Destination XL Group Inc (DXLG) 2007 Q2 法說會逐字稿

Good day, ladies and gentlemen. Welcome to the Casual Male second quarter 2007 earnings conference call. (OPERATOR INSTRUCTIONS). I would now like to introduce your host for today's conference, Mr. Jeff Unger.

Good morning. Thank you for joining us today. On our call today will be David Levin, President and CEO, and Dennis Hernreich, Executive Vice President, Chief Financial Officer and Chief Operating Officer.

Today's discussion will contain certain forward-looking statements concerning the Company's operations, performance and financial conditions, including sales, expenses, gross margins, 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 the 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 found available at CasualMale.com.

Now I'd like to start the call with Dennis Hernreich.

Good morning and thank you for joining us on this morning's call to discuss Casual Male Retail Group's earnings and performance for the second quarter of 2007.

The Company's operating earnings during the first half of 2007 was 7.6 million, resulting in net income of 3.6 million, or $0.08 per share. After considering the losses from the Company's new businesses of 1.9 million, and another $700,000 in legal expenses associated with the successful litigation, the Company's operating earnings from its core Casual Male and Rochester businesses improved by 9% from a year ago for the six months so far this year.

On an earnings per share basis, this $2.5 million, together with last year's $1.4 million gain on the sale of LPI, resulted in a difference of approximately $0.05 per share for the first half of 2007 compared to last year.

As to the second quarter earnings performance, after considering the 700,000 in litigation costs and another 900,000 operating losses related to our new businesses, earnings generated from our core businesses were slightly below last year's levels, as sales during the quarter were slightly below our expectations. Otherwise, the Company's performance was right in line with its internal plans.

Looking ahead, the Company expects to show full-year earnings of between $0.45 and $0.50 per share for 2007. This reflects the Company's expectations of net earnings improvement in the second half of the year of 7 to $9 million from a year ago. We'll go over the underlying assumptions of sales, gross margins and SG&A, which we believe to be achievable.

With respect to the Company's expectations for its new businesses, we previously have stated that we plan the new businesses to attain an operating breakeven level for 2007. However, we now expect that, although the new businesses will generate a modest operating profit in the second half of the year, they will generate an operating loss in the neighborhood of just in excess of $1 million for 2007.

This is the first quarter that the Company has changed its policy of providing financial earnings guidance to the financial community. Going forward, at least at each quarterly earnings call, the Company will update its earnings expectations for the year, but will not comment as to any one quarter. During the Company's earnings call for the year scheduled for the second half of March, the Company will provide earnings guidance for the new year.

Let's now go over the components that comprise the Company's earnings performance for the second quarter and six months of 2007, as well as our expectations for the year.

Sales for the second quarter of fiscal 2007, which includes our e-commerce and catalog businesses, increased 2.2% to 114.2 million, as compared to 111.8 million for the second quarter of fiscal 2006. The sales increase of 2.4 million was driven by increases among all channels, with our direct-to-consumer business representing approximately 1.6 million of the increase.

For the second quarter of fiscal 2007, our new businesses, which include Jared M., LivingXL, and B&T Factory Direct, had sales of $2 million. Comparable sales increased 3.9% during the second quarter, of which the Company's retail chain increased 2.8% and its direct channel increased 11.3%.

For the first six months of fiscal 2007, total sales increased 5.1% to 225.5 million, as compared to 214.7 million for the first six months of fiscal 2006. The sales increase of 10.8 million was driven by increases among all channels, with our retail stores representing 52% of this increase. The remainder of the increase was from our Internet businesses, which had an increase of 16.8% for the first six months of fiscal 2007 as compared to the prior year.

For the first six months of this year, our new businesses had sales of $3.2 million. Comparable sales increased 5% during the first six months of fiscal 2007, of which the Company's retail channel increased 3.4% and its direct channel increased 15.3%.

During the first six months of the year, CMRG opened five Casual Male stores and one Rochester store, closed four Casual Male stores and seven Sears Canada locations, and relocated two Casual Male stores. At the end of the second quarter, total store count was 503 stores, with 1,832,000 square feet of leased space. By the middle of the third quarter, Casual Male will no longer be operating stores within Sears Canada locations. For the balance of the year the company is planning to open three Casual Male stores, two Rochester stores, and close 14 Casual Male stores and one Rochester store, and the remaining five Sears Canada locations, and relocate seven Casual Male stores. Much of Casual Male's store renovation program of approximately 60 stores has commenced, and is expected to be completed in the third quarter. Targeted store count at the end of the year is 488.

