Good day, ladies and gentlemen and welcome to the second quarter 2019 earnings call for Destination XL. 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 would now like to turn the call over to Ms. Nitza McKee. Ma'am, you may begin.

Thank you Victor and good morning everyone. Thank you for joining us on Destination XL Group's second quarter fiscal 2019 earnings call. On our call today is our President and Chief Executive Officer, Harvey Kanter and our Executive Vice President and Chief Financial Officer, Peter Stratton. 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.dxl.com for an explanation and reconciliation of such measures. Today's discussion also contains certain forward-looking statements concerning the company's comparable sales growth, the wholesale segment and free cash flow. Such forward-looking statements are subject to various risks and uncertainties that could cause actual results to differ materially from those assumptions mentioned today due to a variety of factors that affect the company. Information regarding risks and uncertainties is detailed in the company's filings with the Securities and Exchange Commission. I would now like to turn the call over to our CEO, Harvey Kanter. Harvey?

Thank you Nitza and once again, good morning to you all. It's now been just over four months since I arrived at DXL. And my learnings of this great company not only continues but in fact has accelerated as we have begun turning actionable insight to defining plans and execution. One thing that has not changed is the incredible passion I felt early on in our team's commitment to creating an engaging experience with big and tall consumers on a scale that no one else can duplicate. I am thrilled to begin talking with you today in greater detail about our plans and expectations for the future. Our first half financial results have been challenging but I think we, as a company, have made great progress with aligning our resources and in developing our plans for the second half of fiscal 2019 and to the future. On our call today, I plan to talk about a number of strategies we are pursuing. These strategies fall within four major initiatives to which our entire organization is now oriented. The essence of our initiatives is grounded in enabling consumers to purchase our products and services where they want, how they want and through whatever channel they want. The first of our four major initiatives is driven from a digital standpoint around engaging our customers in a more meaningful and personalized way. The foundation for this initiative is our new CRM system. This system allows us to segment our customer file and personalizing our message far better than we have in the past. The second initiative is how we develop and execute our working marketing plans. We recognize there is no silver bullet in marketing media mix and we believe utilizing our marketing and promotional dollars across our recipe of media formats done…

Thank you Harvey and good morning everyone. I would like to start this morning with a brief summary of our second quarter results. For the second quarter, comparable sales were flat to last year, while total sales increased $1 million or 0.9% to $123.2 million compared to last year's second quarter. The increase was primarily due to an increase in wholesale revenue of $2.7 million, which was partially offset by a decrease of $1.8 million in our retail business from unproductive stores that closed in the last 12 months. Within our direct to consumer channel, our e-commerce sales improved in the second quarter as we achieved mid single digit sales growth, driven by an increase in digital traffic. On a trailing 12-month basis, our direct to consumer channel sales increased to 22% of our retail segment as compared to 21.2% in the prior trailing 12-months. Gross margin for the second quarter inclusive of occupancy costs was 44.3% compared to 46.3% in the second quarter last year. The 200 basis point decrease was due to a merchandised margin contraction of 270 basis points, partially offset by 70 basis points of occupancy cost leverage. Of the 270 basis point decrease in merchandise margin, 190 basis points was primarily due to higher promotional activity. As Harvey mentioned, given our strategy to enter the fall season in a better inventory position, we took necessary markdowns on slow moving merchandise. This resulted in a higher penetration of clearance merchandise and lower dollars per transaction for the quarter. The remaining 80 basis point decline in merchandise margin was due to the increase in sales mix, given the wholesale segment carries lower margins than our retail business. It's also worth noting that we closed our London Rochester store earlier this month and the inventory liquidation accounted for…

[Operator Instructions]. Our first line will come from Eric Beder from SCC Research. You may begin.

Good morning.

Good morning.

Good morning. Thank you for the color. It was quite helpful. Could you talk a little bit about the catalog business and how that kind of fits into this mosaic of kind of marketing and other pieces?

Yes. This is Harvey. The catalog, we executed two catalogs last year. They were actually incredible brand bodies of work and while they engage the consumer in the test and control format that we executed them, we will likely reinvest in a different way our direct strategy relative to direct in mail format. So whether it's catalog or other format to direct mail, more effective, more efficient vehicles than the 28 and 56 page catalog, which just didn't increment the business enough versus the control to move forward in that same format. We will still have a direct mail component as I talked about the recipe, if you will, but it will be in a more efficient, I guess I would say, less cost impactful way. And we believe that it's a part of kind of a tri-party way to engage consumers, both in-stores, online and through direct mail formats.

Okay. And as you look going forward, how should we be thinking about the ideal number of stores that you need, given that you are becoming much more, I won't say focused, just much more refined in how you are doing your online business?

Sure. So I will take that one. I think as I think about stores, the biggest change to think about going forward is the remodel program that we have going on. So we have roughly 237, 238 DXL stores today. There is another I think 88 Casual Male stores. And so, many of those stores are going to convert over to the DXL format, which we have seen has been pretty effective with the first 10 or so stores that we have opened up. I think the great thing about this strategy is, it will finally unite the brand and we will not be a company that's still operating Casual Male stores under a separate format than the DXL stores. So as I think about it going forward, there will probably be a small handful of stores and new real estate that we would do every year as conditions warrant. But by and large, it will be conversion of existing Casual Male stores and remodeling in the same real estate.

