Destination XL Group Inc (DXLG) 2008 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Casual Male 2008 first quarter earnings 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). As a reminder, this conference call is being recorded.

I would now like to turn the conference over to your host, Mr. Jeff Unger. Sir, you may begin.

Thank you, Shannon, and thank you all for joining us this morning. On our call today is Dennis Hernreich, Senior Vice President, Chief Financial Officer, Chief Operating Officer; and David Levin, Chief Executive Officer and President. 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 risks and uncertainties are detailed in the Company's filings with the Securities and Exchange Commission. Our complete Safe Harbor statement is available at casualmalexl.com. Now, I would like to turn the call over to David Levin. Thank you.

Thank you, Jeff, and good morning. Our first quarter sales results that we reported today were in line with our expectations. This trend is consistent with the performance we have now seen for the last three quarters. This has been a result of the slowdown in traffic in all our retail channels. We are pleased, however, that our sales have been stronger relative to the traffic issue. Traffic for the quarter was off in the mid single digits, but our comps were only off 2% due to a continued improvement in our conversions and the increase in our average ticket out the door. We continue to believe that the difficulty of the top line is a result of a challenging macroeconomic environment where consumer spending has slowed down in the apparel sector. We are, however, encouraged that when the customer does come in to buy, he is pleased with the product we are offering and is spending more than a year ago. It's interesting to note that the short fall in sales all came in the month of March.

April and May months to date have been trending with modest positive comps, even though we still haven't experienced a good shot of warm weather yet in the Northeast. We are also encouraged that we were able to protect our merchandising gross margin in the first quarter, and anticipate that to continue throughout 2008. We see no need to change our strategy from a promotional point of view even in a tough retail climate. From a marketing perspective, we are optimistic that our strategy to improve store traffic through a new television campaign that we launched three weeks ago. The commercials are geared to attracting the 42 to 44 inch waist guy that's frustrated in the lack of assortment available in those sizes that are being offered to him in the traditional retail channels. These two sizes represent 65% of the big and tall market, yet represent less than 25% of Casual Male XL's business. If we can penetrate a small percentage of this specific customer, it has the capability to offset weaker traffic that we've been experiencing with our existing customer. It's definitely too early to quantify on the impact of the business, but we are seeing some indicators that are encouraging. Besides seeing an improvement in sales in our Casual Male XL stores, we have seen an increase in customers on our website who are clicking through to find the nearest store location. Also, the number of requests for catalogs coming from the commercials is up significantly compared to last year when we were also on TV. We have also built a television campaign in the fall budget, whereas last year we were not on television.

The main difference for us this year is that we have built television advertising into our existing marketing spend, whereas in the past we layered it on top of our traditional marketing budget. To offset the expense, we cut our catalog circulation -- mainly through prospecting -- and also cut the number of catalogs we drop to customers. By drawing more traffic into our stores, we believe we will offset the loss of any catalog prospecting that we normally would have invested in. While we are pleased with the status of the Casual Male XL business, Rochester Clothing is in a state of transition. As I have previously discussed, we are in the process of upgrading the Rochester franchise. We took a significant writedown of inventory last fourth quarter, and pulled out approximately 40,000 units out of the 20 store chain. Our strategy is to position Rochester as the luxury specialty retailer for big and tall customers. At the same time, we are developing a contemporary lifestyle component for the business, and we are pleased that the spring season results are very encouraging. We launched John Varvatos, which is proving to be very successful, while premium denim has also been a big driver. And in the fall season, we are launching Michael Kors, Affliction and Ed Hardy, all exclusive to Rochester. Our product assortment for fall will be much better balanced, and we believe we'll start to see improved results in the back half of the year. On the other hand, our product assortment in our Casual Male XL stores is well balanced, as we continue to improve upon store by store assortments. Our private label lifestyle brands continue to improve in their performance and now represent almost 80% of the inventory assortment.

