Good day and thank you for standing by. Welcome to the Destination XL Group, Incorporated Fourth Quarter 2022 Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speaker's presentation, there'll be a question-and-answer session. [Operator instructions] Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, Shelly Mokas, Vice President of Financial Reporting SEC. Please go ahead.

Thank you, Norma and good morning, everyone. Thank you for joining us on Destination XL Group's fourth quarter fiscal 2022 earnings call. On our call today are President and Chief Executive Officer, Harvey Kanter and our Chief Financial Officer, Peter Stratton. During today's call, we'll 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 @investor.dxl.com for an explanation and reconciliation of such measures. Today's discussions also contain certain forward-looking statements concerning the company's sales and earnings guidance and other expectations for fiscal 2023. Such forward-looking statements are subject to various risks and uncertainties that could cause actual results to different materially from those assumptions mentioned today due to a variety of factors that affect the company. Information regarding risks and uncertainties and detailed in the company's filings of 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. We have made a lot of progress this year and it's a privilege to speak with you today about both our results for 2022 as well as objectiveness and priorities for 2023. 2022 was a remarkable year in the transformation of DXL as we continue the work of the last several years. As you all can relate to, 2020 was a year of survival, 2021 a year of recovery and 2022 was a year of sustained progress. Our vision to provide big and tall men, the freedom to choose their own style and the role that DXL plays in their life, continues to drive and motivate us. At DXL, big and tall is all we do. Whether he is shopping online or in store, we are that haven where big and tall men are respected, valued and celebrated. At DXL, he is not an afterthought or a bystander. DXL is big and tall and in this regard, DXL is a category of one. The progress we've made this past year and the brighter prospects that lie ahead are why we remain incredibly enthusiastic and hopefully why you as an investor are here to listen to the DXL story today. It's truly remarkable and it is my privilege to speak to you today about our journey. The singular focus that we've embraced is to provide big and tall men with a freedom to choose his own style, so he can wear what he wants to wear or as we have coined the phrase from our customer's point of view, wear what you want. This clarity of focus and messaging and digital assets and what we curate and how we engage is now coming to life in more profound ways and in a way that…

Thank you, Harvey, and good morning, everyone. I'm going to start by giving you some more color about our Q4 in full year financial results. Next, I will share some comments on our expectations and full year guidance for fiscal 2023, and I'll close with an update on how we are thinking about capital allocation to drive shareholder value. I also encourage you all to review our 10-K, which will be filed later today for additional discussion of our results. Let's begin with sales. Sales for the fourth quarter were $143.9 million, up from $133.5 million in the fourth quarter last year. Comparable sales which were adjusted for closed stores grew by 10.8% for the quarter. Our comp growth rate included a 13.2% increase in stores and a 6.2% increase in our direct business. We are very pleased with this result, which marks the eighth consecutive quarter of sales growth from both channels. As Harvey mentioned, the holiday shopping season, which began relatively slowly with a comp growth of just 2.7% in November accelerated to plus 10.8% in December, and we finished the quarter strong at plus 23.7% in January. Despite the slow start we remained largely non-pro promotional throughout the holiday season. Regionally, all parts of the country showed gains, but the southeast and south central regions continued to be our strongest performers. It was the second consecutive quarter where our store business outperformed our direct business. While we are pleased with the continued growth in our website and mobile app, the surge of customers to stores that we experienced in the fourth quarter reinforces our belief that our stores can serve as a haven for the big and tall man in a way that no other retailer can replicate. For the year, our comparable sales growth was 10.9%,…

Thanks, Peter. Wear what you want, wear what you want; for those of you on this call who are not our customers, you may not understand the magnitude and importance of this statement. If you are of average build, you can shop virtually anywhere and at any price point. You can virtually define your style, Google it, browse it, shop and check out and look and feel the way you want. For the big and tall consumer, this was not true. This was not true until now. DXL recognizes the urgency to bring to market what he wants, in the sizes he needs and the sit spec he needs across a broad assortment and an assortment we have handpicked for him, and which we believe will truly define our stores, the app and our website as a haven to experience all that he is looking for, to wear what he wants. Wear what you want, is not a slogan, it's why we exist, and it creates a meaningful investment opportunity with materially greater growth yet ahead. And now we will take questions. Thank you.

Thank you Mr. Kanter. [Operator instructions] Our first question comes from Jeremy Hamblin with Craig Hallum. Your line is now open.

Thanks, and congratulations on a really impressive year in Q4 as well. I wanted to start by getting some color and perspective on the performance of the retail stores versus the direct business. And, first is that trend continuing where you're seeing more of your business flowing through your retail stores as opposed to direct? And, how do you expect that to play out over the next year or two? Do you expect retail stores to continue to be your outperforming segment?

