Destination XL Group Inc (DXLG) 2007 Q1 法說會逐字稿

Good day, Ladies and Gentlemen. Welcome to the Casual Male Retail first quarter earnings and sales 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). As a reminder, this conference -- pardon me, I would now like to introduce your host for today's conference, Mr. Jeff Unger. Sir, you may begin the conference.

Thanks, James and thank you for all joining us this morning. Today's discussion will contain certain forward-looking statements concerning the company's operations, performance and financial condition including sales, expenses, gross margin, capital expenditures, 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 at casualmale.com. Now I would like to introduce Dennis Hernreich, our Chief Financial Officer, Chief Operating Officer and Executive Vice President, to begin the call. Thanks, Dennis.

Good morning, and thank you for joining us on this morning's call to discuss Casual Male Retail Group's earnings and performance for quarter one of 2007. The company's operating earnings during the first quarter improved to $2.5 million, up from $2.4 million a year ago. On an earnings per share basis, this year's first quarter amounted to $0.03 per share, compared to $0.02 per share a year ago. Let me explain. During the first quarter last year, the company sold its loss prevention business, LP Innovations Inc. for a gain of approximately $1.4 million, which is included in other income and added net earnings of $0.02 per share to last year's 2007, so comparing earnings to earnings on an apples to apples, $0.03 to $0.02 this year.

The first quarter's earnings performance was impacted by losses from its new businesses by approximately $1 million, as planned. Furthermore, we reiterate that we expect a new business activities to operate within break-even levels for 2007. Therefore, the company's operating income from its core businesses, that being Casual Male and Rochester, improved by approximately 45% this quarter compared to last quarter.

Breaking things down, sales -- the company's sales in the first quarter improved by 8.2% overall, with comparable sales increase of 6.2%. The sales increase occurred in all channels. The retail stores improved by 4.1% and our direct business increased by 19.4%. The direct channel sales penetration, that is the percent of direct sales to total sales, in the first quarter approximated 15.6%, compared to 13.9% during last year's first quarter. Catalog circulation of its direct business increased by 15% during the first quarter. Sales from the company's new businesses approximated $1.2 million in the first quarter. During the quarter, CMRG opened three Casual Male stores and one Rochester store, closed two stores, two Casual Male stores and relocated one other Casual Male store. At the end of the first quarter, the total store count approximated 510 stores, with 1.850 million square feet of leased space.

For the balance of the year, the company is planning to open five Casual Male stores, two Rochester stores, close 14 Casual Male stores and relocate seven other Casual Male stores. Much of Casual Male store renovation program of approximately 60 stores will occur in the second and third quarters. The targeted store count at the end of the year is 503. CMRG's overall gross margins improved to 45.8% of sales during the quarter, up from 4.38% (sic) a year ago for an improvement of 200 basis points. The company's occupancy rate improved by 20 basis points during the quarter, while its merchandise margins improved by 180 basis points.

Much of the merchandise margin improvement was related to higher initial markups, with some improvement associated with lower markdowns. Initial markups gradually improved throughout 2006 and therefore the company's greatest opportunity for gross margin improvement in 2007 was in the first quarter. However, the company expects continued steady improvement in its merchandise margins of approximately 100 basis points throughout the balance of 2007.

CMRG's inventory level rose approximately 7% during the first quarter to $122.7 million which is lower than last year's rate of growth during the first quarter of 13%. Much of our planned drops in inventory levels will occur during the fourth quarter of this year. CMRG's SG&A expense base increased to $44.4 million, from $39.4 million last year. Of the approximate $5 million increase in SG&A, $1.6 million is associated with the company's new businesses. The approximate $42.8 million in SG&A related to its core businesses, therefore, is in line with our expectations. The company expects, as we previously have discussed, its SG&A levels for 2007 to be within its earlier guidance of 1% growth rate on 2006 SG&A base, plus 10% of increased sales volume, plus another $9 million to $10 million for new businesses. On a quarterly basis, how to think about SG&A, we are expecting to approximate between $44 million and $45 million in each of the next three quarters, with another $3 million incremental in quarter number four. Overall the company reported this morning net income of $1.1 million or $0.03 per fully diluted share, compared to net income of $1.4 million or $0.04 per share, and, again, included in last year's earnings was an after-tax gain on sale of the company's loss- prevention business of approximately $900,000 or $0.02 a share.

