Destination XL Group Inc (DXLG) 2011 Q4 法說會逐字稿

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

Great. Thank you, Yolanda. Good morning, everyone, and thank you for joining us today for Casual Male Retail Group's fourth-quarter and fiscal 2011 earnings call. On our call today is Dennis Hernreich, our Executive Vice President, Chief Operating Officer, and Chief Financial Officer, and David Levin, our President and CEO.

I would like to read our forward-looking statement before turning the call over to 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 on our website at DestinationXL.com, for an explanation and reconciliation of such measures. Today's discussion also contains certain forward-looking statements concerning the Company's operations, performance, and financial conditions including sales, expenses, gross margins, capital expenditures, earnings per share, store openings and closings, and other matters. Such forward-looking statements are subject to various risks and uncertainties and could cause actual results to differ materially from those assumptions mentioned today due to a variety of factors that affect the Company. Information regarding risk and uncertainties are detailed in the Company's filings with the Securities and Exchange Commission.

David, the call is yours.

Thank you, Jeff. Today we announced our earnings for the fourth-quarter and year-end fiscal 2011. Our comps for the fourth quarter came in at a positive 0.8%. It was the eighth consecutive quarter of positive comps, but we had anticipated more of a mid-single-digit comp increase as we headed into the quarter.

As we have professed over the years, our customers are need-driven, and the fact that we ended up having one of the warmest winter seasons on record impacted our sales and traffic. At some point along the buying spectrum, customers made the decision to defer their seasonal buying when the weather continued to stay unseasonably warm.

Meanwhile, we stayed aggressive in terms of promotional activity to ensure that going into 2012 we wouldn't carry over excess seasonal inventory. And on that note, our clearance inventory at the end of February had 30% fewer clearance units than the previous year. Dennis will review in detail the financial performance for the quarter and the year after my comments.

I would first like to give an update on the status of our Destination XL stores. Just to give a quick overview, the DXL concept has merged the best assortments from Casual Male XL, Rochester Clothing, and B&T Factory Direct under one roof, making it easy for our customers to find the merchandise they are looking for without having to shop several of our stores. The DXL stores almost triple the product assortment of a Casual Male XL store.

In 2011 CMRG opened 12 new DXL stores, bringing the total count to 16 stores. Overall, we are pleased with the performance of these stores, which we estimate after 36 months of sales will deliver four-wall cash flow of 25% to 35%. The current store sales for 2011 averaged 113% of the existing market.

This year we plan on opening approximately 35 new stores, also while closing 70 Casual Male stores, which will give us a national footprint with 51 DXL stores, with at least one store located in most major metropolitan cities across the United States. It is important to note that the stores we are closing this year and in subsequent years are based on the natural expirations of the lease terms, and we do not anticipate having to buy out our leases in winding down the CM stores.

By the end of fiscal 2012, these 51 DXL stores are expected to generate approximately 30% of the Company sales and almost 50% by the end of fiscal 2013. By the end of 2015 we expect to have 150 to 175 DXL locations, and we see the potential over time to reach up to 250 stores.

So we can envision a portfolio of 250 DXL stores; 57 Casual Male XL stores that are in remote areas yet generate solid cash flow; retaining close to the 60 CM outlet stores that we currently have today, to continue to be a source to liquidate inventory from full-price stores; and five to six Rochester Clothing stores that have enough critical mass of high-end customers to support that brand. The Casual Male XL brand would eventually go away.

We have learned a lot in the almost two years since we launched our first test stores. One is that we have been experimenting with the sales floor capacity and productivity, and we have had success ratcheting down the required square footage from originally 10,000 to 12,000 square feet to our future locations, which will range from 7,000 to 10,000 square feet, with an average of 8,500 to 9,000 square feet. The reduced footprint will save us about 20% on rent.

At the same time, we have been scaling down the buildout costs of the DXL stores and have been able to reduce the costs from $85 a square foot down to closer to $65 a square foot, without losing the essence of the look of the original stores we opened. Between fixtures now being purchased in bulk and cutting costs in the ceilings and floor, along with a smaller box, we expect to save approximately $250,000 per store or $8 million to $9 million a year at an estimated 35 additional new store rollout per year.

We also will be opening up a DXL store in Kuwait City, Kuwait, this quarter. That is a franchise agreement with the Standard Arabian Business and Enterprises Company, also known as SABECO. The franchise agreement covers the operation of the store and provides that within two years of the store opening we have an option to purchase an equity interest in the store.

