Destination XL Group Inc (DXLG) 2006 Q4 法說會逐字稿

Good day, ladies and gentlemen, welcome to your Casual Male Retail Group fourth-quarter and fiscal 2006 earnings conference call. At this time all participants are in a listen-only mode. Later we will conduct a question-and-answer session and instructions will follow at that time. (OPERATOR INSTRUCTIONS). I would now like to introduce Jeff Unger. You may begin, sir.

Good morning. Thank you all for joining us this morning. Today's discussion will contain certain forward-looking statements concerning the Company's operations, performance and financial conditions including sales, expenses, gross margin, CapEx, earnings per share, store openings and closings and other matters. Such forward-looking statements are subject to various risks and uncertainties that could cause actual results to differ materially from those assumptions mentioned today.

Due to a variety of factors that affect the Company information regarding risks and uncertainties are detailed in the Company's filings with the Securities and Exchange Commission. Our complete Safe Harbor statement is available today at www.CasualMale.com. I'd like to introduce Dennis Hernreich, our Executive Vice President, Chief Financial Officer and Chief Operating Officer, for his opening comments. Thank you, Dennis.

Thank you, Jeff. Good morning and thank you all for joining Casual Male Retail Group Inc.'s fiscal year 2006 earnings conference call. During this call I will provide description of explanation to the Company's 2006 annual and fourth-quarter results. Within this discussion I will give some expectations for 2007 followed by comments from David regarding the Company's major initiatives after which we'll field all of your questions and comments.

Today the Company reported its earnings per share for the 2006 year of $0.98 per share compared to $0.30 for 2005 and fourth-quarter earnings of $0.83 per share compared to $0.33 a year ago fourth quarter. Included in the 2006 results for both the year and the quarter is a substantial tax benefit of approximately $29.9 million or $0.63 per share. This tax benefit is the resultant of the removal of all allowances related to the Company's net tax assets associated with its -- primarily associated with its tax net operating loss carryforwards and other tax attributes as even the accountants now agree that the Company's ability to utilize its remaining net tax assets is beyond a reasonable doubt. Therefore at the end of the year the Company is showing net deferred tax assets of $27.6 million to offset future taxable income.

After excluding this onetime tax benefit the Company results for the year are approximately $0.33 per share compared to $0.14 for 2005 and the fourth quarter of $0.20 per share compared to $0.17 per share for the fourth quarter of 2005. At the same time the Company's operating income showed an increase of 45% and 13% for the 2006 year and fourth quarter, respectively. These earnings were produced from comparable sales increases of 9% for the year and 7.5% for the fourth quarter of 2006 and gross margin improvements of 225 basis points for the year and 185 basis points for the quarter.

Current year operating income was partially suppressed by SG&A expenses incurred for the adding of staff and the development of new businesses or product lines to drive sales growth for the long-term. For example, the Company added new staff in marketing and merchandising to support the launching of new businesses or product lines for which no sales volume is expected until 2007. In addition, the Company acquired the Jared M business which generated losses of $1.1 million in 2006 after its acquisition in May of 2006 as the Company restaffed and rebuilt its infrastructure to support growth in 2007 and beyond.

In total operating earnings were negatively impacted by the startup and new business expenses by approximately $4.5 million for the year and $2.5 million for the fourth quarter which equates to $0.06 for the year and $0.03 for the quarter.

Before I further breakdown the components of our performance I want to tell you about the debt we no longer have. At the end of 2005 the Company had approximately $142 million of debt on its balance sheet made up primarily of $95 million of convertible notes and its borrowings under its revolver facility. After completing the sale leaseback transaction of February 2006 and converting the bonds into 8.9 million shares of common stock in January 2007 the Company's debt at the end of 2006 approximates $9 million represented mostly by borrowings under its revolver facility.

At the same time in anticipation of the issuance of these added shares to satisfy the convertible notes, the Company purchased 1.3 million shares in May of 2006 and, under a Board approved $75 million buyback for 2007, acquired another 2.8 million shares in the first quarter of 2007. Now let's spend some time reviewing the components of the Company's performance.

Starting with the sales, the Company's sales volume totaled $146 million in the fourth quarter and $467.5 million for the year after excluding approximately $6.7 million of sales volume occurring in this 53rd week of the fiscal year, the sales increase was 7.4% in the fourth quarter and 9.4% for the year. Much of this increase was generated from comparative sales increases of 7.5% in the fourth quarter and 9% for the year.

The Company's retail store channel generated a comparative store sales increase of 4% for the fourth quarter and 5.5% for the year while this direct channel generated increases of 27.6% for the fourth quarter and 30.2% for the year. A component of the Company's direct channel, the Internet business, grew at a consistent rate of just over 50% during both the fourth quarter and the year. Catalog circulation was increased 47% during the year and 80% of the fourth quarter. Much of the increased circulation was for new customer prospecting. Overall 30% of the Company's circulation during the year was for prospecting activities which is up from 15% a year ago.

