Destination XL Group Inc (DXLG) 2013 Q4 法說會逐字稿

Good day, everyone, and welcome to the DXLG fourth-quarter and fiscal 2013 earnings conference call. Today's call is being recorded. At this time, I would like to turn the conference over to Mr. Jeff Unger. Please go ahead, sir.

Thank you. Good morning, everyone, and thank you for joining us today for Destination XL Group's fourth-quarter and fiscal 2013 conference call. On our call today is David Levin, our President and Chief Executive Officer; and John Kyees, our Interim Chief Financial Officer.

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, earnings per share, store openings and closings, and other such 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.

Now I would like to turn the call over to our President and CEO, David Levin.

Thank you, Jeff, and good morning, everyone. Before I jump into the results, I'd like to mention that I am here with John Kyees, our Interim Chief Financial Officer. And John has served on our Board of Directors since 2010, and was CFO of Urban Outfitters from 2003 until his retirement in 2010. He has also served as a senior financial executive of several other prominent retailers. And John will play a valuable role on our senior management team while we conduct a search for our permanent CFO.

As you know from our preliminary results announcement in January, much like the majority of the retail industry, the fourth quarter was a challenging one for DXL. At the same time, we continue to be pleased with the performance of our DXL stores. I will be discussing some very positive data from our most recent DXL marketing campaign in an update about our DXL rollout strategy on today's call. But, first, let me recap the results for the quarter.

A few factors negatively affected Q4 sales of $108.5 million, which were lower than we had expected at the end of Q3. First, during the key selling weeks between Black Friday and Christmas, store traffic was down approximately 4% from the prior year. Adverse weather conditions in some geographies also kept people from shopping. Nonetheless, we are pleased to report that same-store sales for the 48 DXL stores open greater than a year increased 13.6% and 12.3% for the fourth-quarter and fiscal year 2013, respectively. In total, our comparable sales for the fourth-quarter and full-year increased 4.2% and 3%, respectively from the prior-year periods.

September, we launched our fall marketing campaign for DXL. This time around, our ad campaign aired on network television to supplement our nationwide presence on cable, which included spots during NFL games and prime time television on CBS and Fox. As in the spring, the fall marketing campaign also included a radio and digital marketing mix. With these higher-profile media spots, the results of the fall campaign were even better than our spring flight. DXL brand awareness nearly doubled following the fall campaign to 25%. In markets where we have opened a DXL store, awareness grew to 30%; and in markets where we don't have a store, awareness grew to 22%.

Customer traffic at our DXL stores increased by nearly 10% overall during the seven-week campaign, which ended right before Black Friday. In addition, sales in the bottoms category to the key end-of-the-rack guys with 40 to 46-inch waists increased by 31% during the fall campaign. As we have discussed before, this is a key new demographic for the DXL concept.

2014, we will launch a new marketing campaign that will build on our previous two. The objective of the new campaign will be to further reinforce the DXL brand, better communicate the products and services we offer, and demonstrate why we are the choice retailer for our target customers. This time, the marketing will include a Call to Action, which was not present on our past two campaigns, and will have additional geographically-targeted radio spots.

We anticipate a similar marketing spend in 2014 as we had in 2013. However, we now have over 100 DXL stores in our portfolio and, therefore, expect a higher return on our marketing dollars. We will provide more details on this campaign on our Q1 call.

A portion of our marketing dollars are being spent on digital initiatives. As we all know, Internet and mobile sales are growing at a rapid pace as consumers spend more time shopping online than at brick-and-mortar stores. We have made considerable efforts to improve our online storefront and the experience our customers have at destinationxl.com. As a result, in Q4, our strong online sales outweighed the decline in catalog sales, resulting in an increase of 1.2% for our direct business over last year. And in the second half of 2014, we will anniversary the elimination of our catalog circulation, and will not have the difficult comparison with last year.

Before I turn the call over to John to review our financials, I would like to give you an update on our conversion plan for Destination XL. During Q4, we opened 25 DXL stores and closed 40 Casual Male XL stores. We now have 102 DXL stores open across the country, and are represented with at least one store in every major metropolitan area. DXL store square footage has more than doubled since last year to more than 915,000 square feet. The DXL same-store sales continue to dramatically outperform our Casual Male XL stores. And as the chain becomes more fully converted, our topline sales growth should improve accordingly.

In fiscal 2013, our DXL stores accounted for 25%, and the direct channel accounted for 18% of our total business, compared with 11% and 18%, respectively, in fiscal 2012. Our original plan for 2014 called for us to open another 60 DXL's and to close 100 Casual Male XL stores. The long-term goal was to have 215 to 230 DXL stores open, and to have closed all of our Casual Male stores, excluding outlets, by 2016. We now believe that we should be opening approximately 40 DXL's and close approximately the same number of Casual Male stores in 2014, and extend the rollout through the end of 2017.

