Good day, and thank you for standing by. Welcome to the Destination XL Group Fourth Quarter 2021 Earnings Conference Call. At this time all participants are in a listen-only mode, after the speaker's presentation there will be a question-and-answer session. [Operator Instructions]. Please be advised that today's conference may be recorded. [Operator Instructions] I would now like to hand the conference over to your host today, Shelly Mokas, Director of Financial Reporting. Please go ahead.

Thank you, Michelle, and good morning, everyone. Thank you for joining us on Destination XL Group's fourth 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 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 sales and earnings guidance and other expectations for fiscal 2022. 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, the crisis in Ukraine, supply chain disruption, labor availability and disruption from COVID-19. 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. It is truly a privilege to speak with you today about both our results for 2021 as well as our objectives and momentum for 2022. Before I speak about where we are heading, I want to take a few moments and acknowledge where we've been. At the onset of the pandemic in 2020, DXL was in survival mode, and we took both meaningful and sometimes difficult actions to ensure that we would live to fight another day. During that time, we also began to set the table, so to speak, to build towards long-term success. In the first quarter of 2021, signs of hope emerged, consumer demand and traffic returned, as well as a willingness to reengage with apparel and life outside of the home. At that time, emergence from lockdown, stimulus checks and pent-up demand created a confluence of tailwinds, growing demand provided opportunity to leverage our initiatives to drive greater forward progress. This included more extensive consumer research to continue our repositioning of the DXL brand around the very core of who we are and what we can be, reiterating an unrelenting drive to deliver a differentiated experience built solely for the big and tall consumer, coupled with a transformative digital strategy to create deeper, more meaningful engagements with DXL supported through marketing, technology and merchandising initiatives. Combining this renewed positioning and bottom line-based discipline from 2020 survival mode, we went from playing previously defense to profitably going on offense in 2021. A reduced reliance on discount and price promotions emerged, allowing for improved merchandise margins. Also, the continued restructuring of our lease portfolio and SG&A costs improved our operating platform. Altogether, these developments create -- contributed to an unprecedented financial outcome in 2021. We exceeded $0.5 billion in sales for…

Thank you, Harvey, and good morning, everyone. I'm going to spend a few minutes today on our fourth quarter and full year financial results. Then I'd like to share some thoughts about the stock repurchase program we announced today and how we're thinking about capital allocation. Finally, I'll close with some comments on our full year guidance and expectations for 2022. I'll limit my comments to comparisons to 2019 as that was our last normalized year, but I would encourage you to review our 10-K, which will be filed later today for a discussion and reconciliation of our full year results. So let's begin with sales. Total sales for the fourth quarter were $133.5 million, up from $131.2 million in 2019. On a comparable basis, sales in the fourth quarter increased 9.4% as compared to 2019. Comp growth by month was 17.4% for November, 7.8% for December and 1.8% for January. I am happy to report that the sales slowdown in January seems to have been short-lived. And through the first six weeks of 2022, we are back up to plus 20.1% in comp growth versus 2019 levels. This is very encouraging in light of the macro level uncertainties that we are carefully monitoring and have factored into our outlook for fiscal 2022. Our gross margin rate, inclusive of occupancy costs, was 49.8% for the fourth quarter as compared to a gross margin rate of 43% for the fourth quarter of fiscal 2019. The 680 basis point improvement over 2019 was a combination of 410 basis points of improved merchandise margins and 270 basis points of occupancy leverage. The improvement in merchandise margin was a result of full-price selling and very low markdown rates, a consistent theme for us this past year. Markdowns for us are primarily comprised of two…

[Operator Instructions] And our first question comes from the line of Mike Baker with D.A. Davidson. Your line is open. Please go ahead.

Thanks. First, I wanted to ask just a bigger picture question. With the margins having now more than fully recovered, it seems to me as if you're back to play offense, but can you talk about -- you've given some guidance for 2022, but I'm more thinking longer term, what are your initiatives? Or what's your view on market share? How big can it get? What's a normal or reasonable annual growth rate for the top line to think about beyond 2022, which I understand is impacted by strange comparisons? Just how should we think about your market share gain and how big you can get over some period of time? Thanks.

