Destination XL Group Inc (DXLG) 2007 Q3 法說會逐字稿

Good day, ladies and gentlemen, and welcome to your Casual Male Retail Group third quarter 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 be given at that time. (OPERATOR INSTRUCTIONS)

I would now like to turn the conference over to Mr. Jeff Unger. You may begin.

Good morning, everyone. On today's call we have David Levin, President and CEO of Casual Male, as well as Dennis Hernreich, Executive Vice President, Chief Financial Officer and Chief Operating Officer. I would like to read our forward-looking statements.

Today's discussion will contain certain forward-looking statements concerning the Company's operations, performance, and financial conditions 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 affect the Company. Information regarding risks and uncertainties are detailed in the Company's filings with the Securities & Exchange Commission. Our complete Safe Harbor statement can be found at casualmalexl.com. Now I would like to turn the call over to David Levin, President and CEO of Casual Male.

Thank you, Jeff. Good morning and thank you for joining us this morning's call to discuss Casual Male Retail Group's earnings and sales results for Q3 2007. Today we announced that we intend to discontinue the Jared M. business, either through an eventual sale or simply exiting the business. We've determined that the amount of resources required to make this a scalable business is not aligned with our strategic growth plans. We acquired Jared M. in May of 2006 as an opportunity to build a high-end custom business. Subsequent so that acquisition, we created a model to grow our direct channel of business that had no capital requirements and costs that could be leveraged within our existing infrastructure. Jared M, on the other hand, required its own infrastructure and took CMRG's management group from its core competency of operating retail concepts into trying to operate a custom manufacturing business.

Therefore, we feel it is in CMRG's best long-term interest to focus on expanding our core businesses and growing our recently launched B&T Factory Direct, Living XL and Shoe XL direct channels. Consistent with our strategy to grow our direct business, in August of 2008 we'll be launching our Casual Male and Rochester brands within the European union. Initially in six countries on the web with expansion plans beyond 2008. CMRG intends to leverage its existing merchandising and resourcing strategies for the EU. Our operating partner is GSI Commerce, the premier third party operator of direct marketing fulfillment in the U.S. and Europe. They'll oversee our web fulfillment and call center operations. And we view this venture as an extension of our existing direct business and we'll manage the division within our own merchandising team.

We're optimistic about the opportunity based on the success of our London-based Rochester store. It is the second highest volume store in the Company and continues to be one of our best comp stores year in and year out. Currently there is nothing in Europe that offers the marketplace the strength of brands and assortments that we carry today. In regards to our third quarter performance, we struggled with our top-line sales as a result of disappointing traffic in our stores and direct channels. After delivering 15 consecutive quarters of comp sale increases, we came in at a negative 1.1%. We strongly believe that the unseasonably warm weather, especially in October, was a significant factor in the slowdown. We know that the historical pattern of our customers' buying is tied to seasonable weather.

The good news is that we're currently up 7% comp through quarter four, which is more consistent with our sales performance prior to the problematic third quarter. Another positive factor that gives us confidence in our business is that the metrics that we monitor in the stores are on solid ground. Our customer conversions and average ticket out the door continue to improve compared to last year. We're confident that our product mix is resonating well with customers coming into our stores. Our newest lifestyle brand, Oak Hill, has had an excellent first season launch. Oak Hill, which has a higher quality and higher retails than our traditional Harbor Bay brand, has performed very well with our customers and we're planning to grow that brand significantly for 2008. We also continue to see growth coming out of our young men's business, being led by our own 626 Blue label.

Most important, at this time we don't believe we have an inventory issue with our seasonal weather related products. The warm weather actually accelerated our ability to clear spring/summer clearance to where today it is less than 6% of our inventory. And our fall holiday seasonable product is at a manageable level, where we don't see any major margin implications for the fourth quarter. As I have discussed over the last several months, we are in a transition period with Rochester. We have been over branded and over assorted, and we have been diligently trying to reposition Rochester for the future. We're experiencing some negative impact on the gross margins in this division through incremental markdowns as we reposition the product mix going into 2008. As we have found tremendous success in bringing in a younger customer to Casual Male, we're now finding the same success in Rochester.

In the third quarter we introduced a selection of premium denim jeans and more fashionable tops, and they're delivering the highest sell throughs in the division. And going forward, we'll be increasing our penetration into a broader assortment of young men's product for the Rochester division. In terms of our direct business, we're pleased that the three launches this year, B&T Factory Direct, Living XL, and Shoes XL, show promises, viable long-term business opportunities for CMRG. As almost all the expense in these businesses is marketing, mainly driven by catalog circulation, we continue to fine tune how to grow these concepts profitably. We're monitoring the circulation very closely to ensure we ramp up these start-up businesses without negatively impacting the bottom-line. Shoes XL, which launched in Q3, has given the Company confidence that there is an opportunity to grow our market share in footwear. Although on a relatively small base, we have doubled footwear as a percent to total sales from 4% to 8% in our direct channels.

Also encouraging is that 47% of our footwear sales through Shoes XL have come from customers who haven't purchased from either Casual Male or Rochester. Living XL, our hard lines lifestyle product for men and women, is performing well and we continue to massage the circulation for better margin returns. As we continue to prospect for new customers, we're actually taking our circulation down in Q4 from our last forecast. We're more concerned with maintaining our margins than pushing the envelope for top-line growth this year. We envision improved margins going forward, as we currently are in the process of sourcing our top selling items direct, which will improve our initial markups for fall '08. Finally, our loyalty program continues to gain momentum. We now have over 1.3 million customers in the program and over 80% of our current transactions are by customers in the program. Dennis Hernreich will now review with you the financial performances for the third quarter and our outlook for the rest of the year.

