Good day, and thank you for standing by. Welcome to the Second Quarter 2022 Destination XL Group Earnings Call. [Operator Instructions] Please be advised that today's conference is being recorded. I would now like to hand the conference over to Shelly Mokas, Vice President of SEC and Financial Reporting. Please go ahead.

Thank you, Liz. Good morning, everyone. Thank you for joining us on Destination XL Group's second quarter fiscal 2022 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. 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. I appreciate the opportunity to speak with you all about our business and our outlook for the second half of 2022. My hope is that on today's call, you'll hear a message of consistency, consistency driven by a commitment to our strategic vision, consistency in executing our DXL brand repositioning and also consistency in the results that we are delivering despite the volatility and uncertainty that exist in today's market and retail landscape. As such, we are pleased with our performance in the second quarter. Sales and earnings surpassed our internal expectations Inventory is in line with forecast and more big and tall consumers are discovering DXL for the first time ever. To accomplish these results, we continue to drive the strategic initiatives we outlined at the onset of 2022, all of which ladder up to the company's mission, vision and the overall transformational journey we began back together in 2019. To put it simply, building awareness, creating trial and developing deeper relationships with the underserved community of big and tall men yields greater business results. The DXL story, why we exist, who we exist for and how distinctly differentiated our business has become is resonating with a growing number of big and tall men across the U.S., which leads us into today's remarks. On today's call, I want to share some specifics about our progress to date as well as provide some color and context to our approach for the second half of the year. We believe that our results announced earlier today provide clear evidence of continued progress against our goal to deliver a big and tall shopping experience that fits, fits his body, fits his style and fits his life. DXL's relentless focus on fit is further complemented by a…

Thank you, Harvey, and good morning, everyone. I'd like to give you some more color around our Q2 financial performance and our expectations for the rest of this year. Sales for the quarter were $144.6 million, up 4.4% from $138.6 million in the second quarter last year. On a comparable basis, adjusted for closed stores, sales grew by 6.1% with comparable store sales up 3.6% and our direct business up 12.7%. Relative to 2021 sales, the 6.1% growth in Q2 was a slowdown from our 19.5% pace in Q1. It is important to remember that we saw extremely strong sales performance in Q2 last year as pent-up demand, federal stimulus money and revenge buying fueled unprecedented growth. We expect growth to stay in the low to mid-single digits in Q3 since those strong comparables will persist through October before rising to high single digits in Q4. Regionally, all parts of the country performed above their pre-pandemic levels, but the biggest gains this quarter were in New England and Florida. While parts of the Midwest lagged. Our direct sales trends are driven primarily by our dxl.com website and mobile app, but we have expanded our presence and investment in marketplaces and sales in that channel have scaled even faster than our core business. Moving on to margin. Our gross margin rate, inclusive of occupancy costs, was 52.1% for the second quarter as compared to 51.7% a year ago. This 40 basis point improvement was the result of 50 basis points of improved occupancy leverage on higher sales, slightly offset by a 10 basis point decrease in merchandise margins. Merchandise margins included a significant 180 basis point increase in both inbound and outbound shipping costs, which have persisted since fourth quarter of last year. The supply and demand of containers has started…

Wrapping up today's comments, I want to offer some additional perspective and closing thoughts. Throughout 2022, DXL, like every other business really, has been operating alongside varying levels of ambiguity and consumer confidence. But despite this, DXL has performed well and delivered strong results in both Q1 and Q2. We fully knew and planned that second quarter year-on-year comps to 2021 would become more challenging. To once again reiterate, we expect our comp sales year-on-year results to be favorable. And given the macroeconomic uncertainties, we are prepared to be agile and executing the plan we have authored, leveraging constant dialogue and taking actions with a never-ending growth-oriented mindset. Over the past several years, we have created and embraced a test-and-learn culture, featuring ongoing testing to challenge long-held assumptions while more importantly, creating a level of optionality and preparedness to quickly react to market conditions. Despite these concerns or more appropriately because of these concerns, we will continue to invest in elements that we believe are critical for both the short and long-term health of our business and customer file and believe in executing against the defined strategies already underway. Whether these elements are our brand repositioning, marketplace expansion strategies, new loyalty and digital marketing programs, our store base or our talent, these informed decisions are all meant to yield business impacts and growth. We believe this balanced approach allows us to take informed risks that drive the business while simultaneously being mindful of all possible scenarios and outcomes. Getting back to DXL's very core, we know we solve the fit needs of big and tall men. It's why we exist. By fit needs, I don't just mean how the clothes fit but also fitting how he defines his style, how he expresses his personality, how he wants to shop and…

[Operator Instructions] Our first question comes from the line of Mike Baker with D.A. Davidson. Your line is now open.