An update with respect to our business in Canada. We recently agreed with Sears Canada to discontinue Casual Male's presence in its 12 retail stores, but maintain the direct business. As a result, we are currently in the process of closing all 12 of the Casual Male stores within Sears Canada during the third quarter. In 2006, the sales from the Sears Canada retail chain approximated $1.3 million.

During the first six months of fiscal 2007, the Company's comparable sales from its core Casual Male and Rochester businesses, that is excluding the new businesses, generated an increase of approximately 4.1%. For the balance of the year, the Company is anticipating its comparable sales from its core businesses to approximate between 3.7 and 5.8%. And together with its expected 19 million sales from its new businesses, we expect sales for the fiscal 2007 to approximate between 495 and 500 million.

Gross margins for the second quarter of fiscal 2007, inclusive of occupancy cost, was 46.6%, which was an increase of 130 basis points as compared to a gross margin rate of 45.3% for the second quarter of fiscal 2006. This increase was attributable to improved merchandise margins of approximately 180 basis points over the prior period, offset by a slight increase in occupancy rates as a percent of sales of 50 basis points. The improvement in merchandise margin was primarily due to continued increases in initial margins related to our direct sourcing, and, to a lesser extent, lower overall markdown percentage. The slight increase in occupancy cost as a percent of sales was principally due to the new store leases and lease renewals.

Gross margin for the first six months of fiscal 2007 was 46.2%, which was an increase of 170 basis points as compared to a gross margin rate of 44.5% for the first six months of fiscal 2006. The increase of 170 basis points was attributable to our improved merchandise margins of approximately 190 basis points, offset slightly by an increase of occupancy rates as a percent of sales of 20 basis points.

We anticipate that the Company's gross margins for fiscal 2007 will continue to show improvement for the balance of the year, resulting in an increase of between 150 and [180] basis points improvement for fiscal 2007, or between 47 and 47.3% of sales.

SG&A expenses, as anticipated, and consistent with our previous guidance, were 43.9 million for the second quarter and 88.3 million for the six months of 2007. As a percentage of sales for the second quarter, SG&A was 38.4% of sales as compared to 36% for the second quarter of fiscal 2006. For the first six months of fiscal 2007, SG&A expenses were 39.1% of sales, as compared to 37.1% for the first six months of fiscal 2006. The increase in SG&A of 3.7 million and 8.7 million for the second quarter and first six months of fiscal 2007, respectively, is partially due to approximately 1.5 million and 3 million related to our new businesses for the second quarter and for the first six months.

Also during the second quarter of fiscal 2007, we incurred approximately $700,000 in legal expenses related to our successful litigation against a former business associate and current competitor. As previously reported, the result of this litigation was the Company was awarded a judgment of 1.5 million plus interest. We believe we will collect this award over time, but only after going through a legal process. Therefore, recognition of this award will be made once receipt of the award is more definitive.

The balance of the SG&A increases were as anticipated, and relate primarily to sales volume-related costs, such as supporting payroll transaction and marketing expenses to support our growth.

For the balance of the year, the Company expects its SG&A levels to approximate last year's levels overall, inclusive of the new business SG&A. Therefore, we anticipate that our SG&A expense levels for fiscal 2007 will be between 180 and 182 million, of which approximately 11.5 million relate to the Company's new businesses.

Inventory levels at the end of the second quarter approximated 120 million, compared to 115 million at the end of 2006, and compared to 101 million at the end of the second quarter of 2006. The growth in our inventory levels has subsided, and inventory is expected to be approximately 15 million less than last year by the end of the year.

The Company increased its debt by approximately 52 million during the first half of the year, mostly to support the purchase of 3.8 million shares for approximately 46 million. During the second quarter, the Company entered into a 17.8 million four-year secured term loan to further enhance the Company's balance sheet flexibility. Its liquidity position with respect to its line of credit hovers around 50 million, and it still has 27 million remaining under its 2007 $75 million stock buyback program. Over the past 15 months, the Company has acquired a total of 5.3 million shares for an acquisition cost of approximately $61 million.

