Good day, everyone, and welcome to the Destination XL Group Third 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 Third 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 was filed this morning and is available on our Investor Relations website at investors.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. I appreciate all of you joining us today. Let me start off by acknowledging that DXL's business continues to be challenged in the third quarter by consumer spending headwinds, which resulted in lower traffic to our stores and lower conversion online. Despite these challenges, we have maintained our disciplined operating regimen and have avoided a material erosion in merchandise margin while keeping our inventory position healthy and controlling our operating expenses. Now, with that high-level overview, let me set today's more detailed agenda for our review. There are three topics that I will cover in greater detail. First, I would like to update you on the current environment and our quarterly results. Second, I want to talk a bit about our expectations for the fourth quarter. Third, I would like to update you on the progress we are making against our long-term strategic initiatives. Let me get started with the current environment. It's frustrating to be talking about the macro environment once again in Q3, but our customers are still holding very tight to their wallets. We continue to face consumer spending headwinds, and it appears buying new clothes has just not been a priority for the big and tall consumer. Customers who are coming in and choosing to spend their hard-earned dollars with us are gravitating towards lower-priced goods and select promotions. To that end, our third-quarter results reflect a continued shift towards more affordable, value-driven options. Both in-store and in our direct channels, customers have been moving away from better and best-tiered higher price point brands and are gravitating towards moderate lower price point national brands and our private brands such as Harbor Bay, our more entry-level opening price point brand. We had some modest success with a promotion during Columbus Day weekend, but overall, for the quarter, we have seen a consumer who is carefully choosing where and how he spends his money. Our competitive research suggests that others in men's apparel are struggling as well, but we do believe, based on data we have seen, that we are gaining share of wallet at least from other big and tall retailers in the space and despite an overall down environment for the category. I expect many of you saw our press release this morning, which detailed our financial results. Our sales so far in November continue to pace a low to mid-teens negative comp. Unfortunately, the down cycle and negative trend that we've been speaking to all year is reflected in the continued softness in the big and tall consumer demand as our results show. Let me quickly go through a few specifics on the quarterly results. We'll start with comparable sales, which declined 11.3% for the quarter. Stores were down 9.9%, while direct was down 14.7%. So we are seeing a little better performance in stores and worse performance in direct as compared to the second quarter.

The progression in comp sales across the quarter was mixed.

In August, we saw the combined comp sales decline of negative 10.4%. In September, comp sales fell back further to negative 12.2%. And in October, comp sales were negative 11.2%. In stores, the story for Q3 is much the same as Q1 and Q2. Our struggle continues to be primarily related to a lack of traffic while conversion is up and average transaction value is holding its own. Declining traffic has been impacting our growth now for well over a year, and we do not believe this is unique to DXL. We believe the overall men's category is struggling, and our intel would say it is worst in big and tall. In the digital space, the primary reason for our sales decline was due to a decrease in conversion. We have seen some level of uptick in sales momentum through promotions, but not every promotion has worked, and the results are inconsistent. We believe this is an indication of a more discerning and promotionally driven customer. And if we catch him at the time he is looking for greater value and discounts, we've seen an uptick, but this has not happened across the board when we have run promotions. We have strategically tested several different promotional formats as tactical tools to drive sales, which is only met with limited success. For example, we used a test and control approach with a tiered offer, which effectively means the more you spend, the more you save. We also tested a free $20 off offer with different spend thresholds and softer results. Ultimately, we know the market continues to be challenged, and our view is that we are still in the grips of a downward cycle, and lower price points and enhanced value are critically important. We were encouraged this past weekend with…

I'm happy to report that the conversion to our new email provider has stabilized.

We are seeing a slight return to growth in our file. We have aligned with a new loyalty provider and platform and have further designed an evolved loyalty program to enhance and drive the strategic priorities of the program. We believe this will better set up DXL for long-term growth and success through a heightened level of loyalty and consumer engagement. The new program introduces best-in-class loyalty elements, such as more compelling benefits based on tier migrations for spend, not through points or loyalty currency. The new program also includes safeguards to control costs. New customers are required to opt into the program, which gives us the ability to measure the performance of loyalty members versus non-loyalty members, gaining critical insight into the incrementality of the program. The new platform and program structure also allow for testing and holdouts for specific offers and promotions, which we can pilot and then scale as successful. We are on track for a launch and go-live at the beginning of the new fiscal year. Let me now switch to our work with customer segmentation. The objective of customer segmentation is to identify naturally occurring consumer segments and leverage that data to better understand how each segment, based on underlying needs, attitudes, behaviors, and beliefs, comes to life. Our work has uncovered six distinct segments based on consumers' beliefs, motivations, and behaviors around engagement, shopping, style, retailer, price, and value. We then utilize this segmentation data to guide our communication with each different segment, which we believe will fuel meaningfully greater engagement, leading to heightened growth by fostering deeper, more profound relationships with DXL's customers and prospects. The customer segmentation and now defined segments help us do more to be more deliberate and efficient in targeting, as well as delivering more relevant and purposeful content…

