Destination XL Group Inc (DXLG) 2011 Q1 法說會逐字稿

Good day ladies and gentlemen and welcome to your Casual Male Retail First Quarter 2011 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 and thanks everybody for joining us today for Casual Male Retail Group's First Quarter and Fiscal 2011 Earnings. On our call today will be 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 (technical difficulty) statement 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 at our website at CasualMaleXL.com for an explanation and reconciliation of such measures.

Today's discussion also contains certain forward-looking statements concerning the Company's operation, performance and financial conditions including sales, expenses, gross margin, CapEx, earnings per share, store openings and closings, and other such matters. Such forward-looking statements are subject to various risks and uncertainties that could cause actual results to differ materially from the assumptions mentioned today due to a variety of factors that affect the Company. Information regarding risk and uncertainty are detailed in the Company's filings with the Securities and Exchange Commission.

David, it's all yours.

Thank you Jeff. This morning we announced our results for the first quarter of 2011. Our comp sales for the quarter were up 2.2%, which gives us positive comps for the last four quarters.

We did see within that comp number variances by region of the country where weather impacted our spring selling. The Southern and West regions, where whether was quite favorable, exceeded our expectations while the Midwest and Northeast underperformed in our seasonal categories. As we are geographically weighted to the northern parts of the country, it bodes well that our spring assortments will perform well as the weather becomes warmer and drier in those markets.

So far in the month of May we have seen the positive impact of pent-up demand in our northern stores, and we're still maintaining a forecast of a 4% to 4.5% increase in comparable sales for 2011.

Our traffic for the quarter was slightly down, but comp sales increased due to a higher conversion rate and more dollars spent per customer transaction. In terms of categories, our jeans and casual bottoms in addition to our active business have been the strongest performers.

Also we're encouraged [at] the improvement we are experiencing in the men's suit and sport coat business in both Casual Male and Rochester. The weaker categories were short sleeved tops and shorts, which underscores the impact of the cooler weather.

We now have three quarters of sales under our belt with our Destination XL concept and in 2011 it continues to demonstrate success. The DXL stores are about three times the size of a typical Casual Male store with over three times the selection of product. We're extremely pleased how the four DXL stores have performed. They've been consistent month-to-month with the metrics that we measure for success, and their business continues to gain momentum as more Big & Tall consumers become familiar with these stores.

Our primary objectives are being met and exceeded. First, the average transaction size is over 30% greater in a DXL store compared to a Casual Male XL store. Second, the DXL stores are pulling in customers from a greater distance. This has allowed us to collapse smaller volume stores in outlying markets and have bigger volume stores with four-wall profitability of 30% compared to an average of 20% in our Casual Male stores. The higher sales per square foot are driving our operating efficiencies.

Third, we're now seeing positive trends and attracting more of the 42 inch to 46 inch waist customer, who we also refer to as the end of the rack guy, who is not shopping Casual Male because of the Big & Tall stigma associated with our stores. Finally, we're getting more of the wallet of the Big & Tall market in these trade areas. On an annualized basis, the four DXL stores should exceed the sales of the previous 12 locations by 20% this year.

Based on the performance of these stores, not to mention the continued success of the five hybrid stores we converted prior to the DXL launch, we're accelerating the rollout of Destination XL. We now plan on opening 14 to 15 stores this year, which is an increase from the previously discussed 10 to 14 stores, which was already an increase over the four to five stores planned only six months ago. And for 2012 we're now targeting to open between 20 to 30 stores compared to the previously announced 15 to 20 stores.

With the continued rollout through 2015, DXL will evolve into a larger component of the overall see CMRG business and drive growth in the coming years.

We're also excited about the second quarter launch of our Destination XL website. We will be duplicating the shopping experience of our Destination XL stores online. Rather than shop the individual brands of Casual Male XL, Rochester, B&T Factory Direct, ShoesXL or LivingXL, our customers will be able to shop all that we have to offer in one shopping experience.

