Destination XL Group Inc (DXLG) 2011 Q2 法說會逐字稿

Good day, ladies and gentlemen, and thank you for standing by. Welcome to the Casual Male second-quarter earnings conference. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session, and instructions will be given at that time.

I'd now like to turn the conference over to Jeff Unger. Sir, you may begin.

Thank you, Tammy. Good morning, everyone, and thank you for joining us today for Casual Male Retail Group's second-quarter and fiscal 2011 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'd like to read our forward-looking statements, 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 www.casualmale.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 margins, capital expenditures, earnings per share, store opening and closing, 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 all yours.

Thank you, Jeff. This morning, we announced our earnings for the second quarter of 2011. We delivered a 4.9% comp over last year, which has been our best performance in the last four years. In the first quarter, we had a 2.2% comp, and felt the weather was a factor in suppressing that number; and that did prove to be true, as our comps improved May through July. And with relatively flat store traffic, the real driver for the quarter was the increase in the average transaction.

As in the first quarter, the Southern and West regions continued to outperform the other areas of the country, with the Midwest being the weakest.

One of the factors of the increase in the average transaction has been the impact of our re-ticketing to higher retailers -- retails. During the first half of the year, almost our entire core basic replenishment product was re-ticketed, as a result of the cost increases we are experiencing in our upcoming fall receipts.

We've been closely monitoring the metrics of top-line sales versus unit put-through; and as expected, we have experienced a slight decrease in units sold, with the net result of an increase in gross margin dollars. What we have experienced is pretty much in line with what we had forecasted.

As I have stated before, we have raised retail's prices to be consistent to maintain our initial markup, which was set prior to the turmoil of cotton prices rising so dramatically. And we are pleased to see price quotes for quarter two 2012 starting to come down, and we hope to see additional savings in the back half of the year.

We're now cycling through our first year of the Destination XL launch of our first four locations, and they will all anniversary by next month. With no incremental marketing support for the last three quarters, the four stores' sales have been consistent with no lapse in performance after their grand openings.

Needless to say, we are extremely pleased with the first-year results of the DXL stores. We continue to see the average ticket in a DXL store about 30% higher than in a Casual Male store. And one of the factors has been the introduction of our Rochester brands into markets, where these labels have not been offered before in big and tall sizes.

Brands such as Polo Ralph Lauren, Tommy Bahama, Michael Kors, Robert Graham, and other, better department store labels have resonated strongly with our customer base. And we are excited to announce the exclusive launch in big and tall sizes of three new brands for fall -- being Lacoste, [Basanab], and DKNY Jeans. The DXL stores are also delivering a four-wall profitability of 30%, compared to a Casual Male store at an average of 20%.

As we collapse the Casual Male store base to support a bigger DXL store, we gain operating efficiencies in rent and labor. And we also continue to experience an increase in sales penetration in these markets of 20%. And it's also important to note that we are seeing our size curve move to the left, where we have historically been challenged in getting the 42-inch to 46-inch waist customer in the Casual Male store.

Destination XL doesn't have the stigma of the Casual Male nameplate; and especially with the cachet of desirable brands, we are making headway into the smaller-size end of the rack customer base.

Because we needed several months to monitor the performance of the first DXL stores, we green-lighted the expansion at the end of 2010. We were able to get 15 to 16 deals done for this year, but most of them are opening in the latter part of the year. For 2012, we have planned a much more balanced opening schedule. And right now, we are looking to open 25 to 30 DXL stores next year, which will give us a total in the range of 50 locations by the end of 2012, with most major markets getting at least one store.

Of the four stores we have opened so far this year, it's important to note that two of the store footprints are around 6,000 square feet. These locations have been able to maintain the DNA of a Destination XL in almost half the size of the original four stores.

We have been able to retool the floor design to increase unit capacity in a smaller box; and if successful, it will allow us to expand the Destination XL concept into smaller metro markets, which would raise the number of potential stores beyond the 75 to 100 stores we have targeted up till now.