Also last year we tested Casual Male XL shop-within-shops in 15 Bon-Ton department stores. Selling B&T product in department stores has also always been a challenge, as these customers prefer destination locations for ease of shopping.

The sales we generated did not warrant going forward with this concept and have ceased operations in those locations. We will, however, continue to be a provider of big and tall clothing for Bon-Ton's Internet business as we currently do for Sears in their US and Canadian operations.

On the subject of merchandise, a key initiative for 2012 is the increase in penetration in our clothing categories. Clothing encompasses suits, sportcoats, dress pants, dress shirts, and ties. Historically, it has been about 20% of our sales.

As we have been a casual sportswear driven Company, clothing never really got the real estate, assortments, or customer service that it needed. With the DXL concept, however, we have the space to make these categories something special, and we believe we can grow that penetration over time to 30%.

This will be accomplished through enhanced selections, sales associate training in these stores, and custom tailored or what we call made-to-measure clothing. This has been a work in progress for the last several months, and we are already seeing a positive impact to these categories' sales performance.

Also on the product front, we have commented over the years about the potential of attracting the men whose waist size is 40 to 46 inches. We've referred to him as the end-of-rack guy, because when he shops regular size men's department stores or specialty stores the selection offered is limited, and certainly so when you get to beyond the basics.

Casual Male XL tried to attract that customer and could never really get them over the stigma of a big and tall store that had little shopping appeal. With DXL, that stigma should go away, as the look of the store and the brands we carry represent the type of product environment that these guys should embrace.

We see a tremendous opportunity here. Destination XL is the only national men's chain outside of the department stores that carries heritage brands such as Polo, Lacoste, Tommy Bahama, Michael Kors, Robert Graham, and so on. Plus we have all our private-label brands that offer fashion at value prices.

We know men generally don't like to shop in malls, and now we are going to have a national presence in these men's neighborhoods with the convenience of a destination shopping experience. To be successful in expanding into these what we call smaller big sizes, we will be offering a slimmer fit as our traditional fit has been too generous.

At the same time, we need to brand DXL as a store where these end-of-rackers can find a selection of product that they can't get from any other retailers. On that note, we've engaged Gotham Group LLC, a creative ad agency that will be there to help develop DXL as a brand for guys XL and up.

The first 16 stores we have opened have had a local marketing campaign. Now that we will have a national footprint by the end of this year, we need to move to a broader reach media to deliver our branding message, and we anticipate our marketing campaign to be in place for the fall season.

One other topic on merchandising is the status of our cost of goods. Last year, when cotton prices soared in our Q3 and Q4 deliveries, we raised prices accordingly. While we saw a slight decrease in units sold, our average ticket increased in the high single digits.

Our costs in Q1 2012 were relatively flat to the previous quarter and down slightly in Q2 from Q1. Q3 prices have come down again; but we don't anticipate costs coming down to where they were in 2010, because labor and transportation continue to be higher than in 2010. For those reasons we have no plans this year to lower our retails even though fabric costs have decreased somewhat.

The final topic I would like to discuss is marketing. As I mentioned earlier, we are excited to have teamed up with Gotham as our creative agency to help build a powerhouse brand in Destination XL.

We are also excited to launch our new loyalty program. Loyalty has been a cornerstone of our marketing strategy as approximately 95% of our active customers are enrolled in the program and 80% of all our active customers, both direct and retail, were enrolled.

Last year we issued a black card to our top customers, even though the enhanced benefits to the card were not overly significant. We did see, however, that the average spend increased when they got their black card.

This February we launched a new loyalty program with four tiers of benefits, with increasing benefits and rewards such as free shipping and early announcements of new product and upcoming promotions. We now also have an online Rewards Center, where consumers can see their current balance of points. This creates a great selling tool for our associates, as our customers become focused on moving up the tier ladder from bronze to silver to gold and then finally to platinum.

Also, we've been focused on the retention of existing customers. At the start of this fiscal year we established a new three-channel reactivation program in February for lapsed customers as well as existing customers who may be potentially falling off their buying cycle. Each month e-mails will be sent out with various offers, up to eight different segments, with the strength of the offering differing with the particular segment.

Finally, we are becoming more sophisticated in optimizing direct-mail campaigning, both in retail and direct. For example, we are about to deliver a promotional piece to our retail customers.