Thank you, David, and good morning, everybody. During the third quarter, as David mentioned, the Company recorded a $2.6 million or $0.04 per share of a noncash impairment charge related to discontinuing the Jared M. business. During the nine months the Jared M. business has resulted in a $0.03 per share operating losses. Approximately $900,000 portion of the charge is related to inventory and reflected within gross margin. And the balance, or $1.7 million, is related to other Jared M. asset impairments and shown within total expenses. The Company's operating performance was greatly impacted by the significant downturn in sales during the third quarter. Comparative sales for the third quarter was down 1.1%. The third quarter sales trend is a departure from the prior rolling twelve-month trend of 8% comparative sales going into Q3, a difference of over 900 basis points.

Customer traffic in the stores was down by 6% during the third quarter, partially offset by an improvement in conversion and average ticket. Consequently the $12 million to $13 million less in sales than anticipated, CMRG generated a loss of $0.05 per share from its operations during the third quarter. Looking ahead, the Company expects to produce sales for physical 2007 of now between $470 million and $475 million, down from the previous guidance range of $495 million to $500 million, with full year earnings of between $0.28 and $0.33 per share for 2007, excluding impairment charges of $0.04 per share for the Jared M. business and any operating income or losses in the Jared M. business in the fourth quarter, which would represent a 25% to 50% improvement in fourth quarter earnings compared to a year ago. To achieve this $0.28 to $0.33 earnings per share for the year, CMRG would need to produce a comparative sales increase of between 4% and 7% for the balance of the year.

As David mentioned, during the first few weeks of quarter four, CMRG comparative sales increase has been 7.1%. We'll go over the underlying assumptions of gross margins and SG&A ,as well as go over the components that comprise the Company's earnings performance for the third quarter and nine months of 2007. For the third quarter sales, which include our e-commerce and catalog businesses, was $106.6 million, slightly down when compared to sales of $106.9 million for the third quarter of physical 2006. The sales trend in the third quarter, as I said before, is significantly less than the previous twelve months and was primarily driven by decreases among both our Casual Male and Rochester stores. Similar to many in the retail industry, the third quarter proved to be a difficult environment with the unseasonably warm weather which slowed sales of our fall and winter merchandise and overall economic factors, both having a negative 6% impact upon customer traffic in our store channel. Although when our customer did visit the stores, customer spending per visit did increase slightly.

Comparable sales decreased 1.1% during the third quarter, of which the retail channel decreased 4.8% and our direct channel increased 19.6%. Comparable sales from our core Casual Male and Rochester businesses, excluding the new businesses, had a decrease of approximately 3.4%. For the third quarter our new businesses, which include Living XL, Shoes XL and B&T Factory Direct, had sales of $3.1 million. Total sales for the first nine months of 2007 increased 3.3% to $332.1 million as compared to $321.5 million for the first nine months of last year. Comparable sales increased 3% during the first nine months of this year, of which the retail channel increased 0.7% and our direct channel increased 16.9%. Comparable sales from our core businesses generated an increase of 1.6% and our new businesses generated $5 million during the first nine months.

So far this year CMRG opened with six Casual Male new stores and three new Rochester stores, closed seven Casual Male stores and one Rochester stores, and also closed 12 Sears Canada locations and relocated four other Casual Male stores. In addition, we renovated 42 Casual Male stores during the previous nine months. At the end of the third quarter total store count was 497 stores with 1,839,000 square feet of leased space. For the balance of the year the Company is planning to open two Casual Male stores and close 11 Casual Male stores, and finally relocate three other Casual Male stores. Total targeted store count at the end of the year is 488 stores. For the third quarter the Company's gross margin rate, inclusive of occupancy costs, was 43.9%, which excludes the Jared M. inventory impairment of $900,000 or 80 basis points, as compared to a gross margin rate of 44% for the third quarter of 2006. Merchandise margins for the third quarter this year increased by 30 basis points over the prior year.

This increase was offset by a 40 basis points increase caused by occupancy costs and deleveraging due to the lower sales. The increase in merchandise margin is primarily due to improved initial margins related to our direct sourcing, although the merchandise margin increase was somewhat muted by quarter three due to the higher than anticipated selling rates of our spring/summer 2007 clearance merchandise, with warm weather as an assist, which drove markdowns higher than planned. The slight increase in occupancy costs as a percent of sales was principally due to the new store leases and lease option renewals. Gross margin for the first nine months of 2007 was 45.5%, which was an increase of 120 -- 110 basis points, again excluding the Jared M. inventory impairment of $900,000 or 30 basis points, as compared to a gross margin rate of 44.4% for the first nine months of last year. The increase of 110 basis points was attributable to our improved merchandise margins of approximately 130 basis points, offset slightly by an increase in occupancy rates as a percent of sales of 20 basis points.

We anticipate that our gross margins for '07 will continue to show improvement for the balance of the year, resulting in an overall increase of between 50 and 80 basis points for physical 2007 or between 46% and 46.3%, again excluding the Jared M. inventory impairment. Expected 2007 gross margins dropped by 100 basis points from previous guidance due primarily to the effect of occupancy deleveraging on a lesser sales base and, to a lesser extent, on anticipated somewhat higher markdowns during quarter four as we repositioned the Rochester merchandising strategy. Although we do not expect to have any significant seasonal inventory exposure at the end of the year, due to the better than expected selling of 2007 spring and summer clearance, the Company is well-positioned to absorb any expected 2007 fall/winter clearance merchandise as we move into 2008.

Selling, general, administrative expenses as a percentage of sales for the third quarter of '07 was 42.2% of sales as compared to 39.4% for the third quarter of last year. And for the nine months SG&A expenses were 40.1% of sales as compared to 37.8% for the first nine months of last year. Our SG&A rates as a percentage of sales increased this past quarter due partly to our weak third quarter sales. The increase in SG&A of $2.8 million and $11.5 million for the third quarter and first nine months of '07 respectively is partially due to $2.7 million and $5.7 million respectively related to our new businesses and product extensions including Jared M. The balance of the SG&A increase for the nine months of 2007 were as anticipated and related primarily to sales volume related costs for the first nine months, such as supporting payroll transaction and marketing expenses.