Strongest categories for spring so far have been spring tees, fashion denim, active wear and the introduction of Reebok Golf. Where we have seen down trending numbers is in our core basics. Our customer continues to look for newness in our merchandise mix, and our success has been in flowing in that product on a timely, consistent basis. In regard to the three new direct to consumer businesses, I am pleased to say all of them are performing up to our expectation this year. Shoes XL has already doubled its sales as a percent to total sales in less than a year. Also of interest is that 47% of the customers who have made a purchase at Shoes XL have never shopped Casual Male XL or Rochester. Footwear also continues to be the largest increased category in comp sales in both store concepts. B&T Factory Direct, which is catered to a less affluent customer, is performing above our expectations this spring. We believe this is a result of redesigning the catalog with a stronger price point visual presentation. And Living XL has proven that we could expand beyond apparel and with a robust database of customers, can tap into our customer's lifestyle and grow our top line sales.

We are excited about the long term potential as we further develop this business and also continue to attract the female shopper. Currently, 50% of the customers coming to us through the web are women. In addition to these new businesses, we'll be launching our latest endeavor in August with offering our Casual Male and Rochester concepts on the Internet in six EU countries -- the U.K., Spain, Germany, France, Italy and the Netherlands. There's not any retail operator in Europe that can offer the value brands and breadth of assortment that CMRG will be able to showcase on the web. We have already established a successful presence in London with with our Rochester store, which is ranked Number Two in the chain in sales and profitability. Also, our intelligence into the European market shows strong indicators for male obesity and Internet use. And now, I'll pass this to Dennis Hernreich, our CFO and COO, who will review the financial results for the quarter.

Thank you, David, and good morning. And thank you for joining us on this morning's call to discuss Casual Male Retail Group's earnings and performance for the first quarter of 2008. Although the Company's earnings from continuing operations dropped to flat earnings per share in the first quarter compared to $0.04 per earnings per share a year ago, we reiterate our guidance for the 2000 year of $0.25 to $0.30 per share for this year. The earnings drop in the first quarter was due to a sales decrease of 2.7%, mainly driven by slower customer traffic, as David stated, and the fact that last year's first quarter comparable sales increase was at its highest for last year at 6.2%. At the same time, gross margins declined due only to deleveraging of occupancy costs, as merchandise margins were flat to last year, and SG&A was flat to last year's levels, as well. Looking forward for the balance of the year, our comparable sales will be up against softer 2007 results. A 3.9% increase in the second quarter, a 1.1% decrease in the third quarter, and a decrease of three tenths of a point in the fourth quarter.

Let me take you through the components of the Company's performance in the first quarter. Sales were $107.6 million -- were slightly down when compared to sales of $110.6 million for the first quarter of last year. The sales short fall of 3 million was primarily driven by a decrease in our comparable sales of 2% and a comparable sales decrease of 4.7% from the Company's core businesses. The Company's non-core businesses -- that is, Living XL, B&T Factory Direct and Shoes XL, generated sales of 3.6 million compared to 0.5 million during last year's first quarter. Our retail channel had a comparable decrease of 4.1% for the first quarter, which was partially offset by an increase of 9.4% from our direct channel businesses. As David stated, sales trends improved in April and have continued into the second quarter. During the first quarter, the Company sales productivity in its retail channel, as measured by customer conversion rate and dollars per transaction, improved by almost 5%, partially offsetting the negative customer traffic trends. This is a direct result of the Company's focus towards improved customer service by providing better sales training, development tools and sales productivity measurement reporting applications to all of our stores.

Although these programs are in early stages of implementation, we are already seeing positive impact on selling productivity. Given the uncertainty in the retail market for fiscal 2008, we anticipate that our sales will approximate 470 to $480 million. No change from our prior guidance, based on comparable sales from our core businesses of between flat to negative 2% for the year. During the quarter, CMRG opened five Casual Male stores and closed one store, and relocated three other Casual Male stores. At the end of the quarter, total store count was 492 with 1,830,000 square feet of leased space. For the balance of the year, the Company is planning to open three Casual Male stores and one Rochester store, while closing seven Casual Male stores and relocating five others. For the first quarter of this fiscal year 2008, our gross margin rate, inclusive of occupancy costs, was 44.9% as compared to a gross margin rate of 45.8% for last year. The decrease of gross margin rate was a result of a 90 basis points increase in occupancy costs as a percentage of sales. Merchandise margins remained the same for the first quarter as compared to last year. We anticipate that our gross margins for 2008 as a year will be approximately 50 basis points over that of 2007, with the improvement expected primarily in the second half of the year.

