David Levin - President & Chief Executive Officer
Dennis Hernreich - Executive Vice President, Chief Operating Officer & Chief Financial Officer
Jeff Unger - Vice President of Investor Relations
Tom Filandro - SIG
Richard Jaffe - Stifel Nicolaus
Casual Male Retail Group Inc. (CMRG) Q2 2009 Earnings Call August 25, 2009 9:00 AM ET
Good day ladies and gentlemen and welcome to the Casual Male Retail Group’s second quarter earnings conference call. At this time all participants are in a listen-only mode. Later we will conduct a question-and-answer session and instructions will be given at that time. (Operator Instructions)
I’d now like to introduce to your host for today’s conference Mr. Jeff Unger, sir you may begin.
Good morning and thank you for joining us today for Casual Male Retail Group’s second quarter 2009 fiscal earnings call. On our call today is Dennis Hernreich, our Executive Vice President and Chief Operating Officer and Chief Financial Officer and David Levin, our president and CEO. I’d like to read our forward-looking statements and then introduce David.
Thank you and thanks for joining us today. Today’s discussion contain certain forward-looking statements concerning the company’s operations, performance and financial conditions including sales expense, gross margins, capital expenditures, earnings per share, store openings and closings, other matters.
Such forward-looking statements are subject to various risks and uncertainties that could cause the 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. Our complete Safe Harbor statement is available at www.casualmale.com.
David the call is yours.
Thank you, Jeff. This morning we announced our financial results for the second quarter of 2009. The results speak loudly to the strategy that we laid out at our last call on May 21. The proactive stands we took on retooling our infrastructure and expenses, in response to the downturn in the economy has had a direct positive impact on our bottom line. We’ve executed extremely well in our ability to control the controllable metrics to our business.
With the decrease in sales of $15.2 million or 13.4% compared to the same quarter last year, we actually increased our pre-tax earnings by $1 million or 31%. Our initiative to focus on gross margin dollars and cash flow has been very effective, even though it may have had some impact on our top line sales. Our comp sales were negative 13.9% for the quarter compared to a negative 10.7% in Q1, and now negative 12.4% for the year.
Our sales during the Father’s Day holiday were negatively impacted because last year we had a TV campaign in May June and this year we do not. Our decision not to run TV the spring, June TV campaign accounted for the half of the marketing spend reduction in Q2. It was during this timeframe that the top line was impacted more than our usual run rate. The subsequent to Father’s Day we have seen our comps come more inline with a year-to-date trends.
In terms of how the businesses performed it continues to be consistent with the trends of the last several months. Casual Male comps have been off 9% and Rochester has been down 27%. As I’ve said in the past CMRG is a good barometer of how the economy is reacting in a difficult period because we cater to all economic levels. In clearly we are seeing the luxury segment of the market struggling much more then the moderate level.
There’s no doubt that the customer is holding back and many of them are trading down. That’s very evidence in the fact in that we have 65 Casual Male outlet stores and their comps were almost flat compared to our full priced stores which comp at about a negative 10% and this Segways quite well into our discussion of our new initiative.
During the month of our July we converted five Rochester stores that had been operating at a loss and converted them to what we call hybrid stores. All of these Rochester locations have an existing Casual Male store within a half of a mile of the Rochester location. The stores have been co branded Casual Male XL and Rochester Clothing.
The stores carry the full Casual Males assortment of product and on the average about 40% of the product mix from the assortments in the Rochester store and this 40% of carry over Rochester inventory represented about 70% of their sales. Even though we have only about four weeks of sales in these five stores, we are pleased to report that they’re exceeding expectations at this time.
The hybrids are now reporting as Casual Male stores and it’s important to note that prior to the hybrids, the stores were producing sales at about 1.5 times the average Casual Male store and now they’re producing sales at 2.3 times and four out of these five hybrids are now amongst Casual Male’s top 10 store during this period.
We’re excited about the potential of these stores in next March. We plan on opening a new prototype version in the Chicago market that we hope would be the model for the future development of the hybrid strategy, and while the growth will be dependent on existing store lease terminations, there are already our several markets that are on a radar screen for hybrid locations in the year or two.
As we are now in the back half of our year, we believe we are much better positioned than a year ago. The average store inventory for Rochester is down 33% and down 9% for Casual Male, while our direct channel inventory is down 25%. We anticipate a significant swing in improved gross margins in the fourth quarter this year due to diligently managing our inventory and the reduction of promotional activity.