For the balance of '07 we expect our SG&A levels to approximate last year's levels, inclusive of our new businesses, and therefore we anticipate that our SG&A expense levels for the full year will approximate between $174 million to $175 million excluding the Jared M. business, compared to $170.9 million of last year, of which approximately $70 or $7 million relates to our new businesses of Living XL, Shoes XL and BT Factory Direct. Inventory levels at the end of the third quarter approximate $139 million compared to $115 million at the end of last year and compared to $124 million at the end of the third quarter of 2006. The increase in inventory levels by 12% from year ago levels is primarily related to CMRG's inventory levels in its direct business to support its continued growth, as well as inventory level increases to support Shoes XL, Living XL and BT Factory Direct new businesses and grew from year ago levels due to lower than expected sales in quarter three.

Although we previously indicated that inventory levels would end the year approximately $15 million less than last year, however due to a change in 2008 spring receipt flow and shifting a portion of these receipts into January, inventories are expected to end the year at approximately last year's levels. Inventory should remain relatively flat to year ago levels throughout the spring of 2008 and end quarter two in 2008 at the previously anticipated $10 million to $15 million less than quarter two 2007 inventory levels. Consequently, free cash flow for the year should approximate between $20 million to $25 million for 2007. Since the first quarter of 2006 we have repurchased a total of 5.7 million shares of our common stock at an aggregate cost of $64.1 million. We have funded our stock repurchase program with borrowings from our credit facility.

As of the end of quarter three we have $24.1 million available under the current stock repurchase program, pursuant to which we may repurchase additional shares through December 31, 2007. At the end of the third quarter borrowings under its credit facility approximated $67 million. Without any further stock buyback the Company's revolver facility balance is expected to approximate $25 million to $30 million at the end of the year. This concludes my remarks about the third quarter results and back to you, David.

Thanks, Dennis. No doubt this was the most difficult quarter we've had in the last several years, but we strongly believe our fundamentals are as sound as they were in the first half of the year and traffic in our stores dropped dramatically for us and most apparel retailers in the last quarter. But we are pleased that our comps have improved significantly in Q4 so far, and honestly our stores look the best they've ever looked and we are well-positioned for the holiday season. I thank you for that and now we'll turn over the webcast to the Q&A portion.

(OPERATOR INSTRUCTIONS) Our first question is from Betty Chen from Wedbush Morgan Securities.

Thank you, good morning. I was wondering if you can help us maybe give some clarification on your guidance for the fourth quarter or the implied guidance relative to the quarter to date trends? Has the improvement in terms of comps increasing 7.1% so far been primarily driven because of weather or has there been a change in your promotional cadence during this timeframe and is that why you mentioned that part of the Q4, the full year change in guidance is reflecting some anticipated higher markdowns? Thank you.

Yes. For us our perspective it was clearly weather. If you look at our -- if we really start to breakdown our comp sales by market area, region of the country, it is very easy to see. Even in November we had markets that are doing double-digit comps and markets that are flat based on the weather patterns that are going on. When we announced October 18th that our comp at that point was up, I think, 0.2, the last two weeks of October were probably the worst two weeks we've had in several years. It was also the warmest two weeks on record in the month of October. So what we're seeing a comeback is really driven by traffic in the stores from weather. Our promotional cadence is very consistent with last year in Casual Male, in fact [watched] it up exactly.

Rochester we did run a Thanksgiving weekend promotion, which was very positive for us. But getting back to the anticipated markdowns, it is really as we said before, it's coming out of Rochester. We need to accelerate clearing up some problem inventory that's accumulated over the last several quarters and get them repositioned. But we're watching our inventories very closely on the seasonal product, certainly in Casual Male where the bulk of our inventory is, and we're comfortable that we're going to have good sell throughs through the fourth quarter. Again, we're up against a very weak December a year ago for us. It was one of the mildest Decembers on record, so if we get any kind of weather, we think we'll be able to maintain the comps that we're delivering right now.

Now, in terms of the repositioning for Rochester products, do you expect that could be mostly completed by the end of Q4 or at what point do you expect that to diminish in terms of impact?

We're really focused on fall '08. We will be much better -- we'll be in better shape for spring '08, but not the way we would really want to see it. So we're looking at really another couple quarters to reposition it the way we want to.

Great. Thank you and good luck.

Thank you.

Our next question comes from Scott Krasick from C.L. King.

Hi, David, hi, Dennis.

Hi.

Just to go back to the comp, I think you had said publicly that going into December of last year you were running a double-digit positive comp.

A year ago?

A year ago.

What I had said was coming out of Q3, which was the strongest quarter we've ever had, we were at a 13 comp and Q2 we were at a 10 comp, and we were running pretty well until mid-November and then the comps started to deteriorate on us. We did deliver a 7, but we were expecting to continue at around a 12% at that time. So the hurdle rate we had in Q3 was the highest we've had, so we feel that there is a strong opportunity in Q4 to get back to our trend line of certainly the mid-single comps.

So December and January you might even, I don't know if they're negative, but they're very, very easy comparison.

For us they're the easiest comparisons we've had in the last few years.

Yes. Okay, good. Where did the thinking change? All fall you said, look, Jared M. if it loses $1.5 million in the grand scheme of things it is not a big deal because of the opportunities. What crystallized in your mind to make you think that the opportunities weren't really there?

I think we were out of our core competency. I think we're good retailers. We have a management team here that understands it. We've brought in tremendous talent. And once we got our arms around Jared, we were all out of what we do well and we were bogged down in tremendous amount of logistics in trying to operate this business. And at the same time we saw the potential growth isn't going to be where we want it to be. Again, for us, if we don't see a long-term business of let's say $40 million, $50 million, we don't need to allocate our resources to the degree we were. We were putting a lot of horses behind Jared M. to make it work and we're realistic and we're big boys about this. We saw that we weren't going to live up to what our expectations were, better to cut our losses now and move on. The good news is we have three other launches this year that fit very well into our strategic plan and don't take the amount of resources and certainly no capital required to operate. So we just did the, we believe we did the right thing.

Are there some cash costs to get out of the show room lease or to pay severance?

That's all included in the write off.

