Good day, ladies and gentlemen, and welcome to the Destination XL Group Incorporated, Third Quarter Fiscal 2022 Financial Results Conference Call. Today's call is being recorded. At this time, I would like to turn the call over to Ms. Shelly Mokas, Vice President of Financial Reporting and SEC Compliance at DXL. Please go ahead, Shelly.

Thank you, Latanya, and good morning, everyone. Thank you for joining us on Destination XL Group's third 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'm grateful for the opportunity to speak with you today about DXL's third quarter results, and our continued commitment to the transformational strategy we have been consistently working towards since 2019 and that is delivering our results. Since I joined the organization in 2019, the world and macroeconomic conditions have certainly shifted each and every year, but our defined strategy has not, and this has driven outcomes in the face of headwinds. We know who we are, we know what we do and we know who we do it for. And our commitment to the big and tall consumer is relentless. At DXL, big and tall is all we do, and our positioning is in direct contrast to other retailers. The big and tall man has largely been ignored by the broader apparel industry. Few brands, fewer styles and sizing based on someone else's definition of regular, limit him every time he tried to find clothing. While most retailers of men's apparel offer some level of big and tall assortment to their customers, it is often a single rack or a small sub department for no other omnichannel retailer is at their top priority. At DXL, we trade on the belief that we offer superior fit, superior assortment and an experience to him, period. We believe this leads to a relationship with our customers that is built on respect, trust and belonging. We exist to provide the big and tall man with the freedom to choose his own style and to wear what he wants to wear. Now let me begin with our specific performance around the third quarter. I'm pleased to report that we achieved a comparable store growth of 8.7% over last year and a gross margin rate of 50%. Coupled…

Thank you, Harvey, and good morning, everyone. I'd like to give you some more color around our Q3 financial performance, expectations for fourth quarter and our thoughts on capital allocation. Sales for the quarter were $129.7 million, up 6.7% from $121.5 million in the third quarter last year. On a comparable basis, adjusting for closed stores, sales grew by 8.7% with comparable store sales up 10.1% and our direct business up 5.5%. Compared to 2019, which was still our last normalized year, our comparable sales for third quarter were up 33.7%. The Compared to fiscal 2021, sales accelerated as we moved through the quarter with comparable growth of 7.4% in August, 8.5% in September and 10.3% in October. The continued resurgence of stores was the highlight of our Q3 sales and stores benefited from growth in traffic, conversion and dollars per transaction. Our stores are in a much better inventory position today than they were a year ago with fresh merchandise and fewer out-of-stock positions. And our customer has benefited from that stronger assortment. The dollars per transaction have also risen as we have further reduced markdowns and seen deeper penetration in higher ticket categories like tailored clothing. Geographically, all regions outperformed their results last year, but the biggest gains continued to be in the Southeast. Sales trends in our direct channel were driven primarily by our dxl.com website and mobile app. And marketplaces continued to scale even faster than our core business. Partially offsetting these gains was a decline in our universe sales, which are sales that originate in the store but are fulfilled online. This decline was tied to the better in-stock positions in the stores. As an omnichannel retailer, we remain ready, willing and able to meet the customer on their terms, wherever and whenever they choose…

Thanks Peter. Wrapping up today's comments, I'd like to offer some additional perspective and closing thoughts. While we are proud of the results delivered in Q3, we are by no means complacent. DXL's consistent and aligned strategy has not wavered, nor has our relentless focus on the big and tall customer. As we have reset our brand position, we have also reset our promotional cadence and strategy. Proposal planning and inventory management has ensured that we are well positioned for the holiday season. And while we create short-term impacts, we are simultaneously committed to long-term growth and making strategic investments in people, processes and technology that are all focused on delivering the immense opportunities you had ahead for DXL. DXL's transformation over the past four years is just beginning. We know the opportunity ahead is significant, and we are committed to growth and the teams who will get us there. And now, we will take your questions.

[Operator Instructions] And our first question will come from Mike Baker of D.A. Davidson. Your line is open.

So, you gave a lot of good detail and metrics in terms of comp trends through the quarter, but wondering maybe more from a maybe more qualitative standpoint. Just your view on the consumer heading into the holidays, -- there's been a lot of different data points there suggesting some weakness, particularly in the first week of -- starting after the first week of October. Again, you gave us plenty of metrics so we can see those. But just curious what -- the way you're thinking about the holidays, consumer spending, all those types of bigger picture macro ideas.