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

Thank you, Dennis. As Dennis reported, we delivered a 3.9 comp this quarter, which was the 15th consecutive quarter of comp sales increases. But even though it was on top of last year's 10.6 comp, it was below our expectations. In early July, I said that we had anticipated a mid single-digit comp for the second quarter. However, we experienced a similar drop-off in traffic in July that was consistent with what other specialty retailers reported. The warm weather and shift in the back-to-school period in some of our major markets had an impact in this time period. We are optimistic, however, that we will perform well in the fall and holiday season, and our biggest opportunity being in the fourth quarter, where we're up against a 7.5 comp that, we believe, has quite a bit of upside to it, considering the warm weather we encountered last year during the six weeks of holiday selling.

We are pleased in light of the sales shortfall that our gross margin performance continues to improve. In terms of margins, we had a 180 basis point improvement in the merchandising margins this quarter, resulting from a combination of a reduction in promotional activities, increased percent of our private-label as a percent of total sales, and higher sell-throughs at full price. And we still anticipate improvement in that margin performance for the rest of this year and through 2008.

Our loyalty program, which we launched last October, continues to gain traction. We now have 1.2 million customers in the program, and we just signed up an additional 100,000 customers in the month of June alone. Today, almost 90% of transactions at Casual Male are by customers in the loyalty program. And what we're finding is that upon redemption of rewards, this customer is spending about 20% more net in their transaction compared to our average transaction. So while the redemption rate is not significant at this early stage in the program, it is encouraging that over time it will have a positive impact on our future sales potential.

In terms of merchandising, we believed that our biggest growth opportunity this back half of the year would be in bottoms, and that opportunity is now coming to fruition. We continue to see strong increases in our short category this year, and now we're seeing improvement in our casual and our denim bottoms.

The launch of our Oak Hill 3-in-1 pant has been a solid success, and now our expanded, more fashionable assortment of denim and our 626 Blue lifestyle brand has turned that category around from its down-trending performance from the past couple of years. And based on the early reads, we anticipate a strong fall season in all of our bottoms.

Today, we now have four businesses that did not exist a year ago.

Jared M. continues to expand its client base in the high-end market, and we look to the fall to start to leverage the fixed overhead we've had with a planned acceleration in sales. Our made-to-measure suit business is up and running, and we're operating the Jared M. shops in our New York, Atlanta and Downtown Chicago stores. But we're not going to roll out this concept in further shops until we have all the logistics ironed out.

With B&T Factory Direct, we have increased our circulation in the fall to continue to develop the lower-end customer.

And the early results of LivingXL, our lifestyle catalog and Internet start-up for non-apparel products for those of size, have exceeded our expectations. And here we also have increased our circulation in the back half of the year. But it's important to reiterate that we have adjusted circulations up with the intent to build our database quicker, but not to drive profitability in each one of its first years of operation.

And we are excited about our final launch this year, which is ShoesXL, which specializes in large and wide width footwear for our customers. We have added 10 pages of footwear products to both our Casual Male and Rochester fall catalogs that will be in home this week. In addition, we will have a 36-page ShoesXL catalog in home in mid-September. The response from our stores has been extremely positive. ShoesXL is launching with 570 unique shoes to choose from, including brands such as Cole Haan, Bruno Magli, Kenneth Cole and Steve Madden. Our penetration in footwear has been less than 5% of sales at Casual Male, and less than 3% of sales at Rochester. And we believe this expanded assortment of styles available will become one of our strongest growth vehicles for the future.

Dennis also reviewed the status of our store openings and closings. It's important to note that the 14 Casual Male stores scheduled to close by year-end averaged $100 a square foot and collectively generated virtually no margin profitability. We anticipate transferring a portion of the closing store sales to existing stores in proximity of the stores that we are closing.

We're also pleased with the new store openings over the last year, and we plan on being more aggressive in opening new Casual Male stores, as our ability to identify stronger new store markets has improved dramatically over the last two years. And now we're in the process of identifying new locations, so it's a little premature to put a number on projected store openings for next year. But ideally we would like to open 15 to 20, versus the five to 10 we usually open per year. And with Rochester, we opened our new prototype store in King of Prussia last week, which looks great, and we'll be opening in Paramus in mid-September.

One final note. Today we have given an annual guidance number for the first time since the acquisition of Casual Male five years ago. We hope this will give the investment community a better understanding about where our earnings are headed from a company perspective. And based on our forecasts, if we achieve earnings within this range, it will be another solid year of improved performance of Casual Male Retail Group.

Now we will open the lines to any questions.

(OPERATOR INSTRUCTIONS). Scott Krasick.

David, I know you don't like to give monthly comps. But in light of the weakness in July, can you give any color on how August is trending?

Again, we're not in a position to start talking about third quarter at this time. But we are -- we're comfortable with the way the business has been trending.

