Destination XL Group Inc (DXLG) 2011 Q3 法說會逐字稿

Good day, everyone, and welcome to the Casual Male's third-quarter fiscal 2011 earnings conference call. At this time, I would like to turn the conference over to Mr. Jeff Unger. Please go ahead sir.

Thank you Lisa. Good morning, everyone, and thank you for joining us today for Casual Male Retail Group's third-quarter fiscal 2011 earnings.

On our call today is Dennis Hernreich, our Executive Vice President, Chief Operating Officer, Chief Financial Officer, and David Levin, our President and CEO. I'd like to read our forward-looking statement and then introduce David.

Thank you Jeff. Today, we announced our earnings for the third quarter of 2011. We had a 0.7% comp the quarter. While that being seven consecutive quarters now of comp sales increases, it was disappointing since we were coming off a quarter two comp of 4.9%. We saw the traffic started to downtrend slightly in August, but the month of October was when we felt it the most. In our October, comp sales were down 1.7%. Weather has always had a significant impact on our traffic patterns, and we've experienced considerable warmer weather up until this point in the fall season. But while we're hopeful our traffic will improve in the latter half of November and December, we're taking down our sales forecast for the fourth quarter as a cautionary procedure. We're now assuming our comp sales for Q4 to be up low single digits. Dennis will review the retail metrics in further detail later.

But we've already made our adjustments to our inventory based on the reduced sales forecast and will enter spring 2012 in good shape. We don't anticipate any jeopardy to our gross margins going into next year.

While our business has slowed down from our trend, we are extremely pleased that the Destination XL stores continue to deliver solid results. Now that we have anniversaried the opening of the four initial stores, we're pleased that the group as a whole has delivered positive comps post their grand opening events. We now have opened ten DXL stores this year, including two new stores that open today in the Denver market. We have two more to open by the end of the year, which will bring the total to 16 existing DXL stores.

We continue to be impressed with the results we're seeing with the new concept and we continue to accelerate the projected store openings for 2012. We have been diligently working on site selections for next year and have identified some great locations for the DXL concept. We now anticipate opening 35 to 40 new stores next year in contrast to the 25 to 30 that was discussed on the last quarterly call.

We have learned a lot in the past as far as how to maximize the potential of the Destination XL. The first four stores we opened averaged 12,000 square feet. We've been assessing the floor layout and fixturing and determine we can deliver a full DXL assortment and maintain the aesthetics in closer to 9000 to up to 10,000 square feet. We also recently opened up a few 6000 square-foot stores in some relatively smaller metro markets, and we are very pleased with the early results.

When you dimension out a transformation of our company with the DXL national rollout, our four-wall profitability will be greater than we projected a year ago due to lower occupancy costs. Also, the CapEx per store will be lower based on a smaller footprint and a slight alteration in the buildout.

The success of our new DXL concept has also benefited our merchandise offerings. Based on the merchandise presentations we offer in these stores, the apparel industry has taken note. During the last quarter, we had the exclusive launch of three great brands -- Lacoste, Faconnable, and DKNY jeans. We're currently working on adding other exciting iconic brands for next fall.

Casual Male Retail Group was just named Men's Retailer of the Year by MR magazine.

On an important note, we launched our new Destination XL website in Q3, and I encourage all of our listening audience to visit the site. From a shopping perspective, we now have duplicated the experience one would get in a DXL store with our entire product available in one easy shopping trip. Over time, we will be migrating all our customers into the DXL site where we anticipate the average ticket to go up, as we experienced with the brick-and-mortar DXL stores. We did, however, experience a slight dip in our total direct sales of 2.5% for the quarter, which partly is attributable to the transition to the new platform that has experienced some day-to-day glitches. These should be resolved in time for the big holiday rush.

Finally, on the subject of cost of goods, almost all of our retail prices increases have been put in place by now. As prices peaked and remained steady through Q1 2012 and some of Q2, we have seen costs coming down mid to high single digits for our fall 2012 order placements. Certainly, we're not back to 2010 prices but at least costs are heading in the right direction.

