Destination XL Group Inc (DXLG) 2009 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to your first quarter fiscal year 2009 earnings webcast. At this time, all participants are in a listen-only mode. (Operator Instructions).

I would now like to turn the program over to Mr. Jeff Unger. Please go ahead.

Thank you, Mary. Good morning, everyone, and thank you for joining us for Casual Male Retail Group's first quarter earnings call. Today's discussion will contain certain forward-looking statements concerning the company's condition including sales, expense, gross margin, capital expenditures, earnings per share, store openings and closing, 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 filing with the Securities and Exchange Commission. Our complete Safe Harbor Statement is available at www.CasualMaleXL.com. On our call today is David Levin, our President and CEO; and Dennis Hernreich, our Chief Financial Officer, Chief Operating Officer, and Executive Vice President. I would like to turn the call over to David.

Thank you, Jeff. This morning we announced the results for the first quarter of 2009. Our performance exceeded our planned expectations. For the year, we anticipated that business would continue to be challenging and planned the year at a negative 10% comp, which was consistent with our performance in Q4 of last year. We reported a minus 10.7 for Q1 of this year. What we have encountered has been a stabilization of the business, which has been a positive for the company in that we have a better sense of how to react in this difficult environment. Our management group has been proactive in adjusting how to operate with the shortfall in top line sales.

Our operating results for the quarter pretty much sum up how effective these adjustments were. With a $10 million drop in sales for the quarter, we managed to actually earn $336,000, which was slightly better than last year. Dennis will review in detail how this was accomplished, but needless to say, it took a lot of discipline to get there. What excites me the most, however, is knowing that when business does stabilize, our earnings power will be greater than we've ever envisioned. Going into this year, our strategy was not to try and drive top line sales in this type of economy. Our focus was to improve cash flow, continue lower our inventory levels, reduce our debt, and improve our gross margins. All of these metrics are forecasted to improve throughout the year, even with the negative comp performance.

At the expense of some top line sales, we have significantly reduced our marketing spend by $13 million in 2009. Most of the reduction has come from prospecting for new customers. We've eliminated our television spend for the year, a $5 million expenditure in 2008. In addition, we have cut back on prospecting catalog circulation, the number of catalog drops, page count, and often the size of the catalog itself, representing another $5 million. We've introduced this year's smaller catalogs for the peer internet shopper and have routed some of those dollars into more efficient online media. This initiative of reducing print and investing more in the internet follows the trend of the consumer, as we see our customers naturally shift from the traditional catalog shopper to the internet.

The balance of the reduction is made up of reduced costs of production of marketing materials for in-store presentation, grand opening expenses, and PR. It's important to note with these reductions, our customers will continue to receive marketing communication of new product and sales promotion activity, as well as our continued loyalty program through direct mail and e-mail programs. The marketing results for the first quarter delivered improved profitability in all division, even with the loss of top line sales.

Our sales performance by division was consistent with the way business trended in last year's fourth quarter. Casual Male comps were down 6.7 and Rochester was down about 27%. Rochester's performance was consistent with the problems in the luxury sector today. The Rochester customer profile is similar to other high end retailers, such as Sachs, Neiman's, Nordstrom's, and Barney's. The traffic in our stores is facing the same problems. As we announced on the last webcast, a full-fledged Rochester Clothing store has a limited market base to operate in. The big and tall market cannot support this model in suburban and secondary markets.

In this quarter, we are taking five Rochester locations that have been operating at a loss and converting them to what we call hybrids. All five locations have a Casual Male store less than half a mile from the Rochester stores. The stores will be cobranded Casual Male XL, Rochester Clothing, with the Casual Male store being closed and relocated to the bigger Rochester box. We plan on assorting the hybrids with most of the Casual Male product in the balance with the best selling Rochester product for each existing store. This should be a big win for the Casual Male customer, who will have a larger assortment of styles to choose from, along with I tailoring and better customer service, and all of the hybrids should be open by mid-July.

We're also addressing the assortments of the remaining Rochester locations. The inventory is being rebalanced with a higher concentration of opening price points where we are seeing better sell-throughs during the current spring season. We're also seeing the vendor community react in a similar manner with lowering of their price points for the fall and holiday seasons. Also, we had anticipated the current sales trends and our inventories are in line and we don't foresee having to take excessive markdowns in the fourth quarter like we did last year.

Dennis will now review the financials for the quarter and the outlook for the rest of the year. Our outlook has improved significantly since our last webcast on March 19. This has been accomplished by judiciously reviewing every expense center throughout CMRG and reevaluating how we operate today and in the future. We're confident that if business continues on the track it is today, we will end the year with the healthiest balance sheet since we acquired the company back in 2002.

