Destination XL Group's CEO Discusses F4Q12 Results - Earnings Call Transcript

Mar.15.13 | About: Destination XL (DXLG)

Destination XL Group, Inc. (NASDAQ:DXLG)

F4Q12 Earnings Call

March 15, 2013 9:00 am ET

Executives

Jeff Unger – Vice President-Investor Relations

David A. Levin – President, Chief Executive Officer and Director

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

Analysts

Tom A. Filandro – Susquehanna Financial Group LLP

Richard E. Jaffe – Stifel, Nicolaus & Co., Inc.

Liz O. Pierce – Ascendiant Capital Markets LLC

Thomas Filandro – SIG

Bernard Sosnick – Gilford Securities

Operator

Good day and welcome to the Destination XL 2012 Earnings 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.

Jeff Unger

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 or David, you can begin the call.

David A. Levin

Jeff the Safe Harbor?

Jeff Unger

I’m 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 is 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 closing and other matters, such forward-looking are subject various risk and uncertainty that could cause actual results to differ-materially from those assumptions mention today.

Due to a variety of factors that affect the company information regarding risk and uncertainties are detailed with the company’s filings with the Securities and Exchange Commission.

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

David A. Levin

Thank you, Jeff, and good morning, everyone. Our financial results for the fourth quarter were essentially in line with our initial expectations. Revenue and then 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, and DXL stores represented 18% of our total store sales for the fourth quarter in 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 shipping 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 MaleXL stores. We’re going to complete this transformation in the next three years. And at the end of the third year, our Casual MaleXL retail stores will no longer exists and we will have 215 to 230 DXL stores across the country. And when complete, we will have approximately 25% more square footage, but with about 150 fewer stores.

Our Casual MaleXL outlet stores will remain and will be used to help liquidate product from the DXL stores, and we also plan in 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 to see on 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 reach 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 marking 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 and operations, our new marketing campaign should have a much greater effect on our performance in 2014 and beyond.

We started the process of developing in effective marketing campaign with a comprehensive research study. The study gave us insights and to 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 faster brand awareness and deliver new customers. This past fall, we conducted a six-week test to determine the most effective marketing combination for 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-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 stop at traditional retailers because they don’t carry quality selections into 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. To our marketing campaign, this customer will understand that there is an ideal place for him to shop with a vastly greater selection and better Cashay brand. The test results showed the TV and radio were the most effective mediums to deliver greater brand awareness. The awareness increased by as much as 100% in newer markets but Minneapolis which opened in Fall 2012, 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 to 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 of the DXL controlled group, we found that Memphis comp sales were 15% higher than the controlled group, traffic was 24% higher, new customers purchasing was 64% higher, and web traffic was 84% higher and 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 do not contain any sale or promotional message. In 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 the pre-advertising sales levels. Those were obviously very impressive results.

In addition, we found that we were bringing in a smaller size customer. Again this is a key growth segment. The campaign results showed the 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 campaign combination from our more 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 our 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 far. And then both flights will proceed with a mix of TV, radio and digital and we leverage partnerships with our new PR and social media agencies to drive further awareness and brand enthusiasm and ultimately customer traffic in purchasing.

In addition to the advertising campaign, they are also ramping up our digital efforts. We see opportunities to increase our exposure, and 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. At 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 a 119 Casual MaleXL and Rochester stores. Again because we'll have a significantly greater number of DXLs into 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 of the DXL concept. We will focus on four primary objectives during the year, including opening more stores, ending the year with approximately 105 to 112 DXL stores in operations, investing in our transformation with respect to real estate development, training and merchandizing, 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 will turn the call over to Dennis to review our financial results for the fourth quarter.

Dennis R. Hernreich

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, and give you an update on the Company’s progress on 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 is going through an accelerated transformation of its business from its legacy brands to its Destination XL concept on a nation-wide basis, which started in 2012, and will continue to 2015. There is a lot to cover, but I will 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 point 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 open 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 and 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. Our DXL store is considered a comparable store. Direct businesses are included in the calculation of comparable sales since we are a multichannel retailer.

With that said, sales for our retail business overall was up half a point 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 and the Company’s total comp sales for the quarter.

For the year, DXL stores comp sales were 15.6%. Though, 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 MaleXL sales stores that are in close proximity with a new DXL stores. Comp sales of these locations are below those of our other remaining Casual MaleXL 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 MaleXL stores in the near-term. This was an important factor in our decision to accelerate the closing of our Casual MaleXL stores by opening new DXL stores.