Dennis will now review the financial performance for the last quarter and discuss where we believe the year will end.

Thank you David. Good morning and thank you all for joining our third-quarter update. After providing some insight into the Company's performance and commenting on the Company's strategic direction, David and I will answer any questions you may have about the Company's business.

During the Company's third quarter, we continued to learn that the DXL concept is an important and successful strategy for the long-term, but we had an unexpected short-term earnings performance setback largely as a result of an unanticipated reduction in traffic.

For the third quarter, we had a net loss of $1.6 million, or $0.03 per share, as compared to net income of $300,000, or $0.01 a share, last year. For the nine months of this year, net income was $9.2 million, or $0.19 per share, as compared to $10 million last year at $0.21 per share.

Sales for the third quarter were below our expectations with unexpected sluggishness comparable sales growth at 0.7%, down from a comparable sales increase of 3.5% for the first half of this year.

During the quarter, we experienced a decrease in our traffic of approximately 6% as compared to our trend through the second quarter, which directly impacted our topline. This slowdown in traffic began early in the third quarter, remained lower throughout the quarter, impacting our topline by an approximate $3.5 million.

As a consequence in that, we are forecasting continued sluggishness. In our customer traffic we have lowered the Company's sales expectations for the year by $7.5 million to a range of $397.5 million to $402.5 million for the full year of 2011, and therefore have lowered our earnings expectations for the year to a range of $0.35 to $0.38 per share before reflecting any impact of tax related adjustments that I'll discuss in a few moments.

All other aspects or components of the Company's performance, that being gross margin and SG&A, are within previously provided ranges and thus guidance with respect to those components remain unchanged. SG&A is expected to rise at about a 3% rate for the year to an approximate $156 million in spite of the unplanned expenses of $1.4 million incurred with respect to legal activity associated primarily with two class-action lawsuits in California that are expected to be settled and resolved. There is no other significant legal activity pending. Therefore, we don't expect this event to recur in the foreseeable future.

On a more positive note, as David said, we've opened ten DXL stores so far with another two to come this year, bringing us to 16 by the end of the year. In the aggregate, the DXL stores continue to show improved comparable sales within their respective markets by an average of 15% with all stores showing some improvement.

Just as important, the Company has gained confidence in the DXL concept due to consistently strong customer receptivity and merchandise performance such that we have raised our expected 2012 DXL store opening rollout to between 35 and 40 stores in 2012.

David also mentioned we've introduced our DXL catalog and launched -- and finally launched our new DXL website, supporting the DXL stores with a multi-channel customer solution. Our DXL website has a similar customer experience to that of the DXL in-store experience, has state-of-the-art functionality enabling our customers to shop across all brands and product extensions with ease. Having now watched the DXL direct channel, we intend to introduce all customers to the DXL concept gradually during the fourth quarter, carefully measuring their response and feedback which will be considered in planning 2012 marketing activities.

From a liquidity perspective, we expect cash flow from operating activities to be between $27.5 million to $30 million, a decrease of $10 million from previously reported guidance, resulting in free cash flow of approximately $9.5 million to $12 million after expected capital expenditures of $18 million.

We expect our cash balances to be somewhere between $13 million and $14 million by the end of this year. As we open new DXL stores, we'll be closing existing stores in the area. During the year, the Company has closed 12 stores and expects to close another eight in the fourth quarter, ending the year with a store count of approximately 450 stores.

As I said, in 2012, we plan to open 35 to 40 additional DXL stores, resulting in approximately 50 to 55 DXL stores operating at the end of next year with at least one store located in most of the major metropolitan cities across the US. At the same time, we expect to close approximately 55 to 65 existing stores, the vast majority of which are in connection with opening these DXL stores, and thus resulting in an estimated store count of approximately 425 stores at the end of next year.

