Good day and welcome to the Destination XL Group's second quarter 2016 earnings call. Today's conference is being recorded. At this time, I would like to turn the conference over to Mr. Jeff Unger. Please go ahead, sir.

Good morning and hello everyone. Thank you for joining us today on the Destination XL second quarter fiscal 2016 call. On our call today is David Levin, our President and CEO, as well as Peter Stratton, our Senior Vice President and Chief Financial Officer. During today's call we will discuss some non-GAAP metrics to provide investors with useful information about our financial performance. Please refer to our earnings release which was filed this morning and is available on our Investor Relations 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, profitability, EBITDA, gross margin, capital expenditures, earnings per share, free cash flow, store openings and closings and the company's ability to execute on its strategic plan and the effectiveness of the Destination XL concept. Such forward-looking statements are subject to various risks and uncertainties that could cause actual results to differ materially from those assumptions mentioned today due to a variety of factors that affect the company. Information regarding risks and uncertainty is detailed in the company's filings with the Securities and Exchange Commission. Now I would like to turn the call over to our President and CEO, David Levin.

Thank you, Jeff, and good morning everyone. Before we get into the quarterly results, I would like to take a moment to review with all of you where we are with the DXL transformation. It's hard to believe that we opened our first DXL store in Schaumburg, Illinois six years ago. Up until the opening of our first DXL store, it was unheard of for a retailer to dissolve one brand and migrate its customer base to an entirely new concept without going through a sale or reorganization. Well, today we have 187 DXL retail and outlet stores open across the country and we expect to grow that number to approximately 400 stores over the next five to six years. There are a lot of retailers today who are downsizing because the landscape has become over saturated with their stores. This is especially true in malls where traffic has been declining for years. But that's not true for DXL. We are catering to a niche that is underserved in retail. We believe we have an advantage as a destination concept and we are not dependent on mall traffic like many other retailers as our locations are located in strip centers off mall. Our customers come to us from all walks of life. They come from different ethnic and cultural backgrounds and all age levels. The DXL brand is not bound to a singular demographic or lifestyle. Our brand was created to provide big and tall guys with a store of their own that has the desirable sought after blend of quality, service and selection. Our brand awareness has been steadily growing and we are acquiring a new smaller waisted customer who spends more money and shops more frequently. Fiscal 2016 is a milestone year for us as the leverage in…

Thank you David and good morning everyone. As David just mentioned, in terms of the DXL transformation, we are on a solid foundation both operationally and financially. As we have been saying for the past few years, fiscal 2016 is a pivotal year in the financial transformation of DXL. We have been waiting for the crossover point which we expected to be this year where the company can generate enough free cash flow to fund our DXL store openings and also begin to pay back some of the debt we incurred in order to finance the store buildout in the earlier years. I am very happy to report today that despite the consumer headwinds David mentioned earlier, we are still on target to achieve that goal in fiscal 2016. So let's move on to the second quarter results. This was a good solid quarter for us despite the macro uncertainty. Overall, our financial performance for the second quarter was positive. This is the first time in four years we have delivered positive earnings for the second quarter instead of a net loss. During the second quarter, we reported a total comparable sales increase of 2.4% and that was on top of the 6.7% increase in the prior year quarter. We have 151 DXL stores opened for at least 13 months, which delivered a comparable sales increase of 4.6%, on top of an 11.9% comp sales increase in Q2 2015. The number of DXL transactions increased 3.2% from the second quarter of last year, helping to drive our comp sales growth. But this increase was slightly below our expectations. In the second quarter, gross margin including occupancy costs was 46.5% compared with 47.2% for the second quarter of fiscal 2015. The decrease of 70 basis points was a result of 110…

[Operator Instructions]. And will go first to Greg Pendy with Sidoti.

Hi guys. Thanks for taking my question. Can you just go into, I guess, within the reduced sales guidance where you are seeing that from a customer basis? I know last quarter, you mentioned the more of the wear now customer was a little bit absent, but can you just give us a little bit more color on where you see the pockets of strength and where the pockets of weaknesses are within the lowered sales guidance? Thanks.

Sure. We look at all our key metrics. So in the current quarter, our transactions, our spend per guest, items per guest, Casual Male conversion, end-of-the-rack growth, sales per square foot were all meeting and exceeding our expectations. So we clearly don't see this as a DXL problem. It's more of that macro issue, the uncertainty and on the scheme of things, we have taken our sales down about 2% and we think that that's going to have an impact probably in Q3. We don't know about Q4 yet. But we are just taking this conservative approach. But we have seen no other behavior of our existing customers other than some of them are holding back and making their trip to our stores. But outside of that, we are very confident in that we don't need to really tweak our model or make any changes to our promotional schedule that we have to get through the rest of the year.