Sales from our direct business for the fourth quarter increased slightly over the 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 in our website destinationxl.com. Sales from our catalogs and call center were down 29% 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 a 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 installed 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 will greatly benefit 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.

The merchandise margin benefited from improved initial markups as well as less promotional activity in the fourth quarter, as well as fewer clearance markups. 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 activities 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 item such as pre-opening cost, 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 our 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 $8.1 million 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 DestinationXL 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 remained on target by opening 32 DXL stores and closing 68 Casual MaleXL and two 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 in another 57 to 64 locations. We have already selected sites for all of these new DXL stores and are working on towards finalizing lease arrangements with more than half completed.

We plan to close between 110 to 119 Casual Male XL and Rochester stores this year. Wee 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 rollout 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 will explain in more detail in just a minute, but we expect profitability to grow quickly in 2014 and 2015.

This DXL rollout is projected to approximate $150 million in cost 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 our revolver during this 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.

Raise market awareness with our target, addressable market of 40 million men. As a result, we expected 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 to our stores or website are also expected to increase from blended rate today of $110 in 2012 to between a $130 and $150 per transaction. In 2016 as a result of three things; first, the private label versus name brand assortment mix will shift from an approximately 75-25 mix in 2012, towards 65-35 blend in 2016 raising the average unit retail by approximately 15%.

We expect to improve the company’s sales penetration and tailored clothing and related accessories, which has a much higher average unit retail in 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 expense of the stocking 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 MaleXL stores, and significant enhancing market awareness of the company’s DXL brand across the chain, which we expect to 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 the 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 design to increase DXL awareness.

EBITDA is expected to be in the range of $20 million to $23 million, we expect gross margin to be cuts into 2012 levels at 46.5%, within the 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 opening and Casual MaleXL 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 break-even. Our capital expenditures for 2016 are expected to approximately $45 million after subtracting expected construction levels is contributed by our landlords with the construction of the new the DXL sites. These expenditures will be spent largely on our plan opening of the total of 57 to 54 DXL stores in 2013 as well as technology projects to improve the e-commerce sites and in-store customer experience.

Net capital spend of $45 million will be funded from: a) to between $20 million to $23 million of EBITDA; b) with its beginning cash of $8 million; and c) another $5 million to $10 million of 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 open, we will have reduced our Casual MaleXL and Rochester store base by over half from what it was a few short years ago. And we made significant progress in raising market awareness of the DXL brand nationwide. Taking 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.

Question-and-Answer Session

Operator

Thank you. (Operator Instructions) And we will take our first question from Tom Filandro with SIG.

Tom A. Filandro – Susquehanna Financial Group LLP

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 were shopping previously? And my second question is, so to be clear, I think you said you experienced a pickup in like new to final shoppers in those markets or is that a consumer who didn't previously shop, you’re seeing that sale brand, and then I have two follow-ups please.

Dennis R. Hernreich

Okay, the first one on the previous shopper, we haven't been able to really identify it, but again this was a customer who has been fragmented out there for his life time 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 the discount retailer, but we don’t really know the identity of them, but and drag, bringing that to the second question. Yeah, these are new defined customers, these are customers who are not previously sharp any of our content.

Tom A. Filandro – Susquehanna Financial Group LLP

Okay, cool. The other two questions I have David. So I’m curious about when you’ve closed those CMXL stores, do you have any 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’ve 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 category that assures living in DT and just put it under that one umbrella, thoughts on that? Thank you.

David A. Levin

Well, as we opened the 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 replace Casual Male is, there’s no different than the retention rate today, any Casual Male customers. So we’re pretty much converting on a consistent basis our Casual Male customer to DXL.

Of course, as you know, the major difference is that they spend like 40% more with us when they walk into a DXL store, and when they walk into a Casual Male store because of we 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 have. 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 expected that that retention percentage will increase.

Tom A. Filandro – Susquehanna Financial Group LLP

Excellent, thank you.

Operator

And we’ll take our next question from Richard Jaffe with Stifel.

Richard E. Jaffe – Stifel, Nicolaus & Co., Inc.

Yeah, hi guys. So we say it, Stifel. Just a quick question on DXL stores, there were 18% of the total. so we should assume about $21 million in DXL volume in the quarter. Is that a reasonable assumption?

Dennis R. Hernreich

Yes.

Richard E. Jaffe – Stifel, Nicolaus & Co., Inc.

And I guess that you mentioned $45 million in tax benefits. Could you just explain, I thought that NOLs have been used up. and so I’m not sure what this might be.