A noteworthy trend with respect to CRM, during the year the Company has had tremendous success in growing its customer database by new customer prospecting, improving capture rates in our stores and otherwise implementing a Casual Male loyalty program. CMRG's active customer list grew by approximately 25% in the retail channel, partially reflected by Casual Male's 4% increase in retail store traffic during the year, and a 30% increase in its direct channel for an overall active customer database increase of 27% during last year.

The Company plans to further increase its catalog circulation by approximately 8%, much of it to service its growing customer list while maintaining its new customer prospecting activities at 2006 levels. At the end of the year the Company had 508 stores, a decrease of 10 stores from the end of last year. The Company opened 10 stories during the year, closed 20 others, relocated 11 stores and remodeled five stores. For 2007 the Company is planning to end the year with 506 stores after opening 10 stores, closing 12 others and is also planning to relocate nine stores and remodel 58 other stores.

We have earmarked an approximate $1.5 million in capital expenditure funds to upgrade some of Casual Male's most productive stores addressing not only certain cosmetic needs, but primarily to expand upon the store's capacity to properly hold and present its merchandise assortments to further improve sales productivity by improved space usage with higher capacity fixturing. The Company's total retail store square footage at the tne of the year approximated 1,852,000 sq. ft. producing an overall $211 will sales per square foot. Casual Male generated $197 sales per sq. ft. while Rochester produced 342 sales per sq. ft.

With respect to gross margin, gross margin dollars improved by $10.2 million or 17% for the fourth quarter and $30.4 million or 17% for the year with improved gross margin rates by 185 basis points in the fourth quarter and 225 basis points for the year. The Company leveraged its occupancy cost from greater sales volumes by 130 basis points during the quarter and 100 basis points for the year. Therefore its merchandise margins improved by 55 basis points for the quarter and 125 basis points for the year.

Much of the merchandise margin improvement is a result of the lower purchase cost produced by either the Company's product development function or lowering cost from its domestic vendors. David will discuss this at greater length. In 2007 we are expecting to further improve the Company's gross margin rate by approximately 100 basis points in merchandise margin plus any further occupancy leverage from higher sales volumes.

Now SG&A, after putting aside the 53rd week SG&A expense is up approximately $3 million. The Company's total SG&A for the quarter increased by $4.3 million or 10.2% and for the year by $16 million or 10.5%. The SG&A rate of sales in the fourth quarter were 33.7% compared to 32.3% last year. And for the year the SG&A rate was 36.6% compared to 36.1%.

Ordinarily we would expect to gain leverage on our SG&A expense base with sales volume increases of 12.6% for the quarter and 10.9 for the year. There were three sources of SG&A expense increases during the year. Number one, the Company incurred approximately $1.1 million in the fourth quarter and a $7 million for the year and certain incremental SG&A expenses for which it did not incur in prior years such as corporate rent resulting from the sale leaseback transaction, performance bonus and stock option expense not incurred in prior years, and legal expenses associated with a lawsuit where the Company is the plaintiff.

Number two, additional expenses were incurred of $3 million in the fourth quarter and $6 million for the year to support new business or product extension growth. And except for Jared M business, the official launches are planned for 2007. The nature of these SG&A expenses includes SG&A for Jared M business acquired in May of 2006, adding corporate staff such as marketing, IT product development and merchandising to commence business development activities, and additional store operations and merchandising staff to more fully support integrating Rochester from San Francisco to Canton, Massachusetts.

After considering these expenses SG&A expense levels increased by approximately $0.5 million in the fourth quarter and $3 million for the year to support the increased sales volumes of $16 million in the fourth quarter and $46 million for the year. For 2007 we are planning for SG&A to grow by approximately 1% plus 10% of increased volume for its core Casual Male and Rochester businesses. In addition, although we are managing a new business and product extension activities in 2007 to break even operating income levels, SG&A expenses for these activities are expected to increase by approximately 9 to $10 million during the year.

The Company's operating earnings improved in the fourth quarter by 13% to $15.9 million from $14.1 million during last year's fourth quarter. And for the year the Company's operating income increased by 45% to $25.4 million from $17.6 million last year. The Company's operating margin rate in 2006 reached 5.4%, up from 4.2% a year ago.

During the fourth quarter charges for depreciation and amortization rose to approximately $4.8 million as compared to an average quarterly amount during 2006 of approximately $3.4 million. The increase was partly due to putting into service additional fixed assets during the quarter in an amount where we expect quarterly depreciation in 2007 to average between 4 and $4.5 million per quarter. The variation from this amount in our current year fourth quarter was caused by the disposal of certain fixed assets during the quarter.

The Company's cash flow generated from its operations was approximately $11 million while its EBITDA, earnings before interest and taxes, depreciation and amortization, for the year was $40.5 million with interest of approximately $5.5 million. Much of the Company's operating cash flow was used to increase inventory levels during the year by approximately $22 million to support sales growth. Its direction towards private-label programs, support inventory in-stock programs as well as fuel the growth in our direct business.

During 2007 the Company expects to lower its inventory levels by at least 10% and otherwise return a significant portion of the approximate $25 million in working capital investment this past year. CRMG's capital expenditure plan for 2007 approximates 17 to $19 million with the primary projects as follows -- real estate activities for new stores, relocations and remodels will approximate $8 million; investment in our distribution center for sortation system to improve capacity and efficiency of the picking processes of $4 million; and further IT improvements with emphasis toward websites, new businesses and direct business support of approximately $5 million.

