Destination XL Group Inc (DXLG) 2010 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to your Casual Male Retail Group fourth-quarter and 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 this conference call, Mr. Jeff Unger. You may begin, sir.

Thank you, Kevin. Good morning everybody and thank you for joining today for Casual Male Retail Group's fourth-quarter and fiscal 2010 earnings. On our call today is Dennis Hernreich, our Executive Vice President and Chief Operating Officer and Chief Financial Officer; and David Levin, our President and CEO.

I would like to read our forward-looking statement and then introduce David. During today's call we will 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 at our website at CasualMaleXL.com for an explanation and a 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 margins, capital expenditures, earnings per share, store opening and closing, and other such 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 all yours. Thank you.

Thank you, Jeff. Today we announced our 2010 fourth-quarter and fiscal 2010 results. We are very pleased with the performance for the year and we believe we will continue to build momentum and increase sales and profitability in 2011.

Our comp sales in the fourth quarter increased 2.9%, which gives us positive comps for the last three quarters. Our sales in the fourth quarter mirrored what other retailers have announced. November was very strong, with colder weather than last year driving the comp. On the other hand, the weather impacted sales negatively in January due to severe weather in the Midwest and Northeast.

We are encouraged by the sales in the first six weeks of the first quarter of 2011 with comps at around 4%. Except for bad weather days, we are seeing nice comps on a daily basis.

We have seen traffic finally neutralize over the last several months, along with continued improvements in the sales productivity in our retail channel, as measured by improved conversion rate and an increase in dollars per transaction.

The strongest category so far for the quarter have been all of our bottoms businesses -- denim, casual pants and shorts. We are looking forward to third-quarter launch of three new department store brands that have never been offered in big & tall sizes on the other hand. Based on the trends over the last several months we have planned our comp performance for 2011 to be at around 4% to 4.5%.

We managed our business quite well in a year where our sales were essentially flat with the 1.5% comp, and total sales down 0.4%. That being considered, we were able to double our operating income to $16.2 million from $8 million last year, and improve our earnings per share to $0.32 from $0.14. And for the first time in more than 10 years we are debt-free and have cash on hand.

We are very excited about our initiatives to grow the topline and operating income of CMRG. First and foremost is the rollout of Destination XL. The DXL format footprint is about 3 times the size of a typical Casual Male XL store that carries about 2,000 styles as opposed to 600 styles. We now have two quarters of results of the four stores we opened in 2010, and are pleased that all four have met their expectations.

We collapsed two to three stores in each market to open the new concept, and already the stores are generating sales of 20% more than the total of the closed stores. The success is coming from drawing from a much larger radius and that the customers are spending 33% more on their store business compared to a typical Casual Male store.

We expect the stores to mature in three years, and expect EBITDA margins to approximate 30%, and an ROI payback in less than two years.

We have moved past the terminology of a DXL test and are aggressively progressing to a rollout of the new concept. We plan on opening 10 to 14 new DXL stores in 2011.

The size of the stores will range between 6,000 and 12,000 square feet, depending on the market demographics for each location. If we continue to have success with the DXL stores in 2011 our goal is for another 15 to 20 in 2012, and to have at least 75 to 100 DXL stores by 2015.

The Company store count will drop by over 100 stores, but the total Company square footage will not change significantly.

Along with the success of Destination XL stores, we are also excited about the upcoming spring/summer launch of our Destination XL website, which has been in development for several months. It will be robust with cutting-edge Web technology that will enhance our customers' shopping experience.

If our expectations are correct, the average transaction will increase similar to the DXL store transaction due to the expansion of styles available.

Today our customers shop online through Casual Male XL, Rochester Clothing or B&T Factory Direct. With the new site they will see all assortments available from CMRG.

And we are also pleased with the continued growth and success with our B&T Factory Direct, which has grown double digits each of the last two years, along with gains from ShoesXL and LivingXL.

We have also seen growth through our Amazon business, along with increased sales as the Internet provider for Sears US and Canada, both are big & tall customers.

