Destination XL Group Inc (DXLG) 2012 Q4 法說會逐字稿

Good day, and welcome to the Destination XL 2012 earnings conference call. As a reminder, the call is being recorded.

At this time I would like to turn the conference over to Mr. Jeff Unger. Please go ahead, sir.

Hi. Good morning. Thank you, Kayla.

Thank you for joining us today for Destination XL's fourth-quarter and fiscal 2012 conference call. As most of you are probably aware, in February we officially changed the name of the Company to Destination XL Group to better reflect our identity as we expand the Destination XL concept and rebrand the Company. On our call today is David Levin, our President and Chief Executive Officer, and Dennis Hernreich, Executive Vice President, Chief Operating Officer and Chief Financial Officer.

Dennis, David, you can begin the call.

Jeff, the Safe Harbor?

Oh, sorry.

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 investor.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 condition, including sales, expenses, gross margin, capital expenditures and earnings per share, store openings and closings and other matters. Such forward-looking statements are subject to various risks and uncertainty 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.

I'll now turn the call over to David. Thank you.

Thank you, Jeff, and good morning, everyone.

Our financial results for the fourth quarter were essentially in line with our initial expectations. Revenue and net income growth would have been stronger but were negatively impacted by mild winter weather and some delays in DXL store openings. Despite those Q4 headwinds, the performance of our DXL stores and e-commerce website demonstrate the excellent potential of the DXL concept. Our DXL comparable store sales increased 15% for the fourth quarter and 15.6% for the year. DXL stores represented 18% of our total store sales for the fourth quarter, and 13.6% for the year.

Our direct business is down year-over-year due to lower catalog sales. However, our e-commerce platform, DestinationXL.com, is performing exceptionally well. Sales from the website increased approximately 13% for the fourth quarter and 11.2% for the year. Total direct sales are now approaching approximately 20% of our total Company sales. With web sales growing at an accelerated rate, we're shifting more marketing dollars to digital strategies and cutting back on our catalog circulation.

On our last call, we announced that we are accelerating the opening of our DXL stores and closing all Casual Male XL stores. We're going to complete this transformation in the next three years. And at the end of the third year, our Casual Male XL retail stores will no longer exist, and we will have 215 to 230 DXL stores across the country. When complete, we'll have approximately 25% more square footage, but with about 150 fewer stores. Our Casual Male XL outlet stores will remain, and will be used to help liquidate product from the DXL stores. And we also plan on keeping three to four of our most profitable Rochester clothing stores.

By accelerating our DXL strategy, we'll be able to realize the benefit of the DXL concept much earlier than we initially anticipated. In fact, with the substantial investments we are making this year in the strategy, we expect to report improved profitability and cash flow beginning next year. Our DXL stores and e-commerce platform account for 28% of our total business for fiscal 2012. And by the end of next year we project it will account for almost 50%.

It's important to note that we reached that level of sales at our DXL stores with no marketing support. As we more rapidly expand our footprint across the nation, we are now launching a comprehensive marketing campaign to define the DXL brand more clearly, expand market awareness, and grow our active customer base. Because we now have a significantly greater number of DXL stores in operation, our new marketing campaign should have a much greater effect on our performance in 2014 and beyond.

We started the process of developing an effective marketing campaign with a comprehensive research study. The study gave us insights into how our customers view our stores. And we were able to identify specific emotional triggers that drive their behavior. From this research, we began the process of building key brand attributes that would further connect our customers to the DXL brand.

Finally, we developed and tested an advertising campaign that would foster brand awareness and deliver new customers. This past fall, we conducted a six-week test to determine the most effective marketing combination for our national campaign. We tested our campaign in five markets -- Memphis, Minneapolis, Denver, Atlanta, and Oklahoma City. And in each market, we launched different combinations of digital, radio and television strategies. Going into the test, brand awareness for DXL stores opened one year or more within our target audience was only about 17%. Definitely room for significant improvement.

Before I get into the test results, let me tell you a bit about the actual campaign. The concept was designed to attract new and younger customers into our stores. We're targeting end of the rack guys, those with 40- to 46-inch waists. This customer represents 65 of the total big and tall market.

