Destination XL Group, Inc.

Ladies and gentlemen, thank you for standing by and welcome to the second quarter 2020 Destination XL Group, Inc. earnings call. At this time, all participants are in a listen-only mode. After the speaker presentation, there will be a question and answer session. To ask a question during the session, please press star 1 on your telephone. If you require any further assistance, please press star 0. I would now like to hand the conference over to your speaker, Nisa McKee, at ICR. Please go ahead.

Thank you and good morning, everyone. Thank you for joining us on Destination XL Group's second quarter fiscal 2020 earnings call. On our call today is 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, market to its customers to encourage shopping in-store and online, and maintain sufficient liquidity to meet its working capital needs for the next 12 months. Such forward-looking statements are subject to various risk 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 filing with the Securities and Exchange Commission. I would now like to turn the call over to our CEO, Harvey Kanter. Harvey?

Thank you, Anitza, and good morning to everyone on the call today. I hope you are all healthy, safe, and well. These are very challenging times for us all. Before I share some brief comment on our second quarter results, I want to start today's call with a quick acknowledgement. Earlier this month, three of our longstanding directors retired from our board. I would like to extend a heartfelt thank you to our former board chair, John Keyes, and directors Ward Mooney and Seymour Holtzman. for their service and support over the years. All three contributed to our business in different ways, but like everything else in life, nothing is forever. Their personal passion for the business, for our team, and their most recent support during the COVID-19 pandemic are greatly appreciated. We wish them all the best for their continued success and wellness. I also want to give a big shout-out to all of our associates. who continue to operate at an unparalleled level of perseverance and focus during these unprecedented times. These are the folks who have gone to battle with us during difficult times in the past, and these are the same folks that are fiercely taking on today's challenges. We are so incredibly proud of our teams from the D.C. and call center to the stores and corporate office and the culture that we have created here at DXL. These days, there are more things that keep me up at night, but the team we have is not one of them. We have great people who are the backbone of our continued optimism for the future of DXL. I also want to open with two other important topics. First, our ongoing and continued efforts to combat the challenges of social unrest and racial divide. In 2017, DXL implemented our own program, to address these issues which we call normalizing the brand. In the last few months, our heightened awareness has led us to form a new council across the organization, re-immersed our training team in further addressing unconscious bias, and we remain committed in this regard to not just be a part of the conversation but a part of the solution. Second, at DXL, we have joined a larger consortium of companies supporting time to vote. Workers shouldn't have to choose between earning a paycheck and voting. Time to Vote is a nonpartisan movement led by the business community to contribute to the cultural shift needed to increase voter participation in our country's elections. This is a business-led push to lift the nation's traditionally low voter turnout in our unique American democratic process to elect their representation. We are encouraging every DXL associate to have their voice heard, and we are making a commitment to those who are scheduled and working on election day. We will give them paid time off to get to the polls and vote if they are not using vote-by-mail options. Now, for today's call, I intend to cover three main topics. First, to review what we've accomplished over the past 90 days. Second, to discuss the state of our business. as well as the current state of the industry. And finally, I will address what we have defined as the critical imperatives to win in the fall season and into next year. Everything we have done over the last 90 days has been executed as a pragmatic and thoughtful balancing act. Our retail operational disciplines are well regimented. We have developed a plan and executed against this and we believe we have a solid foundation built on this retail-driven discipline. Every decision we have made has been anchored to driving current outcomes while also protecting the long-term viability of our company. Our focus on cash has been relentless. As a management team, we are living and breathing with incredible attention to the smallest details to ensure we are managing our cash, our liquidity, and our credit to the best of our ability. As you know, in late February, we took swift action to cancel inventory on order and worked throughout the second quarter to work existing inventory down to convert it to cash. Given the need for even greater value to our customer base and the cold reality of high unemployment across the country, we started the quarter uber-promotionally. With cash management continuing to be a primary focus to enhance our liquidity, we have been extremely communicative and transparent with our vendor community and successfully securing extended payment terms for merchandise receipts with our vendor suppliers. We have also been very active with our landlords to communicate our challenges and strengthen our partnerships within the leasing community. We are very grateful that most of our landlords have been open to listening and to the challenges presented by COVID-19 and were willing to make short-term accommodations to assist us with managing cash flow. In both regards, I want to extend a heartfelt thank you and praise for all of our vendors and landlords. The difficulties have been no easier for them than they have been for us as we all struggle through the pandemic. In response to the lower level of store traffic, we have made the difficult decision in the second quarter to initiate a reduction in force of approximately 430 employees, primarily in our stores. This action is aligned with right-sizing our store rosters to the current lower traffic levels we are experiencing and which we expect to continue for the foreseeable future. This is in addition to the reduction we completed in the first quarter, which was primarily related to