The company utilized approximately $45 million of its line of credit during the first quarter mostly to acquire approximately 3.1 million shares for an acquisition cost of around $38.3 million. Over -- that then brings us to company has acquired over the past 12 months 5.3 million shares for an acquisition cost of about $61 million. The company still has approximately $27 million to repurchase shares for the balance of 2007 pursuant to its $75 million stock buy-back for 2007. This concludes my remarks about the quarter one results and now I will turn the call over to David.

Thank you, Dennis. Considering the challenging weather we had in the first quarter, we are quite pleased to deliver a 6.2 comp and along with comp sales, we have shown consistent improvement in our gross margin performance. Our gross margin improvements is a result of several variables and we have increased gross margin, as Dennis said, by 200 basis points in this first quarter and over 600 basis points throughout the last three years. And this is a result of the increase of our percent of private label business, it's over 70% now at Casual Male, and very successful start at Rochester getting them to 10% and we see that probably doubling by next year. Direct sourcing has been an impact; over 60% of all our private label receipts right now are done through direct sourcing. And again, as Dennis spoke to before, it's had a dramatic impact on our initial markup. We've been getting higher sell throughs on our seasonal fashion product. We've become less promotional. We only have three price point promotions planned for the entire year. And again, this gives us an ability to leverage our occupancy costs with comp sales increases.

Our market share initiatives continue to gain traction. Our ability to bring in a younger customer continues to improve. Our young men's private label brands 626 BLUE and Synrgy have been the driving classifications of our comp store improvements. Since we acquired the Company in 2002, the average age of our customer has dropped five years and we see that trend continuing going forward. With the rebranding to Casual Male XL last year, we also are increasing our penetration of smaller big sizes as a percent to our total business. We recently identified the opportunity for a new lifestyle brand and we'll be launching a full collection called Oak Hill in the fall.

With the average income of the Casual Male shopper at $70,000, we believe there's a market for us to have a premium traditional assortment that goes beyond the basic lifestyle of our current Harbor Bay. And our big item in this label will be the three-in-one pant, wrinkle free, stain resistant and color fast. This will be in all stores for Father's Day and our preliminary tests in the fourth quarter are very encouraging that this will be a real driver to our bottoms business. Our loyalty program continues to build momentum. Last month 85% of our store transactions were from customers in the loyalty program. And what we're pleased with is that when these customers redeem their reward points, they're spending more than our average transaction at the register.

Moving on to Rochester, this year we're focused on improving our visual presentation in the store, reduce the number of secondary brands and upgrade the assortments to be aligned more with the high end luxury men's clothing store.

All these initiatives have a high priority and we believe we'll be positioned where we want to be by spring '08. Our New York and Chicago stores have already been changed to the lifestyle presentation and from my recent visits, the impact on the floor has been quite dramatic. And all our new stores will now have a Polo Ralph Lauren concept shop and the upcoming King of Prussia store that is opening in August will be presenting a new, more updated prototype for the future expansion of our Rochester stores.

