Ladies and gentlemen, thank you for standing by and welcome to the Second Quarter 2021 Destination XL Group, Inc. Earnings Conference Call. At this time, all participants lines are in a listen-only mode. After the speakers' presentation, there will be a question-and-answer session. [Operator Instructions] I'd now like to hand the conference over to your host today, Shelly Mokas, Director of Financial Reporting and SEC. Please go ahead.

Thank you, Sarah, and good morning, everyone. Thank you for joining us on Destination XL Group's second quarter fiscal 2021 earnings call. On our call today is our 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 updated sales and earnings guidance and other expectations for fiscal 2021. 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 including but not limited to ongoing surges of the COVID Delta variant potential supply chain issues and ongoing labor challenges. 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, Shelly and good morning, everyone. Today, Peter and I will share with you both the progress we are making with our business and our expectations for our continued recovery. At a high level, I can tell you that we are very pleased with our results. It is inspiring to see the consumer demand coming back at an accelerating rate even more inspiring to see our customers responding to our ongoing digital transformation, which we began back in 2019 and helped us to respond to the challenges of the COVID-19 pandemic. Consumer engagement with DXL over the past three months has been remarkable. This quarter can be considered a very important chapter in the context of the strategy, even if we are pursuing and executing and the results we have achieved. Our digital transformation, which has been steadily developing and is a major underpinning to these results has provided a strong belief that our business was poised for inflection. In our second quarter, we saw big and tall customers surge into the stores and onto our website to drive a level of sales and profitability far greater than previously expected. This is happening across all customer demographics and includes both current and new to DXL customers who have not shopped with us before. We believe there's a material change in how consumers are thinking about DXL. We know that a lot of new customers are starting their shopping journey digitally finding us and based upon some consumer research we have conducted, we believe we are taking share of market. We have seen continued growth with new to file DXL customers growing 28.5% in Q2 as compared to the same period in 2019. Our financial performance in the second quarter surpassed all internal expectations initially forecasted back in mid-May. Year-to-date…

Thank you, Harvey and good morning, everyone. As Harvey discussed the recovery in sales that we began to see in the first quarter continued to accelerate throughout the second quarter and at a rate much faster than we expected. The operating leverage generated from these higher sales, combined with the reduced promotions, and cost reductions drove our strong earnings this quarter. Additionally, the cash flow we have generated this year enabled us to pay off our revolving credit facility and end the quarter with our lowest total debt level in many years. Based on the strength of this quarter's performance, we are again increasing our full year sales and earnings guidance, which I will review with you after I discussed the quarter's results. Due to the significant impact that COVID-19 had on our second quarter 2020 results, I will also compare our results against Q2 of 2019 for better compatibility. So let's start with sales. Total sales for the second quarter were 138.6 million as compared to 76.4 million in the second quarter of fiscal 2020 and 123.2 million in the second quarter of fiscal 2019. On a comparable basis, sales increased 21.6% over the second quarter of 2019. Stores were up 13.1% for the quarter, and direct was up 52.2% 2019 levels, and both channels saw business accelerate month-over-month as the quarter progressed. The dxl.com website, which is the biggest contributor to direct channel was up 66.4% over second quarter 2019. From our prior earnings calls. Most of you are probably familiar with our omni-channel capabilities, whereby our stores are able to assist the customer in placing an order online, which we call our universe. Likewise, our stores play a key role in fulfilling many of our online orders if the merchandise is located in a store rather than…

Thanks, Peter. As you hopefully have heard now, we remain energized and about the potential that lies ahead. Despite the ongoing challenges associated with the COVID-19 pandemic, some of which may have not yet fully understood as well as supply chain risk, we remain cautiously optimistic. We have an incredible team and obsessive focus on our customers and a plan to create a meaningful shareholder return. At DXL big and tall is all we do. We're not just an aisle or rack in a store, we are an entire store. We believe we have entered a new phase in our company's history and that we are in the most solid financial position in recent company history. Most of all, we believe we have a strategy to engage consumers and what we do best, creating memorable experiences for big and tall guys to look and feel their best. We do that by offering the most extensive and uniquely curated assortment from value price essentials to luxury brands and exclusive designers, both online and in store, giving an underserved customer, the be all and all place to shop and interact. And finally, we know we have an incredible employee base that is passionate and committed to our customers and that gives us the confidence that we will continue to make inroads into taking share of markets. And with that, we will now take questions.