Last year fourth quarter merchandise gross margins were 51.3%, and this year we believe they will improve by over 750 basis points. Inventories this year will comedown around 10% or $10 million and that’s on top of reduction last year of $19.2 million. We ended up the first two quarters with a negative 12.4% comp performance that was up against a relatively flat comp in 2008.
Last year’s sales started to significantly deteriorate in September and last fall holiday season, our comp dropped to a negative 7.7% and we hope that as we anniversary these numbers our comps will trend better, but we will continue to take a conservative posture in regards to our sales forecast for the remainder of the year.
By the end of this year our top line sales will have deteriorated about 15% or $70 million over two year period. Based on our customer surveys, we believe we have not lost any market share along the way to any competitors, but what we have is a loyal customer, who has deferred his normal trip to our store due to a multitude of economic issues.
We believe that at some point in time, our customers will return to sure normal buying habits and that means we can quantify $70 million of potential sales that we know already existed and with our new extreme line organization and expense structure, our potential operating margins will be stronger than ever.
Now, Dennis will review our Q2 performance in greater depth.
Thank you, David. Good morning, everyone. Thanks for joining us as we review our second quarter results and discuss our outlook for the balance of the year. As David indicated, although the weaken economy continued to negatively impact our sales trend, we are pleased today to report second quarter net income of $3.6 million or $0.09 per share, as compared to $1.9 million or $0.05 per share for the second quarter last quarter.
Despite sales decreases of 13.4% for the second quarter and 11.4% for the first six months of 2009, our operating income increased 15.6% for the second quarter and 7.5% year-to-date. These improvements in our operating results are attributable to our continued focus on carefully managing our inventory levels, maintaining healthy margins and significantly reducing our SG&A costs consistent with our strategies and financial goals discussed at our last earnings call in May.
In addition to the improvement in operating income, our net income benefited from a reduction in our effective tax rate resulting from the utilization of the company’s fully reserved net operating loss carry forwards. This benefit resulted in a reduction in income tax provision of approximately $1.3 million or $0.03 of share for the first six months of fiscal 2009.
Our quarter two results are consistent with what we described at the end of quarter one with respect to the significant refinements we have made to our business model, which include a 15% reduction in SG&A levels from last year, carefully managed inventory levels to minimize merchandise margin risk together with a specific approach to provide our customer with meaningful assortments for his wardrobe needs, employing a store assortment planning methodology to optimize merchandise performance in each location, providing our customer with assistance in purchasing his wardrobe needs.
Finally employing a contact marketing strategy to assure CMRG stays top of mind when our customer is ready to fulfill his apparel needs. By maintaining this discipline model for the long term and with an eventual 10% recovery in the company’s top line sales, we would expect CMRG to generate 8% to 9% EBITD margins with a free cash flow that would approximate this EBIT level.
Before any recovery however, our 2009 financial targets have only been slightly modified from those discussed in our last earnings call, specifically these goals include a 15% reduction in SG&A for the year, improvement merchandise margins of 275 to 325 basis points, 10% reduction in year end inventory levels, reduction in capital expenditures to $5 million, free cash flow of $20 million to $25 million, and a reduction of bank debt to about $25 million to $30 million compared to $51 million at the end of fiscal 2008.
During the first six months of 2009, we have realigned our infrastructure and inventory flows in an effort to realize these goals within an environment of declining top line sales. Our second quarter results have benefited from the successful implementation of these strategies. In summary, merchandise margins improved 200 basis points. SG&A cost decreased $8 million or 18% rather over last year.
Inventory levels decreased $18 million or 16% as compared to the end of last second quarter, and total debt is lower than last year second quarter by approximately $14 million. The sales we forecasted for the first half of the year were essentially on the mark, and we are forecasting only slightly improved top line results for the second half of the year and the minus 10 to minus 12 range.
When considering the company’s recent comparable sales over a two year period, the second half of 2008 was minus 8.3 and the first half of 2009 was minus 13.3. We are confident that our second half of 2009 forecast of between minus 15 and minus 20 over that two year period is achievable and at the same time hopeful for improved customer traffic.
Regardless, we feel we have properly positioned the business for sustained top line weakness and expect to generate a meaningful level of free cash flow from which we intend to reduce debt and fund our strategies to grow market share and build shareholder value. I’ll now highlight the components of Q2 results. Sales in the quarter declined in total by 13.4%, which is 13.9% on a comparable basis. Our sales decrease was generally consistent with a decrease in store traffic in both our retail and direct channels experienced similar decreases.
In addition to the decrease in traffic, we also experienced a decline in average transaction value of approximately 4% for the quarter. However, this was offset by an increase in our conversion rate resulting in sales productivity performance consistent with last year’s second quarter.
