Destination XL Group Inc (DXLG) 2007 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Casual Male fourth quarter and fiscal 2007 earnings conference call. At this time all participants are in a listen only mode. Later we will conduct a question and answer session and instructions will follow at that time. (OPERATOR INSTRUCTIONS) I'd now like to introduce your host for today's conference call, Mr. Jeff Unger, you may begin, sir.

Thank you. Good morning, all. Thank you for joining us. 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 that affect the Company. Information regarding risk and uncertainties are detailed in the Company's filings with the Securities and Exchange Commission. Our complete Safe Harbor statement can be found at www.casualmalexl.Com. Now I'd like to turn the call over to David Levin, our President and CEO. Thank you.

Good morning, all. The fourth quarter results for CMRG are a reflection of the slow down in traffic we experienced in late November and throughout December and January. After 16 consecutive quarters of comp store sales increases, we started to flatten out in the back half of last year. As consumer spending started to show signs of weakness, the men's apparel business was at the forefront of the slowdown. Men historically in weaker economic times will curtail their apparel purchases before the rest of the household. All things considered I believe CMRG has held its own, because our conversion rate, which is the percent of customers who come in that actually make a purchase, continues to improve along with the higher average ticket out the door, we have managed to deliver relatively flat comp store sales while traffic was off in the mid to high single digits. In fact, our conversion rate and average ticket were both at an all-time high and that trend has continued into the first quarter of 2008.

While our customers have curtailed their shopping experience in our store due to a macroeconomic issue, they are pleased with our assortments and responding accordingly with their purchases. We recently conducted a customer survey and 88% of customers who have not made a purchase from Casual Male in the last 12 months said that they plan on purchasing from us again. We are executing from a merchandising and selling perspective and we do not believe we are losing market share along the way.

Since we started to experience negative traffic numbers in the Fall, we aggressively pursued a conservative sales plan and budget for 2008. We shed a losing start up business in Jared M. that had an after-tax loss of $3.5 million. We also decided to accelerate the merchandising turnaround of Rochester Big & Tall by taking a significant inventory writedown. As I have articulated before, Rochester has been over inventory, over branded and over assorted. By reducing the clutter and aged inventory in the stores we are now better positioned in this division to improve their sales and margins sooner than later. Since we transferred the inventory, we have written down out of the stores, we have seen a higher average ticket and improved gross margins.

With the current environment we are in our hunkering down mode. We plan on reducing our average store inventory by over 10% through improved assortment planning and a better flow of product to the stores on a timely basis. We have also reduced our CapEx by almost 50% this year. A lot of our investments in the infrastructure of the Company are behind us now. We have also implemented cost savings opportunity throughout the Company to improve upon our operating income. Yet at the same time, we have been able to actually increase our marketing spend this year by making reductions in other SG&A line items.

In regards to product, we had a very successful launch of our better grade lifestyle brand Oak Hill which is a more of a traditionally inspired sportswear line, while Harbor Bay is still our biggest label, we clearly have a customer base that is willing to pay more for higher quality product. Our fashion denim business led by 626 BLUE has been the real driver of our bottoms business. And we have a 95% approval rate from those who have purchased from our 626 BLUE line. Our athletic team business continues to grow especially with college apparel and it looks like major league baseball will be a win for us this year also. We had an exceptional response to our newly launched Reebok golf line while only in 150 stores at this time we'll be adding another 100 stores by the fourth quarter. In Rochester, we continued to hone down the assortments and raise the status of the brands that we carry. The results in our contemporary lifestyle brands have been outstanding led by premium denim. As we have eliminated tertiary brands along the way, it has allowed us to upgrade with more identifiable and fashion right brands. This Spring we're launching John Varvatos in the Fall and at the same time our private label business continues to grow and we have raised the quality standards of our house brands and the new receipts are performing better than previous seasons.