Thank you. [Operator Instructions] Our first question comes from the line of Jeremy Hamblin with Craig-Hallum Capital.

Thanks and congratulations on a really impressive performance. I wanted to start by just understanding the composition of the acceleration that you've seen in your comp trends. So can you give us a sense, Peter, for that same-store sales growth, how much of that is growth in average transaction value, versus total transactions versus 2019 levels?

Sure, I'd be happy to give you a little a little color on that. So we definitely saw a slight increase in conversion. We definitely saw a slight increase in average transaction levels. But the biggest level of change really came from traffic coming into the stores. As Harvey talked about, we've seen new customers coming in, we've seen a lot of our returning customers coming back to the stores but more than anything, it's really just been the sequential improvements in traffic that we saw each month during the quarter.

Thanks. That's really helpful. And wanted to get a little more insight. I think what I heard from Harvey's remarks was that you saw new customer growth of over 28%. I wanted to get a little more color around, just what type of customer you're seeing, how you're kind of gleaning that type of information and how much is embedded within that of those new customers? Are they totally new customers to the concept? Are these inclusive of reactivations of customers?

Yes, Jeremy, great question. I'll try to recap. This is Harvey. The new customer growth that we're seeing is really primarily customers that are not in our file, have not been in our file. And I alluded to research, some that we've done softly inquiring those customers asking, is it the first time you shop with us? If you haven't shopped with us before? Where have you shopped? And if you have shopped with us for where else do you shop? And what we're absolutely seeing is a customer that has not shopped with us before coming from the places you would expect, maybe not paying as much attention to the big and tall consumer because they have other priorities, which, although logical, leaves us the opportunity to really take share of market. And so we're seeing that through a pretty meaningful level of research about I think 18% of our query customers who have answered the question. And they're coming from places that you would expect other men's apparel businesses to be possible, but not paying as much attention just to a smaller business, number one. Number two, we're seeing it through the query of search. And a lot of customers are coming to us and what we're seeing through our own data and some available online data is that our growth is accelerating, whereas others is relatively stable. And again, that alludes to the 28.5% of direct-to-consumer growth that we're seeing from our file primarily online but also in stores.

Wow! That's impressive. I also wanted to just get a little more color on the sales trends, which obviously has been accelerating. You've had a pretty extraordinary increase in your total sales guidance for the year and obviously have momentum and clearly confidence in the back half of the year. I wanted to just get a sense if you could provide a little bit more detail around the start to Q3, whether or not you indicated that it's similar to what you delivered in Q2. My sense based on the guidance raise is that it's more likely to be like you saw in July than what you did for the quarter in total, but any additional color that you might be able to share on the Q3 start.

Sure. So Jeremy, this is Peter. And yes, you're exactly right. The performance in August was more similar to what we were seeing in July than what we were seeing in May. The customer has been very resilient. He's coming into the stores and snapping up product as soon as he can get his hands on it. So we have not seen a slowdown, and so far, the performance has been very consistent with what we saw June going into July.

The other thing I would add, Jeremy, is that one of the challenges we pretty directly address is the ongoing chasing of goods. And the team has done a remarkable job both in terms of what was available from pack at home literally and manufacturers that really worked with us in our direct supply chain overseas, we started to receive those goods and that helped accelerate, but I can honestly tell you that the level of turn on those goods has been remarkable. That being said, we're kind of at a low point on our inventory, and we expect even by the end of September to materially impact our inventory levels, and that will allow us a greater ability to not just sell what's in the store and available, which in some respects is really remarkable, the consumer is coming in and I would say we're selling through clearance and colors that normally would not sell the levels they have, but there is a need for things like weddings and what have you. But when we get back even in a better position, and we alluded to things like airing goods in which normally would not be something that would be a cost -- in a good cost and cost prohibitive really, we have been airing goods in. But as we have really chased the goods and we expect that each month going forward, we'll be in a better -- materially better inventory position, and hopefully that will be true, nothing will be a greater hiccup than we expected, that will also further hopefully allow us to fulfill the guidance that we provided.