We are also looking forward to the DXL website, which we expect to launch this quarter. With enhanced features for ease of shopping and wardrobing capabilities, the one-stop shop experience will be similar to what our customers experience in the DXL stores. Having the ability to shop all the products available from our Casual Male, Rochester, B&T Factory Direct, ShoesXL, and LivingXL should result in an increase in the average transaction.

And finally, there's been quite a lot of press about how the instability in the financial markets has impacted retail. We have not seen anything similar as to what had happened to our business during the last recession. There's been a slight decrease in traffic, yet we are still trending with positive comps. And we continue to believe our business will remain strong throughout the back half of the year.

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

Good morning. Thank you for joining the second-quarter update. After my brief remarks on the Company's earnings performance for the quarter and certain other updates, we'll finish the call with a Q&A session, giving you all an opportunity to ask any and all questions you may have.

Here is a snapshot of the Company's second quarter, the Company performed according to our expectations, with the comparable sales increase at 4.9%, operating income increased by 18%, and earnings per share were $0.14 compared to last year's $0.12. Further, for the six months of this year so far, comparable sales increased 3.5%, operating income has increased 12%, and earnings per share rose to $0.22 from $0.21 a year ago.

To reiterate what David stated, the XL stores continue to improve upon its market sales by approximately 20%, with all stores showing improvement. Our plans to further expand DXL concept continue with the opening of four stores so far this year, bringing to eight stores currently operating today. In the next three months we plan to open the balance of our plan for 2011, with 11 to 12 DXL stores, closing the year with 19 to 20 DXL stores.

Again, as David said, we're working towards having 50 by the end of 2012, and a DXL store represented in most of our major metropolitan areas throughout the country.

The DXL multichannel experience will be complete once the DXL website launches, which we expect will be during this quarter. The launch has been delayed pending certain technical issues, which are close to resolution. We are approaching this launch very cautiously, so as to deliver the type of DXL experience we envision.

Finally, we are expecting sales for 2011 to approximate the $405 million, $410 million, which is a 4%, 4.5% comparable sales increase for the year. With operating income at approximately 6% of sales and earnings per share between $0.40 to $0.45. The Company's operating margin, which has been at approximately 2% in 2009 and 4% in 2010, as I said, is expected to exceed 6% in 2011, based on our earnings guidance for the year.

Here is some further color on the Company's second-quarter and six months' performance to date, starting with sales, which were -- which increased 3.8% to $100.9 million, compared to $97.3 million, with comparable sales increase of 4.9%.

On a comparable basis, sales from our direct businesses increased by 4.1%, and sales from our retail business increased by 5.0%. As planned, during the first quarter of 2011, we started increased prices within certain merchandise categories during the second quarter of this year. Our average unit retail increased approximately 6.5% over the prior-year second quarter.

For the first six months of this year, sales increased by 2.3% to $196.7 million, as compared to $192.2 million for the six months of last year, with comparable sales increase of 3.5%. The increase in our direct business was 4.4%, while our retail business showed an increase of 3.4%.

Overall, we continue to experience improvement in the dollars spent per transaction and average retail metrics, which have contributed to mitigating the lower traffic flow. Sales productivity improved by approximately 6% in the second quarter and approximately 5% so far this year.

A portion of these increases are attributable to our sales associate development and training for an enhanced customer experience in addressing our customers' entire wardrobing needs; and also from the continued raising of retail prices of our product assortments during the second quarter which, as David said, has had little impact on our unit demand so far. As expected, the consumer spending has started to improve, albeit slowly. Each quarter we experience gradual improvements in our store metrics, as overall sales productivity continues to increase.

Although we do not expect traffic levels to return to prerecession levels this year, we are planning for continued increases in our dollars per transaction customer conversion, not only as a result of price increases on merchandise product, but also continued improvement in our sales productivity. As such, we are expecting overall volumes, as I said, to increase by approximately 3% to 4% over last year, with total sales to be between $405 million and $410 million, which represents a 4% to 4.5% comp.

On gross margin, in the second quarter, our rate, inclusive of occupancy cost, was 48.3%, as compared to a gross margin rate of 46.4% for the second quarter last year. The increase of 190 basis points was the result of increased merchandise margins. For the second quarter of this year, up 95 basis points, plus an increase of another 95 basis points in occupancy costs, primarily the result of leveraging our occupancy cost against higher sales.