Much of the Company's anticipated free cash flow, expected to approximate 50 to $55 million in 2007, will be used to repurchase common stock throughout the year. Since the Company announced its January 2007 $75 million stock repurchase program it has repurchased approximately 2.8 million shares for $35 million. The Company intends to continue to repurchase stock throughout the year on an opportunistic basis. The current number of shares outstanding today approximates 41.6 million shares and excludes any common stock equivalents such as options and warrants which approximate another 2.5 million shares used for EPS purposes.

Therefore on the basis that the Company continues its buyback program throughout the year we believe CRMG's fully diluted share count will approximate 44 million in quarter one, dropping to 42 million in quarter four and averaging $43 million -- or 43 million shares for the year. At the same time the Company's interest expenses are expected to drop by between 2.5 to $3 million for the year. Going into 2007 the Company has approximately $54 million in tax loss carryforwards which should minimize any cash taxes for 2007.

Before I turn the call over to David for his comments -- starting in this year's first quarter the Company will discontinue announcing its sales results for the quarter on the first Thursday after each quarter end and instead include its sales results with its earnings announcement on the third Thursday after each quarter end. The reason for this change is that it is difficult and often awkward to discuss only one component of the Company's performance without disclosing the results of all components of its performance. We believe that this practice of announcing together sales and earnings adopted by several retailers provides for a more complete disclosure of the Company's quarterly performance and will become more prominent.

My last thought on behalf of the senior management and the rest of the organization, we are very proud of the Company's accomplishments to date and very excited about the Company's opportunities for continued growth and success. We are all committed to the strategic initiatives established by David and are dedicated to its execution. Thank you for your attention and now here is our CEO and President, David Levin.

Thank you, Dennis. We've now delivered 13 consecutive quarters of comp sales increases and we're confident that we will be delivering the 14th this quarter. The 9% comp for 2006 is the best performance since the Company emerged from bankruptcy in 2002. Many of our strategic initiatives came to fruition last year and we believe we will continue to leverage those initiatives throughout 2007 and beyond.

It is important to note that we are getting increased sales while at the same time reducing the promotional treadmill that we were on for the last several years. This year we will only have three price point events for the entire year at Casual Male. The emphasis on our marketing will be to continue to build our brand image with our customers with a better assortment of product on a timely basis. Our major initiative this year is to continue to refine our allocation of product on a store-by-store vases and ensure we maintain a strong in-stock position in our core items.

The strength of our top line and 220 basis point improvement in gross margin has been driven by the growth of our proprietary brands and our ability to source the majority of that product through our direct office. In two years private-label in Casual Male has grown from 50% to 70% and 60% of our private-label was sourced directly. We've had tremendous success with our young men's 626 BLUE lifestyle brand and anticipate a strong back to school in this category. Synrgy, which caters to a slightly older customer, was launched in 200 stores this past fall. The results were outstanding and Synrgy is now available in all our stores.

We're excited to announce that we'll have a new brand launching in fall called [Oak Hill] which will represent a higher quality product in a more traditional lifestyle. Up until this point we've had Harbor Bay and this is more basic product at opening price points. And the big driver in this step-up label will be our three in one pant, which is a premium casual pant that's wrinkle free, stain resistant, color fast. And we tested this pant in the fourth quarter and the response has been excellent.

We continue to make inroads in our rebranding strategy. Between the name change from Casual Male Big & Tall to Casual Male XL and the continued penetration of our young men's products to our assortments, we see the dynamics of our customer base changing. Our percentage of sales to the smaller big guy and a younger guy has been growing every month and this has been a major strategy for us for future growth and we continue to experience very promising results.

In terms of marketing, our loyalty program, which we launched last October, is showing positive results. We rolled out the loyalty program in October of last year and we now have 676,000 members. And a snapshot of our last two weeks of sales showed that 70% of our customer transactions were made by those in the loyalty program.

Another highlight for Casual Male this year was the performance of our 68 outlet stores. By not using the outlets as a dumping ground for the full-price stores we've been able to assort the store with fresh product label and their topline sales performance has actually been outperforming our full price stores. This February we completed the rebranding of the outlets to Casual Male XL.

Moving on to Rochester, on our last webcast we announced that we were moving the San Francisco office to our corporate office in Canton. That move is now complete and fully integrated into our home base and we're very optimist about the opportunities in this division. From a merchandising perspective we believe the stores have been pver sorted and over vendored. And this was the same scenario we faced when we acquired Casual Male. We plan on significantly reducing the number of tertiary brands and build upon the names that represent the heritage of a luxury men's store. And at the same time we'll continue to build our own private-label business offering quality and value that the Rochester customer understands.

In our first season private-label grew to be 10% of our sales and we plan on doubling that in the next few years. The product was well perceived and this offers us a great opportunity to improve the margin performance in this division.

And we're also concentrating on improving the visual merchandising standards in the stores. By early May all the Rochester stores will have been remerchandised to a new floor layout that emphasizes a lifestyle presentation as opposed to a category presentation.