In the past, we had not been successful in getting this customer into our stores. He can't shop at traditional retailers because they don't carry quality selections in his size. But he didn't want to shop at a Casual Male XL store because he had the impression it was for older men. He feels like he's in no man's land when he goes shopping. So that became our theme. Through our marketing campaign, this customer will understand that there is an ideal place for him to shop, with a vastly greater selection and better cache brands.

The test results show that TV and radio were the most effective mediums to deliver greater brand awareness. The awareness increased by as much as 100% in newer markets like Minneapolis, which opened in fall 2012, and 38% in established DXL markets like Memphis, which opened in the summer of 2010. This test also showed that the combination of TV, radio and digital, as executed in Memphis, an established market, was the most effective mix to drive sales, traffic and new customers to the brand. To effectively measure the merits of the test, we examined the performance of Memphis six weeks prior to the test, with the six weeks during the test. We also compared these results to the rest of the chain for control group purposes.

In comparing the Memphis results to that of the DXL control group, we found that Memphis comp sales were 15% higher than the control group, traffic was 24% higher, new customers purchasing was 64% higher, and web traffic was 84% higher, most likely due to the curiosity factor of the DXL commercial. The goal of the commercial was to bring awareness of the new store. It did not contain any sale or promotional message. And the aided awareness -- went from 26% to 38% after the six-week media campaign ran. And today, four months later, Memphis comps continue to outperform their pre-advertising sales levels. Those were obviously very impressive results.

In addition, we found that we were bringing in a smaller-sized customer. Again, this is a key growth segment. The campaign results show that sales in the bottoms category for the 40- to 46-inch waist increased by 38% during this test period in markets like Memphis, Minneapolis and Denver. We'll be using the marketing combination from our most successful test market as the blueprint for our comprehensive national campaign. The goal of this campaign is to grow our total customer base by 40% from the current level of 1.5 million active customers over the next three years. And we're talking about a big and tall market that's approximately 40 million customers.

We plan to execute two major flights of the national campaign. The first flight is slated for late spring and the second is scheduled for late fall. And in both flights we'll proceed with a mix of TV, radio and digital. And we will leverage partnerships with our new PR and social media agencies to drive further awareness and brand enthusiasm, and ultimately customer traffic and purchasing.

In addition to the advertising campaign, we are also ramping up our digital efforts. We see opportunities to increase our exposure in paid search, strengthening our natural search capabilities, and expanding our network of digital affiliates. We are also exploring major new digital providers to dramatically expand our reach into untapped customers in the big and tall space.

With our catalog plan for 2013, does include a 50% reduction in circulation as we move more aggressively into digital. We're working to ensure that we are more profitable in the catalog segment. To this end, we're teaming up with third parties to help us optimize our circulation, and reduce redundancies and customer distribution across brands. The savings from our circulation reduction will place catalogs in the hands of only our most responsive and profitable customers and improve the profitability of our Catalog business.

During 2013, we plan to more than double the number of DXL stores in operation to between 105 to 112, by opening between 57 and 64 stores. At the same time, we have an aggressive schedule to close between 110 and 119 Casual Male XL and Rochester stores. Again, because we'll have a significantly greater number of DXLs in operation by the end of this year, our new marketing campaign is expected to have a much greater impact on our performance in 2014 and beyond.

In summary, 2013 is a critical year for us executing our long-term strategy of transforming the business with the DXL concept. We'll focus on four primary objectives during the year, including opening more stores; ending the year with approximately 105 to 112 DXL stores in operation; investing in our transformation with respect to real estate development, training, and merchandising; along with adequate levels of SG&A additions and capital expenditure.

Third, accelerating the closure of our Casual Male XL anchor stores. And finally, funding and fine-tuning the marketing strategy to define the DXL brand more clearly, expand market awareness, and grow our active customer base. By achieving these objectives, we expect to improve our financial performance significantly in the coming years.

And with that, I'll turn the call over to Dennis to review our financial results for the fourth quarter.

Thank you, David, and good morning everyone.

In my prepared remarks, I will first provide a synopsis highlighting for you the Company's results for the fourth quarter and the 2012 year, then give you an update on the Company's progress of what's still to come with respect to the transformation to the DXL concept, and, lastly, provide the earnings and cash flow guidance for the strategically critical 2013 year. Since the Company's going through an accelerated transformation of its Business from its legacy brands to its Destination XL concept on a nationwide basis, which started in 2012 and will continue through 2015, there is a lot to cover but I'll highlight the major points.

