Destination XL Group, Inc.

Ladies and gentlemen, thank you for standing by, and welcome to the third quarter 2020 Destination XL group earnings call. At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a question and answer session. To ask a question during the session, you will need to press star then 1 on your telephone. Please be advised that today's call may be recorded. If you require additional assistance, press star then 0 to reach an operator. I'm now going to hand the call over to Nita McKee. Please go ahead.

Thank you, Michelle, and good morning, everyone. Thank you for joining us on Destination XL Group's third quarter fiscal 2020 earnings call. On our call today is our President and Chief Executive Officer, Harvey Cantor, 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 realize expected annualized savings from the restructuring actions taken in November, manage inventory, right-size its lease structure, 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 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 Cantor. Harvey?

Thank you, Nitsa, and good morning, everyone. I hope you are all healthy, safe, and well. I'm grateful for the opportunity to speak with you today about DXL and the progress we are making as we continue to navigate through the pandemic. For the past eight months, we have been pivoting and adjusting to withstand the unrelenting impact of the COVID-19 virus on all of us and also on the economy as we strive to position DXL for the long-term recovery and for future growth. Most importantly, and before I begin any remarks in regards to our business, I want to make a few remarks in regards to our associates and their tremendous level of commitment and sacrifice during these most challenging times, it has been nothing but quite remarkable. I have made mention before of the element that most often keeps me up at night, and it's worth saying again. It is the team, and specifically keeping the band together. That is the very foundation of a great business. We are so incredibly proud of our associates in our stores, in our guest center, in our distribution center, and in our corporate office. The COVID-19 impact has been incredibly challenging, and despite the deep commitment we had to our team and the culture at DXL based on trust, empowerment, and innovation, the pandemic and in turn DXL has also impacted many of these very same folks and their livelihood. The incredibly disruptive and challenging impact of COVID has left us no alternative but to reduce headcount, and a number of associates are no longer a part of the DXL team. More broadly, as we know all too well, COVID has also resulted in many lives lost of loved ones who are no longer with us. The world is different in so many ways from what we knew only eight months ago. And as the CEO of DXL, and just as a human being, The challenges to navigate the virus's impact and the negative outcomes for our team and associates of DXL in the decisions we have had to make have been very difficult, and for that, I am very sorry. These days, there are many more things that keep me up at night, but the team we have and their commitment is not one of them. We have great people who are the backbone for our cautious but continued optimism for the future of DXL. Now, and specifically in regards to our business, on our call today, I'm going to speak to you about our third quarter performance. I'm also going to update you on the steps we have taken and the steps currently underway to continue to position our financial recovery. But before I begin, I also want to comment on one other important topic, diversity and inclusion. DXL is a company that We continue to embrace efforts to combat the challenges of social unrest and racial divide. In 2017, we implemented our own awareness program, which we call Normalizing the Brand, to address unconscious bias. We have also this year formed a CEO Advisory Council, which meets every other month, and we also have ongoing training programs through our HR departments to heighten awareness with our associates. We remain committed to not just being a part of the conversation, but a part of the solution. Now, for today's call, I intend to cover three main topics. First, to review what we have accomplished in the third quarter. 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 this holiday season and into next year. So let's get started with a summary of our third quarter results. Our overall sales performance in the third quarter continued to be impacted by the pandemic. Comparable sales for the quarter were down 20.5% to last year, which is an improvement from the second quarter when our sales were down 38.6%. For the third quarter, store sales were down 31.5% and DXL.com was up 28.4% with total direct up 18.2%. It is important to note that all of our stores were opened by the end of June and our store performance has sequentially improved each month from June through September with improvements in both traffic and conversion. And overall, direct sales penetrated DXL total sales at 33.4% of retail revenue. Our October sales momentum slowed by 600 basis points across the company sales as flare-ups from the virus began to resurge, fires on the West Coast, and distractions from the election began to materialize. Our stores continued to lean into the priorities we set out back in May of 2020. as we adjusted our plans to the pandemic environment. First and foremost, to ensure a clean, healthy, and safe environment for our guests and for our associates. We've been working to drive the consumer back into the store through the following three-pronged approach. First, delivering the guest experience that has been DXL's calling card by building relationships, not just sales, but also inclusive of maintaining social distancing guidelines. Second, perfecting the visual presentation within the four walls of the store, such that each store can act as its own salesperson, helping further address social distancing as suggested by the CDC. And finally, enabling each store to act as its own fulfillment center for e-commerce orders. The importance of stores and their ability to support our e-commerce initiatives is critical. Our most valuable customer is the cross-channel shopper who has shopped with us before. Our direct business, anchored by DXL.com, continued to grow throughout the third quarter. Our