Any color on July that you didn't give? Was it just really along with the market, or delivery, the changes in the calendar?

Yes. It was a calendar shift. We had an impact in Texas and Florida with the change of back-to-school and the sales tax weekends. It seemed to be extremely consistent with what was going on out there, because the first week to 10 days in July were normal. And then traffic really started to slow up. And as I'm looking at everybody out there, it just was very consistent with what was going on out there in retail. We were no different. It was really just -- it was a traffic issue in the stores.

And then a little more color on the new initiative. Maybe (inaudible) you seem more pleased with B&T and LivingXL than Jared M. You are headed in to roll that out. How much have you invested in Jared M., I guess, year-to-date? And what are the thoughts on, really, the fuller roll-out, and what it means really to the typical Rochester customer? I don't think it probably means a whole lot.

The beauty of B&T and LivingXL and ShoesXL, it really has no incremental expenses to it, and Jared does. Jared has an overhead to it, with a fairly substantial fixed expense. And we do need -- we do need sales to turn that to profitability. Now, we're encouraged by what has been developed in the last six months. We've almost doubled his client list, and the sales force is being put together to go on the road to start selling fall.

As far as the stores are concerned, we feel pretty good that we have developed a new label -- we're calling it private label, Jared M. -- for a higher-end private-label sportswear line for the Rochester stores. We're comfortable about that. The made-to-measure program is a work in progress. We're -- that got started late. We're just starting to develop that right now, and we're not going to rush it. We want to do it right, so we'll hold it in the three stores. But in the first six months, Jared was the cause of the new business operating losses. But we still are confident that we've got a pretty good plan here that will neutralize itself in the fall season.

Is your plan right now for Jared M. to be profitable along with the others in the second half?

Jared should be, but not enough to cover the (multiple speakers) for the year.

Good. Just lastly, do you have any metrics in terms of when you're in a bottom trend, and you actually sell a pair of bottoms, what that means to your top sales? I assume it's a positive.

We're a pretty strong bottom business compared to any other retailer. Most retailers sell three tops to one bottom. We've always been strong in bottoms. Because in big and tall, you really have no options to shop anywhere if you're -- let's say you're a 52, 54-inch waist. You still can find tops out there. So we've always been heavily weighted towards that. And in the last two years, our growth has come from tops. Really better merchandising, better fitting, more fashionable. And bottoms has somewhat been stagnant. We brought in a new merchandising team on the bottoms, and this is really starting to turn around. So we think our tops will overall be more neutralized, and the growth will come more out of bottoms in the next year.

Gary Giblen.

Could you give us some flavor on the rationale for leaving Sears Canada? And also, were you losing money there, or just breaking even?

I think the rationale was, I think Dennis said, for the year we did $1.3 million.

Low sales (multiple speakers)

That's the rationale. That's not profitable for us. I don't know, Dennis, if you can say what it (inaudible)

The stores were losing modest sums, 4, 500,000. I think that we worked with Sears Canada closely to stay in their direct channel, to the point where our sales there trend more closer to 3 to 4 million on an annual basis, and is contributing decent EBITDA margins. So that's the channel that makes the most sense for the both of us, and therefore, didn't make any sense to maintain the stores.

Okay. And what inning would you say you're in, in terms of revitalizing the overall practices of Rochester, private-label, and store staffing, and all the many things that you've talked about in the past?

There's -- all initiatives are moving forward on a lot of fronts. We're very pleased with the progress. Meanwhile Rochester is performing well. We've made tremendous progress on the store side, merchandising, getting realigned, [planning and allocation], adopting practices from Casual Male. I would say inning-wise, we're sixth to seventh-inning. Still have some work to do. But certainly 2008, for much of 2008, we feel very strongly about where we're going to be, and pleased with the way Rochester is performing given the transition year that we're in.

And finally, is there any pattern of sales in terms of either regions or demographic breakdowns? In other words, one thought would be that the stores skewing lower income would have been more hit by the macro environment. But is that the case?

No. I don't think we've seen that. I think we've seen another similar pattern that the Florida business, which is one of our strong areas, has struggled now for several months. As -- and it was our strongest area. And I think we're hearing a lot of people, other retailers, talking about Florida becoming a disappointment in sales right now. But outside of that, no; we're not seeing anything between our lower demographic stores versus our higher.

So it's more just those -- the problems that exist in those states' economies?

Yes. I think it's a state-by-state issue.

Evren Kopelman.

