Good day, and thank you for standing by. Welcome to Destination XL Group Incorporated's Third Quarter 2023 Financial Results Conference Call. At this time, all participants are in a listen-only mode. After the speakers' presentation, there will 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 and SEC. Please go ahead.

Thank you, Norma, and good morning, everyone. Thank you for joining us on Destination XL Group's third quarter fiscal 2023 earnings call. On our call today are 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, long-range strategic plan and other expectations for fiscal 2023. 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. For the agenda today, I'm going to give you a quick review of our third quarter results and then give you an update on some of our key initiatives. I'll talk a bit about our expectations for the fourth quarter, and then touch on our evolving brand building and growth strategies that we see coming to life in 2024. At that point, I will turn it over to Peter for some more specific comments on our third quarter financial performance and an update on our outlook for the rest of the year. What I hope to accomplish on this call today with you is to simply share perspective; a perspective on where we are today, our strategy, our views on greater investment and what all of that means to 2024 and in turn, our expectations for achieving greater levels of growth for DXL over a period of time, which we loosely define as '25 through '27. Our third quarter results missed our expectations and, like most other retailers, our business continues to be challenged by a difficult macro environment. We believe our customer has shifted away from the level of discretionary spending we experienced in 2021 and 2022 into more essential spending. We are competing for an ever-tightening wallet and economic headwinds persist. So, what exactly are we doing? To be very blunt, we are relentlessly focusing on controlling what we can control, where we can run a clean business and have confidence in our ability to operate and deliver against elements like merchandise margins, inventory levels, payroll and SG&A. Our challenge in Q3 was traffic, and that is job number one, driving traffic. But beyond this challenge, we believe we can execute our…

Thank you, Harvey, and good morning, everyone. On our last earnings call in August, we talked about how through six months, we were at a year-to-date sales comp of negative 0.5%. We further stated that we believe the third quarter will be a mid-single-digit negative comp and the fourth quarter could claw back close to flat. Unfortunately, that is not materializing as we expected. Total sales for the third quarter of 2023 decreased to $119.2 million from $129.7 million in the third quarter of 2022. Our actual sales comp for the third quarter was a bit lower than we expected at negative 6.7%. In August, we saw a sales comp decline of 6.5%. In September, we improved a bit to negative 5.4%. But in October, we fell back further to a negative comp of minus 8.3%. Our direct business performed slightly better than stores at negative 3.2% for the quarter, while stores delivered a negative sales comp of negative 8.1% for the quarter. There is no question, but the greatest challenge we've seen this past quarter is declining traffic. Visits to our stores were down minus 5.9%, while dollars per transaction and conversion combined were down approximately 2%, with DPT being down greater than conversion. For the first three weeks of November, the business continued to perform at a mid to high single-digit negative comp. And given Q3's volatility month-to-month, we are thinking the fourth quarter is likely a mid to high single-digit negative comp, and that is where our sales outlook remains for the balance of the year. Next, a few comments about gross margin. Our gross margin rate, inclusive of occupancy costs, was 47.5% as compared to 50% in the third quarter of last year. The 250 basis point decrease was due to 110 basis point reduction in…

Thanks, Peter. I'd like to just close with a quick summary. But first, I want to say a sincere thank you to our team here at DXL. I feel as though our corporate culture is one of our superpowers and none of this would be possible without the hard work and dedication of our people in the stores, in the distribution center, in the corporate office and in the guest engagement center. Thank you for all your hard work and commitment in pursuit of serving big and tall men everywhere. And finally, I'll offer you this closing perspective. We have authored a strategic plan. But in the current environment, the volatility of the consumer, the market, world events and the like, are quite challenging to achieving the magnitude of our goals in the timeline. But march on, we must and we will. We remain relentlessly focused on executing our fundamentals and are committed to the strategy to grow and the initiatives we have spoken of today and often of in times past. We will open productive new stores, we will get the new platform deployed, we will launch a brand campaign, and we will keep pursuing merchandise collaborations and distribution alliances, taking more drastic actions such as offering deeper discounts and more broadly promoting and funding unproductive ROAS tactics would not make sense in the long run. We are not going to jeopardize the brand position that put so much emphasis and on over the last several years. Our trademark, Wear What You Want is grounded in fit, in assortment and experience and not in price and promotion. We can't control customer traffic, but we can control where we focus our effort and attention. We believe in the DXL brand and everything it can mean and we remain focused on the opportunity ahead as opposed to traffic struggles at this single moment in time. And with that, operator, we'll now take questions.