corporate associates. It is of the utmost importance that we are an employer of choice and a company people want to work for and come to every day. We are doing everything we can to protect our staff and do the right thing. We initially placed many of our employees on furlough until we could not do it any longer. It is very important to me and to our culture that we are building a company which our associates can be proud. Unfortunately, sometimes circumstances are out of our control and we are forced to make difficult decisions to achieve the best path to long-term viability. We do not take these decisions lightly as we knew they would result in irrefutable tradeoffs. We are the only omnichannel retailer who serves big and tall customers comprehensively. Our robust direct-to-consumer e-commerce site and the consumer's clear shift to online shopping is something we have leveraged measurably. Not only do we offer him a great assortment of both designer brands and private label merchandising, But that offer is available on both our digital platform and throughout our brick-and-mortar footprint. As some of our customers are reluctant to venture into stores, we have leaned into contact-free shopping even more, from e-commerce to now BOPAC and BOPUS. We will continue to make these difficult decisions and fight for every customer so that we can continue to exceed his expectations wherever he chooses to shop with us. Now for an update on where we are in the business as well as the current state of the industry. Let me start with digital. Our most current business and most important at the moment, our direct sales channel, anchored by DXL.com, grew rapidly throughout all of the second quarter. Our e-commerce website grew 69% in the second quarter. Our direct channel not only includes sales from DXL.com, but also online marketplaces and sales initiated in-store but fulfilled online via our universe technology. Lack of traffic to the stores drove universe well below prior year levels. Universe sales, as you likely recall, originated in-store as our sales associates are trained to offer product extensions that may not be available in that particular store but are available on the website. Given the decline in store traffic, universe sales have been hit hard. In contrast, our direct fulfillment by stores remained materially higher during the second quarter. Bopac, BuyOnline, Pickup and Curve, and Bopis continue to be momentum drivers, and this is an area that we will continue to develop both in terms of functionality and user experience. Today, we offer Bopac and Bopac in 311 store locations. We will look to optimize these Omni experiences over the coming months, taking a test and learn approach as we look to elevate the customer experience while driving increased penetration and shopper loyalty. Now moving on to an update on stores. Over a 10-week period beginning on April 28th, We gradually reopened our store portfolio with all 245 DXL stores and 72 casual mail stores open for business by the end of June. We were fortunate to reopen our stores sooner than originally anticipated. Overall, store sales improved from May to June and July as states began to lift restrictions and warm weather and Father's Day sales brought customers into our stores. The progress has been steady, with reopened stores performing at roughly 63% of prior year levels for the quarter, and we achieved that with reduced hours of operations. Performance by state has varied widely, and states impacted by a resurgence of the virus have brought down the average. Although it is early in the third quarter, our stores are tracking to about 65% of prior year sales. and although we feel good about the progress we are seeing, like other retailers, we are experiencing somewhat of a plateau at this time given the hotspots in larger states. The brick and mortar retail experience is drastically different during COVID-19. Customer visits are focused and he is looking to make his visit quick and efficient. Customer service and store operational practices will continue to adapt and evolve to his behavior. Home Office teams supporting stores must be quick to adapt to trends, consumer habits, and customer and employee feedback to this ever-changing environment. The primary evolution we are pursuing in our store experience today is three-pronged, all of equal importance and priority, with the number one foundation, safety and hygiene for both our associates and customers. We have new processes and procedures to ensure a clean, Thank you for joining us. and with retail's best practices implemented for safety and hygiene for both our associates and the customer. Secondly, given the change in the direct level of high touch interaction, our stores act as the perfect box and the store presentation acts even more as a silent salesperson and is as visually appealing to inspire the guests to see and experience the incredible assortment our merchants have created. And the third problem Thank you for joining us. We'll be right back. that our second quarter gross margin, although below last year, was ahead of our revised internal expectations. In April and May, we were running with a highly promotional posture. Our promotional offers were stronger than we've offered in the last 10 years. The purpose of that posture was to keep goods flowing to customers and to keep cash coming into our company. As we moved past Father's Day in June and then further into July, We scaled back our promotions and saw a drop in our markdown rate, but we were able to still maintain sales momentum. As we sold through inventory, we also saw our customer sensitivity to promotions was diminishing, and that created an opportunity to improve our margins without jeopardizing sales. We know we will still have to be promotional, and while we hope to return to levels approximating last year, the fact of the matter is we are still hunting. for the best balance between promotion, margin, conversion, and of course, traffic. One example where we made great progress is in our coupon-based promotions. In July, approximately 36% of our DXL.com orders were made with a coupon, and that compares to 56% last July. Moving to inventories. Thank you for joining us. as we do not want to jeopardize sales by having excessive out-of-stock positions. The challenge is as fall approaches, we must ensure we balance the sales demand with the risk in the on-order and availability of inventory. Given the sales dynamics at retail as well as with our wholesale partners, there is not a perfect scenario. In some cases, our