Through our database of information, we are able to customize the mailer to show product that is specific to the lifestyle of each customer. Some will receive a mailer featuring young men's styles, and others may get more traditional styles in their mailers.

Because we have such a broad range of customers, basically from 16 to 70 years old, all levels of income and ethnicity, we can now market to them in a more pinpoint approach and be more relevant to each customer. And we do the same thing for catalogs and e-mails, too.

2012 is going to be a game-changer for Casual Male Retail Group, and we have the confidence that this is going to be a great success story for the future. On that note, Dennis will now review the financial performance for the quarter and the year, and also focus on our direct business and our technology improvements.

Thank you, David, and good morning, everybody. Thanks for joining us this morning for the Company's 2011 earnings call. After completing my brief remarks about the Company's performance in 2011 and what we expect for 2012, David and I will be happy to answer any questions you may have.

On an operating basis and before any nonrecurring items, which I will discuss in a few moments, the Company reported earnings per share for 2011 of $0.30 per share compared to $0.32 per share in 2011. On that same basis, for the fourth quarter the Company reported earnings per share of $0.10 per share compared to $0.11 per share for last year's fourth quarter.

This level of performance is well short of our $0.40 to $0.45 per-share expectations we spoke to you about a year ago. Although the company's comparable sales were up 2.1% for the 2011 year, the comparable sales for the second half of the year were just under 1%, after showing a 4.9% increase in the second quarter and 3.5% increase for the first half of 2011.

In the second half, sales were well below our expectations at just under 1% comp, which resulted overall in a sales shortfall for the year of between $7 million and $12 million, which equates to an earnings level of between $0.07 to $0.12 per share relative to the guidance we spoke of a year ago. The traffic in the second half of the year trended significantly less than the traffic in the first half of the year, without us making any changes in the Company's business approach or marketing campaigns except for the opening of 12 DXL stores, which have generated a comparable sales increase of about 13% during the periods the DXL stores have been open.

The reasons behind the change in traffic trends we believe are partly due to the economic stress of our customers and also partly due to the unseasonably warmer winter conditions this past season. It's 75 degrees today in Chicago, March 15. Municipalities have saved millions of dollars in snow removal costs, as well as consumers not having to buy snowshoes, snowblowers, and shovels. Both reasons are particularly caustic to our business, given our customers are more prone to buy their apparel based on need rather than want.

Furthermore, the warmer than expected winter conditions helped to slow down the sell-through of our fall/winter fashion merchandise, resulting in unexpected discounting of seasonal product during the fourth quarter, resulting in a 70 basis point drop in gross margin during that fourth quarter and only a 40 basis point improvement for 2011, therefore, compared to the expected approximate 100 basis point improvement in gross margins for 2011. This miss in gross margin resulted in another $0.04 per share in earnings for 2011.

The Company's SG&A levels were as expected, despite incurring $2.3 million primarily to settle wage and hour class-action lawsuits for alleged violations of meals and break time requirements for our employees in California.

Meanwhile, the Company opened another 12 DXL stores in different parts of the country in markets such as Phoenix, Denver, Salt Lake City, Dallas, Philadelphia, Baltimore, New York, and Providence, adding to the DXL metro markets we opened in 2010 in Chicago, Houston, Las Vegas, and Memphis. Each DXL store opening was met with exuberance and excitement by our customers that they now have a place where they can comfortably shop with the assistance of knowledgeable and helpful associates to select and buy all of their wardrobe needs regardless of age group, income level, or lifestyle preferences.

The size of the DXL stores, as David said, now range from 6,500 to 13,000 square feet, and the success of the stores has less to do with the size of the store and more to do with the comfortable environment and product selection for that market, leading us to conclude that the optimal size of the DXL is between 8,000 and 9,000 square feet and will range from 6,000 to 10,000 square feet depending upon the needs of the market.

Whereas initially we thought the DXL stores more appropriate for only large markets with large DXL stores, we have learned that the smaller stores are just as effective as delivering the kind of customer experience we envision for our customers. Therefore we plan to open approximately 35 DXL stores in 2012 and close up to 70 Casual Male and Rochester stores during 2012, as I said, in markets such as Orlando, Cleveland, New Jersey, Indianapolis, Minneapolis, Los Angeles, Milwaukee, Oklahoma City, Pittsburgh, Cincinnati, Hartford, Richmond, Portland, Boston, and many other existing Casual Male markets.