Can you talk about how sales growth was only 2% in the quarter, given you had a 4 comp?

The 2.2. Store count differences, as well as our comps. Like most retailers, but unlike some, we realigned our comp calendar week-to-week, day-to-day to a year ago, which is not the same as the physical weeks and months. So there's a slight percentage difference resulting from that. You don't see that for the full six months, but we saw that for the second quarter.

And what do you expect to see in the third and fourth quarters, then?

Third -- I don't -- let me think. I don't expect third quarter to cause any major shift like this. And off the top of my head, I don't expect, given January is what it is, to cause any shift like that as well.

The second question is on your occupancy deleveraging in the second quarter. It looks to me like your second-half gross margin guidance doesn't assume occupancy deleveraging. Is that right, and why not?

That's correct. Our occupancy rate is flat in the second half of the year.

Why is that given you said the reason for the deleveraging is renewal of leases, which sounds like it would continue? No?

I think that many of our renewals are at year-end. And we felt that for the first six months, I think, our sales levels slightly higher, to where we would be able to offset some of this.

Richard Jaffe.

A question on new businesses and, I guess, your discipline in approaching what today is a money-losing operation or operations. Looking at them individually, do you sort of run internally a P&L for Jared M., LivingXL, the direct business, B&T Factory Direct, and ShoesXL? And is there a criteria and a timeframe in which you look at these businesses? So for example, Jared M. in third quarter '08 is still generating half the losses of the new businesses; is there a point where you pull the plug and say nothing definite or we need to rethink the business? How often do you evaluate these businesses, and how disciplined are you in terms of cutting your losses?

Obviously, we do have separate P&Ls for all our businesses. We look at them carefully each and every month. We're in constant re-forecast mode for these new businesses, given that we learn something new virtually every week about them. You know, as David said, LivingXL, and B&T Factory, and soon-to-be ShoesXL, are sort of on a different plane, in that they are very similar to our existing businesses in many ways. Distinctive from that is Jared M. And incidentally, when we talk about Jared M., we're talking about our direct sales Jared M., not so much the product we put into Rochester stores. It's really a direct sales business that's new to us. We're happy with the model that we've created. We're at the latter stages of executing that model. So it's difficult to say (technical difficulty) a period of time to fairly assess the viability and the strength of the business, just because we haven't executed fully yet what David said that we're about to be in that during the second half of '07. Certainly, we're not beyond (technical difficulty) our losses; I just don't think we're at that stage yet with Jared M. We'll see how the second half evolves.

A follow-on. How big is the Jared M. sales force today at the direct sales business? How many guys are out there selling?

(inaudible) right now, Richard, it's very small. (inaudible) few people, but that's the area that we're looking to staff with the right people that have the right experience in this type of business.

Are these guys all commission-driven, or are they salaried as well?

They're virtually fully commissioned.

Marc Bettinger.

David, I want to know, what do you think of the direct versus your expectations (inaudible) the 11%?

The direct business?

Yes.

We're starting to see what -- we've been getting such big increases. We're starting to see it come down a bit. But we've planned -- we've planned that accordingly. And that was part of why our comps we're talking about are coming down to mid-singles versus high-singles. I think that's part of it. We're still getting the increases. But we just can't keep putting these huge numbers on top of each other every year.

So the 11% was on plan?

Like we said, we were off our internal plan in the second quarter. So that also was a part of it.

Are there categories in the stores that, I guess, are down-trending that are offsetting the other successes for the comp number?

No. I think right now we're still selling a lot of summer. The fall product's coming in. So, the fall product is -- for us traditionally starts out slow. But it's being offset by increases coming out of shorts and short sleeves right now. So I think it's a timing issue for us. But there's really no -- we don't really have a category that's down-trending, would be the best (inaudible)

So the comp is really being driven more by traffic than anything else?

It's really traffic.

On that note, what gives you the confidence for the second half, given the macroenvironment?

I think it's because we internally forecast, and we've got a lot of new programs coming in, that we think we could sustain the type of growth we're getting. And as I said before, our year really rests on the fourth quarter. And we think we've got a lot of upside. We can't assume we're going to have the second-warmest holiday ever. And if we get anything neutral, which is what our weather forecast partners tell us, we should have a good run.

So there's no part of these programs -- there's no increase in promotional pricing?

No.

Dennis, what was the point you made about the 3.7%, the 5.8%?

[Point that point?]

Yes.

That's speaking to our comps assumptions for the second half of the year as it relates only to our four Casual Male and Rochester businesses, excluding any of the new business stuff.