Dennis R. Hernreich

Well, the NOLs have not been used up, Richard. We have on our balance sheet you’ll see. we’re filing our 10-K today, by the way. so you’ll have the access to the details.

Richard E. Jaffe – Stifel, Nicolaus & Co., Inc.

Great.

Dennis R. Hernreich

But with $45 million deferred tax asset, over about half of that relates to NOLs, which we will be able to use over the next several years to offset our cash needs.

Richard E. Jaffe – Stifel, Nicolaus & Co., Inc.

That’s a nice answer. And I didn’t know is there a stuff from the trial. And add expense, is that a sort of a balancing act between reducing catalogs and spending more on electronic media, when that can add us more like the wash.

Dennis R. Hernreich

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

Richard E. Jaffe – Stifel, Nicolaus & Co., Inc.

Sure, yeah. I think we are all into that computers now, the 21st century.

David A. Levin

Exactly. Our customers are becoming that way as well.

Richard E. Jaffe – Stifel, Nicolaus & Co., Inc.

(Inaudible) thank you.

David A. Levin

Thank you, Richard.

Operator

And we’ll take our next question from Liz Pierce with Ascendiant Capital Markets.

Liz O. Pierce – Ascendiant Capital Markets LLC

Good morning everyone.

David A. Levin

Hi, Liz.

Liz O. Pierce – Ascendiant Capital Markets LLC

David, a question for you. On the web business in general, not specifically to you, you know lot of retailer continue to add extended sizes to their business, I should quantify that maybe more on the women side. And there is so many other sites that are coming on, are you seeing that in for the men side of the business as well?

David A. Levin

I don’t think there has 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 Intel business online. There is no new player in terms of that, other than I again I think over time as in the women’s business, size will be get added on the far end.

Liz O. Pierce – Ascendiant Capital Markets LLC

Okay. So it’s mainly, it’s very, very I guess random, it’s about [toward] and then…

David A. Levin

Yeah, it’s item driven, it’s not, you’re not going to find any type of wardrobe solution.

Liz O. Pierce – Ascendiant Capital Markets LLC

Okay, okay. And then I am sorry – you mentioned that in the testing that you have done on the marketing, in the test market, did you actually reach the younger customers? If I missed that, I’m sorry.

David A. Levin

Yeah. Yes we did.

Liz O. Pierce – Ascendiant Capital Markets LLC

Is it?

Dennis R. Hernreich

The age came down, the sizes came down, and again, for 2013 he 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.

Liz O. Pierce – Ascendiant Capital Markets LLC

That was my next question so pardon me, if I haven’t seen it so it’s just coming into the stores now.

Dennis R. Hernreich

Yes.

Liz O. Pierce – Ascendiant Capital Markets LLC

And David will that be across the board in many different, I mean not only in your own private label, but will that, are you also going to have some branded products, or you able to work with them?

David A. Levin

We work with all the brands, the brands are a matter of – it’s a timing issuer. 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 have seen the potential, we went over the numbers with them, and actually they’re pretty excited about adding the size to their assortments.

Liz O. Pierce – Ascendiant Capital Markets LLC

And Dennis, it is a quick question for you, when you said that the, I think the existing Casual Male stores, there comp was negative 4.8 for the quarter.

Dennis R. Hernreich

Yeah.

Liz O. Pierce – Ascendiant Capital Markets LLC

Is that right?

Dennis R. Hernreich

Yes.

Liz O. Pierce – Ascendiant Capital Markets LLC

Okay. And then for the year was it up two or down two

Dennis R. Hernreich

It was down two.

Liz O. Pierce – Ascendiant Capital Markets LLC

It was down two. Okay, all right so you, did that arose, and I don’t remember if you give in that kind of those two numbers through the year for us, so did they continue to widen the spread between them?

David A. Levin

Yes, it did widen as the year progressed with.

Liz O. Pierce – Ascendiant Capital Markets LLC

Okay. And then David, the original kind of stores the Chicago, Houston, Las Vegas, -- Chicago and Vegas, are those continuing to like perform above plan or have they kind of settled down?

David A. Levin

I think we said in the – which I thought was one of our best statements…

Liz O. Pierce – Ascendiant Capital Markets LLC

(Inaudible)

David A. Levin

Yeah, these stores that have all anniversary, that comprehend their own, I believe we are up 7% comp in the fourth quarter. So that’s very encouraging for us, but now those stores are continuing to perform and again that’s with zero marketing dollars behind the initiative.

Liz O. Pierce – Ascendiant Capital Markets LLC

I guess I was wondering specifically about Chicago and Vegas since they are from what I thought are going to be – they are larger than the kind of go forward?