Based on continued success, we would plan to continue to open DXL stores at this pace over the next several years and ultimately reach as many as 250 DXL stores, leaving only Casual Male Outlets and a few outlying Casual Male stores besides a half-dozen Rochester stores. Our organization is aligned with this direction and welcomes the tremendous opportunities this provides to all of our associates, corporately and in the field.

Meanwhile, our accountants are also aware of the strategic direction, and in the valuation of the Casual Male trademark our experts have determined that the current value of the trademark to be approximately $6 million with a seven-year limited life, and not the $29 million carrying value with an unlimited life that it was last year. Therefore, the Company recorded an approximate $23 million impairment charge of its Casual Male trademark carrying value in 2011, which resulted in a loss, after tax benefit, of $0.29 per share; and that is not so good news.

The better news is that, given the level of Company's recent profitability and its ability to generate future profits, even the same accountants agreed that we should reinstate the $50-million-plus deferred income tax benefit back onto the balance sheet, which resulted in a tax benefit gain of $0.88 per share. So after including the earnings per share from reoccurring operating earnings of $0.30, plus the income tax benefit of $0.88, less the trademark impairment of $0.29, you get the Company's reported net income of $0.89.

Looking ahead to 2012, the Company is expecting an operating earnings per share between $0.22 and $0.27 per share. On the surface it would appear that the Company's guidance for 2012 was to show less operating earnings than 2011 -- but not true, and let me explain.

Starting in 2012, the Company will be reporting its earnings inclusive of an effective tax rate of 41%, whereas in the recent past we have been showing income taxes on a cash basis, which approximated an effective tax rate of 10%. To get a true comparison between 2011 and 2012, the Company's operating earnings is expected to improve from $0.19 in 2011, after reflecting the 2011 operating results with an effective tax rate of 41%, and the range of earnings for 2012 of between $0.22 and $0.27 per share.

There is one more item I want you to remember. The Company's remaining value of its Casual Male trademark of $6 million will now be amortized over seven years, with the amount for 2012 expected to approximate $1.8 million or $0.02 per share difference from 2011. Were it not for this amortization charge, the guidance for 2012 would have been $0.02 greater.

The components of our guidance includes comparable sales increase of between 4.7% and a 6.6%, primarily driven by DXL openings and total sales of between $416 million and $424 million. Gross profit margin 46.8% to 47.2%, or an improvement of 60 to 100 basis points from 2011.

SG&A expense to increase by approximately 2% to 3% to an approximate range of $159 million to $160 million on a comparable 52-week basis, then add in another $2.5 million for the 53rd week. As a percentage of sales, SG&A expenses are expected to improve 30 to 70 basis points.

Operating margin is expected to improve by between 20 and 110 basis points to a range of between 4.4% and 5.3%, as I said, after including depreciation and amortization charges of $15.4 million, which includes amortization expense of approximately $1.8 million for the Casual Male trademark.

Effective tax rate for '12, 41% compared to 10% in 2011. Please be reminded that the Company has approximately $62 million in tax loss carryforwards, and therefore will not be a significant cash payer for a couple more years.

Diluted earnings per share before discounted operations of 22% to 27%, which is comparable to fiscal '11 per share of $0.19, as I said before. Free cash flow of approximately $10 million for 2012, which was based on operating cash flow of approximately $45 million and capital expenditures of approximately $35 million, raising the expected cash levels at the end of 2012 to about the $20 million level.

The Company has made a number of changes in its marketing approach as we adjust to the DXL concept in both retail and direct channels, but at the same time responding to the sluggish traffic the Company has experienced. There are four areas of marketing being addressed in 2012 -- three areas actually. Market share improvement; optimizing existing customer contacts to free up funds for outreach activities and to maintain profitable growth; intensify activities to improve annual customer retention.

First, the Company's overall marketing expenditure plan for 2012 has been raised by an overall $2 million for marketing campaigns to bring market awareness to the DXL stores. As David mentioned, we hired an ad agency to help us properly brand DXL and create a meaningful creative platform and advertising campaign that will not only resonate with our existing customers, but also the millions of potential customers that have not consider DXL stores or website as a solution for their apparel needs.