Yeah, Jeremy, it's a great question. I think what we are seeing, and I think what traditionally seems oxymoron to say that traditionally direct to consumer companies are seeing is the need to create a more definitive, live interactive experience. And so there's a relevant element of that experience that can only happen in stores and customers are literally looking to have that greater level of interaction. I think unfortunately, coming out of COVID and at whatever level you say we're out of COVID, which hopefully we are primarily out of it, they're returning to stores and they're returning for that experience. In our case, I want to remind you that our customers have an exceptionally low return rate. Our overall return rate is an industry-leading metric in apparel that is not typical. He likes to come in, he doesn't love to shop, and he comes in, he makes a purchase, he doesn't return it and part of that is the fact that he puts it on. And so we believe that over the time that we are, have and will continue to grow our direct business. We will see continued growth of the direct side of the business, but we appreciate and recognize that he has potentially even a stronger desire to come in and try close on, and the longer of that short of it is that we expect, as we've communicated previously, that we will continue our march from 20% to now over 30% and from 30% towards 40%. And that we ultimately over the next three to five years will grow our business online faster, but we recognize that stores today are really important in the mix in creating that experience in, in terms of fit and how the customers want to shop.

Great. That, that's really helpful. And then also wanted to just dig in a little bit further on the plans on unit growth and the 50 net new stores and thanks for the color on the conversions for casual mail as well. In terms of thinking about this as it relates to 2024, I think that you had previously talked about maybe somewhere in the 15 new stores to 25 net new store openings in 2024. And I know this is a bit forward-looking, but wanted to just see if that timeline that you had laid out before where you were thinking about kind of a three-year period for this increase. Does that still hold true?

Thanks for the question, Jeremy. Yeah, I think that that does still hold true as we mentioned we're restarting the store development engine and at this point we have, I think we're up to five stores that we have approved and we're working on we would love to get all five of them open this year. I feel really confident we'll get three, and then in 2024, I think that's where we will really start to accelerate. So, do we get another 15 that feels like a good number? I'd like to say it would be more, but I think it really just comes down to we're going to try to get these stores open as quickly as we can. We know that there's opportunities across the portfolio where there's either opportunities in markets that we haven't explored before or backfilling or infilling markets that already have a DXL presence, but are deserving of another store. So I think the plan is still, it's, it's probably three to five years and yeah, I think it'll be 15 in '24 is what I think where I think we'll be.

Great. And then I wanted to just get a little bit of color on, the FY '23 guidance as it relates to EBITDA margins. So you saw some impact here on gross margins in Q4 related to loyalty related to normalizing markdown rates. In terms of thinking about the split here on gross margin versus SG&A impact, I know that you've invested in the business, but are you, what are your expectations around gross margins specifically for 2023? Should we assume that that's going to be down maybe a 100 basis points as you get some more typical normalization and impact from loyalty program?

Yeah, I don't think it'll be higher than 2022. What we think is that it'll be roughly the same. That's roughly our expectation going forward is that we will be upwards of 50%, I think we finished this year at 49.9%. So, as we move forward, I think where the spread comes in, it's on SG&A and a perfect example is what we were just talking about with developing stores. That requires that we need to bring on project managers and site selectors and design people and legal and admin support to make sure that the leases are all getting vetted and signed. So there is an investment that we're making this year in longer range growth plans, which unfortunately the investment needs to be made now, but the return on that comes when we get the stores open, which won't be -- we won't be feeling that until '24 and '25. So I think as you think about gross margin we still feel very confident in our ability to deliver the kind of margins we showed this past year. But, I think SG&A is what we're going to try to continue to manage so that we can make sure we have the resources to get our objectives moving and initiatives going but still manage that as best we can.

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

Hey guys. Thanks. So one very long term question. One very short term question. On the long term side of it, Harvey, you said in talking with the market share, you, I think you specifically said that you have meaningful share in, I think you said better and best. What can you do, talk about the overall tam, the $23 billion any thoughts on maybe attacking a different part of that over time entry level as an example? And as part of that, can you talk about what you're seeing with your Amazon business and how that plays into that?

