Good day everyone and welcome to the Destination XL Group, Inc. Second Quarter Fiscal 2024 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, operator, and good morning, everyone. Thank you for joining us on Destination XL Group's Second Quarter Fiscal 2024 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 is 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 2024. 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. As always, I appreciate your spending time with us today regarding our earnings release and communication of our quarterly results. For today's agenda, there are three topics I will cover. First, the current environment and our quarterly results. Second, an update on our strategic long-term initiatives and third, our expectations for the second half of the year. Let's start with the current environment. Our customers appear to be still feeling the impact of inflationary pressures and macroeconomic uncertainty. We are seeing customers gravitate towards lower-priced goods and select promotions, signaling a consumer who is carefully choosing where and how he spends his money. Think of spending on his family, his immediate needs, and not necessarily big and tall. Our view is that he is not shopping as much for himself right now and that is being felt across the entire category. We believe we are gaining share of wallet, but this share growth is in an overall down environment for the category. I expect many of you saw our press release this morning, which detailed our financial results. We mentioned on the last quarterly earnings call that sales performance in May was trending in line with our first quarter performance, which was negative low-double-digit comp. Unfortunately, that trend persisted throughout the second quarter and our results reflect continued softness in the big and tall consumer demand. Let me now get into some specifics on the quarterly results. Let's start with comparable sales, which declined 10.9% for the second quarter. Stores were down 10%, while direct was down 12.8%, so not much variation in demand between the channels. The progression in comp sales across the quarter was mixed. In May, we saw the combined comp sales decline 11.8%. In June, comp sales improved to…

Thank you, Harvey, and good morning, everyone. Net sales for the second quarter were $124.8 million as compared to $140 million in the second quarter of last year. This amounts to a 10.9% decrease on both a total sales and comparable sales basis. We believe this result is directly tied to the ongoing macroeconomic challenges that big and tall customers are facing, which are causing them to stretch their time between shopping trips. Our revised sales outlook for the year of $470 million to $490 million represents approximately a negative 10% to negative 6% comp. We do not know when the current downward economic cycle that we are in will reverse, but our performance has been tracking steadily through the first six months of the year with two-year comp stacks in the negative 10% to negative 12% range. Our sales range is built on an expectation that we will not see a material change in trend between now and year-end and will maintain that double-digit negative two-year stack. But comps are expected to improve in the second half of the year as we start to lap the severe negative comp declines we saw starting last year in Q3. So, on a structural basis, the comps should improve in the second half, assuming our two-year stack remains constant. Next, I'll speak about margins. First, merchandise margin. I am pleased with the fact that our merchandise margin for the second quarter was flat to last year. We achieved this despite the increase in promotional activity around us, as Harvey discussed. We were able to offset these increased markdowns with reductions in shipping costs, loyalty program expenses and marketplace commissions. In terms of gross margin, inclusive of occupancy costs, our gross margin was 48.2% for the second quarter as compared to 50.3% in…

So, hopefully, it's now clear, DXL will stay the course and we will weather the storm. The operating regimen we have in place and the foundational extensions and legworks we have worked on will pay us back meaningfully as an uptick in cycle returns. And lastly, as I wrap up, before we take questions, I want to thank the DXL team that I work with every day. Their hard work and dedication in the stores, in the distribution center, in the corporate office and the guest engagement center provide a level of optimism for the opportunity yet ahead. The passion and commitment our team has for our underserved consumers is our reason for being, our purpose and why we do what we do. It is because of the great team and culture that we've created that I want to get up every morning and keep moving on this journey. Thank you for all your hard work and the commitment in our pursuit of serving big and tall men and making DXL the place where they can choose their style and to wear what they want. And operator, with that, we'll now take questions.

[Operator Instructions] Our first question comes from Jeremy Hamblin with Craig-Hallum Capital Group. Your line is open.

Thanks for taking the question. I wanted to start by asking about some of your recent collaborations. So getting a sense of progress on the Nordstrom collaboration in the marketplace. And also, I think, you were working on your -- the rollout of UNTUCKit, I think, maybe 50 of your stores here by the fall. But I wanted to get a sense of progress that you're making on those two strategic initiatives.

Yes, Jeremy, thanks. It's Harvey Kanter. I'll answer both of those. On the collaboration and alliances, we feel really good about where we are. If you are on Nordstrom's app or within their e-mail exchange, you would have probably received on Monday, the very first marketing element of the collaboration with Nordstrom. They launched, on their app, within their app, notification of the program and featured DXL. And that literally is the first marketing communication of the partnership. Their marketplace is in early innings and their marketing of key vendors or key collaborative partners like us is very early. And we do have great expectations. As we said, we're not at a point where we think we should communicate the size of the prize. But initially, for half of the assortment being online, we're very excited about it. And we are being presented as the retailer literally supporting their big and tall consumer because their assortment relative to what we're bringing to the mix is much, much smaller relative to what we're bringing to the mix. So we feel really good about where it's going and time will tell. But it's a journey we've committed to do for multiple years. It's not something that's in and out kind of thing. And relative to UNTUCKit, you are correct, we are extending the stores. We will ultimately get to 100 stores and we are in the final contractual elements of bringing on at least one, if not two more versions of UNTUCKit for spring of 2025. So I think the long and the short of that is, we see other brands recognizing the challenges, inventory management, SKU management, things of that nature, and are coming to us and saying, we'd love to extend our product brand to the big and tall consumer, but we're not sure it's within our four walls, so to speak. And we are reaping, hopefully, the benefits of that over the next several years, where we continue to bring, and you will see, we will announce, probably November and maybe February, it's not clear what the timing is, at least one, if not two, more collaborations like UNTUCKit. And the point there, I think, that's important to us is, we're bringing to the market much better product, more product, but we're also bringing to market a product that is very well known. On UNTUCKit, it's not a secret, is a really big, wonderful marketer and their brand and what they offer is compelling. And now, we're extending that in the big and tall category. So, other brands are doing the same thing. And inside our product, it does literally say, fit by DXL. And that's a testament to our ability to have a proprietary fit that's relevant from their view and that their view is that we do it better than they could. So, that's where we are. Thanks for the questions.