Thank you, Harvey, and good morning, everyone. I'll share some more details on our third-quarter financial performance and then provide an update on our capital allocation strategy. Net sales for the third quarter were $107.5 million as compared to $119.2 million in the third quarter of last year. The decrease in net sales was primarily due to an 11.3% decrease in comparable sales, partially offset by an increase in non-comparable sales from our new stores. The third-quarter decline was consistent with the trend we experienced in the first half of the year and continues to manifest primarily through lower traffic in our stores and lower conversion online. Harvey discussed the underlying consumer fundamentals, which center around the ongoing macroeconomic challenges that big and tall customers are facing. We can see that our customers are stretching their time between shopping trips and continue to demonstrate price sensitivity. Our revised sales outlook for the year of approximately $470 million represents a comp sales assumption of approximately negative 10% for the year. On a sequential basis, this represents a modest improvement in Q4 comp performance as we close out the year with an implied comp for Q4 in the negative mid-single digits, but it's consistent with Q3 on a two-year stack. Switching over to margin, I'm pleased to report that our merchandise margins held relatively flat for the quarter, down only 20 basis points to last year. We have been able to offset increases in markdown rates on seasonal inventory with decreases in shipping costs, a decrease in loyalty program expenses, and a slight shift in product mix selling to more private label brands. Despite this, we cannot escape the sales shortfall, and our gross margin inclusive of occupancy costs drove our rate to 45.1% for Q3 as compared to a gross margin…

So hopefully, it's clear. And as I noted at the end of our prior earnings call, DXL will stay the course, and we will weather the storm. The operating regimen we have in place and the foundational extensions and legwork we have worked on will pay us back meaningfully when an uptick in cycle returns. And lastly, as I wrap up before we take questions, as I always do, I want to thank the DXL team that I work for and 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 ahead. The passion and commitment of our team for our underserved consumers is our reason for being, our purpose, and why we do what we do. It is because of this great team and the 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 your commitment in our pursuit of serving the big and tall man and making DXL the only place they will ever want to choose to buy their styles and wear what they want. And with that, operator, we will now take questions.

Star one one again. One moment for our first question. Our first question is going to come from the line of Mike Baker with DA Davidson. Your line is open. Please go ahead.

Hi. Hopefully, you can hear me. So first, I want to start with a short-term question. I'm intrigued by the implied fourth-quarter guidance you said down mid-single digits for the comp, understanding that it's, you know, a tougher comparison, but still, that would be a nice improvement. Is that indicative of what you're seeing a couple of weeks into the quarter? It's gotten a little bit colder, as you said. Election's over. Are you starting to see trends get better into that range?

Hi, Mike. This is Peter. Thanks for that question. So, yes, I mean, I don't want to read too much into the fourth quarter because we are only a couple of weeks in. I would say that it has gotten a little bit better, but as you pointed out, part of that guidance is built on the fact that our comparables against last year are significantly better in the fourth quarter than they were in the third. Now, we were also expecting that we would see better growth in the third quarter, which didn't come as strongly as we had hoped. But as we head into the holiday, I think we are optimistic about some of the things that we have planned, and we are seeing a little bit more momentum than we did in the first half of the fall. So part of it's structural, part of it is a bet on improved consumer sentiment.

Mike, the other thing I would share with you is we've acknowledged in our comments that we have been testing both strategic, what we would define as strategic, as well as some level of tactical understanding of promotion looking for incrementality. And while I think that it's been inconsistent, we have found issue elements that seem to be working, and we're trying to balance, as you might imagine, the level of promotion, which we have been, relatively speaking, allergic to in our repositioning and believing that the element of fit and the exclusivity and breadth of depth of offer, including the experience, has been our calling card that was sufficient. But in the environment that requires more value, we have recognized the consumers need to have a better price opening price and some level of promotion in the mix. And so we have what I hope to be strategically created an opportunity to create either higher levels of repeat and engagement with current customers or customers that don't know us, either vis-a-vis the marketplace of Nordstrom today, which we're quite excited about, or other elements on our direct business. The opportunity in the balance of this fourth quarter to see what you just acknowledged, which is appreciation of our comps. And hopefully, with Peter's comment about the year-over-year comparison and some of the things we're doing, to see, at a minimum, a change in our business, and in a more optimistic and a more meaningful change in our business, and obviously, time will tell.

