Destination XL Group Inc (DXLG) 2010 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to your Casual Male Retail Group second-quarter fiscal 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). I would now like to introduce your host for today's conference call, Mr. Jeff Unger. You may begin, sir.

Good morning, everybody, and thank you for joining us today for Casual Male Retail Group's second-quarter 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 read our forward-looking statements and then introduce David.

During today's call, we discuss some non-GAAP metrics to provide investors with 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 discussion also contains 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 for 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 [on] the Securities and Exchange Commission. David, I'd like to turn the call over to you.

Thank you, Jeff. This morning, we announced our second-quarter 2010 financial results. As in the first quarter, second-quarter earnings improved over last year. Net income increased 56% to $5.6 million or $0.12 per share from $3.6 million or $0.09 per share in the second quarter last year. Gross margin improved 180 basis points to 46.4%, and we generated our first positive comp in the last eight quarters, at 0.8%.

Business for the Company has been stabilized over the last six months with comp sales being relatively flat for both the first and second quarters. Our spring and summer merchandise sold through at our projected rate, which helped contribute to the strong gross margin improvement. And our receipt flow for the third quarter was on time and we're getting some nice, early results with our fall assortments.

The strongest categories for the spring/summer quarters were activewear, which was driven by golf apparel, shorts and swimwear, screen T-shirts, and woven shirts.

During the second quarter, our outlet stores comped 2%, which exceeded the comps of our regular priced stores, which were negative 0.3%. And that seems to be consistent from what other retailers have been reporting.

Also consistent with other retailers is that the West Coast stores continue to underperform as compared to the rest of the country. We are, however, encouraged to see the Florida market begin to rebound in its performance.

And, consistent with the last several months, our comp performance is several percentage points better than our traffic due to continued improvement in our conversion rate, as well as increases in our average transaction.

We also had a solid performance from our direct businesses, especially B&T Factory Direct and ShoesXL. And LivingXL's comps have been improving over the last few months as well. As I mentioned on the last call, we have recently been bundling catalogs and cross marketing our different customer bases, and that has improved the overall profitability of our direct marketing programs.

We remain very excited about our new DX Destination XL concept. Also called DXL, this is our new superstore design that averages 10,000 to 12,000 square feet and offers nearly 3 times the product assortment with twice as many brands as a typical Casual Male store. These stores are designed to be a one-stop shop for all types of big & tall customers by combining a good, better best selection from our value-oriented B&T Factory outlets, moderately priced Casual Male, and high-end Rochester merchandise, along with footwear from ShoesXL.

On July 8, we opened our first DXL store in Schaumburg, Illinois, and simultaneously closed three Casual Male stores in the surrounding area. Last week, we opened up a second DXL in an existing Casual Male location in Memphis, Tennessee, and closed the Casual Male store and an outlet store in the area. And last Saturday, we opened our third DXL store in Las Vegas and closed the nearby Rochester and Casual Male store. And finally, on September 3, we plan to open our fourth DXL in Houston in an expanded Rochester location and close two surrounding Casual Male stores.

We are very pleased with the layout of the stores and earlier customer feedback has been extremely positive. The store is divided into young men's, modern, traditional, active and dress clothing. The lighting, flooring, fixturing and displays have created a visual energy that Casual Male never could accomplish in its existing format. Wider aisles, bigger dressing rooms, and an abundance of mannequins for wardrobing, give our customers what they've been asking for. And to get a real sense of what DXL stores look like, you can go to DestinationXL.com for a visual slide presentation.

As I've discussed before, we anticipate the DXL stores will demonstrate improved leverage associated with reduced occupancy costs and store operating expenses in the market consolidation; and we are projecting a four wall contribution of 30% compared to our existing 20% in our typical Casual Male stores.

And in the first quarter of fiscal 2011, we will be launching the Destination XL website. And the new site will offer our customers the same buying experience our customers have in a DXL store. The site will offer the entire product assortment of all our concepts with the addition of LivingXL and will have new enhancements that will make for a more compelling buying experience.