For a Company with a store base of 460 stores, the fact that we have grown our catalog Internet sales from 5% of total sales in 2002 to 20% of total sales in 2010 is a result of the commitment we have made to be a strong multichannel retailer. And with Destination XL on the near horizon, our goal is to grow these channels to be 30% of total sales in the future.

The third opportunity to gain marketshare is to attract the female shopper. 70% of men's apparel is purchased by the female shopper, yet we only get 30% of females to shop for men at our stores -- shopping for men's apparel at our stores, which are destination sites that are freestanding or in strip centers.

That shopper is in the malls and department stores, and we hope to penetrate those markets by opening store-within-store Big & Tall shops. This week we are pleased to announce that we opened 15 Destination XL Annex stores with the Bon-Ton Group. We already have been active on their websites since last fall, and the real win here is that we are already experiencing that we are attracting a new customer base.

Financially we have no significant CapEx requirements, as we are using Bon-Ton's existing fixtures whenever possible. We own the inventory and Bon-Ton is the operator. If this format is successful we anticipate rolling out the concept throughout the Bon-Ton chain.

In the future we can look to other companies to partner with as CMRG covers good, better, best price points and can find compatible merchandise assortments for each retailer.

Finally, on the subject of the impending cost increases on our product, I can reiterate what I said on the last call. We don't have any cost issues on our receipts until June of this year. And we have mitigated the cost increases the best we could by limiting our sourcing out of China and increasing the amount of business we do directly with the factories and limited the amount of business that we do with direct importers.

We have strengthened our global sourcing team, and they have done an outstanding job keeping cost increases reasonable. We have achieved our goal for 2011 to maintain our IMU, and will be passing on price increases to our customers. We have already started to take our prices up, and logistically it will take us through August to reprice several million units.

We are monitoring the trendline of unit put-through versus topline sales and gross margin dollars. We have rarely raised prices in eight years and when we have seen -- when we have, we have seen minimal impact to sales. The most important driver for our customer continues to be comfort, fit and being in stock by size. And as long as we continue to deliver on those variables, we believe our increased retails will have a minimal effect on sales.

As I stated earlier, we are at an exciting point in time in the future of CMRG. We have a strategy in place that we believe will be a catalyst to growth. In 2008 through 2009 we lost about $65 million of topline sales. Our customers, through our surveys, have told us they didn't shop anywhere else, but had just deferred shopping at all. Those lost sales have the potential to come back to us as the economy slowly recovers.

With our revamped SG&A structure we have the opportunity to get CMRG to operating income levels in the high-single-digits, which is where we are focused today to achieve.

Now Dennis will review our financial results in further detail for the fourth quarter and the fiscal year and give an outlook on 2011.

Thank you, David, and good morning everyone. As David said, after I complete my prepared remarks regarding the Company's 2010 financial performance and 2011's financial guidance, and after making some comments regarding the Company's strategic direction, David and I will conduct the Q&A session.

First, about 2010. We exceeded our original expectations for earnings in fiscal 2010 despite the slow economic recovery. With an essentially flat sales base in fiscal 2010, we were able to double our operating income from $8 million to $16.2 million, resulting in earnings per share of $0.32 as compared to $0.14 last year.

While traffic and consumer spending have been slow to recover, we have seen our business strengthen each quarter across all of our brands. For 2010 we generated a positive comparable sales increase of 1.5% compared to comparable sales decreases of 10.8% and 4.3% for 2009 and 2008, respectively.

Sales for 2010 decreased by $1.5 million overall or 0.4% to $393.6 million as compared to $395.2 million in 2009.

The comparable sales increase consisted of 0.5 point increase in sales from our Casual Male business and 2.7% increase from our Rochester business, and a 13.4% increase in our B&T Factory Direct business.

The B&T Factory Direct business, which caters to our value-oriented customer, has had double-digit comp sales increases for the past two years, representing the tremendous opportunities still to be realized.

Comp sales from our direct businesses increased by 3.2% and comp sales from our retail channel businesses increased by 1.1%.

Our comparable sales increase for 2010 of 1.5% is primarily attributable to improvements in sales productivity. While store traffic was down 4.2% in 2010, it was a substantial improvement from traffic trends of down 9.7% and 9.2% experienced in 2009 and 2008, respectively. Furthermore, customer traffic trends flattened in the fourth quarter and turned slightly positive so far in the first quarter of 2011.

