Casual Male Retail Group Inc. Q3 2008 Earnings Call Transcript

Nov.20.08 | About: Destination XL (DXLG)

Casual Male Retail Group Inc. (CMRG) Q3 2008 Earnings Call November 20, 2008 9:00 AM ET

Executives

Jeff Unger – Vice President, Investor Relations

David A. Levin – Chief Executive Officer, President

Dennis R. Hernreich – Chief Operating Officer, Chief Financial Officer, Executive Vice President

Analysts

Scott Krasik – C.L. King & Associates, Inc.

Gary M. Giblen – Goldsmith & Harris

Thomas Filandro – Susquehanna Financial Group

Tara Gary – RBC Capital Markets

Margaret Whitfield – Sterne, Agee & Leach

Betty Chen – Wedbush Morgan Securities

[Klaus Von Stutterheim] – Deutsche Bank

Operator

Welcome to the Casual Male Retail Group’s third quarter 2008 earnings call. (Operator Instructions) I would now like to introduce your host for today’s conference, Jeff Unger.

Jeff Unger

Thank you for joining us today. On our call today is David Levin, our President and Chief Executive Officer as well as Dennis Hernreich, Executive Vice President, Chief Operating Officer and Chief Financial Officer.

After I read the forward-looking statements, both David and Dennis will read prepared statements and then open up for question and answering.

Today’s discussion will contain certain forward-looking statements concerning the company’s operations, performance and financial conditions, including sales, expenses, gross margin, CapEx, earnings per share, store openings and closings and other matters.

Such forward-looking statements are subject to various risks and uncertainties that could cause an actual result 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. Our complete Safe Harbor statement is available at www.casualmaleXL.com. David, the call’s open for you.

David A. Levin

Today we announced third quarter comp sales decreased 5.3% from last year, with the comp sales being down 2% in the previous year. The most recent quarter showed about a 5% drop in sales trends from Q2. Consistent with other retailers, there was a significant fall off in traffic during the month of October.

Also consistent with the market, the more problematic areas of the country were in the southeast and the southwest. On a positive note, conversion rates and the average transaction continues to improve over last year, so we have been able to offset some of the loss in traffic by improving our sales metrics.

We’re confident that the loss in comp sales is not a result of losing market share. What we are seeing is the effect of macro economic conditions that have caused erosion in customer confidence and spending.

It’s interesting to note that CMRG has two Big and Tall chains that cater to different demographics. We’re seeing that Rochester Clothing, our higher end luxury concept has felt the impact of the current economic situation to a much greater degree than the Casual Male. This seems to be consistent with the results reported last week by the higher end department stores, such as Neiman Marcus, Nordstrom’s and Saks.

As the retail world has been turned upside down in the last 60 days, we have been quick and diligent to take appropriate actions where we can. Managing our inventory has become the central focus of our activities as we try to adjust to the slowdown at retail.

Even with the shortfall in sales to our forecast, today our inventory is 7% less than a year ago in total and 10% less on a store average basis. And we believe by the end of our fiscal year, total inventory will be 5% to 10% less than year ago levels. Our other priority is to improve the liquidity of the company during a difficult time for all retailers. Dennis will address this all important issue with you shortly.

In the last month we successfully converted the eight Dahle stores we acquired in the second quarter to Casual Male stores. We now have a presence in Utah, Montana and Idaho, and have added market share in Las Vegas, Seattle and Phoenix. I’d like to thank the Dahle family for the smooth transition and we are pleased with the early results. We now have 500 stores in 47 states with the next largest specialty store competitor having five.

We also launched our European e-commerce initiative in the last month. We now have Casual Male XL and Rochester Clothing sites up and running in the UK, Spain, Italy, France, Germany and the Netherlands. We’ve been pleased with the initial traffic into the sites, however our conversion rates have not been up to our expectations at this point and we’re working on improving that over time.

Our direct businesses with Casual Male XL and Rochester Clothing in the U.S. have experienced similar results as our brick and mortar in terms of a fall off in traffic and demand. The same is true of Living XL and Shoes XL. We continue to adjust the circulation plans with the continued goal of trying to break even in each of these concepts.

Our priorities have shifted as we are experiencing the most difficult retail environment of our generation. We will not drive top line sales at the expense of gross margin and carrying excess inventory. And we’re not motivated to drive down our gross margins when we are not losing market share. And we’re not motivated in this current environment to spend a lot of capital to grow our business.