Mike, this is Harvey. Thanks for the question. The way we would characterize it is important to understand contextually, we're not providing long-term guidance but a characterization. So that being said, the way we think about our business is that our direct digital business to the consumer, we believe taking share of market means that we will grow faster than average. And according to which metric you look at, whether it's 12% or 14% or 16%, there's some number around that, that would be the overall direct-to-consumer growth rates that people expect. And we believe our business online should grow faster than that. In our stores, you can make the same characterization that somewhere 1% or 2%, most retailers would probably be at least moderately happy with that growth rate of continuing to comp, and we believe we should grow in excess to that. So whether that's 3% or 4% as a baseline growth rate, we would expect to take share of market, we will grow in excess of the average growth rate of what moderate retail growth rate would be as an expectation. So if you think about our business on a 60-40 or 70-30 relative reference point in that context, you can kind of triangulate in and expect that we will grow 6%, 7%, 8%, something along that line as a baseline growth rate. And we believe that, that is a baseline growth rate. We have other initiatives, which, over the course of the year, we will share more broadly that talk about a greater opportunity to take share of market as well as actually approach other markets through other means to further accelerate on top of the baseline. And hopefully, that, at this point, is sufficient for perspective.

Yes, thanks. That's a great perspective. One more, just clarification. I want to ask Peter about the gross margin comment. So I think you said down 200 basis points for 2022 on the gross margin, then offset by some initiatives. So for 2022, can we think about -- or offset by leverage, right? Can we think about 2022 gross margins down -- but down something less than 200 basis points, is that a sort of a reasonable place to start for 2022 gross margin outlook?

Yes. So great question. So the 200 basis points is where I would say we would start at. And I think that's based on -- it's really it's a number of things. It's increased freight costs, which we are certainly seeing a lot of conversation right now about fuel surcharges and cost of fuel. There's product cost inflation that we're dealing with. There's another issue we talked a little bit about where our clearance levels were last year. And we are going to have -- we will be back to a more normalized clearance level, which is higher markdowns. And then there'll be some level of promotions. We talked about revamping the loyalty program and other customer acquisition tactics. So the 200 basis points is sort of where I would start at. That was sort of net of all the pieces together, including the occupancy leverage.

Okay. If I could follow up one more on that. Just as you said, normalized clearance and promotions. I presume that means far less than you were historically. So what does normalized mean? And are you seeing others within apparel and broadly speaking. So everyone's talking about being getting back to more promotions next year, that's sort of a common refrain among retailer’s apparel and otherwise. Are you starting to see it yet? Or is this just what everyone's expecting?

Mike, yes, this is Harvey. I would not characterize our expectations the way you characterize perhaps what might be more broadly expected. We have worked really hard to engage the consumer in ways that are not around price. We've tested numerous times at this point, engaging the consumer based on some form of discount. And when the day is done, we do not see incrementality and any incrementality we see is offset by deterioration in margin. And we believe, based on the initiatives that I've outlined today and others that are in queue that we will have promotion really driven around seasonal liquidation, provided choices that when the day is done, didn't work at the level we expected and just clearing goods, and ongoing clearance. We do not expect to "normalize" in a backward-looking way, a heightened level of promotion or discounting at any level at this point in time.

That’s a great clarification. Thank you for that.

[Operator Instructions] And our next question comes from the line of Jeremy Hamblin with Craig-Hallum Capital Group. Your line is open. Please go ahead.

Thanks and congrats on an amazing year and a strong update. Let me ask about the store development and I think the comments around potential for 50 new locations. In terms of thinking about '22, in terms of your ending store count at 290 locations, are you thinking about store count actually up for '22? What's your CapEx needs for the year? And then I guess let's just start with that in terms of kind of some new stores in addition to whatever your closures would be.

Sure. So thanks for the question, Jeremy. Let me start with that one. So with regard to store count this year, I actually expect that our store count will be slightly down this year. And I say that because although we are very much off to the races with store development, the lead times on opening a new store are typically 12 months out. So we are spending a lot of time right now, particularly using -- really using data and analytics. We've engaged a top flight real estate advisory firm who's helping us leverage data and analytics to figure out what the store development plan should look like. But it is a little bit further out. So that's how I would think about stores for this year. And sorry, what was the second part of your question?

The CapEx guidance that would have to be...

Exactly. Good -- another good point. So for the last two years, our CapEx, it's been around $4 million, $5 million, $6 million. If you were to look back to 2019, I think we were $13 million. I would say that we're probably going to be more like $10 million to $12 million this year. Again, it's -- we are starting to invest in building stores out, but we're not necessarily going to have as many open as we would like by the end of this year, but it's definitely something that will be in process this year.

Okay. And then a related question, based on where your sales guidance, the $510 million to $530 million for the year, you ended at roughly $82 million in the inventory for the year. So Harvey and Peter, in terms of thinking about your store count at the end of the year, which is going to be down just slightly your sales plan for the year, would you expect your absolute dollars of inventory at the end of '22 to be up slightly? I know that, in particular, tailored clothing that you are not where you want to be on your inventory levels. But are we thinking something like $90 million in inventories to end the year as a target? Or how are you thinking about that?