That's all in there. Good. And then just give us a little idea. You sort of lump all the new stuff together. What's going on with B&T? That's really the low end consumer, are they pressured more than some of your other customers and what's the opportunity look like for the next six or nine months there?

B&T is doing well. It is making our forecast. We've nurtured it very conservatively. Again, we're not going out and mailing millions of catalogs to try and drive sales and at the same time lose operating margin. It is doing well. We continue to move more of our marketing money into B&T because it has very good long-term potential for us. And again, we're utilizing the existing inventory out of our outlets, so it makes sense. But we're not saying we're going to grow it to $25 million, $50 million over night, but we're just going to continue to build our sales plan into B&T and it's, again, it is a very efficient operation for us to run.

What do you see there? Are people ordering fewer items or are people just ordering less often?

No. I think what it is is we're trying not to cannibalize Casual Male. We don't want to trade that customer down, so we're not utilizing our full database with intent and we're trying to utilize customers that for whatever reasons no longer are shopping in Casual Male direct catalog business and we're doing some prospecting into that business. But again, we're more, we're very aware not to grow that business at the expense of Casual Male.

Good. And them just, Dennis, your comment that you expect inventory to be down by the end of the second quarter next year. Certainly admirable, so with the impact of all the new businesses ramping up, is that just operating significantly less basic merchandise at your existing stores or how is that going to break down?

I think several factors, one of which is moderating the amount of basic merchandise that we carry as backup stock. The second piece is to get a bit more pruned on fashion merchandise. The third piece of this is to bring down Rochester's inventory levels, as we re-strategize the merchandise initiatives in the stores. So those three things together will help bring down the inventories, offset partially by the new business pieces.

Right. Okay. Thanks, guys, I will jump back in the queue.

Our next question comes from Margaret Whitfield from Sterne Agee.

Good morning, everyone. Could you kindly repeat the contribution of the three new businesses in Q4 and the year and break them down by the individual units and discuss whether or not these units will break even or make money in those periods and give us an outlook for next year?

The only thing that we're discussing separately, Margaret, is the fact that the sales from these new businesses was $5 million for the first nine months and third quarter was $3.1 million and that's all we've said and would like to say about the new businesses.

Did you say something about the new businesses contributing 6 or 7 million? I wrote that down.

SG&A related to the new businesses is $7 million, anticipated to be $7 million for the year.

Okay. Previously the new businesses were thought to be breakeven. Can you state whether or not that's still your goal for the year?

It has always been our goal for the year. We're probably sliding a bit off of that, primarily because of increased marketing expenses. And as we learn about the responses from our customers, both our existing customer base and prospecting activity, we're learning how to better moderate marketing spend versus what to expect on the top-line.

I think you're going to moderate the circulation. Could you discuss what the circulation plans are for Q4 and next year?

Margaret, we're not giving out circulation numbers for competitive reasons. We are going to be increasing circulation next year. We'll be talking about, more about strategy next quarter.

And the move into Europe, could you discuss the size of the B&T market, the competitive issues, and what that business might look like?

Well, we've got reams of information on Europe. First of all, the obesity issues and the size issues of Europe are incredible opportunity. The rates are increasing there, actually higher rates than are currently happening in the United States. It is just a very real world. We have it by -- we have obesity rates by country and size and height by country, so there is a wide open opportunity for us. And again, our Rochester London store is just doing phenomenal for us. And in terms of the competition, as far as internet, there is really nothing out there anything like what we have in terms of scale. There is some small operators out there. There is one small, relatively small chain in that market, but this fits right up our sweet spot.

This is just a continuation of our growth into internet and catalog and we'll start with internet. We anticipate once we build the business we can move into catalog. And long-term our intent is to put some brick and mortar stores in those countries. We're doing it the most prudent way and efficient way and GSI is a great partner and this project has been going on for several months. We're just announcing it today, but it it has been -- we've been working on it for quite a long time.

Do you see this as an opportunity that might, in the short-term, lose money or breakeven? How would you define it for next year?

First, there is no capital expenditure related with this. I think at a very -- it is a breakeven at a very low volume level and so it should be nothing like, obviously, Jared M., but it has a lot of potential and can quickly turn profitable with some volume growth that we do anticipate. I think that, Margaret, the initial year will be difficult to see because it will take some marketing expenditure on the websites to help sort of make people known about what Casual Male and Rochester is. We're -- the only difficulty in entering this market is that we're relatively unknown other than the Rochester store in London. So the initial year we'll probably have more to say about what we expect in 2008 when we -- on our next call in March, but that's the only trepidation we have, I think, going into this is what happens in the first year?

Another quick one. What was the impact of the 53rd week on results last year, the extra week?

Well, it generated expenses of close to $4 million and I believe the operating income level was positively impacted by some $1.5 million to $2 million.

Okay. Thank you.

Thanks, Margaret.

Our next question comes from Evren Kopelman from JPMorgan.

Thank you. Hi, guys.

Hi.

Two questions on your guidance. The first one you said for the year now your new sales expectation is $470 million to $475 million?

Yes.

So that's about $20 million to $30 million lower than your previous expectation and I can see that half of that was due to sales being lower than planned in the third quarter.

Yes.

So the remaining kind of $12 million to $13 million, I guess, comes out of the fourth quarter. I'm wondering why you're taking so much out of the fourth quarter given the strong start?

Part of it, Evren, is we pulled Jared M. out of the $470 million, the $475 million, where it was in previously at the $495 million to $500 million.

Can you quantify that?

That was about $6 million there.

$6 million for the fourth quarter or for the whole year?

For the whole year. That would help explain -- in other words, quarter four isn't coming down as much as you're computing.

But it is still coming down, then?

Oh, yes.

Why is that given the 7 comp in November?

Well, we still have December and January to go.

Okay. Then the second question's on the gross margin guidance. I think you said 50 to 80 basis points of improvement this year. How much of that is merchandise margin improvement and how much do you expect from occupancy?

Merchandise margin is expected to improve -- one quick second -- by about 100 basis points, Evren.

Okay.