We're pleased to announce last month we opened our second store in the Chicago market in Oak Brook, Illinois which is doing well. And we'll be opening two more stores, one in Paramus, New Jersey and the second in King of Prussia, Pennsylvania in the July/August time period.

As Dennis mentioned, we continue to make substantial gains in our multichannel operations. CMRG's catalog and e-commerce businesses gained significant marketshare throughout the year. We're just becoming savier in our ability to prospect for new customers, reactivate older customers and drive traffic to our website.

We continue to look for new venues to increase our marketshare. With the average income of the Casual Male shopper at $70,000 we see an opportunity to tap into the lower economic demographics where the propensity for obesity is higher. And this month we launched B&T Factory Direct, a catalog and Internet vehicle where the retails are about 25% less than at Casual Male. The assortment mix is tailored to the products we offer in our outlets and it's because it's mostly private-label and sourced directly. And we have similar margin thresholds even with lower retails. And although it's premature to report on its performance, we're very pleased with the early results.

Also on the last webcast we announced the acquisition of a big and tall lifestyle e-commerce company called Supersize World. The website carried 250 nonapparel items that cater to the everyday needs of people of size. I originally stated that we were going to change the name to Think Big, but after input from our focus groups we have changed the name to LivingXL. We'll be utilizing our existing database to market via the Internet and we'll be delivering a 48 page catalog to our customers around May 15th.

And finally, in May of last year we acquired Jared M. We saw a tremendous opportunity for Rochester to expand its custom clothing business which was only 2% of total sales. Jared M is targeted to high-end clientele where the average yearly spend with Jared is $40,000. We have spent the last year building an infrastructure that will support a scalable custom business.

This quarter we opened up the Jared M showroom at 35th and 7th Avenue in Manhattan; we also launched our Internet site; added a Jared M insert into the Rochester catalog and opened the first three Jared M collection shops in our Chicago, New York and Atlanta Rochester stores. The custom component of the Jared M concept will be available in these locations in May.

Our strategy remains focused. We see a highly fragmented market in big and tall. We're executing a strategy to leverage our infrastructure and expertise and continue to flush out opportunities that fit into our core competencies. In the last year we were able to lay the groundwork for these new business opportunities without sacrificing our existing businesses. With a lot on our plate we still managed to deliver the best results since the acquisition five years ago and we still see more opportunities in the near future. Now we'll open up the phones to any questions.

(OPERATOR INSTRUCTIONS). Scott Krasick, CL King.

Thanks. On your sales release you mentioned that your comp trends reverted back to the 9, 9.5% range in January. Can you talk a little bit about where you've seen them the last few months?

We don't give guidance on our current business trends, Scott. We feel pretty good about the year. We're optimistic that we're going to continue to deliver pretty good numbers.

Right, but I mean you put the language in there to indicate that it was certainly higher than what you were reporting; is there any color there?

I think the color that we could acknowledge is that in the month of December our comps were lower than what they had been running and that we attributed to the weather. And in the month of January they bounced back to the trends that we were seeing in the second and third quarter.

Okay. How long have the Jared M shops in shops been in the three Rochester stores?

Just for a few weeks now. What we have in the three shops are the collections which is ready to where, to be purchased, but the custom piece of the operation is not going to be active until May.

Okay. And then can you talk about the plan for doing the new layouts at all the Rochester's by early may, what sort of disruptions are there going to be? Will they be done overnight? Can you talk a little about that?

There is no disruption to that; that is work that will be done non open hours. It's just reformatting the stores. We feel very good about this because this was one of the first breakthroughs we had at Casual Male when we changed to a lifestyle presentation was the first time we saw a reaction in our comp sales. So we feel pretty good that the customer will react the same way once we remerchandise the floors in the Rochester chain.

Good. And then I guess just lastly, do you feel good about your pricing in that you can maintain full price on your summer -- spring and summer product longer than other a lot of other retailers because your customers aren't pushing to buy fall product in August and September?

Actually we've moved up our delivery cycle and doing quite well. We were in a much better stock position early this first quarter than we were a year ago. And our real drivers right now are our shorts and short sleave product. So in August we'll be transitioning earlier than we normally do because we definitely have more fashion, customers reacting quicker, they understand if they don't buy it today it may not be there tomorrow. So by doing that it gives us a longer selling period on the floor rather than shortening the window. Now in the heavyweight products like sweaters and outerwear, we definitely don't want those on the floor until later in the season.

Dennis, do you have what the inventories are on a same-store basis, up year-over-year?

Not at my fingertips, Scott, but they're probably up, excluding the rack on a same-store basis, probably around 10%, Scott.

Okay. That's great. Thanks, guys.

Rob Wilson, Tiburon Research.

Dennis, did you say circulation was up 80% in Q4?

Yes, I did.

Okay. And could you give us some color maybe on page counts? Are you sending larger or smaller books than normal? Can you help us there?

Not a major change in the page count. It was more -- we increased circulation really to -- new customer prospecting stuff like I described. Not only to our active customers, but also to rental lists, retail customers, etc.