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

Okay. Great. Thanks, guys. You sort of addressed this in the prepared remarks, but I figured I'd follow up on it. Last quarter, spent a lot of time talking about a long-term investment strategy, which I think makes sense. Since then, it does seem like things have slowed. How does that impact your long-term plans, if at all I think, correct me if I'm wrong, but the advertising budget for next year is maybe a little bit more conservative than what you had talked about on the second quarter call? But just in general, what does this do to your long-term outlook, if anything?

Yeah. Mike, it's Harvey. I'll address that at a very high level for competitive reasons. We don't want to obviously share every element. But yes, the reality is it's hard to understand where the customer is going and what the economic realities are over the next 12 months. So, we have moderated our investment view, marching forward with what we have planned because we think it is not just critical. It's a critical imperative to do so if we're going to gain share of voice and share of market. And we know that once we do that and get trial, we will win. But we are moderating that in the first half of the year to try to understand the return and the level of investment that makes sense and we'll lean in even harder hopefully, as the economic realities become a little bit better in the second half of the year. But equally so, we have learnings in place to make sure that we understand what the return will be.

Okay. That makes sense. A couple of others. One, interesting about the BTE pullback in Amazon. I get that it's harder to be profitable there. But what about demand? And what does that tell you about your ability to go after -- as I understood it, that was more of an entry-level type of product. What does that tell you about your ability to go after that customer?

Yeah. There's still -- there really still is a meaningful opportunity to address the larger addressable market that is really outside the box, so I can better way to say DXL. The challenge with Amazon is actually not a lot dissimilar than Google these days where paid elements of search rise to the top and organic is much more difficult, and you have to buy that traffic. And if you don't do that, you can't get to the top. So, when the program was white label, the reality is that they owned it and they could drive it anywhere they want. When you think about the fact that we're buying our way to search results and in addition to that, having FBA as part of our mix, the costs are just going up. And so, we're trying to obviously navigate a fine line between the addressable market of the lower-income consumer and the profitability of that product, because buying product that then ultimately sells at a loss doesn't make any sense. So, it's something that I would say is yet to be concluded. We believe there is greater opportunities. We continue to believe that over the long term, once we are at a point where we're comfortable with the DXL brand and it's well on its way, there are greater opportunities for a lower income consumer, whether that's a new brand or new distribution channels or greater opportunities, we have had great learning by the BTE program and the top line versus the bottom line, which is distinctly different.

Yeah. Okay. So yes, it sounds like it's something that maybe you come back to in a different way. What's more...

Indeed.

I don't know if you can possibly answer this. But you're right, there is a lot of focus on the GLP-1 drugs. And it makes sense to me that as weight lines fluctuate -- waist lines fluctuate, that could actually be good for you. I guess, and again, maybe if you can, is there any evidence of that? Like would you even have any way to know which of your customers might be on that? And have you seen anything, understanding it's very early in this whole situation?

Yeah. In all honesty, we have been monitoring assertively, very assertively size penetration, and we haven't seen any material shifts. But part of the reality is we look at our business in kind of three distinct ways. There's the entry level, which is the rack of 38 to 40, so to speak. There's core suite spot of our business, which is 43 to 46, and I'm talking about waist sizes. And then there's the upper end of the rack, which let's just say that 60 to 70. And in the range of our core suite spot, we've seen small movements, lower in scale, but in the core suite overall, it's about the same. And so, it's hard to really know where that's coming from But what you might have expected is actually a greater level of move out of our middle core suite spot into sizes that are more competitive with other retailers and quite honestly, not our core suite spot, and we just haven't seen that. And so that's a long way of saying, I think that the jury is still out. I think that the unfortunate reality is as much as I think the weight loss drug is such a positive outcome for some part of the population, it's $10,000, $12,000, $15,000 a year, and it's not accessible to everybody. And as a result of that, the question is what's the penetration? And then, if you stay on that, it's great. But if you go off it, and as we mentioned, you don't have lifestyle changes, you gain weight back. And so, those are all things that are creating cloudiness. And ultimately, I think we're going to just need years, not months or weeks to better understand this.