And then offset the other way 40 or so basis points on occupancy.

I am curious why occupancy is deleveraging for the year because I think given your comp guidance for the fourth quarter, 4 to 7, I am getting more like a 3 comp for the year. I am not sure why it is deleveraging then?

Occupancy costs have increased that's causing some of that. We do have new stores and, as you know, it does take some new stores to -- several years to mature and so that's a working against us.

So I was asking for modeling purposes for '08 if on a three or low to mid-single digit comp then do you not expect leverage on occupancy or even just flat?

We've always said we expect SG&A leverage 2 points or better and occupancy obviously this year it's better than 2, but usually 2, 2.5 is what we need or so to leverage out occupancy. But this year we did open three major Rochester stores, which I think is working against us from that point of view this year.

Okay. Final clarification. You said the direct channel was up 19.6% in the third quarter?

Yes.

Does that include the new businesses?

That includes new businesses.

What's the growth for just the Rochester and Casual Male direct business then?

That was up about, direct business around 13%, 14%, Evren.

Okay. Great. Thank you.

Our next question comes from Thomas Filandro from SIG.

Hi, guys, thanks. couple of questions. First is, David, I think you mentioned that the shoe business you saw like a 47% of those customers were new to file. If that's correct I have two questions. One, can you tell us also in the Living XL how many customers are new to file and what are you doing with those names in terms of prospecting? Then I have a follow-up?

Yes. Now, what I am talking about is the shoe business is growing in all channels. Our store business is growing in footwear because we've increased assortments. Our Casual Male and Rochester catalogs are growing and internet business in terms of footwear because we've put more pages in. What we're talking about is the Shoes XL entity, the website itself. 47% of the customers making purchases through the Shoes XL are new to file for us which is great because they don't shop Casual Male Rochester, they happened to be surfing the internet looking for large-sized shoes. That gives us a lot of optimism about the future to again gain new market share. And now that they're in our database of [footwear] we could certainly mail them Rochester and Casual Male catalogs, too, so that works in our favor. What was the second question?

My other question was on Living XL, what type of experience are you seeing in terms of new to file shoppers?

The same type of situation is happening there. Here we're getting a lot of women in who are -- obviously, we didn't prospect into a lot of these women, they found us through the internet. And this is our biggest challenge is how can we profitably prospect into the women's market and that's what we're working on diligently right now. We have to find the right spots of prospecting to make it profitable for us, but the catalog is non-gender and we're selling as many products to women as men. If you go through the catalog, we have a lot of women models and now we're introducing a lot of product, it is basically non-gender, but we're introducing product for women into next spring and summer.

Okay. I think, David, you mentioned that the circulation, not just -- I think you mentioned that the circulation for the fourth quarter will come down at CM XL or maybe both CM XL and Rochester. I know you don't give numbers but can you give magnitude of the circulation? Is it a decline, is it an increase and how should we view circulation of the two major businesses heading into 2008?

Well, first of all, what I was referring to was the new businesses circulation. I wasn't referring to Casual Male or Rochester.

Okay.

Again, as our internet business continues to grow at a much faster rate, we have new vehicles to prospect into on the internet versus the catalog, which has more expense to it. But, Dennis, I think what would you say about circulation right now?

Everywhere else hasn't changed as planned, slightly up. The house file has obviously grown over the past year, so, no, no changes there.

So, Dennis, up slightly for the fourth quarter in terms of circulation for the core?

Yes, overall. We had some shifting, Sears is less, Tom, not terribly significant but part of [sirk] numbers obviously.

And then that increase, that slight increase is that -- is there a percentage dedicated to prospecting or is this just maintaining the house file at this point?

Yes. Quarter four -- I know overall our prospecting portion for Rochester Casual Male approximates 25% to 30% relatively consistent and there just might be some of it was at the end of the third quarter versus early fourth quarter, Tom. But we haven't changed our [sir] cadence really in our core businesses at all.

Is it fair to assume as we head into 2008 that that cadence will also be managed modest increases?

We're certainly going to keep up with our house file and we'll just determine what prospecting level we'll continue with.

Okay. Great. One final question, David, just more broadly speaking as we head into 2008 from a merchandise point of view, can you kind of give us a sense of where we can expect to see expansion of private label, maybe some scaling back or any new opportunities to garner greater market share?

Well, Casual Male, just through natural growth, our private label continues to out perform our brands, which is phenomenal opportunity for us, so we continue to move along those lines. The Oak Hill launch that we did in third quarter, like any launch, we have to be prudent in how we launch it, so we went in with limited assortments in a limited number of stores. But we did put product throughout the chain to make sure it is a chain brand and it's got a tremendous opportunity for us. We've sold out of -- we just didn't buy enough of the product in the end, so we're pretty encouraged about that. 626 continues to develop the denim business. The fashion denim business is very strong for us. Where our weakness is right now is in the old hard core Harbor Bay basic business.

We've had losses coming in through there because we filled the pipeline quite well and there is no growth for that. And, again, we're really not gearing towards that older customer like we did in the past because we're not going to get the growth we're getting out of the young men's market. In terms of Rochester, again, very good success with the two brands that we've had and where we're seeing success there again is in the young men's business. It's wide open for us. There is nothing like it at those price points and the customer is responding quite well. But as I said before, I believe Casual Male's private label business will be approximately 80% of our business next year and in Rochester it is, again, we said we were going to try and grow it to 20% of our business.

One final one, please, if I can. Just an update on the overall store base in terms of where you are in closings, where you are in remodels and relos, not just for '07, just longer term view?

Well, we've done a lot of cleaning up in the Casual Male portfolio. We're really just about at the end of store closings. The reality is these stores that we're closing this year averaged $125 a square foot. We're just closing them and trying to move the traffic accordingly. We're still getting those very strong comps in our relocation program and new stores are performing the best they have. We think that the store count should stay relatively flat. We're planning on actually Casual Male, I believe, will open more stores next year than will probably close.