For the fourth quarter of 2012, total sales increased to $114.9 million, from $111.1 million for the prior fourth quarter. Comparable sales increased 0.5 points for the quarter. And for the full year total sales were $399.6 million, compared to $395.9 million for the full year 2011. Comparable sales for the full year 2012 increased approximately 1.5%.

Let me quickly define what we mean by comparable sales. Total comparable sales for all periods include retail stores that have been opened for at least one full year. Stores that have been remodeled, expanded or relocated during the period also are included in determining comparable sales. Most DXL stores are considered relocations and are comparable to all closed stores in each respective market area. Therefore, unless we have opened a DXL store in a new market, of which we have two DXL stores like that today in brand-new markets, a DXL store is considered a comparable store. Direct businesses are included in the calculation of comparable sales since we are a multi-channel retailer.

With that said, sales for our Retail business overall was up 0.5 points, and 2% for the fourth quarter and the year. The 46 comparable DXL stores experienced a 15% increase over the prior year for the fourth quarter, which is primarily responsible for driving the growth in the Company's total comp sales for the quarter. For the year, DXL stores comp sales were 15.6%. Those 16 DXL stores that have been opened for more than one year generated a 7.6% comp sales in the fourth quarter, which we expect will improve during 2013 as the Company raises market awareness of the DXL stores with its national marketing campaigns.

A negative trend has emerged among some of our traditional Casual Male XL stores that are in close proximity to the new DXL stores. Comp sales at these locations are below those of our other remaining Casual Male XL stores. Casual Male retail and outlet stores continue to experience sales erosion, reporting negative comparable sales for quarter four of approximately 4.8%, and 2.2% for the year. This tells us that the success of our DXL stores is a negative for our traditional Casual Male XL stores in the near term. This was an important factor in our decision to accelerate the closing of our Casual Male XL stores while opening new DXL stores.

Sales from our direct business for the fourth quarter increased slightly over last year, with sales from the direct business increasing 0.6%. For the year, our direct business was down 1% over the prior year. Our Direct business consists of two primary channels, catalogs and our website, DestinationXL.com. Sales from our catalogs and call center were down 49% during the fourth quarter, while sales from our website were up 13%.

We are transitioning our customers away from our traditional catalogs to making purchases on our more profitable e-commerce website. So, this is a positive for us in the long run. As David mentioned, in response to the shift in purchasing behavior, we decreased catalog circ and impressions by approximately 70% in the fourth quarter and are decreasing our catalog circulation in 2013 by another 50%, and impressions by almost 70%, resulting in a $3 million amount of savings being diverted to partially fund the national advertising campaigns and increasing our marketing spend in digital strategies.

Although sales growth in the direct channel may have stalled as we work through this transition, the operating margin of the Direct business has improved significantly from prior years and is approaching 25% from the less than 20% in prior years, and is expected to continue to grow in 2013. We expect the Company's direct business will resume its revenue growth in 2013 on the strength of our digital marketing strategies, and our 2013 customer acquisition strategy to raise market awareness on a national basis, which should greatly benefit the e-commerce website.

For the fourth quarter, gross margin, inclusive of occupancy costs, was 47.5%, compared with gross margin of 44.7% for the fourth quarter of last year. The increase of 280 basis points was a result of an increase in merchandise margins of 290 basis points, offset slightly by a decrease of 10 basis points related to higher occupancy costs. Merchandise margin benefited from improved initial markups, as well as less promotional activity in the fourth quarter, as well as fewer clearance markdowns. On a dollar basis, occupancy costs for the fourth quarter of 2012 increased 5% over the prior year, due in part to higher costs for the DXL stores.

Regarding the Company's SG&A levels, I'd like to note that the 53rd week in 2012 added $2.7 million in the fourth quarter. And the Company's DXL store opening activity also added to the SG&A level for the year. The Company expended approximately $9 million, or $0.11 per share, in DXL-related transition costs, including items such as pre-opening costs, store closing expenses and marketing-related expenses throughout 2012.

