Destination XL Group Inc (DXLG) 2010 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Casual Male's first quarter 2010 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) As a reminder, this program is being recorded. I would now like to introduce your host for today's program, Mr. Jeff Unger. Please go ahead, sir.

Thanks, Jonathan. Good morning, everyone, and thank you for joining us today for Casual Male Retail Group's first quarter and fiscal 2010 earnings. 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 would like to look at our forward-looking statement and then introduce David.

During today's call we'll discussion some non-GAAP metrics to provide investors useful information about our financial performance. Please refer to our earnings release which was filed this morning and is available on our website at www.casualmalexl.com for an explanation and reconciliation of such measures. Today's concession also 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. David, the call is yours.

Thank you, Jeff. This morning we announced our first quarter 2010 financial results. We're pleased to deliver significant earnings improvement over last year. Net earnings increased to $4.2 million from last year's $336,000. Gross margin also improved 327 basis points to 45.9%. We also had a notable improvement in our comp sales performance. Sequentially, comps improved significantly to a negative 0.07% in the first quarter of 2010 compared to a negative 8.2% in the fourth quarter of 2009.

Overall, our performance in the first quarter was consistent with what other retailers have reported. We had a very strong month in March, but we experienced the slowdown in traffic in the back half of April, and based on our selling reports, weather also had an impact on our seasonal product categories.

For the spring/summer season, we're very pleased with our assortments. Our inventories are well balanced and our sell throughs are meeting our projections. As a result, our merchandise margins improved 282 basis points from last year. Strongest categories have been shorts, weather permitting, denim bottoms, active wear, especially in the golf area, and screen T-shirts.

To meet the needs of consumers, we have added some peripheral sizes such as 6 XLT and 7 XL to all of our stores in tops and bottoms. This is based on store catalog demand and is another growth opportunity that we are now pursuing. In addition, through our direct channels we are now offering our bottoms in increments of one half inch instead of one inch. Both of these additions have been positively received by our customers.

In terms of our direct business, BT Factory Direct and Shoes XL have had the strongest performance. Our most current catalog mailings in both divisions are doing extremely well. Our direct businesses collectively represent about 20% of our total Company sales and with 476 stores, that's a significant statistic compared to other retailers that started as brick and mortar entities. When we acquired the Company, direct sales were only 7% of total sales. Over the last several years, our direct to consumer channel has been a strategic growth initiative and we have been successful in converting our customers into multi channeled shoppers.

We've been discussing the upcoming launch of our Destination XL concept for several months. This is our latest strategic concept to expand our business and expect to launch our first store this summer. For those of you unfamiliar with this concept, Destination XL represents a new direction for the Company in how we interface with our customers in the stores and online. Whereas our existing Casual Male XL stores are 3500 square feet on average, the DXL stores will range from 10,000 to 12,000 square feet. The DXL stores will combine all of our products at CMRG, including Casual Male XL, Rochester clothing, B& T Factory Direct, Living XL and Shoes XL. Expanding the assortment of our brands will offer the consumers more than three times the current selection at a Casual Male XL store allowing customers to select from a broad selection of price points and brands within each lifestyle.

While the primary goal is to increase the average spend of our customer, we also believe we'll have an opportunity to grow our penetration of the 42 to 46 inch waist customer. As we have discussed in the past, there's been a reluctance for the smaller big guy to shop at a big & tall specialty store. We're confident that a name change, better ambiance, and a more inviting shopping environment, Destination XL has the potential to draw the 42 to 46 inch consumer sector into the stores.

In addition to the extensive merchandise, we'll be addressing the other major concerns of our existing customers, wider aisles, larger dressing rooms, better lighting and an on-site tailoring service. As we open a DXL store in an existing market, we'll be closing two to three Casual Male X stores in the same market area at the same time. In a DXL market, the number of stores will decrease, but the total Company square footage will not change. Total inventory in the market will be reduced, but our customers will see three times the number of styles and twice as many brands to choose from. Our plan is to execute this transition so the stores we are closing are aligned with lease terminations. At the same time with the XL stores, we expect to create significant cost efficiencies by the closing of the satellite stores and the consolidation of market share resulting in increased operating margins. We anticipate that the DXL stores will demonstrate improved leverage associated with reduced occupancy costs and store operating expenses in the market consolidation and we're projecting a four-wall contribution of 30% compared to our existing 20% in a three-year ROI of 50%.