Selling, general and administrative expenses for the first quarter of 2008 were 40.3% of sales as compared to 39.2% for the first quarter of 2007, although SG&A levels were flat to last year on a dollar basis. During the first quarter, SG&A for the Company's non-core businesses increased by 1.7 million, which were largely offset by improved productivity in our distribution center and by overall cost savings in corporate expenses. For fiscal 2008, we expect our SG&A levels to approximate $180 million as compared to $178.1 million in 2007. Although strong expense control will be a priority for us in 2008, it will also be important that we invest our SG&A dollars into our key marketing and merchandising initiatives. Overall, the Company reported for the first quarter net income of just under $100,000 or flat per fully diluted share compared to net income of 1.1 million or $0.03 per share.

The Company's inventory levels were virtually flat to last years levels, and we still expect that inventory levels will slowly drop as compared to last year's levels. By year end, we expect a 10 to $15 million inventory reduction from the end of last year. Also at the end of the quarter, the Company had borrowings under its revolving line of credit, which expires towards the end of 2011, of $54 million of interest rate which are currently at an average of 4.5% and availability stands at just under $50 million. That ends my comments, and now Shannon will open it up for any questions.

(OPERATOR INSTRUCTIONS). Our first question comes from Scott Krasick with C.L. King & Associates. You may begin.

Yes, hey guys. The categories that you pointed out that were doing well at Casual Male seem to skew younger. Is there some evidence that you are getting a younger customer in there?

Well, as we stated over time, we've managed to bring down the average age of our customer from 50 years old down to 45 years old, and we continue to see that younger guy lifestyle coming in. Our fastest growing lifestyle as a percent of sales continues to be 626 BLUE, which is definitely catered towards -- influenced by Abercrombie and Aeropostel. For example, stream tees are just on fire right [inaudible, audio interruption] -- good news is it's a category we can catch up to relatively quickly and we are moving some more of our inventory dollar. [inaudible, audio interruption], short as well [inaudible] weather [inaudible], but anytime we had pockets of weather, that category is doing very well. So yes, we [inaudible, audio interruption] younger influenced customer coming in and going for those categories.

Yes, I don't think 45 year olds are wearing graphic tees. Maybe. You would be surprised.

We actually monitor that, and they are wearing our tees. Our best telling t-shirts are a lot of rock influences, like right now Led Zeppelin, Pink Floyd. And we can all remember those groups.

Absolutely. Okay. What product are you focusing on for the European launch?

What product?

Is it going to be casual? Is it more dress? What is the sort of mix?

It's pretty well the balance of what we carry in our stores and what we would carry on the Internet. Certainly we'd do more sportswear Internet-based than we would do on the clothing side, but we'll have a balance of all products.

And do you have any expectation for sales for that business?

We do. It's not going to be impactful on this year. We are committed to not coming in and delivering a big loss in a startup like this. Our cost is really based on the amount of marketing we are going to spend, and on the Internet is efficient, but we are not geared to have this influence our earnings one way or the other for 2008. We have to get a feel for what is selling, what sizes work, how many bigs versus talls. These are all things we'll have to monitor and make adjustments as we are to mature the business.

Okay. And then Dennis, if the sales plan doesn't come in as you expected, is there more room to cut into SG&A or are you pretty trim there?

No, I think it's pretty trim, Scott. Not unlike what we've said in the past.

Okay. All right. Thanks very much.

You bet.

Thank you. Our next question comes from [Tara Gary] with RBC Capital. You may begin.

Thank you. Hi, guys.

Hi.

I know you said that you expect the inventory to fully drop over the year, but do you know where, or -- yes, do you know where you expect it to be at the end of the second quarter?

At the end of the second quarter, primarily flattish, Tara. I think much of the inventory level improvement, you'll start to see that in the third quarter and obviously at the end of the year.

Okay. Great. And just one more question. In Living XL, I noticed the new women's apparel, mostly active wear and swim suits. Are you planning to expand into women's apparel based on the customer base that you said is about, what, 50%? Or do you think it's just going to be kind of a small part of the business?

I think it will be a small part of the business, but we are probing, we are trying some things. We've put some items up on the Internet where we didn't have to make a major commitment. It's something we are watching, but I really think it will stay where it is in terms of we'll have some active wear, some lounge wear, some which would be similar to the types of apparel we are offering on the men's side.

Okay, all right. Great, thank you.

Thank you. Our next question comes from Margaret Whitfield with Sterne Agee. You may begin.