Sure. Just and then I wanted to follow-up and ask, what do you think that you're learning from your customer? You noted in the release that you've seen some gravitation to kind of the lower-value brands. I would say, if you look across apparel retail, there really has been a mixture of results, some companies seeing quite strong results and others that have not. But in terms of the DXL customer, do you sense this is a fight over the value equation to drive better traffic? Is there demand for maybe more branded product, but maybe lower-end branded product or is there anything you feel like you need to adjust in terms of the assortment within stores and online?

It's a great question. Some perspective I want to share. We think and I would say that we at least have more than anecdotal evidence that the overall men's business is soft. And without naming names, there was one of the national retailers that reported 48 hours ago and their reference was home and women's and beauty and kids' and didn't even murmur about men's. And so we believe that's more than anecdotal. They're not talking about men's because the men's business is soft. And we think that, and at some level, we know, our shopping cycle of our core men's customer is less frequent than the shopping cycle of women's or kids' purchases. And so, inherently, we have a customer that doesn't shop as frequently. And given the environment, whether it's gas prices, even though they're down $0.40 versus last year, they're still expensive and mortgage rates are still 6% and change and given those variables and the fact that our customer literally doesn't have a high frequency of shopping a) we think he is just shopping less. And so whether you believe that or support that or not, that's the first line. And then, the second element of that, as he is shopping less, he is being challenged by discretionary income. And so the reality is, yes, we've seen him trading down into Harbor Bay and other low priced offerings. We've also seen other replication of data where the consumer overall appears to be trading down. And that reference to Adobe is very purposeful because again, it's not our data, it's not anecdotal. It's data that says the products in price points lower are penetrating greater than the products in price points higher and there's a shift. So between both of those, we think that there is more…

Great. Thanks for all the color and best wishes.

Thanks so much.

Thank you. [Operator Instructions] Our next question comes from Mike Baker with Davidson. Your line is open.

Hi, guys. It's Keegan Cox on for Mike right now. I just wanted to ask a question a little bit on the brand campaign and the advertising just for the rest of the year. You talked about the national brands promoting more and then kind of shifting away from your campaign. So I was just wondering like what are you going to do in terms of your spend to drive those immediate sales results? Are you going to try to match the promotions of these national brands? Are you going to spend on more like broad media to drive awareness and traffic? What's going to drive the sales immediately?

Yes, it's a great question. There are three components of what we're going to do at a very high level. First is just plain and simply our marketing spend will be increased and there's not a black and white silver bullet here. So our SCM practice is going to be augmented, which is basically words that we will pay for. There are other elements of our, what I would call, brand advertising that can be executed to continue to build awareness, but not at the level of, what I would call, national broadcast TV, and so specifically things like cable TV or streaming video. We can still do that just at a lower level. So we will continue to do that. That's number one. Number two, relative to our loyalty program. Loyalty is one of the places where consumers have point blank told us they see value in the program. There are no exclusions in our loyalty program. So when you come and shop with us and you earn a loyalty point or a loyalty certificate, you can use that. And when the day is done, it's a denomination. So it's $15 and it's a $15 discount on anything you want, whether it's Ralph Lauren or any other brand. And quite honestly, that's not the way our typical promotions work. We exclude our national brands from most of the discounting we do. And so that's the second element where there will be enhanced programs within the loyalty program to offer the customer the ability to basically have greater value. And then, last but not least, to your point about national brands, we are never going to win at a pricing game. And so our attempt is to be competitive, but it will not always be to match dollar-for-dollar. We have…

Awesome. And then just a follow-up you talked about the monthly cadence of comps and you exited July weaker. I was just wondering if you're still seeing that kind of trend in August or if things have picked up a little?

Yes. No, we feel I'm not going to say really good about where we are, but I will definitely tell you, we're on the cusp of being in the single-digit net decline. So we've definitely seen a pickup. It's mostly in stores. We've seen our traffic in stores. I'm not going to say measurably improved, but we've definitely seen it improved. And with conversion and DPT holding the same variables, we've seen a decline in the negative comp. For lack of a better word, I would say, it's kind of a double negative. But, yes, the answer is, we've seen our business improve. And as Peter said, our expectation for fall is that we will see improvement. I'll remind you, I'm doing this from memory, I think, we're against a negative 8% in Q3 and a negative 11% in Q4. And in spring, we are against in Q1 a positive comp. So as we start to see that two-year stack, our expectation is the one-year performance will improve and that's built into our guidance. Good.

Thank you. I'm showing no further questions at this time. I would like to turn it back.

All right. Thank you. Daniel, we appreciate your helping us here. To our investor base and shareholders, thank you so much for your commitment of your time this morning. We hope to obviously report a better outcome in Q3 and continue to fight the good fight. Have a great day. Have a nice Labor Day. Safe journey to all of you.

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