David, if I look at 80% circulation growth and I look at 4% same-store sales growth. Were you guys disappointed in that outcome?

Like I said in the earlier press release, we were not up to where we thought we were going to be because December, which is such a big driving month for us, we had a shortfall in what our expectations were with the weather change. So December is the biggest month of the year for us so it did have an impact on the traffic in our stores. But as I've also said that traffic has come back as we had anticipated since then.

Also too, 4% was up in the stores. The direction channel was up 30% which is where the catalog largely is targeted towards.

Right. And do you have the Rochester comp? Is that 4%? Is that Rochester and Casual Male or is the Casual Male only?

That's Rochester and Casual Male, we don't segment report.

Okay. And I guess one last question on SG&A. You said 1% growth, but then you also mentioned is that 9 to $10 million growth based on the new businesses? So we should say 1% greater than last year plust 9 to $10 million for '07?

Yes, our core businesses of Casual Male and Rochester, excluding any new business activity, 1% on the dollars of 2006 plus 10% incremental volume, whatever you're assuming there. Then in another column you've got new businesses going on that's going to add another 9 to $10 million of SG&A to support that which overall should be at a breakeven level. Make sense?

I want to make sure I get this right. 1% on top of let's say 170 roughly million? Right? And then I should add 9 to 10 more million?

For the new businesses, correct.

Thanks for taking my call.

Marc Bettinger, Stanford Group.

Congratulations on a great year. Just want to confirm a couple things. Dennis, did you say that the remodels, you're going to do 58 this year alone?

Yes.

Okay. And as far as the gross margin you said 100 basis points on the merchandise margin plus occupancy leverage?

Yes.

Okay. And with respect to the lower inventory position do you think you can get about $25 million out of the working capital this year?

I don't know that we can get all $25 million; no, I didn't suggest that necessarily.

Okay, what did you say?

A good portion of that we should be able to get back.

Okay. But this is on a lower inventory position per store or overall in the D.C., where is it coming from?

I think in all, all of the above. I think that as we continue to gain knowledge, get more efficient, better allocation methods our inventories will get that much more efficient I believe.

Okay. And final question. How much would you say the -- or were there any cost overruns on the SG&A in the fourth quarter for Jared M and B&T direct and so on?

Not cost overruns, no. All of these were intended expenditures that we might not have anticipated during the first half of the year that we made in the second half of the year to support the growth activities that we planned for 2007.

Okay. So is there really an acceleration of plan that was pulled from '07 into '06 or was it an overspending kind of number?

Not an acceleration necessarily, not an overexpenditure. A decision to spend the money so that we would be positioned to grow that business in 2007.

Okay, so this wasn't anything of an internal control issue?

No, not at all.

Congratulations again. Thanks, guys.

Clint Greenberg, Baron Capital.

Congratulations. Could you detail in any way how the progress you are making in selling more products to younger and smaller big guys?

There's been an every month improvement. The needle doesn't move dramatically, but some of the things we can quantify is every year in the last four years the average age of our customer has dropped one year at a rate and this last year we dropped it 1.5 years. So where the average age of our customer when we acquired the business was 50 years old it's now approaching 45 years old. We definitely see the younger customer moving in. Our percent of young men's business is growing dramatically, but again, it's coming off a small base.

And what we're also seeing on the smaller bigger guy is our size scales are moving to the left selling a lot more. We're selling a lot more 1X and 2X tops; we're selling more 42 and 44 inch waists as a percent to total sales. So we believe a lot of this grow that we're getting from new customers and comp sales is coming from the initiative of the rebranding process and the merchandise mixes, we're definitely going for the younger guy.

Thank you.

Margaret Whitfield, Sterne, Agee.

Good morning, everyone. Dennis, I guess this is for you. The incremental spending on the new businesses impacted Q4 by $0.03, and I am guessing that the expenses might be front end weighted with perhaps accretion in the second half. If you could give us some guidance on how to model the quarters regarding the incremental spending.

And also, David I would be curious what you think, I am guessing these businesses collectively might contribute 10 or $15 million to the year. What could be the potential, and how would you rank them in terms of which of the three businesses would contribute the most to the forward business.

First, in terms of the $0.06 and the $0.03 I had mentioned was for 2006. We're expecting for the year these businesses to be about breakeven. But true, they won't necessarily be breakeven into any one quarter. But I would expect that we are planning our new businesses to be somewhat additive in the third and fourth quarter and at a loss in the first and second quarter, but in any case no more than $0.01 or $0.02 in any quarter.

Okay. That is good to hear.

The answer to your question, we don't have a crystal ball in these new businesses. Jared M is the only one that had an existing business, and the sales when we acquired it was at a run rate of slightly over maybe $2.5 million. So we see significant growth coming out of Jared M.

It is hard to say. We are not quantifying any topline numbers for any of these three launches until we get some history under our belt. But again, B&T came off to a very good start for us. And what was interesting was to this point none of it came from cannibalization. We mailed to Casual Male customers who haven't shopped us in over three years. So whatever we're getting out of that to us is rejuvenated businesses.