Good morning, everyone.

Good morning.

[inaudible] on the new businesses, if you have changed your thoughts on what they could do for the year, both on the top line and bottom line. I think it was 20 million and break even.

I think we are going to hold to that strategy. Between the three brands, we do move circulation up and down, which is really the only cost we have associated with these businesses, and they are all still geared to break even. So circulation moves up and down, and if the sales go up at all, the marketing would probably move with it, or down it would be the same scenario. So we are still intent on having these new businesses break even for the year, and we'll start talking about where we think 2009 could be in a few quarters from now.

And Rochester, what impact did Rochester have online, as well as the new businesses in Q1, kind of a loss?

We don't break out profit and loss by area, but the only thing we would comment on is that the comp sales in Rochester were several points lower than Casual Male.

What would be the time frame? You said Rochester was in transition. Would we expect better results in the second half, or is this --?

Yes. We think the second quarter will stay like the first quarter. We really geared our new inventory assortments for third quarter delivery. So we believe we'll start to see a turn in that business in Q3 and improving through Q4. Again, when we made the decision to take the write-off on the inventory, we didn't have inventory behind that to replace it, and with the lead times, our inventories are not balanced right now by store. We have shortfalls in certain categories by store. So we believe that by third quarter that should be balanced much better.

You said you saw a pick up in comps April into May. Was there also an improving trend in traffic?

Better than it's been. I mean, March is, I think every retailer said, we haven't seen traffic drop off like that for quite some time -- for years. But, yes, we are seeing improvement in traffic. It's hard for us to quantify. Television has had an impact on the traffic yet, but we've seen the best sales trends in several months in the last -- in April and May really.

So how bad was traffic in March? I think you said the quarter was down mid singles.

Oh, I think it was -- if you look at March, we were probably close to double digit loss in traffic. But it came back. You know, we had a big bounce back in April.

Will your TV spot feature more Father's Day product, or would it be this similar focus on the waist 42 to 44?

This is our campaign. It's very focused, and this will run right up to Father's Day, as is. We have three different commercials running right now, but all delivering the same message.

And the same message for the Fall TV that you are planning?

Well, we'll review that, but we like what we are seeing and we think that is our best long-term strategy, is to continue to penetrate for that smaller big guy, because there are so many of them out there. And anecdotally, we know stories of some of these guys who have come into a Casual Male store in the last several weeks, and they are always pleasantly surprised. It's always a positive experience when they come in and see the breadth of selection and the fact that we do have fashion in our stores, and that's our long term strategy. That's going to be much easier for to us execute than trying to get our existing customers to shop three times a year instead of two times a year. Changing behavior is rather difficult. So we have a big population of big guys out there who have never been in a Casual Male store and that's our strategy, is to get them to experience it for the first time.

And you mentioned weather, and I know you have a large base of Northern stores, but are you seeing any comp difference between the Southern base and your Northern tier?

It goes by week. We really haven't had the warm spell that we look forward to in the Northeast. One or two weeks where we have had favorable weather, comps were certainly stronger in the northeast. Overall, things are pretty even all over; except as we discussed in the past, our Florida market continues to be underperforming, but that's been going on for at least nine months now.

Okay. Thanks and good luck.

Thank you.

Thank you. (OPERATOR INSTRUCTIONS). Our next question comes from Gary Giblen with Goldsmith & Harris. You may begin.

Hi. Good morning.

Good morning.

Following up on some of the last -- Margaret's questions, is there any pattern of more affluent areas doing better or worse than nonaffluent area? I mention that because of the Rochester comps doing worse, but --

No. Nothing that we can tell by market area. Our rural or our metro stores or our Suburban stores. We haven't seen any major difference in our sales patterns.

So it would be more the Rochester specific merchandising transition that would --

We think Rochester is not as much of an economic issue as it is our own execution. Now, we are hearing struggling from Neiman's, Nordstrom it seems everybody is struggling at that level, so it's certainly having an impact, but a lot has to do with our own execution.

Okay. And also you said things were pretty even through the country regionally. But how about California? And is there any distinction between Northern California versus Southern Cal, because in Southern Cal you have traditionally had a top performing area there, so.