And that's a whole second-half figure?

That's a whole second-half figure. That compares to 4.1 for the first half of this year. So, can we sustain 4.1 into the second half within -- which is within that range is the question you're really asking.

Last question on numbers. Do you have an update on direct sourcing and private-label percentages?

I think it's consistent where we said a month or two ago in a Webcast or on the road, that private-label is over 70% in Casual Male. It was 10% in Rochester. We're driving that number up for spring '08. I don't have a good number on that yet. And as far as direct sourcing, about 60% of Casual Male is direct source, and about 100% of Rochester's is direct source.

[Rasei Khalid].

Can you give us a little color about 626 Blue for back-to-school, and how it's performing?

It's really starting to accelerate. We only had one fit last year, and now we have three fits in several washes. The response from the stores themselves; they've been very excited about it. We think we're going to have a very strong September. We're getting very big increases in it, but it's coming off a small base. But it's encouraging that it's doing as well as it is in a non-denim month for us. August is still a little warm out there for our guy to be buying a lot of bottoms.

What is inventory on a comp store basis?

As an absolute number?

No. Just on a percentage.

On a percentage from a year ago?

Yes.

Comp approximately -- I don't have that in front of me -- but approximately, it's up about 13%.

That's on a comp store basis?

Yes.

How's the inventory mix in freshness versus clearance?

It's very similar to what it's been. No real change. Probably approximately 5 to 7% depending upon Rochester, Casual Male. Inventory mix is in a clearance stage.

For the new locations, David was talking about 15 to 18 new stores. Do you have any leases signed yet for '08?

We have a few, with several in progress.

[Tara Gary].

I just have a quick question on the Oak Hill line. I know you touched a little bit about the bottoms; now there's more out there, dress shirts and whatnot. I was wondering if you could give a little more color on how that's doing so far, like initial reads, and the potential size or penetration on the floor.

Actually, the knit tops are on the floor right now getting very high sell-throughs. And what's encouraging; it's at a $50 retail. So we're still very strong on Oak Hill. But Oak Hill is going to be building in the next couple months. Because we're bringing in corduroy. We're bringing in sweaters. Long-sleeve knits are going to be coming in. So it's in a very early stage. We were concentrating more on getting the 626 line for the earlier period, and Oak Hill starts to build its department in the next several weeks. But we're very encouraged. To move to these price points and get these type of sell-throughs is encouraging for us.

Howard Tubin.

Can you remind us -- do you have any plans to put any of the LivingXL or the ShoesXL assortment into Casual Male stores or Rochester stores?

That's a good question. We are actually putting the portable chair into all our stores probably -- they will probably be in the stores in 30 days. We tested it. We've had a nice sell-through. They're selling for $70 a pop. And it's such a driver on the Internet and in our LivingXL catalog, we thought it would be a natural to have that item. We are testing in six stores a LivingXL little concept shop. It's only been in a week. We're not making any judgments on that.

In terms of footwear, yes; a big part of our future is we're building the shoe departments within Rochester and Casual Male. We're testing new fixtures that could have 30% more capacity on them. And in Casual Male we're changing out the brands. Where we had a brand like Deer Stag; that's being replaced with Steve Madden and Skechers and some Kenneth Cole-type products. So, footwear is a big driver for us. It's not going to be hard for us to get significant increases, because honestly it was (inaudible) area of the Company for us. So we are leveraging shoes, and we're going to see what LivingXL product does do in the Casual Male stores.

Great. Just one other question about the balance sheet. How do you think it's going to look at the end of the year in terms of debt, or how far into your revolver will you be at the end of the year?

We anticipate being in our revolver somewhere in the range of 10 to 20 million. Liquidity will be somewhere in the 60 -- over 60 million level. Very modest usage of the line at the end of the year.

Rob Wilson.

Dennis, I joined late. What was the retail channel comp store percentage?

For which period?

The second quarter.

The second -- retail was 2.8 and direct was 11.3.

And you mentioned some new stores next year; I'm assuming there will be some store closings as well. Is that 15 to 20 you suggest, David -- is that a net number or a gross number?

That would be a gross number.

I think the store closings, though, Rob, are slowing up. We don't anticipate perhaps even half of what this year's number is. I think many of the closings that we were -- as we rationalize each and every market, I think, we're running through that and we don't see anywhere near the number of store closings, at least in 2008.

Got it. Finally, what was the circulation growth in Q2? I probably missed that as well. And what are your plans for the remainder of this year?