Net income for the fourth quarter was $4.2 million, or $0.09 per share, which compares with quarter four of 2011 adjusted net income of $3.1 million, or $0.06 per share, which excludes a non-recurring income tax benefit of $42.5 million, and a partial non-cash impairment charge of $23.1 million against the Casual Male trademark. For 2012 year income from continuing operations was $8.1million, or $0.17 per share, during this DXL transition year, which compares to $0.22 per share in 2011 on an adjusted basis.

The Company's $32.1 million in investing activities during the year was largely covered by operating cash flow of $29.9 million. From a liquidity perspective, at the end of the year we had $8.2 million in cash and cash equivalents. And no outstanding borrowings under our credit facility, which has $71 million of credit available at year end.

Now I'd like to provide an update on the accelerated conversion plan for our Destination XL concept. In quarter four we opened 14 new DXL stores. And at year end we had a total of 48 DXL stores in operation. For the year, we remain on target by opening 32 DXL stores and closing 68 Casual Male XL and 2 Rochester stores. We now have at least one DXL store located in most major metropolitan cities across the US. The Company's total square footage increased 2.6%, but the DXL store square footage doubled to just under 500,000 square feet.

In 2013, we plan to double the number of DXL stores in operation to a range of 105 to 112, by opening another 57 to 64 locations. We have already selected sites for all of these new DXL stores. And are working towards finalizing lease arrangements, with more than 50% completed. We plan to close between 110 and 119 Casual Male XL and Rochester stores this year.

We expect the overall store square footage to increase just over 5%, but the overall DXL square footage is expected to again double to just over 1 million square feet at the end of the year. We expect that the roll-out into existing markets will be mostly completed by the end of 2015, with between 215 to 230 DXL stores in operation. At that time we should see the full effects of the top- and bottom-line benefit from the DXL format.

From a profitability standpoint, 2013 will be the most challenging year, which I'll explain in more detail in just a minute. But we expect profitability to build quickly in 2014 and 2015. This DXL roll-out is projected to approximate $150 million in costs, which will be funded primarily from operational cash flow, including the use of the Company's approximately $45 million in tax benefits, and limited funding under our revolver during these transition years.

As the Company transforms its markets to DXL over the next three years, we will open approximately another 175 DXL stores and close approximately 300 Casual Male XL stores and Rochester stores, and raise market awareness with our target addressable market of 40 million men. As a result, we expect that our active customer base will increase by in the neighborhood of 40%, generating an approximate average annual 12% growth rate in the number of transactions.

In addition, dollars per transaction from each customer visit to either our stores or our website are also expected to increase from a blended rate today of $110 in 2012 to between $130 to $150 per transaction in 2016, as a result of three things. First, the private label versus name brand assortment mix will shift from an approximate 75%/25% mix in 2012, to a 65%/35% blend in 2016, raising the average unit retail by approximately 15%. We expect to improve the Company's sales penetration in tailored clothing and related accessories, which has a much higher average unit retail than sportswear.

The DXL stores have the ability to properly display the widened assortment better than Casual Male can, and to better service the customer with better-trained and more qualified sales associates. The current penetration approximates 15%. We believe the penetration will exceed 25% in three years.

And lastly, the Company's customer experience delivered in the stores, together with the expansive assortment available in any DXL store, are hallmarks of the Company's DXL brand, which we expect will produce greater sales productivity.

As the Company continues with the DXL transformation, we are forecasting significant sales growth in 2014 and 2015, reaching $600 million in 2016. And producing gradually increased operating margins, reaching over 10% in 2016. With that, I'll give you our guidance for 2013, which is a critical year in growing DXL store count across the chain, making significant progress in closing Casual Male XL stores and significantly enhancing market awareness of the Company's DXL brand across the chain, which we expect will produce greater store and e-commerce traffic.

We expect total sales to be in the range of $415 million to $420 million, which is based on a comparable sales increase of between 8.5% and 10% for the year. The critical factors in achieving this guidance is in the DXL store expansion, along with the national media campaigns designed to increase DXL awareness. EBITDA is expected to be in the range of $20 million to $23 million. We expect gross margin to be constant to 2012 levels at 46.5%, within a range of plus or minus 20 basis points.