At the end of the quarter, the Company had no borrowings outstanding under its $75 million credit facility. Further, we believe that the Company's operating cash flow will be more than adequate to fund the Company's 2012 capital expenditure program.

I'll share now with you some other notable items explaining the Company's third-quarter performance. Total sales decreased 0.6% to $89.4 million for the quarter but grew 1.4% to $286.2 million so far during the year. Comparable sales, as we said, increased 0.7% and 2.6% through nine months.

During the quarter, our retail business increased 1.5% while our direct business decreased 2.5%. For the nine months, our retail business increased 2.8%, and our direct business also increased 1.9%.

During the quarter, our average unit retail prices increased approximately 8% over the prior year's third quarter. This is due partly to product price increases and partly to the result of improved sales productivity by our selling associates in the stores.

During the quarter, gross margin rate, inclusive of occupancy costs, was 45% as compared to a gross margin rate of 45.7% for last year's third quarter. For the nine months, gross margin rate is 46.8% compared to last year's nine months of 46%. The decrease is 70 basis points for the quarter which was the result of a 20 basis point drop in merchandise margins, plus an increase of 50 basis points in occupancy costs, primarily the result of higher occupancy costs against sales. The increase of 80 basis points for the nine months was a result of an increase of 60 basis points in merchandise margins, plus 20 basis points in occupancy cost leveraging.

On a dollar basis, occupancy cost increased 2.8% for the quarter and was flat for the nine months. The increase in the third quarter is primarily related to the addition of our seven new DXL stores and sluggish sales growth.

SG&A expenses for the quarter represented 43.2% of sales as compared to 43.1% of sales for last year's third quarter. For the nine months, SG&A was 39.9% compared to 38.9% last year. On a dollar basis, SG&A slightly decreased by $200,000 or 0.5 point for the third quarter. This decrease is primarily due to lower bonus accruals which have been adjusted as a result of our revised 2011 earnings expectations. Also, this decrease was offset by an increase of $1.4 million related to accruals for the anticipated litigation settlements incurred and incurred legal expenses to date associated with the two California wage and hour class action suits.

On a dollar basis, SG&A expenses increased $4.2 million or 3.8% for the nine months of this year as compared to the first nine months of last year. This increase of $4.2 million includes the increase of approximately $2 million for legal and accruals for litigation as well as increases in payroll related expenses such as modest salary increases, severance payments and reinstatement of 401(k) employer match, as well as increased staffing in our global sourcing and merchandise areas.

At the end of the quarter, our total deferred tax assets was approximately $47.1 million with the corresponding valuation allowance. Based on our results of operations for the past two years as well as our projected earnings for this year and barring any unforeseen circumstances, we expect to be able to reverse the valuation allowance in our fourth quarter. We expect that the reversal of the allowance will increase net income in the fourth quarter and for the year by $40 million, or $0.83 per share.

Our effective tax rate for the third quarter and first nine months of this year has been reduced from the statutory rate due to the utilization of fully reserved net operating loss carry-forwards. We expect our effective rate of return to a rate of approximately 40% in 2012 and thereafter.

At the end of the quarter, inventory was at $114.9 million compared to $92.9 million at the end of the year compared to $109.6 million at the end of last year's third quarter. Inventory at the end of the quarter increased by $5.3 million as compared to last year due primarily related to cost increases. The Company's unit inventories at the end of the quarter remain unchanged to last year's levels.

That concludes my remarks. David and I will now be happy to answer any questions that you might have.

(Operator Instructions). Klaus von Stutterheim, Deutsche Bank.

I have two questions. One, I was wondering if you have an explanation why the traffic turned sluggish. There was an article in the Wall Street Journal this morning that talks about how men's clothing was actually doing surprisingly better in contrast to your experience. So -- then I have a second question.

Again, as I stated, for Casual Male, as people who have followed us for many years know, weather is a big driver for our customer. These need-based and -- comes in when the weather changes, and we just haven't seen that favorable weather. That certainly impacted the October numbers and a little bit into November. So, again, we're not driven as much by the fashion part of the business; we're driven by the needs of our customers. So when -- a year ago the weather was much more favorable for us. So we're not saying it's -- that we can achieve the numbers we want to, but we're just taking a more cautionary approach to it.