Finally, let me conclude by briefly commenting on our exposure to rising merchandise costs across the industry. Most of our spring 2000 goods have been placed and we do not anticipate having any material margin issues and are not planning on raising retail prices to maintain our margins. China today represents less than 12% of our imports. And where we have experienced material cost increases, most significantly, the price of cotton, we have been able to offset that with our global sourcing team, placing more programs directly with factories as opposed to sourcing through domestic importers.

And now Dennis will review the financial performance for the quarter and year to date.

Thank you, David, and good morning to everyone. During the first half of this 2010 year, Casual Male Retail Group continued its profit recovery by posting the most profitable first six months of any year since the business was acquired in 2002. We believe key initiatives and merchandise design allocation, inventory management and customer service are leading to sustainable positive trends in sales gross margin and our expense structure.

Notably, as David mentioned, over the past two quarters, sales trends have flattened, gross margin has increased significantly, and SG&A expenses have remained flat. This has resulted in a 45% increase in operating income for the second quarter to $6.3 million, and 120% increase in operating income for the first six months of 2010 to $10.9 million.

We have significantly strengthened our balance sheet over the past year with total indebtedness down nearly 90%, no outstanding borrowings under our credit facility, and with credit availability of over $65 million. We believe the significant adjustments made to the business in late 2008 and early 2009 produced a simple but sustainable operating model which focuses on optimizing operating margins while nurturing a loyal customer base.

With a profitable operating model, healthy balance sheet and solid free cash flow, we believe the business is on solid footing and have begun to turn our attention to market share growth. As David mentioned, the Destination XL concept was designed to appeal to a broad base of customers across the big & tall market, and we believe this new concept is capable of capturing a higher percentage of spending with not only our existing customers, but also attract a wider customer demographic, particularly in the 42- to 46-inch waist side of the market.

With the opening of just three DXL stores over the past few weeks and one more to open in a few weeks, it will be some time before this concept has a meaningful impact on the business.

In the meantime, we are well aware that the earnings growth the Company has had in 2009 and so far in 2010 is largely based on expense and gross margin improvements. And benefits of the SG&A expense reductions have now cycled through our financial statements on an annualized basis, and therefore, further operating income gains must come from gross margin rate improvements and/or top-line growth, which is exactly how we are positioning the Company going forward.

In 2010, we are expecting operating income to more than double from 2009 to the approximate 4.5% level. And we're planning for continued operating margin growth into 2011 on the basis of some incremental gross margin expansion and positive top-line gains.

We're not ready to share these expectations as yet, but the basis for the top-line growth plans is based on the strength of the Company's operating strategy, the loyalty of its customer base, and the eventual, but gradual, recovery of the over $75 million or 15% of its 2007 sales volume base. So far in 2010, the Company's direct channel has resumed the modest growth trajectory, and the retail channel sales growth is only being held back by declines in traffic.

Irrespective of traffic trends in the near term, we believe the Company's operating strategy of giving our customers exceptional customer service will lead us to meaningful profitability and free cash flow gains for the foreseeable future.

Our strategy is to create merchandise assortments for the lifestyle activities of our market; allocate to each store with most compelling and appropriate assortments for each store while maintaining in-stock positions by size; and lastly, but most importantly, engage with our customers to identify and offer wardrobe solutions that fit their lifestyle preferences.

This strategy will provide us with the means to pursue a more aggressive growth initiative such as the DXL concept. To help us fully realize the sales opportunity that exists in providing our customers a superior service experience, we have recently made a leadership change in our store sales and operations organization by adding to our executive management team, Mr. Brian Reaves, who comes to us from David's Bridal, and After Hours Formalwear, two organizations that are known for the same exceptional customer experience that we aspire to emulate on a consistent basis.

The [physical] 2010 outlook is based on the operating results for the first six months of this year and the recent trends, we are raising our earnings expectations for the year by $0.03 per share to a range of $0.29 to $0.32. For the second half of 2010, we expect to see improvements in earnings consistent with the expected 2010 annual improvement to 2009.

Sales volumes for 2010 are expected to be relatively flat to physical 2009 at around $390 million to $395 million, which represents a comparable sales change of a flat to plus 1%. At this sales level, we expect gross margin to improve by 110 to 140 basis points, of which 50 to 60 basis points is associated with occupancy leverage. And, SG&A costs are expected to decline by approximately 2% from 2009 levels.