We will continue to grow market share by utilizing the improvements we have made in our inventory management systems and our strong planning and allocation teams. We will continue on our path to increase our market share in the smaller sizes that we have to offer. And we’re motivated in keeping a healthy balance sheet and we’re motivated to increasing our cash flow and reducing our debt.

When we see the business turning in our favor again we will be ready to get back on track on the growth potential we’ve always believed in with CMRG. And now Dennis will review the financials of the company.

Dennis Hernreich

Thank you for joining us on this morning’s call to discuss cash from our retail groups earnings and performance for the third quarter of 2008. Many of my comments may reiterate some of the points David has made, but I think it important to emphasize the attention and focus the business has in managing through a difficult business climate.

For the third quarter of 2008 we had a net loss of $3.2 million or $0.08 per diluted share as compared to a net loss of $3.8 million or $0.09 per diluted share for the third quarter of last year. For the nine months ended November 1st we had a net loss of $1.2 million or $0.03 a share as compared to a net loss of a couple of hundred thousand dollars or $0.01 a share last year.

What is the most significant part about the third quarter is the impact the macro economic trends had on the company’s business, which was not entirely apparent earlier in the year. During the third quarter the company experienced a significant downturn in the sales trends.

Comparable sales during the first quarter and second quarters were minus 2.7% and plus 0.3% with August performing similar to the year-to-date trend. However in the third quarter comparable sales decreased by 5.3% due to significant drops in September and October which are continuing in November.

As David stated sales trends deteriorated as traffic decreased, not only in our retail channel but also the direct channel as well. Being uncertain as to the depth and duration of this economic down cycle we have re-prioritized the company’s many initiatives to focus on free cash flow, inventory management and strengthening the company’s strong liquidity position under its revolving line of credit.

At the end of the third quarter the company’s debt balances have been reduced by 15% from a year ago to $71 million. Capital expenditures have been reduced by 40% to $9.4 million compared to a year ago and comparable store inventory levels have dropped by 10% and overall inventory levels are down by almost 7%.

As a result the company’s liquidity or unused excess availability under its revolving credit facility has grown by 20% to $47 million from year ago levels. Furthermore, even in this uncertain and difficult environment the company expects to generate positive free cash flow for 2008 and 2009 years, reduce its debt levels, and further strengthen its already solid liquidity position under its credit facility which does not expire until October 2011.

Needless to say we feel very confident that the company can continue its effort to increase market share, market to the smaller sized component of our target market and take advantage of the infrastructure improvements that we have made over the previous four years in managing its inventory levels and maintaining strong in stock positions by size, while providing meaningful lifestyle assortments to each of our stores and the direct channels without interruption from this difficult economic cycle.

We will continue our focus on enhancing the company’s market share, but with reduced inventory levels and minimal capital expenditures which for next year are planned at approximately $5 million, an almost 80% reduction from 2007 levels.

Don’t be alarmed. All that needs to be done will be done and as you know in the past our new store openings have been very modest anyway. Market share growth has to come from improved productivity.

Also as a result of the current volatile economic and business conditions, we find it difficult to predict our customer traffic in our retail and direct channels, not only quarter to quarter but also week to week. Therefore we are not able to provide any earnings guidance for the balance of the year and consequently for 2008. At the time of our next earnings call scheduled for March 2009, we will again review business and economic conditions and make a determination as to our ability to provide meaningful earnings guidance for 2009.

Just a few observations regarding the third quarter performance, total sales decreased by 5.7% to $100 million as compared to sales of $106.1 million at a year ago. Comparable sales, as I said for the third quarter, decreased 5.3% this decrease consisted of 6.1% decrease in sales from our direct businesses and a 5.2% decrease in sales from our retail business.

Our core business, which includes just Casual Male and Rochester businesses, had a comparable sales decrease of 5.5% for the third quarter. For the first nine months of this year, total sales decreased by 2.8%. The sales shortfall of $9.2 million was primarily driven by decrease in our comparable sales of 2.2% which includes a comparable sales decrease of 4% from our core businesses.

Our direct businesses increased by 5.6% for the first nine months; however, this increase was offset by a decrease of 3.7% from our retail businesses. Customer traffic in the retail channel decreased by approximately 10% during the third quarter; such decrease accelerated from traffic trends we experienced during the first six months of this year.