Provided that our construction deadlines are met, our test DXL stores will open as follows, Schaumburg, Illinois, and Memphis, Tennessee, in July and Las Vegas and Houston, Texas, in August. Schaumburg and Las Vegas are new locations while Memphis is an existing Casual Male store and Houston is an existing Rochester clothing store. We're going to soft launch these stores and are planning on having grand opening events right after Labor Day. We are also planning on having a vendor, investor, analyst event at our Las Vegas store during Magic Week in mid-August. We'll analyze the performance of the four test stores over several months. If we're comfortable with the results, we envision a roll out starting in the back half of 2011 with a goal to open at least five new locations. The expansion would start to accelerate in 2012 and continue over the next three to four years.

Another important aspect of the DXL strategy is that we will be replicating the shopping experience online. We'll be launching a new website first quarter of 2011 that will allow customers to cross shop all our brands in one easy shopping experience. The enhanced selection should have a positive impact on the average transaction by capturing a greater percentage of our customers' clothing budget. Even today we're experiencing a higher ticket when we bundle three different catalogs in one mailing which we refer to as a portfolio. Clearly, we have a customer who will shop for value, style or brands and will cross over when presented with more choices.

This multi-channel experience is very important for our customer and our strategy. The DXL concept meets the needs of the majority of the male consumer for one-stop shopping. It offers a better selection and fits our strategy to satisfy all market segments, socioeconomic backgrounds and all age groups.

To wrap things up, while the DXL launch offers us a tremendous opportunity to change the strategic direction of the Company, long term we are still focused on improving the existing operating margins. We have lost about $70 million in top line sales over the last two years and if consumer confidence continues to improve over time, there's no reason we can't recapture a good portion of those lost sales. Getting back half of those sales would bring our operating margins up to 8%. Dennis will now review the financial performance for the quarter.

Thank you, David, and good morning, everyone. Thank you for joining us for the quarter one 2010 earnings call. The first quarter of this year comparable sales performance was down slightly to 0.7%. It is an improvement in sales trends from 2009's first quarter, fourth quarter and year comparable sales which were a minus 11, a minus 8 and a minus 11 respectively and represents an expected flattening of Company sales level comparisons. The improvement in the first quarter sales performance was largely achieved through increased sales productivity offsetting a drop in traffic. At the same time we improved our gross margin by 330 basis points to 45.9% and reduced our operating expenses by over 4% from last year's first quarter.

As a result, net income rose to $0.09 per diluted share from last year's first quarter of $0.01. You might note that the $0.09 earnings per share this quarter is substantially higher than any other first quarter earnings on record here at the Company. The previous high was in 2006 first quarter. Consistent with our 2009 goals, our primary focus is on improving operating income and optimizing our free cash flow as the sales base gradually recovers over the long term. We will also continue to move forward with our strategic plans to explore the Destination XL for future growth as David described.

During the first quarter of 2010, we continued to reduce our inventory levels as well. This aggressive approach to managing our inventory has been a key component in optimizing our merchandise margins, enabling us to avoid excessive promotional clearance activity. In addition, our total indebtedness at the end of the first quarter of $12 million is 78% lower than it was last year's end of first quarter. Accordingly, the amount of borrowing available under our credit facility was over $60 million at the end of this quarter.

Looking ahead for 2010, although we are seeing a gradual improvement throughout the retail industry, we expect our sales volumes for physical 2010 will be relatively flat to physical 2009 consistent with the expectation that the rebound in consumer spending in the big & tall market will be over an extended period of time. Based on these sales projections for 2010, we expect to make continued improvements in gross margins of between 75 and 125 basis points and SG&A costs to decline approximately 2% from 2009 levels.

During the first quarter of 2010, we exceeded our plans with respect to sales and gross margin and, as a result, we are raising our earnings expectations for 2010 by $0.03 per share. Previously we stated that we expect the 2010 earnings to be between $0.23 and $0.26 per share. We have now raised that to $0.26 to $0.29 per share.

