Ladies and gentlemen, thank you for standing by and welcome to the Second Quarter 2020 Destination XL Group, Incorporated Earnings Call. At this time, all participants are in a listen-only mode. [Operator Instructions] I would now like to hand the conference over to your speaker Nitza McKee at ICR. Please go ahead.

Thank you and good morning, everyone. Thank you for joining us on Destination XL Group's second quarter fiscal 2020 earnings call. On our call today is President and Chief Executive Officer, Harvey Kanter; and our 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 now 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 ability to withstand the impact of the COVID-19 pandemic on its business and results in fiscal 2020 and to manage through the pandemic, including its efforts to restructure and reduce costs, manage inventory, market to its customers to encourage shopping in-store and online and maintain sufficient liquidity to meet its working capital needs for the next 12 months. 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 risk 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 good morning to everyone on the call today. I hope you are all healthy, safe, and well. These are very challenging times for us all. Before I share some brief comments on our second quarter results, I want to start today's call with a quick acknowledgement. Earlier this month, three of our long standing directors retired from our board. I would like to extend a heartfelt thank you to our former Board Chair, John Kyees, and directors Ward Mooney and Seymour Holtzman for their service and support over the years. All three contributed to our business in different ways, but like everything else in life, nothing is forever. Their personal passion for the business, for our team, and their most recent support during the COVID-19 pandemic are greatly appreciated. We wish them all the best for their continued success and wellness. I also want to give a big shout out to all of our associates who continue to operate at an unparalleled level of perseverance, and focus during these unprecedented times. These are the folks who have gone to battle with us during difficult times in the past and these are the same folks that are fiercely taking on today's challenges. We are so incredibly proud of our teams from the DC and call center to the stores and corporate office and the culture that we have created here at DXL. These days, there are more things that keep me up at night, but the team we have is not one of them. We have great people who are the backbone of our continued optimism for the future of DXL. Also want to open with two other important topics. First, our ongoing and continued efforts to combat the challenges of social unrest and racial divide. In…

Thank you, Harvey and good morning everyone. I like to provide you with a summary of our second quarter financial results, and then spend a few minutes highlighting some of the actions we have taken to protect the long-term viability of our company. Like Harvey said, I too remain cautiously optimistic. We believe the strategic decisions we have made throughout the pandemic will position us to emerge from the crisis well equipped to continue serving big and tall guys all across the country. With that, let's start with sales and margin. Total sales for the second quarter decreased 38% to 76.4 million, down from 123.2 million in the second quarter of last year. This decrease was due to having most of our stores closed throughout May and much of June and since reopening stores operating on limited hours. Nevertheless, our second quarter sales performance improved from the first quarter and surpassed our expectations as we were able to reopen our stores sooner than expected. As noted by the end of June, all store locations have been reopened. We continue to see a material increase in online shopping, and we were once again pleased that our direct business performed very well, with DXL.com sales up 69% over last year. We expect online shopping to be a growth channel through the remainder of fiscal 2020 making up for some of the store shortfall. Buy online pick up at curbside and buy online pick up in store are available in 311 stores and grew over 200% versus last year's volume. Our wholesale business contributed $5 million in sales during the second quarter as compared to 2.7 million in the prior year, driven primarily by the sale of 4.1 million in protective masks. Gross margin rate inclusive of occupancy costs was 28.1%, as compared…

Thank you, Peter. As we focus on the balance of 2020 and look to 2021, we are ever hopeful for the health of our nation, a vaccine, and over some time a return to normal. However long that actually is defined. For the moment, [indiscernible] to all, and for all a better fall season than spring has been. And now, we will take questions. Operator?

[Operator Instructions] And our first question comes from Eric Beder with SCC Research. Your line is open.

Good morning.

Good morning.

A few competitive questions. So, one of your biggest competitors have filed for bankruptcy. How have you, you know, how do you look upon that as an opportunity to move some of those customers over to you?

Eric, it's a great question. And obviously every opportunity to take share market is something that we're continuing to evaluate. Those businesses that have found more strikes in us are in more of a tailored clothing situation. So, while there is a casual elements of their business, and we absolutely hope and believe that our digital practice is allowing us to accelerate both our own sales and shared market, time will tell, but we do see that is a distinct opportunity potentially in the coming months with a casual part of our mix, and the [inherent strife] that they're experiencing.

Okay. When you look at the store returns there were about 60% plus of prior, is that including someone who buys online and you ship from store?

No. That does not include that Eric. That's included in our direct number.

Okay.