Our non-core businesses which include Living XL, Shoes XL, and B&T Factory Direct generated sales of $3.5 million and $11.6 million for the third quarter and first nine months of this year, compared to sales of $3.1 million and $5 million for the last year periods.

During the third quarter our gross margin rate inclusive of occupancy costs was 42.2% as compared to a gross margin rate of 43.9% a year ago. The decrease in margin rate was a result of 30 basis point decrease in merchandise margins and 140 basis point increase in occupancy costs as a percentage of sales. The 140 basis point increase is a result of relatively fixed occupancy costs over a decreased sales base. Our occupancy costs in dollars increased only 4% over the prior quarter.

The decrease in merchandise margin during the third quarter was negatively affected by an increase in cost associated with our loyalty program. Increased postage costs from our direct businesses and increased markdowns in our Rochester merchandise and a slight deterioration in our initial margins due to a shift in sales mix from our higher margin core business to our lower margin non-core businesses.

For the first nine months our margin rate was 44.2% compared to 45.4%. The decrease in margin rate was a result of 30 basis point increase in merchandised margin and a 90 basis point increase in occupancy costs, all the reasons previously stated.

SG&A expenses for the third quarter were 42.7% of sales as compared to 41.5% for a year ago. On a dollar basis SG&A expenses decreased by $1.3 million or 2.9% for the third quarter as compared to a year ago with a decrease of 3% from our core businesses.

For the first nine months SG&A expenses were 40.3% of sales as compared to 39.4% a year ago. The SG&A costs for our non-core businesses increased by $3 million over the same period in the prior year while expenses for our core businesses decreased by 2.9%, resulting in a total decrease of approximately $700,000 on a year-to-date basis.

With the weakness in sales continuing this quarter, strong expense control has been a significant priority for us and will be for the remainder of this year and next year. We will closely manage our SG&A levels, while continuing to invest in our marketing campaigns and growing our direct businesses.

We expect SG&A levels to approximate between flat to minus 2% during quarter four of 2008, and into 2009, even after including added SG&A for our new value stores and the EU direct channel growth. [Giovan], that completes my comments and please open the call to our Question-and-Answer Session.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from Scott Krasik – C.L. King & Associates, Inc.

Scott Krasik – C.L. King & Associates, Inc

David, I know you don't typically do this, but can you give us sort of a monthly progression during the quarter of the same store sales, and then give us some indication of where they've gone in November?

David A. Levin

No, we don't comment on current quarter. As Dennis said, we're seeing a continued shortfall in traffic and the same type of improvements we're seeing in conversion as we have in the second quarter, but I think it's consistent that things have not improved at all. Starting into the fourth quarter for us and what we've heard out there from everybody else we seem to be fairly consistent with what other retailers are reporting.

Scott Krasik – C.L. King & Associates, Inc

I mean some people are putting on minus 20s, is that consistent?

David A. Levin

No, but remember, they were coming from minus 15s or 12s. I mean I think our performance of minus 5 for Q3 was probably one of the better numbers out there.

Scott Krasik – C.L. King & Associates, Inc

So now, I mean, obviously the traffic is weaker than you expected when you had originally planned inventory and whatnot. Since you haven't been successful in the past, and I don't think most retailers will be, promoting to get traffic – the inventory, they're probably still going to be too high at the end of the year, or?

David A. Levin

No, I think I said that inventories should be down 5% to 10% less than year ago levels at the end of the year. We've been very aggressive and early to respond to the shortfalls in traffic and our merchandising teams have been very diligent in moving inventory. Again, one of the advantages we have at Casual Male is 50% of our inventory is core, which is programmable and that's very manageable for us to maneuver that inventory forwards and backwards. So our inventories look very good at this point in time, all things considered.

Scott Krasik – C.L. King & Associates, Inc

Dennis, without giving specific guidance, can you give us sort of a range of where you potentially see the cash flow coming in for the year and what sort of range we could apply to the debt?

Dennis R. Hernreich

I think I said it's – the only range I can give you, Scott, is it is positive.

Scott Krasik – C.L. King & Associates, Inc

You're going to pay some level of debt then.

Dennis R. Hernreich

Yes.

Operator

Your next question comes from Gary M. Giblen – Goldsmith & Harris.