Yeah. Makes perfect sense. I appreciate the time. Thank you.

Thank you. One moment for our next question, please. Next question comes from the line of Jeremy Hamblin with Craig-Hallum Capital Markets Group. Your line is now open.

Thanks. I wanted to start with just talking about some of the customer behavior. Obviously, retail traffic trends have been tough. You noted that you've seen an uptick in the use of the loyalty program certificates. And just in terms of thinking about what you've seen so far here in November, do you expect -- or what type of insight are you gaining from that increase in use of the loyalty certificates? And on a go-forward basis, how do you think about as you try and have that balance of getting traffic in the stores and staying engaged with this customer so they don't lapse or anything? How are you thinking about utilizing that program to help kind of balance that drive of foot traffic into the stores, but also not kind of marking down product?

Yeah. It's a great question. And there's three or four different elements there that I'll try to unpack for you. First and foremost, the reality is the loyalty program is something that's really important to us. We believe that if we can successfully communicate the value of the program, that he will or she will shop more regularly with us because they'll appreciate that. And the value of the program specifically is performing best with our best customers. It's probably not a surprise, but they understand that value. They shop more frequently. They are more engaged with their purchases. And they recognize one of the critical elements is literally, our loyalty certificates are like currency. It's like greenbacks for lack of a better way to say it. They can come in and use them like dollars, there's no exclusion, they can buy anything and any brand that we offer. Unlike a coupon, where we are using coupon selectively to manage inventory and the file, which we've spoken about before. But any time we do that, it's to our actual internal file and there are limitations and exclusions such that they can't use it on most of the national brands because we're just not discounting those brands. And as a result of that, our best customers utilizing them the most, where they understand the program and the efficacy of the program for them. And in opening kind of price points, if you will, and opening customers, bronze and silver versus gold and platinum, they don't yet understand that. So the third element, I would say, is that we spoke about in my prepared remarks that our challenge is to evolve the consumers' understanding of the program and the inherent value in being not just a member but utilizing the certificate. And unlike a discount for us, if they come in with a certificate, whether it's $15 or $30 or even $45, our average ticket is well above that. And we know that if they use the certificate, they will end up spending close to our average ticket, and we will win at a lower level of, if you will, discount, which is when the day is done, the actual $15 certificate is a discount from the product price, but it's not discounted as a pure discount, it's discounted with the ability to use it as currency. So, we still look at it as a really meaningful opportunity for us, one we continue to work really hard. It's only a year old and really hard to creating the communication and understanding of the benefits of the program. Over time, we think it will ultimately be a big win for us. But like anything else, it's new to the consumer, it's uniquely different than it was a year ago.

That's helpful color. I wanted to transition to talk about the store opening plan. So, 10 locations for '24 along with a bunch of free models. In terms of thinking about -- two aspects to this. One is the CapEx investment presumably will step up decently from the $16.5 million midpoint that you guided to for this year. But I also wanted to understand, for those 10 locations, roughly the cadence you're expecting, whether that's 25% of those, or two, three in the first half of the year and the balance in the back half of the year, just to get a sense on that. And then also as it relates to that, there's obviously, some increased infrastructure cost that goes along with that, whether that's members, maybe your real estate team that you've needed to add. But just wanted to get a sense for embarking on that program, what the rough annualized cost is from an SG&A standpoint to support the new openings and the remodels?