LivingXL, that is a real unknown because we don't have much to go on. But we feel very good about it because the focus groups that we've had, the response to what we are pulling together has been very encouraging. And I think when you get to all see the catalog it is pretty outstanding the way it came out. So we are really excited about that opportunity. And again, we should get no cannibalization out of that because there is no apparel in that catalog at all.

David, you said you were coming back to maybe -- did you say three promotions this year? Could you tell me what the timing is?

Yes, our price point promotions are this week we have Easter, we have Father's Day and we have Thanksgiving. Outside of that we have our special two-day event sales. And then where we are finding a lot of success is just branding our name out there through direct marketing and coming in with an offer if you spend $75 or more you can get $20 off. But we are really starting to get away from this $19.99, regularly $24.99 business. It just isn't driving our topline enough, and that is where we are capturing a lot of this gross margin improvement just by weaning ourselves out of that. We used to do bounce back coupons which were very costly. We totally eliminated those in 2006, so we don't have to worry about going up against those numbers anymore, either.

And finally for Dennis, the inventory. Any part of that increase tied to the new businesses and any overhang of holiday or winter merchandise as you enter this new year?

The so-called overhang is not abnormal. Obviously we had some clearance carried forward, but that is being liquidated as we normally do. So it has got nothing to do with our real seasonal merchandise. It is not so much the new businesses, because we really hadn't bought a lot of inventory by year-end for the businesses, somewhat but not terribly significant. Most of it is -- most of the inventory increases are coming out of either our core merchandise, a lot of it for Rochester as we build up that business. We planned for new stores in Rochester, two of which needed to be deterred until opening into 2007 unexpectedly. And our direct business, which has been growing quite significantly. So on a good side I don't think it has anything to do with age or seasonal or potential markdown problems or liquidation issues going forward. It has more to do with supporting the growth of the business, which I think, as I said before we can get more efficient at managing during 2007.

Okay. Thanks again. Congratulations.

Gary Giblen, Murray, Carret.

Good morning, everybody. The 55 basis points of pure gross margin, pure merchandise gross margin that is good, although not as big an improvement as the rest of the year. So was that weather affected or why was that last event that rate of improvement in the prior part of the year?

I think it has as much more to do with the fact that we've been seeing fairly consistent merchandise margin improvements in the 200 basis points area for a number of quarters now, Gary, that we have always expected it to slow down to around the 100 basis points area, and I think that is what we are starting to see happening in the fourth quarter. Nothing that we did not expect.

Okay. And the -- I mean as you increase your private-label mix at Rochester though, does that fewer merchandise gross margin expand more than that in the future?

That will be one source, but I think much of the increase in merchandise margin going forward will be our product costs Casual Male, Rochester for both our retail and our direct businesses. It will be a smattering from all places.

Okay, and then what inning are we in so to speak in terms of selectively upgrading in the Rochester store and field staffing? We've talked about that as something that was begun in '06 and is continuing. Where are we in the process?

We're still in the early innings. We've got a lot ahead of us, and we are pleased because Rochester is doing very well. The way it has been operated up until this point. We see a lot of upside, and again a lot of the same dynamics that we saw in Casual Male are where Rochester is today. But we have no intent on the customer ever being confused whether they are in a Casual Male store or a Rochester store. We are actually going the opposite way. We want to elevate Rochester to an even more luxurious, higher level and really put emphasis behind some of the more dominant brands out there, give them more exposure and start to cut out some of the names that really don't mean anything to the customers at Rochester today.

Understood. Any developments in the Cutter & Buck matter?

We can't comment on any pending litigation.

Well, I guess the question is, is settlement in the next several months a real possibility as opposed to protracted litigation?

Gary, can't make any.

Okay. I'm sorry, just trying to get a broad sense there. And have you found in the second quarter has weather been pretty normal? Any weather disruptions?

No, we don't see weather as any comment that its going to have any type of impact on our business in the first quarter.

Thank you very much.

Paula Kalandiak, First Albany.

I have a couple questions for you. First of all on this new Oakhill line, can you give us a sense of what kind of price point you are talking about versus some of your other private-label brands?

Oakhill will have price points around the $50 ticket level, and that would be compared to $35 to $40 tickets. It's interesting. We introduced this pant at $55 which is significantly higher than the comfort zone pant that has been our number one pant. And the customer response has been unbelievable. They see the quality difference. This would be equivalent to a $90.00 pant that you would find out there today. And we have presented the line to our field organization, and they are really excited because we are attracting a customer that is willing to pay more for a better quality garment, not that we are backing off Harbor Bay, but Harbor Bay has its limitations. It is really our commodity price point driven brand, and I think when you see this line coming in for the fall season it is pretty spectacular from our perspective.

Okay, great. And with regards to your remodels can you remind me what kind of bump have you been seeing in the stores that you've remodeled?

We are seeing much more boost in performance in the stores when we relocate, not necessarily up till now in the remodels, although these -- certain of these particular remodels are now to increase sales productivity specifically to improve visual presentation of existing assortments, better space to store, add higher capacities for inventory in these high sales volume stores. So I'm not sure yet what to expect in terms of sales improvement in these particular stores yet.

And do both the remodels and the relocations stay in the comp base?

Yes.