Okay. Hi, guys. So yes, I think the strength of the quarter speaks for itself and your comments. So congratulations on that. What I guess I wanted to ask, you keep talking about normalized margins this year or more normal than last year. But I guess my question is more color if you could on what that means. I mean your margins are clearly going to be a lot higher than they were historically. I guess that they'll be down from the abnormally high 15.2% last year. But you said you increased your guidance to above - greater than 12% before. Now presumably, it's more greater than - sorry, 10%. Now it's more greater than 10%, but if you could help us a little bit, what does that mean? Is it 12%? Is it 11%? Is it 13%? Just what's the right long-term margin here?

Mike. This is Peter. So just with a comment on last year versus this year in terms of margin. So yes, last year, we were coming out of the pandemic with I think the words that we used were an unsustainably low cost base, and we had what I would call an unexpected surge in business last year. With those two elements combined, they led to abnormally high margins. This year, we're starting to get back to what I would consider more normalized. This quarter, we were at a 17.9% margin. Last quarter, it was 13.5%. So for the rest of the year, we are still being cautiously optimistic for where the rest of the year is going to lie. And the change to guidance that we're announcing today is an increase in the sales range taking that to $520 million to $540 million. With regard to EBITDA margin, we've said historically that we want to be able to build sustainable margins in excess of 10%. That's what our goal was at the beginning of the year, and that's what it continues to be this year. So we're not taking that - we're not putting a ceiling on that or putting a range on that. We're still calling that as greater than 10%. And we feel really good about where the business is going. But at this point, we've decided not to narrow that onto a specific range, but we do feel as this year develops, it's becoming more normalized than what you would see in 2021.

Okay. Fair enough. If I could sort of maybe come at it a different way. Is there a reason to believe that the SG&A dollars will be higher than maybe we didn't necessarily guide to that, but maybe what we were thinking last quarter? In other words, as the sales ramping up, do you leverage all that? Or is there a need to add back in wages or hiring people or whatever the case may be? I think your marketing budget - Well, actually, let me ask this, your marketing budget staying at 6.2% which if your sales is higher that means the marketing budget and dollars is going up as well, right?

That's right. So the marketing budget is absolutely going up. I think one of the comments that I made in the prepared remarks is that the SG&A structure for the rest of the year, we think will be consistent with what we've seen in Q2. So I would think of that in terms of dollars. Now I think you will also see that we have a cyclical business where Q2 and Q4 are always our strongest quarters for sales with the lead up to the summer and Father's Day and then holiday, whereas Q3 and Q1 are typically lower. So I would expect some deleverage in Q3 simply because we're going to have less sales, but the SG&A structure should be similar in the second half to what we saw in the first half with the exception of marketing, which as you noted, yes, that's going to be more in the 6.2% range is what we are thinking, and it was 5.4% in Q3. It doesn't sound like - so , maybe we can go on to the next question.

Our next question comes from the line of Noah [indiscernible] with FactSet. Noah, your line is now open. Noah, you may be on mute.

Why don't we -, operator, why don't we go to the next call, there may be either a problem with the system or maybe or Noah has dropped off.

Our next question comes from the line of [P. Johnson]. Your line is now open.

Yes, Good morning. Can you hear me?.

Yes, we can. Thank you so much.

Yes. Congrats on the good results. Can you talk a little bit about some of the business at some of the major retailers like Amazon like Walmart and Target. Obviously, there was a lot in the press from both Walmart and Target about having too much inventory. Can one assume that too much inventory, including apparel being a major category did not include DXL items? Is that a fair assumption?

Yes. So just to be clear, we are on their marketplace. And we are the ones that own the inventory, and we are the one shipping the inventory. So that - the question you asked has nothing to do with our business specifically.

Got it. So it's - and the same thing with Amazon?

Yes. All of our marketplace business is owned, shipped and directed by us.

Understood. And then just in terms of the competitive landscape, who else is out there doing what you do? There don't seem to be any publicly traded companies, but for example, is Amazon or Target or Walmart, do they do their own private label, big and tall, which competes directly with you? Is that one of the bigger forces out there? Or is that less of an issue?

