Destination XL Group, Inc.

Good day, ladies and gentlemen, and welcome to the DXLG Fiscal First Quarter Year 2020 Financial Results Conference Call. Today's call is being recorded. At this time, I would like to turn the call over to Nitza McKee, Senior Associate at ICR. Please go ahead, Nitza.

Thank you, Operator, and good morning, everyone. Thank you for joining us on Destination XL Group's first quarter fiscal 2020 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 now 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 ability to withstand the impact of the COVID-19 pandemic on its business and results in fiscal 2020 and to manage through the pandemic, including its efforts to restructure and reduce costs, manage inventory, negotiate rent concessions or rent relief from its landlord, market to its customers to encourage shopping online, and maintain sufficient liquidity, the expected pace of store reopenings and expected liquidity for the next 12 months. 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 risk 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, Nitsa, and good morning, everyone. There are several topics that I would like to cover, including the current state of our business, our response to the COVID-19 crisis, our progress in reopening stores, and our plan to reopen all stores by the end of June. But before I do, I want to wish everyone continued progress in this recovery. Good health. and offer our condolences and prayers. These have certainly been the most trying of times for us as a nation and across the globe. I also want to give a great big heartfelt thank you to all our associates and a few quick shout outs for the team's perseverance during the pandemic and most importantly, those on the team who kept us actively engaged in commerce and supporting our consumer base. For the past 12 weeks or so, our Guest Insagement Center, which includes chat, email, and the call center, which we refer to as our GEC. Our warehouse team, our store operations team, and our management team have all shown incredible resilience. And we've adjusted to a new working environment while keeping our eye focused on what we need to do differently to keep servicing big and tall guys across the country. This includes everything from how we have engaged consumers through the GEC and the continued fulfillment of e-commerce orders for both the distribution center and 30 plus some stores to the safety precautions we are taking as we reopen stores and how we are re-engaging with our customer. So let me get right into it and start with an update on our business operations. Before our stores closed, we began responding to a significant perceived impact expected from the pandemic. We triangulated our consumer data from Asia, from retailers doing business in Asia, and from our wholesale partners. We made relatively big moves early. In mid to late February, we canceled all travel. We canceled all our store management national conferences, put a hold on all open positions, and began canceling planned receipts of on-order. In mid-March, we began to evaluate closing stores, and on March 17th, We closed all 321 stores across the chain. We began to prepare for a more stringent and demonstrative level of actions that would enable us to withstand the inevitable loss of revenue that comes with a prolonged store closure. As already noted, we were very fortunate to keep our distribution center operational and we were able to fulfill e-commerce orders uninterrupted throughout the first quarter. A huge shout out to what will be several I cannot say it enough. And here that shout out goes to the GEC and the DC staff. Thank you for staying engaged with our customers. Thank you for keeping the lights on and for shipping. Our online business, and to a lesser degree wholesale, became our only source of revenue while stores were closed, which was critical to keeping a minimal level of cash flowing into the business during the first quarter. However, as you might expect, The online business would only mitigate a fraction of the revenue loss we would experience from closed stores. Accordingly, we acted quickly and decisively. We took additional steps and measures to preserve liquidity and keep our business intact while we waited for stores to reopen and resume some sense of normal operations. We have made a great deal of progress this quarter by strengthening our financial flexibility. by realigning our inventory receipt plan and by reducing our overhead costs. Let me give you a quick rundown of some of the more significant steps we took to preserve liquidity. On March 20th, we initiated a defensive draw on our credit facility of $30 million. That cash is being held and used for working capital needs as we slowly rebuild our spring sales momentum. At the end of the quarter, Our cash balance was $26.1 million compared to $6.8 million a year ago. We took this step to preserve our financial flexibility. On April 15th, we amended our credit facility to expand our borrowing capacity, which Peter will cover in detail in a moment. We were pleased that our bank group was quick to work with us and to find creative ways to generate additional liquidity. We took several steps from a cost management perspective to reduce our cash outflow. Upon closing our entire store portfolio on March 17th, we began the unpleasant process of initiating furloughs. Within a few days of closing stores, we furloughed almost our entire store operations team and the company's non-employee directors temporarily suspended their compensation for the second quarter of fiscal 2020. Effective April 2nd, We began furloughs in our corporate office. In total, 264 corporate associates, which represent about 60% of our corporate roster, were placed on furlough. Effective April 5th, we instituted a temporary