My second question may sound a little provocative, but it's not meant as such. Things have been pretty flat for (technical difficulty) out loud whether I should just think of Casual Male perhaps as a well-run company but with a very static business, rather than a growth company. Can you -- you may have different views and I'd love to hear it.

Again, I would say that was probably true a year ago before we came up with the new Destination XL concept. The reality is we have -- we've had four stores that anniversaried a year. We're opening -- we opened quite a few stores very recently. That isn't enough to move the needle when we've got 450 existing stores.

But I think why we consider ourselves a growth company, as we open up -- as we have 50 stores next year doing three times or more the volume of a Casual Male store, the needle is going to start moving on our topline and on our earnings performance.

So yes, I understand what you're saying because we haven't been a major growth company, but we really believe this is what is going to change the game for us. Again, we have been -- we just keep getting more aggressive in trying to get more of these Destination XL stores open as soon as we can.

So the experience at the XL stores is substantially different from the smaller stores.

Yes. That's what we alluded to. We're getting comp increases in those stores, and the market share is growing in all those locations. So, again, it's going to take us time, but what we're -- if we talk about the future, which is Destination XL stores, that performance has been stronger than our existing store base.

Okay, thanks.

Liz Pierce, ROTH Capital Partners.

Thanks. Good morning everyone. How are you guys? Is weather better today?

Not really.

So October, maybe was October performance in the DXL stores do -- maybe give us any kind of indication -- better, worse than the Company average?

Yes. We're starting to really look at the comps very closely on the ones that have anniversaried because going up against grand opening, we certainly wouldn't anticipate exceeding those numbers. But for the last -- through the last half of October and through November, as we said, collectively, they're comping ahead. We're obviously relatively flat in the other stores. So yes, they are outperforming. We're not -- again, we don't have a comparable to last year for a lot of these. It's difficult to say. But of the four existing ones, they're definitely outperforming what the rest of the chain is doing.

I guess the question that I was trying to understand is even in tough -- even when weather works against you, are those DXL stores -- is the broad array of products something that he is going to come to anyway? Even --

I would definitely say yes.

Then when I think, Dennis, in your remarks, I'm not sure I understood what you meant when you said 15%. Is that what they're comping at or they're 15% ahead in total sales?

The DXL stores are 15% ahead of the market that they come from, from a year ago.

Okay. So --

We don't treat -- when we open a DXL store unless -- there's only one store today that's actually considered a new store. All the other stores where we've closed Casual Males and opened DXLs, they are in the comp.

So for example, if we close three stores in a market, we comp the DXL stores against the combined sales of the three stores closed.

That's what I wanted to figure out. So the combined -- whatever the combined number of stores closed.

We're exceeding the last year's numbers by at least 15%.

That's very impressive.

Then in terms of the new stores for next year, and perhaps it's too early to know in terms of size of stores, I know you said you felt like 9000 to 10,000 now is probably a good range, maybe in terms of let's call them small stores versus the larger stores. Do you have a sense of the mix yet?

Yes. They're probably averaging right at 9500.

For next year?

For next year, ranging from 8000 to -- in a couple of situations, you'll see one or two 11,000 to 12,000. It depends on the lease situation. But certainly the DXL experience can be had in a store of a minimum 8000 square feet, and so we're looking more at an average between 8000 and 10,000.

Does that mean that the 6000 is too small?

6000 is generally too small.

The 6000 ones happen to be oversized Casual Male stores that we converted. We don't have any more of those. If we do a 6000, it's going to be a special situation, and the merchandise assortment will be pruned accordingly.

Of course. Right. Okay. In the Web -- so what we've seen with other retailers in times of adverse weather or whatever -- and I realize this wasn't necessarily the case in October -- but did the Web performance in October reflect the store performance, or because of the migration into the new concept, there's too much noise and you can't even tell?