On a quarterly basis, we expect to see improvements in earnings in the third and fourth quarters of 2010 consistent with the expected 2010 annual improvement to 2009. As to the second quarter, despite the sales shortfall of 14 -- almost 14% in last year's second quarter, net income for the quarter was $0.09 per diluted share which is the same level as this year's first quarter, which has -- which was a result of strong gross margins and reduced SG&A spending. Therefore, we do not expect to improve upon last year's second quarter results during this year's second quarter. At the $0.26 to $0.29 earnings per share level we are expecting in 2010, operating margins will significantly improve to the 4% level up from 2009's 2% level.

From a liquidity perspective, we expect to generate free cash flow of approximately $20 million which represents cash flow from operations of $30 million less budgeted capital expenditures of approximately $10 million. Our capital expenditure projects for this year are primarily related to Destination XL store concept and the corresponding enhancement and launching of our cross channel e-commerce website. The free cash flow we generate in 2010 is expected to be used to fully reduce our existing bank debt. At the end of 2010, we expect that we will be debt free and cash positive with availability under our revolver which will not expire until October 2011. We'll be over $60 million at the end of the year.

Now, let me break down some of the performance components of the first quarter. Where total sales decreased by 2.6% to $95 million when compared to total sales of $97.6 million last year's first quarter. As I said, comparable sales for the first quarter decreased 0.7%. This decrease consisted of 2.4% decrease in the Casual Male business partially offset by a 4.6% increase in our Rochester business. During the fourth quarter of 2009 we began to see improvements in our Rochester business as our higher end customers started returning to the stores. Also, the Company's direction channel increased sales during the first quarter by approximately 1% while its retail channel overall dropped comps by 1%.

Catalog circulation decreased 8% during the first quarter which was offset by catalog productivity improvement by over 8% from last year and a note, our catalog productivity improved by 55% from the first quarter of two years ago. Our comparable sales decreased for the first quarter of 2010 is primarily attributable to an approximate 7% decrease in store traffic, largely offset by an improvement in sales productivity by 6%. As I said, we expect sales volumes in 2010 to be flat in 2009 at approximately the $385 million to $395 million range which will be a comparable sales decrease to increase of 1% range. This will be achieved through continued sales productivity improvements generated by the Company's updated sales approach being executed by our store sales associates and a moderation of customer traffic trends as the year progresses.

In the first quarter, our gross margin rate inclusive of occupancy cost was 45.9% compared to a gross margin rate of 42.6% for last year's first quarter. The increase of 330 basis points for the first quarter was a result of increased merchandise margins of 280 basis points plus an increase of 50 basis points in occupancy costs. Our merchandise margin continues to benefit from our improved inventory management and reduced markdown activity. In addition, our merchandise margin last year's first quarter was negatively impacted by some residual fourth quarter 2008 clearance merchandise. Occupancy costs for the first quarter also improved despite the sales -- the lower sales base.

On a dollar for dollar basis, we dropped our occupancy costs by almost $1 million as a result of our ongoing rent reduction efforts with our various landlords. During 2009, we were successful in renegotiating existing lease terms with many of our landlords, enabling us to reduce future occupancy by over $9 million in total which will be recognized over the remaining lease terms of those respective leases. As a result, we expect to leverage occupancy costs for the year by 30 to 45 basis points.

In addition, we expect to continue with our aggressive management inventory levels during 2010 to ensure a healthy inventory position and ,accordingly, strong merchandise margins with improvements of 45 to 80 basis points for the year. That will bring our total gross margin improvement in the range of 75 to 125 basis points which is adjusted upward by 25 to 35 basis points from our previous guidance.

Our SG&A expenses for the first quarter were 37.5% of sales as compared to 38.1% of sales during last year's first quarter. On a dollar for dollar basis, SG&A dropped by $1.5 million or 4.1% when compared to last year's first quarter. We continue to benefit from the cross reductions that we took during the first half of 2009. Approximately two-thirds of the savings were the result of improved field productivity with the remaining cost savings resulting from reduced marketing costs.