We also continue to see improvements each quarter in our conversion rate, as well as improvements in dollars spent per transaction. These improvements are largely attributable to ongoing efforts within store operations to develop a stronger salesforce that is sales driven and focused on serving the customer.

Moreover, we continue to produce strong gross margins with the rate increase of 316 basis points over the past two years, despite a decrease in total sales 11.4% from 2008 to 2010.

Gross margin rate for 2010 was 45.8% as compared to 44.2% for 2009 and 42.7% for 2008. The increase of 166 basis points for 2010 was comprised of a 96 basis point increase in merchandise margin and an increase of 70 basis points in occupancy costs.

Our merchandise margin improvement of 96 basis points was slightly below where we expected merchandise margins to be for 2010, as we had 100 basis point drop in merchandise margin during the fourth quarter, not only as a result of closing a Rochester outlet store and liquidating its inventory in the fourth quarter, but also as a result of selling clearance inventory at a faster pace than we anticipated.

As we have enhanced the flow of fashion merchandise to the stores on a more frequent basis, we have also increased the frequency of adding clearance inventory. Clearance inventory levels are still expected to approximate the same 10% to 14% range of overall inventories, and therefore, over the course of the year we don't expect the amount of clearance markdowns to markedly change.

Merchandise margins have also been positively impacted from our growing global sourcing activities, which have contributed to maintaining our merchandise cost structure. Our occupancy cost improvement of 70 basis points was the annualized result of our rent reduction efforts with landlords that occurred primarily in 2009.

Our SG&A expenses for 2010 remained flat to the prior year at $150.9 million as we continue to effectively manage our cost structure. SG&A expense as a percentage of sales for 2010, 2009, and 2008 were 38.3%, 38.2% and 40.1%, respectively.

As planned, we maintain a similar cost structure to fiscal 2009, and limited our SG&A expense to only those programs supporting our growth activities.

For 2010 we continued to realize cost savings for several of our 2009 cost reduction initiatives, such as reductions of store payroll and lower distribution costs. These cost savings allowed us to absorb the SG&A expense increases principally related to the opening and marketing our new DXL stores.

Of equal significance is our strengthened financial position at the end of 2010. For the first time in more than 10 years we are debt free and have cash on hand. In addition, during the fourth quarter we entered into an amended and restated credit facility which will not expire until November 2014. With no outstanding borrowings at the end of the year we had full availability under this credit facility of $63 million.

Our resulting free cash flow of 2010 was $10 million compared to $26.2 million for 2009. The primary reason for the decrease in free cash flow of $16.2 million was due to the timing principally of working capital of over $20 million and an increase in capital expenditures of $4.4 million to support the DXL plan. This was partially offset by our improvement in cash flow from operations of 8.6 (technical difficulty).

It is important to note that the changes in working capital, primarily due to an increase in inventory cost from early spring receipts towards the end of the year, and due to the Company's excess cash position in 2010 as compared to 2008 -- 2009, that is -- a reduction in accounts payable primarily due to the timing of cash payments.

The company's working capital has more than tripled since 2008 to $63.3 million for a current ratio of 2.4 compared to 1.2 a few years ago, primarily as a result of reduction in current liabilities. No further meaningful investments in net working capital is expected going forward.

As I previously mentioned, we further strengthened our liquidity profile by extending our credit facility with Bank of America to November 2014. The amended credit facility provides for maximum committed borrowings of $75 million, which can be increased to $125 million. The facility contains no financial covenants.

At the end of the year the Company's store count dropped by 4% to 460 stores, with square footage of 1.58 million, which is also a 4% drop from the prior year.

So about 2011's outlook. We expect to continue to improve our performance during 2011, with earnings between $0.40 to $0.45 per share, an improvement of between 25% to 40% upon 2010's results, with free cash flow between $15 million to $20 million, and any cash balances between $20 million to $25 million.