reduction in the salaries of our named executive offers by 20%. Other members of our management team have taken temporary reductions in the range of 10% to 20%. And on May 1st, we further restructured parts of our corporate workforce which resulted in a permanent reduction of 34 corporate positions. We've also worked very hard to partner and work through payables in regards to payment to merchandise suppliers, vendors, and landlords. There's an old saying that the strongest partnerships are forged during the most difficult of times. And we've certainly seen our business partners step up to the plate to work with us on the merchandise side, the vendor side, and the leasing front. We have aggressively canceled merchandise receipts for fiscal 2020, which we estimate to be worth nearly $150 million at retail. To give you a sense of the scale, $150 million in cancellations is worth approximately 28% of our total fiscal 2020 receipt plan. We have had very productive conversations with our vendor base to extend payment terms, and in some cases, We have entered into short-term promissory notes to extend payment terms with some of our largest merchandise suppliers. We did not make our April or May rent payments and our leases for stores and our home office and distribution center. We are currently in private negotiations with our landlords for rent relief, which includes rental abatements and rental deferments for April for May, June, and July. And lastly, we have eliminated most of our capital improvement programs, all discretionary spending on store improvement projects and non-essential IT infrastructure. Overall, we have reacted quickly and decisively to do everything we could to avoid a liquidity crisis. We are not out of the woods yet, but we are cautiously optimistic in the course We have charted to get us through the next 12 months without any additional cash infusion. To achieve the plan, we need to see a gradual reopening of stores and a gradual ramp of customer traffic and conversion. To that end, let me share with you some of the details about how our stores have performed as we have slowly begun the reopening process. One of the most critical and quite honestly delicate actions that we have undertaken, like other retailers, is the reopening of our store base. Our first hurdles were to clear and adhere to state and local guidelines for each reopening. Once that had been achieved, our attention turned to making our employees and customers feel safe before we open any doors. This has been a very thoughtful and pragmatic process, with associate and customer safety being our highest priority. We have also worked with numerous retail cohorts sharing our plans, comparing notes, and leveraging their plans to make sure the very best thinking was in place for all of our associates and our guests. Before opening, all stores receive a safety kit, including face masks, disposable gloves, cleanup and disinfecting wipes, and hand sanitizers. Our store managers have been trained on safety and cleanliness procedures and will perform regular maintenance and system checks, order necessary supplies for shipping products, and fully clean and sanitize stores before opening each day, as well as an ongoing basis throughout the day and at store closing. We can maintain appropriate social distancing throughout the stores and have developed procedures for the fitting rooms and checkout to limit any contact or exposure to others. Overall, we have been very pleased with how things are going in the stores. And I want to give a second huge shout out to our store managers, assistant managers, key holders, senior residential management, and the store operations team who are all making this happen. Now let me give you a little more color on how it's going in the stores. As of June 2nd, we have reopened 201 stores across the country that are fully open and operational. Most of the stores open today are throughout the middle and southern regions of the country. Some states have just reopened or have yet to reopen, and they account for some of our biggest markets and are located primarily along the coast. On April 28th, we began our reopening with three stores in Murray, Utah, Columbia, South Carolina, and Sioux Falls, South Dakota. Plus, three stores opened for curbside pickup only, which were in Texas. That is how we ended the first quarter. We then followed up with 14 stores on May 5th, another 33, 58, and 39 over the next three weeks. And just this Tuesday opens another 54. We expect to have 100% of our stores open for business by the end of June, and we are well on the way. The important question you'll want to know is how are our stores performing? We are making great progress. At a high level, initial openings performed at minus 70 to minus 80% comp, then minus 50 to 60, and today we are tracking at approximately minus 40. But we'll continue to see progress as more consumers enter into the public space. Our best day thus far has been a comp for stores at minus 31%, but pockets such as our outlets have had days of plus comp performance over last year. For DXL, the good news is the majority of our stores are freestanding and no store is in a traditional mall setting. We are adapting and evolving our customer service and store operational practices to thrive in this new environment. The environment to which I refer at this time includes limited store hours of 12 to 6 Monday through Saturday and 12 to 5 on Sunday. Direct fulfillment by stores is materially higher than it has ever been in our history. and where Bopas has turned to Bopac. Buy online and pick up at curbside. We expect it will become a multiple of what Bopas was in penetration. Like many other retailers, our business in direct and specifically our DXL.com business has been strong and performed well over the past several