That's definitely what we're planning. I think much of the store closing part of things, Tom, will moderate from where it's been. There will always be a handful, but we are accelerating our new store openings as we get more comfortable in what works and what doesn't. And as David said, our new stores are performing better than they have in the past. We're pleased about that. Rochester is sort of wait and see. We just opened up a lot of big Rochester stores and we need to see how they mature before proceeding on with any significant store growth there.

Great. Well, thank you all very much and best of luck.

Thank you, Tom.

Our next question comes from Gary Giblen from Goldsmith and Harris.

Hi. Good morning, everybody. I haven't heard any attribution of the sales weakness of the third quarter to macro conditions and that is consistent with what you've been saying that you're not too much affected by macro, but is there any percentage of the weakness that would stem from the economic pressures on the consumer?

That's the question that is difficult for us to really understand. We're cautious about the fourth quarter. I think that's why the numbers we're giving right now are somewhat cautious because we don't know. If there is a macro issue, we will get impacted to some degree. We believe our advantage is that we're just better positioned. Our stores look better than they did a year ago. Our operations are stronger than a year ago. Our store penetration of catalog sales are stronger than a year ago. So we think we could offset some of those macro issues out there. But I think if, look, if we said we weren't concerned, that would be -- that wouldn't be a great statement for us to make. Of course we're concerned with the traffic out there. We sense there is a little macro business affecting us. Our outlet stores, which have been very strong for us, the traffic in the outlet stores is weaker than in our anchor stores, which is the exact opposite of what it's been for the last two years.

Okay. Then is there anything specific that causes you to be -- you're being quite cautious on the fourth quarter just based on the strong comp to date and the lower expectation implied for the rest of the fourth quarter, so is that specific or general cautiousness on the environment?

It is general, but we do -- here is a good example. You hear a lot about the softness in the Florida market, for example. We experienced it. We're experiencing the same softness. That's got to be a localized macro issue, but we're feeling it, too. Our Florida stores have been under performing for the last several months and they historically have been one of our strongest markets. So there is something there and we don't know how widespread that may become. We haven't felt it in the California market like other retailers have spoken to. I think for us that's another operational issue. We're much stronger operationally in that market than we were a year ago.

Okay. And then realizing that you haven't given '08 guidance at all, but just are you thinking more cautiously internally about '08 then you had been a few months ago or -- ?

I beg to differ. I don't think we're being cautious at all, Gary. I think that we gave a range of 4% to 7% comp. We are performing at the upper end through three weeks in November. The earnings are corresponding to that. I think we're trying to be as forthright at possible and predict as best we can based on what we know. I think our posture into '08 is no different than that posture.

That's what I am trying to get at. In terms of next year, --

I don't think it is cautious. I think it's -- we're being realistic about our business.

Okay. So in other words because of the environment you're thinking about next year a little more cautiously than -- (multiple speakers) there was lower numbers that you would have had in your internal planning three months ago? I don't mean to say conservative in the sense of too conservative, but just in terms of lower numbers in '08 than whatever your internal planning was a few months ago? Is that a correct understanding?

Certainly we have tweaked it down a notch. It is still going to be extremely positive, but obviously we're taking into account not so much quarter three but just the slight softness that we're seeing perhaps related to macroeconomic events that still haven't come to fruition but seem to exist.

Okay. Last quick one. Was the attempt to get Jared going on all cylinders, was that a significant management distraction that affected the rest of the business? In other words can that be a benefit that you have it behind you now?

Certainly it had an impact on the management resources around here as we tried to capture and get the business on the right track. Certainly not having to focus on this we can go back to focusing, not that we didn't not focus on our other business, we'll just have more time to do that. I think that's part of where the decision eminated from.

Sure. Understood. Okay. Thank you. Good luck for the holidays.

Our next question comes from David Cohen from Midwood Capital.

Hi, everybody.

Morning.

I think you said that the merchandising margin improvement in the third quarter was mitigated by sell through of spring/summer merchandise. Can you isolate on your fall holiday merchandise what kind of merchandise margin you had on a year-over-year basis or is that too difficult to do?

We like to talk about that as we get through the quarter. We are expecting improvement in our merchandise margins for the fourth quarter inherent in our guidance for the year. Certainly not, and we've said this before, certainly not at rates that we've seen in the past, but we still are forecasting improvement in our merchandise margins in quarter four.

I was getting at Q3 actually, what's your experience on fall merchandise?

Fall, yes. Again, consistent with quarter four thinking, what I just said, positive, not as much as it has been just because we've been -- we've made great strides on that end, but certainly positive. Just didn't sell enough of it as a mix in quarter three.

Okay. And then just wanted to clarify the set of comments on the new businesses with my benchmark being the prior elements of guidance being I think $90 million of sales for the full year but and $11.5 million of SG&A and an operating loss of 1.3. I think you said that baked into the $19 million was $6 million Jared M. Now that Jared M. is out of there, what is that -- those components of the P&L for that set of new businesses, what is that piece of your new '07 expectations? If I assume $13 million of sales from the other three new businesses, what's the SG&A? What's the operating profit or loss on that?

SG&A is $7 million.

Okay.

The sales are slightly less for the year from that $13 million you're indicating.

Okay.

There will be a slight loss as we previously spoke about.

Okay. I guess is it fair to say, though, disproportionate share of the loss was Jared M.?

Absolutely. Absolutely.

And I think that's my questions. Thanks.

Okay, thank you, David.

Our next question comes from Richard Jaffe from Stifel Nicolaus

Thanks very much, guys. I guess a couple of questions. You provided I guess 7% comps quarter to date. Could you compare that to the same timeframe last year, what the same time period was, what the comp store sales were last year for those first three weeks in November?

It was slightly less than that, Richard, not significantly -- it was in the 5%, 6% range.

Got it. And I don't know if we can do this online, but if we could look at last year without Jared M., without the sales, without the SG&A, and therefore be able to model sort of apples-to-apples, that would be very helpful. Could we do that or talk that through certainly for fourth quarter?

Jared, just so you know, last fourth quarter Jared M. generated sales of $1.3 million, had expenses of $900,000, and lost $400,000.