Our capital expenditures for 2011 is expected to approximate $18 million, and will be primarily spent on investing in the infrastructure of our direct channel in connection with the launch of our new DXL website in the first half of 2011, and capital incurred for the openings of between 10 and 14 new DXL stores.

As we open new DXL stores, we will be closing existing stores in each market area. For 2011 we currently expect to close between 15 and 20 stores.

The basis for the earnings guidance of between $0.40 to $0.45, inclusive of opening 10 to 14 DXL stores, is as follows -- an increase of sales of between 3% and 4%, resulting in total sales of $405 million to $410 million, with a comparable sales increase of between 4% to 4.5%.

As expected, consumer spending and traffic, although slow, has started to return. During the fourth quarter of 2010, as we said, customer traffic trends flattened. Although we do not expect traffic levels to return to pre-recession levels this year, we are planning a modest increase in our dollars per transaction as a result of price increases on some of our merchandise product.

In addition, we expect to continue to enhance sales productivity by our sales staff in effectively engaging with our customers to satisfy their wardrobing needs.

For 2011 we are also expecting gross margin will improve by approximately 75 to 125 basis points. Our occupancy cost on a dollar basis will remain flat to 2010, and as a result we expect leverage occupancy costs by approximately 30 to 50 basis points in fiscal 2011. In addition, we are planning on continued improvement of 40 to 75 basis points in merchandise margins.

While SG&A expense management is a significant priority for us, we are expecting our SG&A expenses to increase by approximately 3% for 2011. This increase is primarily related to our incremental marketing costs associated with targeting our new DXL stores, as well as reinstatement of our 401(k) employer match and modest salary increases to our associates.

Overall, we expect to limit our SG&A growth rates, except where necessary to support our growth activities or where there are unanticipated costs are necessary to support our overall activities.

Depreciation expense in 2010 was $13.2 million and has dropped almost 25% during the previous couple of years, consistent with the reduction of capital expenditures. Depreciation and amortization charges for 2011 are expected to slightly decrease further to $12.5 million.

At the end of 2010 the Company still had almost $50 million of unrecorded deferred tax benefits and, therefore, will not be a significant tax payer during 2011. Also, we expect 2011 will be the last year the Company will be [flexing] its tax provision on essentially a tax -- a cash basis at an effective tax rate of approximately 10%. Thereafter, the Company's effective tax rate is expected to approximate 40%.

More than half of the earnings increase expected in 2011 is anticipated to occur in the fourth quarter, with slight earnings improvements during each of the first three quarters.

Okay, some thoughts on Destination XL, where we open -- as David said, our first four Destination XL stores in Schaumburg, Memphis, Houston and Las Vegas. The DXL concept was conceived as a channel that can better service the Company's markets with a destination one-stop shop that can meet the wardrobing needs of our diverse customer base, drawing from the approximately 2,000 apparel, accessory or shoe styles the Company has to offer.

Our customers' reaction to the stores have been overwhelmingly positive, with an over 20% sales increase within the respective DXL store market area. On average, the Company is expecting a similar impact in each DXL market. Furthermore, a DXL store is expected to mature after 36 months, with a full four-wall margin of approximately 30%.

The Company anticipates opening, as we said, 10 to 14 new DXL stores in 2011. Depending on the real estate and market demographics for each of these locations, we expect the size of each store to vary between 6,000 to 12,000 square feet to accommodate the product assortment needs of each market.

During 2010 DXL stores generated just over 1% of our total sales, while in 2011 DXL stores are expected to generate just over 5% of total sales, but almost 8% of total sales in the second half of the year when many of the 2011 DXL stores are scheduled to open.

To provide a multichannel DXL solution where our customers can also shop the Company's universal product assortments in a convenient and streamlined manner, the Company will be launching the DXL website during the second quarter of 2011, which will ultimately be combining all of our existing e-commerce sites into one enhanced website with state-of-the-art features and best practices.

The classification as a Rochester customer, Casual Male customer, or B&T Factory Direct customer will no longer limit their ability to access our full product assortment, and instead the entire assortment can be shopped and purchased with one shopping cart.

Over the past couple of years the Company has been retooling its systemic infrastructure to support the sharing of inventory amongst all of our channels, and analyzing and managing the business in a merged environment, such that the business can be customized under a consumer-centric approach, which we believe the DXL strategy represents.