Our marketing initiatives this year are a reflection of the opportunities we see in growing our market share by driving more traffic to our stores. I've stated over the last several quarters that we have a tremendous opportunity to increase our market share in a fragmented big and tall industry with over 500 doors and a robust catalog Internet channel that is soon to be approaching 20% of our sales, our market share according to NPD is still less than 10%. The reason is that 65% of the big and tall market resides in waists 42 and 44 inches where we significantly underperform. The peak of our customer base is 48 to 50 inches.

We addressed this two years ago with the rebranding of Casual Male XL from Casual Male Big & Tall. We had an immediate lift to our business and had the highest comp sales increase in the last seven years, but really that's all that we did at the time. No marketing dollars were spent to focus on that entry level big and tall potential customer.

Over the past five years, to support the growth of our direct business, we shifted marketing dollars from stores to direct. In 2008, we have reversed this trend by increasing the store marketing support over '07 by 19%. Starting in late April, we'll have a cable television campaign targeted to the 42 to 44 inch guy who is frustrated with the lack of product available in his size. And at the same time, we have comfort in '08 with our direct business being able to sustain its sales through efficiencies that will include a reduction of pages and lower production costs.

Our loyalty program continues to gain traction. Our conversion rate of signing customers into the program is 76% and we now have over 1.5 million members enrolled. On average, the loyalty customer spends 15% more than those not in the program, and upon redemption of loyalty points, the customer is spending 16% more at the register than the average transaction.

We're very pleased with the three new multi-channel concepts we launched this year, and last year that show a lot of promise for the future. BT Factory Direct, our catalog and Internet concept which focuses more on value is performing well, Living XL, our lifestyle concept for men and women of size is also proving to be a viable growth vehicle for us, and Shoes XL has proven our assumption that we are underpenetrated in footwear. Our footwear sales as a percent of total sales has more than doubled through catalog and Internet sales and is our top category in terms of percent of sales increase in both our Casual Male and Rochester stores. And we're very excited about our August launch in six European countries on the Internet. We see tremendous opportunity for both Casual Male and Rochester in Europe. Currently, our Rochester store in London has the second highest sales volume in the chain and its sales have been increasing at a double digit rate for the last several years. No other specialty retailer in Europe offers anywhere near the depth of product and the value that we do.

In 2008, we're up against $13.5 million of non-recurring charges that occurred last year. We also assuming our sales trends will continue throughout the year. That being said, we believe we can deliver the $0.25 to $0.30 per share forecast this year through our initiatives of cost savings and improved gross margins and we firmly believe based on our metrics that with just flat traffic which we anticipate at some point down the road we'll be able to deliver positive store comps through improved performances when the customer is in the store buying.

Our consistent improvement in performance over the last several years hit a roadblock in the last quarter. We don't believe this was based on a lack of execution. As we saw consumer confidence wane we have adjusted accordingly. We've planned a conservative '08 and we're focused on a healthy balance sheet with tightening of CapEx, lowering expenses, and reducing our average store inventory with the result of improved cash flow throughout the year. Dennis Hernreich, our CFO and COO, will now review the financials for last year and give some insight into our expectations for 2008.

Thank you, David, and good morning. Everyone, thank you for joining us. During the fourth quarter of 2008, the Company's performance from continuing operations generated earnings of $0.03 per share, a departure from the earnings expectations we provided early in the fourth quarter of between $0.24 and $0.29 per share, and a drop in operating income from a year ago. The Company was expecting a comparable sales increase of between 4% to 7% during the fourth quarter, but due to a drop in customer traffic of approximately 7.5%, during the important peak holiday selling season, and therefore, comparable sales were essentially flat, resulting in a lower sales from expectations of approximately $10 million during the quarter. In addition, our gross margin for the fourth quarter was negatively impacted 430 basis points by a charge of approximately $6.1 million in inventory reductions for writing off and clearing Rochester merchandise product which is no longer relevant to its updated merchandise strategy, together with other related inventory adjustments. Additionally, to minimize excess seasonal inventory levels, the Company accelerated discounting activity during the fourth quarter which further eroded gross margins by another 140 basis points. In aggregate these factors reduced operating earnings by approximately $14 million or $0.19 per share.