On an operating basis.

On an operating basis. Shouldn't throw your model off too far.

No. It is helpful. Thank you. I guess I am curious about the international business. You've hired a third party provider, have a contractual relationship with them, but you will own all the inventory and inventory merchandise in this country and then fulfill internationally, is that correct?

The merchandise will flow into Europe directly and not touch the U.S.

You'll have a DC and --

We'll have contracted DC.

In continental Europe?

In continental Europe, Netherlands to be precise.

And the size or the cost of that inventory investment?

Relatively modest at first, Richard.

Okay.

Probably we are still working through the assortments, but I wouldn't think more than $1 million, $1.5 million of costs.

And that will remain under your control so markdowns and reorders, that sort of thing, will be totally your control, is that correct?

Absolutely.

And I guess the last question is inventory is up now for year-over-year over year. I understand the quality of the inventory is better this year, that you don't have a lot of carry over?

To be exact, 5% of our inventory is of an aged nature, about the same as it was a year ago.

Right. I am not concerned about the aging but is concerned of the absolute level on a per square foot basis. My estimate it is up 13% per square foot. Last year it was up 12.5%. And yet sales aren't growing anywhere near that rate would suggest -- .

Yes. Now, a lot of the increase, Richard, on our inventories is in our direct side of our business. Some of it is in stores, yes, but a good portion of the increase is here in our own warehouse.

Can you tease that apart for me? I tried to do it on a sales weighted basis and clearly that doesn't sound like I have done it well.

Of our 15 million year-over-year increase level, two-thirds of it is on the direct side. And probably much of the balance is on the Rochester side, which obviously needs to get moderated and we're in the process of doing that. A little bit in Casual Male, but not so much. It is more on the direct side. And obviously part of the direct side has to do with our growth in our business in both Rochester and Casual Male on direct side, but also Living XL, Shoes XL, and BT Factory.

Got it. The Rochester inventory is not going to be resolved in 4Q, that's a spring second quarter kind of -- .

We've been addressing it all year. We've somewhat reduced our current receipts to help sell down the older inventory. We are continuing that posture into spring. We'll be a much better position, as David said, going into fall. But as you know, it takes time at our turns to work through inventories to introduce new strategies. With that we're taking a cautious approach about.

Got it. I guess the last point, you mentioned lack of leverage on occupancy at a mid-or 4% comp. At what point do you start to leverage occupancy or do you anticipate being able to leverage your occupancy costs? At what sales levels?

Definitely, because overall at the range of sales that we're talking about, $470 million to $475 million -- .

Right.

The overall increase on sales for the year is a modest 2, 2.5 from a year ago.

Right.

So that's about -- normally we'll breakeven on the occupancy at that point. However, this year we've opened a few more new stores, particularly on Rochester, higher occupancy costs as you know. Next year, again, we do expect to leverage occupancy on a normal year at something better than a 2 point comp. And so therefore we do expect to leverage occupancy next year.

Okay. It seems -- . I will fool around with the math, as you renovate stores there is an additional expense in there as well, and that is --

Only if we expand the store, Richard.

The square foot expansion was so small year-over-year -- .

Oh, yes.

And that -- in the Rochester new stores on a fairly large base I wouldn't think would move the needle on a corporate level.

Well, opening three stores is tantamount to opening, on a square footage basis, almost nine Casual Male stores.

Right.

Probably up to at these high profile stores probably triple the rent. When you do the multiple on that, we traded out -- closed three Casual Male stores, opened in effect nine Casual Male stores in the presence of Rochester.

Right.

And tripled the rent to boot. That's helping to cause what you're feeling, what everybody is feeling on the occupancy side. We don't do that every year.

No, no, I understand that Rochester growth may stand still next year or grow very slightly.

Yes. Right. And the Rochester stores as they mature should start to help leverage their own rent.

Sure. So for '08 we should assume essentially zero new stores at Rochester?

We definitely have one relo and we have one in right now, one new store right now.

Planned for '08?

Yes.

That's correct.

And then for Casual Male you were talking about net opening up?

We're thinking now as we formulate our plans, we're thinking like 12 to 14 new Casual Male stores and probably closing like a half a dozen or so, Richard.

Net eight?

Net eight, yes.

Okay. While we're there, on the Outlet side?

That's inclusive.

Yes, that's inclusive.

The eight is part of that. Okay. Should we assume a couple of Outlets and six net Casual Males?

Yes, that's fair, yes.

Okay.

Thank you, Richard.

Thanks very much.

Okay. Thank you.

Our next question comes from Marc Bettinger from Stanford Group.

Hi, guys, David, a couple of questions. Europe was Casual Male and Rochester or just Rochester?

Both. We're going to put brought brands on.

Okay. And, David, with respect to the marketing, can you give your impression of your comfort level with the effectiveness of the marketing, the traction that you've been getting? Are you happy with it?

Yes. Again, strategically we've cut dramatically back on the promotional side of our activity and put more into branding the names, but the discounting is based on the amount of purchase you make that seems to be effective for us. Really, next year we're only going to do probably one major price point promotion, which will be over Thanksgiving. Outside of that we're still, we're doing much better showing off the product and offering the customer a price off if they spend so much money. That seems to be our best most profitable way to market. We're not going to be doing television. It is a nice -- it is nice to get your name out there, but it has never been very efficient for us from a cost and reward prospect, so we're going to cut that back. And the good news for us is that these zero to 12 file, those customers who shop with us in the last year continues to grow, so every time we do a mailing next year, we have more customers to mail to. That's the most important driver in our business is dealing with our existing customers.

Okay. But I am saying I guess more qualitatively in terms of reaching the customer and having the brand imaging of Casual Male XL and so on and all the other things that you've been doing, do you think you're getting the kind of response that you would hope to get?