direct channel not only includes sales from DXL.com, but also sales from online marketplaces and sales initiated in-store but fulfilled online via our universe technology. Lower traffic to the stores drove universe well below prior year levels. Universe sales, as you likely recall, originate 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 web. Given the decline in store traffic, universe sales have been hit hard. In contrast, our direct fulfillment of our stores remained materially higher during the third quarter. In the third quarter, our stores fulfilled $10.6 million worth of e-commerce demand, which compares to only $5.7 million last year, or an increase of 87.3% in the quarter. Boat Pack and Boat Piff 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 Bopis in 311 stores. We will look to optimize this omni-channel experience over the coming months, taking a continued test and learn approach as we look to elevate the customer experience while driving increased digital penetration and shopper loyalty. DXL is positioned to continue benefiting from the shift online. We have flexible off-mall store base, a large and growing platform digitally, and compelling and differentiated omni-channel capabilities, which reach not only our existing base of customers but a new consumer as well. Our omni-channel customer is five times more productive than a digital-only customer and three times more productive than a store-only customer. We were pleased to see a number of our store-only customers become omni-channel customers during this time. For the past three quarters, I've talked about how our focus on cash has been relentless. We are living and breathing with incredible attention to the smallest details to ensure we are managing our cash and maintaining liquidity. Every day we are making decisions to drive the outcomes that will protect the long-term viability of our company, and occasionally these decisions are some of the toughest. On November 2nd, we implemented an internal corporate restructuring to further realign our corporate selling, general, and administrative costs with our lower sales levels that resulted from the pandemic. We eliminated 45 corporate positions, which we estimate will save $3.8 million on an annualized basis. We also eliminated certain service agreements, professional services, and certain marketing costs, which we will estimate will save $5.2 million on an annualized basis. Combined, we estimate the restructuring will save $9.7 million in SG&A on an annualized basis. I would like to also point out that the actions implemented on November 2nd are in addition to cost-saving actions that were already taken through the end of the third quarter, inclusive of all the actions executed earlier this year the company has now eliminated 101 positions from its corporate office, or 29% of its corporate workforce in the current fiscal year. In addition, since March of 2020, the company's field personnel has been reduced by 1,078 positions, or 54% of the total field count. We continue to aggressively look to drive our SG&E expense down to be properly aligned with our expected sales and are managing to a downside case versus a more realistic, excuse me, a more optimistic recovery. In addition to the above actions, we remain equally focused on right-sizing the company's occupancy costs. We have been very active with our landlords to communicate our challenges and strengthen our partnerships with the leasing community. As I mentioned last quarter, we are grateful that most of our landlords have been open to listening to us about the challenges presented by the COVID-19 pandemic and were willing to assist us with managing cash flow and ultimately the occupancy costs of our retail stores. Now that we are past the initial surge of having stores closed in April, May, and part of June, we have turned our attention to our forward-looking rent structure. Over the quarter, we performed yet again an exhaustive review of our lease portfolio given the sales recovery or reality lack thereof at the level we expected. We are now actively engaged with our landlord group to focus on stores where occupancy as a percent of sales has moved upward and outside an acceptable band for market rents. One of the biggest risks to the company's business model is its predominantly fixed rent structure on a lower sales base. We are pushing hard to reduce lease costs with those landlords where our rents are out of line with sales. Let me now shift to a quick update on our merchandising strategies. In the third quarter, casual sportswear and loungewear continued to drive the business. while tailored clothing remained extremely challenging. In the past eight months, we observed a dramatic consumer behavior shift that is focused on casual apparel and aligned with work-from-home lifestyle. Some might even say the Zoom life. Comfort, functionality, and versatility are essential features expected from our customer and embedded in the key categories that will drive the business this season. We are seeing the customer gravitate to categories such as knits, shorts, activewear, denim underwear, and athletic or sketcher-esque shoes. There is a heightened focus on these categories and on the brands that will meaningfully drive the business. We are also working on speed-to-market initiatives, such as exploring with vendor-managed inventory, or VMI as it's often referred to. and we are working with factories to hold undyed materials for production, grayish fabrication as it's referred to, and key items that have given us a greater ability to react and drive the business as well as create elasticity in our inventory. Let me now briefly touch on the topic of gross margins, promotions, and inventory. Peter will provide additional detail, but I am pleased to report that our third quarter gross margin, although below last year, was ahead of revised internal expectations. Back in the spring, specifically in April and May, we were running with a highly promotional posture. Our promotional offers were stronger than any 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. For the third quarter, we became much more targeted with our promotions and saw a corresponding drop in our markdown rate. We have become increasingly oriented to specific consumer behaviors and consumer segments, and we are finding greater opportunity to be