I know we've been stating that in the past. Because of competitive reasons, Rob, we don't want to continue talking about that detailed kind of stuff.

I guess a couple quarters ago you said it would be about 8% growth this year. Has that materially changed?

We're constantly re-forecasting and revising those numbers, but no further comment.

Scott Krasick.

Just one question. Given your aggressive plans to reduce inventories in the back half, if the fourth quarter turns out as good as you hope, are you going to be potentially leaving some sales on the table, and not able to get as good of a comp as you're looking for?

I don't think that that's really at risk. I think what it will mean is that our stores will be slightly more clean going into spring '08. I don't think that -- I think we'll still have adequate levels of seasonal merchandise, and particularly in core merchandise, to sustain the slower selling weeks in the transition periods between winter and spring.

[Eli Cantor].

Do you guys still expect the new businesses to generate 15 to 20 million in the first year?

Sales?

Yes.

I said 19.

Can you quantify what kind of effect the back-to-school sales shift in Texas and Florida had on revenues? It seems like, being that the Casual Male shopper average age is in the 40s, that the shift in back-to-school sales would be de minimis. Is that a fair assessment? Am I thinking about that right?

Again, we saw the traffic slowdown. The sales tax weekend is pretty significant to us, because that impacts everybody. And that is a very strong driver of sales. I will say that when we went up against those weekends, our comps in those stores dropped in the neighborhood of 50%. And then, when we anniversaried them in August, when we got it back in August, they comped up over 100%. That's a pretty big shift when you're playing in that type of extreme comps.

Last question is just on the direct business. I was hoping to get a little clarity on it, on what you had -- sort of the color that you'd given earlier. Direct business -- it seemed like about a month ago your expectation was that it would grow about 20 to 30%. And your comments earlier sounded like you're not so sure about that anymore. I'm wondering if the direct business, being that it did 11.3% in the second quarter, is that just a product of the second quarter sort of being light, or are you sort of bringing down your expectation for the future?

I don't think we expected our direct businesses to grow 20 to 30. I think our plans for the year really call for 15 to 20. We lightened those up a little bit, because, yes; we are trending at 11. Double digits still, but -- and it is still a strong channel within our company. But it has slowed up a little bit more than we expected it to.

Within that 11.3% increase, what exactly was the e-commerce? Can you break that out, or is that something you guys can't talk about?

We don't break that out.

Margaret Whitfield.

In terms of the new businesses, I take it the change in expectations of an operating loss, a modest one from breakeven, is entirely tied to Jared M. Is that correct?

That's mostly it.

A huge increase in sales to 19 million, from the 2.0 to something like 15.8, how would we split that out between the four new businesses?

We don't really speak to, and never have, between the four.

Could you give us some indication as to which businesses might be in the lead in terms of revenue contribution?

Certainly, LivingXL is ahead of the pack in terms of timing, and more of a product extension than anything. B&T Factory has increased perhaps slightly less, only because that -- we're not targeting necessarily our existing customer for B&T Factory. And shoes, you know, has just launched. So it's difficult to say with any definitiveness where we are on that. But certainly, LivingXL has, out of the box, been doing extremely well.

I noticed a wide range of estimates for Q3, normally not your seasonally strongest quarter. And I'm guessing it's going to be a lost quarter for the new lines as well. Any thoughts you could give us in our modeling efforts for the quarters two, three and four?

As we said, we really don't want to speak to any one quarter. 45 to 50 for the year.

Gary Giblen.

Could you give some color around the sales staffing for Jared M.? Because I know that the plan has shifted from internal training and development to hiring external people. So where are those people coming from? And are they hitting the ground running better than what your original plan had been?

I think we're going to hold that information for now. Again, it's a competitive situation, and we're not going to lay out our hand right now.

Okay. Can you say what -- is there a typical profile of the kind of person that you're recruiting, or you just don't want to talk about it at all?

Not right now. We'll get everybody caught up on the next Webcast. We're right in the middle of doing some hiring right now, and we don't want to lose our competitive advantage to get that done.

I fully understand. Thanks.

Marc Bettinger.

Dennis, any comment on further buybacks?

We have 27 million still to go. Other than that, we don't have any specific thoughts about it. Obviously, it depends on a few factors. And we'll see how things play out over the next several weeks, several months.

Is there a willingness to increase the debt load from here?

Certainly. That's not -- I don't think that's really [one of] the factors that is going to enter into it.