As we noted in our last Webcast, we have launched three new businesses opportunities for this year. Jared M., our high end made to measure and collection brand is up and running. The showroom in Manhattan is open, along with the catalog, internet and the three Jared M. concept shops. And by mid June the final stage, which is the custom shirt and suit business, in the Rochester concept shops will be live and running. The second launch was the B&T Factory Direct Catalog and e-commerce site. This concept has retail price points that are on average 25% less than in our Casual Male division. We have targeted this brand to a lower economic demographic to attract the customer who is price resistant to Casual Male at this time. In the initial March drop we only mailed the catalog to customers in our data base who hadn't shopped the catalog in over 36 months, which means we have not really mined into these customers because of their low productivity. But the results to date have exceeded our expectations. We said that our new businesses are modeled to break even this year, but with the early success of B&T factory direct, we're now able to increase circulation and build a data base of considerably more customers than we anticipated which will allow us to end the year with a much bigger database of customers and still break even. And our productivity per catalog will increase as we start to penetrate into our more active list of customers.

Our third initiative, Living XL, just launched last week. We delivered 350,000 48-page Lifestyle Catalogs to our customers that feature products that will relate to those of size. Products range from bathroom scales to airline seat belt extenders, to life belts-- life vests to wrap-around towels. And even though we only have 10 days of sales under our belt, we're very pleased with the early results. Again, now we are planning to add an additional drop in the fall and increase our circulation for the back half of the year. We think this has tremendous potential for CMRG in the future and just to reiterate, the increase in circ and sales will be modeled to break even in 2007 and the impact of these increases will give us a more compelling model for 2008. We have managed to create new opportunities for growth that have not been taxing on our capital expenditures. What is most important to note is that we have created these new businesses without them being a distraction to our core business. And while we'll be facing challenging comp sales in Q2 and Q3, we still believe we'll be able to continue comp sales growth in these two quarters and we view the fourth quarter as our best opportunity to deliver our strongest results. Finally, I'd like to remind everyone that we will be hosting an analyst day at our home office on Wednesday, May 30th from 9 am to approximately 3:15 pm. We'll webcast the day and you can listen in at www.casualmale.com/investor. Okay, so now we'll be ready to open the phone lines to any questions.

(OPERATOR INSTRUCTIONS). Our first question comes from Margaret Whitfield. Your question, please.

Good morning, everyone. Congratulations. David, if you hadn't added the extra circulation and the bigger database to the Living XL and B&T, I take it these new businesses might have been slightly accretive for the year.

Well, we actually modeled this that with, with -- we're modeling the circulation to ensure that we're break even. Had we been disappointed we may have had to rejigger the circulation down. But because we feel pretty optimistic about the early results we're going to take the circulation up and again, we'll be building a bigger database so we can have 2008 working these at a profitable level.

So can you give us any commentary as to the level of profitability for the three new businesses next year, just a broad range would help.

Boy, we'd love to do that. I think we'll know a lot more as the year progresses, Margaret.

Okay. And Dennis, you mentioned in Q4 the SG&A would rise only, I think you said, 3 million compared to last year when it was up, I think, 7. That's a function of the new businesses not draining the SG&A line as they did in Q4 last year?

Well, it's more last year's fourth quarter had a quirk in it, Margaret. There was an extra week in there.

Okay.

So you really need to back that out.

And the extra week impact on SG&A was?

Was about $3 million last fourth quarter.

Okay. And I wondered with the comps, I guess it's been a little bit of a roller coaster. Could you give us some commentary about how the retail store comps performed during the quarter itself and how May is looking to date?

Well, the quarter was interesting and that's why we don't report monthly, because we had, as you know, most people had a difficult April and with the weather it wasn't favorable but we had a really stellar March performance within the quarter itself. As far as business going forward, again, we don't make comments, but I did say that we will continue to view this as positive comps throughout the rest of the year by quarter.

And did the new businesses at all contribute to the comp in the period, Living XL or B&T?

No.

No XL at all because that was really just launched last week. And B&T, again, on the base it's on it's not going to really move the needle at all.

Okay and just one final question. How much do your loyalty shoppers spend versus the average transaction?

We never quantify that, but it is more and we just haven't given out the exact number. But we are clearly seeing they're customers who spend more and when they're redeeming their points, they're spending quite a bit more than the -- our average transaction. So, the good news is, they're not coming in with ten and $20, buying a pair of socks and walk out. They're coming in and they're shopping pretty heavily when they're ready to redeem.

