Destination XL Group, Inc.

Ladies and gentlemen, thank you for standing by and welcome to the Q1 2021 Destination XL Group, Inc. Earnings Conference Call. At this time, all participants are in 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 1 on your telephone. Please be advised that today's conference is being recorded. If you require further assistance, please press star 0. I would now like to turn the conference over to your speaker today, Ms. Mokas. You may begin.

Thank you, Angie, and good morning, everyone. Thank you for joining us on Destination XL Group's first quarter fiscal 2021 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 updated sales and earnings guidance and other expectations for fiscal 2021. 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 solid progress we were making in our business financially in terms of sales and profit, as well as in regards to our ongoing strategic transformation. On our fourth quarter earnings call in March, I shared with you my perspective that we were starting to see signs of a shift in consumer buying behavior and our optimism for greater recovery in fiscal 21 was growing. In starting today's call, while I have several opening comments, I want to certainly lead off by saying sales in both our stores and direct channels have continued to accelerate and our first quarter financial results have materially exceeded our internal expectations. This has been a strong quarter for DXL and a quarter we believe is a step forward in a post-pandemic world. We are both fortunate and grateful that since we last spoke, our teams and the recrafted operating model in place are working well to drive sales back and enhanced levels of profit as we serve the big and dull consumer through our ongoing digital transformation. Given our first quarter's performance and what we believe is a chapter of greater growth from our initial expectations at the onset of the year, we are raising our guidance for fiscal 2021's annual performance, which Peter will cover in more detail later. As I noted, before I get into the first quarter business details, there are a few topics that I want to cover off. First, I truly want to thank all of our employees in our stores, in our guest engagement center, in our distribution center, and in our corporate supporting departments for your unwavering commitment to our mission of empowering big and tall men everywhere to look good and feel good. And I actually want to pause for a second here and truly acknowledge, not just thank, what the team has taken on their backs to accomplish on behalf of DXL. If it were not for the dedication and commitment of the teams we have in our stores and our distribution center, our call center and corporate office, we most certainly would have not made it this far. We strive to be an employer of choice, an employer of choice for all of our associates. We strive to be a place that may not only earn a paycheck, but believe and are engaged in who we are and our purpose and the culture that we so often speak about. I started at DXL just over two years ago. To say it has been a very challenging journey is an understatement we all recognize. But to continue to build upon what we have both accomplished and begun to create requires that we all double down on our efforts to do more, be more, and not just for our customers, but equally for our associates who have helped us to live to see another day. To be an employer of choice. To be an employer of choice means we are happier, create better outcomes for ourselves, and in turn, our customers. And today, as we embark on growing levels of recovery and hopefully good fortunes, I want to be equally clear. We strive to be an employer choice, and together we are working harder to be just that through ongoing efforts to provide greater growth and development, to provide a culture that is endearing, to better balance life and work, and to be worthy of their esteem and to continue to pursue the shared purpose we all have. I am hopeful that our continued actions will set us apart both as an employer and as a retailer, creating improved results as we steer to bring our vision and mission to life and return to shareholders. Our vision and mission at DXL, as we endeavor to be the market leader, is to deliver a big and tall shopping experience that fits, fits his body, fits his style, and fits his life. to bring a breadth and depth and a level of exclusivity in an assortment of clothing that cannot be found anywhere else and to create an experience rooted in the value we place in our consumer and the respect we have for him and in our desire to build a trusted relationship, creating a level of satisfaction and happiness that distills as few retailers have a community and belonging driven by our culture, and the very employees who interact with our guests every single day. We are truly grateful and proud of what our team has accomplished over the past 18 months. And the credit goes to all of you who answered the call day in and day out to serve and support our big and tall guys. Second, I want to recognize DXL's ongoing discussion to promote inclusion and diversity in the workplace. A little over three weeks ago, I, along with DXL, made a commitment through the CEO Action for Diversity and Inclusion Coalition. Through this organization, DXL has pledged to take a greater action to cultivate a workplace where diverse perspectives and experience are welcomed and respected and where employees feel encouraged to discuss diversity and inclusion. For the past three years, we have promoted these values through our own company initiative, which we call normalizing the brand, which helps us recognize and address unconscious bias. But now we have taken another step on this journey by joining a coalition of nearly 2,000 other CEOs and companies who believe that together we can affect positive change. Our commitment to the coalition is a natural extension of our own internal culture and our prioritization for diversity and inclusion as we continue to evolve. And third, I want to give a warm welcome to Elaine Rubin, who joined our board on April 14. With over 25 years of digital experience, Elaine is an e-commerce pioneer with digital insight and expertise in the direct-to-consumer business and consumer marketing. Elaine is the founder and president of Digital Profits