Sure. So, I'll take that one, Jeremy. You're absolutely right. This is something that we've been talking about for well over a year now and the investment that we need to make in order to have site selectors, have store planners and construction folks, project managers, all of that adds up, and it's all got a deferred return because we're incurring those expenses earlier for stores that typically, it takes us a year to get a store open. The cost of our stores is typically around $1 million and that's usually net of some TI allowance that we would try to get. So, we're definitely pushing forward with those. As Harvey mentioned, we've got nine leases that are being negotiated right now. I'm hopeful that we'll get, I would say 30% of those done in the first half and 70% in the second half, will definitely be more weighted towards the second half of the year. But we're -- I'm glad we've got the nine and hopefully, we'll get one more, so we'll get 10 in place for the year. But this is a big part of our strategy. We know that the customer is attractive to the experience in stores and our store associates are one of our secret weapons that not everybody knows about and how well they're able to engage with and deliver an experience that big and tall customers are not going to get anywhere else. It's something that we're going to continue to leverage.

Got it. Thanks. And just remind us in terms of the conversions and the remodels, the approximate cost of those when you're going from Casual Males to DXL and other conversions that you're doing? Just the range of this cost?

Yeah. Of the two types of conversions, we have the casual male being converted to DXL, of which we're going to get 10 of those done this year. And then, there's probably another, I would say, five to 10 next year that we'll get done. Those typically cost $200,000 to $300,000 a piece. And then, there's the DXL remodels, which is -- it's already an existing DXL store, but we have two stores -- actually, three stores that we have -- we've done this in already in Warwick, Rhode Island and in Troy, Michigan, where, in some cases, we think that by remodeling the inside of the store and there's a number of changes, which I won't get into on the call here, but remodeling the interior of the store, that's about a $300,000 price tag as well. And there's five of those that are in progress right now. And next year, we're going to do a few of those as well. We don't have the exact number of what we're going to do yet next year. But we're continuing to monitor what kind of return those DXL remodels will get for us.

One thing I might add just to that, Jamie -- Jeremy, that Peter said, he wouldn't get into, but I can't help myself just acknowledge that if you haven't been at Regal Park, you should definitely make it a point to go when you're in the city. It's really rather remarkable, the evolution of what I would call the social community element of the storefront there. I know I referenced this last time, I think I did, the concept of in-home where you have the center island in a kitchen and everyone hanging out and the community and the ability to access our entire online assortment, buy it in the store, pick it up in the store, have it sent to your home, the community of laydowns, the integrated digital experience, it's really a very different storefront, and we're quite excited about it. We're very early in the process. But as Peter said, we'll have a second this year and multiple more next year. And as we build new stores, the new stores are being built out in this format of the remodel boxes, but it's just a compelling store front. And I think it's very different than most of the retail store fronts you would go into, especially for this core customer who has nearly no other options that pure-play box would provide like we do.

Got it. Thanks. And then, last one for me is, I think at the end of Q2, you had a little over 9% of your inventory was of the clearance variety. And you might have mentioned this and I missed it, but where does that percentage stand today?

That's -- today, we're at 9.7%.

Got it. And so that's up about 300 basis points from a year ago?

Yeah. I don't have at my fingertips what it was a year ago, but I remember the 9.7% was where we are at the end of Q3.

Jeremy, what's a really interesting conversation to explore, maybe not on the call, but later if you'd like, is that our inventories have come down. We talked about we're 6.5% under last year's inventory levels. And our view is that clearance and primarily, I would say, units, but also dollars based on what we carry, it's really important to maintain an offer. And so, we're actually strategically and tactically trying to manage to a certain level of clearance because we believe in the box as it fits that the reality is the customer gets greater value from the clearance, and that's our opportunity to create greater value for lower income consumers as opposed to discounting product. But when our inventory in total comes down, and we're trying to make a certain level of units in the store, by default, the percentage and dollar value penetrates greater. So, as we've always said, 10% is the marker. We're trying to actually achieve closer to 10% than farther away. So, the migration from 6% to 10% had some thoughtfulness behind it. It didn't just happen.

Got it. Thanks so much for the color, and best wishes.

Thank you.

Thanks. Happy Thanksgiving to you.

One moment for our next question, please. Our next question comes from Raphi Savitz with RYS Advisors. Your line is open.

Hey, Raphi.