Okay. Thank you.

You're welcome.

Our next question comes from Scott Krasick of CL King. Your question please.

Hey you guys, thanks. A couple questions actually were answered, but. What's the impact from the postage increases on your catalog business and have you built that in?

Built in, Scott. We're aware of them. We built them into our plans. They're factored in. Probably if you wanted to quantify that for the year, it's like a half million dollar impact in our SG&A.

Okay.

But we knew about that going in.

Okay. And then talk about -- sort of missed a little bit, Rochester, private label, you know, how you improve that and maybe it's a different message to the customer?

Well, we have two labels active right now, Rochester 1906, which is our traditional classic side and [Castanea] which is a little more European, Italian influenced design. Again, we started from zero and already those two brands are in our top five in terms of unit sales. So now we're expanding it into more classifications because we're confident that the customer will buy it if we give them a good perceived value.

So again, we see that business in the relatively near term growing to 20% and then we'll see what -- where it could go from there. But we certainly believe we can double that penetration and it's by far our most profitable names out there because all of the product in those two names are sourced private -- are sourced through our direct office.

You think you can do that just by adding classifications, not changing the message?

Oh, exactly. I mean, we're replacing what we could call some secondary brands that have been in the Big & Tall business. You could find them at any Big & Tall mom and pop stores. Those brands are going away and that's where we're developing our own proprietary brands. But we still certainly believe strongly in our big names, such as Polo Ralph Lauren, Zegna, Burberry, those are the kind of brands that we see growing in the future.

Sure. Okay. And then just trying to read into your message on positive comps in Q2 and Q3, just so we don't get ahead of ourselves, do you think that given the tough comparisons, you return to sort of a low single digit positive? Is that more realistic than the run rate we have been seeing?

That remains to be seen. We still think we can maintain what we said over the course of the year, which is going to be the mid single digits. Again, we are coming up against some bigger comps but --

your goal is still --

our goal is still there. I think we'll be fine. But again, going up against the bigger numbers in Q2 and Q3, we don't see the kind of increases we had the last several quarters.

Okay. All right. Thanks, guys.

Our next question comes from Tom Filandro of SIG. Your question, please.

Thanks. Hi guys. A couple of questions, first. David, can you maybe talk a little bit more about Casual Male as we look past spring, summer. I hear you talking about Oak Hill and I know you're going to expand the collection there. Is there anything going on at the Casual Male brand as we get to back to school to more deeply penetrate that core customer? Then I have a couple of followups.

Yeah, I'm glad you asked that, because, one of our driving growth areas is in young men's. We're looking at this August, September period really as our first back to school. We're well-positioned. When we had 626 and Synrgy last fall period, we didn't have enough product.

We built up our inventories and one of our weak spots by classification has been in our bottom area and we are coming out with three fits for our denim, for back to school, where we've only had one in the past. And we have had this at the national sales manager's meeting and the response was phenomenal. They're very excited. They believe this was a missing part of our business. So, we -- And our mailer for the August period is actually targeted more towards the back-to- school look, which we have never done in the past.

Great. And Dennis, question for you I think, circulation outlook for just the core businesses right now, can you just -- I can't remember the numbers you gave us for the first quarter. How should we view the second quarter and back half?

We were planning core businesses (inaudible) to be up about 7, 8% for the year, Tom.

Okay.

Some of that increase as you heard occurred in the first quarter. I mean, it's more flattish, really, for the balance of the year in terms of our core business.

Okay. That's what I thought. And just one other question on the retail store front, can you give us a little color on the metrics of that 4% comp, 4.1.

Yeah, traffic up slightly, average ticket up slightly more and otherwise conversions flat is about how it is shaking out for the first quarter.

Terrific. Nice job and best of luck to you.

Thanks.

Our next question comes from Evren Kopelman of JP Morgan. Your question, please.