Mike, I would say our answer is going to be no different than it's been literally for the last two years. We believe we can push water uphill. I think our seventh quarter in a row of success, top line and bottom line, demonstrates that. The size of the file being the highest it's ever been in the history of the Company demonstrates that. And the continued evolution of exclusivity of brands demonstrates that the wholesale community believes that we are the choice for big and tall expansion. I think the reality is, though, as we've always been conservative, our optimism is tainted, if you will, for lack of a better way to say, by the ongoing consumer elements, right, the recession, the elements of inflation, mortgage rates. Those issues are not beyond us. And so while we believe we can push water uphill, we're pretty conservative. And we believe that we will continue to grow this business. We are oriented around growth both short term and long term. But we're definitely cognizant of the macroeconomic headwinds, and we have tempered that in our guidance. But even though we've taken it up, our guidance is from approximately [Technical Difficulty] to nearly 10. And so we've given a range of performance to acknowledge that there is the ongoing issue of volatility in the marketplace and obviously with the consumer.

Okay. Fair enough. One more, if I could. Just looking ahead -- maybe it's too early to think about this, but looking ahead, to 2023 in the margins there. So, this year -- so you had a huge margin last year. When this year began, you said, well, that's not sustainable, and it could be around 10%. Now you're clearly going to beat that I get why cycling the unsustainable pandemic margins made sense. But from here, from this new level, have we hit a new level where you can grow margins continually from the 12.5% to 13.5% level? Or are there one-time things this year that won't repeat such that we might be down next year?

So, at a very high level, I'm going to start this and then Peter will pick up. At a very high level, I think, the answer to the question has to be embedded in how we think about the business. First and foremost, we think about growth. And so Peter has alluded to a multiple number of expenses and capital utilization elements in terms of cash that we'll think about that. And also in that context, it could affect EBITDA margins if we think there's a greater opportunity to make investments and grow and invest in the business where the acceleration of EBITDA may not be as great next year because we believe that there are really material opportunities. To the degree those opportunities are not balanced well enough, we may not make those investments and of course, that will create an impact on margins. So, I'm not giving you an answer specifically, but I think it's embedded in how we think about growth and the investments we'll make. And that's a TBD based on how we come out of fourth quarter.

Yes. I mean the only thing that I would add is I think we've reached a point with our gross margins where we're really happy with the promotional cadence that we're on. We've still got some headwinds that we're dealing with, with elevated freight costs and certainly inflation in production costs. But we feel pretty good about where those are and believe that those are sustainable. But I think to Harvey's point, it's where do we continue to invest in the business. So we've said that marketing expenses are going to be -- we're targeting 6.2% this year. We haven't said anything about where that's going to be next year. But I think first and foremost, we consider ourselves a growth company. So all of our actions and decisions are grounded in what can we do to grow the top line because we believe that's going to deliver the best result for shareholders and for our customer long term.

Yes. Okay. That makes sense. And so at least to me, it sounds a little different than a year ago when the answer to a similar question may have been the 15% EBITDA margin from 2021 is just not sustainable. This sounds a little bit different than that.

Yes. I would not say that our expectations, just to be very clear, that we'll generate 15% EBITDA margins. That is not our expectation. We continue to think about being north of 10%, and we will continue to balance the level of investment, SG&A, things like -- of that nature that could affect EBITDA. But I think 15% we would not today author that we would expect to be there.

And our next question will come from Jeremy Hamblin of Craig Hallum. Your line is open.

Congratulations on some really impressive performance, especially in light of what we're seeing from some other retailers. So, I just wanted to make sure to clarify -- come back to the kind of -- it sounds like quarter-to-date trends have continued to be actually pretty strong. But I wanted to just also clarify, Peter, I think if our notes are right, the compares get actually substantially easier throughout the quarter. I believe that November is the toughest comparison followed by December and then January, but I wanted to just start by clarifying that.

Yes. So compared to last year, fourth quarter was the most difficult quarter that we had. So, the comparisons Q4 are a little easier than Q2 and Q3. But I think as Harvey was mentioning, when you look at our guidance of $535 million to $545 million, that would imply a 2.5% to 10% comp for Q4. So, I think that wide range is still -- it just takes into consideration that there is still so much uncertainty out there. And while we do believe that we can push water uphill, as Harvey was saying, it's still -- it's difficult to predict what's going to happen, but we feel really confident that we will be able to deliver a single-digit increase somewhere between, call it, 2% and 10% for the fourth quarter.

Understood. Okay. I want to come back to the capital allocation and it's -- you guys are in kind of an exciting point here where you have multiple pathways to growth, with store growth now part of the equation rather than storage shrinking like it's been the last four years, remodels, relocating. And then obviously, your marketplace, your DXL big and tall essentials, sounds like that is doing really well. I wanted to come to that -- the cost. You highlighted the Warwick, Rhode Island, remodel, and see if you could share a little bit more color around as you do that remodel, what's the potential range of costs for a remodel? And what's kind of the type of return that you get on that or sales lift as compared to, let's say, the costs associated with relocating a Casual -- or converting a Casual Male into a DXL versus the cost for opening just a new white space location?