SG&A costs are expected to increase by between $15 million and $17.1 million, to a range of $171.4 million to $173.5 million, primarily due to the $10 million increased advertising spend for the national marketing campaigns, higher corporate bonus expense, increases in DXL store openings, and Casual Male XL store closing costs, training and travel costs related to new DXL stores, and higher operating expenses to support the expected sales increase. As a percentage of sales, SG&A expenses are expected to increase over the last year as a result of our DXL initiative by 220 basis points, to 41.3% of sales.

Earnings per diluted share are expected to be approximately breakeven. Our capital expenditures for 2016 are expected to approximate $45 million, after subtracting expected construction allowances contributed by our landlords for the construction of the new DXL sites. These expenditures will be spent largely on our planned opening of a total of 57 to 64 DXL stores in 2013, as well as technology projects to improve the e-commerce site and the in-store customer experience. [2000] Net capital spend of $45 million will be funded from, A, the between $20 million to $23 million of EBITDA. B, with its beginning cash of $8 million, and C, another $5 million to $10 million in reduced working capital. Therefore, we expect free cash flow to be negative during the year, such that the revolver borrowing is expected to be between $10 million to $15 million at year's end.

Together with the Company's seasonal borrowing needs, we expect the Company's peak borrowing from its revolver to be in the neighborhood of $40 million during the year. Borrowing availability at year end is expected to approximate $60 million to $65 million. At the end of 2013, the Company will have approximately 110 DXL stores opened. We will have reduced our Casual Male XL and Rochester store base by over 50% from what it was a few short years ago, and we will have made significant progress in raising market awareness of the DXL brand nationwide. Taken in total, this positions the Company for substantial revenue and operating profit growth, beginning in 2014.

This concludes my remarks. We will now take your questions.

(Operator Instructions)

Tom Filandro with SIG.

Thank you, gentlemen, for that comprehensive overview. Very impressive. I have four questions I'd like to ask. First, in the test markets, where do you think that customer that you gained was shopping previously? Then my second question is, so to be clear, I think you said you experienced a pickup in new-to-file shoppers in those markets. Was that a consumer who didn't previously shop your CMXL brand? And then I have two follow-ups, please.

The first one, on the previous shopper, we haven't been able to really identify it. But again, this is a customer who's been fragmented out there for his lifetime, being a big and tall customer. He may be shopping on the Internet for a pair of pants at one retailer, picking up something at a discount retailer. But again, we don't really know the identity of them. But in bringing that to the second question, yes, these are new-to-file customers. These are customers who had not previously shopped any of our concepts.

Okay, cool. The other two questions I have, David, are, I'm curious about when you've closed those CMXL stores, do you have a sense of what percentage of that business you're currently capturing? And then, Dennis, in the pro forma view of the DXL strategy, how much of that business do you believe you will retain? And then my final question is, as you talked about the brand awareness campaign, and really focusing your efforts on the DXL brand, does it make sense to maybe just take the successful categories out of Shoes, Living and BT, and just put it under that one umbrella? Thoughts on that. Thank you.

As we open a DXL store in Casual Male markets, we're converting a majority of our Casual Male customer. The retention of our customer base in new DXL markets where they've replaced Casual Males is no different than the retention rate today of any Casual Male customer. So we're pretty much converting on a consistent basis our Casual Male customer to DXLs. Of course, as you know, the major difference is that they spend like 40% more with us when they walk into a DXL store than when they walk into a Casual Male store because of the deep and broad assortment. We believe that not only our new to file will increase, but also our retention will increase as the DXL awareness improves from its current low levels, Tom. And so I expect where today we have a normal retention rate of some 50%, 55% on existing customers, no matter where they shop, Casual Male or DXL, we expect that that retention percentage will increase.

Excellent. Thank you.

Richard Jaffe with Stifel.

Just a quick question on DXL stores. They were 18% of the total. So we should assume about $21 million in DXL volume in the quarter? Is that a reasonable assumption?

Yes.

And you mentioned $45 million in tax benefits. Could you just explain? I thought the NOLs had been used up. So I'm not sure what this might be.