Yeah. Sure. Fair enough. And just to follow up on that, so a little bit more promotional. Presumably, that's embedded in your guidance. Just to confirm that. But also, does this, you know, I was intrigued by that comment about the national brands being a little bit more competitive on their own website. So is this in response to that? You said you are getting a little bit more promotional because of that. So if you could just talk about that dynamic, how that relationship with the national brands works. Did they help you at all if they're going to get more promotional? Does that become adversarial? I'm just intrigued by that whole dynamic.

Yeah. The two comments, I'd say for the most part, our promotion is baked into our guidance. And when I only say that, obviously, we're trying to take advantage of things like the promotional outerwear business, the sweater business that we did last week, which we acknowledge we've got a response to. It really was in response to the weather and inventory that has been slow with the really warm temperatures. That was not planned. So to the extent that there's something like that in the next eight or ten weeks, that it is not baked in guidance. But most of the things that we anticipate are fully baked into guidance. And then relative to the question on the brand, I would say that it varies a lot by brands. In some cases, we literally have with brands support vendor allowances or guaranteed margins. In other cases, the brands are literally trying to navigate what I think many in retail are, which is business that is softer and inventories which need to move out of their warehouse and through the customer. And they're trying not to have those inventories back up, or in some cases, also the comment that I made already about the recognition the customer is just requiring greater value and lower prices. So when all said and done, I think there's no one answer. We have some brands that are meaningfully working with us, some brands which are promoting, and we just have to match them. Hopefully, you caught our guarantee price strategy, which we've implemented. I think it was on the 28th of October when it went live. And it's our attempt to say to the customer, we will not be undersold. And you can buy anything from us with confidence. And if it's a lower price elsewhere, we will match that price. And that just underlines, hopefully, the value that is available in what the customer wants. In many cases, they may want it in a size or color that is not available elsewhere. And based on our breadth and depth of assortment, it's more than likely they can actually get it in DXL. But that, in combination with the guaranteed price, hopefully, gives them greater confidence that any brand promoting more than likely, we will have what they have, and we will be at the same price.

Yep. Fair enough. Makes sense. If I could ask one more. Just can you share the comment that, you know, you think this is so clearly, you think this is industry-wide, not a share issue. In fact, I think you said you think you're gaining share. What data or evidence do you have on that? You know, maybe a little bit of concern that you could be losing share to more lower-end offerings because you did acknowledge that that is a part of your business that's doing well. So I know there are competitors who are more, you know, more private label, etcetera. You don't think you're losing share to those guys, though?

Yeah. I think the way we would characterize it, first of all, without telling you which platform, there is a platform which we are now paying for, and it provides aggregated anonymous data and credit card information. Now, we don't know that at a customer level, but that provider or that platform can provide us perspective on competing retailers of big and tall. And in those two select that are purely big and tall, purely big and tall as opposed to Walmart or Amazon or Target or Kohl's or any of those that have a menswear business and big and tall and bigger than that, we cannot see that data at the level of tactical detail that we can see a few others. And so that's where we're coming up with the perspective that we appear to be taking share. And there's no question that at least in that data on that platform, it shows that we versus them are doing better. And better is defined as less worse, really, in reality. But less worse for sure. The other element that I think is important to recognize is that our assortment, good, bad, or indifferent, for lack of a better way to say it, is moderate to upper moderate. So when you think about Levi's, that's really our opening price denim brand. And from there, it goes up. And whether it's Nautica or Vineyard Vines or Polo Ralph Lauren or Psycho Bunny, our assortment is upper moderate. And so we don't look at Walmart as a direct competitor. Sure, there's some level of minimal crossover, but when we talk about share, we're talking about really share based on our customer, who is, relatively speaking, a $100,000 income, and buys upper moderate brands. And what we see in the platform that we're using is, in that particular case, share shift to us. And so that's how we've answered the question for you today and how we have created our lack of a better way to say it.

Makes sense. Thank you. Thank you. Operator, it does not appear we have any other questions.

You can take one more crack at that. And if not, then we will wish everyone a happy and healthy Thanksgiving and a wonderful holiday season and regroup actually at the end of March, which is our next earnings call. But if there's any other questions, we're happy to do that.

One moment for our next question. Our next question comes from the line of William Forsberg with Craig Hallum Capital. Your line is open. Please go ahead.

Morning, guys. I'm on for Jeremy this morning. So this is the second quarter now that we've seen this price-sensitive consumer trading down to the mid and the entry-level price points versus those more upscale brands. I guess I'm wondering how the product margin for the lower price point and private label brands compare to that of upscale names, maybe like Polo or Vineyard Vines. And then if you're planning on shifting any of the assortment mix to maybe capture more of this consumer shift.

