Destination XL Group, Inc.

Ladies and gentlemen, thank you for standing by, and welcome to the Q4 2020 Destination XL Group, Inc. Earnings Conference 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 the question during this session, you will need to press star then 1 on your telephone. If you require any further assistance, please press star then 0. I would now like to hand the conference over to your speaker for today. Shelly Mokas, you may begin.

Thank you, Tawanda, and good morning, everyone. Thank you for joining us on Destination XL Group's fourth 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 outlook for fiscal 2021, the continuing impact of the COVID-19 pandemic on its business in fiscal 2021, expected leverage from reduced operating costs, savings from the restructuring of its store leases, expectations regarding store closures, Expectations regarding improved customer demand and gradual sales improvement, the impact of direct sales on results in fiscal 2021, and marketing efforts to encourage shopping in-store and online. 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. It is my pleasure to speak with you today about DXL and the progress we are making in the business as we leave 2020 behind and look forward to a brighter future in 2021. As I've shared with all of you on our quarterly calls this past year, We have been thoughtful and decisive in our approach to managing through the challenges of 2020. We are encouraged by some of the early signs we are seeing in the first seven weeks of 2021, given the decisions made and the positioning of the company for longer-term recovery and for our future growth. Most importantly, and before I begin my remarks in regards to our business, I want to again recognize our associates and their tremendous level of commitment and sacrifice to keep our business moving forward through what has been quite possibly the most difficult period in our company's history. It cannot be said enough. If it were not for them, we might not be here. To our associates and our guest engagement center associates, thank you for continuing to serve our guests and for helping him look his best when he needed us. to our distribution associates, thank you for keeping our product flowing uninterrupted despite all the logistical and health and safety challenges this year. To our corporate associates, thank you. Thank you for continuing to evolve and innovate our business while we are adapting to a new network, a new work-from-home dynamic. I am so proud of what our team has accomplished this year and the credit goes to all of you who have answered the call day in and day out to serve and support our big and tall guys. Now, for today's agenda, I want to update you on three different topics. First, I want to share what we are seeing in our business today. We are only seven weeks into the new year and we've had some exciting developments that I want to talk about. Second, I want to update you on specific strategies we are pursuing across the business and how we expect those strategies will position the company for the longer-term recovery and for our future growth. And finally, Peter is going to take you through our financial results for the fourth quarter and full year before we open it up to questions. So let's get started with an update on where we are today with our business. One of our greatest challenges this past year has been store traffic. We've talked to our customers this year and the common theme we kept hearing was, Thank you for joining us. has been impacted, and his buying behavior in 2020 more or less had been erased. Because so many of our guests haven't shopped much this past year, our belief is that there is a level of pent-up demand for apparel that was created in 2020 and which we think will be relieved in 2021. We believe that we are starting to see some of that pent-up demand satisfied now, in the months of November, December, and January, Our comparable store sales were down minus 41, minus 36, and minus 34, respectively. In February, our comparable store sales were down 33% to fiscal 19, and for the first two weeks of March, our comparable store sales have improved to minus 16%. Over the last six days, we have been nearly flat to 2019. This puts us at a comparable store sales decline of minus 27% for the first six weeks of the year. I tell you all this not to create hype, but to give you a sense of our true optimism. We believe we are starting to see a shift in consumer buying, which we are attributing to a few different factors. First, we are starting to see some of our loyal customers return for more than just underwear and activewear and work-from-home apparel, perhaps the only real thing they did need. For the first time in a long time, Thank you for watching. More and more of our customers will be shopping. Geographically, we've seen our strongest performance in the last six weeks from the southeast, south central, and midwest parts of the country. Our business on the coasts have trailed behind the middle of the country by approximately 500 basis points. Even our stores in areas like Texas that were hard hit by the snow and freezing temperatures only a few weeks ago have quickly once again recovered from what was a weather event. Finally, it's worth noting, particularly in the last two weeks, that we've seen the warm weather across the country, which is often a catalyst for our customers to shop. It is still very early in the year, and we certainly have a long way to go, but the early signals that we are seeing in 2021 are pointing towards a recovery in stores, as the restrictions around gathering are eased and our customer feels more comfortable venturing out from his home. We remain cautiously