Understood. And I also wanted to get the call out on geographies, Pacific Northwest, the Coast, basically, you mentioned are comping about 600 basis points below the rest of the chain. Wanted to understand embedded within your full-year guidance, are you assuming normalization of that? Do you believe that the differential in comps is simply a reaction to a reflection of sentiment around COVID and COVID protocols, but what's embedded within that guidance? Do you expect that to normalize by Q4 or do you assume that, that trend continues in the back half of the year?

Sure. So I'll take that one. So with regard to the guidance for the year, we expect that the numbers will start to get closer to one another. In fact, we did see them start to get a little closer in July than they started to separate back to the 600 points in August. So it's really difficult to get our arms around that. But we do think that over time, they're going to neutralize and get closer to whether than historically which is very close to one another. But it's primarily, we believe it coincides very much with what you're seeing more socially around some of the COVID restrictions, the Pacific Northwest in the Northeast have particularly been lower than the middle of the country. So we're -- we are expecting it to get better over the second half of the year.

Great. And then I wanted to ask a couple of questions around your gross margins, which are truly extraordinary. In terms of, what you're seeing in freight impact, you noted that your merch margins were up significantly over 300 basis points versus 2019 levels, but that's despite the impact you're seeing from freight. I wanted to see if you could actually be more specific what was the drag from freight either versus last year versus 2019 levels?

Sure. So again, we're making all the comparisons to 2019. I would probably -- I would put it at about 100 basis points to 200 basis points is the drag on the freight. The improvement in promotions and the impact that that's had on margin has really been remarkable. And it's more than covered that pressure that we're seeing from some of the supply chain challenges, but it's like I said, maybe 100 basis points to 200 basis points.

Got it. And then last one on the gross margins, your rent obviously is down significantly both from store closures, as well as the renegotiation of 133 stores leases. You note in here, you've got 119 over the next two years, and I think of those 133 stores, you said $17 million over the life of the lease. Of the 119 that you have coming up over the next couple of years, I imagine you're probably not going to get $17 million in savings, things obviously have improved across retail, but what are your expectation, how are those negotiations going? Do you think it's something where you might be able to get $10 million of savings on those next 119 locations?

Yes, no. So, I mean, we're definitely continuing to renegotiate. We're seeing some savings, but it's definitely getting more difficult than it was pre-pandemic or during the pandemic. But we're very, very comfortable with being able to continue to generate some savings, and that's essentially what we're going to continue to do. And so, Jeremy, I'm just going to ask that we move on to the next person in the queue, and we'd be happy to follow up with you with more questions afterwards.

Thanks so much, guys.

Thank you.

Thank you. Our next question comes from the line of Eric Beder with SCC Research. Your line is now open.

Good morning. Congratulations on a great quarter.

Thanks, Eric.

Thank you.

I got a few kind of -- we'll talk a little bit about this 1XL opportunity you mentioned of about $5 billion. When you look at that customer, they also have as they get a little bit, I guess bigger or taller, they have a little bit more in terms of options. What are you seeing and how can you think you can attract and keep that customer going forward?

Eric, we really alluded to a bigger market, but that is not where we're really headed today. We are trying to leverage the share market gain greatest with respect to the core business that is greater than that size range of course. We've talked about that size range extending the opportunity of our market positioning, but you just specifically and directly really alluded to the fact that it is outside of the core part of what we do. And so we recognize that if you look at the addressable, the broader addressable market, that's the reference to $15 million. But we believe we have such a meaningful opportunity really to address the share gains in the $10 billion that exists, and we understand that customers have actually moved up on that size range, not down. So not to say that we won't go there eventually, but to your point, that is a space that other people are paying as much attention to as part of their core business unlike the space that we referred to where they're really just not in the business that we are in at the level we're in it.

Got it. That makes sense. When you look at -- I want to talk about the new customers, Pete, there you've talked about being much more focused with both your marketing and your merchandizing and other pieces, those new customers, what are you -- how are you thinking about leveraging them and keeping them on board and driving them to do even more business with you through emails through all the different levers and marketing levers that you have?