Lastly, the Company incurred unanticipated and mostly non-reoccurring SG&A expenses of approximately $2.5 million during the quarter to fund additional distribution center start up expenses associated with the Company's sortation systems, professional fees to resolve certain legal matters and institute certain tax planning strategies, recruiting fees for key additions to its senior management staff, and otherwise maintain store labor coverage in its stores during the important holiday selling season.

Despite our limited sales growth and profitability during Fiscal 2007, we made significant progress toward increasing the breadth of our direct businesses which is in line with our long term strategies to grow our market share. We continue to see strong growth with both Casual Male and Rochester direct businesses of double digit increase, double digit comparable sale increases and we believe that this level of growth will continue. During Fiscal 2007 we invested additional SG&A of approximately $2 million into our existing direct businesses. Building on this growth we launched three new lifestyle product extensions to complement our existing businesses, the performance of these three direct businesses, Living XL, BT Factory Direct and Shoes XL was very solid with sales of $8.9 million and a combined operating loss of $1.5 million. These businesses together with our Casual Male and Rochester Direct business are expected to fuel 2008 sales increases with the new businesses growing to an approximate $20 million sales level and produce breakeven profitability in 2008.

For the year, sales were essentially flat at approximately $464 million with a 2% comparable sales increase. The Company's direct businesses increased 16.5% while its retail businesses dropped by 0.5 point. After excluding the inventory writedowns, gross margin rate improved by 20 basis points from year ago levels in spite of occupancy deleveraging of 70 basis points for the year. SG&A levels increased by approximately 5.5% or $9.2 million, two-thirds of which attributable to the Company's three new businesses.

As we previously discussed during the fourth quarter of Fiscal 2007, we exited our Jared M. business. However, based on the financial performance of Jared M. since the acquisition, we did not believe that Jared M. had the scalability and potential profitability as a long term strategy and as a result we decided to exit our Jared M. operations. As a result of this decision we recorded a total non-cash charge of $2.6 million relating to the impairment of fixed assets, the writedown of inventory, and the write-off of certain other assets. Of the $2.6 million charge approximately $1.1 million related to the writedown of inventory and the remaining million $1.5 related to the write-off of fixed assets and other assets. The results of operations for our Jared M. business for Fiscal 2007 and 2006 have been reclassified to discontinued operations for both fiscal years and amounted to losses of $3.5 million and $700,000 net of tax respectively or a loss of $0.08 and $0.02 per share for the year and fourth quarter respectively.

Looking forward to 2008, we are assuming customer traffic continues at its current trend and therefore, we have adjusted and planned our operation accordingly and are focused on gaining improved productivity within our existing loyal and dedicated customer base. In addition we will continue to expand CMRG's reach beyond its traditional customer base by further growing our product extension businesses of Living XL and Shoes XL, and our new value oriented brand BT Factory Direct to a $20 million sales level and breakeven profitability, commencing Casual Male and Rochester shopping sites within European Union during 2008 which we believe will represent a source of significant growth in the years to come, and reapproach our target market to those who have not shopped CMRG brands with revised marketing message to convince him of the compelling reasons to wardrobe at CMRG as David discussed.

Meanwhile, much as CMRG's expected improved profitability will be generated by focusing upon its core business and core customers. We intend to grow market share by intensifying market share by increasing its marketing spend to almost 8% of sales up from just over 7% in 2007. This increase will support the mass media marketing campaign which is planned to commence in the second quarter of 2008, without compromising its traditional direct mail campaigns. Continue to improve upon offering relevant meaningful lifestyle product assortments to our customers, improving upon our methodology of planning and allocating appropriate assortments, to each and every store considering the demographics and lifestyle tendencies of each store, and developing and training our vast network of store management and sales associates to improve upon their selling skills and better cater to the needs of our customers. In these ways, we expect to continue to produce gains in market share, and accordingly, sales volume increases, maintain and slightly improve upon our gross margins, and slow the SG&A expense growth incurred in Fiscal 2006 and 2007, resulting in our expectations to show healthy growth, healthy operating margin growth with increases in our cash flow. Given the uncertainty in the retail market as a whole, for Fiscal 2008 we are expecting our sales to range between 470 million to $480 million, based upon a comparable sales rate of 2% to 3%, the direct businesses are expected to grow 25% while the retail business is expected to drop by 2.5%, and also represents a comparable sales change from its core businesses of between minus 2% to flat for the year.