With the expanded assortments, we anticipate our average transaction will increase as it has in the DXL store environment. On the next call we will highlight some of the features of the site that really takes us to another level when it comes to presentation and customer satisfaction.

CMRG has always been ahead of the curve when it comes to multichannel shopping. Today, our catalog Internet represents 20% of our total sales. With a base of 468 stores, that is an impressive number. And our goal is to grow that business to 30% of our total sales and the new website will be a catalyst to get there.

In the first quarter we launched 15 store-within-stores with the Bon-Ton department store chain. And I would like to comment that the management team at Bon-Ton has been tremendous to work with. Both parties are committed to ensure that we give this test every opportunity to be successful. We will be evaluating this test over the next several quarters and determine if it is a viable growth vehicle for us.

Finally, the topic of the price increases we're facing in our product for the back half of the year is top of mind for everyone. We began raising pricing in the first quarter and we will continue re-pricing through August.

It is important to note that 50% of our inventory is core basic replenishment, so will literally have to re-ticket millions of units in our DC and stores. We have now executed approximately 45% of our planned price increases and the analysis of the impact has not changed our sales outlook for the year. As far as 2011 is concerned we were able to maintain our initial markup goal by increasing retail.

Looking ahead into 2012, it is still premature to know where the pricing will actually land concerning considering the current volatility in the cotton prices. But we're working diligently to minimize any more pressure on our initial markups.

And now, Dennis will go over the financial performances for the first quarter.

Thank you David and good morning all. We are glad you were able to join us on the First Quarter Earnings Call. I will keep my first quarter remarks brief so we can quickly get to any questions you all may have.

Overall the Company's first quarter went very well. The Company's comparable sales increased by 2.2%. Its gross margin improved by 100 basis points, resulting in a 3% increase in gross profit. And its 4.2% SG&A increase was within our plan, all resulting in a 4% increase in operating income.

In the earnings release we commented on the adverse weather conditions in the Midwest and Northeast regions of our chain, only because we ordinarily do not experience such variations over a full quarter. And we believe with more normal patterns the Company sales would've improved to over 3.5% for the quarter. However, we have not seen these regional sales variations continue into the second quarter and therefore, with all other components of our business on track, we are reaffirming our full year 2011 earnings guidance of between $0.40 to $0.45 earnings per share.

Likewise, we have not made any changes to our previously disclosed expectations for sales levels, gross margins or SG&A levels for 2011.

Also during the first quarter we closely monitored the performance of our four DXL stores. And we continue to be pleased with their sales performance, profitability and the extremely positive customer responses.

In aggregate the DXL store sales continue to exceed our plans and improve upon last year's sales in the market. Consequently we continue to evaluate each market and locate DXL sites in these markets. As David stated, we are finalizing our plans to open between 35 and 45 DXL stores over the next 18 months.

After we complete the opening of these up to 45 DXL stores we have planned over the next 18 months, there will be at least one DXL store in most major markets throughout the country. We will continue to monitor the performance of our existing and soon to be open DXL stores, and continue to evaluate the DXL potential in all remaining markets.

Adding further to David's comments, the future DXL stores to be open will be better supported with our soon to be launched DXL website providing a multichannel solution for DXL, and giving our customers everywhere the same convenient one-stop shopping experience they find in our DXL stores.

Other notable items for the first quarter include -- as we said, comparable store sales increased by 2.2% for the quarter. The retail channel went up by 1.7% and the direct channel grew by 4.7%. The increase in the retail channel is based primarily on improved sales productivity and dollars per transaction, while traffic declined by approximately 1.5%. The direct channel increase was based mostly on improved conversion.

As we stated the traffic trends and resulting sales performance was very different between regions. In the West and South our retail channel traffic was virtually flat, while in the weather-tormented Midwest and Northeast regions traffic was down 2.5%, significantly impacting the Company's overall sales and earnings performance in the first quarter as I stated earlier. We're happy to report that these trends have not continued into the second quarter.