Similar to 2009, we plan to limit our SG&A growth rates except for key programs to support our growth activities, unanticipated cost increases by our suppliers and unanticipated costs that are necessary to support our overall activities. For 2010, we expect our SG&A costs to drop by 2% over 2009, primarily related to the annualization of our 2009 cost reduction initiatives. These savings will be partially offset by an increase in marketing and other expenditures during the latter half of 2010 to support our Destination XL concept.

Our interest expense was barely $0.2 million for the first quarter as compared to $0.3 million last year's first quarter. The reduction in interest cost for the first quarter as compared to the prior year was due to an overall reduction of 78% in total debt. Interest costs for this year are expected not to exceed but $0.5 million compared to last year's $1.1 million level.

Inventory at the end of the first quarter decreased by $6.9 million or 6.6%. We continued to make a concerted effort to manage our inventory levels and, as a result, our merchandise margins continue to improve. However, the reduction in inventory levels is an outcome of aligning our merchandise product receipts with expected demand levels, our commitment to maintaining in stock by size positions has never been more evident as David mentioned in his comments, we are confident that our business has not suffered as a result of these lower and more appropriate inventory levels. Finally, at the end of 2010 we expect our inventory levels to be flat to last year. That concludes my comments about the first quarter and will open it up to any questions.

Certainly. (Operator Instructions) Our first question comes from Richard Jaffe from Stifel Nicolaus. Your question, please.

Thanks very much. Quick follow-up questions. You talked about leverage occupancy for the calendar year 2010 and wondering what your comp assumption would be and I believe it's a fairly conservative comp, is some of the occupancy leverage based on rent reduction and if you could quantify some of the rent reductions you've been able to achieve?

Our comp assumptions are a plus one to a minus one range, Richard, and the occupancy dollar reduction during this year is expected to approximate about $2.5 million, which is generating my thoughts as to how we're going to leverage the occupancy.

Are those savings for the term of the lease or are they sort of one-time situations?

They're over the term of each of the leases.

Very good. One question, circulation being so productive, obviously reduced and then heightened productivity, wondering if there's an opportunity to sort of reverse that a little bit and drive the direct business more robustly? Any thoughts regarding that in the second half?

Well, again, most of our reduction has come from the prospecting side. We're not really giving our existing customers any less drops on the circulation side. We are looking at BT, Factory and Shoes XL based on their strength that we'll be reviewing that circulation. There may be some opportunity going forward by possibly adding a drop or two into those businesses but, again, we're going to be very conservative on the prospecting side of circulation for at least for the next year.

So the other side of that question, are there levers you can pull to drive the direct business? Obviously it's quite healthy and large, but also quite profitable. It would be great to see that continue to grow. Is there anything else you can do in that direction?

Well, we're doing more of this portfolio concept where we're bundling three catalogs into one home as opposed to separate distributions and the results of that have been very strong in the total purchase by that customer by giving him one bundle as opposed to three others. And, again, that leads us to a very positive feeling about consolidating our direct business into one website where the customer will see all the choices available and certainly looking for getting a bigger average ticket.

And the launch of that combo or united website, when is that, please?

It's really not going to be until January, February of 2011. We have a lot of infrastructure work that's going to require us to get that thing launched.

Yes, I recall you had mentioned it on the last call as well and it sounds like a really good idea.

Another note, Richard, we do, in the background, we have continued to prospect, but at much lower levels. We continue to explore profitable avenues to raise customer traffic into our direction channel, but we have extensive experience at prospecting what's profitable and what's not and we're going to keep it on the profitable side, at least at this point.

Some of the other things that people are doing or hearing about, Twitter, YouTube, social networking, electronic outreach to consumers. Have you had any success with any of those kinds of initiatives?

We're on -- we have all of those concepts in play right now. Varying degrees of success. We don't get a lot of action off Facebook and twittering right now, but we are focused on it. We think that's future growth. We're going to be able to be on cell phone transactions, so that's all working in a positive way for us going forward.

And cell phone transactions, when will that be? That's sort of -- pretty cutting edge.