During the implementation of a transformative strategy like our conversion to DXL, you learn along the way and you have opportunities to adjust the plan. The first thing that we've learned is that the conversion to DXL was certainly the right strategy for the Company. Our DXL comps, customer reaction, and new store margins give us continued confidence in the strategy. Since initiating the DXL rollout nearly three years ago, we have made tremendous progress, and have been able to analyze a significant amount of data with respect to the effectiveness of our store openings and closings. So, what did we learn?

First, our initial concerns about declining productivity and erosion of our customer base at the remaining Casual Male XL stores did not materialize. In 2013, we closed Casual Male stores, which contributed $16.2 million in sales last year and were not replaced by DXL stores. We are, therefore, slowing down the Casual Male closings, and will keep more Casual Male stores open for a longer period of time. The Casual Male XL stores that will remain open are not the one-for-one stores that were closed when a DXL store opened in close proximity. However, most of the remaining Casual Male stores are still within driving distance of the new DXL stores, and can, therefore, serve as ambassadors for the DXL brand.

Our Casual Male associates will educate their current customers about the benefit of shopping at the new DXL stores and where to find the nearest location. The remaining Casual Male stores also will be equipped with marketing kiosks that provide information about the nearest DXL store. We expect these efforts to improve DXL brand awareness and our customer conversion rate.

Second, by extending the completion date of our strategy, we can be more selective about real estate decisions -- for example, the locations, timing and size of our new stores. By accelerating the closing of our Casual Male stores, we were incurring unnecessary expenses related to early lease exit penalties. Immature DXL stores in certain geographies were not able to offset that expense and recoup the lost cash flow of the Casual Male stores. This is especially true when a DXL store was opened in the fourth quarter.

Stores that open during the fourth quarter generally don't have enough time to sell through the fall holiday inventory before it is put into clearance, thus negatively affecting a store's profitability. Therefore, going forward, DXL store openings will be weighted toward the first three quarters of the year.

We have also determined that the average size of the standard DXL box exceeds the square footage necessary for some of the smaller markets we currently occupy or that we plan to enter. Our standard DXL box calls for 8400 square feet of space, but we are modifying our design to fit into spaces with a smaller footprint of 5000 to 6000 square feet. We plan to open this concept in several smaller markets this year. This will significantly reduce our net buildout costs, improve our sales per square foot, and increase the four-wall contribution in these smaller markets. The stores will offer all the same styles and brands as our larger DXL's, but will hold fewer units of inventory.

I would like to be very clear that the number of full-sized DXL stores that we intend to open remains the same. The 215 to [230] store openings that we previously quoted just move out to the end of fiscal 2017. And with the smaller-format stores now being introduced, the final number of DXL stores in our portfolio may increase. We now expect the overall store square footage at year-end fiscal 2014 to approximate 1.2 million, an approximate 34% increase from the end of 2013.

To summarize, we remain very confident in our DXL strategy, and now expect to complete the rollout by the end of 2017. After accelerating the rollout during the past 18 months in order to capitalize on the benefits of the DXL concept and our marketing campaigns, we now have a critical mass of 102 DXL stores, 48 of which have been open for a full year. We have learned a tremendous amount from our experience in rolling out DXL. And, as result, we have optimized our rollout plan in order to grow our topline, improve profitability, increase cash flow, reduce early lease terminations, and improve our sales per square foot and four-wall contributions.

We expect these changes to help us achieve double-digit operating margins in three to five years. This refined strategy enables us to be a stronger company from a financial and operating perspective, both during the conversion to the DXL concept, as well as to the end of the process. We have known for a long time that we have a winning concept, and now we're using the knowledge that we have gained along the way to adjust our strategy to better serve our customers and shareholders.

And with that, I will turn the call over to John.

Thank you, David, and good morning to everyone. I'm delighted to be back in the saddle, and look forward to working with David during this transition period. As you know, I have served on the Board for more than three years, and I am deeply committed to and supportive of the Company strategy.

I'll start by highlighting the Company's results and then provide some context around our guidance for fiscal 2014. For the quarter, total sales were $108.5 million compared with $114.9 million for the prior year's fourth-quarter. The decrease of $6.4 million in total sales was principally due to the challenging retail environment, shorter holiday selling season, and adverse weather conditions in certain regions. In addition, the fourth quarter of 2012 contained an extra week, which contributed approximately $5.9 million of sales in that period.

Furthermore, we experienced a decrease in the quarter of $4.5 million related to lost sales from our Casual Male XL and Rochester Clothing stores that have closed since last year, and have not been replaced with a DXL store. These factors were partially offset by a comparable sales increase of 4.2% or $4.3 million.

Let me briefly define what we mean by comparable sales. Total comparable sales for all periods include retail stores that have been open for at least one full year. Stores that have been remodeled, expanded or relocated during this period are also included in determining comparable sales. Most DXL stores are considered relocations, and are comparable to all closed stores in each respective market. Therefore, those DXL stores are considered a comparable store upon opening. Direct businesses are also included in the calculation of comparable sales since we are a multichannel retailer.