We have seen a steady increase in our gross margin rate over the past several years, as a result of our improved operating systems and the development of a strong private label program. We expect a modest increase in gross margin for Fiscal 2008 of between 50 and 75 basis points. Although strong expense control will be a priority in Fiscal 2008, it will also be important that we invest our SG&A dollars in the right initiatives which we believe are described -- are in the described merchandising, marketing and sales training initiatives. We are expecting that our total SG&A will approximate $180 million. Based on these assumptions we anticipate that our earnings for Fiscal 2008 will approximate $0.25 to $0.30 per share with operating earnings of between 20 million to $24 million up from this year's $10.5 million and reaching 2006 levels.

Given the shortfall in CMRG's business trends during 2007, inventory level reductions and free cash flow increases did not materialize. Inventories in our stores were up by 4% from year ago levels. During 2008, our expectations is that inventory levels currently at $118 million will drop by between $10 million to $15 million and also capital expenditures have been cut in half to approximately $11 million to $12 million and free cash flow targets are expected to reach between $35 million and $40 million for 2008. Furthermore, with the Company's recently extended $110 million revolving facility extension into 2011, at favorable pricing, and its tax loss carry forwards in excess of $50 million, the Company will be well positioned later in the year to resume its stock buyback program. The Company has an authorized 24 million buyback program in place for 2008 which under current market prices could result in the Company reducing its outstanding share count by over 15%. The Company closed the year with 488 stores and almost 1.8 million in store square footage. During 2008 we expect that store count will remain flat with approximately nine stores closing, nine stores opening, and planning eight relocations and several more remodels occurring during the year. That concludes my remarks and Kevin, we are now ready for the Q&A session.

(OPERATOR INSTRUCTIONS) Our first question comes from Margaret Whitfield with Sterne Agee.

Good morning, everyone. I wondered, Dennis, and David, if you could discuss the outlook for gross margins beyond this year. Do you still see opportunities improving your direct and private label?

I think, Margaret, we're expecting gross margins to relatively plateau in 2008 but should be maintained thereafter.

And how about the square footage outlook beyond this year? Do you still see opportunities to increase your store base?

I think that's a good point. We continue to see opportunities in the West Coast for Casual Male. We were just on a trip out there but we kind of see high single digit, new store openings, really starting to wane as far as store closings. We're in a very good position right now. Over the last four or five years we've closed 40, 50 stores that were not really driving any margin for us, so our real estate is in very good shape right now and we see somewhat growth but not a real driver at this point in time.

And two modeling questions for Dennis. The D&A outlook for this year and the tax rate?

Tax rate about 40%, Margaret, and D&A about $17 million.

Thank you.

Our next question comes from Betty Chen with Wedbush Morgan.

Thank you, good morning. I was wondering if you can talk a little about during the fourth quarter and perhaps so far in Q1, if you've seen any sort of regional variations amongst different brands? And then secondly to follow-up on the earlier question, can you give us the openings and closings by concept, for 2008? Thank you.

Okay, as far as opening and closing by concept, they would all be Casual Male. I mean, I'm sorry, closings would all be Casual Male. Openings, we have one new store opening in Rochester and the rest are Casual Males. In terms of by market area, what we see going on, I think it's consistent with what other retailers are saying. Our Florida market has been our weakest market now for several months. Surprisingly, where we're hearing a lot of problems in Southern California, we're doing well there. I don't seem to be falling in line there, I think that could be a matter of operationally we're just much better positioned than we were a year ago. Outside of that it's been fairly consistent throughout the markets.

And then if I could have a follow-up too for Rochester, following the accelerated writedown in Q4, how do you currently feel about the inventory mix that you have? It sounds like maybe you've already seen improvement. Is that mainly complete now in terms of the repositioning of the inventory?

