Destination XL Group Inc (DXLG) 2009 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Casual Male Retail Group second quarter earnings conference call. (Operator Instructions) Later, we will conduct a question-and-answer session and instructions will be given at that time. As a reminder, this conference call is being recorded. I would now like to introduce your host for today's conference, Mr. Jeff Unger. Sir, you may begin.

Good morning and thank you for joining us today for Casual Male Retail Group's second quarter 2009 fiscal earnings call. On our call today is Dennis Hernreich, our Executive Vice President, Chief Operating Officer and Chief Financial Officer; and David Levin, our President and CEO. I'd like to read our forward-looking statements and then introduce David. Thank you and thanks for joining us today.

Today's discussion contains certain forward-looking statements concerning the Company's operations, performance and financial conditions, including sales, expenses, gross margins, capital expenditures, earnings per share, store openings and closings and other matters. Such forward-looking statements are subject to various risks and uncertainties that could cause 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 www.casualmalexl.com. David, the call is yours.

Thank you Jeff. This morning, we announced our financial results for the second quarter of 2009. The results speak loudly to the strategy that we laid out at our last call on May 21. The proactive stance that we took on retooling our infrastructure and expenses in response to the downturn in the economy has had a direct positive impact on our bottom line. We've executed extremely well in our ability to control the controllable metrics to our business. With the decrease in sales of $15.2 million or 13.4%, compared to the same quarter last year, we actually increased our pre-tax earnings by $1 million or 31%.

Our initiative to focus on gross margin dollars and cash flow has been very effective, even though it may have had some impact on our top line sales. Our comp sales were negative 13.9% for the quarter, compared to a negative 10.7% in Q1 and now negative 12.4% for the year. Our sales during the Father's Day holiday were negatively impacted because last year we had a TV campaign in May/June and this year we did do not. Our decision not to run TV this spring, June TV campaign, accounted for the 50% of the marketing spend reduction in Q2. It was during this time frame that the top line was impacted more than our usual run rate. Subsequent to Father's Day, we have seen our comps come more in line with the year to date trends.

In terms of how the businesses performed. It continues to be consistent with the trends of the last several months. Casual Male comps have been off 9% and Rochester has been down 27%. As I've said in the past, CMRG is a good barometer of how the economy is reacting in a difficult period because we cater to all economic levels. And clearly, we are seeing the luxury segment of the market struggling much more than the moderate level. There's no doubt that the consumer is holding back and many of them are trading down. And that's very evident in the fact that we have 65 Casual Male outlet stores and their comps were almost flat, compared to our full priced stores, which comped at about a negative 10%.

And this segueways quite well into the discussion of our new initiative. During the month of our July, we converted five Rochester stores that had been operating at a loss and converted them to what we call hybrid stores. All of these Rochester locations have an existing Casual Male store within 0.5 mile of the Rochester location. The stores have been cobranded Casual Male XL and Rochester Clothing. The stores carry a full casual male assortment of product and on average, about 40% of the product mix from the assortments in the Rochester store. And this 40% of carryover Rochester inventory represented about 70% of their sales.

Even though we have only about four weeks of sales in these five stores, we're pleased to report that they're exceeding expectations at this time. The hybrids are now reporting as Casual Male stores. And it's important to note that prior to the hybrids, the stories were producing sales at about 1.5 times the average Casual Male store and now, they're producing sales at 2.3 times. And four out of these five hybrids are now amongst Casual Male's top 10 stores during this period. We're excited about the potential of these stores and next March, we plan on opening a new prototype version in the Chicago market that we hope will be the model for the future development of the hybrid strategy. And while the growth will be dependent on existing store lease terminations, there already are several markets that are on our radar screen for hybrid locations in the next year or two.

As we are now in the back half of our year, we believe we are much better positioned than a year ago. The average store inventory for Rochester is down 33% and down 9% for Casual Male, while our direct channel inventory is down 25%. We anticipate a significant swing in improved gross margins in the fourth quarter this year due to diligently managing our inventory and the reduction of promotional activity. Last year, fourth quarter merchandise gross margins were 51.3%. And this year, we believe they will improve by over 750 basis points. Inventories this year will come down around 10% or $10 million and that's on top of a reduction last year of $19.2 million.

We ended up the first two quarters with a negative 12.4% comp performance. That was up against a relatively flat comp in 2008. Last year, sales started to significantly deteriorate in September. And last fall holiday season, our comp dropped to a negative 7.7%. And we hope that as we anniversary these numbers, our comps will trend better but we will continue to take a conservative posture in regards to our sales forecast for the remainder of the year. By the end of this year, our top line sales will have deteriorated about 15% or $70 million over two-year period.