On a year-to-date basis, sales decreased by a total of 11.4% and 12.3% on a comparable basis. Similar to other luxury retailers, our Rochester business has been significantly impacted by the recession, while our comparable sales in Casual Male have declined 8.9%. Our Rochester has experienced a 26.3%, comparable sales decrease.
During quarter two in the first six months of the year, the company’s marketing spend has approximated 4.2% and 4.6% respectively compared to last year’s 7.1% in the second quarter and 7.4% for the six months. Although the marketing reductions may seem to Chromium, our more focus strategy has resulted in significantly more effective marketing campaigns such as a 40% improvement in revenue per catalog for this year so far.
Even with these reductions, CMRG still distributed over 8 million catalogs and 11.8 million direct mail pieces to keep our customers reminded of the solutions the company has for their wardrobe needs. In managing the company’s spending and inventory levels, we have forecasted continued decreases in the company’s sales levels and in total as I’ve said before; we expect the sales drop of between 10% and 12% for the year.
Our second quarter gross margin rate decreased by 60 basis points as a result of a 260 basis points increased in fixed occupancy costs on a lower sales base. However, our merchandise margin improved by over 200 basis points, compared to last year’s second quarter. Year-to-date our gross margin decreased by 150 basis points. This decrease consists of a 70 basis point improvement of merchandise margin offset with a 220 basis point increase in occupancy costs.
Our merchandise margin was impacted during the first quarter by some residual fourth quarter 2008 clearance merchandize. The year-to-date increase in occupancy rate similar to the second quarter increase is primarily the result of an unfavorable leveraging of fixed occupancy cost on a declining sales base.
On a dollar basis, year-to-date occupancy costs are approximately $750,000 over last year, mainly as a result of an accrual for lease obligations related to conversion of the five stores to our new hybrid format. For the year we expect our merchandise margins to exceed last year’s by 275 to 325 basis points. However, as a result of our sale shortfall this improvement will be partially offset by unfavorable leveraging of fixed occupancy cost by approximately 180 basis points.
As a result of our cost reduction initiatives, SG&A expenses for the quarter were reduced by $8 million or 18% to last year second quarter. For the first six months of 2009, our SG&A has been reduced by over $14 million or 16%. Approximately half of the reductions were a result of the revised marketing objectives which I just mentioned.
The remainder of the savings were realized throughout our organization include corporate overhead reductions, distribution and field productivity improvements, and staff reductions. The full effect of these cost initiatives were reflected in quarter two. We expect to continue execution of cost reduction initiatives to result in SG&A savings of $26 million in 2009 and $30 million on an annualized basis. Strong expense control will continue to be a significant priority for us, while continuing to invest in our marketing campaigns and growing our direct businesses.
During the first half of 2009, we continued to improve our balance sheet liquidity with an improvement in free cash flow of $6 million from last year’s levels to $5.9 million for the first six months of 2009. Additionally, inventory levels have been reduced by approximately $18 million or 16% and our total debt has been reduced by almost $14 million or 23% compared to last year’s second quarter.
Our credit line, whose term goes to October 2011, has availability at the end of the quarter of $29 million. As I mentioned for the year, we expect to generate between $20 million to $25 million in free cash flow and expect our year end debt to be reduced by approximately $25 million to $30 million. This concludes my comments on the second quarter results and financial expectations for the year.
Now, David and I will be happy to answer any questions you may have. Devin, you may open up the lines.
(Operator Instructions) Your first question comes from Tom Filandro - SIG.
Tom Filandro - SIG
A question is, David can you just review those comments you said earlier? I came in a little bit late. I heard you say from about 1.5 and then 2.3 related to these hybrids. Can you just put in perspective for us, what the experience has been in terms of the total market and how that compares to your thinking, meaning when you combine these two stores, I’d imagine on some level you’re expecting total market sales not to be at a 100% to give us a better understanding of how that’s played out? Thank you.
We’re expecting these stores, when they combined each other that will carry 100% of the existing Casual Male stores and 40%, 50% of the sales from the Rochester store when you put them combine.
What I was trying to describe is these five specific stores that we have converted, their average sales were about 1.5 times the normal Casual Male stores which was about $650,000. Now they are performing at about 2.3 times the average Casual Male store and of these five stores, I don’t believe any of them were in the top 10 until out of 400 plus stores, and now four out of five are already in the top 10.
Tom Filandro - SIG
Can I ask this question to David? Those are great numbers, can you give us a little more detail on where the incremental volume coming from, I mean if you look at the overall mix where you are seeing the greater benefit. Is it private label, is it branded, is it suit, I mean what’s happening?