I think what we've said is we will be positioned for Fall '08. It is in transition. Getting it ready for Fall, we're in much better shape than we were a year ago. Our sportswear piece business is ahead of our clothing piece which would really be suits and ties and dress shirts. This really won't be aligned where we want it until the Fall season.

Great, thank you and good luck.

Thank you.

Our next question comes from Gary Giblen with Goldsmith, Harris.

Hi, good morning, all. Just wondering if the Rochester customer is holding up and is general consumption pattern given kind of mixed signals in the luxury sector recently?

Well, I think we've experienced the same thing in Rochester as Casual Male. It's been a matter of the slowdown of the traffic coming into the stores. Certainly, I think in the last couple of months, Rochester has seen the same traffic issues that are starting to show up in other luxury retailers so we're watching it closely, keeping our inventories in line but again when the customer is coming in, seems to be responding well to the assortments that we have right now.

Okay, great. And then to follow-up on one of the answers to Margaret's question, why would gross margin be expected to plateau in '08 when I thought that there were continuous improvements and procurement and private label mix and so forth, I mean I realize that you have the economy and the head wind now but beyond that?

Well, I think we want to take a conservative approach. We have improved our margin by over 600 basis points. We've taken a lot of debt off the table as we've reached our plateau as a level of private label and Casual Male certainly maturing close to 80% private label. Rochester certainly has growth there but can't move the numbers that much, but I think we want to take a conservative view on margin until we see a better consumer attitude towards shopping right now. We have to be, we want to keep our inventory clean and fresh and if we -- and just concentrate on getting the sell-throughs that we need right now. Not to say that we can't have margin opportunity. We're just saying we're taking a more conservative approach to the growth that we've had over the last few years.

Okay, understood. And final question, what was the, what were the components of the other inventory related write-offs and might there be further inventory or fixture write-offs this year or nothing envisioned at this point?

No, I think it's a one-time physical inventory adjustment, Gary, that won't carry forward. Mainly related to Casual Male.

So the other item, called other inventory related is Casual Male inventory that, is that what that is?

Yes.

Okay, thanks, bye-bye.

Our next question comes from Tom Filandro with Susquehanna.

Thanks, hi guys. Question on the marketing spend. Can you spend a little more time helping us understand how this spend as a percent of sales plays out on a quarterly basis? And then my question is in the second quarter, where it sounds like the acceleration is going to hit, are you anticipating an immediate return on that investment or is it more of a back half investment and then I have a follow-up question, thanks.

Well, we said that the marketing campaign starts late April, going up through Father's Day. We're going to monitor that closely on a daily basis to see the immediate reaction. What we have seen over the last several years is our best quarters of comp sales were always when we were running television. The problem was it was an expensive vehicle for us to use and layered on top of our other marketing initiatives, it impacted our operating margins. This time, we're ahead of the curve. We've made the adjustments in the other marketing areas that we could put this mark -- go on to a cable TV marketing campaign without taking on the incremental SG&A that we have in the past.

Okay, so in terms of percent of sales because it is going up though, David, right? 7% to 8%?

Correct.

Is it evenly weighted throughout the quarters? Obviously the first quarter it's not. So what I'm -- my question is will we see a meaningful increase in add spend as a percent of sales in the second quarter?

No, Tom.

We won't, okay. My second question is in terms of Rochester, obviously the writedown and you made, David, some positive comments on the average sale I believe and gross margins. Maybe Dennis could you put a little sort of meat on the bones on this one and help us understand how this division contributed historically to earnings or if it was a drag? Maybe the operating margin of the business on a pure basis and how we should view that go forward near and longer term?

Which division are you referring to?

The Rochester division.

Rochester division. The Rochester division, if you recall we acquired the business it was generating about $3 million in EBITDA. Today, it's 8 million to $9 million and expected to grow further in 2008. It's just basis points below operating margin relative to Casual Male so it's not really a drag per se, and I think now with the improved merchandising strategy and some of the changes that have been made over the last two years I think we'll be able to now better optimize the true potential that Rochester has. Meanwhile, its direct business has been trending very well, and has grown quite a bit since we've owned the business and that growth has taken place in the last few years.