For 2012 we have reduced the number of page impressions of our catalogs by approximately 35%, and reduced total circulation by another 20% to approximately 9 million catalogs, and used the $2.5 million in marketing funds freed up to redeploy to more productive uses to market the DXL website and expand digital marketing -- by eliminating close to 1 million full-page catalogs with smaller page mailers for Internet shoppers; eliminating 12 catalog drops of all of our brands and instead distributing one DXL catalog such that the direct channel distribution will now get two individual brand titles and one DXL title per season; using a portion of these saved funds for use in digital marketing for outreach activities relating to DXL.

These are significant changes to our marketing approach. We will closely monitor these aggressive marketing changes to improve direct channel productivity without compromising profitability and making adjustments where necessary.

At the same time, to improve traffic in 2012 we have taken a number of other steps. We eliminated the $1.1 million in shipping income to be more competitive in the direct channel on shipping costs by adding a ship to store for free and going to a flat rate shipping charge of $8.95 for all orders over $150.

As David stated, we relaunched a more impactful loyalty program with four tiers of benefits, providing our more frequent shoppers with enhanced benefits. Increasing our customer reactivation e-mail campaigning to improve customer retention. Adding e-mail versioning to all of our customer e-mails to enhance customer response with more relevant, personalized messaging. Using more advanced customer database analytics to use more aggressive offers on customers demonstrating a downtrend in buying habits. And adopting a DXL store-level grassroots marketing program where store-level resources are being used to source potential and existing customer prospects to motivate DXL store visits.

There is a lot going on here at CMRG for 2012, including opening 35 DXL stores; closing 70 Casual Male and Rochester stores; establishing the DXL brand and developing marketing campaigns to raise market awareness; shifting direct customers to a more productive DXL concept; improving traffic from existing customers; and finally, improving operating income by up to 40% for this year. So to keep the organization's focus in this important 2012 year, we have decided to terminate website operations in the EU as soon as possible.

Building the EU business has not only been difficult, but also a distraction from the Company's strategic areas of growth. For the long term, we have not given up on a global strategy, and there will be a more appropriate time for the Company to expand its marketing solution globally. Therefore, during the year the Company will incur an approximate charge of $1.5 million to shut down the operation and incur the contract termination charges to its vendor in the EU, all of which will be reflected as discontinued operations.

That completes my comments on the Company's 2011 performance and 2012 expectations. We will now open it up for any questions you may have.

(Operator Instructions) Tom Filandro, Susquehanna Financial Group.

Thank you very much. That was very detailed. Quick one first to David, and then one for Dennis.

David, I think you talked about that clothing that represented an opportunity. I think you said it was at 20%, could reach 30%. You also stated that I think you experienced some positive trends there.

So I guess, are you under -- testing this strategy, the made-for-measure strategy, now? And if, so can you give us some insight on how it has impacted the sales and profits of the stores? And finally, should we assume that this strategy requires having a tailor in stores at all times?

Having a tailor in stores at all time?

Yes.

Yes. Okay, first of all, what we are talking about in growing this business, it's really going to come out of the DXL stores and continued growth in the existing Rochester stores. This strategy really isn't going to be conducive to the existing Casual Male stores. So as we transition and grow it is really going to be coming out of DXL stores, where we really have the space to do it.

In fact, all DXL stores have tailors. So that is a tremendous advantage for us also.

We've actually hired a full-time employee that works exclusively on training customers -- training our sales people in the stores. So that has been a good advantage.

We actually just kicked off -- this week is our made-to-measure event. And where historically we've only gotten the sales in the last few years out of the Rochester stores, because they are much more experienced at this, at made-to-measure selling, all of our DXL stores are equipped with the product, the samples to try on, and our people are ready to go as far as being trained to move that business.

So we see a tremendous opportunity through our surveys in our stores and just talking to the customer. It is the growth opportunity for us in the DXL environment, so we are pretty excited about it.

Okay, thanks, David. A quick one for Dennis. I think it was David actually that mentioned this, that that four-wall on the DXL, at like 25% to 35%. Can you just walk us through, since you've got some changes in the average size and cost? Can you just walk us through the math on that, meaning -- what are we looking at in terms of average volume?

And maybe talk a little bit if you could, Dennis, about the cash-on-cash payback period, given the change in the format, size, and the lower-cost buildout?

The cash-on-cash is at about two years. It will vary from 1.5 to 2.5 years, depending upon -- but I'd say average is about two years' payout.

Okay.