From a liquidity perspective, we expect to generate free cash flow of approximately $24 million in 2010, which represents cash flow from operations of $34 million, less our expected capital expenditures of approximately $10 million. Our capital expenditure projects for this year are primarily related to our DXL store concept and the corresponding enhancement and launching of our cross channel e-commerce site.

The free cash flow we generate this year is being utilized to reduce our existing credit facility. And at the end of 2010, we expect to have cash balances of between $15 million and $20 million and only approximately $3 million in outstanding debt relating to a term note maturing in 2011. We also expect that the availability under our revolver, which does not expire until October 2011, will be over $70 million by the end of the year. Therefore, we expect to maintain a level of free cash flow and balance sheet liquidity to support and finance our long-term strategic plans.

Now I will provide some detail as to the Company's operating performance for the second quarter. For the quarter, total sales decreased by 1% to $97.3 million when compared to total sales of $98.3 million for the second quarter of last year. Comparable sales for the second quarter increased almost 1% at 0.8%, which consisted of a 0.3% increase in sales from our Casual Male business, offset by a 2.2% decrease in our Rochester business.

Our comparable sales increase for this quarter is primarily attributable to improvements in our conversion rate, that is, the percentage of store customers who come into our store who make a purchase of 5.3%, as well as a 1.5% increase in dollars spent per transaction. Both of these metrics have contributed to mitigating the reduced traffic flow, which was down about 6.3% for the second quarter as compared to last year.

Sales across our direct channel increased 5.2% while comparable sales from our retail channel decreased 0.2% for the second quarter of this year. For the first six months, total sales decreased 1.8% to $192.2 million as compared to $195.8 million last year. Comparable sales for the first six months increased 0.1%, which consisted of a 1.2% increase in Rochester business, offset by a 1% decline in the Casual Male business. Sales from our direct businesses increased by 2.9% for the six months while sales from our retail channel dropped 0.6%.

Our gross margin rate, inclusive of occupancy costs, was 46.4% as compared to the gross margin rate of 44.6% for last year's second quarter. The increase of 180 basis points was the result of increased merchandise margins for the second quarter of 100 basis points plus and 80% or 80 basis point increase in occupancy -- or decrease in occupancy costs as a result of lower occupancy costs.

For the six months of this year, our gross margin rate, inclusive of occupancy costs, was 46.1% as compared to 43.6% for the six months of 2009. The increase of 250 basis points was the result of increased merchandise margins for the first six months of 190 basis points plus an increase of 60 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 for the first six months of 2009 was negatively impacted by some residual fourth-quarter 2008 clearance merchandise. Occupancy costs for the first six months also improved despite the lower sales base. On a dollar basis, occupancy costs declined by $1.8 million as compared to last year as a result of our ongoing rent reduction efforts with various landlords.

SG&A expenses for the second quarter were 36.4% of sales as compared to 36.1% last year. On a dollar basis, SG&A expenses were relatively flat for the second quarter, with the SG&A percentage of sales increasing slightly with the 1% loss in sales to 36.4%, as I said.

For the first six months of 2010, SG&A expenses were 37% of sales as compared to 37.1% a year ago. On a dollar basis, SG&A expenses declined by $1.6 million or 2.2% for the first six months as compared to last year.

During these first six months, we continued to benefit from the cost reductions that we took during the first half of 2009. Approximately two-thirds of these savings were the result of store payroll reductions and store operating efficiencies, with the remaining cost savings resulting from reduced marketing costs. In the second quarter, we anniversaried last year's significant change to the Company's expense base, and, therefore, will be working to minimize any expense increases on a quarterly basis going forward and expect flat SG&A levels for the balance of 2010.

For the second quarter and first six months of 2010, we had operating gains of 210 basis points and 300 basis points, respectively, with net income gains of 56% and 145%, respectively. We expect further gains in profitability during the second half of 2010.