That's cutting edge. Probably -- we're dabbling in it now, but probably -- as -- our primary focus is getting DXL website up and --

Sure.

-- which will then lead to other technology improvements.

Got it. Thanks very much, guys.

Okay.

Thank you. Our next question comes from Tom Filandro from CIG. Your question, please.

Thanks. A couple of questions. David, I think you noted based on the selling reports that you believe the weather had negatively impacted performance in late April. Did you witness any regional variance to support that view and has weather had -- thus far had an impact on the current business either way from the trends you saw late in April? And then I have a follow-up question.

Well, geographically, as I have said before, we're pretty consistent with what other retailers would be saying. Our California business is the toughest for us. Actually, our Florida business has rebounded somewhat. In terms of the weather itself, it's day to day with our business. When we have a good weather week, our business gets quite stronger and where the pockets of rain and colder weather are, we have -- we show signs of weakness.

Fair enough. Can you walk us through the expanded size and incremental size offerings that you indicated earlier, help us better understand the additions and how that might impact the business either from core shoppers or is that potentially new shoppers? And did that have any impact at all in the first quarter results?

Well, what we noticed is that the first point is that about a third of our catalog sales come from the stores themselves, customers coming in and not having their size or we're getting incremental purchases through the catalog. And we were seeing a very strong pattern in some sizes that we didn't carry in the stores. They were catalog-only sizes. As we've populated the stores with some of these sizes across all categories, whether it's a knit, a woven, we've found instant success. A strong demand for those sizes and now they've become -- they're becoming a significant part of our business. I would say that's something that's going to start building over time because it's relatively new that we've populated the stores with these sizes. So it's a little premature to say what impact it had on first quarter.

We -- the other thing we added was half-inch inseams on all our bottoms -- not on all of our bottoms, but a good portion of our bottoms on the internet catalog side and we're very surprised at how many of our customers are ordering to the half inch. And that's just good customer service. What does that mean in incremental sales? Hard to define at this point in time but it certainly is a good service to our customer who probably would have had to take these pants and had them hemmed up or down for a better fit.

And I noticed -- one final question, the Destination XL website is up and I see you have sort of the universal platform where you can go to the selected brands.

It's -- yes, it's just an information page primarily at the moment, Tom.

Okay. Are you guys doing anything currently to drive customers to that site? Because you can get to your other brands.

Yes, no.

You're not. Okay. You're going to wait until --

Right.

-- stores are launched and you're fully set and you can offer product from the site?

Absolutely.

Okay. Terrific.

Just wanted to at least put it up there for those that got in there to start getting familiar with DXL.

Fantastic. Best of luck to you all. Thanks.

Thank you. (Operator Instructions) Our next question comes from Liz Pierce from Roth Capital Partners. Your question, please.

Thank you, good morning. Congratulations, guys. Nice job. Just to circle back on the expanded sizes a bit, what -- so what I'm trying to get my arms around is particularly -- I mean I understand in the DXL stores you'll have plenty of room for this, but is there something coming out of the existing stores to kind of make room for that?

No.

No, we're -- that's one of the reasons that Dennis said at the end of the year, our inventories will be relatively flat. Several months ago we probably would have said our inventories were coming down a few million, but we're going to be put that extra inventory -- putting that extra inventory into the stores. We have the space to add sizes within each of the shelving units or hanging units.

Got it. Okay.

It's not a lot of units per store, Liz. It lives within where the programs are set within the store today. It's just as we've analyzed, as we always do, our size part of our business, our direct business, of course, covers the entire universe of sizes, but there were opportunities within stores to add a size here or a size there in some of our top and bottom programs which is what's causing another focus of customer service aspect to our business. We've decided to add some of these sizes.

Now, is it a -- is it across the board in a variety of offerings or is it like very selective?

It's across the board. In other words, we've standardized our size offerings in our core programs and now are looking at our fashion side of our business, but we've now -- we want to become more consistent with our size offerings across our store chain and so that's -- this is the result of that effort. Okay.

And because you already had it on the web, I mean -- so it's available?

Oh, absolutely.

All right. And same thing on the branded side, it's available?

Not always by brand.