Going forward the primary focus of business will be to provide meaningful and relevant product assortments to our diverse customer base, allocating those product assortments to each market in order to optimize the marketshare. And providing important product knowledge to our sales staff so they are able to give superior and helpful customer service to assist our customer base in identifying and selecting their desired wardrobing needs.

We believe the strategic direction will continue to yield growing profitability and free cash flow that generates significant shareholder values for the long-term.

That is the extent of our prepared remarks. We will now be happy to answer any and all the questions you may have.

(Operator Instructions). Richard Jaffe.

I will follow up what has been a great quarter. Inventory seems higher than anticipated. I am wondering if you could help us understand the ending inventory and your goals for inventory for the balance of the year?

Then on a related question, how you will manage the direct-to-consumer inventories versus inventories in stores, will they be single inventory or somehow blended electronically?

First of all, the ending inventory at the end of the year rose just slightly again -- as I said, it was early spring receipts. So the inventory is fresh. The level of clearance inventory is where it was supposed to be. So there is no problem with inventories. Inventories at the end of 2011 are expected to be at or near approximately where we are at the end of 2010.

As to how we manage our direct versus retail inventories, it is one pool of inventory. Because of the retail channel, of course, being much bigger than the direct channel, we do protect the direct channel's inventory, but otherwise, direct can share with retail to satisfy the consumer needs, depending upon where it might be coming from.

So we have seen great efficiencies with respect to merging the inventories together. And the consumer has won with that infrastructure change that we made last year.

Where is that located now?

It has always been, and it is all right here in beautiful Canton, Massachusetts.

And do you have sufficient facilities to accommodate all three brands for both DTC and then backstop for stores there?

Yes, and for years to come.

And for years to come.

Our building is 750,000 square feet, so we have capacity.

So I guess the other question is, is there a chance to sublet some of that space?

No, we do use it.

No doubt. Thank you very much.

Liz Pierce.

Congratulations, guys, on a great quarter. Dennis, I am wondering can you give any of the metrics for the fourth quarter? Specifically you gave them for the year, but I didn't see them anywhere in the press release as a comp, etc. I think you just gave the total comp of 2.9%, but not the components.

I see. The comp in the fourth -- one second, please.

If you don't have it handy, we can talk about it after.

Well, let me at least give you the comp. In the fourth quarter it was 2.9%, and for the year it was 1.5%.

Just to be -- since a lot of people have changed how they're reporting comp, I just want to make sure that I have the definition of your comp correct. Is this the retail only or is this --?

No, we have been reporting an all-inclusive comp since -- I want to say 2004.

Yes.

Just because of the way we look at our consumer, the way we market our consumer, we are agnostic as to where they shop us, direct versus retail, and so this is how we have been reporting it for many years.

Okay, I just wanted to make sure. Let's go over this after the call, because I want to make sure I have the right numbers historically. I seem to have some discrepancies.

Okay, great.

Then, David, in terms of the Bon-Ton agreement, is there a lockup like on how long they would -- or an exclusive -- or are you free to move forward with that when you feel comfortable doing so?

First of all, our intent is to get this successful with Bon-Ton so we could get that -- start to expand beyond the 15 store base. But, no, we have no -- there is no agreement that says we can't do this with any other retailers.

But we would try -- what we would do is mix up the format and the assortment so it would make a lot more sense. Because each one of the retailers has a slightly different demographic in their customer base, but we have got them all covered. So even in the Bon-Ton stores certain brands are in certain locations within the 15, because in their store base they have different product mixes themselves. So we try to tailor it to each specific store.

Of the 15 that are open, how diverse -- what is the geographic footprint? How spread out are they, is it clustered? I'm curious how you -- like what you have been able to see so far that convinces you this is like a new customer.

Well, we opened yesterday, so I have absolutely no opinion on the existing customer in the store.

Got it.

What we are basing it on is the customers that have made a purchase through the Internet, which went live in October of last year. There clearly we have matched that to our database and we are finding that we are definitely getting a customer that isn't in our existing database. Which is great, because that gives us a lot of confidence as we go into this type strategy it won't cannibalize our existing stores.