optimistic, and we are monitoring to see if dependent demand will wane or carry into summer and even the fall and winter months ahead. We do recognize that the savings rate of the U.S. consumer is up measurably, and another round of stimulus checks is beginning to hit banks now. Given this conversation, The roaring 20s and celebratory times ahead may be very real. Like you, we are excited about the prospects but do not want to get ahead of ourselves in expectations. Time will tell, and we will, of course, formally update you on our Q1 earnings call. Another recent development that I want to talk about involves two separate and distinct transactions that we executed subsequent to fiscal year-end 2020. First, I hope Most of you saw that we initiated a registered direct offering of common stock on February 9th. Peter will cover specific details of the offering in his remarks, but I think it's worthwhile for me to note that this transaction generated $5 million of additional liquidity for our business before closing costs. For the past three quarters, I've talked about how our focus on cash has been relentless. We've been living and breathing with incredible attention to the smallest details, to ensure we are managing our cash and maintaining liquidity. Each day, we are making decisions to drive the outcomes that will protect the long-term viability of our company, and this transaction represents another marker towards our ability to enhance liquidity. Second, and certainly more recently, just a couple of days ago on March 16th, we closed on a transaction to refinance our Philo term loan. This transaction was not a condition of the registered direct offering, nor was it necessitated by our existing bank group. This was an opportunity for us to further enhance our liquidity based on the strength of our balance sheet and our outlook for continued recovery in 2021. The new filo will generate between $5 and $10 million of incremental excess availability, depending on our inventory balance each month, which primarily secures the debt. Again, this is another marker we believe will shift the conversation about DXL away from solvency risk and back towards our ability to execute our strategic plan for growth. As we have all along, or at least believe so, we have taken every measure possible to ensure there is a future, and with investor interest and credit opportunities, we looked at both of these as a measure of insurance, if you will, in the event of a greater level of volatility. The filo is quite advantageous, and the interest in the business from an outside investment with the registered direct offering speaks to the upside others see. And that really is what I love talking about most, the future and the brightening outlook for DXL. What we are doing to create a memorable experience for big Intel guys to look and feel their best We do that by offering the most extensive and uniquely curated assortment from value-priced essentials to luxury brands and exclusive designers, both online and in-store. So now let me shift into what we're doing across our functional areas to execute our strategic plan for greater growth. Let's start with digital, our direct business, anchored by DXL.com. Continued to grow throughout the fourth quarter and made up over 40%. of Total Retail Sales. DXL.com specifically grew at nearly 29%, and with our ability to create a superior UX and improved merchandising for our customers, this growth was partially driven by our conversion rate, which improved 23% year over year for Q4. As we have discussed before, our direct channel not only includes sales from DXL.com, but also sales from online marketplaces and sales initiated in-store but fulfilled online VR universe technology. Lower traffic to the stores drove universe well below prior 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 by stores remained materially higher during the fourth quarter. In the fourth quarter, our stores fulfilled $12.9 million worth of e-commerce demand, which compares to only $10 million in the fourth quarter last year, or an increase of 29%. Bopec, BuyOnline, PickUp, and Curb, and Bopec, by online pickup in-store continue to be momentum drivers with four times the level of orders being picked up via BOPAC and BOPIS versus 2019. This is an area we'll continue to develop in both terms of functionality and user experience. Today, we offer BOPAC and BOPIS in 304 store locations. We will look to optimize these omni-channel experiences over the coming months, taking a test and learn approach as we look to elevate the customer experience while driving increased growth and shopper loyalty. As I've said before, DXL is well positioned to benefit from consumers who are shifting their buying behavior online. We have a flexible off-mall store base, a large and growing digital platform, and a compelling and differentiated omni-channel capability which we reach not only our existing customers but new consumers as well. As we have noted before, Thank you for joining us. Let me share with you some thoughts on our marketing and digital strategies. The single biggest challenge facing DXL continues to be our ability to drive meaningful traffic into our stores, which for anyone in retail has been an uphill road. Equally important is our continuing need to drive the growth in traffic on our website. While we continue to make progress in new to file and reactivate customers, successfully engaging our best customers and most loyal guests across channels is a significant priority for 2021. We have such a great appreciation for our top customer concerns and understanding of their shopping behaviors. We are reinforcing relevant and personalized messaging for these loyalists in