Going forward, due to the significant number of DXL stores that now have been opened for more than a year, beginning with Destination XL's first-quarter of fiscal 2014 financial results, the Company's DXL store comp sales metric will no longer include sales from DXL stores that have been opened less than a year. Starting in Q1, we will now be reporting same-store sales in line with industry standards.

The comparable sales increase of 4.2% consisted of an increase in our retail business of 4.9% or $4 million, driven by our 99 DXL stores that had a comparable store sales increase of $4.5 million or 15.7%, including relocated stores. As previously mentioned, the same-store sales increases for the 48 DXL stores open greater than one year was 13.6%. Our remaining retail stores had a comparable sales decrease of $0.5 million or 0.9%. The comparable sales increase included an increase in our direct business of 1.2% or $0.3 million. Sales for our eCommerce business were up $1 million or 6.1% for Q4, partially offset by a decrease in our catalog sales of $0.9 million or a negative 59.1%.

As a reminder, we eliminated our catalogs completely in Q2 2013, and replaced them with more cost-effective direct mail pieces. Total circulation of our catalogs and mailers decreased 15.5% in the fourth quarter over the prior-year. The operating profit for the fourth quarter increased slightly from 31% to 31.3%. While catalog sales have decreased, the profit margin from our direct business will continue to improve over time, as we continue to drive sales from our more profitable eCommerce business. In the long-term, we expect our eCommerce business to replace the current shortfall in sales from our legacy brand catalogs.

Gross margin for the fourth quarter, inclusive of occupancy costs, was 45.3% compared with gross margin of 47.5% for the fourth quarter of last year. The decrease of 220 basis points was the result of an increase in occupancy costs of 180 basis points and a decrease in merchandise margin of 40 basis points. On a dollar basis, occupancy costs for the fourth quarter increased 7.1% over the prior year, due to the associated preopening costs and timing of 25 DXL store openings during Q4, as well as the timing of our Casual Male XL store closings and lease exit costs.

In fiscal 2014, we are expecting our occupancy costs on a dollar basis to increase by about $1.8 million as a result of the 40 new DXL stores opening this year and the annualization of this year's openings. However, we expect occupancy costs will be approximately 20 to 50 basis points lower as a percent of sales in 2014 than in 2013. We are expecting that our merchandise margins, which have improved more than 170 basis points over the past four years, will remain relatively flat to a slight increase of 40 basis points in 2014.

As a percentage of sales, SG&A expenses increased to 44.1% compared with 37.7% for the fourth quarter of 2012. On a dollar basis, SG&A expenses increased $4.6 million or 10.6% for the fourth quarter compared to the prior -- compared with the prior-year fourth-quarter.

During Q4, the Company incurred approximately $2.9 million in incremental transition costs related to DXL preopening payroll, store training and infrastructure costs, and $2.3 million of severance costs, which were accrued at year-end. Net loss for the fourth quarter was $55.1 million or $1.14 per share, which compares with net income of $4.2 million or $0.09 a share in last year's fourth quarter. The net loss for the fourth quarter of fiscal 2013 includes a non-cash charge of $51.3 million to establish a valuation allowance against our deferred tax assets.

During the fourth quarter of fiscal 2011, we reversed $42.5 million of our valuation allowance against our deferred tax assets, resulting in an income tax benefit for fiscal 2011. However, since our fiscal 2013 net loss resulted in a three-year cumulative loss position, we recorded this non-cash charge to establish full valuation allowance against our deferred tax assets. For fiscal 2013, excluding the $1.05 loss due to the valuation allowance, a $0.03 loss due to the executive severance, and a $0.02 loss due to the fixed asset impairment charges, our diluted earnings per share related to operating the business is a loss of $0.13.

This number is less than the previous-year EPS of positive $0.13, and is primarily attributable to lower-than-expected sales, the increase in marketing costs related to our national marketing campaign, and increased costs associated with our DXL growth. In total, we incurred $11.2 million or $0.14 a share in transition costs during fiscal 2013. This included $4.3 million in occupancy-related costs associated with lease terminations and preopening ramp; $5.3 million of DXL SG&A costs; and $1.6 million of amortization related to our trademark.

The Company used $54.1 million for capital expenditures in fiscal 2013. That was partially offset by approximately $9.9 million from tenant allowances from landlords. From a liquidity perspective for the 12 months of fiscal 2013, we had $4.5 million in cash and cash equivalents; debt of $25.7 million; and $75.5 million of credit available under our revolver facility. Our inventory levels at the end of the fourth quarter were up 1.3%, but unit inventory levels were down 6.9% than year-ago levels. We are carrying a greater percentage of branded apparel for our DXL stores, and this inventory has a higher carrying cost.