And on that note, I'll pass it over to Dennis.

Thank you, David, and good morning to you all. Thanks for joining us as we describe our first quarter business results. At our last earnings call in March, when we went over the company's fourth quarter and the 2008 performance, we described in detail the company's primary financial goals for 2009, highlights of which were optimizing cash flow by reducing SG&A by 9% to an expected level of $162 million for 2009, reducing capital expenditures to less than $5 million, improving merchandise margins by 225 to 275 basis points from 2008 by appropriately managing fashion inventory levels to minimize clearance markdowns, the source of over three quarters of CMRG's total markdowns, and reducing inventory levels by approximately 10% by the end of 2009. And thereby producing free cash flow of 2009 in the neighborhood of $15 million, with a plan to reduce bank debt to between $30 million to $35 million inclusive of the term loan.

While we are still expecting an approximate 10% decline in CMRG sales volume for the year, we have made significant improvements to our expected earnings performance that David alluded to. The Q1 update of our 2009 financial goals is as follows. We further reduced SG&A costs to 2005 levels and are now expecting a total reduction of 15% in expenses in 2009 to an approximate level for the year of $151 million, representing an $11.5 million improvement from our last guidance. Capital expenditures are still planned to be less than $5 million, consistent with our last guidance.

Merchandise margins are expected to improve by 275 to 325 basis points over 2008 merchandise margin levels as a result of further reducing less productive promotions in the latter part of the year. This represents a 50-basis point improvement from our last guidance. Inventory levels are on trend to be reduced by another 10% by the end of the year, consistent with our last guidance. At the end of quarter one, incidentally , inventories are 15% less than last year. And finally, free cash flow for 2009 is now expected to approximate $25 million, up by $10 million from our last guidance with a plan to reduce bank debt to between $20 million to $25 million, inclusive of the term loan. By the end of the year, a further reduction of $10 million from our last guidance.

The management group at CMRG has worked very hard at making necessary adjustments to the business in realigning the infrastructure and inventory flows to the realities of a new top line sales level. The most significant adjustment that has been made is to the company's SG&A levels which have been reduced is to the company's SG&A levels which have been reduced from 2008 by approximately $30 million on an annualized basis to a level which closely resembles, as I said before, CMRG's SG&A level back in 2005. These reductions were made after reprioritizing all business functions, identifying key areas of focus and carefully analyzing less productive tasks and projects.

The brief explanation of the source of these reductions are 40% of which came from marketing and were achieved by reducing less productive promotions and new customer acquisition activity, such as catalog prospecting, 20% of the reductions from our store labor productivity improvements resulting from optimizing store operating hours and consolidating several functions, such as combining Rochester field supervision, which is being combined with Casual Male's field supervision. 20% of the reduction also coming from corporate payroll reductions, resulting from elimination of certain corporate functions, a 5% pay reduction for all salaried employees for 2009 and the elimination of the 401(k) 2009 corporate match effective in June of 2009, another 10% from distribution productivity improvements, mostly driven from technology investments and finally, another 10% from renegotiated service contracts and volume-related expenses.

So far this year, the company exceeded its operating income for quarter one by approximately $3.4 million, achieving that with a 9.4% decline in top line sales and was a tad more profitable than last year's quarter 1. Although we do not expect these expense cuts to have any measurable impact upon the company's sales and gross margin dollars, we will not be certain of any impact until the end of the year. Likewise, we are uncertain as to the level of company sales for 2009, given the current economic conditions, but are still operating under the assumption of a 10% sales decline during 2009.

Operationally, we are keenly focused on being the industry's very best at catering to our target market by continuing to transform our cultural focus towards creating an enhanced customer experience by providing our store sales associates and management with better sales training, development tools and monitoring capabilities. Further improving upon our methodology of planning and allocating appropriate assortments to each store, considering the unique demographics and life-style tendencies of our customers in each of our store locations. Testing a hybrid format, as David spoke about, to better capitalize upon the higher end customer to improve store productivity and overall profitability for the long-term, building our primary brands of Casual Male and Rochester Clothing on websites in the European Union, which were launched in the third quarter of 2008 and otherwise focusing on growing our market share within the smaller size component, the big and tall target market.

Therefore, CMRG's business model is based more on servicing, wardrobing, and effective contact marketing to our niche market and less on driving traffic through promotional marketing and discounting. Based upon CMRG's current business model, a year with sales volume of $400 million would be expected to generate gross margin of 46%, $150 million in SG&A, or 37.5% of sales and finally EBITDA at 8.5%. EBITDA after that would be expected to vary by 100 basis points for every $10 million increase or decrease in sales volume.