At the end of the quarter, total inventory was $94.2 million compared to $90 million at the end of last year, and $94.3 million, or flat, from a year ago on the same date. We continue to make a concerted effort to manage our inventory levels, and as a result, [of] our merchandise margins continue to improve. We have successfully reduced our inventory levels over the past two years without sacrificing our broad selection of core basic merchandise and current fashion items.

By the end of the year, we are expecting our inventory levels to drop by approximately 5% from last year's year-end levels to just below $85 million overall.

At this time, we are happy to entertain any and all questions or comments that you all might have.

(Operator Instructions).

Good morning, guys. This is [Omare] calling in for Liz. Just wanted to talk a little bit about the DXL stores. Could you compare and contrast your DXL customer with your traditional Casual Male customer, and maybe some of the differences you are seeing? And if you could talk a little bit about the lower end of the lower sizes in terms of waist size and what you're seeing there in terms of the customers coming into the DXL store? I know it's early, but any color you could provide?

Of course, it is early, and we don't want to give out too many specifics because, again, these stores have been open several days, with Schaumburg being open a month.

But as far as the customer, what we are seeing is a strong response from our Casual Male customer coming in, and he's seeing product and prices that he hasn't seen before. And we're not talking about high-end luxury prices, but brands such as Calvin Klein, Polo, Tommy Bahama, and he's starting to make some of the those purchases, which we're very excited about. So he's mixing between Casual Male product and Rochester product.

And our Rochester customer is coming in and seeing his normal assortments, and he's also seeing some good value on some basic product that he is picking up along the way, too. So it's pretty much following the pattern of the hybrid stores, where we put the customers in the same sandbox, and they are playing very well together. And what they really enjoy is the broader selection.

As far as the size curves, again, it's too premature for us to make any comment on where we are seeing any differences in size purchases.

Got it. And, looking at the Destination XL website, it looks -- I think you mentioned that it is planned for launch in Q1. Is that right?

Yes, Q1 of 2011.

Okay. And can you talk a little bit about some of the additional changes you might be making to the website or what might be different from what is currently online right now?

I think that the primary difference between the DXL site and our existing sites, I mean first of all, is that our customer will be able to see our entire array of assortments on one shopping site. And secondly, there will be many different ways from which our customer can search and identify and collect items that he would like to buy by size, by lifestyle, by brand, by price point. So I think those are the two most powerful differences between the site that we are building and the existing sites as they are today.

Okay. Well, thank you very much, and best of luck.

Thank you.

[Klaus van Stederheim].

I can't remember, do you guys have a share buyback program? And if not, do you think that would be a good idea?

We do not have a share buyback program at the moment. And of course, for the long term, we continue to grow our free cash flow. A stock buyback program is something that we'll definitely entertain as we go forward.

But we also want to maintain a healthy balance sheet and provide the Company the adequate level of capital to sustain its growth initiatives all at the same time.

Okay, thanks.

(Operator Instructions). [Greg Fontana].

I'm wondering if you could give us some color on the loyalty program and what your expectations are for DXL with regards to growing the loyalty program.

Well, our loyalty program has been extremely successful. About 90% of our transactions go through the loyalty program. As I've mentioned before, we now have a prestige card for customers who spend considerably more than our average customer. If this is the black -- it's like a black card. And what we have experienced is once we've get the prestige card into our customers' hands, their spend has actually increased, so we're looking to expand upon that program.

As far as DXL, there will also be a loyalty card coming there. And that's something that, again, is new. But loyalty has been certainly front and center for us. We do have a loyal customer, and he does love his points and redeems on a regular basis.

Okay, thanks.

Lance James.

Tremendous quarter; congratulations to everyone. My question is on the gross margin improvement -- the merchandise improvement, was that more a factor of the mix of clothing or just better sourcing on your part? Or could you give us a little more color on the improvement on the merchandise margins?

Not so much source -- sorry, not so much mix of sales product, but more a balance between better sourcing and slightly lower markdowns from a year ago, which means to us less clearance merchandise, which primarily generates our markdowns. So, we haven't seen a significant change in the balance of our sales mix in the products.

Thank you.

I'm not showing any further questions at this time.

Okay. Well, thank you very much. The next webcast will certainly be a little more transparent on the results of DXL and our future plans for growth there. Again, thank you very much for joining us.

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