Okay. Okay. Is that something that you think that in the DXL you might work with some of the brands to push into those sizes?

We're always working with our brands to make the sizes that are relevant. Will it ever cover the size range of our private label, no.

Okay. And then, Dennis, on the G&A, I just wanted to make sure I understood. So down on a dollar basis 2% from 2009, which I think was like $151-some million. But if you add the additional marketing, I mean, is that including additional marketing that's down 2%?

Yes, it does.

Okay.

Yes.

So with -- okay. Just when you said it again, I wasn't quite sure when you went over it in the comments. And then, David, in terms of the comp difference between Rochester and Casual Male, I presume it's just the level of the river, if you will, at Rochester was a lot lower which is why it got pushed into positive territory and, like you said, that customer is starting to feel a little bit better?

Yes. Yes to both comments, yes. They were certainly coming off a weaker comp comparison, so they had a better opportunity to improve.

So should -- as we think about the second quarter, the other thing I wanted to clarify, are you saying no improvement in second quarter, so flat to LY or could there actually be some pressure on -- this year versus LY?

What I did say, we don't expect any earnings improvement in the second quarter.

So in other words, flat to LY?

Certainly not an improvement.

All right. And then in terms of the gross margin, I mean clearly it was a lot better than I had been anticipating. I understand the occupancy part in what you're doing from product and you're guiding up. Is this kind of the new benchmark that we should be thinking about going forward and what do you think the ultimate target could be on that?

Well, certainly we don't see ourselves back tracking on margin. We're going to have to fight like hell on the IMU side to maintain our margins, but so far we do anticipate being able to do that, going beyond this year.

You say fight like hell just on the IMU because of the competitive pressure or sourcing pressure? I mean I would presume it's more sourcing, right?

Yes, sourcing is an issue. I'm sure you're -- there's a lot of articles going on about costs going up. We have not taken any of those cost increases at this point in time, but we certainly have to be aware of it.

Okay.

But in terms of thinking about further improvements in gross margins, we're really not thinking about that other than what might come out of the occupancy side.

Okay. Okay. But this kind of 45ish, 46ish is a good number for us to be thinking about maybe for next year?

Well, we haven't got to that but certainly, as I said, we're not planning to back track on gross margins.

Okay. All right. And then how did the hybrid stores perform in the quarter?

They performed exactly to our expectations. They're doing everything we wanted them to do and, again, it's -- it gives us the confidence to talk about the potential of DXL because --

Did they perform above the company level?

Well, it's difficult to measure because how do you define a comp on them? But as we said before, they needed to be and they are four out of the five hybrids are the top four highest volume Casual Male stores we have in the Company.

Okay.

We needed them to be up there and they certainly are.

Okay. So you didn't see any kind of change in that?

No. Very consistent from day one when we opened in July and they're getting close to anniversarying.

Okay. And then, David, your comment about if you get half of the $70 million back, you're at 8%. What kind of traction do you think you made in Q1 on that? Not a dollar amount, just perception as you look at the business. Like -- it's -- .

Well, I don't think we -- we haven't made that traction yet with the flat comp. We're going to need four or five comps, three, four comps over the next several years to recapture that. Our strength has been on our conversion and our average ticket. We're -- we look forward to the -- when the traffic flattens out for us because that's what will occur if we get that traffic flat, we'll be looking at positive comps.

And I presume on the productivity, this is what you're -- is the average ticket, is that the driver here? If you look at the transaction metrics?

And conversion rates, both of those together.

One more than the other or -- ?

They're about the same, to make -- as Dennis said, 6% productivity, it's a pretty equal combination of traffic and -- of conversion and average ticket.

Got it. Great. Good job and thanks and best of luck.

Thanks.

Thank you. (Operator Instructions)

Okay.

I am not showing any further questions at this time.

Okay. Again, thank you all for listening this quarter. We do have our DXL stores opening and, again, we'll send further information, but we're planning a big event for Las Vegas to show everybody what DXL is all about. Thank you and we look forward to talking to you in the next quarter.

Thank you, ladies and gentlemen, for your participation in today's conference. This does conclude the program. You may now disconnect. Good day.