months. Traffic to our website has been volatile but continually growing and conversion has been very strong and exponentially greater than ever in our history. It will be very interesting to learn where it settles in as we begin to learn the return to what is the new normal. We've been encouraged as our sales trends have accelerated as warmer weather settles in across the country. The web business could not substitute for 321 stores closed, but the growth rate on the DXL.com website initially tripled from what it was in the low double-digit growth year-to-date. is now over 30%. And for the quarter-to-date Q2 period, we're experiencing accelerated year-over-year growth of over 70%. Now let me shift gears a bit and give you a few comments on inventory status and our merchandising strategy during the pandemic. As I mentioned, we took an early and aggressive stance on inventories through a combination of order cancellations and significantly reduced receipt plans and We instituted a heightened promotional pace to convert inventory to sales. The accelerated promotional efforts were particularly oriented around our spring seasonal goods. We have created more value and a reason for him to shop with us by driving deep discounts. The good news is we have experienced meaningful new customer growth in our direct channel, providing an opportunity to expand our loyal customer base. With regards to our assortment highlights, We experienced a considerable shift in buying behavior with strengths in our core and basic categories such as active and loungewear. We expect the current shift in buying behaviors, including what they are buying, will last for a long time and perhaps forever as the concept of work from home is likely here to stay. Our clearance inventory represented 11.5% of our total inventory as compared to 10.6% a year ago. As we look beyond COVID-19, our forward long-term merchandising view is evolving, and we see an opportunity to narrow our assortment, increase product depth, which will result in a greater level of brand pruning across categories. We are taking a test and learn approach, as we need to be sure we can offer compelling assortment with enough depth and sizes to meet our broad customer base. More on this topic as the year progresses. I also want to specifically cover marketing, but in reality, it is really not marketing per se, but the consumer who has evolved overnight and how we engage with him as well. Our belief is that the pandemic has meaningfully and permanently, perhaps, shifted the consumer and customer behavior in many ways. What was years in terms of evolution has become months in terms of change and revolutions. The digital landscape and the ensuing growth have been accelerated in a multiple of years and marketing to consumers will forever be different. For the long term, our thesis remains the same. Talk to cohorts, archetypes, and consumers overall, but in more personalized ways and win by being more relevant and more efficient. In a post-COVID world, understanding the customer and their preferences and then marketing in a way that's relevant to them is going to be much more important and more important than ever. And we will continue to build infrastructure to be able to achieve this. As customer buying preferences change due to COVID-19, we've already evolved some of our approaches and to ensure we are not only more relevant in the moment, but as we continue to build a long-term relationship with our customer base. Let me give you a few specifics in both how we have evolved marketing and how we are driving productivity. During this time, we have marketed to a customer differently and tested many new ideas. We have prioritized marketing of merchandise that customers are more likely to buy while working and being remote, marketing active loungewear and casual over tailored clothing and shoulder garments. We have changed our website functionality with agility to build curbside pickup fulfillment for customer orders and created happy hour type events. We have powered our app with exclusive promotions, redesigned the web experience, leveraging the highest clickstream and conversion, giving what you want at the top of the funnel. In terms of productivity of marketing and expense, we have shifted spend even further away from mass media to more targeted digital-only channels and have ultimately leveraged our customer file to grow our web business. In terms of expenses, we have renegotiated many agreements with media, partners and vendors in both terms of the pure cost and the SLA. In the short term, we have been very focused on fulfilling the customer's needs through the mechanisms and platforms they are gravitating toward, along with balancing the financial outcome for the business. And lastly, I want to give you an update on our wholesale business. The growth of our wholesale business continues to be a key initiative in fiscal 2020, led by our business with Amazon Essentials, which contributed $2 million to sales in the first quarter. This business, the Amazon Essentials program, was not immune to the impact of the virus and Amazon shifted to essential supplies and so did the customer in what they ordered. That being said, the business has also come back very strong. In the past couple of weeks, demand has been the highest of all year, even pre-COVID levels. With our sourcing expertise and factory relations in place, We have also launched a new wholesale line of business in the design and sourcing of protective masks. With sales beginning in the fiscal second quarter and already in the second quarter of fiscal 2020, we have received commitments for the sourcing and selling of masks to Fortune 100 companies with nearly 2.5 million masks ordered so far. I will now turn it over to Peter for an update on the financials. Peter.