Because it’s only been four weeks we’re not really going to talk about the specifics yet and probably until the next phone call. We just wanted to give a little color at this point time.
We have got a lot of analyzing to do as to how much the Casual Male customers trading up, how much is the Rochester customer trading down, what impact are we having with new customers coming in, what impact are we having from outline stores that are moving over to the hybrid, lot of variables to work with. We are just giving a little color because we really haven’t had enough time to give further depth. We will on the next phone call.
Tom Filandro - SIG
Dennis quick one for you, I think as you described your contact marketing strategies and you mentioned some of the numbers, can you give us a sense how is think about the back half in terms of just total catalog search, direct mail and prospecting and are there any major shifts in the strategy this year, meeting more direct mail, less catalog or one or the other?
No. Our second half, Tom, is similar to the first half in terms of our marketing campaigning. The number of catalogs being distributed in the second half is just seasonally higher than the first half, but generally the same context strategy that we’ve been working with during the first half and much the same also on the direct mail side.
Tom Filandro - SIG
In terms of prospecting?
Your next question comes from Richard Jaffe - Stifel Nicolaus.
Richard Jaffe - Stifel Nicolaus
A quick question, obviously the marketing spend was a big help in the quarter regarding the SG&A savings. Could we look forward a little bit and anticipate what the savings will be or what they were last year and the percentage change we should anticipate?
The marketing rates that I just described, Richard, for the year will be in the same neighborhood as they were in the first half. Slightly less just because of the greater volumes we expect in the second half.
Richard Jaffe - Stifel Nicolaus
Could you talk about some of the operating metrics of the hybrid stores? Are you willing to go into your sale per square foot or number of transactions before and after or any of the more...?
I think the as I mentioned this stores have been opened barely 30 days. I think we would like more time to let them operator, let them get new fall assortments. We just marketed into these markets, and I think we’ll have much more details with respect to this and future strategies on the next in the quarter three.
Richard Jaffe - Stifel Nicolaus
I appreciate because, that 30 days we shouldn’t build a model on. Last question do you guys subscribed to any of the services that track selling by category to MPD? If you could share that with us regarding trends for men’s apparel and big and tall sizes?
NTD does that study special for us. We have not updated that recently, Richard.
Richard Jaffe - Stifel Nicolaus
I know there is sort of macro men’s data out, which is obviously trending negative, but I didn’t know if you guys knew by sector or whatever. It would be interesting to see. Okay. Thanks very much.
(Operator Instructions) Your final question comes from Tom Filandro - SIG.
Tom Filandro - SIG
Can you just tell us, what’s going on in terms of IMU? Anything on the product side and also if you could, can you give us a real estate update anything happening in terms of better negotiations? How many leases do you have coming due? Are they significant or not over the next couple of years? Thank you.
The IMU, Tom is steady and has risen slightly during this year and probably will rise slightly again for the balance of the year. So we continue to watch our merchandise cost, work with our vendors, find new freight routes to bring merchandise and to maintain and even grow slightly our IMU. So we’re very pleased with all of that.
We’ve been very busy on the Real Estate. Our Real Estate Group very much occupied with many of our landlords. Landlords have been generally cooperative and understanding and working with us on revising terms. We’ve had a fair amount of success of reducing base rents over the remaining terms of many of our leases, but the effort still continues. There’s still a lot of work to do, a lot of landlords to get deals with, and so that effort will continue. Go ahead, David.
I think the point is, we usually have about a 100 leases coming due on any given year, but we’re renegotiating every lease that we have. Even if we have four, or five years left on our term, we’re going back and trying to renegotiate better terms on the existing leases at this time too. So every lease is being attacked at this point in time.
Tom Filandro - SIG
Can you give us an update too on the new businesses, anything on that front or is it all just a sort of a breakeven strategy overall?
All our new businesses, outside of Europe is profitable, growing more moderately, and so with reducing the amount of prospecting, they’ve gone into the black and we expect them to continue that way.
(Operator Instructions) I am showing no further questions sir.
We appreciate you dialing in today and again we’re excited about the hybrids. We got a lot more information coming forward, and we think that’s going to be a good vehicle for us for the future. As we said, we’re keeping as tight model as we can as until we see things change and we’re somewhat optimistic that the comps will start to improve somewhere along the in line in the next several months.
Thank you again for joining us and we look forward to again talking with you at the next meeting. Thank you.
Thank you. Ladies and gentlemen, thank you for your participation in today’s conference. This concludes the program. You may all disconnect. Thank you and have a nice day.
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