Yes, there's a lot of noise.

I just gave you an out, right?

No, there is. There is. As you know, we launched in October. We actually launched DXL first as an independent site in September and brought all the sites together in October. There was a big effort; there was a lot of issues that we've been working through. I think we're getting beyond those now, but certainly it impacted the Company's performance on the Web really throughout the third quarter because all of these efforts really span the entire third quarter.

What were the glitches? It was just -- where people couldn't move, navigate through the site, so they dropped out or --?

There was performance issues initially, and then there's issues with product falling off the site because of various reasons that are getting perfected now. It's a new site, so how we operate is a bit different from how we operated before, from a product content point of view. All of the tags have to be re-tagged, if you will, with our affiliates, and for natural search at all of that -- Liz, I can go on and on about all of the --.

What do you mean when product falls off the site? I have this picture -- bye-bye -- falling off the back of a truck but I don't think that's quite what it is.

It's almost like that, but electronically. What I'm trying to describe -- just give you a picture that we've been working through some issues. I think we're beyond that. The site is a wonderful site; I'm not sure if you've had time to --

Yes, I've been on it, yes.

We're very proud of it and I think it's going to perform wonderfully once we get past this transition.

Then David, for you, what is your take on the competitive landscape right now, particularly in the Kansas City and the Dallas market where we all know that J.C. Penney has launched this new concept foundry?

Again, I'll reiterate what we said before. It really had no impact on our business. I was -- they've out-square-footed -- they have twice the square footage that we have. It's surprising, but they've really have no impact on us. So I'm not sure what their direction is going forward.

Have the stores in those respective markets, have they done any outreach to the customer, or just anecdotally heard anything from customers that they may have passed on to you about their -- have they visited and they didn't like it or whatever?

Yes. I have that information, but we're not going to go into that. Needless to say we're moving on, and we have no impact. I think the one thing that's going to make it even less significant is we just opened our two DXL -- our first who DXL stores in Dallas in the last few weeks. So they weren't impacting us against the Casual Male chain. I imagine we'll only get stronger now that we have our DXL presence there.

Fair enough. I understand that's a tough maybe to answer on a public forum.

In terms of the price increase, is there any way you can kind give us a little bit more on a breakdown of the metrics, Dennis, in terms of the transaction?

I said we've seen our price increases 8%. Our traffic is almost offsetting all of that, and that's really why we're showing a sluggish topline performance overall.

Okay. Any comments about November?

November?

In terms of the comp trend? Has it continued or --?

It hasn't really improved terribly much so far, and that's really what's driving our outlook on the rest of the year.

Great. Best of luck. Thank you so much.

(Operator Instructions). Rajani Vaithinathan, Sidoti & Co.

Good morning. Just a question, I just wanted to make sure, the expenses related to the litigation that weren't in the release, those are one-time expenses? There is no -- it's not like this money has set -- some money is set aside for these kind of general G&A type of things each quarter? Is that the way we should think about it, as being a one-time incremental expense?

Yes.

Also, just could you just give me the store count now by brand, DXL versus the Casual Male and the Casual Male outlet in Rochester?

At the end of the quarter -- I (technical difficulty) have it for you. And then some of the numbers we provided you in our discussion were -- included some of the activity going on during November. But at the end of the quarter, we had 11 DXL stores and we had 14 Rochester stores. Then we had 431 Casual Male stores, of which around 60 were outlets.

Great. Thank you.

(Operator Instructions). Richard Jaffe, Stifel Nicolaus.

A question -- I know you were timely and comprehensive in raising your retail prices to reflect the product cost inflation in 2011. Wondering today, with the weaknesses in sales, is there an opportunity to give some of that retail price increase back to the consumer in an effort to drive sales either through promotions or everyday low pricing? Has that been a consideration? If so, to what degree?