And now, turning to our guidance for next year. We expect revenue for fiscal 2014 to be in the range of $405 million to $410 million, which is based on the comparable sales increase of approximately 5.6% for the year for direct and sales on stores open greater than one year. A same-store sales increase of between 12% and 15% for the DXL stores that will have been open for one year. We expect gross margin to increase 20 to 90 basis points. SG&A costs are expected to be approximately $175 million to $177 million, primarily related to an increase in operating costs associated with a greater number of DXL stores versus Casual Male stores, as well as the preopening costs and payroll.

We expect earnings per diluted share to be in the range of a loss of $0.21 to $0.27. We will not recognize any income tax benefit in fiscal 2014, because DXL established a full valuation allowance in the fourth quarter of fiscal 2013. For comparative purposes, assuming a normal tax benefit of approximately 40%, the loss per diluted share for fiscal 2014 on a non-GAAP basis is expected to be approximately $0.12 to $0.16.

Our capital expenditures for fiscal 2014 are expected to be approximately $36 million after considering expected construction allowances, and contributed by our landlords, on the new DXL sites. These expenditures will be spent largely on our planned opening of DXL stores, as well as technology projects to continue to improve the eCommerce site and the in-store customer experience.

The fiscal 2014 net capital spend of $36 million, net of tenant allowances, will be funded from equipment financing notes, our revolving credit facility, and EBITDA generated during the year. Inventory levels are expected to be approximately flat with the prior-year by the end of fiscal 2014. By the end of the year, the Company expects to have a net debt position of approximately $50 million to $55 million, with $50 million to $60 million in excess availability.

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

(Operator Instructions). Thomas Filandro, Susquehanna Financial Group.

Nice to see you involved with the day to day, John. So, so much for retirement. David, a quick question for you. On the accelerated traffic impact that you experienced from the advertising campaign, and then you did not experience it, I think, through December, so are you guys planning any adjustments to the timing and/or shifting of dollars in the way you're advertising for the second half?

And then my second question is more related to John. Can you just be clear on exactly when you anniversary cutting the catalog mailings? And how should we think about normalized direct channel growth on an apples-to-apples basis, please? Thank you.

Okay, in response to the timing of the marketing, yes, we are smoothing that out. And what we are doing is we still have two major television campaigns going on in the spring and in the fall. But what we are doing is we're adding radio in extended periods of time to smooth out some of those bumps that we get when we have the commercial running. So, we have addressed that. But we will be running our commercial through December; where, this year, we ended it November 15th.

Okay, excellent. Thank you.

In terms, Thomas, of the (technical difficulty) quarter catalog, it stopped in the end of second quarter in 2013, so we have -- once we get to third quarter, we won't be against any catalog business.

And do we have sort of a view of a normalized rate of growth that we should think about for the catalog? I mean, I'm sorry, not for catalog; for the direct channel?

Right now, we're assuming high-singles to low-double digits increases.

Okay, excellent. Thank you very much. Best of luck to you all. Thank you.

Laura Champine, Canaccord.

Good morning and good to be able to chat with you again, John. Just wondering what the change in timing of the transition does to your long-term objectives? And if you can give us a sense of where those stand today?

Hi, Laura. Good to talk with you as well. And I've missed a lot of you folks. So, good to have a chat. The potential of the long-term still remains the same. It just got pushed out a little bit. It probably does a wonderful job in terms of protecting our liquidity during that period of time. So -- and it definitely will improve our store real estate choices and our timing on our real estate decisions. So, I am really very pleased with this approach. I think it gives us much more confidence in the DXL concept being a success.

Got it. Thank you.

(Operator Instructions). Mark Montagna, Avondale Partners.

Just to follow up on the radio question, how many weeks of the year do you plan on being on TV this year versus last year? And then how many weeks of radio? And then are the radio ads -- it sounds like they're going to run also concurrent with the TV ads. Just want to verify that.

Yes, the television -- we haven't finalized the fall run yet, but we're going to be pretty much anniversarying what we did in 2013. So, we're talking about 12, 13 weeks of television that will also have the radio going on at the same time. And then we're going to be extending out several more weeks on the radio, mostly in the back half of the year, to get where our business is much stronger. We do want to penetrate into that holiday period where we stop the advertising, again, as I said around the middle of December.

Okay. And then I would imagine that you guys obviously got hit pretty hard with the weather. Can you help us understand how many partial closed days or full closed days you had? Did that decrease potential days by a couple percentage points?

Absolutely. And I know some retailers are giving closing -- number of closing days. We didn't add it up, but I know one day we had 85 stores closed in one day, and we probably had another 50 that did less than [$100]. So we were severely impacted by the weather, as most retailers were. But on a positive note, what we're hearing about first-quarter has been pretty dismal out there at retail and, actually, we're pretty pleased with our first-quarter business. Our DXL store comps are still close to double-digit. And in total Company, we're up in the mid-single digits, which is actually higher than we were in Q4.