I'll now provide a financial summary of CMRG's quarter one results. The company reported earnings per share of $0.01 for the first quarter of 2009 compared to flat per share in first quarter of 2008. Operating earnings were $336,000 compared to $96,000 a year ago. Sales in the quarter declined by 9.4% overall and 10.7% on a comparable sales basis. The sales decline was consistent amongst both the retail and direct channels. Casual Male sales, which approximate over 85% of our total sales volume were down by 6.7% while Rochester sales were down by almost 27%. Retail traffic trends were consistent with the company's comparable sales trends.

Looking ahead to 2009 year overall, we are prepared for and expecting consumer traffic and spending to remain weak. And as I said before, therefore, forecasting a drop in sales of 10% for the year. Regardless of sales trends, we will execute our strategy of delivering meaningful life-style assortments to fill out our customers' wardrobes and help them select their most appropriate outfits. Gross margin during the quarter declined by 230 basis points to 42.6% from 44.9% a year ago, mostly as a result of unfavorable leveraging of occupancy costs by 180 basis points due to lower sales volumes. Merchandise margins also dropped by 50 basis points from last year's comparable first quarter, due primarily to clearance markdowns on Quarter 4 2008 residual product assortments, whose levels have now subsided at the end of their first quarter.

As previously stated, for the balance of the year, we are expecting meaningful improvement in gross margin each quarter, and expect to end 2009 with a 275 to 325 basis point improvement in merchandise margin, partially offset by an approximate 150-basis point deleveraging of fixed occupancy costs. SG&A levels during the quarter dropped by $6.2 million, or 14% from last year's comparable quarter to 38.1% of sales, an improvement of 220 basis points from last year. Approximately two-thirds of the decrease in SG&A in quarter one resulted from moderating marketing campaigns, particularly in prospecting catalog circulation. Inventory levels were 15% less than a year ago at the same time. Comparable store inventories are lower by 18%.

Company's bank debt is lower by 21%, or $15 million from year-ago levels and the company's current credit facility availability approximates $30 million, even with a 15% lower inventory level. To reiterate, the company is managing to a free cash flow of approximately $25 million for 2009 and expecting to reduce its bank debt from a 2008 year end level by another $25 million to $30 million to end the year with $20 million to $25 million in bank debt.

That concludes my quarter one, 2009 comments and now we'll entertain any questions or comments you may

Thank you. (Operator Instructions) Our first question comes from Scott Krasik.

Hey, guys. Question on the Casual Male business. You acquired Rochester and you entered these direct businesses, sort of to diversify revenue avenues and to sort of leverage your fixed costs, but at the end of the day, I guess the issue with Casual Male is that you weren't driving enough traffic to the store to really increase the store productivity and get higher profitability there. So, even once the traffic flattens out overall and we hit bottom here, how do you improve that core Casual Male business?

I think we're going to win on conversion. It continues to improve, so we believe with our existing customer base, we could still get a lot more dollars out of them. Again, it's very fragmented, even within our best customers, still spend money in other channels at other retailers. And we've been -- that's been our strength, has been the ability to convert customers and to a transaction to try to get a higher AUR. But we certainly are backing off of trying to generate new customers in our stores like we have in the past because, again, it's a very expensive proposition and we're more, we're more concentrated on the bottom line than we ever have been before.

So basically traffic is going to be what it's going to be. If you get two customers an hour, so be it, but if you train your salespeople to upsell and sell more stuff, that's the road to higher sales? Is that--

That's correct. We're going that direction.

Okay, and then, you know, there has been talk in the past, do the hybrid stores ultimately work, are there more opportunities for that sort of -- I know you're not through the conversion yet, but what's the thinking maybe 6 or 12 months down the road?

If these hybrids perform up to our expectations, they will change in strategy in our real estate. I think that major markets, Chicago or San Francisco type markets, but let's say St. Louis, Minneapolis, Kansas City, where we may have six or seven Casual Male stores is to populate one hybrid in each of these markets that would kind of be a superstore, lot more productivity. Because we believe in each one of these markets, there is a big and tall guy that wants to wear Polo or Calvin Klein, but will never happen with a full-fledged Rochester store, they can't accommodate it. But putting one store in a market, very effective.

I may have missed your comments in the prepared section, but what's your thought on closing some Casual Male stores? Further relocation given the declining traffic trends we've seen?

We'll continue to evaluate. As we always have, business as usual on that front, Scott.

Is there -- is a lot more popping up on the screen and maybe we should have taken a second look the first time around?

No.

Okay, good.

We've judiciously closed 70 stores in the last few years. Every year, every time a store comes up for renewal, so I think I may have said on the last call, but 97% Casual Male stores are cash flow positive.