Hey, good morning, guys. Maybe one tactical question and then kind of a bigger picture question. On the tactical side, as you're reinvesting in the store base here, have you revisited at all how you're thinking about incentivizing your workers and your store managers to ensure success?

Yeah. So, we have three different programs in place. We have a base compensation program. It varies by locale where the minimum wages are different. But every single store is above minimum wage in its locale and the combination of the store quarterly bonus and the actual sales associate commission ultimately creates their hourly pay. And we're, I'd say, at a high level, comfortable with where they are. They're materially greater than any historical perspective in terms of their hourly wage rates. I think if you're going to a store and actually experience interaction, you would find it remarkable, you would never know they're on commission where often enough in commissioned stores, you have a heavier push of the sales because they're trying to sell you what's on the rack. And in our case, the first question is, how can I help you today? May I take your measurements by our certified fit specialists. And it's really understanding what they came in for, what they're shopping for and helping them put together looks. And the outcome is successfully doing that, achieves an average DPT or average transaction value that is above what most other retailers have an average transaction value. And ultimately, a result of that is a higher commission and a better store bonus if we achieve our results. So, kind of a backdoor way to look at that. I think the outcome of their compensation is the effectiveness of creating the experience that we talk about so often and frequently.

Got it. Okay. And then as you think about the next few years at DXL, you've talked about, again, kind of inflecting growth and really driving growth in the out years. How do you think about kind of rank ordering, what will drive that growth? Is it kind of the increased customer lifetime value of existing folks? Is it the branding efforts to bring in new folks? Is it the new stores?

Yeah, it's a great question. I was just going to say, there is no silver bullet. I want to caution you, there's not a silver bullet. So, what you've referred to, there's a little bit embedded in each one of those elements. But obviously, the way we've thought about it and prioritize it and we're trying to balance it is we believe that our share of awareness in the marketplace is just sub water. We have done research. We have consumer insight. We did a brand study. We are in single-digit awareness levels on an unaided basis and low double-digit awareness levels on an aided basis. And in both cases, just by the name of other retailers that are not really specialists in this business at any shape, matter or form and more general merchants, their awareness levels perceived are higher even though the reality is they might not be the same in terms of the assortment breadth and depth we carry. So our job number one is share of voice, our job number two is awareness, actual awareness, and job number three is trial. And when you successfully do all of those things, you create new customer acquisition. I cannot tell you that it's prioritized literally as number one, but it is a very strong priority for us. The flip side is it's not necessarily number one exclusively because as you might imagine, if we did that, the cost of acquisition is always the highest versus the cost of reengaging your current customer. So, the reason we talk about trial and repeat and lifetime value is because we both appreciate that the core customer with us today generates more efficacy in our marketing returns by just reminding them of who we are and the reason to come in, and the combination of both new and repeat hopefully creates the long-term growth opportunity we have. When the day is done, you obviously have to appreciate and recognize that we have to exponentially grow our new customer file. So we have to do that in a, what I would say, is the pragmatic and thoughtful way because the cost to do that is a challenge to the P&L, which is why we've talked about the fact that the P&L as a percentage of EBITDA margins will go down for a period of time before they go back up as we try to engage more customers. But we've even moderated that view given the environment and the efficacy of our marketing return where traffic in the customer is just more challenged today than ever. And the expectation might be in 2024 that we're going to have a rougher year than we -- I think any of us really hoped for.

Got it. And on the awareness question, is there a significant significantly better awareness where you have stores in market than where you don't have stores?

For sure. There are absolutely awareness levels that are better by geography and even more so by the population centers of the world, and within where we have really strong performance. So like we talked often about the Northeast and the Southeast, very strong markets for us, higher awareness levels. Midwest is more challenging. And so yes, the answer to your question is yes.

Got it. okay. Thanks, Harvey.

Thank you. Happy Thanksgiving to you. Operator, it looks like that's the end of the questions. We can take one more and pass. If there any other questions? If not, we will wish everyone a happy and healthy Thanksgiving, quality time with your family, and look forward to coming back to you in early January with a holiday release.

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