Thank you. Looking at the tough comparisons coming off over the next few quarters and there were a lot of comp drivers last year. You had the in stock-- the guaranteed in stock programs, and the lower markdowns and new private label merchandise. I'm curious, what are some of the comp drivers for the rest of this year?

I think while we had those significant gains last year, we left a lot on the table. Short falls in having enough product in certain classifications, certainly our more fashionable product is driving our business today as core has-- is maturing and again, we see a lot of opportunity in our bottom business.

In the last two years, all our growth has been coming out of tops, and bottoms have not lived up to keeping up with the successes we've had in the tops and, I mentioned before, we got a new merchandising group in that area, really starting to drive some sales and we think this Oak Hill brand is another category, like Synrgy and 626 that will be received very well and take us into some higher price points that we haven't had in the past.

Okay.

One more thing. In the fourth quarter, if we get any kind of weather, we should have a very good fourth quarter because we had that shortfall in our outerwear and sweater business.

Right. The direct business also grew very strongly last year, I think over 30% in the second and third quarters. What do you expect for growth in the direct business for the remainder of this year?

It's fairly consistent with what you saw in Quarter One, Evren.

About 19% growth?

In the 20% neighborhood. I think that also-- look, Evren, you know where our target market share. We've been saying 12%, 12%. I think that whatever numbers we're up against, really, it speaks very well to the health of the business, our customer base is growing. The strategies are, we believe to be, right and so we see no reason why we will not be showing consistent growth, not only several quarters but really for a number of quarters beyond this year.

Right. It's just, that you said you expect -- and I know a lot of growth is coming from Internet but you said you expect your circulation to be flattish at the core businesses and last year was up a lot driving that sales growth. That's why I was asking.

And maintaining -- maintaining the higher circulation numbers, we believe is more than adequate to fuel that kind of growth. Okay. That makes sense. And then two quick ones. First one, the occupancy, what comp level do you need to break even on your occupancy. It's about 2% comp, Evren.

Overall, right, not just store only?

Overall, yes.

Okay, and then the second one is what was the diluted share count at quarter end?

The diluted share count, 44.4.

Quarter end? And the average for the quarter.

That was the average for the quarter. Excuse me. The quarter end was about a million shares less.

Less. Okay. Great, thank you so much.

Our next question comes from Gary Giblen of Goldsmith and Harris. Your question, please.

Hi, good morning, everybody. Can you give us an update on the outlet stores in terms of did the XL conversion achieve a similar lift to what you achieved in the regular Casual Male stores.

Well our-- I think I mentioned this in our last Webcast. Our outlet stores continue to out perform our anchor stores. We're reporting stores as a blend. We've projected them to out perform. They are out performing.

Again, it's a combination of what we believe is the rebranding to the XL and probably a bigger driver has been the product assortment where they have clean, fresh products, full size scales, balanced inventory and we don't use them as a dumping ground from our full price stores anymore and that's really where we're getting those increases. They only rep about 15% of our sales so they don't drive the total number up very high but as a group, they're performing extremely well this year.

Okay. Great. And then, any update on the time frame for resolution of the Cutter and Buck matter and have they been able to use the customer list that's in question to do a Father's Day catalog drop and so forth?

Gary, we can't comment on anything on our upcom-- on any pending litigation.

Okay. Can you roughly quantify the impact of the lousy April weather, perhaps the spread between non weather affected stores and weather affected stores?

I don't have that broken out by area, but our business has been very good, when we get any type of weather break out there right now. We do seem to be driven by weather, as other retailers had that rough April, it was rough for us also. But again, the quarter came in quite nice.

Okay. And finally, can you give some granularity on Rochester, revitalization efforts that you accomplished, maybe since the last call, since three months ago? I mean, I know it's just a lot of different initiatives, but anything brand new?