Based on our customer surveys, we believe we have not lost any market share along the way to any competitors. What we have is a loyal customer who has deferred his normal trip to our store due to a multitude of economic issues. But we believe that, at some point in time, our customers will return to their normal buying habits and that means we can quantify $70 million of potential sales that we know already existed. And with our new extreme lined organization and expense structure, our potential operating margins will be stronger than ever. And now, Dennis will review our Q2 performance in greater depth.

Thank you, David. Good morning, everyone. Thanks for joining us as we review our second quarter results and discuss our outlook for the balance of the year. As David indicated, although the weakened economy continued to negatively impact our sales trend, we are pleased today to report second quarter net income of $3.6 million or $0.09 per share, as compared to $1.9 million or $0.05 per share for the second quarter last year. Despite sales decreases of 13.4% for the second quarter and 11.4% for the first six months of 2009, our operating income increased 15.6% for the second quarter and 7.5% year-to-date. These improvements in our operating results are attributable to our continued focus on carefully managing our inventory levels, maintaining healthy merchandise margins and significantly reducing our SG&A costs, consistent with our strategies and financial goals discussed at our last earnings call in May.

In addition to the improvement in operating income, our net income benefited from a reduction in our effective tax rate, resulting from the utilization of the Company's fully reserved net operating loss carry-forwards. This benefit resulted in a reduction in income tax provision of approximately $1.3 million or $0.03 a share for the first six months of fiscal 2009. Our quarter two results are consistent with what we described at the end of quarter one with respect to the significant refinements we have made to our business model, which include; A 15% reduction in SG&A levels from last year. Carefully managed inventory levels to minimize merchandise margin risk, together with a specific approach to provide our customer with meaningful assortments for his wardrobing needs. Employing a store assortment planning methodology to optimize merchandise performance in each location. Providing our customer with assistance in purchasing his wardrobe needs. And finally, employing a contact marketing strategy to assure CMRG stays top of mind when our customer is ready to fulfill his apparel needs.

By maintaining this discipline model for the long term and with an eventual 10% recovery in the Company's top line sales, we would expect CMRG to generate 8% to 9% EBIT margins. With a free cash flow that would approximate this EBIT level. Before any recovery however, our 2009 financial targets have only been slightly modified from those discussed in our last earnings call. Specifically, these goals include; A 15% reduction in SG&A for the year. Improvement in merchandise margins of 275 to 325 basis points. A 10% reduction in year end inventory levels. A reduction in capital expenditures to $5 million. Free cash flow of $20 million to $25 million. And a reduction of bank debt to about $25 million to $30 million, compared to $51 million at the end of fiscal 2008.

During the first six months of 2009, we have realigned our infrastructure and inventory flows in an effort to realize these goals within an environment of declining top line sales. Our second quarter results have benefited from the successful implementation of these strategies. In summary, merchandise margins improved 200 basis points. SG&A cost decreased [$8 million] -- or 18%, rather, over last year. Inventory levels decreased $18 million or 16%, as compared to the end of last second quarter. And total debt is lower than last year's second quarter by approximately $14 million. The sales we've forecasted for the first half of the year were essentially on the mark and we are forecasting only slightly improved top line results for the second half of the year, in the minus 10% to minus 12% range.

When considering the Company's recent comparable sales over a two-year period, the second half of 2008 was minus 8.3% and the first half of 2009 was minus 13.3%. We are confident that our second half of 2009 forecast of between minus 15% and minus 20%, over that two-year period, is achievable and at the same time hopeful for improved customer traffic. Regardless, we feel we have properly positioned the business for sustained top line weakness and expect to generate a meaningful level of free cash flow. From which we intend to reduce debt and fund our strategies to grow market share and build shareholder value.

I'll now highlight the components of Q2 results. Sales in the quarter declined in total by 13.4%, which is 13.9% on a comparable basis. Our sales decrease was generally consistent with the decrease in store traffic and both our retail and direct channels experienced similar decreases. In addition to the decrease in traffic, we also experienced a decline in average transaction value of approximately 4% for the quarter. However, this was offset by an increase in our conversion rate, resulting in sales productivity performance consistent with last year's second quarter. On a year-to-date basis, sales decreased by a total of 11.4% and 12.3% on a comparable basis.