less peanut butter spreading of promotions, and as a result, we are driving promotions which positively impact gross margin dollars and eliminating promotions that drive sales but have no or even negative ultimate bottom line impact. We know we still have to be promotional, and while we expect to return two levels approximating last year, over time we believe we can outperform these historic rates. Moving to inventories, we have managed inventories very conservatively and are down just over 21% from last year's third quarter. We have been selling down our product and have slowed replenishment as we are being mindful of not overextending our assortment and having to clear through unsold merchandise in the out season. It is also worth noting that we are working very hard to maintain our supply chain and logistics capabilities. One of the challenges we have been grappling with in the third quarter is securing vessels in a timely manner from overseas to receipt product. There have been some disruptions. Excuse me. There have been some disruptions in the global supply chain for reasons ranging from COVID-19 outbreaks in foreign ports to shortages of vessels and shipping containers. Our fall receipts are down to last year, but in line with Q3 levels. It's actually been quite remarkable. how we've seen certain brands and categories perform with sales levels nearly flat in some weeks and yet on inventory levels that are down 40 to 50%. We continue to push inventory to our stores to satisfy the customer who is continuing to shop in person. Because of our ship-from-store technology, we have the capability to fulfill direct orders from any store in the portfolio. Next, Let me share with you some thoughts on our marketing and digital strategies. The single biggest challenge facing DXL is our ability to drive meaningful traffic into our stores in the current environment, and secondarily, continuing to drive the growth in traffic onto our website. While we continue to make progress with new to file and reactivating customers, successfully engaging our best customer, highest spending customers, continues to be a significant headwind in the current environment. We have identified and tested strategic and tactical actions in contact and communication changes to engage with our customers. But the challenge remains significant and must be solved in order for us to make meaningful strides. Our belief, our thesis, if you will, is that our very best customers who bought fashion and shopped albeit for going out or just to shop, is no longer shopping the way they did. They unfortunately are going out less, if at all, have no weddings, no events, and are not visiting bars and restaurants and are filling in based on need, not based on want. Our brands and even our private label assortments have always been quite fashionable, and these looks and wearing occasions are just not happening today. Our Q3 objective was to leverage consumer behavior by testing and learning with spend allocation, promotions, and other traffic driving mechanisms to lean into this behavior. We have developed weekly reporting KPIs to better understand the database's files health and customer sales trends. We've also improved our email optimization for customer file growth, including segmentation and technology updates on consumer preferences. Finally, we have tested direct mail promotions with a control group to better understand causation versus correlation for greater holiday success and omnichannel gross margin impact. We have tested and measured incremental outcomes, learned and changed marketing to optimize targeting and the promotional strategy for Q4. The brick-and-mortar retail experience continues to be drastically different during the COVID-19 pandemic. Our store creed continues to be engage to build a relationship, or as we refer to it as EVAR. We want to create a memorable experience while practicing social distancing by providing guests with the same in-store experience they've grown to love. We have also launched in test mode a new tool which allows store associates to interact virtually, but directly with online shoppers. It is an interactive platform that will bring our exceptional store experience to online customers by allowing in-store associates to connect live with an online shopper via a live video chat. The app provides online customers an in-store experience digitally and via video while also allowing the store associate to earn commissions by creating sales. Store associates are able to suggest items based on the customer's wants and needs as well as send pictures and videos of items in their stores to guests via chat on the app. We are currently running a 90-day pilot program with 40 stores and 100 associates. Based on the results of this test, we will consider how to augment this test and if this program warrants moving forward and can evolve further in important ways. And finally, let me give you an update on Wholesale. We continue to chase the wholesale business with our in-stock position with Amazon Essentials, but have experienced a slowdown in the market demand for PPE. Amazon Essentials Fit by DXL sales for Q3 came in at 71% to last year at $4.3 million. We continue to chase the business to reduce our stock out that peaked in August at 35.5%, and have come down to 30% for the balance of the quarter as additional inventory has been shipped. We have resumed the platforming of key fabrications to reduce our production lead times and partnered with Amazon on an advanced replenishment model with visibility to future forecasting of key programs in order to secure fabrics and production capacity. And finally, Despite the challenge of in-stocks and losing some level of sales, the business opportunity continues to be robust with greater opportunity. Further testament of this for both Amazon and DXL is the launch in Q3 of the second branded program, Good Threads, lined by DXL. Good Threads is Amazon's upscale private brand and differs from the core essentials brand. Better fabrics, more fashion, albeit fashion basics. This launch represents greater opportunity and is DXL's second brand for big and tall with Amazon in their private brands program. It's very exciting and further substantiates the opportunity yet ahead for both companies. I would like to now turn the call over to Peter for an update on the financials. Peter?