Okay, all right. Then to the question in terms of the 15 stores, how spread out is that footprint?

Not very. We tried to cluster stores so we could get some marketing benefit from their circulars, so they are in a few clusters. But we did cross through different brands, titles within their chain, so we could get a flavor of what this would mean on a more expanded basis. We did not pick their top 15, in other words. We took a nice cross-section of stores.

Then in terms of the store closings, if you're opening 10 to 14, I would have thought that you might be closing a little bit more. Is there -- I know it has been maybe two to three, but it seems like this might be a little bit on the low side.

I think we are going to average two or three as we move along. We are not giving out locations. This next wave there is a few Rochester conversions where we are not going to have the number of store closings. And we have a couple tests of smaller boxes where we are not going to have that type of store closing. But long-term as we roll this thing out a good indicator would be normally we would close two to three stores.

Okay, so as we are thinking about next year, when I think you talked about 15 to 20, should we raise that then on the closings?

You should, I think, add about five to that just because of normal attrition with our existing store base.

Okay, that's helpful. Then just finally on the direct, the new websites, is it just fine-tuning? I guess I was expecting that it would be open -- it would be up and running by now. I thought it was supposed to go live like towards the first of the year.

Obviously, all the soldiers are working hard. The site is in place. We are testing. We want to make sure it functions the way it was intended to function.

There is a number of issues that we have been working through with respect to putting all of our businesses together on one site. Sometimes in one business we might call something different than we call it somewhere else in another business. And if you can imagine, all that now has to be synchronized. And so we don't want to take away from the experience that we have intended, and therefore, we've pushed back by a month or two the launch.

Fair enough. All right, Dennis, I will follow up with you on the comps. Thanks so much and best of luck to you guys. Terrific job.

(Operator Instructions). Craig Bernstein.

It is actually Jon Duskin and Craig Bernstein from Macellum. Congrats on the business accelerating.

Just a quick question on the gross margin in the quarter. It sounds like most of the things that caused some of the drag were one-time in nature. Just clarify for me on the closures. It is not related -- is it related to a DXL conversion or was it -- I think you guys might have been closing an outlet store somewhere.

No, it was not -- the closing of a Rochester outlet store has nothing to do with DXL store -- the closing of those stores in those market areas.

Great, great. I suspected that was the issue. I just wasn't 100% clear. Then on the clearance piece, was that just a shift in timing of an event? Were you just trying to get ahead of bringing some fresh merchandise in for Father's Day, and there is just some goods you wanted to get out of it? Why was the clearance piece a little bit disproportionate in the fourth quarter?

I think that -- to clarify, we have been trying to move up and make more frequent the delivery of fashion product into our stores. And so on a monthly basis more and more fashion is hitting the stores, which is a good thing for our business.

But at the same time to not only make room, but also to keep the older merchandise flowing through the store, we have been adding more frequently at the same time clearance inventory. We have a dot system you might know, where we have 25%, 50% and 75% off buckets.

And so as we move new merchandise in, the old merchandise goes into these parts of the store, into these three different buckets. And our customer knows us for this and they shop that. And during the fourth quarter as we began to accelerate the adding of clearance, we sold more than we anticipated.

Now we didn't add more units; we would have added these units along the way anyway. And so over the long term there is no degradation in our margin, it just a timing. So, therefore, that is why we are saying next year we do expect our merchandise margin to continue to improve. We don't expect this occurrence that we had in the fourth quarter to continue into 2011.

Great. I guess it is fair to assume the sell-through rates on the stuff you're flowing more frequently would be better than the other merchandise?

Yes, much better.

Great. Congrats, guys. It sounds like business is off to a good start. God knows this customer hasn't spent in a long time.

I am not showing any further questions at this time.

Thank you very much for joining us. As we said, we are off to the best start we have seen in several years. And we think we've got some momentum going in our favor, and we will continue to perform well. And we are committed to a good year this year, and I think there's a lot of confidence on our part that we're going to deliver.

So thank you all for joining us, and we will look forward to talking to you on the next call.

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