There is no single entity that does what we do. Our reference to being a category of one in the business that we represent, and you have to appreciate we represent opening price points to design your brands like Polo, Ralph Lauren, Vineyard Vines, Lacoste. The offer we bring to market, which is mostly exclusive is the middle upper market price points, and no one does what we do with the breadth of offer, the store count, the online offer, the app and ultimately, the experience we're creating, no one does that whatsoever. There are other folks that are - we would call ankle biters, for lack of a better way to say it, no disrespect, but their core business is not what we do. They extend their menswear business in ways that is not as compelling, is not comprehensive, is not unique in their fit and they offer some selection often in stocks that are lacking and often breadth of offer that is less than desirable by our customer. So a long way of saying, we believe we compete with a number of people, but no one does what we do exclusively for the big and tall consumers.

That's great. And then just in terms of the formal wear and the business were coming back a little bit more. Is there an opportunity to have more of a presence in traditional department store retailers like Macy's or Dillards or the like in material clothing department?

That's an interesting question. I really can't comment on it at this point in time other than to say I think that the tailored clothing business represents a unique opportunity. Our proprietary fit runs across every element of the business. So whether it's a dress shirt, a sport coat or a suit, our unique proprietary fit is the execution we bring to market and that may be something that others seek to emulate in some way and a potential opportunity for partnerships. But today, as I've said, we are the single entity that does what we do, and no one else is doing that. And in tailored clothing, which represents mid-double digits for us, it's a meaningful part of our business, and it's coming back a little bit potentially because of all the events and weddings and what have you.

We have a question from the line of Mike Baker with D.A. Davidson. Your line is now open.

Mike, are you there?

Yes. I'm sorry. I don't know why it was sort of going in and out. First of all, I got dropped before and then I just didn't hear who she said for the name. But yes, I'm here if you can hear me, hopefully.

We can hear you. Welcome back.

Don't know what happened there. One other question, just a small question I wanted to ask. But I think, Peter, in the commentary, you said - you said 3Q comps in the mid - in the low to mid-single-digit range. I believe the press release says low single-digit range. I just wanted to clarify that small, but I think important description.

Yes. So what we were trying to communicate is - when - because last year was so choppy, we are up against really, really big comps in Q2 and Q3. So one of the ways that we look at the business is we're looking at 2022 against 2019 because that was really our last normalized year. And if you smooth out some of the choppiness of the last two years, we would see our comps being in the greater than 20% was what we had said. But when you're looking at it relative to last year, yes, it's that Q3 should be a little bit lower than Q4. In Q4, we said was going to be in the high single digits versus low to mid in Q3.

Okay. Well, again, not to harp on it, but low to mid in Q3 press release, I think, right here says low. So that's fine. Close enough. I just wanted to clarify it. And then one more, if I could. I'm just curious, so the comp was driven all by AOV, as you talked about. And so traffic flat, I think you had said, is that traffic - is that transaction count? Or do actually sort of measure in-store traffic? I think you do. And if you do, what's the conversion? Is the ticket flat and the traffic flat just that conversion is similar? Or is there anything to call out in terms of conversion?

Mike, before I answer that question, I want to circle back to the press release. In the press release, what we wrote specifically is we are off to another solid start in Q3 with an August month-to-date comp increase in the mid-single digits. And we said we would emulate basic - we are emulating Q2's performance, which was 6% plus. So that's kind of where we are. And to the point is we expect mid-single digits and for the year in terms of the second half. Just want to be really clear. Your question on traffic now?

Well, traffic versus transaction count, in other words, conversion.

Yes. So traffic has actually come back. It has definitely been more challenging in Q2. But as we move through the quarter and into August, we have seen traffic come back. We've obviously referenced that the average transaction value is up, conversion is solid, but with traffic down, transactions is a little lighter than we would have anticipated. And conversely, the average order value is a little bit richer than we would have anticipated.

We have a question from the line of Noah [indiscernible] with FactSet. Noah, your line is now open.

Noah, are you there. Operator, I'm not sure why but folks seem to be having a challenge with it. We don't see any other calls - questions in the queue.

Yes, I'm showing no further questions in queue at this time.

Okay. Great. Well, I would like to thank everyone for participating in today's call. We are quite excited about the quarter. We think it's a solid performance. It stacks on top of Q1, and we look forward to the second half of the year. Despite the volatility and ambiguity, we feel optimistic and look forward to rejoining with you again in about 90 days for our third quarter earnings call. Thank you so much, and have a wonderful safe day.

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