Yes, definitely. Inventories will be up a little bit. I think $90 million, that's probably on the high side. Maybe it's $85 million, $85 million to $90 million. But we are definitely still working to get back into a better inventory position in certain categories. And you called out tailored clothing is a great example. We've seen such a resurgence in tailored clothing over the last six months. So yes, inventories will be up slightly, but I wouldn't -- I certainly -- I wouldn't say it's over $90 million, I would say it's less than $90 million.

Okay. And then just coming back to the point, so I think under those levers, you would create pretty significant free cash flow for the year, probably well in excess of $55 million or $60 million just based on those figures. So in terms of thinking about I totally understand investing in customer acquisition, but that would build a tremendous amount of cash on your balance sheet as well. Do you feel like if -- let's say, the share price were to languish in the current level, do you feel like there's some reception to getting maybe a little more aggressive as part of your capital allocation plan should shares stay in kind of the current range?

Yes, for sure. I mean the reason we put the share repurchase program in place was to give us that flexibility. But I do want to stress that our first preference on using cash is for all of the items that we just talked about. It's marketing and technology, it's stores, it's infrastructure. And so we talked about in marketing and technology, we talk about a loyalty program, upgrades to the website and the app and SMS and the CDP, I think we are getting aggressive there. And even on the -- just the marketing expense side, Harvey had mentioned in his comments that we're going to be spending 6% of sales on marketing costs this year as opposed to 4.7% last year. So it's a meaningful increase. We talked a little bit about the capital that we're investing in stores. And then the third area that I would point to is infrastructure. So it's looking at distribution and fulfillment, network optimization, logistics and then there's an entire layer on IT upgrades, software enhancement. I think there's plenty of opportunities for us to be investing cash in growth and making sure that we're positioning the business for long-term success. So I think all of those initiatives, coupled with the flexibility to buy back shares when the price is undervalued, when we believe it's undervalued, I think is the strategy we're going to pursue.

Peter, do you want to comment a little bit on Jeremy's characterization of free cash flow and maybe touch on that in terms of -- in comparison of what he noted?

Yes. So thanks, Harvey, for that. So we did not specifically give a guidance number for free cash this year. But there's two major pieces, I guess, that I would call out when you're thinking about the difference between EBITDA and free cash because we did give some direction on EBITDA of greater than 10%. We mentioned that gross margin could be down a couple of hundred basis points. And I just mentioned that marketing is going to be higher by another, call it, 130 basis points. So when you're reconciling EBITDA to free cash flow, the two pieces that I would call out are, one, we just talked about inventory that we are going to be investing a little bit more in inventory. Secondly, I would just mention the CapEx that if we're spending $10 million, $11 million on CapEx, that's also going to contribute to the difference between where we are landing on EBITDA and where we end up landing on free cash flow.

Understood. Appreciate that. I also wanted to just get some clarification here on the quarter-to-date trends, I think I just want to make sure it was versus 2019, but I think you had indicated that same-store sales up roughly 20% versus 2019 levels. Now your store count is down about 12.5%, 13% versus Q1 of 2019 and you're getting rid of the wholesale business, which I think contributed about $2.5 million in Q1. So would that kind of have you projected in, let's call it, maybe $115 million to $120 million range for Q1?

Yes. I mean that feels about right. I think we definitely said the trend so far year-to-date that comps are up 20%. I'm really happy with that considering that from November to December and January, we were seeing downward pressure on the comps. And we highlighted a number of reasons for why that is, but I also think that we have a lot of reasons to be optimistic this year, and we're certainly seeing it in the first six weeks of the year.

That's great. Last one for me. Harvey, so as you have clearly kind of stepped to the forefront of this category, you've struck some really nice new exclusive deals. Are you getting more inbound interest from some other brands in terms of thinking about potentially exclusive relationships after you kind of locked in Vineyard Vines and Nautica? Is that generating potentially more interest?

It's a great question. On one level, I want to say, in a moderate way, yes. But also the challenge, which I don't know that people truly appreciate, is the big and tall consumer and the proprietary spec or just literally the spec is not something everyone wants to go after. It's a smaller piece of the market, and it takes a lot of energy around building a spec and then unique factory sourcing. It's not something you can just build on a traditional production line. Most of the factories that our private label products that are in, have dedicated big and tall lines if they're not literally a dedicated big and tall factory. And so it goes back to our global sourcing initiative and how much we talk about that world-class element of what we do, and it underlines the challenge for a traditional average-sized retail brand to go into the big and tall business. It's a great question. It's not as easy as one would expect.

Understood. Thanks for taking my questions. Best wishes this year.

Thanks so much. Operator, I believe that's the end of the call's questions today. I don't see anything else in the queue. So for those that were in attendance today, I want to thank you very much for your continued interest in DXL and wish you a happy and healthy, hopefully, safe 2022, and we look forward to talking with you again in about 90 days.

This concludes today's conference call. Thank you for participating. You may now disconnect.