conjunction with appropriate CRM-driven targeted media outreach. The challenge remains significant and must be solved in order for us to make meaningful strides. Our objective was to leverage customer behavior by leaning into the testing and learning results we delivered in Q3 for spend allocation, promotions, and other traffic driving mechanisms. We continue to learn more in Q4 and now look to even greater leverage in spring of 2021. We have developed weekly reporting and actionable key performance indicators to better understand the database's files health and customer sales trends so that we will be able to continue to act decisively. We have also optimized our email infrastructure to support customer file growth and greater segmentation. Finally, we tested direct mail promotions with control groups to better understand causation versus correlation for greater holiday success and omni-channel gross margin impact. We tested and measured to create incremental outcomes across campaigns, learning and change marketing to support a more optimized targeting and promotional strategy for Q4 and into 2021. Now let me shift to a quick update on our merchandising strategies. In Q4, casual sportswear and loungewear continued to drive the business. while tailored clothing remained extremely challenged. Comfort, functionality, and versatility are essential features expected by our customer and are embedded in the key categories that will drive the spring sales growth. Also worthy of mentioning is that we have seen an uptick in recent weeks in tailored clothing, specifically sport coats and dress shirts. It may not yet be material, but an uptick at any level is encouraging. That being said, we still believe the customer will continue to gravitate to categories such as knits, shorts, activewear, and denim. There is a heightened focus on these categories and the key brands that will meaningfully drive the business. We are also working on speed-to-market initiatives, such as exploring opportunities with vendor-managed inventory, or VMI as it's referred to, and working with our factories to hold undyed materials for production Grage Fabric, as it's referred to, in key items that have given us a greater ability to react and respond to drive the business as well as create elasticity in our inventory. Now, let me briefly touch on topics of gross margin, promotions, and inventory. Peter will provide additional detail, but I am pleased to report that our fourth quarter gross margin, although below last year, was ahead of our revised internal expectations. As we moved through 2020 with more control over inventories, we became much more targeted with our promotions and saw a corresponding drop in our markdown rate. We are increasingly oriented to specific consumer behaviors and segments. And as a result, we are driving unique promotions that positively impact gross margin dollars. We know there is a place for promotion. but we expect to return to levels approximating 2019 as we move forward in 2021. Now, moving to inventories. We have managed inventories conservatively and are down 17% from last year's fourth quarter. We have been working very hard to maintain our supply chain and logistics capabilities. One of the challenges that emerged in the third quarter and continues today is the shortage of vessels available for delivery of overseas product. Our spring receipts, which are landing now, have been mostly on time, but the cost of freight has been escalating and we will continue to monitor for any greater disruption in the supply chain. We are also seeing increased costs for certain raw materials, particularly in cotton, which is exasperated by the humanitarian crisis in the Xinjiang province. We continue to have a heightened awareness and concern regarding forced labor and ethical manufacturing working with our world-class sourcing team. We are a member of CEDEX, and we are actively partnering with several other brands and retailers to continue to proactively create a transparency and ethical supply chain. Another area we have made tremendous progress in this year was on right-sizing the company's occupancy costs. We've been very active with our landlords to communicate our challenges and strengthen our partnerships with the leasing community. We are incredibly grateful that most of our landlords have been open to having dialogue about occupancy and have restructured leases with us. In the first half of 2020, we negotiated approximately $10 million of rent abatement and deferrals. In addition, We have restructured 91 individual store leases, nearly one-third of the chain, which are expected to deliver over $13.5 million of savings over the life of the leases, including $5.2 million of expected savings in fiscal 2021. We continue to push hard to reduce lease costs with those landlords where our rents are out of line with our sales. And finally, Let me give you an update on our wholesale. We continue to chase the wholesale business with our in-stock position with Amazon Essentials and Good Threads and have experienced a slowdown in the market demand for masks. In total, our wholesale business, which is primarily with Amazon, came in at $4.5 million for the quarter, which was flat to last year. While there have been some challenges and projections and the ensuing receipt flow impacting in-stock levels, The good news is we are selling nearly everything we can deliver, and we believe there is even greater upside potential with Amazon. We also continue to search for other opportunities to the overall wholesale business. For the full year, wholesale revenues increased $4.1 million to $16.6 million. And now I would like to turn it over to Peter for an update on the financials. Peter?