Gary M. Giblen – Goldsmith & Harris

I'm wondering what percent of your merchandise is sort of career wear, because maybe that's tied into one reason Rochester was comparatively weaker. Suits, obviously, tend to be career, work-oriented, but if you go across categories, do you know what percent it would come to approximately in both chains?

David A. Levin

Casual Male is about 15% and Rochester is 25%. Surprisingly, our clothing business, suit business in Casual Male has been on the healthier side of our total sales.

Gary M. Giblen – Goldsmith & Harris

I mean would you expect it to be related to broad changes in unemployment?

David A. Levin

No, I think our assortments in Casual Male have gotten stronger. Rochester shortfall in sales is pretty well across the board. It's directly related to traffic.

Dennis R. Hernreich

Not unlike what you see in the higher end department stores, Gary. It's a very similar impact on the business.

David A. Levin

The higher price points, the more challenging it's becoming and we're making adjustments for that for next year for Rochester, having a higher percent of our inventory at more moderate prices than our highest end product.

Gary M. Giblen – Goldsmith & Harris

Within Rochester, are you seeing more pronounced weakness in financial center cities like San Francisco, or of course, the 6th Avenue store in New York?

David A. Levin

Well, New York has held up pretty well. We remodeled that store. It looks great and there's been good response, but yes, we think the major markets certainly are having an impact and we're seeing that in our London store too.

Gary M. Giblen – Goldsmith & Harris

An incremental weakness there, okay, and then I know gift cards isn't a big part of your business, but there's been a lot of talk about a big decline in gift card usage or purchases this time around. So, what do you see happening?

David A. Levin

It's hard for us to speculate. We don't have – the gift card program really doesn't kick in until Thanksgiving weekend.

Gary M. Giblen – Goldsmith & Harris

Finally, is your procurement, your buying power so to speak, the prices that you can negotiate affected by softer volumes or is it maybe improved because you're doing somewhat better than other retailers, so you're that much more important to the vendors or to the sectors?

David A. Levin

Well, starting in spring '09, where our next receipts are going to be coming in, we have gross margin improvement planned mostly through our global sourcing division where we've been very aggressive and able to get better prices than we have in the past. So, we don't see any margin impairment.

As I said, I think on the last call, the only area we're looking at price increases would be in branded footwear, which is coming out of China and it seems like every manufacturer has raised their prices across the board. But again, that's 5% of our total sales.

Operator

Your next question comes from Thomas Filandro – Susquehanna Financial Group.

Thomas Filandro – Susquehanna Financial Group

Dennis, first question's to you. Can you just speak a little more about SG&A? You talked about marketing investment. I think you said flat to negative two on a dollar basis for the fourth quarter. Did you also say that is the type of number we should see for '09?

Dennis R. Hernreich

Yes.

Thomas Filandro – Susquehanna Financial Group

In terms of the marketing piece, are we seeing marketing up year-over-year?

Dennis R. Hernreich

Well, marketing has been up year-over-year in 2008, and the point I intended to make was we're going to maintain that posture, not increase the dollars in '09, but certainly maintain our campaigns into '09 from '08.

Thomas Filandro – Susquehanna Financial Group

Can you be more specific about how circulation plays into that, and just remind us too, TV, whether we're doing TV this year?

Dennis R. Hernreich

Yes, as you know we're doing TV this year in the fall, as the same posture as the spring and we intend on at this point to continue that into next spring and next fall. Our circulation in our cataloguing, as it relates to our current customer basis, our active files if you will, we're maintaining the same posture, same circ as we've been doing in '07 and '08, of course mailing to our new customers that have joined us, etc.

But we have shifted many of the prospecting dollars that the catalog circ that was being used and instead, focusing on TV and mass media as the medium by which we'll prospect for new customers.

Thomas Filandro – Susquehanna Financial Group

Is overall circulation – what was the overall circulation in the third quarter, up, down?

Dennis R. Hernreich

Overall circ is down because of the shift out of prospecting and into the TV.

Thomas Filandro – Susquehanna Financial Group

Can you be more specific? How much it was down?

Dennis R. Hernreich

Top of my head, Tom, I want to say like 15% down.

Thomas Filandro – Susquehanna Financial Group

And so that will be a similar trend in the fourth quarter?

Dennis R. Hernreich

That will be a similar trend in the fourth quarter.

Thomas Filandro – Susquehanna Financial Group

As well as at least the first half of '09?