Okay. Good stuff. Thanks.

(Operator Instructions) Our next question comes from Tom Filandro.

Thank you. Couple of quick ones. First, congratulations. Good job on controlling expenses, guys. Can you give us a sense of the inventory positioning by brand? And also in the quarter, Dennis, maybe you can give us the comp metrics by brand as well?

The inventory levels in each of our brands are really down. A little bit more in Rochester as you would expect, and a little bit less so in Casual Male, but both double digits. As I said, the only metrics we care to share here today, Tom, is the fact that our comps are consistent with our traffic and all the other metrics, conversion is up. Average ticket is down slightly and that's how it's looking for pretty much both businesses.

Dennis, are the inventory levels at Rochester in particular, are they where you want them to be, or do you still need to see a reduction?

They are precisely where we want them to be.

Okay. So they are more in line with the sales trends?

Definitely.

Okay, and can you just give us a view on how IMU should play out for the balance of the year?

IMU is generally slightly up. Our costs have -- our sourcing group's done a good job. We're working hard with our vendors on the cost. We're not seeing any cost pressures there. We're constantly reviewing our retail pricing. And generally IMU is steady to up slightly.

Okay, and then one final one. This is either Dennis or David. In terms of the hybrid, as you move to the convergence of these stores, can you help us understand where you are in terms of your systems in ability of doing that, are in terms of your systems in ability of doing that, having any issues or concerns or any risks of, you know, managing the inventory as you convert these two concepts?

No, I don't see any risk, Tom. Obviously when we set up Rochester with Casual Male, we didn't anticipate mixing the two at the time, so we're having to do some tweaks to our applications to allow Casual Male and Rochester merchandisers to have vision within the Casual Male store. All that is set to go, expected to be ready sometime in the second quarter, at which point we will convert the five stores into hybrids.

Final one, any update on Living, B&T, Shoes, the other online businesses?

Making money.

As a group?

As a group.

And directionally, we should expect that to be a positive contributor for the balance of the year?

Yes. Sales are down, but they are profitable.

Thank you very much, gentlemen. Best of luck.

Our next question comes from Gary Giblen.

Yeah, Gary Giblen. Good morning, David, Dennis and Jeff.

Good morning.

In the release you talk about the improved supply contracts. And is that better buying of merchandise or is that--

No, more on the servicing side, Gary.

Okay.

We're constantly reviewing our merchandising costs, but we've taken perhaps a bit more dramatic steps on certain large, larger service contracts that we have with our partners.

You mean service partners, not merchandise--

Service and merchandise partners.

Which then begs the question in this environment, do you have room to push back on your merchandise sources?

I think that's in constant motion, Gary.

Okay. Sounds like it's active motion. And then in the last couple conference calls, you said that sales somewhat correlated with regionally with weak housing areas, had weaker sales, but there's been a few companies saying that Florida is beginning to improve and California definitely is improving as a general economy. So are you finding that corresponding to your business?

I think it's been consistent with what we've said before. Florida has come back somewhat. California, I would say would be our toughest market right now.

Okay. So California seems not to be coming back from the Casual Male side, or Florida is?

Well, let's just say it's been consistent with the last months. It's stabilized. It hasn't gotten any worse.

Yeah.

And it is moderating as time goes on, Gary. I mean that's what we're seeing. It's still down a little bit more than the average store in the chain, but it's not declining at the same slope as it was before.

Okay, great. And then amidst this bad economy, what are the merchandise categories of greatest strength? I mean I imagine maybe accessories, but, if you could flush that out a little bit.

Are you asking what categories are performing?

Yeah, what are the good performing categories?

Oh, seasonal for us is doing quite well. Our biggest growth category has actually been screened T-shirts. We're doing phenomenal in that category. We're having a very good short run right now, which is encouraging because we really haven't had the best of weather yet. So those businesses are pretty healthy. And everything else is pretty well consistent with where it's been before. Those -- but those two areas are by far strongest performers.

And I mean would those three areas core respond to lower than average AURs just by virtue of the nature of the items?

I don't think so.

I mean our screened tee's are $25 to $30. Our shorts are $45. So we haven't, we haven't seen that.

It's really the product, not the--

The AUR -- I didn't mean to imply it was. AUR is not down at all, Gary. It's probably more on the units per transaction slightly down.

Yeah, that was just my own inference that I was wondering about on the AUR.

Yeah.

Okay. Thanks very much, guys.

Okay.

(Operator Instructions)

Okay. It doesn't sound like there's any further questions. So we appreciate you phoning in today and we look forward to some good results in Q2 also. Thank you very much.

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

Thank you, Mary.

Thank you, Mr. Unger.