What is direct as a percent of their total business, Dennis?

They are just over 20, Tom.

20%, great. One final question, if I might. In terms of your overall view on comp for the year, could you just tell us at least from a planning point of view, should we model a more negative comp in the first half versus the back half?

I think that would be good. If when we lay up last year, first quarter was the best quarter of the year. We were high single digits and as we hit the fourth quarter, it started to erode, so I would be definitely more conservative on the comps in Q1 and then again, we're foreseeing our opportunities still in the fourth quarter relative to the year. I mean, we're still planning to be somewhat flat, but we're hoping that by the fourth quarter, things will get better and again we're going to be up against some pretty soft numbers.

And one other, that would suggest then we should take a more conservative and possibly down view of first half earnings? With a view that the second half is where the recovery is?

Certainly the second half is where the difference will be made in earnings compared to this year, not the first half.

Okay, gentlemen, thank you very much. Best of luck.

Thanks, Tom.

Our next question comes from Evren Kopelman with JPMorgan.

Thank you, good morning.

Good morning.

I had a couple of questions on your guidance. First, on the gross margin, so the 50 to 75 basis points, what, is that off of an '07 number that includes or excludes the writedown?

Excludes the writedown.

Okay.

45.7 is your base for '07.

45.7, okay. And then the second question on that is I assume there's some occupancy deleverage on a flat to down comp, right? So you're suggesting the merchandise margin should be up more than 50 to 75 basis points?

That's accurate.

Okay. And then the second question, did you say you expect the direct business to grow 25% in '08?

Inclusive of our--?

Oh, new business.

New business pieces, Evren.

How about excluding that? I'm sure I can run the number but if you had it quickly?

Excluding that, it will be just the core Rochester Casual Male will be single digits.

Okay. That's fine. And then could you give us the store only comp for Q4 in '07?

Yes. We were minus 2.5 in the stores during '07, Evren.

Okay, and another quick one is the diluted share count at the end of the quarter?

43.1.

And then finally, I guess a broader question is on the 42 to 44 inch waste guy, sounds like you have some initiatives going after that guy more directly this year. Maybe talk about your confidence in getting that guy into your store in terms of how much of it, how much of an obstacle is it for that guy to go to a specific store for a special size store versus clearly he doesn't have a lot of selection in a regular store but at least he doesn't have to go to a specialized store and maybe the 42 to 44 inch guy just can't admit to themselves that they're heavier now, so can you talk about maybe that and what percent share you think you can gain given some of these issues?

Well, that's the big question. We know it's out there. We were able to snag a segment of them simply by changing our name which took a little of the stigma off the word big and tall. We know when that customer came in he responded very well, but we hadn't done any marketing to get him in. Now, this commercial that we're running has already been tested and through focus groups and we specifically had only 42 and 44 inch guys who have not shopped Casual Male in the focus group watching the commercial, and they responded quite well, and came out feeling that they would be interested in going into a Casual Male store.

It's a tough battle but we know for sure he's very frustrated because especially at 44 inch, there is nowhere to shop for this guy, so I think it's a long term project but if we could just get a small percent of them, it's a huge piece of incremental sales to us, so this is really the first time we're going to market directly to him. The commercial is one of these guys in a testimonial situation talking about where his limited choices and what Casual Male has, so we're excited about it. Again we'll monitor it on a daily basis to see the response, but it is a huge opportunity for us and we think that going through television campaign is the best way to reach him.

And what channels will it run on?

Well, we've spent a lot of research over the years on cable so we know the programs that do quite well for us, ESPN, we know what markets are strong for the female side of the business so a lot of sport shows tend to do very well for us, lifestyle channels, but it's strictly cable where we could get a good bang for our buck on the number of impressions we can make.

All right, thank you, good luck.

Our next question comes from Richard Jaffe with Stifel Nicolaus.

Good morning. Just a couple of follow-on questions, guys. You talked about a European initiative, could you give us a sense of investment this year '08 in Europe and when we should look for store openings either further store openings in UK or off to the continent?

