traffic.

But with this new message, we're going to be talking to three times the market that we spoke to before, because we are targeting these towards guys who are 42 and 44 inch waists. So it becomes more efficient.

Net result is we allocated $1.7 million to this campaign, so it is nothing -- and it is not incremental. This is a cost savings we got out of reducing some promotions in the spring season.

We will learn; and if it does not work, then we will not build that into our future plans. But we want to go back one more time and see if we can use this as a traffic driver.

Okay. Then are you still on track for a goal of a 9% to 10% operating margin in '07?

Yes, that is what we are tracking. That is correct.

Okay. Then finally, I was wondering; it looks like the revenue number in today's press release for the fourth quarter is different from the revenue number when you reported 4Q comps. I was wondering just what the reason was for that change.

There was a reclass done by the accountants to do that, and it's related to gift cards.

Okay, all right.

Line 525.

Hi, Ben Strom, Variant Research. If we could go through some of the XL conversions here, I know you have just been testing. Is there anything you can just talk about with the kind of results you're seeing, I guess with the Internet as well?

And where -- what the 42 to 44 size guy is buying, if he is buying anything differently? You know, tops, bottoms; if you could just go through a few of the categories if there has been any differences, that would be great.

Again, we haven't had a full line of product available in depth in those sizes. But it was, again, where we would anticipate. It is in the younger product. We cater to a customer who is 18 to 70 years old, so it is not coming in the more traditional product.

It is certainly coming in premium denim; it is coming in cargo shorts; the woven and knit tops in the 626 line. That is where we are seeing the movement. That was kind of what we had predicted would happen.

Okay, great. You said the tests, the stores have been exceeding the comp average. Were those stores -- because I guess some of those were some of your Southern locations -- were those stores previously exceeding the comp average before the test?

Yes. We used it as a -- but we took the current trend and then moved it from there. So they were outperforming it; but then they outperformed over and above their trend line. Because we did not want to get tainted by a false read, so we adjusted for that, and they're still getting the incremental comp.

Okay, great. Did I hear correctly you said it was 10 key items in the fourth quarter, or about 20% of sales? Is that right?

I said seven key items represent almost 20% of our sales.

Okay, seven. Did you say in the spring whether that was going to be something pretty similar representation?

It is year-round. Those seven items are guaranteed 365 days a year for us.

So you're not moving up the number of key items. Is there a relative increase that you can kind of point to on those items? Because those were with the --?

I mentioned that overall collectively those items have had a 25% unit increase since we came in with the guaranteed in-stock program. Which was pretty interesting, because when we originally turned our system on for replenishment of these core items we were about 25% out of stock. Once we filled the pipeline the sales went right up with it.

Okay. What about as just a percent of sales? Was there an approximate number on what the items were, just a percent of comps? Can you drill down to that?

No, we don't drill down to that level.

Okay, that's it. Thanks a lot.

Line 478.

This is [Jean Bendite] with SAC Capital. I had a question on your balance sheet. I'm not sure if I misheard, but I think you said your debt went down by 30% over the course of the year. Is that correct?

It went down 30% due to the sale-leaseback transaction that took place.

Okay; so pro forma.

Right after, yes.

What was your current portion of long-term debt in the quarter? You know, at the end of the quarter?

At the end of the year it was sitting at $9 million.

Okay, so we should take the balance sheet you reported; and initially, when you said you did the sale-leaseback, you said your long-term debt will go down by $44 million. Is that right?

Of which 5 goes to current.

Okay, so 5 to current, and then the rest goes to your notes payable?

Correct.

Is that right? Okay. Okay, thank you very much.

Line 203.

Good morning. I was thinking, given the fact that your capital expenditures seems to be subsiding a little bit here, and your debt metrics are getting better, your total debt is down, what are your thoughts in terms of pursuing another avenue of growth, in terms of acquisitions? Do you see any opportunities there, maybe doing something similar to what you did with Rochester? Is that something that you might be focusing on over the next couple of years?

No, our focus is capture as much market share as we possibly can. We said our market share was 7.2%. We think there's a lot of opportunities. There are some things we are always -- we are looking at some growth vehicles that may be on a small base but could get us quick entry into some other categories, into some other price points.

So, yes, we are always actively -- have a few things that we are looking at that makes sense to Big & Tall. Because we have the infrastructure. We have the systems where we could go into any category and really get some leverage. So certainly, catalog opportunities, Internet opportunities, and again, we continue to look for those opportunities.

Great, thank you very much.

Line 275.

Gary Giblin again. Just to clarify on the tax rate, you had mentioned that in the first quarter it might look like 39.5%. I just didn't quite grasp why that was versus the ongoing 37.

Yes, I said going forward and until we utilize many of our losses, Gary, un-taxed planned effective rate for the Company is 39.5%.

That is the fully taxed?

That is the fully taxed, full state, full fed.

Right, because you are in Massachusetts. Yes.

Well, not only that, it's a matter of what is the most efficient way -- I don't want to talk too much about this -- but what is the most efficient way for the Company to utilize our losses versus employing tax planning strategies at the appropriate time? That is the two differences.

So therefore, I'm telling everybody, 2006 and until further notice, 39.5% will be the Company's effective tax rate.

Okay. Did your internal tax rate change? Or this is just the corporate financial reporting?

A corporate accounting thing; it has nothing to do with -- obviously we're not paying any taxes.

Right, yes; that is what I am saying. So it is just the external corporate reporting is changing on these lines.

Yes.

Okay. Then just a different kind of question. Is there a potential for more George Foreman products that are not technology features? In other words, I saw underwear flying off the shelves, with George Foreman underwear, which is not -- doesn't have advanced technology features to it.

We have tried George, we have tested George in just about anything that was -- that we could, in private label. We have him honed in certainly in the comfort technology. In certain categories, he underperformed compared to some of our other house brands.

So we have got his brand where we want it, which is about 20% of our assortment. We don't see any further growth as a percent of that brand, because we have been there and tested it already and it did not perform.

So the underwear just happens to work; but it is not a pattern that you can work off of. Okay, thank you very much.

I'm showing no further questions in the queue, sir.

Okay. [Lenny], please read the forward-looking statement.

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 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 (indiscernible) 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, increasing 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 would like to thank you for attending our conference. If you have any questions please give us a call.

Thank you very much for attending today.

Ladies and gentlemen, this does conclude your program for today. You may all disconnect.