Our merchandise margin continues to benefit from our improved inventory management and managed markdowns. On a dollar basis, occupancy costs for the second quarter of 2011 decreased 2.6%, when compared to the second quarter of last year.

For the six months, our gross margin rate, inclusive of occupancy cost, was 47.7%, as compared to an overall gross margin rate of 46.1% last year. The increase of 160 basis points was the result of increased merchandise margins of 100 basis points, plus an increase of 60 basis points in occupancy costs as a result of leverage.

On the dollar basis occupancy cost for the year so far decreased 1.5% when compared to last year. Overall, for 2011, we are expecting our occupancy costs on a dollar-for-dollar basis will remain flat to last year. As a result, we expect to leverage occupancy costs by approximately between 30 to 50 basis points in this year. So far, we have successfully managed cost increases in the Company's merchandise.

We are expecting some more modest increases entering the spring season, but then expect the cost increases to ebb, perhaps even decrease slightly. Therefore, we are planning on continued improvement of 70 to 100 basis points in merchandise margins. Accordingly, overall, our gross margin is expected to improve by 100 to 150 basis points, compared to a year ago.

Our SG&A for the second quarter was 38.8% of sales, as compared to 36.4% last -- the second quarter, last year's second quarter. On a dollar basis, SG&A increased $2.9 million, or 8.3%, compared to last year's second quarter.

This increase is primarily related due to payroll-related expenses, such as modest salary increases, bonus accruals, severance payments, reinstatement of 401k employer match, as well as increased staffing in our global sourcing and merchandise areas to support our growth plans. For the first six months, SG&A was 38.4% of sales, as compared to 37% last year. On a dollar basis, SG&A increased $4.4 million, or 6.1%.

The first six months of '11 include an increase in bonus accrual of approximately $1.9 million over the prior year, or a difference of approximately $0.04 per share. For last year, the bonus was not accrued until the third quarter, when achievement of the bonus became probable. This shift of expense contributed to our 6.1% increase for the first six months so far this year. This increase in SG&A will adjust itself during the second half of 2011, resulting in our SG&A expenses being in line with our overall annual forecast for the full year.

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

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

At July, we have $18.3 million in cash, no outstanding debt, and full availability under our credit facility of approximately $64 million. We expect our cash balances to further increase to $22.5 million to $25 million by the end of this year, with expected cash flow after capital expenditures approximating $20 million, to between $17.5 million and $20 million in free cash flow.

Through the first six months, the Company's free cash flow increased to $13.6 million from $9 million last year. Also, at the end of the quarter, our inventory was $95 million compared to $92.9 million at the end of last year, and $94.2 million a year ago at the end of the second quarter.

Looking ahead, we anticipate that the Company's internally generated cash flow from operations will be sufficient to fund the Company's growth strategy of expanding upon its DXL concept.

At the end of the quarter, the Company had 458 stores, which is down by 2.8% from a year ago, occupying 1.76 million square feet, down by 1.2% from a year ago. As we stated, we anticipate the Company store count to drop to 450 at the end of 2011 and to 435 stores at the end of 2012, with little or no drop in occupying square foot -- feet.

Thank you, and now David and I will entertain any questions that you have.

(Operator Instructions)

Richard Jaffe.

Thanks very much, guys, and well done. A couple of details or follow-ons. As you expand DXL in 2012, can you address the flip side -- that the store closing schedule of the Casual Male XL stores, and how that would break out?

Well, we're expecting, as we said, to open 25 to 30 store -- DXL stores, Richard. At the same time, we'll be closing between 40 to 45 Casual Male and/or Rochester stores. So, that's why the store count drops by about that 15 or so number of stores.

Right. And how many Rochester stores are left -- freestanding Rochester stores?

There are 14 operating today.

And you might close two to four of those next year?

I'd say about two next year -- two to three next year, Richard.

Okay. And could you -- I don't know if you want to quantify the increase in retail or average unit retail, since the -- as you anticipate that the product cost inflation -- but it would be interesting to know how much retail price is offsetting the weaker traffic. If you could help us.