Dennis R. Hernreich

Yes. But don't forget that productivity of that part of our circ has always been very poor.

Thomas Filandro – Susquehanna Financial Group

Okay, so core non-prospecting circulation I'm assuming is down but to a much lesser degree?

Dennis R. Hernreich

Actually it's slightly up.

Thomas Filandro – Susquehanna Financial Group

Slightly up, okay. You've answered my question on that. Thank you. Can you tell us are there any covenants on the credit facility and if there are what they are and whether you're in compliance in your view as you go forward?

Dennis R. Hernreich

There's really no financial covenants at this level. The only covenant that does exist is in the event that our liquidity, our unused excess availability drops below $20 million and EBITDA covenant does kick in. But we don't anticipate getting close to that at all.

Thomas Filandro – Susquehanna Financial Group

You made an IMU comment. I sort of missed it. You said something about lower IMUs which impacted the MMU –

Dennis R. Hernreich

I was talking core versus non-core businesses, Tom.

Thomas Filandro – Susquehanna Financial Group

Oh businesses, not products. You’re talking about like the Shoes XL and –

Dennis R. Hernreich

Yes, our shoe margins are slightly less than our apparel margins and as shoes become slightly more higher penetration of our business it tends to drop the average slightly.

Thomas Filandro – Susquehanna Financial Group

So with David's comments, your comments on the IMU front, should we continue to view MMUs coming under a little bit of pressure in the fourth quarter and then rebounding in '09? How should we view?

Dennis R. Hernreich

Yes, difficult to, well, the factors that are at play here, Tom, depending upon traffic and sales trends and our position to stay liquid on inventory, we may or may not have to discount and at what depth of discount will we have to maintain to continue to stay liquid with our current traffic.

Thomas Filandro – Susquehanna Financial Group

Okay, but I just want to confirm what I'm hearing here that you had a 30 basis point decline in the MMU and then none of the negative factors you've highlighted were related to markdowns, they were all related to loyalty program which is in and of itself a markdown –

Dennis R. Hernreich

Yes, so far through nine months that is exactly right.

Thomas Filandro – Susquehanna Financial Group

So at this stage of the game, unless of course the environment continues to get more challenging, your inventories are in good position and David, as you alluded to, you don't want to put pressure on gross margins just to drive sales. The likelihood is it would not be a huge fallout in MMU unless of course the environment changes dramatically. Is that a fair assessment?

Dennis R. Hernreich

That's a fair assessment, although our fashion part of our inventory, we will be aggressive if necessary to liquidate that inventory to stay current, Tom.

David A. Levin

Look, we're not going to take our basic core product, promote it deep to try and generate traffic or sales. We will concentrate on anything that's perishable, seasonable, to get rid of it in this quarter so we come out clean for next year. And that's a moving target weekly as we make those price adjustments.

Thomas Filandro – Susquehanna Financial Group

Just a couple more things, David A. Levin, the Rochester comment about coming in with some lower, more moderate priced product, that's a change. Clearly a reaction to what's going on in the environment –

David A. Levin

Let me clarify that. It's not bringing in new assortments by brand; it's balancing the mix a little better because we're not bringing in any lower priced brands. It's just the percentage of sales we're going to get out of our opening price points that we currently have will increase and some of the very high price points will have to come down. That's what we're saying. We're not going to change the strategy really.

Thomas Filandro – Susquehanna Financial Group

Okay, that was my question. And any thoughts on why you had strong traffic on the European operations but you didn't see as strong a conversion as anticipated? Any thoughts as to why that has occurred?

Dennis R. Hernreich

We're learning about that. I mean, we're glad that we’re getting a lot of exposure, and we’re learning about, through surveys and other means, understanding what our potential costumers are seeing and why they’re not converting quite at the rates that we see here domestically.

Thomas Filandro – Susquehanna Financial Group

Dennis or Dave, how are you guys getting the message out, is it just like search engines, or how do people know that –

Dennis R. Hernreich

So, search engines, banners, we also circulate a catalog to our costumer base that has been accumulated out of our London store for the last several years.

Operator

Your next question comes from Tara Gary – RBC Capital Market.

Tara Gary – RBC Capital Markets

Quick question on the debt balance, if you could just talk a little bit about your thought process behind continuing to pay down the debt versus holding onto the cash?