wholesalers cut back on production. In other cases, there are logistical delays in shipping and the supply chain as business ramps up such that it is challenging to receive the right product in the right place at the right time. It seems like a never-ending yo-yo, up, down, up, down. If it were not for our operational discipline and rigor to move the assortments forward, given the myriad of issues, I suspect we would have had even greater challenges. Now I will spend a few moments discussing what we are seeing in terms of consumer buying habits. Not surprisingly, in the second quarter, we saw a greater shift in business to casual sportswear and loungewear, while the tailored clothing business continues to remain very challenging. The good news is we have been shifting our merchandise mix away from tailored clothing over the past several years, which now accounts for only 7% of our overall assortment mix. In the second quarter, we saw strength in our higher margin private label sportswear categories such as knits, casual shorts, and sports shirts. While the bulk of the second quarter business was driven by core basics, we began to see a shift in late June and into July into fashion colors and prints, which bodes well as we enter the fall selling season. In the designer sportswear, our sportswear business was led by polo, Reebok, and Adidas. Top items were tops and shorts that offered technical benefits such as wicking and antimicrobial fabrics, which are beneficial to the guest in the warmer months and working from home. In defining our critical imperatives to win in the fall season, we anticipate that our guests will continue to work from home, and as a result, will lean into the acceleration we experience in casual sportswear and loungewear. Our Merchandise Strategy for 2021 will focus even more on categories that are rooted in comfort, functionality, and versatility to accommodate the new work-from-home lifestyle, as well as continuing to create more impactful and curated assortments to further engage the guest while limiting inventory liability. As we've communicated before, marketing remains the most critical imperative. Our strategic intent is for marketing to be able to engage and interact with our customers and consumers in more relevant ways to drive behavioral change. We'll do this with our continued focus on gaining a more thorough understanding of our customer through our analytics practice and digital capabilities, which are growing. This will enable us to speak with customers in ways that are more visible, more relevant, and help truly differentiate ourselves from competitors. The primary initiative through Q3 is to create success in the holiday season. Based on our understanding of the customer and our marketing initiatives, we have created a series of if-then bets as inputs to help us build the optimal media and marketing mix for the fast approaching holiday season. With our test, learn, and optimize headset, We will continue to challenge ourselves to evaluate and accelerate sustainable growth drivers driven digitally. This is paramount to our vision to becoming the ultimate destination for big and tall consumers with an intense focus on the customer and their shifting consumer habits. The onset of COVID-19 shifted our focus to finding the balance between being operational with being strategic. Managing for the present became key to deliver customer messaging and execution across marketing initiatives to drive the best business outcomes through these unprecedented times. We've also leveraged this time to strategically test and validate premises on customer segmentation. Our segmentation efforts have started to show promise, and we're driving wider related initiatives. We have also taken meaningful and deliberate steps to further accelerate our digital roadmap and drive digital innovation and collaboration centered on the customer experience across all buying channels. This collective appreciation of our customers' needs is helping us to manage the current state of the business while simultaneously laying the foundation for building the future of DXL. Dramatic changes in retail plus the consumer landscape and digital acceleration have presented us with what we believe is our single greatest opportunity in years. Our ability to capitalize and create inflection for all things digital and specifically our direct business is crucial to driving long-term overall growth for the entire business. We have developed tested and validated our thesis on segmentation and relevance in Q2. We are now moving to the implementation phase and plan to build marketing programs to drive higher brand engagement through relevance for the rest of 2020 and into 2021. We have begun measuring the true causation of our marketing outcomes rather than being driven by an initiative's correlation to outcomes. This focus on incremental impact creates an ability for our marketing to be more directly and consequent for our results in the somewhat uncertain near term. As we look forward to this and next year, it continues to be less about any silver bullet and more about a balanced approach in our marketing media mix and digital orientation. A balance in our ability to be as relevant as possible operationally to produce the optimal outcome of top-line sales, gross margin dollars, and gross margin rate and the channel mix with a laser focus and rigor in the process and analytic framework we have now built. And lastly, a brief update on our wholesale business. As I mentioned in our Q1 call, we have launched a whole new wholesale line of business in designing and sourcing of PPE protective masks. Thank you for joining us. for the communities that we do business that we expect will continue to grow over the coming quarters. Aligned with expected growth, we have hired a new wholesale account executive to help support and build out this business opportunity. I look forward to updating you on our progress on our next call. As we entered the second half of the year cautiously optimistic, we have been pleased to have seen the improving trends in our stores, and the continued growth in our direct business in the second quarter. We remain keenly focused on balancing cash preservation and the strategic decisions to maximize top line and margin opportunities for the balance of the year. As we look to next year, we are focused on continuing to accelerate our digital first, mobile first approach to everything we do while leveraging the insights we are gaining from our test and learn approach Thank you, Harvey, and good morning, everyone.