Terms of their four-wall, the volumes of a smaller size will depend on the market. But we are not looking at anything below $1 million and probably a 6,000 to 7,000 store would be a volume of between $1 million and $1.5 million. Depending upon, again, the market and the number of Casual Male stores, folding into that DXL stores, and how many customers -- there is just a lot of dynamics.

And that should produce at a minimum a 25% operating margin four-wall for that type of store.

Okay, got it. I think you gave us the -- was it $85? I forgot the number you said. Oh, $65; it is now $65 per square foot to open. Is that correct?

As low as $60, but it is ranging from $60 to $75.

Okay.

Again, I think the $65 is more of the type of average we are looking to do.

Okay. Thank you very much. I wish you guys all the best success.

(Operator Instructions) Liz Pierce, ROTH Capital Partners.

Wow, lots of information here. So while we are just talking about the four-wall, can you just remind me what the range was for the existing Casual Male stores?

Casual Male existing stores average is 18%, 19%; and the range is sort of wide.

The range is sort of wide?

About 10% to 30%.

Okay, but the average? Okay.

Just below 20%.

Okay, that's what I thought, but I just wanted to clarify.

Then, I'm real interested in two things, I guess, and they are kind of related to the marketing campaign, which I think is a great use of funds. But do you think with the -- whether it is how you are mailing the catalogs with the different covers, what is it that is going to allow you to reach this end-of-the-rack customer, to really penetrate his psyche so that he wants to come in?

Is there something that you've already seen in the 16 stores that are open to give you more insight in how to reach him? Or her, the significant other, the person that might be purchasing or driving him to update the wardrobe.

I think we will be more ready to talk about this next quarter. In fact, this week we had nine focus groups in three different cities addressing all these problems with different subsectors, as you said.

We had women focus groups. We had customers who have been in the DXL stores, and we wanted to hear what they had to say. We had the end-of-the-rack guys in exclusively to talk to them about why they haven't come in to a DXL store.

And that's exactly what we are going through. The ad agency was there, our consultants were there, so it is a full-court press right now. But I would really like to defer that answer until we get more clarity on it in the next 90 days.

Okay.

What's exciting, though, Liz, is that the solution that we developed, the DXL solution, is the right solution for that, what we call, end-of-rack guy. It is now a matter of communicating that message in a way that they will listen and understand.

When you say solution, Dennis, I'm not sure that I understand what you mean.

Solution meaning range of product selection, sizes, environment, customer service.

Got it.

Four are the key elements to attracting that end-of-rack guy.

Okay.

The ones that have come in love what they are experiencing. That we know for sure.

Are you able to reach out to them, like as a follow-up, and say -- hey, what did you like? Or, I mean I presume you have.

Oh, sure.

Okay. Then I suppose this slimmer sizing is a key part of this. Can you just frame that for me in terms of is this across-the-board? Certain product?

Just so I -- you would hate to alienate someone at the other end of the size. I'm just trying to figure it out spatially in my mind.

We are not touching our sizing as it is today.

Okay.

These are added sizes.

Got it.

On the smaller end of the rack, if you will.

Okay. But I thought you said like slimmer styling. So I shouldn't --

Not slimmer styling, a slimmer -- it is a slimmer fit, a trimmer fit. Because in our XL size it is very generous.

Right.

And what we are seeing with -- as these guys, these end-of-rackers are coming in, the bottoms are fine but they are saying basically the tops have been -- they are too big.

So would you be taking at the small, on a relative basis those end-of-the-rack sizes on tops and slimming those down, but not at the -- like on -- so you are actually taking the fit structure but not at the top end? Does that -- am I making myself --?

I'm not -- what I can say is that we are, again, another work in progress. Our sourcing group right now is going through the fit model process to see what fit we actually need.

That is not saying we are not going down into some of those regular sizes with the fit that they have. Again, another work in progress that we are going to know a lot more as we start fitting our models out to get a better fit.

So wait, David. You said you are not going down like below the 40?

No --

Is that what you just said?

I said it's not to say that we are not going down.

Got it, okay.

Liz, we carry today waist sizes of 38 in the stores. Maybe not all the inseams, but we intend to fill out those inseams. What we don't want to be is as end-of-rack to our customers as Macy's is to these same guys.

Right. I guess that is what I was trying to figure out. Okay.