No, the NOLs have not been used up, Richard. We have on our balance sheet -- we're filing our 10-K today, by the way, so you'll have access to the details -- $45 million of deferred tax assets. About 50% of that relates to NOLs which we will be able to use over the next several years to offset our cash needs.

That's a nice asset. I didn't realize there was still so much left. And ad expense, is that a balancing act between reducing catalogs and spending more on electronic media? And will that come out as more or less a wash?

Our overall marketing spend is increasing by $10 million from, like, 4.5% of sales to 6.5% of sales. But reducing our catalogs helped keep that to just a $10 million increase. We're finding our catalogs are just becoming less and less and less productive, Richard.

Sure. I think we're all into computers now, the 21st century.

Exactly. Our customers are becoming that way, as well.

I think that's it from me. Thank you.

Liz Pierce with Ascendiant Capital Markets.

David, a question for you. On the web business in general, not specifically to you, a lot of retailers continue to add extended sizes to their business. I should qualify that. Maybe more on the women's side. And there's so many other sites that are coming on. Are you seeing that for the men's side of the business, as well?

I don't think there's been any major change in the last two or three years. I think some of the retailers will continue to add a size. But we haven't seen any new retailers specifically focused and saying now we're in the big and tall business online. There's no new player in terms of that. Other than, again, I think over time, as in the women's business, a size will get added on the far end.

Okay. So it's mainly -- it's just very random, is the best word?

Yes. It's item-driven. You're not going to find any type of wardrobe solution.

Okay. And then, I'm not sure if you mentioned this, but in the testing that you have done on the marketing, in those test markets, did you actually reach a younger customer? If I missed that, I'm sorry.

Yes, we did. The age came down, the sizes came down. And again, for 2013, the big changes, we did not necessarily have the right fit for that gentleman coming in, especially on the top side of the business. And as of this month the stores are getting populated with a brand-new size that hasn't been offered in the big and tall market, which is more of a slimmer fit for a younger guy.

That was my next question. So, okay, because I hadn't seen it, so it's just coming into the stores now?

Yes.

And David, will that be across the board in many different -- not only in your own private labels but are you also going to have some branded product? Were you able to work with them, some of the brands?

All the brands. The brands are a matter of -- it's a timing issue. We'll have our private label brands, will be in now. The brands will be coming on in the next several months as they have to make the adjustments. Again, this was a year project to get all the brands to sign up for this initiative. And realistically speaking, the last thing brands want to do is add another size to their inventory but they've seen the potential. We went over the numbers with them, and actually they're pretty excited about adding the size to their assortments.

And Dennis, just a quick question for you. When you said that the, I think, existing Casual Male stores, their comp was negative 4.8% for the quarter, was that right?

Yes.

Okay. And then, but for the year was it up 2% or down 2%?

It was down 2%, Liz.

It was down 2%. Okay. All right. And did that erosion -- I don't remember if you've given those two numbers through the year for us. So did it continue to widen the spread between them?

Yes, it did widen as the year progressed, Liz.

Okay. And then, David, the original stores -- the Chicago, Houston, Vegas, and let's maybe just do Chicago and Vegas -- are those continuing to perform above plan or have they settled down?

I think we said in the -- which I thought was one of our best statements.

I'm sorry. I missed it.

The 16 stores that have all anniversaried and are comping on their own, I believe were up 7% comp in the fourth quarter. So that's very encouraging for us, that now those stores are continuing to perform. And again, that's with zero marketing dollars behind the initiative.

I was wondering specifically about Chicago and Vegas since they are, from what I thought are going to be -- they are larger than the go-forward.

Specifically, to my best recollection, Las Vegas was definitely one of the higher ones, and Chicago was probably in the lower quartile in terms of the spectrum of the stores.

Okay, great. Thanks and best of luck.

Tom Filandro with SIG.

I just wanted to circle back on that other question I had asked about the awareness focus on DXL, and what your thoughts are in terms of Shoes, Living and BT. And I might as well throw on, in addition. Any meaningful new brand introductions this year, 2013? Thank you.

As far as the new brands, we're working on one for the third quarter but we're not ready to announce that yet. We do have the big roll-out of Tommy Hilfiger. We did it in a limited number of stores in the fourth quarter,. And, again, with a limited collection. And for spring, it will be in all DXL stores in a full spread of assortment between casual, dress and accessories. And Dennis?