Okay. And when you look at the split, I know you talked a little about adding more designer product, how should we be thinking about that split between designer and the kind of your core basic/private label product going forward? And how should we be thinking about that in terms of ability to maintain margins if you are increasing the designer product?

Well, I think when the day is done, it's all about satisfying the consumer and the consumer, as I mentioned a couple of times, is really in the driver's seat. It is an area that, as we talk about balance of sale and a little bit of margin pressure that we are experiencing, driven by the fact that the consumers are in fact choosing some of the brands that the merchant team continues to bring to market and we are continuing to bring really new brand offerings to market. Vineyard Vines is an example, North Face is an example where both were brought in, in late fall, early spring and we will extend that distribution even greater this fall and that success-driven by consumer engagement is really what drives our merchandise strategy. We believe that the private label business is still very meaningful and while there is greater margin upside, when the day is done, it's about dollars and really GMROI. So well, margin may be under pressure slightly from mark-up or gross margin on brand versus private label, when the day is done, it's about driving dollars per square foot in the box, productivity online and converting that in dollars, not percents.

Great. And last question, how do you look upon this as being able to attract new customers? It sounds like you are doing a tremendous job in terms of being able to cut, slice and dice the people you have. How do you look upon this as driving new people who are big and tall and just haven't gone to a DXL or other store into the store?

Yes. It's actually a really great question and although many of you would think we were going to do a big advertising campaign and create greater awareness, my own belief, our belief internally is that the greatest path to creating more customers is to create a compelling experience for those that come in and it starts to driving traffic. That's why we continue to talk about traffic not brand building and marketing awareness. Drive traffic to the box. Convert that traffic either online or in a store. Have an incredible experience which we get high watermarks for. And then I am sure you are familiar with NPS, Net Promoter Score, the greatest ability for us to drive greater growth is because people will talk about us. And the viral element of that experience is way more authentic and genuine than us creating a marketing campaign to just get our name out there in a more meaningful way and not have people come into our store or as the website evolves, come onto our website and have that incredible experience. So the belief we have is that by engaging consumers into actually shopping with us, we will create a viral experience that is efficient and actually much more capable of creating greater number of customers than knowing who we are. You know a guy is at a party, he's a big and tall customer, he looks great, so when the conversation travels and he said oh, yes, I had this the greatest experience at DXL store. That is actually not happenstance. That happens more regular than you would imagine and our belief is that traffic and conversion will ultimately drive that.

Great. Thank you and good luck for the holiday season.

Thanks so much.

And our next question comes from the line of Chris Krueger from Lake Street Capital. You may begin.

Hi. Good morning.

Good morning.

Hi. Back in mid-June, you announced that you are working with Infor Customer Engagement Solutions. Are they heavily involved with the CRM project? Or are they more involved with future things to come?

No. They are very heavily involved in the backbone of the CRM project.

Is it safe to say that you were already working with them prior to that announcement? Or is this all happening this quickly?

It really was Q1, Q2. The team before I arrived was under with David and what have you, went through a pretty extensive process in really handpicking the platform to launch CRM, among other things. Infor is actually far greater than just that CRM component. And when I arrived really was when we agreed to move forward with them as the partner and we have accelerated those efforts tremendously in the last 90 days to the point where literally I think it's about 120 days from signing a contract to implementing this program. So we have moved really fast. The marketing team has done a yeoman's job at really executing that CRM platform. But again, that Infor system and platform provides us much more than just that. Single-use coupon is another example that it's really not the CRM system, it's a different way to execute our promotional strategy.

Got it. Okay. And then on marketing, are you guys pulling back on TV advertising to focus more on digital in general this fall?

You know, I would prefer not to talk about that quite that directly in a public format. I would tell you that, as I have said, it's a recipe and we expect that, as the recipes go, there are many ingredients and we will continue to add TV as part of the mix. But in terms of trying to qualify the level, I think I would leave that alone at this point.

Got it. Any new brands coming on?

I think the biggest thing we would talk about is the extension of brands that we have dipped the toe in the water. Vineyard Vines and North Face are two great examples of that. While we do have a couple of new brands in the mix, they are light in distribution and I think it would be misleading to tell you that a brand in the box at 10 store distribution right now is important and worth mentioning. But the merchant team is continuing to push hard in understanding, what I would call on trend, not necessarily fashion, but on trend in terms of the casualization of America and our core consumer and looking for brands that resonate with that customer.

Okay. Then you guys mentioned the China tariff situation. What percent of your sourcing comes from China, if you can say it?