So, again, I think weather has been the enemy of all of us. But wherever we've seen weather, decent weather, we're confident. In fact, we zone out our businesses by geography, and our southern tropical stores comps are running at 10% better than the Midwest and the North. So, we are confident that it's weather, and we're also feeling very good about the early reads on our spring product. Again, we could look to Florida, we could look at some of those markets, and the checkout of our spring receipts have been quite good.

So, and when you are saying DXL store comps are running close to double-digit, this is based on your new methodology industry standard for (multiple speakers) having comps?

Yes, this would be stores open greater than a year.

Okay, that's good. And then I might have missed this, but did you say whether traffic had improved following the ad campaign?

Yes, weather -- traffic did improve. But, again, once we hit December, we lost traffic. And, again, I think that was relative to everybody else having traffic problems in the month of December and January. But our traffic, while we were running the commercial, was up 10%, which was a dramatic swing from what we have been seeing. Again, traffic has not been the driver for the DXL stores as much as has been the average ticket. But what we are currently seeing is we are seeing that starting to balance out where traffic and dollar-per-transaction are equalizing themselves, which is a much healthier position for us.

Okay. And then how about Web traffic following this campaign? Because I think last spring, it did increase; but did this show a better increase in the Web traffic?

It was very similar. We get a big boost in traffic when the TV commercial is running. Conversion comes down somewhat because there's a lot of this curiosity going into the website. But as we mentioned previously, that our Web business, our Internet business traffic, sales, has been much stronger in the last four months than it was in the prior -- earlier in the year. And we are very pleased with that. And again, we are starting to cycle through finishing up going against catalog. We're up against it for the next -- this quarter and next quarter, but we are already seeing a significant shift in the top-line sales of our Internet business, as the Internet continues to dominate and the catalogs become less significant.

Okay. And then when you were talking about the smaller market stores, are these markets that you had previously not considered? Or -- and then you (multiple speakers) --?

That's a very good question. Some of them were on the bubble. You couldn't seem to rationalize. Some we said, well, let's -- we need to be in that market. But with this new model, again, where we're looking for stores to do $1.5 million, $2 million, we could rationalize going into the smaller markets. And at $1 million, we could make four-wall profitability that's similar to the bigger boxes.

This was a big move for us. We were able to maintain the D&A and the integrity of the bigger stores. The look and feel is going to be the same. Customers walking in for the first time will be wowed as much as they were in the previous locations. We have made some cosmetic moves that the customer should not see -- taking down the grade of the carpeting; not putting in as-expensive light fixture packages; less registers; one less dressing room -- but it really brings down our CapEx for the year dramatically. And, so, for the stores opening this year compared to last year, on average, they're 1000 square feet less, which will equate to over $1 million just in rent savings alone.

Okay. So -- but these stores that you're opening this year, are any of these in these smaller markets?

Yes. We will be opening -- probably 5 to 10 of our 40 stores will be in the smaller box in the smaller markets. And just to give you a few examples that we have lined up -- Temecula, California; Lafayette, Louisiana; Springfield, Illinois. Again, a lot of these markets were on the bubble with the old format, and now we could certainly rationalize to get the pro forma to be where we want it to be. So these stores will eventually have 25% to 30% four-wall profitability when they mature.

Oh, that's good. So, then, what about in the larger markets with stores, like when you have stores in New Jersey, Nashville -- are those stores going to be smaller?

Yes. Again, the average store was 8,000 to 9,000 square feet last year, and we're tightening it up. We're now 7,000 to 8,000 square feet. Every square foot helps us in the end. It helps our sales per square foot certainly; it helps our CapEx buildout. It helps on our occupancy costs. So, we have been tightening it up from the early prototype. When we started, it was close to 12,000. We went to 10,000, to 9,000. And now we could make -- we could fit everything we need into 7,500 square feet. Smaller -- then it becomes a matter of the market size. But we're not going to be opening up stores that are more than 9,000 square feet going forward, unless it's a flagship type operation.

All right. So you can do a store that's 7,500 square feet. Is that 7,500 in the major markets? And then the smaller markets, maybe it's 6,500?

Yes, well, in the smaller markets, we are going to try -- we're going to ratchet it down to 5,000 square feet where we can.

Wow.

So, that is a significant difference from 7,500 to 8,000. But, yes, again, we -- because we're not going from a buildup real estate market where there is a lot of new real estate, we are going into a lot of buildings that have been previously occupied. So we can't always control what it's going to be. So some are 7,500; some are 8,500; it's what the landlord can carve out for us in the right place. But, again, 7,500, 8,000 square feet, that seems to be the magic number.

And then last question just dealing with (multiple speakers) inventory.

Mark, Mark, Mark?

Yes?

Can you let someone else and just come back, please? Because we've got a bunch of people to take.

Yes, sure. I'll jump back in. Thanks.

Chris Krueger, Lake Street Capital Markets.