No, what I mentioned before, our big priority for us is to get the stores visually presented up to the standards that we think it should be. That is going to take us several months, because it's a major project that requires a lot of on-site supervision to get it done. So that's very -- that's just been very critical to what we have to get done. And the other part is really cleaning up the assortments on the floor. We are overbranded right now, oversorted, and that plan is in place. That's why I say, we really aren't looking until spring '08 to see the impact of these changes.

Okay. And then final one for me is the -- there's been market speculation that there would be more granular guidance-- or some degree of granular guidance given at your investor day on Wednesday. Is there going to be any kind of financial guidance component of that investor day?

No, not at this time.

Okay. Great. Thank you very much. I'll see you next Wednesday.

Thank you. Our next question comes from Paula [Kalandiak] of First Albany Capital. Your question, please.

Good morning. You guys did much nicer job on the top line than I was thinking, given how crummy April was for most retailers. I was wondering to what extent you might attribute some of the top line growth to the customer loyalty program? I know you said a lot of people were participating. But, how much credit would you give that for your top line growth?

Can't quantify that for you, Paula, but it took the -- it's a combination of again, the product assortments in the store and loyalty, another year of rebranding behind us. It's all those things working in our favor and what I always mention and I find most challenging being in retail for my whole career is we've been doing this and being less promotional at the same time. That's what we're most excited about. We did not go out and buy any of this business. We've actually cut back our promotional spend. We've cut back on our direct mail circulation and we're still able to achieve these comps, so a lot of it is due to the rebranding and the product itself.

Okay. And then I know you called out Synrgy and 626 as particularly strong. Are there any other, either categories or brands that were particularly strong or any areas where you experienced weakness?

No, I think we're pretty well balanced. I may have mentioned before in the clothing area we've had a shortfall in our suits separate business. I think you've heard that probably from a lot of the menswear industry. But we were able to offset that with significant gains in our sport coat business. That was an underdeveloped area for us. So all in all, within the categories and brands, everybody's holding their own pretty well right now.

Did your -- I don't know the official name but the 199 suit, shirt, tie combo sale, was that about on par with last year's results?

Actually, we tested in several markets, taking that up to 229 and you'll see in the Father's Day promotion, that's where -- we're moving it to 229 because we've brought in higher priced suits under a platinum label and they're performing quite well. So the customer is -- we've raised our price, given a better value out there and by testing it at 229, we saw that there was no resistance to that price point. So, again, going forward, that will help us a little bit on our margin also.

Okay. Great, thank you.

Our next question comes from Rob Wilson of Tiburon Research Group. Your question please.

Yes, thank you. Dennis, what did you say the inventory growth was? I don't think I got that correctly.

The Quarter One growth was 7%, from the --

versus last year?

No, from the first of the year.

Okay.

114 is what we started with. And we ended with 122.

All right. What's your expectation for new business? You mentioned 1.2 million in Q1. What's the expectation for the full year? Should we think of that as 1% of the total revenues?

Last quarter call, at the year-end, we had indicated -- we were approximating sales in the 15 million neighborhood for the year. How that botches up by quarter, we hadn't spoken about that.

Okay. And I guess like a previous caller, I'm curious about the circulation, the flattish circulation the rest of the year and how you're going to drive traffic and comps. Is there anything you're doing with store trade area circulation that's different? In other words, are you increasing store trade area circulation versus non-store trade area circulation this year?

No.

I think. I think one of the differences that within our direct business we have catalog and we have Internet. And the business is driving -- that's driving it has really been the growth of the Internet, which has been growing 40, 50% a year, versus the catalog. So a lot of our energy this year is enhancing our ability to drive more traffic into the Internet site, versus putting out more catalogs. So we still see the sustained growth we could get with a comparable catalog circ -- circ but having a bigger driver coming through the Internet channels.

As I indicated to Evren, we increased our circ quite a bit last year and so even though you're not seeing percentage increases, the quantity of circulation is more than adequate to generate continued growth and direct.

Okay. And finally, you mentioned, Dennis, that there was flattish transaction counts in Q1. Given the unveiling of the loyalty program, are you happy with that? Would you have expected more traffic improvement with the loyalty program?