Yes, we have measurably moved our capabilities in terms of individual quasi one-to-one marketing. And the reason I say quasi one-to-one marketing is we literally don't market to each individual consumer, but at this point we have, relatively speaking, nine consumer segments. So there's Active Andy, there's Casual Carroll, there's Wally Wall Street, and those names and references are to unique customer buying categories, and our marketing team is interacting with them via email through even how they come to our site. So if a new customer came to our site and we have no reference to cookies or experiences on them, we will serve up a different initial website experience than we would for a customer who is coming back and purchases with us, and we'll continue to move down that path by representing ourselves uniquely relative to what they bought and what they might be buying. I think I've referenced before that where we have historically messaged one single message, if a customer and we know this actually today has only bought regular price, we would never send them a clearance message at this point. If they've only bought purely clearance, we would never send them a -- one of our greatest brands like Ralph Lauren introduction, because just they have a representative they buy themselves. And we're very cognizant of things like really a checkout rate, abandoned rate, and even email, opt in or opt out. And what we're looking for is the greatest level of initial open rate click-through and then obviously conversion. So that kind of marketing is materially different. Then the other thing I would add and the reason I referenced not so subtle elements of marketing is that really if you study our marketing, you will see that it is materially different and more unique each day and how we present ourselves. So whether it's fall goods or summer goods or specific brands or utilization or fashion and function or features and benefits, we are really talking to why we're relevant in unique ways that address a lot of consumer segments much more so than when we had one mass email or one mass marketing message.

Yes, one more question. In terms of mass market messages, so I know we are entering football season and historically you guys have done stuff with the NFL and other pieces online and on TV, how does this year look in terms of your thought process for something like that?

Well, I specifically spoke to the fact that we are extending our awareness building and consumer engagement in what we would call streaming and more digital interaction via video and things like that, YouTube, Hulu, et cetera. We don't expect, but are still evaluating other broad-based campaigns. But the unfortunate reality is when you execute broad-based mass media campaigns, you are really not talking as much to your customer, you're talking to all customers, and the productivity of that is just not where it needs to be. And so we've continued to leverage and drive a level of efficiency as we've become much more oriented around the digital transformation strategic and tactical elements, which obviously are allowing our marketing to resonate with our core customer versus customers that don't care about us.

Great. Good luck for fall and holiday seasons.

Thanks so much for your interest. Really appreciate it.

Thank you. Our next question comes from the line of Mike Baker with D.A. Davidson. Your line is now open.

Great. Thanks, guys.

Hi, Mike.

Hi, how are you? I'm wondering if you could in broad strokes discuss what inning you guys think you're in, in terms of the some of the inventory and marketing improvements, you've clearly come a long way. How much more is there to go both in terms of, if you can answer qualitatively and possibly quantitatively?

Yes, great questions. I think on inventory, there's two different elements to it. One, I think we have a world class inventory team. Our planning and merchandizing and global sourcing teams work in unison in a remarkable way. It allowed us to really get out of goods early in the pandemic. It allowed us to very proactively drive decisions to get back into goods early, early in the year. And I think it is literally a defining element of how we've been able to navigate really supporting the customers' desire to buy product and the demand need. So I think that's been quite remarkable. I think the other end of the issue on inventory is the fact that demand has just so exceeded our expectations. And the customer has come back so quickly that on a scale of one to 10, I might say we're a five or six right now on inventory, and we hope and believe as I've alluded to that September will build and as will October, November, and we'll be back to something more like a seven or eight, but we will be chasing goods, I think through the balance of the year. There's too many variables that I think are challenging. And the flipside is, as I spoke, we have the core skill set to be a nine or 10 on inventory. I think the reality is in this environment, the greatest level of capabilities are still being impacted measurably by containers, the ability to get goods or what have you. So that's the first answer to the question. In terms of marketing, we have typically talked about that, we think we've moved measurably in our digital transformation and how we market to our customers. And although I like to think we've moved measurably in terms of our core capabilities, and we absolutely have, I think we're in the sixth inning maybe out of a nine inning game, if you will, for lack of a better way to say it or on a scale of one to 10, maybe a six, I think we have lots of opportunities to learn and to continue to really understand how to engage consumers and digitally, I think the world's changing. And so things like the collections outfitting that I referred to or the future potential of what would be avatars or digital fitting, I think are elements that are really critically important. And we're chasing, understanding what they might mean in addition to AI and ML, which is being -- will be continued to be used in our marketing to learn. And so I think like anybody else in the direct to consumer space, there's lots of movement on the customers' part, and we continue to pursue opportunities to learn to grow and really increase our core skill set.