Just a quick couple of questions. First, on your advertising campaign, I know it's been kind of -- in the periods leading up to Father's Day and the October/November NFL football season -- looking down this coming year, are there any other times of the year that you're sort of targeting longer-term to potentially add into that, whether it be -- first comes to mind, like NFL playoffs or March Madness or NCAA basketball?

No. Again, we have -- obviously, we have a budget to adhere to, and we are spending about the same amount of money we had last year. To get the right balance of weight of viewership and all those things, we have to -- we do have to concentrate. If we spread ourselves too thin, it loses its impact. But, again, we look at it as the key selling period. There is a dramatic difference in our business in Q2 and Q4 versus the end of Q3. So, our guy's really not out there shopping in force really until Memorial Day. That's when our business starts to spike.

And it would be difficult for us to change that behavior. So we would be spending quite a bit of money and not getting the bang for our buck. So, we are hitting it up when the most opportune periods are for us right now.

Okay. Currently, I guess, in your newer DXL markets, do you have a pretty good handle on tracking the conversion of Casual Male customers who have converted to DXL through your databases, and how that is trending?

Yes. That we know to the customer. We do track that customer. And, again, we know a lot about that today. Obviously, we're going to get the highest conversion where the store stays very close to its Casual Male base. The further we move the store -- for example, if we move the store 15 miles, we're going to get less conversion. And that's what is -- our number one priority is to increase that conversion rate, and what -- we are doing a lot more than we've ever done in the past, today. The day we sign a lease in a market, we put that store into a marketing campaign, where we bring in video monitors behind the registers. We talk about the new store; we give them DXL shopping bags, and we start getting them prepped.

And one of the problems we had in the past was that we were doing this two months prior to the store closing. Well, if a customer only shops us two times a year, there's four months of customers that had no idea where -- if Casual Male was going away and DXL was coming. Now we have a better opportunity, And a very big, important play by extending these Casual Male stores openings, is going to give us a lot more opportunity to tell that customer where the DXL store is going. And we are very excited about that. Again, these store people are going to be ambassadors to DXL World.

Okay, last question. What was your stock-based compensation expense for the fourth quarter?

I'll get back to you on that.

Okay, thanks. That's all I got.

Charles Bellows, White Pine Capital.

Sort of a tag on to Chris's -- what is the merchandise strategy for the Casual Male's that you keep open? And how is that differentiated from the DXLG?

Well, the Casual Male stores are going to continue with the balance of inventory that they have always had. We're not going to be putting in more brands into those stores. They operate at high margins because it's almost all private label. And we don't see any adjustments -- any adjustments to that.

Again, what is encouraging to us is we haven't seen the anticipated deterioration of these Casual Male stores that we thought was going to happen. They do kick off a lot of cash for us. Most of these stores are 20, 25 years old, so (technical difficulty). And they have a nice contribution for us. So we don't really see anything changing. And from us, from an expense point of view, from here, it's just another store number to our planning and allocation and buying group. So, we don't have any special group that's operating the Casual Male stores versus the DXL stores. It's all the same group, and they treat it as a different store number, and have a specific assortment out of the total assortment of the DXL products that we have to offer.

Okay, so -- and then it goes just to a transition to the DXL store, but just over a longer period of time?

Correct. And, again, we were aggressive in trying to accelerate this. And we were taking significant lease write-offs to get these DXL stores open. And what we have been working with our landlords now going back to them, getting extensions on our existing leases, and taking it out another year or two to utilize all that cash it is generating.

Okay, great. And any new brands? Or are you pretty well set with your brands that are in DXL?

We are so pleased with what we have accomplished with the brands. We're kind of scratching our heads because we don't really see anything else out there that we really need in our assortment. We do have specialty smaller market brands -- a brand like -- called Cycle Bunny. It's a young men's brand. It does extremely well in certain markets, but certainly not going to be an all-store brand for us. But we're feeling very comfortable and we like the result of what we have seen with Brooks Brothers. It's been excellent. And we have had the sportswear line in, and now the dress line of clothing coming in from Brooks Brothers.

We have just brought in Adidas Golf, and that looks very strong. We've only had a few weeks sales, but very pleased to have another brand in the golf area, which is one of our strongest growth categories.

Okay, perfect. Thank you.

Mark Garfinkel, Perimeter Capital Management.

A couple of questions. Let me start off kind of one at a time. I was wondering if you might be able to provide any additional metrics or commentary surrounding your inroads into the end-of-rack customer, since that is such an important part of the long-term growth story here.

Yes. Well, again, there we are doing -- we were very pleased. Yes, we have -- John had some numbers he could go over.

Yes. In the fourth quarter, for instance, end-of-rack customers at 43% versus 38% a year ago. And for the full year, it was 40% versus 36%. So, you can see quarter-by-quarter, we are gaining ground and we are gaining against last year. So while we think it could be better, we are pleased with the progress we're making.