Tom, over time, Shoes of course, there's a other customer base that have wider feet that have the need, and should have access to ShoesXL.com. And so that service is obviously our main customer base. But there's another segment that it appeals to. As to Living and BT, over time, again, Living's the same way as shoes. There's a segment of a customer base, regardless. We have a lot of female shoppers, LivingXL. So, it's not a main thrust of a brand, as you know, for us, but it does service a need. But certainly BT, Casual Male and Rochester, over time, as the customers absorb and embrace DXL, you'll see those get absorbed by DXL over time. We're letting the customers tell us, sort of, when to do that.

Excellent. Thank you very much. Best of luck.

Bernard Sosnick with Gilford Securities.

Could you give us an idea of the pace of openings for DXL during the year?

The pace, although perhaps not dictated by us, as we would have liked, but it's going to be something in the range of 20 stores in the first half and 40 stores in the second half.

Okay. So it's going to be a later schedule of openings. Not quite as heavily skewed to the fourth quarter, but somewhat later than you would have wished, is what I gather you're saying.

In the second half, it is somewhat skewed to the fourth quarter as well, Bernie.

Okay. And how many -- you should already know how many will open in the first quarter. What's expected?

We'll have around five to seven openings in the first quarter, and almost 15 in the second quarter.

Okay. Now, quite a number of retailers have experienced a letdown in business in late January, early February. Could you give us an idea of what your experience was during that period?

I think we pretty much followed the trend of what was going on out there. Again, from our perspective, the weather flips on us and becomes -- colder weather becomes a detriment as we start to hit those months. It was very mild a year ago. And while our categories like outerwear and sweaters are quite good, that's insignificant to us at this point in time. We really want to start selling the new spring product. But I'd say we're probably generally consistent with everybody else.

Okay. Does that mean running behind your expectations as you were in the fourth quarter?

No, we're not ready to -- no, Bernie. It's too early to put that on. Everything that we know about the business today is incorporated in the guidance I gave you today.

Okay. And with respect to the closing pace, does that pretty much match up with what you said for the opening pace?

Yes, very similar. Almost all of the closings of the Casual Male XL are somewhat tied to the openings of the DXL stores.

And, finally, there seems to be a change in your expectations regarding the use of debt versus what you were thinking about just several months ago. What is the main factor for that?

Primarily the amount of spend that we anticipate requiring for marketing, I think is one of the major. The second piece, of course, is we missed the numbers slightly from what we -- we came in with less cash coming into the year than we expected. But the other primary factor is the investment that we feel we have to make in the marketing side.

Okay. Thank you very much. It's been a very thorough conversation so far. Appreciate it.

Richard Jaffe with Stifel.

I think Bernie touched on this question I was coming back for, which is just the current trends, the particularly cold weather, January and February which has hampered most retailers. Wondering if you guys had seen similar pressure, if you wanted to comment on that. And on the other side of things, your inventory looks particularly lean and clean. Which is certainly very good news going into spring in terms of markdowns. But given the cold weather in January, was there a missed opportunity not having that clearance volume or clearance winter product?

We don't think we missed any opportunities, Richard. But we are proud of the inventory position that we're in. It is clean. You saw that in our gross margins in the fourth quarter. And we feel very confident with the gross margin expectations in 2013. And we plan on keeping the inventories in that same lean and mean position throughout the year.

Okay. And just a quick question on occupancy leverage. Obviously with the comp, I would have expected more leverage, but it was offset by the increase in rents at some of the new stores. Is that the way we should think about it?

Yes, exactly.

Okay. Great. Thank you.

It appears there are no more questions at this time.

One second, please. Dennis misspoke when he was talking about CapEx. For 2013, it's $45 million. He had said for 2016 was $45 million. Just want to correct that.

Thank you, Jeff.

Thank you all for being on the call. I'd like to end by inviting all of you to visit one of our DXL stores. Because it is hard to grasp the opportunity we have with DXL stores until you've been in the store and can see for yourself what we offer our customers with this new concept. If interested, please give us a call if you'd like to inquire about any location, or would like a tour of the store. And we look forward to speaking with you next quarter. Thank you.

This concludes today's conference. Thank you for your participation.