I didn't say flat. I said slightly up.

Okay.

And yeah, we would like to see double-digit up traffic. And I'm not disappointed necessarily. I think it's Quarter One and now we're in Quarter Two.

Okay. Fair enough. Thanks for taking my call.

Our next question comes from Eli Cantor of Weeden & Company. Your question, please.

Hi, good morning, guys. Good quarter. My first question is about your target market share. Given that 4 billion of the $6 billion Big & Tall industry falls in the 42 to 40-inch waist size, can you quantify what percentage of your sales comes from selling to this demographic and what type of growth you've seen in sales od this demographic since the Company started focusing on selling to the smaller bigger guy.

We're not quantifying percentages by size. We try to keep a competitive advantage the best we can. However, our -- as I said, we have a very low penetration in the 42, 44, considering the size of the market. Yet, our rebranding, we're finding success there. Every month our percent to total sales has been increasing. Not huge percentages, but continual improvement month to month. And that's exactly what we were hoping to see.

So our XL tops and our 42s and 44-inch waists are certainly getting the bulk of the increases out there today. But that's going to -- that's a long process to change people's perceptions, but we're very pleased that it's working for us. And again, as I say, a lot of our business is being driven through young men's. Our young men's size curves are certainly more to the smaller guy that our traditional ones.

Okay. I might have missed your CapEx guidance. I know originally you guys had guided for 17 to 19 million for this year. Is that still the same?

Yes.

And does that include the cost incurred in terms of remerchandising the Rochester stores?

Remerchandising -- to the extent that it requires capital expenditures, yes.

Okay. And lastly, have you guys put any sort of tracking measures in place to ensure that the factory direct business does not cannibalize the existing XL or outlet business.

Studying that very closely. So yes, we have tracking measures in place to understand that.

Great. Thank you very much.

Thank you. Our next question comes from Brian [Rieunick] of ELR Capital Partners. Your question, please.

Hey, guys, how are you doing? Good quarter. What was the inventory quarter-over-quarter on a per square foot basis?

Say again.

The inventory at the end of the first quarter.

Yes.

Per square foot.

Per square foot, compared to last year's first quarter?

Yes.

It's up approximately -- approximately 12%.

And is any of that due to the shift in timing with the calendar, et cetera?

No, I wouldn't say that so much. I think that as we saw at the year-end inventory levels were of a similar increase from a year ago.

Right.

And I think that part of it has to do with supporting our direct business growth, part of it has to do with supporting Rochester's growth and keeping them, getting them in stock by size and otherwise I think over the -- as we have stated before, otherwise the inventory levels will begin to drop during fall of this year. To the extent where we'll be actually lower inventory from a year ago.

Why would that be the case? Why are you going to plan on inventories being lower as you move through the year?

I think not so much on direct, but the retail, we just have that much more room to be more efficient with our inventory levels. And we're planning to be that way in the fall of '07.

So when you say more efficient, are you looking to merchandise the stores less out of basics that maybe are sitting there at slower turns and more into fashion goods?

I don't think it has anything to do with the change in the assortment strategy at all. I think it has more to do with better managing our supply chain and our distribution methods.

When you say that, do you mean that you're quicker to market on reorders, et cetera?

Little quicker to market, less safety stocks in the warehouse and quicker distribution to our stores.

The direct business for the quarter was up 19.4%.

Yes.

In dollars, kind of what does that equate to?

That is approximately -- one sec-- . That will give you -- it's just about -- in the neighborhood of $3 million

For the quarter?

Yes.

And did I hear correctly that the same store sales increased for the stores meaning your retail operations alone was up 4.1?

Yes.

Including direct it's up 6.2?

Correct.

Okay, great. Thank you very much.

Next we have a follow-up question from Margaret Whitfield. Your question, please.

It was on inventories and it's been answered. Thanks.

Our next question comes from Howard [Cubin] of RBC capital. Your question, please.