Yes, there's two dynamics going on. One, of course, is the increase in prices; but also, our sales productivity gains produced by our store associates. But together, our traffic was down about one point in the second quarter, our comps were up almost 5%; and so, we're outdistancing the traffic flow by that much.

Sure. And productivity being more units and dollars per transaction?

More -- primarily more dollars per transaction. A richer sale.

Right.

As opposed to units, at this point. Although we are expecting working towards goaling additional units per transaction, going forward.

Yes, the -- and as we move more to DXL stores, the unit transaction in the DXL stores is higher than the Casual Male.

Right. And now, the opportunity is to put another unit into that bag, and take it even higher?

Exactly.

Got it. I think that's it for me. Thank you very much.

Liz Pierce.

Congratulations, guys.

Thank you.

Nice job. I actually have got quite a few questions. But I wanted to start out with your -- and I'm not going to use the word competition, because I'm not sure that I would describe them accurately. But I'd seen some of The Foundry stores in the Dallas market, and I recognize that they've only been open a few months. I've been tracking their e-mails, it seems like they've been somewhat more promotional than I had expected.

I wonder if you could comment on -- I don't know how much overlap there is in the two markets -- I think it's Kansas City and Dallas that they're in. But any thoughts that you have, as you think about perhaps also your smaller market stores? We'll start with that one.

Yes, okay. Just to give some background on that, they opened up four stores in Kansas City and six stores in Dallas, where we have three in Kansas City and eight in the Dallas market. If you look at it by a square-footage basis, they almost double our square-footage basis in these two markets.

They've been open for pretty much the entire second quarter. And even with a strong marketing blitz, where they had radio and newspaper ads and billboards, the facts are, these 10 stores have had no impact on our sales. And in fact, the comps in both of these markets were consistent with the comps in the chain.

So, from what we are seeing is, they've not been successful at getting our customer base, and that's with the existing Casual Male stores we have today. Come -- by the end of this year, we're going to have two DXL stores in that market, plus a third one coming in the first quarter of next year.

And if it shows what we are expecting, our market share is going to even grow greater once we have DXL stores in these markets, as compared to our Casual Male market. So, again, we anticipated some drop in sales with all the -- with that type of competition and marketing and off-price promotion, but no impact on our business.

The stores that you are planning to open in Dallas, are they going to be -- I presume they are going to be the larger-size stores?

We won't comment on that at this time, until we open them.

Okay. All right. And then, from the four stores -- the 2010 class of stores, it sounds from your earlier comments that you haven't -- no incremental marketing, you haven't seen any fall-off in the pace of their sales. But what else have you learned about -- in terms of brand preference, pricing, shopping, anything else that is coloring how you look at the rollout of additional stores?

Right. I think the two factors that we're seeing shifts in, that we didn't see upon the opening, is -- one, is what I mentioned before in the size curve of what we are selling. In the last six months, we are seeing that move to the smaller-waisted guy, the end-of-the-rack guy, as we call him.

And we believe that's more -- mostly a function of word of mouth, because we haven't really been having any marketing for that customer. I think the word is certainly getting out.

I think the other shift we're seeing is the continued increase of what I would call the better brands, as a percent to the total -- better and best brands. That number continues to increase from a year ago. And I think, again, that's the awareness that we have a lot of brands, a lot of exclusive brands, like Polo and Tommy Bahama and countless other brands, where the word is getting out that these size -- that these brands are available in the -- in our sizes. And having a slow-growing impact as that percent of the business continues to grow in each of the four stores that are anniversarying right now.

So, David, that's interesting, in the sense that those are obviously higher-priced, higher-ticketed items, and just given all the macro pressures. Are you still feeling like some of that pent-up demand is still kicking in? Chain-wide, not necessarily to DXL?

I think so, because, again, our comps have -- continue to improve. Not any great leaps in any quarter, but we're just moving along and those comps continue to get better. And again, this was the best comp we've had in four years. And hopefully, that trend is going to continue on. I think there is certainly some pent-up demand that we are recapturing, from what we lost the last two years.