As David stated, although we have completed approximately 45% of our planned price changes in the first quarter, the sales average unit retail for the quarter only rose just over 1%. As I said, the sales growth in the retail channel was driven mainly by sales productivity gains and improved quality of sale being delivered at the store level.

SG&A expenses increased by $1.5 million as we had planned it. The 4.2% rise was largely due to added headcount in our global sourcing and clothing merchandise areas of the business. The reinstatement of the 401(k) match that was suspended in 2009 and the accrual of an appropriate payout of management bonuses based on the level of earnings performance for the first quarter.

Historically, management performances have not been accrued until the second half of the year due to the uncertainties of the Company's earnings trends in the past.

Inventory levels are within our planned range, dropping by over 1% from last year's first quarter end. The Company has almost $70 million of available liquidity under its unused revolver facility.

At the end of the quarter the Company had 459 stores open with 1.75 million square feet after closing one Casual Male XL store during the quarter. And we expect to end the physical 2011 year with approximately 455 stores after the opening of 14 to 15 DXL stores and the closing of approximately 19 to 20 stores.

Lastly, as a reminder to the investment community, later this year we expect to reverse the deferred tax net asset valuation allowance, currently valued at $49 million and reflect a net gain of almost $0.85 per share. The Company's tax expense in subsequent periods is expected to be accrued at an approximate 40% effective tax rate.

This concludes my remarks on the Company's first quarter. David and I will now be happy to entertain any and all questions you may have.

(Operator Instructions) Tom Filandro.

Three quick questions if I can. Can you guys give us a better understanding specifically on the re-pricing, on what impact that will have on ticketed prices for the first half and the second half?

My second question is related to the DXL site. Can you tell us the timing in which you plan on marketing the site? And I know, David, you said we have to wait until the next quarter release, but maybe you could give us a nugget or two on the enhancement.

And my final comment, not to put you guys on the spot, but I know there's a new competitor out there in some select markets. Can you comment on the early stage performance of your stores in that market and maybe give us a handle on what differentiates your stores from that new competitor? Thank you.

The -- in order, Tom, the price increases and the impact on our business first half/second half, the price changes are continuing to be completed, most of which through the first half; a little bit more in the short (technical difficulty) month of August.

In terms of what impact we're expecting on our business, we plan a slightly higher comp sales in the second half versus the first half largely due to these price increases. We do expect to give up some units, but overall the topline, we're expecting it to be positive.

Dennis, can you give us more specifics on -- are prices up 1% to 2% in the first half, up 5% in the second half, just the general view?

Our prices in general overall are up about 5% in the first quarter. And they expect to continue that way -- 5% to 10% really throughout the year. Our inventory average unit retail is expected to be higher by that rate.

Thank you.

The DXL sites, when we expect all of these to happen and the marketing subsequent as these do happen, we're going to start seeing DXL's openings in the July, August and then September and October. So July will be the first month where we will see new DXL stores. And each market will then enjoy the marketing launch of those stores at the same time.

I'm sorry Dennis. I was asking more specifically about the website. I apologize. I wanted to know when you will begin to market the website.

Well, if you were wondering about the stores I answered that for you.

Thank you so much.

The website, we're weeks away from launching the initial DXL website. That will be in effect, as they call it in retail, a soft opening. The true DXL launch and the marketing of it will occur in about the early to mid-quarter 3 time period when all of our websites get amalgamated under the DXL flag at about that time, as I said, in quarter three.

And the third question about new entries, we're really excited about what we have going on with DXL. These DXL stores have more choices than really anywhere in the world. Between our private label lifestyle brands and the extensive list of the great brands we have in the Big & Tall sector.

By the way, we're really excited. We have three new exclusive launches for our Company starting in the third quarter being Lacoste, which we have been hoping to have that for several years; [fossil knob] and DKNY Jeans. So we're really excited about that.

Now as you can see by what we've been talking about in our focus, right now we want to get these stores open. The sooner we get them open, the more impact it's going to have. And then once we get past 2012, if all things are going according to plan, we can really get that store count even accelerated from what we've been talking about up until this point.