Yeah, Mike, I will talk about it honestly at a very high level that there's an element of competitive intelligence embedded in a deeper answer, but I think the way we think about the addressable market is that, we say it's $23 billion and, and we know it is. We know that that $23 billion runs across from mass to really better and better, maybe defined as either Nordstroms or even above Nordstroms in terms of price points and what have you. We believe, we play in this space primarily think about our assortment. The assortment we have is moderate, upper moderate, and beyond that, or if you think about it in good, better, best terms, it's better and best and really, the nature of that is Ralph Lauren is one of our greatest brands, Vineyard Vines, Lacoste, those brands are great value, but they're in more upper moderate price point better and best in, and there's an opportunity, represented by some of the things we're doing with things like the DXL BTE program, which is the big Intel Essentials program, which is product that we feel very proud of. It has our unique proprietary fit, and each independent size is uniquely fit just like our core assortment, but that is product not sold in our stores and not sold on our website and addressing another part of the market. And we're continuing to work to build that, and that is represented on Amazon's marketplace today among others. There are far greater opportunities, some of which we might prioritize in within the framework of your maybe long-term view and that we're just not at liberty to go into much more detail, but yeah, there's another part of the addressable market that we can go after in a more meaningful way. It all becomes about priorities and understanding the volatility of the marketplace and timing and I think right now we have our heads down to execute where what you want, which we believe is a game-changing element of how we interact with customers and are concentrating on the better and best part of that mix to do it. And extending our footprint through things like Walmart and Target at Amazon with the big and tall program and other private brands that we carry which might be somewhat lower in price point than brands like the national brands of Ralph Lauren and Vineyard Vines and what have you.

Got it. Okay. Makes sense. The short term question, I guess in a way is related because I wanted to ask you about the slowdown that you're seeing in the first quarter, which frankly isn't that surprising, but are you seeing, is it units, is it traffic, is it conversion? Are your customers maybe trading down to or looking for lower end product or what's if you could flesh out the trade down a little bit and then I'm going to reserve the right to come back with one more,

Yeah, I would say overall it is mostly traffic. A little bit of conversion and a very small element of any given day potentially average order value. But I'd say average order value is not the material driver. It's more traffic, absolutely. Just less people coming into the stores and less people getting on the website. And then when they get on, we're just seeing conversion. I don't think the lower price point part of our business is holding up better than the upper. To be quite honest, we're seeing, things like the clothing business, which is actually one of the more expensive parts of our business, just from a pure price point for a sport coder suit holding up really well. And I think that the flip side is we're seeing some parts of a business like active and golf and denim and screen t-shirts where customers don't have the same need they had over the last couple years in many cases going back to work, and they're just choosing to spend their money differently. And, I think we're just seeing the overall macro and then unfortunately, I would say that any given day, the last four or five days with SVB among others, and Credit Suisse this morning and last night, it's just one more thing after another that in the consumer's mind creates, psyche elements where trying to read the tea leaves and figure out what's going on is nearly impossible. So, you think about that and consumer debt being up and all the variables, interest rates and mortgage rates and the consumers being more cautious. I think when the day is done, that's really the bottom line.

Sure. Okay. Makes sense. One more, it could real quick, why not buy back more -- buy back stock? Is it that you don't see the stock as a value? Is it that you preserving cash? Why not?

I'll attempt that and Peter can jump in if he wants anymore. I think when the day's done, we are making, trying to make sure that we look at this as an opportunity to grow and we want to make sure we have the cash to grow and invest in this business. And that means, when it makes sense to go even deeper into a brand campaign on where what you want and expose that to a broader part of the audience, we are looking at ways to do that, but we will never just do that in a blunt way. So we're working our way through how did -- how do you do that in effective ways that are measurable and definable? And that's just one element of investments in growth. Another one Peter already mentioned is stores. We are building the stores, but if we continue down the path, we hope we will, we will have to layer more in terms of staff and SG&A and that's a balancing act, right? It's you front load elements like that before the stores open and create revenue, but when the day is done, it requires certain elements. So we are trying to be agile and keep our options open. Our number one priority is to invest for growth, to the degree that we've already articulated, our free cash flow and the cash we're sitting on, we have the opportunity to do buybacks, but we're going to make sure that those buybacks are the absolute best use of capital. And those are ongoing conversations with the board and management in terms of how we invest in our business or in return to shareholders.

Thank you. I would now like to turn the conference back over to Mr. Harvey Kanter for closing remarks.

Thank you, operator. Hey, listen we appreciate you getting on the call today. All of you, we know they'll be ensuing follow up. We are very excited about our business. We hope you see the enthusiasm we have warranted by the performance we've delivered and the prospects for future. And we look forward to getting back together with you on the next earnings call in approximately 90 days. Thank you so much. Be safe. Take care and be will.

This concludes today's conference call. Thank you for your participation. You may now disconnect. Everyone, have a wonderful day.