Hey guys. Can you give us any more update on Jared M and how is that business ramping up?

Jared M. is up and rolling. We have a sales force now that is getting organized to really go out and sell for the fall season. We're starting our strategy to penetrate into the NFL and then later in the year we'll be strategizing for Major League Baseball. We have the three concept shops up and running. Product-wise, we are confident that the Jared M label will sell because it was more item by item. We had some very strong product.

We had some product that didn't do as well but most of that was because of fit problems that we've resolved going forward on some of the product. The showroom is up and running. The customers coming in love it. They're doing quite well. And the most important piece of the business, which is the custom made-to-order suit business, will be live middle of June. Stores will have their try-on garments, their sample books and actually the salespeople that will be doing the measuring were here yesterday and got certified. We have a training program to be certified to take the measurements, so we're ready to go. It's been -- are we where we wanted to be from when we originally thought we would get this up and running? No, we're months behind. But now we're ready to go.

Great. Thanks. And just one question on B&T. What percentage of that merchandise is private label?

A very high percent. I can't tell you exactly, but it's mostly private label.

Okay. Great. Thanks.

Next we have a follow-up question from Gary Giblen. Your question, please.

Yeah, hi. Any sustained geographical patterns differentiating the comp levels, because we have heard from some retailers that Florida is weak because-- maybe because of the housing market being weak or something, but any patterns in your business?

I would say that's probably the one thing I would agree to. Our Florida market has been -- has not held up to the chain level. They're coming off a very strong year last year, but we have seen weakness in that market also.

Okay. All right. That's it for me.

Thank you. Next we have a follow-up question from Brian Rieunick. Your question, please.

Sorry, guys I wanted to ask you another question about the note payable line on the balance sheet. Is that representative of the 45 million in stock repurchases that you've used?

Yes. That's all revolver balance, the note payable.

What kind of long-term view do you guys have on the leverage on the Balance Sheet that you're comfortable with?

We view our balance sheet as basically very unlevered. We have a lot more leverage capacity built into our balance sheet. We don't have any plans to use that leverage. Our plan is to continue to generate free cash flow and lacking any other significant projects to use such free cash flow to reduce our share count. If we dip into our revolver to support our working capital needs and/or share repurchases during the year we won't hesitate. But otherwise, we'll remain relatively debt-free on the balance sheet, with very healthy liquidity leverage available to us.

Where do you project the free cash flow for the year to be at this point in time?

Year-end, we had mentioned that our expectations are in the 50 to 55 million range.

Use of?

I'm sorry.

I'm sorry, use of cash.

Free cash flow.

You'll be positive 50, 55 million?

That's right.

Even after the stock repurchase?

No, that does not include the stock repurchase.

Okay. So basically you're using the expected free cash flow to repurchase stock?

That's precisely accurate.

Perfect. Okay, thank you very much.

Next we have a follow-up question from Rob Wilson. Your question, please.

Sort of follow-up on that question. Where should we expect revolver balance to be at the end of Q2 and Q3.

Q2, Q3, Q4, might as well throw that in too. Our expectation at the end of the year will be 20 to 30 million in the line, range, each of the quarters, we'll be about where we are, 50 to 60 million.

Does this impact your expectation of lower interest expense this year versus last year? I think you said that on the last call.

No, not significantly, Rob, I don't think, no.

Okay.

We're not expecting that.

Okay. And I have to ask. How do you define free cash flow?

Free cash -- operating activities less capital expenditures.

So cash flow statement, operating cash flows on the cash flow statement.

Cash generated from the P&L, less interest, less working capital changes, less capital expenditures, provides us with the cash flow that's available for other purposes outside of that.

That's helpful. Thank you.

Thank you. At this time I show no further questions.

Well, thank you all for participating. We'll soon be able to go more in depth. We're excited about the analyst day on May 30th. We'll have that Webcast. We look forward to talking to you again next week. Thank you very much.

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