Well, it's actually Eric. Just so, you know, this, Harvey, it's a direct part of that I would say although we're excited about nearly 70% growth, our universe sales, which are store sales driven in the store, but actually allocated to the web and the direct side of the business are greatly challenged because of the traffic in the stores not being there. And so our opportunity to extend the assortment from the web, selling it in the store is limited by the traffic itself.

Got it? Okay. You know, when you look at the limited hours, do you believe how much of that do you believe is a way down on the stores or is, you know the new norm of 11 to 5 or 6 or 7, kind of where it should be just in terms of maximizing efficiency in terms of costs and other pieces?

Again, another really good question, which I would tell you that we're testing and trying to optimize, we originally opened at 12 to 6. What we saw was that customers are literally relatively speaking knocking on the door in some cases earlier. So, we opened earlier because the fact of the matter is our store associates are in the stores as early as 9 a.m., while they're shipping out of stores as the mini warehouses that they are, we are looking to again extend that on the other side, which is how we went from 6 to 7 to accommodate anyone that might need to come in if they're in fact working a full day. What we've seen is, to your point, the new normal is a relatively compressed sales environment while we have seen sales grow into the 11 o'clock hour, we haven't seen the level of sales really growing much into the 6 to 7 hour. So, we will continue to evaluate that, but as I've said, everything is a balancing act, and it's balancing our associate’s exposure being out. The hours we have, the payroll we have against the sales, and we will continue to look at whether or not hours should be extended to support our customers, and do so accordingly.

Okay, and last question, what historically period is when you need the most capital, and how has that changed in terms of relative needs for prior periods for this year and going forward?

Sure. So Eric, I'll answer that one. The, you know, it's typically at the beginning of the spring season, and the beginning of the fall season is when we have the biggest use of cash and we take our inventory in two cycles per year. So that's typically where it is. It's right now. We're taking in an awful lot of fall merchandise this month in August, and that will continue into September and October, but then once we get through the holiday that's when we tend to be in our most cash rich position and you see a greater pay down on our revolver as we get into January. So, I don't think that's going to change much this year. You know, what we're going to continue to do is keep working with our vendors, our merchandise vendors. Harvey talked a little bit about, you know, how important it is that we just stay very close with them to make sure that we can get all of our receipts in, so that we're ready when the customer does come in, you know, this fall season.

Great. Good luck for the remainder of the year and next year.

Thank you.

Thank you. Our next question comes from Alex Silverman with AWM Investments. Your line is open.

Hey, good morning.

Good morning.

I struggled a little bit with the – operating at 63% of last year versus operating at 65% of last year. What was the difference there?

Really, we were seeing what I would say is continued acceleration in our store trends. And the finite difference between 60 and 65 is that we seem to have plateaued a bit with the hotspots and there are bright lines, as you probably can imagine, between California, Georgia, Illinois, Texas, Arizona, where those markets have actually gone backwards in their performance, and they are affecting the total whereas we have other markets surprisingly, as an example, Michigan, which were operating in the low double digit declines, which would be characterized as 85%, 87%, 88% of last year. And so that is the characterization when you aggregate it all together, you know, we're not making a great deal of progress from what the 63% said the other way would be negative 30 and change, we're still negative 30 and change at the moment.

So was 63%, where you were for the quarter and 65% is where you are today?

That is correct and the 65% is the first three plus weeks of August. So, we've made slight improvement in August from what the second quarter was.

And, and as you…please go ahead.

Excuse me, and as you might imagine, it's obvious we have an expectation that as Peter said, we will continue to see slow improvement. We are encouraged by the reduction in infection rates and really not flat-lining yet, but some level of that. And then equally so the level of infection not turning into something more challenging and the ability to treat that with a faster course for remediation of those that are affected with the virus.

As people start to move back to the office, which is slow, but seemingly happening, are you seeing any improvement or can you tell whether your consumer is in the store because they need clothes to return to the office?

Yeah, I would definitely say, we've seen a reduction for lack of better ways; say this is a double negative. In the negative trend, the tailored clothing. So as you might imagine, tailored clothing and things like that were like literally negative 96%. It's gone from negative 96%, you know, negative 70. And now we're in the negative 50s, if you will. So, it’s better, but our overall businesses in the 30s. So, it's still 40% worse or 20 points of comp worse than our overall business.

Great, thank you very much. That's very helpful.

Thank you. And our next question comes from the line of [indiscernible]. Your line is open.