All right. That's helpful. And if I could just get one more question. Is there any update, I know, it's a ways out the projections, but just on the international franchising opportunities?

No. We don't have any updates at this time, other than we will be entering the Canadian market next spring. We are finalizing our leases right now. And on the international part, outside of North America, there's a lot of discussions. We have made several trips around the world and talking to a lot of interested investors. But it's a slow process and we are walking through it very conservatively and making sure we find the right partners.

That's helpful. Thank you.

And we will take our next question from Bernard Sosnick with Madison Global Partners.

Good morning. First I would like to say, each time I read your press release in the quarter, I am impressed and you do a very good job as you just did with the verbal summation. So thank you for that. With regard to sales, retailers saw weak sales in the first quarter and that quarter ended with sales weak after having been more robust early in the first quarter. The same was happening with you. But during the first quarter call, you noted that your sales weakness was in the East and it still hadn't brought in the seasonal shopper. The weather turned better and I am wondering, what the rhythm of sales was month-by-month during the quarter?

Sure. So that's right that in the first quarter we definitely saw performance was a little bit better in our warm climate stores. In the second quarter, what we saw really across the country was, May was a weak month, June got a bit stronger and then it softened up again in July. So I think, as David just alluded to, the people that are coming into the store, the response has been very positive. It's more, the sales shortfall or the reduction of sales guidance, is more due to the fact that we have just seen a bit of a slowdown in traffic, which I think a lot of other of our peers are noticing as well. So that leads us to believe that it's not anything to do with the DXL concept. It's more the macro issues that are surrounding us right now.

All right. So in other words, you didn't get as much lift when the weather turned warm in the East as you had expected. And [indiscernible] the goods for clearance at the end of the first quarter was somewhat higher than a year earlier and you ended the second quarter in the same situation despite taking heavier markdowns and accelerating the markdown pace. Could you give a little bit of enlightenment about the clearance issue?

Yes. It's really a non issue for us. It's strictly a matter of timing because when we roll our markdowns, they fall into the clearance. So by taking them earlier, it was just a higher percentage, not significant 9.7% versus 9.2% a year ago. That will all catch up by the end of the year. So that really cost is a non-issue. We don't really have any more clearance than we did a year ago. We haven't taken any more aggressive markdowns than we did a year ago. It's really just a matter of timing. It'll washout.

Well, I want to congratulate you on the steps with inventory control and the backroom and expense control and getting to the crossover point this year, let's hope. Thanks.

Thanks Bernie.

[Operator Instructions]. We will go next to Eric Beder with Wunderlich.

Yes, Good morning everyone. This is Bryan Caronia, on for Eric. The first question we had was, we were hoping you could give some insight into the cadence of performance across product segments within the stores, specifically noting perhaps, how suiting did, but overall I would say, we would be interested in to see if there was any deviation or distinction between performance amongst tops and bottoms and different fashion trends over the last three months?

Okay. Clearly, our suiting business, which we will have our suits, sport coats, dress shirts and ties, dress pants, has been the stellar performance for us. And that's really a result of, when we open a DXL store we have a much bigger presentation in the clothing area than we did in our Casual Male stores. So they get a dramatic lift. We got in our Casual Male store, they may have a choice of two or three options in buying a suit and we have a full suit selection and sport coat selection in the DXL stores. So that remains consistent. Our footwear business is very strong. And outside of that, everything is pretty predictable. We are definitely seeing some great movement in our younger men's styling and we are chasing that product. Actually, it's more of a West Coast phenomenon, but it's starting to shift throughout the country. And that's great for us because this clearly is a younger customer that again, the DXL is starting to certainly cater more to that guy as the age of our customer comes down. But those are the highlights.

Great. And I guess as an extension of that, even if it's not I guess specifically quantified numbers, do you have any insight in terms of the split and I guess sales trends of the products being branded or private label? And whether that is commiserate or perhaps a bit deviated from what your long term plans are in terms of trends in either segment and product mix?

Yes. So I mean, right now we are 55% branded, 45% private label. That is going to remain pretty consistent and maybe moving a point or two per year. But we have so many stores opened right now. We really pretty well have that balance laid out. So I think branded may grow as a percent, but nothing dramatic. I think we have got - and again, our private label still is a big driver of our business regardless of the locations throughout the country.

Perfect. Thank you very much. And I will step back in the queue.

And will go next to Chris Krueger with Lake Street Capital Markets.

Hi. Good morning.

Good morning.

Can you talk a little bit about how your smaller units are performing? The ones that allowed you to kind of enter in smaller markets and kind of fill in some larger markets?