Network, and her extensive experience, coupled with DXL's strategic digital transformation, which is well underway, leads us exponentially to greater opportunity to further accelerate our business. I have personally known Elaine for over 10 years, and I'm thrilled to have her join our board of directors. And now, with that said, let's talk about our business. I am planning to cover two topics today. First, I want to talk to you about our first quarter performance and what we are seeing and hearing from our customers. And second, I want to talk to you about our priorities for the remainder of 2021 and and how we see our company evolving in a post-pandemic world as we lean into 2022. I am very pleased to announce that for the first time in eight years, DXL is reporting meaningful net income for the first quarter. Since 2019 was our last normalized year from a financial standpoint, we will be making our comparisons year over year to 2019 results. Our first quarter sales were 111.5 million compared to $113 million in the first quarter of 2019. Our adjusted EBITDA for the quarter was $13.7 million compared to $4.8 million in the first quarter of 2019. And finally, our net income was $8.7 million compared to a net loss of $3.1 million in the first quarter of 2019. These results exceeded our expectations and are a direct outcome of the leverage we've created as we've recrafted our operations and drove sales greater than internally expected. We've held a firm belief that our customers would return as the pandemic began to subside, but we really didn't know when that would actually happen. Our plan for the year was constructed on the thesis that business would return gradually and over the year, but clearly we have seen a dramatic acceleration in the first quarter to a level consistent with 2019. Again, this has been a truly remarkable start to fiscal 2021 and gives us incredible optimism with our prospects for the balance of the year. Let me expand a bit on what's been happening with our customer. As many of you know, our greatest challenge in 2020 was store traffic. For part of the year, our stores were closed, and once they reopened, they came in and demand for new clothing accelerated, initially from a very sluggish position. Throughout the pandemic, customers were telling us, I love your store, but I really don't have anywhere to go, and I'm staying home. I don't need anything from you right now. We started to see that sentiment shift after vaccines were being administered and pandemic restrictions were starting to scale back in different parts of the country. Suddenly, many of our customers were venturing out of the house again. He is socializing. He's resuming activities he enjoyed pre-pandemic. and that creates a need to shop for new clothes. There was certainly a tailwind to some degree of pent-up demand for clothing being relieved in the first quarter's results. We were expecting this to happen at some point, but not so soon and certainly not so dramatically. Another tailwind that had some level of impact on consumer demand were stimulus checks that started hitting bank accounts in mid-March. While it's impossible to quantify how much of the business's acceleration was due to stimulus cannot be ignored. We heard more than once from our customers when posing the question, what brought you in today? The answer was stimmies and the direct reference to stimulus checks. Urban dictionary or perhaps a new Webster definition, the stimulus checks clearly were a driver for consumers getting back out to shop. Fortunately, our sales trends are continuing to surpass 2019 levels, and even now, 10 weeks passed when the last round of stimulus checks were being deposited. Finally, we cannot ignore the fact that warm spring weather arrived early in much of the U.S. in April and continued into May. We have known for years that the changing seasons are often a catalyst for our customers to come in and shop. Oftentimes our customers will begin changing from his winter wardrobe to his warm weather clothes and realize some things may not fit It's just time to replace his clothes. The confluence of these three factors all coming together creates an environment ripe for shopping, and we are happy that DXL has been there to serve his needs. In the month of February, our comparable store sales were down minus 33%, but rebounded to over 3% positive with March and April as compared to 2019. Meanwhile, on the direct side of the business, overall business continues to improve. Sales on our DXL website were up 55.8% to first quarter 2019 with gains in traffic, gains in conversion, and gains in average order value. In both channels, there was a clear acceleration in March and April, and that momentum has continued right into May. Geographically, we've seen our strongest performance in the first quarter from the southeast, south central, and midwest parts of the country. Our business on the coasts has trailed behind the middle of the country by approximately 800 basis points, which is similar to what we saw in the fourth quarter of 2020. While traffic distress has not fully recovered to fiscal 2019, we are seeing more visits with intent to buy, which is being realized, as I noted, through strong growth in conversion and strong growth in dollars per transaction. Now let me shift to a quick update on our merchandising strategies. We continue to see casual sportswear, active, and loungewear drive meaningful business, which was led by Polo, Nautica, and Reebok. This is particularly encouraging because it comes at a time when we are leaning in to more full-priced messaging and less reliance on promotion. Fit, comfort, functionality, and versatility are essential features expected by our customer and embedded in the key categories that are driving our spring season. We attribute to the rescheduling of events such as weddings that were obviously put on hold during the pandemic. While this demand for tailored clothing is not game-changing, it is meaningful and, for certain, better than we expected. Moving to inventories, we have managed inventories conservatively, and we are down 21.3% from first quarter 2019. We have been working very hard to maintain our supply chain and logistics through our global sourcing organization. One of the challenges that emerged in the second half of 2020 and continues today are supply