Hey, Harvey, first question is, in terms of kind of a longer-term opportunity set here, and your strategy, has anything changed? And, you know, I guess the first thing that comes to mind is, you know, the value and size of kind of the store portfolio.

Well, I'm going to go from the reverse order, although you just asked if anything's changed and then segue to the store portfolio. Actually, what's changed in a positive way is that our initiatives and strategic intent literally since I've walked in the door to the Excel now a year and a half ago is unfortunately, and I say unfortunately, because the COVID environment has created that and we certainly wouldn't have wished for the COVID environment, but it has further strengthened our conviction in the digital initiatives and acceleration of the roadmap that we have been pursuing. I've talked about the app before. The app is producing three to four times the volume of what it was before. And we've leaned into the app as an example. Some of the segmentation and cohort marketing we've done, we've seen test and control examples of as we brought on the Salesforce email program and the campaign management program. We've seen definitive elements of success in the – against the control. So, we are leaning in as hard and fast as we can go to that initiative because the customer regardless of where they shop to your point about stores is starting with a digital experience, even if they're going to the store. So, it may start on their mobile device. And they started on a mobile device looking for a store. They may purchase on a store, and we may end up in a BOPAC environment and literally, let's say six months ago, there was no buy online pick at curbside. Today, we are in double-digit penetration of rate in terms of BOPUS and BOPAC and that is literally a factor of probably nine times that, you know, a BOPUS for us used to be a couple of points. Today we're you know, experiencing every couple, two, three days of 10%, 12% penetration for those elements in our mix, not every day, but it's definitely important. And then in terms of the store portfolio, we definitely believe there's an opportunity to prune the store portfolio. We've gone through a very extensive profit process with both our landlords and internally evaluating the formal contribution. I would say, unlike other experiences I've had in the retail brick-and-mortar environment, our four wall contribution of most of our stores has historically been a positive outcome with the COVID environment and the sales that is more challenging, but we are not looking to accelerate store closings. We believe that given what we know today, that there's natural explorations that would allow us to close a meaningful part of the mix over time in the next three years that makes sense for the business. And remember those stores all act as mini warehouses and last direct two mile shipping points as well. So, we're getting leverage out of this store that historically was [four-wall] positive contributors.

Got it. That's helpful. And maybe this is for Peter. In terms of liquidity, can you talk about, and this kind of goes off the last callers question, can you talk about, you know, when you reach your lowest point, liquidity wise, and you know, kind of what gives you or what the puts and takes are that give you confidence that you have enough liquidity for the next 12 months?

Sure, I'd be happy too. So, this is really one of the things that we have been focused on non-stop since the pandemic started. And we've really gotten very, very detailed and very granular with how we're managing cash on a week-to-week basis and we've projected out for the next 52 weeks of how to get through the ebbs and flows and I would say where it's the most challenging, it's these times right now. It'll be in August and into September, as we've brought in or we're in the process of bringing in all of our inventory for the fall, but the majority of that inventory won't sell until November and December. So, you know, it's always been very cyclical for us. Like many other retailers, I don't think that's changing this year. The only thing that's changing is because of the first half of the year in the store closures and the impact that that's had on sales. We're just having to be much more mindful and precise in how we manage that cash. And I think we've been doing a pretty fair job of doing it. I would, you know, encourage you to take a look at our balance sheet, our cash, or our debt net of cash is actually in a pretty good situation right now. We're at about where we were at this time a year ago. So, we're just going to continue to manage it very, very carefully, and stay on this path for the next 52 weeks.

And what sort of…

It’s Harvey; I just wanted to double down on one thing Peter just said, because I think it's really important that you hear this. We as a management team have been Uber aggressive at kind of downside scenario planning, and we have, we really have two plans. One is the downside scenario with assumptions. And one is the management plan. We're navigating pretty close to the management and so we feel really good about that, but in the scenario that that we've spoken about a little bit, whether it be the pandemic or what have you in terms of the future, we have the confidence in the liquidity conversation that you're trying to tease out a little bit from the downside scenario planning with things like our borrowing base, which for us is a really important component and the inventory and our vendor support of shipping. So, we have meaningful opportunities to leverage really our credit facility, but more importantly, we have a downside scenario, which we've been very hard on ourselves. And the most important thing that I use the word relentless on is cash preservation and understanding what that downside scenario could mean to it and gives Peter and I greater confidence in liquidity.

Got it. And I guess to that point, are you considering any other additional sources of capital? I had noticed you filed the shelf, maybe a few months back?