Similar to other luxury retailers, our Rochester business has been significantly impacted by the recession. While comparable sales in Casual Male have declined 8.9%, our Rochester business has experienced a 26.3% comparable sales decrease. During quarter two and the first six months of the year, the Company's marketing spend has approximated 4.2% and 4.6% respectively, compared to last year's 7.1% in the second quarter and 7.4% for the six months. Although the marketing reductions may seem draconian, our more focused strategy has resulted in significantly more effective marketing campaigns, such as a 40% improvement in revenue per catalog for this year so far.

Even with these reductions, CMRG still distributed over 8 million catalogs and 11.8 million direct mail pieces to keep our customers reminded of the solutions the Company has for their wardrobing needs. In managing the Company's spending and inventory levels, we have forecast a continued decrease in the Company's sales levels. And in total, as I've said before, we expect a sales drop of between 10% and 12% for the year. Our second quarter gross margin rate decreased by 60 basis points, as a result of a 260 basis points increase in fixed occupancy cost on a lower sales base. However, our merchandise margin improved by over 200 basis points compared to last year's second quarter.

Year-to-date, our gross margin decreased by 150 basis points. This decrease consists of a 70 basis point improve at merchandise margin, offset with a 220 basis point increase in occupancy costs. Our merchandise margin was impacted during the first quarter by some residual fourth quarter 2008 clearance merchandise. The year-to-date increase in occupancy rate, similar to the second quarter increase, is primarily the result of an unfavorable leveraging of fixed occupancy costs on a declining sales base. On a dollar basis, year-to-date occupancy costs are approximately $750,000 over last year. As a result of an -- mainly as a result of an accrual for lease obligations related to the conversion of the five stores to our new hybrid format. For the year, we expect our merchandise margins to exceed last year's by 275 to 325 basis points. However, as a result of our sales shortfall, this improvement will be partially offset by unfavorable leveraging of fixed occupance costs by approximately 180 basis points.

As a result of our cost reduction initiatives, SG&A expenses for the quarter were reduced by $8 million or 18% to last year's second quarter. For the first six months of 2009, our SG&A has been reduced by over $14 million or 16%. Approximately, 50% of the reductions were a result of the revised marketing objectives, which I just mentioned. The remainder of the savings were realized throughout our organization include corporate overhead reductions, distribution and field productivity improvements, and staff reductions. The full effect of these cost initiatives were reflected in quarter two. We expect the continued execution of the cost reduction initiatives to result in SG&A savings of $26 million in 2009 and $30 million on an annualized basis.

Strong expense control will continue to be a significant priority for us, while continuing to invest in our marketing campaigns and growing our direct businesses. During the first half of 2009, we continued to improve our balance sheet liquidity, with an improvement in free cash flow of $6 million from last year's levels, to $5.9 million for the first six months of 2009. Additionally, inventory levels have been reduced by approximately $18 million or 16%. And our total debt has been reduced by almost $14 million or 23% compared to last year's second quarter.

Our credit line, whose term goes to October 2011, has availability at the end of the quarter of $29 million. As I mentioned, for the year, we expect to generate between $20 million to $25 million in free cash flow. And expect our year end debt to be reduced by approximately $25 million to $30 million. This concludes my comments on the second quarter results and financial expectations for the year. And now, David and I will be happy to answer any questions you may have. Devon, you may open up the lines.

Thank you. (Operator Instructions) Our first question comes from Tom Filandro of SIG.

Thank you and great job on the defensive front guys. A question to David. Can you just review those comments you said earlier? I came in a little bit late. I thought I heard you say something about 1.5 and then, 2.3 related to these hybrids. Can you just put in perspective for us, what the experience has been in terms of the total market and how that compares to your thinking? Meaning when you combine these two stores, I would imagine, on some level, you're expecting total market sales not to be at 100%. So, could you give us a better understand on how that's played out? Thank you.

Yes, we're expecting these stores, when they combine each other, that we'll carry 100% of the existing Casual Male stores and 40%, 50% of the sales from the Rochester store, when you put them combined. But what I was trying to describe was these five specific stores that we have converted, their average sales were about 1.5 times the normal Casual Male stores, which was about $650,000. Now, they're performing at about 2.3 times the average Casual Male store. And of these five stores, I don't believe any of them were in the top 10, out of 400 plus stores. And now, four out of five are already in the top 10.

Okay. And can I ask this question too ,David? Those are great numbers. Can you tell us -- can you give us a little more detail on where the incremental volume is coming from? If you look at the overall mix, where you're seeing the greatest benefit? Is it private label, is it branded, is it suits? What's happening?