So, lost that $60 million, that I think that you've spoken to before?

Right.

Correct.

Okay. And in terms of --.

They're --.

I'm sorry --.

Liz, just to add a couple of other things we've learned in DXL -- and that is, there's not any one part of the store that's not being shopped, which suggests to us that we are attracting a very, very wide demographic customer, that really our customer base represents. So, all age groups, all demographics are coming into that store and shopping all parts of the store, which is exactly what we want to see. So, we're very pleased with that. And we've also learned that each market, of course, has its own identity; and we have to continue to be thoughtful about what components of our different assortments belong in each store.

In terms of the store openings, the 11 to 12 that you plan for the four months, five months left -- or four months, four and a half months, any possibility that some of those could slip? Or are you pretty confident you will get them all open by year end?

Well, it's coming late. Some of those are actually going to happen in January, which will have a different inventory assortment than the ones that are going to open in October. But they are spread out pretty equally each month; and again, next year we won't have them as clustered together, because we've had a lot more time to prepare.

And I -- that was my next question, David. Have you signed all those leases for next year?

No, we haven't signed all of them.

Not yet?

We've signed all of the ones we are opening Q1, and probably half in Q2.

Okay.

But it's on track.

Okay.

To sign leases at more than -- that kind of lead time.

Great. And then, just one final question, if I could -- on the price increases, have you now raised prices on everything that you plan to raise? I couldn't quite tell from your comments. It sounded like it was just the core, and I'm not sure if there was more to come.

Well, we're pretty much closed in on all our existing programs. Of course, the new product coming in, the seasonal product, the fashion product, that just gets repriced, as it -- that's ticketed as it comes in. But we have to actually go back and re-ticket existing inventory on all our ongoing programs.

Right. And I think you had said that you expected to be done with that by August. So, I just wanted to --.

Oh, okay.

Actually, it's moved out to October -- we're probably, right now, Liz, about 75% complete, at the end of the second quarter.

Okay. Is that just -- it's just a lot of SKUs to go through?

Yes.

Okay. I can get back in line. Thanks, and best of luck.

(Operator Instructions)

Richard Jaffe.

Just a quick follow-up. As you launch the DXL website, will you -- well, I guess, electronically, at least, close the Casual Male XL site and forward everybody to the DXL site?

Not close it, per se, Richard. Fold it in.

Yes. So, there won't be two duplicate CRMG e-commerce sites; it'll all -- ended up being part of the Casual Male business?

What you will see during the third quarter -- so, you won't be surprised -- what you will officially see is a separate DXL website.

Okay.

Alongside with all of our existing websites. Then, several weeks later, you'll see the existing websites fold into DXL, such that if you went in the Casual Male XL website, at the second stage, you'll land into the DXL website.

Right.

And then, our customer will have a choice as to how he or she wants to shop.

Makes sense. And the -- as the e-commerce business grows, does that become a part of the comp store sales report? Or we (technical difficulty) those separate --?

Yes, we've been including our direct business results in our comps since 2004. We were one of the early adopters.

Yes. As -- will you provide us some -- at least some color on the DXL contribution to e-commerce? That switch?

I always comment on our direct business results, Richard.

Okay. Great, just wanted to make sure. Thanks very much.

Liz Pierce.

So, Dennis, I did want to clarify, on the 5% that you -- comp sale, is that direct -- includes direct, as well?

Oh, yes.

Okay, I just wanted to clarify. And then, Richard kind of touched on this a little bit -- on the European operations, I just wanted any commentary on what you are seeing on your international online?

International. Our Europe websites. Work in progress. Slowly progressing, but moving forward. Not a significant part of our business, not a primary focus.

Okay. All right. And you still have the, what -- a couple stores, one in London, right?

We have one in London, yes.

Okay, that's it. Thank you.

(Operator Instructions)

Please, gentlemen, I am showing no further questions in the queue. I'd like to turn it back over to you for any closing remarks.

Okay, thank you all for joining us on this call. And we're excited about the upcoming quarters, and we will talk to you soon. Thank you very much.

Ladies and gentlemen, this does conclude the conference. You may all disconnect at this time. Everyone have a great day.