Yes. So let me just start, Jeremy, with we don't want to get too far ahead of ourselves because we have one of these stores open. We actually just opened a second remodel in Troy, Michigan, a couple of days ago. So what we are trying to do is to really learn -- test and learn right now and to see what that can do. So while we do believe that there is a significant opportunity, it's been very, very early. The Warwick store has been open a little more than a month as a remodel, and the Troy store really just a few days. So, we're not talking about the same kind of costs to open a new store. It's significantly less than that. But it's -- what we're trying to do is figure out how much are we going to see a lift in stores by changing the sign from DXL men's apparel to DXL Big & Tall and more clearly identifying who we are and what we do. Trying to have an experience in the store that allows for better consultation and lay downs and being able to leverage our universe giving Harbor Bay its own identity. There's a lot of things that we think we can benefit from. And keep in mind, a lot of these stores -- some of them are approaching 10, 11, 12 years old. So, to some degree, there is just simply they're in need of a refresh, they're in need of updated lighting in paint and carpets or different just maintenance items that we need to take care of. So, I think we're going to be coming back to you with more information on that as we learn more, but it's still pretty early, but we're excited about it and wanted to let you know that at least it's on the horizon.

Got it. Maybe just to clarify the expected range of cash cost for opening a new greenfield location?

Yes. So historically, when we opened a new store, it was upwards of $0.5 million. Now that was a few years ago. So in today's market with increased construction costs and just where the market is, it's going to be higher than that. But we're not talking about $1 million. But -- I mean I wouldn't be surprised if a new store cost us $600,000, $700,000.

Great. That's super helpful. And then just -- you guys are really building quite a strong balance sheet -- and it looks like you're going to end this year probably roughly around $1 a share. And at a CapEx range of, let's call it, $10 million to $15 million for next year, you'd end up with $2 a share by the end of next year. But in terms of thinking about, Peter, the range of investment now that you're clearly triggering a different growth element for your real estate portfolio, can you give us a sense for what that potential range is? Is it something more like $15 million to $25 million next year on a CapEx investment? Just anything that might share a little bit of color on that would be helpful.

Yes. I appreciate it, Jeremy. We're not quite ready to come out with that information yet, but we certainly will be talking about that in Q4 as we put together our 2023 plans.

Okay. Got it. And then coming back to gross margins here for a second as well. So really strong performance. You noted, I think, that supply chain costs sound like that is off the peak. As we look forward in thinking about other pieces of it, you noted that raw materials costs are up. We think that some of those input costs have actually started to come down as well in the recent months. But can you give us a sense for where kind of the timing of inventory cycles coming through and turnover rates. Where do you think that you might kind of get some relief from the supply chain cost side? Are we looking at Q2 of next year or Q1 of next year? Any additional color on that would be helpful.

Well, I think what you started with is absolutely correct is that we are seeing that freight and shipping costs are less of an impact on the comparisons that we're seeing now in Q3 and Q4 than they were in the first half of the year. So that's definitely, definitely moderating. I think that as we get into next year, we've -- I think we've pushed promotions pretty hard. I don't think that we're going to get a heck of a lot more relief and less promotion. So eventually, that's going to cycle an anniversary. So when you look at our gross margins at around 50%, that feels really good to me. I feel like we -- traditionally, pre-pandemic, we were 43, 44, now getting that up to 49, 50, I think feels great, and that's what we're going to be continuing to target in the future.

Yes. No question, really strong. Okay. Just last thing here, coming back to the unit growth for a second. I think you previously talked about roughly five locations to open up next year. There's been a lot of restaurants, retailers that have run into permitting delays construction delays, et cetera. Is there any update that you have? Any change to that number as a result of the kind of current construction environment?

Yes. So the number -- we're still working towards a goal of five for next year. And I completely agree with you on the challenges in real estate and construction and permitting and -- we've, behind the scenes, been doing a lot of work and our real estate team is doing a fantastic job with getting out and canvassing the country and identifying where are the opportunities that we want to be looking into. So, it's a long turnaround process, which -- this is, I think, the third quarter in a row that we've been talking about. Look, we think we can open new stores and we're looking at five for next year. But it's typically a 12-month process once we identify a store. So, we're getting up to that point where by the end of fourth quarter, beginning of first quarter next year, we're going to have a much better line of sight on are we going to be able to get five or not next year. But that's the plan, it's five next year. And then in 2024 and 2025, we're probably in the 10 to 20 type of range.

And our next question will come from [Mark Hoffman of Jewel Core Company]. Mark, your line is open.

[Indiscernible]

Hello Seymour, how are you?

Good. Great job. Thank you very much.

Well, thanks so much, and thanks for your continued investment in the firm.

Okay. I'm still on 6%. Okay, thanks very much.

Take care. Good luck.

Okay.

Okay. It appears that's done, I think?

Yes, I'm showing there's no further questions.

Okay. Well, then we would just like to wish everyone a happy and healthy Thanksgiving. Stay safe. We look forward to reconvening with you shortly after the holidays, which we'll do a pre-release and then in the fourth quarter -- end of fourth quarter conference call.

And this concludes today's conference. Thank you for participating. You may now disconnect.