Can you characterize the percentage of your customers that are coming in? If you are seeing such large inroad to the end-of-rack customers, how is that impacting or how does that jive with your overall traffic count?

Well, we can't connect one from the other. We can't connect traffic to what the size of the customer is. But, obviously, in the new -- it's being driven by the new to file customers, because we know -- if we're getting the increase, it's not coming from our existing customers. So, I think that our marketing, I think word-of-mouth is resonating out there with this guy who is 42 to 46.

He is -- anecdotally, from everything I've seen in this when I'm in the stores -- he is excited, because he's finally found the place to shop, and he is enamored by the breadth of selection and certainly some of the brands that we carry. They are pretty amazed that we have both Cache brands and Big & Tall sizes.

So, I don't -- we don't -- we continue to increase that penetration, and adding more inventory into those sites. And, again, having a brand like True Religion there, you're going to find certainly selling more to the left. It's a pricey pair of jeans, but it's got a lot of name brands behind it. So on those type of brands, we're going to definitely see a bigger swing to the left.

Okay. My next question would be, you made some -- in your prepared remarks, you talked a little bit about the Casual Male stores kind of helping with the transition to ambassador -- or being an ambassador, if you will. I know that you have talked in the past about there being a little bit of a problem on the transition, when you were closing DXL's and opening; just kind of not there being kind of that link between the Casual Male and the DXL store in the same market.

So, how much have you seen -- where you have already been doing this, leaving a store open -- how much have you seen this help? Do you have any additional commentary that you can provide as to how that may already be working if you're already doing that?

This is relatively new and we are measuring that now, and I think we will be able to talk to that on the Q1 call. But we're not -- we don't have enough information on your question at this point in time. But we're obviously very focused on it and measuring everything we can to look for improvement there.

I think one thing to think about on it is, with -- a guy typically doesn't shop a lot. He may shop a couple of times a year. And if you closed your Casual Male store, even though you told him on his last shopping visit that three months from now, you're going to open a DXL store, he isn't going to remember that six months down the line. And, so, this opportunity of saying -- he's shopping in a Casual Male store and the DXL store is already open, and you can guide him to that DXL store, there is a tremendous opportunity in making the conversion a real thing.

I think that will be very helpful. Hey, thanks a lot, guys.

(Operator Instructions). Mark Montagna, Avondale Partners.

Just a question on inventory. Wondering how much you see perhaps reducing per store inventory of a DXL that, if you plan to reduce it for stores that have been open for a year, to try to boost store productivity?

Again, we have never been the highest priority on inventory turn, because we just have so many sizes we have to manage. Those of you who know us, where a regular size store has 18 size combinations and a bottom, we have 55 size combinations. And it's imperative that we keep our inventory in stock, so we -- and again, in our core programs, we are about 95% in stock. But we do carry -- that is the burden we have to face -- we do have to carry inventory.

The good news is it's not perishable inventory. It's manageable; we move that inventory in and out every month with the manufacturers, so we manage that. Again, those of you who have followed us for many years, we have never had an inventory issue. And the units will continue to come down over time as brands become more prominent. There is a significant price difference. But the dollars will probably stay in the same range -- very close to the same range.

Okay.

(multiple speakers) This may perk a little bit farther with the StoreNet program, which allows us to pull items from different stores. It is an opportunity to potentially reduce inventory. But right now, we wouldn't want to do that. We want to give the best-of-the-best experience possible in a new concept DXL store. But I just had a personal experience shopping with my son last week, and he was looking for a shirt that -- I think it was like an 18 neck and a 38-inch sleeve. And in that particular color, they didn't have it in the store we were in, but they were able to just go online at the store, order it, and have it delivered to the store in three days. So, it does work for us. Just -- we're still feeling our way on this whole program.

John brought up a good point, because he said a word that we haven't really discussed before, and that's StoreNet. And this has been a project that has been going on for close to a year. But we are live with it right now, and it is similar to what Nordstrom's has in place and what Macy's is working towards.

On the Internet, the inventory availability only came from our warehouse. And so, when the warehouse would sell out of an item, it would be out of stock and gone. Today, every store's inventory in the DXL world is part of the inventory. So, if we're out of a specific item in the warehouse, it will move to the next -- to the closest store to that customer who may have that item.

And what's very encouraging is a strong percentage of these transactions that have taken place in the last month are on clearance items, which is items that we tend to be broken up on and have more chance to say we don't have in the warehouse. And, boy, if we can move clearance at an accelerated pace, that should save us a lot of money on our markdowns and improves our gross margins.

Okay, that is very helpful. Thank you.

Bernard Sosnick, Gilford Securities.

Could you provide a little bit of coloration, please, with regard to accounts payable? The size of the increase has caught my eye, and I'm wondering what's responsible for that?

That would simply be timing. It's nothing other than delivering of inventory and the timing related to those deliveries.

So, that you're all current on your payables?

Yes, we are doing nothing (multiple speakers) --

Okay.