Well, in terms of investing, our investment is really the inventory, and the marketing we'll do to get the business moving. The GSI is covering the expense side of it and they will revenue share in the sales that take place. We have no plans in '08 to open any stores in Europe, but we know the opportunity is there. Hopefully we could start the initiative in '09 but what this will give us since we're in six countries we'll get a good indication of where the best opportunities are to open stores based on the sales we're going to get.

And just a follow-on question to Rochester inventory. Given the writedown we should assume inventories are where they should be both in terms of dollars but also in terms of mix; is that correct? Or is it really still a work in progress in terms of getting the mix right in Rochester?

Again, I'm very confident that starting in August, our inventory will be merchandised correctly. Again, we're still in transition as I stated before. Our clothing inventory isn't where we want it to be. Sportswear is certainly further along, but we're going to, say by Fall, we're going to have it where it's going to be.

In terms of units in the store, yes, now we're comfortable. That writedown really got to clean up the stores. Again, for those who have been in the stores a few months ago, if you came in today, you're going to see everything basically is back at full price and all the aged inventory, all our clearance inventory is out of the stores now.

Got it. And just a question about your loyalty program. In terms of your penetration or the percentage of shoppers who are using the loyalty program, could you break that out for us or give us a sense of how that's unfolded this year?

Well, we don't give out the -- certain numbers we don't give out for competitive reasons, but again, we're not having any problem at all getting people signed into the program. They are using this as a purchase vehicle. When they come in, including the points that they're getting, they tend to spend more on that return visit than they normally spend, which is exactly what we're hoping happens, so it is somewhat, there is an expense to it and that's certainly in our marketing dollars, but it seems to be registering the way we want it to. They appreciate the points, they follow their points, and they're using their points.

Is the catalog expense considered part of your ad budget, the 8% you commented on?

Yes.

It is? And could you break that out or sort of take apart the traditional print and media advertising versus catalog and direct mail?

We don't break that out, Richard.

Okay. Thanks very much.

Thank you.

Our next question comes from David Cohen with Midwood.

Components of the free cash flow, Dennis, I thought you said 20 million to $24 million of operating income, take out interest expense, taxes, add back D&A, 10 million to $15 million of inventory reduction, I mean I'm coming out with a number for operating cash flow of say 31 to 43, that's after 6 million to $7.5 million of taxes. I guess what is in your free cash flow number? Is it anything besides operating cash flow besides the minus CapEx?

Free cash flow, no, that's about right. Taxes, we're using NOLs to shelter cash taxes.

What level of cash taxes? Is it going to be minimal cash taxes?

I would say approximately, I would say approximately 5% for cash taxes.

Okay. So that's a significant difference, but from a working capital standpoint, is there anything just directionally, inventory reduction at 10 million to $15 million is obviously the biggest one. Are there any other components that are a material source or use of cash?

Not material. There will be some reductions in some of the liabilities associated with inventory flow as you would expect. But not terribly significant.

Okay. Well, maybe I'll follow-up with you and/or Jeff off line and try to nail this down a little bit.

Be happy to.

Okay, thanks.

Our next question comes from Marc Bettinger with Stanford Group.

Hi, guys. The August launch in the six countries in Europe, that's all Casual Male; correct?

And Rochester.

And Rochester.

Actually, there will be 12 shopping sites in total.

Okay.

Six for each brand.

Six in each, okay. And as far as Rochester in the United States, is it a Real Estate issue for only opening one store or can you comment on that?

I think again, with the, it gets back to that hunkering down, I think we want to be conservative. We've opened up some very high profile stores in the last year. We also have a relocation in Washington D.C. that's taking place actually next month. Again, we're just taking a conservative approach and we'll realign ourselves up for store growth when we see an improvement in the business.

Okay, and just one follow-up. Dennis, I think you said for 2008 you're looking for the comp retails to be down 2.5 and direct to be up 25%?

Yes.

Okay, good luck, guys, thank you.

Thanks.

Our next question comes from Howard Tubin with RBC Capital Markets.