Dennis R. Hernreich

We’d rather reduce our debt. The interest savings I think is more than the interest to be earned on cash. To us it’s almost no difference quite frankly, and as debt is reduced it expands our credit availability and liquidity to the business.

Operator

Your next question comes from Margaret Whitfield - Sterne, Agee & Leach.

Margaret Whitfield – Sterne, Agee & Leach

Most of my questions have been answered but I was curious, you had a lot going on with the EU, the Dahle acquisition and the three new businesses that were opened in the last year or two. Wondered if you can quantify the bottom line impact to your quarter from these new ventures or recent ventures?

Dennis R. Hernreich

Margaret, all told, it’s probably a loss of, on a pre-tax basis, Margaret, of some $400,000 for the quarter.

Margaret Whitfield – Sterne, Agee & Leach

And would a loss be expected in Q4 as well?

Dennis R. Hernreich

Probably of that kind of magnitude, yes.

Margaret Whitfield – Sterne, Agee & Leach

So you had TV in November. I guess you had TV starting at the end of October. Normally your consumer response, I take it, you did not see any pick up, or maybe it made it less negative than it would have been otherwise. Any comments on TV and how long does it go on for?

David A. Levin

I think you said that. I mean, maybe it would’ve been less negative. It would have been more negative if we weren’t on TV. It’s always hard for us to measure, but again, all I could do is I compare ourselves to the other retailers out there and it seems we’re doing considerably better in holding our comp sales to what else is out there. That’s about all we can quantify at this point in time. We do get considerable phone calls into our call centers when we’re on television. We get a lot of requests for catalogs, but as far as it driving traffic to the stores, it’ very difficult for us to measure.

Margaret Whitfield – Sterne, Agee & Leach

And when does the TV spots end, this month?

David A. Levin

We go through week one of December, I believe.

Margaret Whitfield – Sterne, Agee & Leach

Any holiday plans that are new and different this year in terms of maybe some hard lines, more of them in the stores, more giftables?

David A. Levin

We’re pretty consistent with where we were a year ago. Our Thanksgiving promotion is the most aggressive we’ve ever been. But we've planned this six months ago, but we think we have a pretty compelling offers out there for Thanksgiving, and other than that, it’s pretty much the same promotional schedule that we had a year ago.

Margaret Whitfield – Sterne, Agee & Leach

Given where the stock is, I think there are concerns about liquidity here. If you could be a little more specific on where the debt might be at year end, that would be very helpful I think? Is there any way you can give us a range, Dennis, on where you think you might end?

Dennis R. Hernreich

We expect our revolver balance to end somewhere between $30 and $35 million. And liquidity close to $50 million, Margaret.

Operator

Your next question comes from Betty Chen – Wedbush Morgan Securities.

Betty Chen – Wedbush Morgan Securities

I was wondering if you can give us a sense of the sales mix or profitability contribution of the Rochester division given the some of the struggles you highlighted for the third quarter?

Dennis R. Hernreich

The Rochester business represented to us in the quarter about – just under 20% [base].

Betty Chen – Wedbush Morgan Securities

And is that usually the kind of profitability mix we would expect from them or is it higher given the –

Dennis R. Hernreich

The profitability mix is slightly to Casual Male's advantage, so it’s slightly less therefore as a penetration for Rochester.

Betty Chen – Wedbush Morgan Securities

And then in terms of Europe, just to follow up on the earlier question, could you remind us, is the product offering the same in all those countries relative to the U.S. merchandise or what adjustments have you made to cater to the local preferences?

Dennis R. Hernreich

Well, we're learning about the local preferences. The assortments are pulled from our U.S. assortments so, they’re very much alike. Not 100% everything is available in Europe but almost everything. As we go forward we’ll learn more about those local preferences and they are the same. The assortments are the same in all countries right now. And not only will we learn about the lifestyle preferences, we’ll also learn about the sizing as well. And that might be having an impact on our conversion, and as we learn more about that we’ll make the appropriate adjustments.

Betty Chen – Wedbush Morgan Securities

And are we seeing better traction in the UK given the established base with the Rochester store there relative to the other countries?

Dennis R. Hernreich

We're seeing good traffic into UK, but we’re pleased with the traffic in all the countries quite frankly.

Betty Chen – Wedbush Morgan Securities

Now I know you mentioned the expected investment for Q4 in Europe. How should we think about that for 2009?

