Destination XL Group Inc (DXLG) 2012 Q1 法說會逐字稿

Good day and welcome to the Casual Male first-quarter fiscal 2012 earnings call. At this time, I would like to turn the conference over to Mr. Jeff Unger. Please go ahead.

Hi. Good morning, everyone, and thank you for joining us today for Casual Male's Retail Group's first-quarter and fiscal 2012 earnings. On our call today is Dennis Hernreich, 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 statement and then turn the call over to David.

During today's call, we discussed 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 investor.casualmale.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 margin, capital expenditures, earnings per share, store openings and closings, 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.

Thanks, Jeff. We announced our earnings for the first quarter for 2012 today. With a comp sales increase of 2%, we have now delivered nine consecutive quarters of positive comps; our retail business comp, 3.8%, while our US direct businesses decreased 3.9%. And while we're pleased to see the best store comps since Q2 of 2011, the negative comp in our direct sales was a disappointment. But we can isolate the loss due to the poor performance in March, with the inaugural DXL catalog that had a fairly high circulation behind it.

The DXL catalog was designed to eventually replace our existing Casual Male XL, Rochester Clothing, and B&T Factory Direct catalogs, as we will be rebranding our existing stores to Destination XL over the next several years. That alone contributed to a loss of $1.5 million in the month of March. Subsequent to that, we've returned to our traditional catalog format of our heritage brands, along with its continued increase in its digital marketing efforts. And by April, our direct channel business increased 4.6%.

After an extensive review and focus group input of the spring DXL catalog's performance, we'll be relaunching a redesigned DXL on a test basis in the third quarter of this year. Overall, however, we will continue our strategy of reducing catalog circulation, and reallocating those media dollars into building our eCommerce business.

As far as our Destination XL store initiative, the Company opened six DXL stores during the first quarter for a total of 22 stores. For the quarter, the DXL stores delivered 116% of the sales of the stores that they replaced. We plan on opening an additional nine stores this quarter, and will open a total of 35 stores this year and close approximately 70 Casual Male XL stores, resulting in approximately 51 DXL stores that will be operating in most major metropolitan cities across the United States.

And as I stated on the March 15 webcast, these 51 stores are expected to generate approximately 30% of the Company's sales on an annualized basis, and DXL sales will be in the neighborhood of 50% of total sales by the end of 2013. As we continue to refine the real estate rollout strategy, we now anticipate having 225 to 250 DXL stores when we complete the transition from Casual Male XL to DXL. We'll maintain the majority of our outlet stores and also continue to operate select Rochester clothing stores in the key metropolitan markets.

As we have fine-tuned the size and buildout of the DXL stores, we have been able to reduce the average CapEx spending by 35%. And by reducing the average square footage from 10,000 to 12,000 square feet now to 7,000 to 10,000 square feet, our IRR and our four-wall profitability has also improved.

The key driver in the DXL model continues to be the average dollar per transaction, which is 55% higher than an average Casual Male purchase. And as we transform our brand into Destination XL, one of our key objectives is to create more awareness of what DXL is all about. Marketing becomes a major focal point for our Company to develop an effective campaign, using an array of media outlets to drive customers into our stores from television, radio and grassroot campaigns, and certainly a strong digital marketing program.

We're in the process of hiring a new Chief Marketing Officer who will have the experience to execute a strong brand strategy for the future of our Company. And as I said on the last call, we've engaged Gotham Group, a creative advertising agency that has been developing the brand strategy for DXL. And in the fall, we will be testing broad local direct and store media, and establish a national marketing plan that we will roll out for spring of 2013.

And now Dennis will review the financial results for the first quarter.

Thank you, David, and good morning, everyone. Thank you for joining us this morning for our update of CMRG's business for the first quarter.

The Company produced earnings per share of $0.05 compared to last year's aftertax adjusted $0.06 per share with comparable sales of 2%-plus. This performance is in line with our expectations for quarter one. We continue to expect to generate for the 2012 year earnings per share in the $0.25 neighborhood at a range of between $0.22 to $0.27 per share on the comparable sales of between 5% to 6.5%-plus. This compares to 2011 earnings per share of an aftertax adjusted $0.19.

Just as important, our plans to transform the business to the Destination XL platform by opening 35 DXL stores this year is on schedule, with 23 DXL stores open through today. We opened a DXL store in Minneapolis two weeks ago, and the 24th DXL store is to open next week in Southern California. By the end of quarter two, we expect to have 29 DXL stores, 45 DXL stores by the end of quarter three, and 51 stores to close out the year.