Thank you gentlemen. Best of luck.

Liz Pierce.

Good morning everyone. Congratulations. In terms of the DXL doors, because you are accelerating next year the number of openings, does that mean that you're going to have to pay to get out of some of the leases? Maybe they are coming up. You will need to close them before the lease expiration?

No, not so much Liz. To the extent that we open a DXL store and close a related or unrelated Casual Male store, we might be four months or six months until the end of the term. It is not terribly significant.

Perhaps if we accelerate beyond this point, we might have some of what you were thinking about. But based on the store count that we have described this morning, that is not going to have any material impact on lease expiration costs.

The other thing look like to add is, you have to realize we've been on this project for two years even though the store has been open for only one year. So considering almost all our leases are five-year terms, in the last few years we have definitely been trying to ratchet down the terms on any extensions we had and renewals. So we've been aggressive about it and the outlook on any write-offs is minimal.

Okay, that is helpful. And then in terms of the DXL door openings, Dennis, you had said July, August, September, October. Can you narrow that down for us, because it does seem like it would be quite a few stores, if I'm thinking about this correctly in the August -- excuse me, the third quarter timeframe?

I will give you ranges because all of this is subject to permitting and construction issues. And I'm reciting all of the things our real estate people remind us of every day.

That's fair.

July it's two to three stores. August is another three stores, September is three, October three to four and a couple might straggle then into November.

Okay. (multiple speakers) Presumed that leases are signed and you have already started the buildout for the vast majority of these --

Yes.

Are you willing to disclose what city?

No.

No.

(Laughter)

Was that clear?

(Laughter) Apparently, quite clear. So as you're thinking about the future of DXL, particularly with the acceleration next year -- I will put it out to anybody who wants to answer it. Are there more cities that it could go into than you originally thought, like cities where you don't even have a Casual Male? And perhaps -- particularly as you -- I think the press release mentioned the size of the stores could be 6000 square foot range. And do you think that are there certain cities, obviously the bigger cities, where you can see multiple DXL stores in?

Yes, that's exactly right. Where we announced on this press release 6000 to 12,000 square feet we are looking at some smaller markets where there is only -- we only have one or two Casual Males and we think we can economically maximize that business in 6000 square feet, we really don't need the 12,000 square feet. So there's a lot of ranges going on.

Those stores will be reviewed as the potential of them. If, in fact, we are right that the 6000 sq. ft. box works in secondary markets where we originally said that DXL was 75 to 100 stores, that number could go up dramatically. So we're going to be watching those smaller stores rather closely.

That's what I figured that would add.

Yes. That will add significantly to the potential rollout of how many DXLs we can have.

Okay. And David, given that the four stores that you have open now, I've seen three of the four are somewhat different venues. I can't really speak to the Memphis store. Is there anything that stands out that you didn't expect, positive or negative, in terms of how you are thinking about the business?

I think the thing that has surprised me the most is -- well, I don't know if it's somewhat like the restaurant business where you get this big jump in sales and over time it starts to level out. But in these cases, we have not spent a penny of marketing these locations since November and the momentum continues to be strong as the day we opened.

That is what excites me the most, is that it's got to be a lot of word of mouth. These customers have to be telling their friends, because all four of them are just doing very well. And we haven't had a bad week since we opened these stores.

And in terms of the Bon-Ton arrangement, I realize it's early. But do you think, when you say are penetrating the 42 to the 46, I think you made that reference to the DXL stores versus the Bon-Ton right?

Yes, yes. I think that was the nugget of excitement that we are showing, too. As you know, we have been working very hard to try and get that 42 to 46 inch customer in our store. We're seeing a significant move over the last several months. The percent of sales coming out of those sizes has been growing and we're really excited about that opportunity.

Is that DXL chain-wide?

No, that's the [four] -- it is not chain-wide. It's DXL.

Okay, and then do you think at Bon-Ton are you reaching a new customer, the female side of the equation perhaps?