That is going to take slimmer sizes. We want our guys to come in, be confident that when they buy a 38 waist/32 inseam pant they will have a top that fits them at the same time.

Okay. Then on the tailored side of it, are you actually adding SKUs or are you just trying to market it?

We are adding SKUs. We are adding some brands. We just launched Tommy Hilfiger, which is off to a good start.

We are filling out that assortment. Again, we've got some other initiatives that we're not ready to talk about yet.

But again, from what our customers are telling us and what we are seeing is they want a bigger selection.

Okay.

It has been pretty much black and navy and a little gray. As we are starting to bring in more swatches of fashion, they are responding quite well.

Yes, because I noticed in the Atlanta store you had a linen program.

Exactly. Things like that.

Okay, all right. Okay. And then -- but is it, David, just more pruning the mix versus increasing the square footage dedicated to it?

We have the square footage for the DXL stores. They're --

Even in the smaller 7,000 to 9,000 square foot range?

Yes, they will still have more than enough space to put in a nice assortment on the clothing side.

We hope we don't have enough space at some point in the future.

Okay. But are you taking it out of any of the other parts of the -- as how you segment the four different areas of the store? Are you taking square footage away from anything?

No.

Okay. Then internationally, I would presume what you're doing in Kuwait could set the footprint for how you look at internationally going forward.

Perhaps.

Again we started this one on a franchise basis. We've had lots of requests over the years, and we are just putting our toe in the water, see how this goes. The store is almost ready to open in the next couple weeks, and we will watch it closely and work with them to ensure their success in expanding outside of the United States.

The Middle -- it is a good -- this is a very good market for us in terms of the demographics of obesity. Kuwait has actually about one of the highest obesity rates in the world.

Did they approach you on this?

Yes, they did.

All right. That is I think all I have for now. Thanks and best of luck, guys. Thanks for all the detail.

(Operator Instructions) Richard Jaffe, Stifel Nicolaus.

Thanks very much. Two quick follow-ons. Are you guys able to track sales by size by store? And is that something that you are doing as part of this new product design that you are able to watch what is working and see how it develops?

That is fundamental to our business, Richard.

Have you seen any feedback from the customers yet, or is it still too early?

Well, the size initiative that we are speaking about -- we don't have these sizes in the stores yet.

Right.

But we do have obviously the smaller sizes that we do carry, and we do see movement in those sizes. But we also think that our marketing approach, as we restrategize it, will include the so-called end-of-rack guy in a more pronounced way. So we do expect a higher degree of traffic flow from these guys into the stores in the future.

Sure. Just wondering, I know this is not a new topic for you guys, and the effort to get that smaller guy, that was part of the XL effort. Wondering if you can, without revealing I guess trade secrets, the kinds of things you will be pushing out will be different than last time that might make a difference here, in getting that -- attracting that younger guy or that end-of-rack guy.

Again as David said, it is just -- today, for example, our XL size today, it's more like almost a plus-2XL that the regular-size guys sell.

Right.

So therefore, there is room for us to carry more of a regular size 2XL and a regular size 1XL that we call a slimmer fit. It might be the same spec; it might be a different spec. But the idea is that those guys are sort of borderline.

I hate to call them big and tall. They certainly don't think of themselves as being big and tall. But certainly they fit into a waist size 38, inseam 32; and we should have tops for them, Richard.

What always comes back, as we focus group with these guys, they themselves are very frustrated. They don't see the selection that their friends do who are a regular large. They know -- they call themselves end-of-rack guys. What's in it? I don't get the fashion.

So there is this void coming from both sides. The department stores and the specialty stores aren't catering to them, and they don't want to come into the big and tall environment.

So that is why the marketing has to change and we have to -- we are coming in with a brand-new store that doesn't have the baggage of being known specifically as big and tall. And that is the perception we are going to work on changing.

And the perception will be print, TV, electronic, over all channels?

All channels are wide open at the moment, and we need to develop the medium for the message over the next several months.

But the message is something you are working on now with your creative team?

Precisely.

Give it a sense of timing. Would that be for the back-to-school season, early fall?

Probably, Richard, yes.

That is our goal.

Right. Thanks very much.

Gentlemen, it appears we have no further questions at this time.

Okay. Again, thank you for joining us on the call today. Again, big year for the rollout and future years ahead of us. Again, thanks for being on the call, and we will talk to you next quarter. Thank you.

That does conclude today's conference. Thank you all once again for your participation.