At the same time, we have closed 11 existing stores, and expect to close another 13 existing stores in quarter two; 24 more closings in quarter three; and finally, in quarter four, 22 more stores for a total of 70 existing store closings for 2012. The store count by the end of this year should approximate 415 stores. Further, it is not too early for us to start planning for 2013. We have mapped out a plan to open another 40 Destination XL stores for 2013 and close another 80 existing stores, dropping the expected store count to 375 stores by the end of 2013.

In quarter one, Destination XL stores generated a comparable sales increase of 16.3%. As David stated in his remarks, expanding market awareness of the Destination XL's multichannel solution to its current potential customers is a key focus of ours for the next 18 months.

Before opening the session to any questions you may have, I'll give you some highlights of the first quarter. Comparable sales increased 2% in the quarter. Half of this comp increase was contributed by the Destination XL stores. The retail channel had a comp increase of 3.8%, while the US direct channel had a decrease of 3.9%. The direct channel contributed 18% of the Company's sales in the quarter.

As David stated, a new DXL catalog distributed in March performed poorly, causing a disruption in sales in the direct channel during the quarter. Much was learned, though, from this catalog, and is being redesigned for a fall relaunch. An important component of optimizing the Company's direct channel marketing spend is to reduce reliance upon the more unproductive print media, and put more emphasis on more productive digital marketing, for not only its cost-effective marketing methods, but also for a source of new customers.

Transitioning our direct customer base to the Destination XL website and catalog is an important part of this optimization plan. Digitally marketed direct channel sales increased 25% in the quarter, and now represents over half the direct channel sales, a significant increase from a year ago. We expect it to continue to grow throughout the year.

In the quarter, the total store count of 445 stores was 3% less than a year ago, explaining the overall flat sales for the quarter. All six of the new DXL stores were open in the second half of the first quarter, and therefore, were not fully impactful to the quarter. During the quarter, the retail sales metrics continues to reflect the productivity increase, as traffic dropped by 1.6%, but the average transaction improved by 9%.

Merchandise margins in the quarter improved 80 basis points, reflecting a healthy inventory position. SG&A increased by $1 million, as expected, based upon the DXL preopening costs, as well as the human capital investments we've made in global sourcing and tailored clothing component of merchandising. Depreciation/amortization reflected an approximate $500,000 increase, primarily from amortizing its remaining Casual Male trademark.

And lastly, I'm sure you noticed that the Company's tax rate rose to just over 40% from 10% last year, which is a result of the valuation allowance being reversed at the end of last year. For comparison purposes, we will continue to adjust last year's tax rate, so that the earnings per share can be comparable to this year's results.

This concludes my remarks for the first quarter. We'll now address any questions or comments you may have.

(Operator instructions) Liz Pierce, ROTH Capital Partners.

So on the direct, just to kind of go back, you launched the consolidator, the DXL -- that went out in March, right?

Yes.

Okay. Were any catalogs sent out -- I know February is a small month, but were any other catalogs sent in February?

No, the catalog in February and April were the traditional catalogs. We seeded the DXL catalog in between the two. We have three [props] in the quarter.

So I guess that's what I was trying to figure out. So what is the cadence of the business in direct? When you sent the regular catalogs out in February, business was okay; then you sent it out in March, the new one, and it fell off, but then came back in April when you sent the normal?

Well, the catalog has been dropping in its importance over the past year. February business was okay. March was not okay. April was much better. We did intensify after seeing February and March -- mainly March, though -- we did intensify the efforts in digital marketing between mid-March and into April. April was a very good month for direct. Part of it was we didn't have a DXL catalog, and part of it was from the digital emphasis.

Okay. And when you talk about the digital emphasis, is that just reaching out via email? Or are there other things?

It's email, it's paid search, it's tagging for natural search, it's affiliate programs. It's a number of -- banner program is very important. So it's a number of all of these things that is having a big impact on the direct channel.

Okay, and how was last year in terms of digital? Can you just remind me what it was a year ago, like, as a percent in the quarter? You said it was about (multiple speakers) [18%] --?

Digitally sourced demand a year ago was about 15 to 20 basis points less a year ago today than it is today.

Sorry, that was digital. But what about the total direct?

Oh, total direct a year ago -- might I recall -- it was up in the low-single digits a year ago.

And in terms of -- I'm sorry, maybe I'm not asking this clearly. I think you said direct was 18-point-some percent of sales in Europe?

Oh, as a percent of sales, I'm sorry.

That's okay.

The penetration a year ago was just about at the same rate, say 18% in round numbers.

What's the feedback? I mean, was it just they just didn't recognize the catalog? I mean, what did you hear from stores?