chain disruptions from a shortage of containers and vessels available for delivery of overseas projects, which I'm sure you've heard often. Our spring receipts were largely unaffected by delays, but the cost of freight has been escalating. We are also seeing increasing costs for certain raw materials, We are a member of CEDICS, Thank you for joining us. The pace of negotiations has slowed dramatically compared to 2020, but we are pleased with the progress we've made so far. In the first half of 2020, we negotiated approximately $10 million of rent abatements and deferments. In addition, we restructured 115 individual store leases, more than one-third of our chain. Since the beginning of 2020, we are expected to deliver over $16.1 million of savings over the life of the lease, including $6 million expected specifically in fiscal 2021. We continue to push hard to reduce lease costs with these landlords where our rents are out of line with sales. Now, let me shift to the second topic I want to discuss today, specifically how we see DXL in a post-pandemic world and what our priorities are for the remainder of 2021 as we lean into 2022. First, I want to talk about our promotional strategy. Our overall promotional strategy has been shifting for the better part of nine months from sale discounts and coupons to more full-price messaging with a specific focus on differentiated product full of features and benefits to exclusive products and unique selling propositions. Promotions were fewer, more targeted, and overall far more efficient in Q1 than in prior years. were made available to a much smaller, more targeted audience through our developing segmentation and personalization capabilities with ensuing offers not being public, meaning not on the website, not on the app, and not in stores. Promotions were built around lapsed customers or increasing frequency, but not generalized and communicated broadly in any of our marketing. This strategy drove significant savings in markdown dollars and created an increased gross margin rate and specifically improves our brand's positioning. This is a change we expect to maintain in terms of this promotional posture further into 2021. Last year, during the pandemic, we were forced to incur depromotions, as you expect, to drive traffic to our site and encourage buying. This year, we have taken a much different approach by focusing our marketing dollars on key product differentiation and our uniquely curated and exclusive assortments. We know there's a place for promotions, but as we move forward in 2021, we do not expect to return to levels approximately in 2019, let alone what we were forced to execute during the pandemic's toughest days as we drove liquidity outcomes. Next. Let me share with you how we are thinking about our evolving brands positioning and the addressable market. We have immense learnings coming out of 2020, and we leverage a lot of these insights to drive our Q1 2021 performance. As we have discussed, the DXL.com business grew by 55.8% in Q1 to 2019, not only driven by existing customers returning to DXL as they came out of quarantine, Thank you for joining us. and converting them efficiently to drive results. Driving positive outcomes with customers across channels continues to be our top priority and we've been making great progress on this. Our approach has shifted from wanting to drive customers to the stores or to the web to driving customers to DXL and being there for them based on how they choose to engage and experience DXL, whether in our stores, on our app or on our website. Our most loyal customers who have been a focus of our marketing efforts for the past six months have shown positive signs of returning to stores, with some of our segmentation initiatives truly paying off. We discussed our test and learn strategy in our last earnings call, the learnings from which not only helped refine our short-term promotional cadence in Q4 2020 and Q1 2021, but have also meaningfully influenced our long-term marketing and brand strategy to create market share and mind share with our customer and with new guests alike. We seek to create a more enduring and comprehensive relationship that is stickier with consumers and creates greater advocacy for DXL more broadly across the retail landscape and in general business. Speaking of market share, based on research we have done, We believe the total addressable market for core merchandise we sell is north of $10 billion. While all along we've continued to reposition the DXL brand, we have pivoted from pandemic-driven actions that included more finitely managing our cash, liquidity, and credit to a perspective clearly on the offense, driven around approach to acquire customers, the opportunity to grow market share coming out of the pandemic. We have conceptualized as a team and clearly articulated our vision for the business, bringing this to life now and will continue to do so throughout 2021 to further strengthen our defendable position and our moat as we look to create greater inflection in 2022 and beyond. We refer to this evolving positioning in everything we do today and believe it is the position's competitive stance that makes us the leading big and tall men's apparel retailer with the greatest possible potential for growth in consumer mind share, yet alone market share. We're continuing to evolve how we engage consumers with more relevant and personalized messages to our different customer segments across all touch points. We believe the goal of not only creating short-term behavioral change, but also driving measurable long-term loyalty as judged by NPS scores Net Promoter Scores, specifically, which will result in growing and even greater advocacy at being stickier for the DXL brand with consumers. And finally, let me give you an update on wholesale. In total, our wholesale business, which is primarily driven by Amazon, generated sales of 3.1 million for the first quarter compared to 2.4 million in the first quarter of 2019. While there are some challenges in wholesale projections, receipt flow, and in-stock levels, we continue to work to find a path for our wholesale business that works for DXL and works for Amazon. We also continue to search for new opportunities to grow the overall wholesale business. Thank you, and now let me turn it over to Peter for an update. Peter?