David, last question. Given the addressable population or demographic that you're trying to serve, and all the initiatives that the Company has been putting through for the last couple years, I guess I would have expected that the comps would be higher than they are. And I realize comping on a 10.6 and a 13 is difficult. But I think above the 4, medium, longer-term, I thought it would have been a little low. Can you just maybe give me a sense of what I'm not taking into account when I think of it that way?

Again, we want to be realistic. Of course we'd like to exceed that number, but we have to -- now that we're giving guidance, we want to -- we want to be realistic on what's going on. And we look at our current trends, and we make adjustments along the way. And right now we're comfortable that we can deliver the 4. Why not 6 or 7? Because we wouldn't plan our business that way. It's just how we view things. And we're trying to be more open and give some -- give all the real numbers of where the pieces of the business are coming in. We're going to be pleased if we could continue to give these type of comps on a consistent basis. It's been -- it's four years of consecutive comps that we're driving here. And again, we're going up against a 13 comp in this quarter. So we have to be realistic about what we could get in this quarter.

[David Berman].

Just was wondering if I could ask a couple of balance sheet questions. On your notes payable, I see that it was reduced year-over-year from 95 million to 44, and that the long-term notes payable value went [up] to 17 million. Can you just talk about the notes payable, what that is? And do you have to pay that back, and then you've got to convert it to a long-term note payable as well, the 44 million? Thanks a lot.

44 million is our line of credit outstanding. That fluctuates throughout the year. And as I said earlier, it's expected to drop to, say, between 10 and 20 million by the end of the year. And it does fluctuate. And it's a working capital seasonal line that does that. So I think it's higher, perhaps, than at year-end, only because we have been buying stock. Otherwise it would have been at similar levels as year-end primarily. However, at the same time, our liquidity under that line is a very robust $50 million. So we're all very comfortable with how that is operating.

Looks like you actually are in a much better cash position now than you were last year at this time, despite the fact that the inventories are up, working capital. So, what is that (inaudible) I'm just trying to figure out (inaudible) cash flow statement. I'm just trying to figure out where that comes from.

I don't know that we're in any better cash -- we're in, basically, a minimal cash position, same as last year. So I'm not sure (multiple speakers)

Forgive me; you're right. I'm just looking at this the wrong way. In terms of the payables, you don't break out the payables from accrued expense and liabilities. And I'm just curious, because that whole category went up, the whole payable category went up 2%, with the inventories up 19%, generally that's not a good thing, because you kind of want payables to go up with the inventories (inaudible) current? (inaudible) hard for us to see that. Can you give us a sense of what your payables are, how much they increased year-over-year?

There's a slight shift in that relationship that, I think, you have to recognize, in that our direct sourcing percentage has increased year-over-year. And the relationship between payables and inventory is slightly different on direct sourcing product than it is product [we] buy from vendors. I think that overall, our payables plus accrued expense amounts overall are very similar to last year's levels. True enough, our inventories are higher. But again, I think, that's more explained by the difference in our sourcing than it is by anything else.

I see. Do you have a target of sort of number of days of inventory or anything like that that you're working towards? What should we be seeing?

(inaudible) I think closer to 60, and it's gravitating more towards 55. And I think that that's going to be a relatively stable level 35 to 45 days, type accounts payable levels.

Finally, one more question. Are you seeing -- on the merchandising side, are you seeing -- the retail environment is always changing, and competitors are always adding and taking away lines. Are you seeing -- what are you seeing competitors doing in your space?

We haven't seen anything different in the last [year]. I think occasionally every few years, a retailer may add one more -- may take it up one more size; they may add 40 (technical difficulty) inch waist, and they only went up to 40. In terms of specialty, there's nobody new in our space than there was before.

But I mean more the big department stores and those guys. You're not seeing much of a change?

No. We haven't seen anything.

Rob Wilson.

Dennis, real quickly. Inventory. You're telling us to expect about 100 million on the balance sheet at the end of the year?

Yes, that's right. That's about right.

One final question. Is Jared still around? Is Jared Margolis still the President of that division?

Oh, sure. Yes. He's very active out there working with the clients. We don't name clients by name, but he's really scored a lot of the high-profile players that have a lot of discretionary income that are coming at us very pleased and looking to place some significant orders for their wardrobe for the fall season. So we're pretty optimistic about getting that on track.

At this time I show no further questions.

Thank you all for joining us. Again, we will be providing updated guidance at the end of the third quarter, and hope to talk to you soon with some good news about fall. Thank you.

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