It was a lot of that, not understanding that DXL was even a Big & Tall catalog. We found three key points that we're readdressing. But for competitive reasons -- we have catalog competitors out there -- that's something we really don't want to share what we're going to be doing on the next drop in the third quarter. But we have a pretty good handle on what took place through our focus groups of customers that had received it and our own surveys.

So, we're pretty comfortable we're on the right track. But that being said, we're only going to be testing it in the third quarter. It won't be a full distribution, just to protect ourselves until we really know we've got it right.

And you don't think -- didn't you guys go to a flat rate on shipping? You don't think that any impact, right?

No, not the impact that we're describing, no.

Did that have any impact at all?

Well, the whole postage shift, I think, compared to a year ago, I think is a plus. Not much of a plus, but a plus, nevertheless. Only because our net shipping charges to our customers overall is much less than it was a year ago.

And what Dennis mentioned earlier -- our long-term strategy is to really reduce the amount of catalogs we're putting out there. We're talking about catalogs that cost in the neighborhood of $1.20 versus an email that's less than 1/10 of a penny. So we're certainly moving in that direction. Our circulation is down over 50% from what it was several years ago. And we have to do it prudently to make sure we don't lose customers along the way. But we're really working long-term to transition our existing catalog customers into the digital world.

Right. I mean, something -- and I appreciate what you, for competitive reasons, that you don't want to get into specifics. But it's somewhat of a conundrum to me, because part of what the effort on DXL is to reset end-of-the-rack customer so that they don't think this is a Big & Tall -- if that was an issue, they didn't think -- didn't recognize it being Big & Tall, yet isn't that part of the process, that you don't want it to be so kind of in-your-face with Big & Tall?

Yes, but again, the circulation is only going to our existing customers. We have a whole marketing campaign coming that's going to reach out to that 40 to 44-inch waist guy that will not be tied to the Casual Male and Rochester heritage. But to our existing customers, they're already familiar with the brands and the product. So that's not the issue there.

Okay, maybe we can talk a little bit more about that offline. What did you see in terms of the mix of sales this quarter with the end-of-the-rack customer, with those sizes? Like particularly the DXL stores?

We've seen growth, but nothing where our potential is. And that, again, goes back to us engaging Gotham as a creative agency to really define who that customer is and how we're going to reach out to him, and convey what Destination XL is all about.

Okay. And are you willing to talk to us about any of the commentary you had for all -- from the focus group that you had in March?

No. I don't think we want to really go in that direction right now on the call.

Okay, all right. How was the made-to-measure event?

The made-to-measure event was positive. We're introducing made-to-measure into the DXL stores, which is more challenging, as opposed to the heritage Rochester stores that have been doing made-to-measure for many years.

The training program has been going well. We are getting traction on that. And that's going to continue to be a major long-term strategy for us to increase our percent of clothing. As we mentioned on the last call, currently that business is about 20% of our sales and we want to -- we'd like to see that penetrate up to 30% of our sales.

Okay. And David, what were the challenges on that? Is it the training part?

Oh, absolutely. It's training. Again, it's a new -- it's something new for our sales people to understand. It's more challenging. It's -- there's -- you know, the measuring is difficult for them to be -- get comfortable with. But we've made tremendous strides. We have a full-time person onboard that was part of the clothing group that is totally dedicated to the clothing training in the field right now. And again, we've shown remarkable improvement in getting our sales people comfortable in selling made-to-measure products.

Okay. And what about in terms of AUC? Any cost pressures? Are we -- I mean, where do you guys stand with what's in your inventory?

You mean cost increases, Liz?

Yes, just in terms of -- I mean, I know you guys were pretty successful in raising prices. And it sounds like -- I mean, you have been able to maintain that. Any issues with -- obviously, labor cost continues to be something that's happening in China.

No, I don't think -- we don't have any problems going into next year. We've had -- overall, we still are looking at cost reductions; nothing significant compared to the increases that we took. But our initiative of raising prices is pretty well behind us. There will be occasional price increases along the way, but -- and our customer accepted it for the value that we're delivering to them. And again, cost issues are not on our problem list for 2013.

Got it, okay. All right, I'll get back in the queue. (multiple speakers) I'm sorry -- yes?

No, I was just going to say could we let some other people ask a couple questions.

I'm gone. Yes.

Thanks.

Richard Jaffe, Stifel Nicolaus.

I apologize, I had to jump off the call for a minute. So if my question about inventory is repeated, I appreciate you bearing with me. Just surprised at the inventory per square foot. And is that just a function of a deeper assortment in the DXL stores taking the average inventory up? (multiple speakers) Or is also the direct?