Yeah, that's right. We did file a shelf registration back at the beginning of the second quarter, I believe it was. And so we are not planning to do a share issuance right now, we don't think that that's in the best interest of the company or of our shareholders, but that is out there if we decide to exercise that. But yeah, that is out there.

Okay. Thank you very much. Good luck guys.

Thank you.

Thank you. And our next question comes from [Paul Johnson], as a Private Investor. Your line is open.

Yes. Good morning. Can you tell us a little bit about the competitive landscape, obviously in the tailored area, we have tailor brands filing, which I imagine is a positive, but in the sportswear area or other than tailored brands, for your, obviously JC Penney was a big force they've filed as well. Obviously, both of them may restructure so hard to know how that all play out, but who are you seeing as sort of the number two and number three competitors in the XL area, sportswear and tailored at this point?

You know, another great question, and I'll try to answer that. Peter can weigh in, if he has a different perspective in addition to what our comments are. The reality is, what we think about, when we think about competitors, with few exceptions there are limited direct competitors. Most men's apparel retailers trade on the edges of our business, whether it's JC Penney, Men’s Wearhouse, Macy's, there are most competitors that are in the upper end of their size range, which literally is the lower end of our size range, and not the average. So, what I'm talking about is, is what we've historically referred to as end of the rack and 38 and 40, whereas our average size is, you know, mid-40s for a waist size for lack of a better way to say it. We believe there is opportunity to – for lack of a better way say conquest and to take advantage through the direct search environment of both non-branded search and shopping search, which our customers that would not necessarily shop with us today because they're not shopping by brand, but they're starting in the digital environment to basically take the opportunity to leverage that searching on the digital platform to acquire those customers. So without naming competitors there, you already named a number. There are competitors that are clearly in the casual space, and competitors that are in the – that I would say the tailored clothing space. Those that are in the casual space are typically lower in price point and not as high touch. Those are in the tailored space are typically higher in price point and in higher touch, but when you add them all together, there's absolutely a market share gain. And we believe that the digital platform allows us to get at that quickest. We are using geo targeted elements where our research and market information helps us understand the specific store closings. We're looking at store closings within a five mile radius of our store and then conquesting geographically the opportunity to really go after those consumers. That's one example of how we're going at it, but we definitely believe there's an opportunity there. And the unfortunate reality for them, which I wouldn't wish bad luck on anyone, but the unfortunate reality for them is when companies [go 11] and what have you, there stripes, and that stripe gives us an opportunity where their attention is not always focused on some of the things that ours is at the level it is at the moment.

That's very helpful. Thank you. And can you give us – just give us an update on your wholesale business with Amazon?

Yeah, our wholesale business with Amazon, I was wondering whether anyone was going to ask about that, is holding its own. It's actually ahead of our overall company's results. As you might imagine, digital player doing well, it's, you know, our performance overall, the results we articulated are obviously not positive the last year. Amazon is still positive, but the level of increase has definitely subsided from what it was. We have great expectations. We have launched a second brand, which I think there's a few styles online, but you'll see that come online and fall with them. And we are hopeful that as the pandemic hopefully subsides at any level, and new normal happens, that digital platform that we're pursuing that obviously Amazon is among other leaders will continue to provide an opportunity to leverage not just the mass business, but more importantly the core of what we do, which was big and tall sizes in core apparel, which is more casual driven, which is what we're leaning into with them.

Great. And then just finally, with regard to the debt, you mentioned of the 80 million, or can you just give us sort of the scheduling of the debt because I know some of it is out in May of 2023, I think I just want to understand the relative terms.

Sure. So the credit facility does not mature until May of 2023. So, it's an asset based loan, which fluctuates with our borrowing days. So, the more assets that we have, the more availability that we have. And there's different step downs in advance rate as we move out, but I guess the takeaway is that we're not in a situation where we need to go out and secure financing in the next 12 months or even 24 months. You know, we've got three of the biggest banks in the world behind us that are in the Banking Group. I think we're very, very transparent and communicative with them. And we're very, very happy that they've been supporting us. I think the fact that we were able to renegotiate the terms of our deal in the first quarter, I believe it was, says a lot to the relationship that we have with our Banking Group. So, we've been very happy with it, but that's a quick overview.

Appreciate it. Thank you.

Thank you.

Thank you. And I'm not showing any further questions at this time.

Thank you, operator. I wish everyone the greatest of safety and health and good wellness over the fall season and thank you for your time. We'll talk to you again in 90 days.

Ladies and gentlemen, this concludes today's conference call. Thank you for your participation. You may now disconnect. Everyone have a great day.