Sure. The small format stores have been performing very well. I think as many of you know, that's one of the key reasons why we have been able to grow our long term projections to get to 400 stores is because that smaller store allows us to penetrate so much more deeply across the U.S. But they have been performing very well. In fact, in 2015 and 2016, most of the stores that we have opened this year have been performing beyond their initial projections. So we think part of that is a due to the fact that these stores opening today are benefiting from the higher brand awareness that we have out there versus the stores opening a few years ago didn't have that benefit. So they are still doing very well, still on track and they will be the substantial portion of stores that we are opening going forward would be that smaller format.

Okay. And as you look ahead to the next few months with your advertising spending, how do you look at that this year versus last year as far as spending levels and also the timing of your ad spend?

Yes. Well, a good part of our ability to maintain our earnings is we have lowered our marketing expense. And we were driven by TV and radio, very expensive, not very targeted. And we have seen really a seismic shift in how our customers are responding to our marketing. There is something dramatic going on and we are trying to get ahead of it. Our smartphone traffic is up 42% this year from a year ago. And our online revenue from the smartphones are up over 30%. So now over 50% of our traffic is coming from mobile versus 40% a year ago. So we are making a conscientious aggressive move to go off of the TV, radio marketing and move more into a digital world. This is really not a lot different than when we were a catalog house with 16 drops a year, a few years ago. We got rid of the catalog. We replaced all that business. And we really feel a shift into digital is where customers are moving. It's much more targeted. It's much less expensive. Our cost per thousand views is $10 versus TV was $30. So yes, that's where we are going to be spending our money going forward and it also allows us to protect our earnings more.

Okay. And a last question. Anything new on the competitive front as far as other concepts or other brands or anything there?

No. Certainly in brick-and-mortar, we don't anticipate anybody trying to come at us from competitor point of view. There's always more on the Internet. But nothing that we have seen that we could identify as changing our percentage of market share on the Internet at this time.

All right. Thanks. That's all I got.

[Operator Instructions]. We will go next to Bill Caton with First Wilshire.

Hi. Good morning. Curious on the end-of-rack customer. As your bottoms business continues to grow with them, up over 44%, is there any statistic you could give around? Are these guys only going in to buy bottoms? Or are they buying other things in the store? And what are just some statistical trends on the end-of-rack, if you could share any more information?

Yes. Sure. First of all, the only reason we identified bottoms because it could kind of distinguish what size this guy our tops are a little more challenging for us. So that's just an indicator. But it's across the board, spending is going on. And the most important thing is, when we designed this DXL concept, we wanted to get this end-of-the-rack guy in our stores, but we didn't really understand how powerful he is. So our current trend is, the guy who is 40 to 46 inch waist, is spending 100% more than the guy from 48 inch and up. So he is really worth two of our customers. He is shopping 46% more than our guy who is 48 inch and up. So this has been a huge win for us and to me, the exciting part is, today only four out of 10 guys that size has ever even heard of DXL. And as the marketing and the awareness grows, once he comes into the store, he loves what he is seeing and he is going to be a loyal customer of us for a long time. So we got a lot of loose guy out there to really grow this customer because again it's all about awareness. Once we get them in, we own them.

Okay. So the end-of-the-rack guys, 40% type of brand name recognition or customer awareness and the 48 inches and above, in terms of branding recognition, DXL versus your older generation Casual Male, what's the breakdown on that?

We don't track it anymore, but Casual Male awareness was, I think, closer to 60%. And we haven't marketed Casual Male since we started the DXL. We haven't put any of our marketing money there because all the stores are going to be converting over.

Okay. And in light of weakness in consumer confidence or I don't know if that's a new story, but if that continues to persist and linger longer term, would you consider not rolling out as many stores or extending the rollout? Or you feel you are sticking to the plan despite any macro headwinds absent anything drastic?

We are not at that point yet. We are planning on opening quite a few stores next year. Those are in the queue already. We feel very good about it. Again, the new stores are doing the best of any of our stores. They are clearly beating our projections. So we are going to continue on this path. Again depending on what happens out there in the world, certainly we may change. But right now, we have no plans to deviate from our current strategies.

And one thing that I would just like to add is that we have talked a little bit about our positive free cash flow that we are going to have this year. This is the first time in four years that we are going to be generating significant positive free cash flow of $5 million to $10 million this year. And you have seen it in our Q1 and our Q2 results where we are profitable on a bottom line basis year-to-date. So despite some of the weakness on the topline, we think that we have made the right corrections to ensure that the cash in the bottom line come in where we are expecting them to come in.

Okay. Well, thank you. Congrats on the profitability this quarter. Good quarter. Thank you.

And we have no further questions in the queue at this time.

All right. Okay. Thank you all for joining us today. And as I have said before, as a reminder, I really would open to invite all of you to visit one of our DXL stores and experience what we have built into our concept. And if you would like to visit any of our stores, please let us know and we will be happy to give you a tour. We look forward to speaking with you next quarter and have a great day.

Again, that does conclude today's presentation. We thank you for your participation.