Yes, that makes sense. A couple of more quick ones, want to follow up to that, I think you said you think EBITDA margins can be 10% plus overtime, and my calculation at least here about 9.8% right now on a trailing 12-month basis. So still a little bit of room to go there, and I think that probably speaks to the gross margin comments you've just made. On the other hand though -- and we know there's still some room in occupancy. On the other hand though, are there areas you need to reinvest, probably payroll, I assume as that continues to be a pressure point for a lot of retailers, but any other areas where we think cost might go up?

Yes, that's another great question. So there's definitely some SG&A areas that we're readdressing. So whether that's certain areas of overhead that we had really cut down and just we're sort of choking those areas, we may need to make some reinvestments in, and making sure that we're recognizing our people for the work that they're doing. I think beyond that the biggest areas are, I would say our warehouse and our infrastructure, our marketing efforts in our technology areas. I think all of those are areas that we have opportunities to continue to invest in and we're going to continue to do that. And I'm just going to ask Mike that we just move on to the next caller since we're coming up on the top of the hour, but thank you for your interest.

Absolutely. Sure.

Yes. Operator, this will have to be our last question. Unfortunately, we're running out of time and we'll be happy to follow up with all our investor base offline on call. So last question.

Our last question comes from the line of William Zolezzi with Divisadero Street Capital. Your line is now open.

Hi, guys, congratulations. Can you hear me?

Yes, we can. Thank you.

We hear you.

Great. I just wanted to double click on the inventory issue. I mean, obviously, the results today are outstanding, but it sounds like inventory was down sequentially and you said that brands that had inventory were driving more sales. I guess, is there any way to quantify how much higher the sales would have been had we had adequate inventory across kind of the top brands?

I think the answer to the question is we're not sure, because quite honestly what we've seen is a remarkable level of sell-through on goods that may not have sold at the same level, but we think we're fulfilling and satisfying most of the demand. What we've really become is incredibly clean and really allowed us the opportunity to chase into new goods and fresh receipts. And so we actually feel pretty comfortable with where we are. The hope and belief is that we'll get what is on order and we will be in a very strong inventory position. But we really have continued to experience remarkable sell-through of inventory, and equally sell sell-through of inventory, which in some cases, we literally have not sold in a long time where -- and that is a positive outcome for us.

Okay, great. I guess just can we get -- I mean, I'm thrilled to hear you guys are going to up-list to the NASDAQ, can we get a little bit of -- can you help explain just how that process will work and the associated timeline with that?

Sure. So I guess what I'll just say on it is we've made the application, we've had a number of conversations with NASDAQ and we expect that the approval will be coming very soon. So I don't think it's going to be a long wait before we're able to speak about that more comprehensively.

Okay. So you would expect for sure the approval come before the holiday timeframe?

Yes, if you're referring, yes, absolutely.

Okay.

Yes, we expect will be -- will honestly be on pretty quick that with the approval, that's what our hope has been.

That's great. I think that's going to be a huge catalyst for the stock at the end of the day, your guidance is conservative, your sales would have been higher had you had more inventory and that's going to rectify itself. And it sounds like the full-year guide calls from a deceleration from the trends you're seeing in August and you guys keep finding ways to do better, not worse. So when you put all that together and put a market multiple on what I think you guys could do this year, I think this is a $20 stock, and obviously, we're not going to get there with the stock on the pink sheet. So I appreciate you guys making the move to up-list, because I think once that happens, the markets going to recognize the value here. So thank you, guys.

Well, William, really appreciate that comment. That's -- there's probably no more perfect way than an investor telling you have a $20 stock and there's upside. So we really appreciate that.

We appreciate all the interest that you guys have shown. I again want to thank our employee base for the incredible work they've done. And we wish you all a great safe and healthy fall season, and look forward to regrouping again with you in November. And with that operator, we'll call this call to a close.

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