Okay, and then with regards to SG&A leverage what comp do you need to get SG&A leverage?

Any comp better than 2% gives us leverage is our general rule.

Okay, and on Jared M, did you say the average spend is $40,000 a year?

That is just with Jared, yes. Jared M has some clients that will spend as much as $200,000 a year.

And repeat that each year?

Yes, hopefully when they get bigger contracts they will spend even more with us.

So that implies that he had an average of only about 62 or 63 customers, but he probably had more if there are some that are spending $200,000?

Yes, right but, no he did. That is where we saw this opportunity. Jared was able to service about 70 customers by himself and was spread so thin and now we are really leveraging this thing to get out there. We fitted 55 NBA players at the NBA All-Star event in Las Vegas. The NBA and us have partnered together to get the Jared M brand out there. And last week we had a fashion event at the NBA store in Manhattan. Over 700 people came. There were 90 people from the media there. So again what we've been spending our time and energy on is building this infrastructure, being able to source multi internationally to be able to take on the incremental business that we anticipate coming in the next couple years. So we are building a sales force of people to help support Jared M get to all these players, celebrities out there today. And again, we are ready to go in the next couple months to get the sales force out there selling.

And is it almost all suits or what else would be included in custom clothing?

It is sportswear. We do shorts and sweaters and shirts. It is pretty robust in what we are selling. The suit business is certainly one of the things we looked at Rochester to capitalize on, and being able to get a bigger share of custom clothing. But the Jared M collection is mostly sportswear.

And that is what Jared M was selling or is that a transition that you've made?

Jared M did some of that selling, but we've really built it into more of a collection line covering all the necessary categories.

And then just finally on the LivingXL concept, I was just curious as to how you are doing your sourcing because this is primarily hardlines, and I was wondering how you are ramping up to speed on how to source hardlines since that is not typically what you do.

Because we don't know where the action is going to take place in terms of what products are going to be really outperforming other products, we are using the existing vendors that SuperSizeWorld had at this time. Once we are able to scale out what our quantities will be for a year, we anticipate taking that stuff -- a lot of that product directly where we could buy sufficient quantity. So the margin opportunity on LivingXL won't be nearly what it will be a year from now but we plan on direct sourcing that. Li & Fung who is our agent, 35% of their sales volume is done through hardlines.

Okay, great. Thank you very much.

Rob Wilson, Tiburon Research.

Just want to circle back on a couple things. Dennis you previously had given your aged inventory metric. Do you have that for Q4?

Unchanged, it is around 4%, Rob.

Versus what, last year?

Last year at this time it was about the same.

And your direct-to-customer sales mix, I guess last quarter was 16%?

Direct-to -- for the quarter -- for the year -- I'll have to pull that, Rob, but top of mind we are now at about 17% for the year.

Okay, thank you. And also should we assume now that you are buying back stock and you are not really opening any core Casual Male stores that you don't see any further growth in the Casual Male chain David?

No, I mean to us relocating stores is a very similar cost to opening new stores. We've got 60 stores over the next few years as leases become to term that we want to relocate. And I've said this before but we finished the year -- of the nine stores we relocated this year got us 22% comps out of those stores. And we anticipate that same type of movement as we get these other stores relocated.

I think our priority right now is to get more Rochester stores open. But we have identified that Casual Male could handle at least 100 more new stores over the next several years. But our priority right now bigger bang for our buck is to get stores relocated. However, if a new store location comes up that is a slam dunk, and that actually happened when another retailer decided to close 35 stores, we picked up three locations that we had been eyeing for quite some time. So we don't pass up on any good Casual Male locations. It is just not our priority right now.

Dennis, you mentioned the loyalty program; 70% of your transactions were driven by the loyalty program the last two weeks. Would it be fair to say that the volume, the sales volume was even higher than 70%?

No, I'm not saying the volume is 70%. I am saying that of customers going to the register and making a transaction 70% of them are currently in the loyalty program.

They are not spending more?

The customers in the loyalty program spend more money than those not in the loyalty program. We are not quantifying that with you, but they do spend more money on the average transaction, yes.

So it would be safe to say the sales volume would be higher than 70%?

It is not that they didn't shop a year ago either. The point to be made here is that on the positive side many, many, many of our customers -- the vast majority of them are into the loyalty program. Which for the long-term we hope that it will enjoy the benefits that a loyalty program can produce. I think that is the major point to be gotten here.

Fair enough. One final question last quarter you mentioned that your 10% operating margin goal might be approachable in FY '07, this current fiscal year. You still believe that?

I did say that. I think that the sales for fourth quarter weren't quite what we had hoped that they would be, and therefore we obviously lose that base of sales now going into 2007. Certainly it is still approachable this year, but unlikely, unless we have a performance that even exceeds our expectations. So I don't see that happening. I see it happening in 2008.

Okay. Thank you.

Evren Kopelman, JPMorgan.

Good morning, thank you. I have a question about your direct business. It seems like a lot of your new growth initiatives are on the direct channel. Where do you see the direct business going over the next two years as a percent of your business, and what kind of growth rates do you see in that business? And secondly, how does the profitability of these direct businesses compare to stores?