Yeah. Great question. The two answers, I guess, first and foremost. There's no question the lower-priced product for DXL is primarily our private brands. And Harbor Bay, True Nation, Synergy, those brands among the others in our private brand offer are lower price point and our highest margins. So it actually is a good thing for us to see channel shift to those price points. We're able to address the customer's needs at some level and actually profit from that margin that is better on private brands. In terms of the shift, I would tell you that we have had lots of conversation about really the assortment, and if we materially went after lower price point brands, it would take, you know, potentially a couple of two, three years. What we are trying to do is evolve and shift. And so we have, I'd say, three or four key national brands which we will launch. In some cases, we might have them in already, like Hager is on the website, and we have several other brands which we are bringing online in spring to further address lower price points. Those are national brands. Think Carhartt but a lower price point version of Carhartt. We love Carhartt, but it's not a lower price point. It happens to actually be a moderate top of moderate price point. But think about brands like that and then an analogous brand that might be lower in price point. And we will bring those in in spring to further augment the balance of our bell curve, for lack of a better way to say it, and shift down into lower price points. But it's really an assortment addition to move the bell curve down. It's not like we're going to magically take our assortment and lower the overall mix materially. Because, obviously, we do have a very meaningful business in moderate, upper moderate brands. And to the degree that we are correct in our belief that this is a cycle, when the cycle actually moves back in the economy improves and mortgage rates go down, and things of that nature help the consumer feel a greater level of discretionary spend in our business, we believe that they will return and want to buy these more upper moderate brands at a level that they have historically witnessed. So we're trying to make sure we balance our movement and actions with great thought as opposed to just knee-jerk and chase things that don't make sense for the positioning of the company.

Great. Thanks for that color. Then kind of a follow-up here. I believe last quarter you had noted a DXL brand awareness figure around, like, seven or eight percent. And I know in the prepared remarks, you'd mentioned web traffic was looking healthy. But I guess I'm curious if you had an updated awareness figure for the third quarter. Then if you had any results from the Q2 ad campaign that were quantifiable at this point?

Yeah. So we do the brand campaign work twice a year. And so the last brand awareness work, brand campaign study was done in the second quarter, so we do not have another updated one for this quarter. We made literally, and I don't think it's material, but I will acknowledge we made a couple of point movements in unaided awareness and a couple of point movements in aided awareness. We would not call that material. The brand campaign, which we have acknowledged in our remarks, continued to demonstrate greater traffic to the website and in the three test markets versus the control markets, greater traffic to those stores. The challenge is that traffic has to convert, and it's first awareness, then it's trial, then it's conversion, and then it's repeat. And that's a longer runway. And so the ROAS, return on ad spend, is challenging when you're really multiple millions of dollars in a campaign and you're not moving the business part up. And so we pulled back on that, as we acknowledge in our remarks. But we believe that we will re-immerse ourselves in it. That being said, what you might be interested to learn and look be on the lookout for is we've done a video which leads into certain elements of pricing and the consumer in a witty way, and it may or may not, you know, greatest aspiration is that it will become viral. But it will be on streaming where we are not on national broadcast TV but on streaming media where it will be picked up and will continue to help us hopefully create awareness, perhaps not at the level of a national brand campaign on NBC or CBS or what have you. But at least on streaming, YouTube, Hulu, and things of that nature, social media, that it will create hopefully a greater level of awareness. And if we are so lucky to see it become viral, that will only further help us create greater levels of awareness. And really, when the day is done, that is literally what we really need to do. Create awareness for the business first and foremost, and we believe over time that the cycle returns, we will see our business uptick in a meaningful way.

Yeah. I'll certainly be on the lookout for that. And then just lastly here, noting the SG&A improvement on a dollar basis in the quarter. Kinda looking towards Q4, are you expecting to extend any of the store hours to maybe capture some of the holiday shopping in the back half of Q4?

We have a very, very minimal increase in store hours. Our employee base has found great favor, literally great favor, in us not extending store hours based on, you know, the staff in the store, which we're running very light. And the reality is what we found is when we've extended, we've tested extended hours. We're really just moving the business from the hours we're open to the hours that we've extended to and not materially moving the customer and yet generating incremental SG&A that is not leveraging, but it's actually deleveraging. So the long and the short of that answer is no. There's not a material change in hours. When the day is done, we have to be honest with ourselves, and we are not the first place that people are going to run to on Black Friday or, you know, shop at nine o'clock at night. So our hours are still relatively eleven to five on Sundays, now extended to eleven to six, and we'll go from seven to eight for a few days, but that's really the extent of the extension of hours.

Great. Thanks for all the color. That's all I've got.

Okay, operator. It looks like we're done with Q&A. If you can take one more pass, if there's no other questions, I will again wish you all a happy and healthy holiday season. And wish you the very best.

Perfect. I'm showing no further questions at this time, sir. Ladies and gentlemen, this does conclude today's conference call. Thank you for participating, and you may now disconnect. Everyone, have a great day.