We haven't really dug in on the analysis of customers yet. Maybe we will have a little bit more color on that in the next call.

Okay. Fair enough. Best of luck, great job guys.

Gary Giblen.

I have a question on the conversion rate. It's good to hear that it has increased. I guess for David, to what extent is that due to your ongoing initiatives versus maybe a byproduct of the weather, where the customers that did soldier on through the adverse weather came to buy rather than browse?

I really think it's a function of our educating and working with our -- store people to really begin wardrobing our customers more than just -- more than the customers just buying what they want. This has been a three-year project. We have had increases in conversion now for probably 10 or 12 quarters where conversion has always been going up.

We still see a lot of potential there, too, because we're not done with this project. But most of the reason for the conversion is coming from the store side of it.

Okay, that is helpful. And my other question is -- are you seeing diverse results in more affluent versus less affluent market?

No, I don't think we're seeing that. I would say we do have the ability if we have two different brands between Casual Male and Rochester. And we're seeing a little more accelerated topline performance in Rochester recently, which seems to be consistent from what you're hearing from the more upscale department store chains.

Okay, great. Well, good luck with the new quarter.

Richard Jaffe.

Thanks very much guys. Just if you could talk about average unit retail. About half of your product has been increased in price or had its tickets changed with the balance following the next couple of quarters. And I'm wondering why that's not showing up in average unit retail.

Is it just a question of timing that it -- the ticketing wasn't done at the start of the quarter, it was just completed in this quarter? Or is it that that product that was re-ticketed is the [go forward with] T-shirts and shorts and that is the less appealing category right now?

Yes, good question Richard. Yes, I think partly it is timing when the changes took place during the quarter.

But looking ahead, we should assume -- you said the end of the second quarter all of the tickets will be re-priced. And everything else being equal we should see that 5% to 10% increase in average unit retail.

Yes, we should. That's exactly what I'm saying, yes. The average unit retail in quarters two, three and then obviously for would be much more impactful than what we saw in quarter one. I wanted to get that out there so that you can see that it didn't have much impact on quarter one so far.

One more question on the same subject. As you look at your inventory plans, presumably you're buying the inventory dollars on a year-over-year basis. But if everything costs let's say 10% more, will you actually have fewer units in the stores? Or are you trying to adjust that on a product by product basis?

I don't think there is fewer units in the stores. I think that the flow into the stores are fewer units, reflecting perhaps the expected change in unit sales velocities as a result of the price changes.

Right. And the dollar inventories at the end of each quarter, how should we think about changes in that, increases -- (multiple speakers)

They will be up slightly reflecting the overall impact. The units will be down, but the prices are up. And I think overall there will be a couple [0.2, 3 percentage] increase, all else being equal in the inventory levels.

Got it. Thanks very much.

Bob Sullivan.

Good morning. Nice quarter gentlemen. Could you kind of walk us through maybe in the quarter, the monthly comps?

And then I'm trying to get a handle on the characterization, if you could, on April. And how, given the weather-tormented -- and I love that line. I'm going to use that and not give you any credit for it. (laughter) But the weather tormented -- sort of coming out of March into April, if you could maybe characterize how those weekly store sales were going and then into May. I'm just trying to get a sense for the acceleration out of that lousy weather and then maybe sort of into the spring/summer kind of selling season for you guys.

If you go back to our last conference call, at the time we said our comps were up 4%. And that was in mid-March I believe. And then from second week in March through the first few weeks in April, the weather really turned on us in a lot of these markets and drove the comp down.

We don't do week by week, but March was a bad month in the quarter for us. We're not a big Easter driven retailer, so it was more a weather for us than a shift of Easter.

And in May, like we said, the pent-up demand that we have seen, whenever we have seen decent weather, has been there. And in our business comps swing dramatically. [If we got] a good day in the Chicago region last week, we could comp up 50% to 80% in one day.

Okay, that's great. Thank you. I appreciate that color.

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

Okay, thank you all for joining us on the call and we look forward to you for the next quarter results. Thank you.

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