We got our big boost last year was with the rebranding and that's still has importance, but we got a thing for a buck on that over the last several quarters. We're pleased. It is just we understand our customer pretty well. It is very hard for us to motivate him to shop. He is still going to shop when he is ready to shop. And our focus has always been on making sure the day he comes in the store he is going to spend more than he did historically and going after that younger customer. That customer does respond to shopping us more often and strategically that is working well for us. We are getting that younger guy in there. That's a guy that we could certainly market to better in terms of in responding and shopping more often than our traditional 50-year-old customer who comes in twice a year and spends $75 both times he comes in.

Okay. And, Dennis, just on some of the numbers just to recap here, I think you said traffic was down about 6%. Do you have a number for conversions, what that was up?

No. We just talk about that directionally, Marc.

Okay. But it would seem to indicate between the average ticket being up and the conversions being up that the merchandise is on target?

Yes, that's what the -- .

That's really what I am getting at.

The message, yes, absolutely. When they do come in, they are shopping us like nothing happened.

Okay, fine. Then on the total sales you've got $470 million, $475 million this year and you said SG&A would be about $174 million to $175 million for the year?

Yes.

For modeling purposes. Okay. And then the $0.28 to $0.33, that's going to include how much of Jared for the first three quarters?

There is a $0.03, as I think I indicated, there is already baked into our numbers through nine months a $0.03 operating loss related to Jared M.

That's what I wanted to know. You have a $0.03 loss from Jared and that's included in the $0.28 to $0.33?

That's right. But it does exclude the $0.04 impairment and it does exclude anything else good or bad that happens with Jared and Jared M. in quarter four.

Okay. So from an operating basis we're really looking at 31 to 36 for the year?

On an operating basis, yes, without Jared, you mean?

Okay.

Yes.

And now compared to '06, how should we look at that? How much did you lose in Jared on an EPS basis in '06?

In '06?

Yes.

It's probably $0.02, at most $0.02, Marc.

Okay, $0.02. Just really at the mid-point here, even if I took 34 on 31, you would be up about 10% year-over-year on an earnings per share, apples-to-apples?

Approximately right, yes. Much of that is going to happen -- expected to happen in quarter four. As I said, we're expecting our operating earnings to improve by 25% to 50% depending upon where we fall out in that range compared to last year's quarter four.

Right. Okay. And that's why I am just taking mid-points and doing it on the year because the 25 you said was referring to the fourth quarter?

Yes.

Okay. All right. If you're up 10% for the year in this market, congratulations.

Not what we bargained for, but we'll move forward and strive towards 2008.

I hear you. Best of luck. Thanks, guys. Thank you.

Our next question comes from Eli Kantor from Weeden and Company.

Good morning, guys. Thanks for all the information. Actually, all my questions have been answered.

Thank you.

Our next question comes from Paula Kalandiak from [Bob Point Capital].

Good morning. I will keep it quick. I just wanted to know do you have any timing in your mind about when you're going to make a decision about selling Jared M. or just closing it down?

That will occur during this quarter that we're in.

Okay. And then with regards to Oak Hill, that's a little bit higher price point, I think, than both Harbor Bay and Comfort Zone. Do you think that those customers are trading up to Oak Hill or is it a different customer?

I think we're bifurcating some of those customers. Some of them are trading up and some are staying with Harbor Bay. There is a clearer differentiation when you see the product in the stores between the two brands and we believe we got a commodity meat and potato customer who just wants the price and is not concerned about it. But we certainly have a customer that's willing to trade up, certainly in our Oak Hill pant is $15 more than our Harbor Bay comfort pant and customers' responding very well. Again, I've said this before, the average income of a Casual Male customer is $70,000, so that's average. So we certainly have customers that have the money to go out and trade up, so it is not going to be all incremental. We understand that, but if we could keep driving that average ticket up, that's going to certainly help our business going forward.

Thanks and good luck.

Thanks, Paula.

Our next question comes from Scott Krasick from CL King.

Thanks, just one quick one. On the Rochester gross margins, what was the negative impact in the quarter and sort of the outlook? Is it going to continue on the gross margins?

Well, Rochester's impact in quarter three has been probably around 25, 30 basis points.

And that would be both deleveraging on occupancy and the merchandise margins?

No, more merchandise margin I am talking about.

Okay.

That probably of that, that kind of magnitude will carry on into quarter four.

And realistically when you said spring will look better, but not as good as fall, that's just because there is still too many brands?

Yes.

Too over assorted?

Yes.

Okay. And then the buildout in terms of building out Shop and Shops for Polo, is that all done at Rochester?

No. That's a long-term project for us. That's an expensive proposition and we're certainly watching our capital expenditures, but all new stores get the Polo Shop and we'll be very prudent about retrofitting Polo stores, certainly the higher volume stores will get that attention, but that's a long-term project.

2008 is really just the year you get the assortments and product right. The stores won't be optimized for several years?

No, no, that's just more of a cosmetic thing. We're really re-styling the stores more into Casual Male, getting into more lifestyle presentations, building the branded departments up within that. So that's an ongoing improvement that we're experiencing. But the good news is is that the holiday, the fall product that we've purchased under the new management merchandising group is performing quite well. That inventory's spinning and it is kind of the 80/20 rule for us. The new product is driving the sales and the old product is the part that's not -- we're not getting the sell through, so that's why we have to accelerate the markdowns. And it prevented us from bringing in as much new product as we would have liked to have because of the carryover.

What we believe is that by fall '08 it will all be fresh product. We won't have the carryover and that's when we'll be running on all cylinders. That it is just going to take us that amount of time to have the stores where we want to position them. Again, certainly better Q1. Q2 will be better than Q1, but really fall '08 is when we should be where we want to be.

Okay. Thanks, guys.

Next question comes from Evren Kopelman from JPMorgan.

Hi, just a quick follow-up. What was the diluted share count exiting the quarter?

In quarter three, Evren?

Yes.

About 41.3.

Great. Thank you.

I am not showing any further questions.

Okay. Thank you for joining us today. We hope we could keep up the current trends we have for the rest of the quarter and we'll get back to you in a few months with more updates. Thank you very much.

Ladies and gentlemen, this does conclude today's conference. You may now disconnect and have a wonderful day.