Well, because it's only been four weeks, we're not really going to talk about the specifics yet, until probably the next phone call. We just wanted to give a little color at this point in time. We've got a lot of analyzing to do as to how much the Casual Male customer is trading up? How much is the Rochester customer trading down? What impact are we having with new customers coming in? What impact are we having from outlying stores that are moving over to the hybrid? A lot of variables to work with. We're just giving a little color because we really haven't had enough time to give further depth. We will on the next phone call.

Understood. But it's great to see those numbers. And Dennis, a quick one for you. Just on the, I think as you described it, your contact marketing strategies and you mentioned some of the numbers. Can you give us a sense of how we should think about the back half in terms of just total catalog search, direct mail and prospecting? And are there any major shifts in the strategy this year, meaning more direct mail, less catalog or one or the other?

No, our second half, Tom, is similar to the first half in terms of our marketing campaigning. The number of catalogs being distributed in the second half is just seasonally higher than the first half. But generally, it's the same contact strategy that we've been working with during the first half. And much the same, also, on the direct mail side.

In terms of prospecting?

Very little.

Very little. Okay. Thank you, gentlemen, very much. Best of luck.

Thank you. (Operator Instructions) Our next question comes from Richard, and excuse me if I pronounce this wrong, Jaffe of Stifel Nicolaus.

Two for two. Richard Jaffe and we say Stifel. Good morning, guys. A quick question. Obviously, the marketing spend was a big help in the quarter regarding the SG&A savings. Can we look forward a little bit and anticipate what the savings will be or what they were last year and the percentage change we should anticipate?

The marketing rates that I just described, Richard, for the year will be in the same neighborhood as they were in the first half. Slightly less just because of the greater volumes we expect in the second half.

And could you talk about some of the operating metrics of the hybrid stores? Are you willing to go into your sales per square foot or number of transactions before and after or any of the more --?

I think the, as we've already mentioned, these stores have been opened barely 30 days. I think we would like more time to let them operate, let them get new fall assortments. We've just marketed into these markets and I think we'll have much more details with respect to this in and future strategies on the next call in quarter three.

Fair enough. I appreciate because that 30 days, we shouldn't build a model on. Last question, do you guys subscribe to any of the services that track selling by category, say NPD? Is that -- and if you can share that with us regarding trends for men's apparel and big and tall sizes?

NPD does that study special for us. We have not updated that recently, Richard.

Okay. I know there's sort of macro data men's out, which is obviously trending negative but I didn't know if you guys knew by sector or whatever. It would be interesting to see. Okay. Thanks very much.

Thank you. (Operator Instructions) We have a follow-up question from Mr. Tom Filandro.

Hi, guys, thanks. Can you just tell us what's going on in terms of IMU, anything on the product side? And also, if you could, could you give us a real estate update? Anything happening in terms of better negotiations? And how many leases do you have coming due? Are they significant or not over the next couple of years? Thank you.

The IMU, Tom, is steady and has risen slightly during this year and probably will rise slightly again for the balance of the year. So, we continue to watch our merchandise costs, work with our vendors, find new freight routes to bring merchandise in, to maintain and even grow slightly our IMU. So, we're very pleased with all of that. What was the second?

Real estate.

We've been very busy on the real estate. Our real estate group very much occupied with many of our landlords. Landlords have been generally cooperative and understanding and working with us on revising terms. We've had a fair amount of success of reducing base rents over the remaining terms of many of our leases but the effort still continues. There's still a lot of work to do, a lot of landlords to get deals with. And so, that effort will continue. I think that -- well, go ahead, David.

Yes, I think the point is, we usually have about 100 leases coming due on any given year but we're renegotiating every lease that we have. Even if we have four or five years left on our terms, we're going back and trying to renegotiate better terms on the existing leases at this time too. So, every lease is being attacked at this point in time.

And can you give us an update too on the new businesses, anything on that front or is it all just sort of a break-even strategy overall?

Well, the new businesses are -- all our new businesses, outside of Europe, is profitable, growing more moderately. And so, with reducing the amount of prospecting, they've turned -- they've gone into the black and we expect them to continue that way.

And thank you, gentlemen. Thank you. (Operator Instructions)

Devon, no more questions?

I'm showing no further questions, sir.

Okay. Well, we appreciate your dialing in today. And again, we're excited about the hybrids. We've got a lot more information coming forward and we think that's going to be a good vehicle for us for the future. And as we said, we're keeping tight of a model as we can, until we see things change. And we're somewhat optimistic that the comps will start to improve somewhere along the line in the next several months. Thank you again for joining us and we look forward talking with you at the next meeting. Thank you.

Thank you. Ladies and gentlemen, thank you for your participation in today's conference. This concludes the program. You may all disconnect. Thank you and have a nice day.