Thanks very much. Can you give us any more details on Living XL and how that performed in the fourth quarter and how it's performing now going into the first quarter?

Well, we're seeing significant in growth and it's very difficult for us to measure that business because it's a start up and there's a lot of prospecting involved and we're constantly moving up and down drops in circulation because our plan is to have that business breakeven. We don't really want it to impact our earnings in '08, so it's a work in progress. The key to success of this business is product innovation. We have to constantly come out and add a new product to stimulate the customer over time. Still, big items are any type of chairs, scales, seat belt extenders, really seem to drive the business. We've introduced some apparel into the catalog and that seems to be doing well, but it is a work in progress and our numbers change every month as to what we think it will do this year but again we're always trying to plan it to breakeven throughout the course of the year. But we're excited about it. It's drawing in new customers. We're getting a lot of the female shopper coming in, and it's a great extension for us without really any extra overhead expense to operate in.

Great, thanks, and would you be willing to give us Casual Male store, same-store sales by month in the fourth quarter?

No. We don't give out that granular information.

Got it. Okay, great. Thanks.

(OPERATOR INSTRUCTIONS) Our next question comes from Erin Moloney from Merriman Curhan Ford.

Hi, good morning. Dennis, first of all I apologize. I think I just missed your comments on this. Did you say what the revenue and then I think loss was for the new businesses in '07 excluding Jared M.?

Just under 9 million, Erin, 8.9.

And for sales?

That is the sales.

Okay, and then what was the loss, did you give that?

A loss of $1.5 million.

Okay, great. Thank you. And then looking ahead to '08, you've talked about the launch of the new European business. Kind of what's your outlook as far as launching new businesses, potential acquisitions, does that continue to be ongoing or are you kind of pulled back from that this year with the current business environment?

I think we always will be optimistic about finding the right fit for us. We've got an infrastructure here that could certainly take on new businesses but it would have to be the right business at the right time but we keep an open eye on what's going on out there. We believe long term, we can certainly leverage our management group and the systems we've put in this to take on more businesses, but nothing to talk about today.

Okay, great. And then just finally again looking at the SG&A levels, expectations for '08 you've obviously talked a lot about the marketing spend being up. Are there other areas outside of marketing, direct being kind of other places where you're looking to cut expenses or control expenses in '08?

We have reduced our corporate expenses, Erin, already by 6 to 7% and have cut other levels around the various businesses to maintain a steady slow rate of SG&A growth, and to allow and accommodate for these initiatives that we spoke about.

Okay, great. Thank you.

Our next question comes from [Kia von Sutherheen] with Deutsche Bank.

Hi, it's actually [Klaus von Stiban]. I want to ask a question about the European expansion. I don't know your business obviously other than listening to you for a few years now, but I'm skeptical of whether -- does this really translate well into your European operation? It seems so culturally tied to the U.S. and Europe is far away, involves a lot of travel, different customs, different languages. Why do you think that European expansion is a good idea? Can you explain that?

Well, we see what's going on in the United States and if we look at our New York Rochester store alone, a very high percent of the sales come from the tourist market. They come from Germany, they come from Saudi Arabia, they're coming from the UK. There's a tremendous demand for what we have overseas. There's nothing like this. Certainly I could share with you at some other point in time the statistics of big and tall in these European countries. It's pretty high, so there's a customer there. We've seen the market. It's certainly there's nothing like what we have to offer. We're approaching it in a conservative way, by starting on the Internet, let it grow but we're very optimistic that there's a consumer out there that wants value at the Casual Male price and wants luxury at the Rochester prices that we have to offer. So we're very enthusiastic about this opportunity and we believe it's going to do well.

You should also know that our sites will be in the native languages and will basically be relatively seamless to a Company of U.S. based operation. And that's -- we've been very careful about preserving our sites to make them look like they're coming from Germany and all the other countries we will be in.

Okay, that's good, thanks.

There are no further questions at this time.

Okay, well, thank you all for joining us, and we look forward to reviewing our first quarter results later in the year. Thank you very much.

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