(multiple speakers) Well, it's a couple things. If you're comparing against a year ago today, there's cost increases embedded in the dollars. If you look at the units we said were pretty flat to a year ago in terms of units. So if you're doing units per square foot, actually down units per square foot, because our square footage did increase.

But in any case, the dollars are also increasing, Richard, because the mix is changing ever so slightly as we add more DXL stores, put more branded merchandise in those DXL stores, in comparison to the closed Casual Male stores, it will tend to -- the average retail is rising somewhat, apples to apples.

And just a follow-on -- in the new DXL stores, how is sales per square foot evolving in those stores compared to the chain average of retail stores?

Well, we said DXL stores are up plus-16 and the overall comp for the company is plus-2%, so --

Right, but the comp doesn't adjust for the square footage. I'm trying to keep it apples to apples on a square foot basis.

Sales per square foot is rising.

At the DXL stores?

At the DXL stores, yes.

Okay. So you think (multiple speakers) -- so the ramp-up is kind of a two-year ramp-up till it gets to Company average? Is that a reasonable timeframe?

Company average in what, Richard?

Company average of sales per gross square foot.

I have to think about that, Richard.

Okay, maybe I can catch up with you offline. Thank you.

Yes.

(Operator instructions) Thomas Filandro, Susquehanna Group.

Happy Friday. A quick question. The comment I think you said was the average dollar transaction was like 50% -- 55% higher at DXL. I think that's what you said, David. Can you dig a little deeper into the makeup of that? Is that AUR? Is it UPT? And I'm kind of just curious to help us understand what's driving it. Is it -- I'll leave it open-ended. And then I have two more questions, please.

Well, yes, the UPT -- there is increase in the UPTs, but a lot of it is the average ticket of the items. Again, we're talking about a Casual Male store that has very little branded product. And now these DXL stores have Polo and Lacoste and Calvin Klein and Michael Kors, our Casual Male customer is gravitating up in price point considerably. And that's really the big driver, is he's -- the ticket's going up because he's buying more branded goods. These are brands that Casual Male never had in their stores.

And is the margin structure on that -- is it fair to assume that it's a positive on dollars but a negative on margin?

Not necessarily. Margin rate or margin dollars?

Margin rate, just margin rate.

It's a slight drop in margin rate.

But obviously generating higher gross profit dollars, which --?

A tremendous amount more.

Okay. And then the second question as it relates to that is, is this changing the profile of your typical shopper? Or is it meaning -- again, going back to what you've talked about years back, of the opportunity for those smaller size shoppers -- is the bandwidth changing? Or is it just more deeply penetrating your core shopper that already exists in your file?

I mean, currently, today, the DXL stores is being driven primarily by -- not totally, but primarily by existing customers. And we're garnering more of their clothing budget for the year. We're increasing our market share primarily with our existing customers. Obviously, what we want to do going forward is garner more customers in terms of numbers. There's 10 times more potential customers than what we're garnering today. (multiple speakers) And that's the whole issue of market awareness and that of brand marketing.

Got it. And that, of course, leads to the hiring that you just talked about. Then the final question is -- it kind of sounds like maybe a dumb question, but just from the standpoint of this whole trend of color having an impact broadly in specialty retail, how important is that trend to your shopper? And if you could possibly maybe provide some merchandising highlights for spring, and maybe some thoughts about what might drive the summer and/or fall business, would be helpful.

Okay, yes. Color has been very good for us. We weren't sure how it would relate to the Big & Tall customer, but they've embraced it extremely well; being driven by our knit business. Our woven business got a little soft, but color and knits are doing extremely well. And the other big driver for us has been shorts. Our shorts are up significant double-digits for the year -- partly weather, but also I think some of the new silhouettes.

We are selling blues and reds and greens in the -- in our shorts that we never had before, more in the branded side, probably, on the Rochester type brands. That customer will react to color quicker. The other strong category for us has been activewear in Team and in Golf. Golf not necessarily as a golfer, but more to the golf lifestyle. That business has been very strong for us this year.

And just one final comment on the shorts, David. You said new Silhouettes -- is there a link change or a style change, a cleaner cut? What's happening in the Silhouettes?

Yes, we're seeing a cleaning up in that. Cargoes are still the driver for us; we sell a ton of cargoes. But our core business, classic looks, we've -- flat-front shorts, which we've never really had a business in before, we're starting to penetrate in those categories.

Okay. Best of luck to you all. Thank you so much.

(Operator instructions)

No more questions?

It appears there are no further questions at this time.

Okay, thank you all for joining in. We'll talk to you on the next webcast and review second-quarter results.

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