David A. Levin

Well, 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.

Liz O. Pierce – Ascendiant Capital Markets LLC

Okay, great. Thanks and best of luck.

David A. Levin

Thank you.

Operator

We will take our next question from Tom Filandro with SIG.

Thomas Filandro – SIG

Hi guys, I just wanted to circle back on an other question I had asked about the awareness focus on DXL and what was your thoughts on – in terms of shoes, living and DT and also from one end, in addition any meaningful new brand introduction this year 2013? Thank you.

David A. Levin

As far as the new brands, we’re working on one for the third quarter, but we are not ready to announce that yet. We had a big rollout 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 an all DXL stores in a full spread of assortment between casual dress and accessories. Dennis?

Dennis R. Hernreich

Time overtime, shoes of course there is other customer base that have wider feet than have the need and should have access to ShoesXL.com. And so that service is obviously our main customer base, but there is another segment that it appeals to.

Thomas Filandro – SIG

Okay.

Dennis R. Hernreich

As to living and I mean over time, again Living is the same way of shoes, there is a segment of a customer base regardless that we have a lot of female shoppers, LivingXL. And so it’s not a main thrust of a brandish no for us, but it does service a need, and but certainly BT Casual Male, Rochester over time has 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...

Thomas Filandro – SIG

Okay.

Dennis R. Hernreich

When to do that.

Thomas Filandro – SIG

Excellent, thank you very much. Best of luck.

Dennis R. Hernreich

Thank you.

Operator

And we’ll take our next question from Bernard Sosnick with Gilford Securities.

Bernard Sosnick – Gilford Securities

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

David Levin

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

Bernard Sosnick – Gilford Securities

Okay. So it’s going to be latter schedule of openings, not quite as heavily skewed to the fourth quarter, but somewhat later than you would have wished as what I got, what you are saying?

David A. Levin

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

Bernard Sosnick – Gilford Securities

Okay. And how many, you should already know how many will open in the first quarter?

David A. Levin

Yeah.

Bernard Sosnick – Gilford Securities

What’s expected?

David A. Levin

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

Bernard Sosnick – Gilford Securities

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

Dennis R. Hernreich

I think we pretty much followed the trend of what was going on out there. Again from our perspective, the weather flip side as it becomes – colder weather becomes a determent as we start to hit those months. And it was very mild a year ago and while our categories like sweaters are quite good. That’s in significant 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.

Bernard Sosnick – Gilford Securities

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

David A. Levin

No. I mean we're not, Bernie – it’s too early to put that. I mean everything that we know about the business today is incorporated in the guidance I gave you today.

Bernard Sosnick – Gilford Securities

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

David A. Levin

Yeah, it's very similar. Almost all of the closings; I think Casual Male XL are somewhat tied to the openings of the DXL stores.

Bernard Sosnick – Gilford Securities

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?

David Levin

Primarily, the amount of spend that we’d 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.

Bernard Sosnick – Gilford Securities

Well thank you very much. It’s been a very thorough conversation so far. Appreciate it.

David A. Levin

Thank you, Bernie.

Operator

And we'll take our next question from Richard Jaffe with Stifel.

Richard E. Jaffe – Stifel, Nicolaus & Co., Inc.

Hi, guys and I think Bernie touched on this question I was coming back forward which is just in the current trend, the particularly cold weather January and February which has hampered most retailers; wondering if you guys had seen similar pressure; if you want to comment on that? And I guess on the other side of the 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?

David A. Levin

We don’t think we missed any opportunities, Richard. But we are proud of the inventory position that we’re in, it is clean. We saw that in our gross margins in the fourth quarter and we feel very, 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.

Richard E. Jaffe – Stifel, Nicolaus & Co., Inc.

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?

David A. Levin

Yeah, exactly.

Richard E. Jaffe – Stifel, Nicolaus & Co., Inc.

Okay. Great, thank you.

Operator

It appears there are no more questions at this time.

David A. Levin

Okay, one second please; Dennis spoke when he was talking about CapEx, for 2013, it’s $45 million. He had said, for 2016, it was $35 million. I just want to correct that.

Dennis R. Hernreich

Oh, thank you, Jeff.

David A. Levin

Okay. Anyway, thank you all for being in the call. I would like to invite – 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. And if interested, please give us a call if you would like to enquire out at any location or like a tour of the store and we look forward to speaking with you next quarter. Thank you.

Operator

And this concludes today’s conference. Thank you for participation.

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