I think we have a unique situation there, because a year ago to this year our operations are much stronger there. We have some really good people out there that have really upgraded the stores. We've upgraded the management. Apples to apples, from what we are hearing, Southern California should be doing worse than it is, but we had some low hanging fruit there. So we are not experiencing that today. Maybe we will if this trend continues that we are hearing about in Southern California. But as of now, our only real pocket of problem is in that Florida market.

Okay. Thanks. Very helpful.

Okay.

Thank you. Our next question comes from Betty Chen with Wedbush Morgan. You may begin.

Thank you. Good morning. David, I was wondering if you can talk a little bit about the plans to go into Europe. I believe you said you obviously would be evaluating the merchandise mix. I was just curious, what is your current marketing plan? Obviously, direct is the focus. And then I was wondering if that was included as part of your budget? And then I have a couple of follow-ups.

Well, marketing is mostly geared towards the Internet. We'll use the same strategy that we use in the States -- Google, word searching, affiliate programs where we can banner advertisement. Pretty much the traditional way we do it here. I would say almost all our -- virtually all our marketing money will go into that approach. What was the next part of that?

Was the spend on that already included in your 2008?

Oh, absolutely, Betty. And as we go forward, once we've launched the six countries and our two brands it would be our plan to follow up that with another six to eight countries next year and be almost -- well, there's 39 countries in the European union today. We are going to be not in quite half of them, but we we're going to double the number of countries that we'll start with into next year.

Great. That's very helpful. Could you also talk a little bit about, I guess, the reasoning for I think some of the gross margin improvement that you are expecting? I think you said about 50 basis points this year, primarily coming in the back half. Is that mainly because of the Rochester repositioning should be done by then, and then also maybe inventory coming down?

Well, certainly the inventory coming down, we -- last year, we weren't quite positioned to absorb the change in our sales plan as it actually unfolded. If you remember, our spring season was very good, and that really switched around in the second half of the year, and we didn't really position ourselves for that. Therefore, we had more seasonal inventory to have to clear than we had anticipated and [inaudible] some of the markdown rates. We don't think we are going to have quite that issue -- excess issue this year. Rochester should help, because we did start to purge inventory in the second half of last year. We are expecting to maintain our nonpromotional cadence since it doesn't resonate well with our customers, and therefore we will see some improvement in our markdown rates in the second half, as well as there are some cost decreases which we are expecting in the second half which will help our merchandise margin as well.

That's very helpful. And then, I guess I was curious. You mentioned that inventory plans will be going down. How should we think about that for the back to school time frame? I would imagine that could be another very meaningful market or opportunity timing for you, and obviously I think of growing business as you start to look even younger given some of the obesity trends that we are seeing. What is sort of the back to school inventory plan? And then, are there also some marketing initiatives to support that as we look ahead?

Well, 626 is the customer that you are referring to -- is the life styling that you are referring to. 626 has grown steadily in our assortments. It will be well positioned for August. The last time, however, we tried to promote or feature that brand in the back to school period, seems that our guys don't go to school so much because it's really not -- August is not -- unlike our outlets, it doesn't resonate well with our customers. But 626 will be even more robust part of our assortment in the fall and we'll certainly be ready for them in the first part of August in our stores, and that is incorporated in our inventory plans. Expect that 626 -- my recollection is the assortments will be about 10% higher than they were this time last August.

And any new categories you'll maybe increase investments in certain classifications for 626 to look for this year?

Yes. Again, as I mentioned before, screen tees are part of the 626 line, which are doing extremely well. We are also launching a new sub-brand called Synergy Jeans, which we are really, really excited about. Our number one selling woven brand in Rochester is Robert Graham. Definitely more fashion forward, contemporary line of clothing, and we have now interpreted that for our Casual Male stores at much more reasonable prices. These are shirts that we are selling in Rochester day in and day out for $200, $225. We'll have those shirts in Casual Male for under $60. So we know already how well they are doing in Rochester, so we are pretty excited about that; and we are coming out with a premium denim pant in Synergy also which will be a little more updated. And again, we're getting a lot of success with that in our Rochester stores in the premium denim brands.

Great. Thank you, and good luck.

Thank you.

Thank you. I am showing no further questions at this time.

Okay. Well, thank you all for joining us today; and hopefully we'll continue our current rate of business performance, and we'll be talking to you next quarter. Thanks again.

Ladies and gentlemen, this concludes today's conference. Thank you for your participation and have a wonderful day.