Our Internet piece of the business has been growing at 50% compounding. We tend to keep thinking it is going to start leveling off, but we just haven't seen it yet. What is actually happening is the catalog business is driving a lot of that Internet business. So as we push more catalogs out there the customers are actually utilizing the Internet to actual place the order, that is where we have to put it in that bucket.

We feel this will be our most profitable channel over time because we don't have rent, and we don't have store labor to encumber it and again, catalogs are expensive to mail. So the more we get them comfortable and moving into the Internet and buying off the Internet, that is strategically where we want to grow. But I wouldn't be surprised if one day the multichannel piece wouldn't be 25% of our sales.

And my second question is about the 100 base points of merchandise margin guidance, what does that assume for the percent of product sourced directly and also the percent of private-label penetration in '07?

A combination of all the above. We're not going to get as much leverage on the promotional side because we are now cycling through that this year. So a lot of our gains last year where we became less promotional. This year we don't have that advantage so much. So most of the gain is coming from the growth of -- it's a combination of the growth of private-label, the lowering of our costs through direct or through our domestic vendors and getting higher sell through on our product which creates less markdowns along the way. So we have managed in the last few years to increase our gross margin by 600 basis points. We are starting to say it has got to start losing its leverage. We're not going to get that continuance, but we still have lots of opportunities. That's why we are just guiding to another 100 basis points, and maybe we could outperform that.

Finally on your interest expense guidance I think you said $3 to $3.5 million for '07. What does that assume in terms of borrowing? Is that for all the borrowing for working capital needs or does that have any borrowing assumption for a share buyback?

Mostly share buyback. I said $2.5 to $3 million I thought for 2007.

Okay, all right. Sounds great. Thank you.

Marc Bettinger, Stanford Group.

Just a couple quick follow-ups, Dennis, can you give the total SG&A that you're looking to spend next year in '07 on B&T and Jared M and so on?

That is the -- well, Jared, $9 to $10 million, Mark in SG&A.

Okay, total for the year. And the interest expense, did you say you were going to be $2 to $3 million down from this year?

On an absolute basis $2.5 to $3 million.

Is what you would be spending in '07?

Yes.

And in terms of the ongoing capital structure do you see putting any long-term debt on or pretty much run the company debt free?

No, we don't see at this point in time with the company's generation of free cash flow, Mark, I think that we could find and our strategy is to maintain a fine balance between growth of the business, maintaining a level of cash flow and producing returns back to the shareholders via share buybacks. And I think we can do that at our level of profitability without incurring large amounts of long-term debt.

Okay and did you say the number of relocations for this year was going to be nine?

Yes, that is what we are estimating right now.

Is that down from a different, a previous estimate?

Before the year started we said that if we could do 15 a year that would keep us on a good pace, but nine is a guess, 15 was a guess. It shouldn't move anybody's numbers because it is not a lot of stores that could move our comps at all.

Okay, congratulations again. Thank you.

Gary Giblen, Murray, Carret.

Just wondering about more color on the LivingXL -- I'm sorry -- on the ramp up of B&T direct. You said it is doing very well in early days. Do you think is it just fast out of the gate or do you think it will be bigger than your initial planning assumption was?

It is less than two weeks. It is really hard for us to say what is going to happen, but what we're seeing is very positive. It gives us more confidence that we've got something that we always thought was out there as potential growth. But it is too early to make a judgment call.

Okay, and then back on LivingXL, when do you start adding a lot of products and gearing up that business in a significant way?

We're in really good shape. We've got 48 pages in our first catalog, which is very extensive and it has got -- you'll have to see what it looks like in the end, it doesn't look like anything that SuperSizeWorld was doing in the past. But it will grow. We will be adding product, testing product over the next several years. And I'm not saying how big it will be, but the merchandising group in that division is out right now constantly looking for new ideas and new product lines.

Are you finding consistent success with products that you added to what was not in the mix when you bought the business there?

It is not going to be out there until May. We haven't.

Okay, I was trying to say when do we know -- yes, okay. So it is -- so you will know whether those new products are successful at that point. Okay.

Yes, we have no sales yet because it is not live.

Okay, got it. Thank you.

Scott Krasick, C.L. King.

Dennis, just on the SG&A one more time, in addition to the $9 to $10 million of new investment spending is it still at 10% of the dollar sales increase?

Yes, that is what I said. We are breaking out new businesses from core. Our core is Casual Male and Rochester, right? So that base SG&A we see it growing by 1% off of '06 dollars plus another 10% of the incremental volume related to that.

Okay, 1% plus the 10% of the incremental sales dollars, perfect.

Over to the side our new businesses which we are managing to a breakeven level -- right -- they'll generate $9 to $10 million of SG&A on its own. There will be some sales, there will be some margin dollars to offset that, but on the SG&A line, $9 to $10 million for that.

I guess what was the core SG&A then expense in 2006 ex the new investment spending as well the 1% would grow off of?

I had indicated that our new business, that category expenditures for the year approximated $6 million for the year.

Okay. Thanks.

There are no further questions at this time.

Thank you all for joining us, and we will look forward to giving you our first quarter results in a few months. Thank you.

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