-- we're doing anything like that.

All right, that's encouraging. The other point -- 2013 was expected to be a breakeven year, and I understand all the reasons that you didn't make it. But since you are pleased with DXL, and since you have become more conservative with your expansion rate, and since some of the problems from Black Friday through the end of the year probably won't be repeated in 2014, why are we still looking at a guidance number that's negative for this year?

It's a great question. And we obviously have looked at that a lot and tried to figure out how we ramp up the profit. But the real issue in our conversion from 2013 to 2014 is that we're going to lose about $50 million of high profit sales for Casual Male as we close those stores. The Casual Male stores, while they are not great for the future, their existence today is a highly profitable existence. They are probably generating 20% to 25% four-wall income and cash flow. Most of them are almost fully depreciated. So, we lose about $10 million in profits from closing those stores.

Long-term, it's absolutely the right decision, and we're happy to do it; but short-term, it does have ramifications. The other we lose -- we're going to lose probably $2 million due to a mix of private label and branded product, as we shift the DXL business to a mix of private label and branded, where it's a very different mix than what Casual Male was.

The third thing is we're going to incur another $1 million in additional interest expense as we expand -- as we go between stores. We, obviously, have a CapEx expenditure to deal with. And all that is then offset by $80 million of additional DXL volume that is worth about $12 million of profit. So, end result is kind of a wash. It's a painful wash in terms of looking at the numbers on a broad brush right now. Long-term, we absolutely think it's the right thing to do and we feel very comfortable that we will turn a nice profit going forward.

Yes. Bernie, let me add one thing. We opened 25 stores in the fourth quarter and a lot of them were later in the -- late in the fourth quarter. And regardless of what stores we opened in the DXL store -- in the DXL world -- the first year, we go backward. We are going to make less money in the DXL store in year-one than we did in the Casual Male store. That's never going to change. The trick is the following year, we get double-digit comps and double-digit comps, and then we are on our way. And then around year-two, year-three, we should -- we hit the profitability that exceeds the Casual Male store.

So, we are just very weighted; when we opened half of the stores that we have today, opened in the -- that we opened, opened in the fourth quarter. So that's going to be the snag in things. But as we hit 2015, the weight of those stores become important. And they are fully -- and now they are comping double digits and they start to offset the Casual Male. And that's just the nature of shutting down a chain and rebuilding another one. We have just a lot of transition costs -- the payroll, the pre-payroll, the openings, the trainings -- all those things that take place in a major conversion like this.

However, the key point is, we are going to get to everybody's expectations on earnings, just pushed out a few more years than we originally thought. We were very aggressive on the operating -- on the sales and operating income to take place in a few years. And we are learning now that it's just going to take us longer to get there. But as John said, we are confident that we are going to get there. And it gives us the opportunity on the upside that these Casual Male stores that we're doing $650,000, have been doing $650,000 for the last 10 years with no growth.

These Casual Male -- these DXL stores that are doing $1.1 million, $1.2 million, will do $1.7 million, $1.8 million, give them the five years to mature. So long-term, we have a tremendous upside where, previously, we had no opportunity to grow our market share and grow our top line.

I really appreciate the explanation. Just one other thing. Of the 40 stores scheduled to open this year, how many are on plan to open in the first half?

First half, I'm not sure. I think we have like six stores scheduled to open in the fourth quarter, and the balance of the stores will open during the year -- the majority in the first half; but there will be some third-quarter stores.

Yes, there is a considerable amount in Q3, which is good for us. Going forward, we want to open stores ideally February/ March and August/September. Those are going to be our optimal times, because that's when all the fresh receipts are coming in. So we are gearing towards that.

Thank you.

Thanks, Bernie.

That does conclude our question-and-answer session. Mr. Levin, I'd like to turn the conference back over to you for any additional or closing remarks.

Okay. Wait, John?

Yes, I just wanted to provide the information on the stock-based compensation. It was $400,000.

Approximately $400,000?

Approximately $400,000. Yes.

All right, so (multiple speakers) --

One other thing that I just wanted to comment on, that I think sometimes people miss -- David pointed out on the potential of DXL and how strong it is, and how we think it has tremendous future potential. I've been in retail a long time, and I have not seen very many brands where the customer falls in love with it. Anthropologie was an example of that, where the customer just was crazy about that brand. But this -- the DXL customers crazy about the brand, we get these unbelievable letters from customers saying they're just -- they can't believe how well they are treated; they can't believe the assortment. Finally, somebody has done something for the Big & Tall business customer. And I think that's pretty unique and it gives us a great future.

So, thank you, John, for those. That's great. Thank you all for being on the call. And, as always, I would like to end by inviting you all to visit one of our DXL stores. And give us a call if you would like to inquire about a store location or would like to tour with management. And on that note, we look forward to speaking with you next quarter. Thanks.

And that does conclude today's teleconference. We thank you all for your participation.