Dennis R. Hernreich

With our relationship we have with GSI Commerce, who’s helping us with the infrastructure part of this business, we expect to operate Europe at slight loss to perhaps even a breakeven into 2009. We’ll have a slight loss in the forth quarter of this year.

Betty Chen – Wedbush Morgan Securities

And then in terms of the non-core business here, I know your management circulation. Should we still anticipate a breakeven this year and then what are the targets this year?

Dennis R. Hernreich

Non-core businesses will probably have a loss for the year of about $1 million. But we’re making the appropriate adjustments and expect that to be break even or perhaps slightly positive for 2009.

Betty Chen – Wedbush Morgan Securities

And is the slow down the same across the board or is the Shoe doing better than Living XL and B&T?

David A. Levin

I would say shoes are doing the best of the new concepts right now. It’s very consistent, growing at a good pace, and again, for Living XL, we’re still working on a longer term plan on that. We need to increase our base. We need to prospect more into the women’s side where we’re getting some good activity, continuing to mail catalogs to our existing customers. It slowly works its way down in revenue because a lot of this product is not replicable on a seasonal basis.

Betty Chen – Wedbush Morgan Securities

And so David, when we think about that for next year, are we going to plan for circulation to be up a little bit to try to target that female customer base?

David A. Levin

We’re working on that right now. I can’t give you any guidance on that. I should be able to have more color on that at the next call.

Betty Chen – Wedbush Morgan Securities

And then just lastly, then, as you mentioned that CapEx will be approximately $5 million next year, how should we think about the allocation of that and, I’m sorry if I missed this early, did you say that there will not be any store openings next year?

Dennis R. Hernreich

I think we have like one store opening next year, Betty. So, the $5 million, basically that is a maintenance level type capital expenditure amount. Real estate probably takes up over half of that. We have on the board part of that real estate, much of that is for relocations that makes sense, even in this environment. And then we have some maintenance level type expenditures necessary on our IT side and in our warehouse center.

Operator

Your next question comes from [Klaus Von Stutterheim] – Deutsche Bank.

[Klaus Von Stutterheim] – Deutsche Bank

I have two questions. You’ve got liquidity and you’re buying in debt, wouldn’t it be more accretive to buy stock?

Dennis R. Hernreich

It would be accretive to buy stock. I think that the companies posture is to be more defensive at this point in terms of its liquidity position, and make sure that the working capital needs are being supported for the business, and we’ll continue to evaluate that as we go through this.

[Klaus Von Stutterheim] – Deutsche Bank

Right, now that makes sense, obviously, with given the price of the stock, a little bit of a buy back could make a big difference it would seem to me. So that was one question. The second one is, I can remember, do you guys have a poison pill?

David A. Levin

No.

[Klaus Von Stutterheim] – Deutsche Bank

Is that something that might be a good idea?

David A. Levin

I think that our posture has always been to increase the shareholder value and to not put up artificial measures necessarily.

Operator

Your next question is a follow up from Thomas Filandro – Susquehanna Financial Group.

Thomas Filandro – Susquehanna Financial Group

Hey David, just a quick question on, are you seeing any variance between the total business and the smaller size arena? Are you seeing maybe a better penetration there?

David A. Levin

We’re doing a lot of analysis on that and we’re making a commitment to bring in more smaller sizes. Our information is telling us we're not keeping enough inventory levels in those small size direct connect to maximize the business and we are going to commit to expanding the in store commission on those sides. That’s a key priority to us. We continue to work on that and we get improvements but we see it’s got so much upside we should be doing even better than we are.

Thomas Filandro – Susquehanna Financial Group

And any comments, I know in this environment it’s tough to get anything off the ground but Bold XL?

David A. Levin

Well Bold XL is one of those things – it's a website that really has no overhead to it and because of expense tightening we’re kind of putting it on ice through traffic. Again, we’re generating sales but we’re not going to put a lot of capital or SG&A into that at this point in time. We’ll let it stay where it is and then attack it when we feel more comfortable about then environment out there.

Operator

(Operator Instructions) I’m showing no further questions.

David A. Levin

Well thank you all for joining us on this call and we'll get back to you next quarter. Thank you very much.

Operator

Ladies and gentlemen, thank you for your participation in today's conference. This concludes the program. You may all disconnect and have a great day.

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