You know, I wouldn't suggest we will talk about that level of detail here again, but I would tell you that, the takeaway that you should have is the global sourcing team has done an incredible job over the course of really the last year or two at continuing to drive quality and really the lowest cost provider. And I would say in the last six months we have accelerated that tremendously. But really, while we are still in that part of the world, we have moved out of China in a very meaningful way and we really have a very minimal challenge, if you will, in terms of the tariffs. The other thing we have done relative to that is really pushed hard to move up the timeline with our resources and we will be receiving most of the goods in front of those marker dates. So the takeaway you should have is, it's minimal impact in terms of where we are. And then for 2020, it will be very light what will actually remain in China.

Okay. Last question. Can you just refresh my memory of how many weeks were in the fourth quarter last year versus number of weeks in the fourth quarter this year?

So I believe it was 13 in the fourth quarter of this year and 13 in the fourth quarter of last year. It was two years ago that we had the extra week, a 1fourth week.

Okay. Thank you.

Thank you.

Thank you. And our next question comes from the line of Sam Poser from Susquehanna. You may begin.

Good morning. Thank you for taking my question. I am fairly new to this, but what is the inventory turn that you guys want to see over the long term because I just noticed going in the stores that you go in there repeatedly and you see the same stuff repeatedly for over longs period of time. So what is the kind of inventory turn you foresee down the road here as you move through all the processes and initiatives you are doing?

So, it's a pretty low turn right now. That's one of the things that we are working on improving. I don't want to throw a specific number out there, but it's a pretty low turn that we have. But that's something that we have been improving over the last couple of years especially as we had a large inventory initiative in 2016, 2017. Our inventory levels have come down quite dramatically over the last two years. This quarter we were elevated a bit for some of the reasons I highlighted. But inventory turn is low, but getting better.

Sam, one of the things and I think it's actually a great question. One of the things that I think is really important, especially being new to the mix is, as I talked about some of the unique elements of DXL, we have a comprehensive breadth of size runs and most of our competitors, not literally all, but most of our competitors without naming them specifically are more end of the rack and you could go into any of those larger competitors that are, let's say, department store X and see 38 or 39 or 44 and you might have black in 44 and gray in 38, but they are really end of the rack. And one of the challenges as being the be-all, end-all really for the big and tall customer is our size runs across the number of sizes as we carry in all of the colors we carry, which is an ongoing challenge of balancing efficiency versus being the place to go and the only place really important.

Well, I mean I could just say this. I am one of your customers as well. So I have personally shopped at your stores for myself and I find it that if I go in every two months, I am seeing about 90% of the same product I saw two months earlier and I want to see new stuff. So I appreciate I can always find my size, but I have already bought most of the stuff I like and want to go back and buy something new and that's where the challenge comes in. That's why I asked you about the turn. And I had one other question as well.

Yes. So one other comment I just would tell you on that and hopefully you will, I don't know how long you have been shopping with us, but one of the important points is like Psycho Bunny is a perfect example where for Psycho Bunny which is one of our fashion brands, we will rotate through the tees and there is kind of a collector level of involvement, for lack of a better way to say, with our core consumer that comes in every four to eight weeks, looking for a new tee. Vineyard Vines, North Face, the extension to North Face, there is other examples of that, which are more demonstrative across the broader distribution of stores. But to your point, we understand the challenge, good, better and different. Our customers are not, "at the same speed" with which women's apparel moves. And so our inventory, according to how quickly you shop, may or may not turn as fast as you would like. But it's an ongoing challenge of trying to drive efficiency of inventory and turnover.

And just one other point that I will add, Sam, is that, first, thanks for being one of our customers. Secondly, when I was talking earlier in the prepared remarks about our best product everywhere strategy that's exactly, the reason that you just quoted is exactly the reason that we are pursuing this. It's because there are certain stores where, let's say we have a Polo assortment or a Nautica assortment, but it may not be up to the presentation levels that we would like to see it at, so we are adding more styles into those stores. This is something where we have to be careful. We can't overextend ourselves but I think it's important to call out that we are recognizing that there are people that are coming into our stores and are looking for more choice and more selection. And that's one of the things that you should see in some of our stores that we are trying this best product everywhere strategy.

Thank you. And then lastly, I mean, just a follow-up on the China question. I believe your answers were around your own private brand product. Can you talk about sort of the overall percentage exposure of overall purchases that are coming from China from the branded goods as well as your own, the stuff you are doing yourself?

Yes. I would tell you two things. One, there is for sure a greater challenge in branded goods. Many of our resources after, I would say, just great due diligence, as you might imagine, any retailer worth their weight at this point is trying to understand that better, have done what we have done, maybe not quite at the pace we have done it and those that have not, for the most part and not every one of them, but for the most part, are holding their prices and eating it. Now I don't know long term where that will end up, but I think our exposure at least through the end of the year and beginning of next year still remains relatively minimal. There's a few key brands that are really heavily in China and while it held price, I have an expectation if they can't resource it, that will be a greater challenge as we look down the road.

Okay. Thank you very much and good luck.

Thanks so much. And thanks again for shopping with us.

My pleasure.

And I am showing no further questions at this time. Ladies and gentlemen, thank you for participating in today's conference. This does conclude the program and you may all disconnect. Everyone have a great day.

Thank you everyone. Have a great day. Talk to you next quarter.