I think we are going to be a little more aggressive than we were a year ago. That strictly comes back to my comment that our inventories are going to be aligned. We're just concerned -- we want to keep our inventories fresh and clean going forward area, but historically, as we've explained to the market many times, it doesn't usually drive any topline gross margin dollars for us. The markdowns tend to just offset the increase in sales we get. So strategically we're not going to be moving in that direction, but we will be a little more promotional strictly to get our inventories in line.

(technical difficulty) our business strategy, it's much more for us than others about comfort and fit. Our customers tell us price is secondary. It has to look good and it has to fit, and that's what is of primary importance to our customers. Price is a secondary consideration, very much unlike what we see elsewhere in men's apparel and as you see in men's apparel. Whenever we try and do something with the price, we're very terribly disappointed with the results.

That's interesting because, as you pointed out, the men's space has grown even more promotional. You can't miss some of the advertising in TV and radio from some of the men's specialty businesses. So it's interesting that it doesn't cross over to the big and tall.

I've said this over the past, but it is important. We do extensive surveys. We always ask that question about what is the most important reason for you to shop Casual Male. 65% say comfort and fit. If you ask that of a regular sized business, it wouldn't even be on the radar as their first choice. When we ask about price, always less than 10% of our customers say price is their main reason for shopping us. We're a unique animal when it comes to this.

Thoughts about traffic, just now that you have Destination XL -- go ahead, I'm sorry.

We're hoping traffic comes back again. When we get the cold snap, it does bounce back rather quickly. But we're seeing sluggish traffic, as Dennis said, sluggish traffic in the last several weeks, so we're just being cautious about it.

But again, on the DXLs, that's another story. We don't have the comp to compare it to, but we can tell why, but we can't compare it to what these stores were doing in these markets a year ago. Again, we're very optimistic and they're doing very well.

If we look into 2012 and a robust Destination XL website, does that become a traffic driving tool for you guys, a customer relationship building mechanism?

Certainly. It should do two things. Really the whole DXL concept grew from this. Two things. One is that we should be able to garner more of our existing customers' apparel dollar just because it's a much (technical difficulty) solution for him.

Number two, and number two is that it's no longer a small Casual Male limited selection and assortment type solution that we're offering, but rather therefore we should be able to capture more of the new customers that perhaps didn't see themselves going into a Casual Male type store but does see themselves perhaps getting into a DXL store. It's a completely, entirely different experience for these guys.

Another point is our stores do a tremendous percent of -- I mean a strong percent of our Web transactions through the catalog business. We asked our customer -- we give our customers the option where they can -- we could ship the product to their home or they can come back to the store and get that order for free shipping. 80% of our customers opt for that factor.

One of the exciting things on the new website is when you get to the checkout phase of your transaction on the Destination XL website, it will populate the closest store to your residence and we're going to offer the same deal. So if you want free shipping, you can pick it up at the store, which should help drive traffic to the store and also allow our associates to help wardrobe around whatever purchase they made on the Internet. So again, to your point, yes. We see opportunities to take that traffic coming off the Internet and also drive traffic into our stores.

Great. Could you comment further on the glitches (technical difficulty) you commented that the new Destination XL had some glitches.

Yes, I mean, we had glitches, Richard. We're getting past them. I went through that. I don't think it means anything for the fourth quarter.

Good to know. Thank you.

(Operator Instructions). There are no further questions. I'd like to turn the conference back over to the speakers for any additional or closing remarks.

Thank you for joining us on the call today. We look forward to coming in with a strong performance for the fourth quarter, and we'll talk to you soon. Thank you very much.

Please don't hang up. We had a glitch on the call. The forward-looking statement, my line dropped off.

Just quickly, today's discussion contained certain forward-looking statements concerning the Company's operations, performance, financial conditions, including sales, expenses, gross margins, CapEx, earnings per share, store openings and closings, and other matters. Such statements are subject to various risks and uncertainties and could cause actual results to material differently (sic). Please review the SEC filings of the Company for any further information. Thank you all.

That concludes today's teleconference. Thank you for your participation.