Destination XL Group, Inc.

Ladies and gentlemen, thank you for standing by. And welcome to the second quarter 2021 Destination XL Group, Inc. earnings conference call. At this time, all participant lines 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 conference may be recorded. If you require any further assistance, please press star then 0. I would now like to hand the conference over to your host today, Shelly Mokas, Director of Financial Reporting and SEC. Please go ahead.

Thank you, Sarah, and good morning, everyone. Thank you for joining us on Destination XL Group's second 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. Thank you very much. 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, including but not limited to ongoing surges of the COVID Delta variant, potential supply chain issues, and ongoing labor challenges. Information regarding risks and uncertainties is detailed in the company's filings at the Securities and Exchange Commission. I would now like to turn the call over to our CEO, Harvey. Harvey Kanter. Harvey?

Thank you, Shelly, and good morning, everyone. Today, Peter and I will share with you both the progress we are making with our business and our expectations for our continued recovery. At a high level, I can tell you that we are very pleased with our results. It is inspiring to see the consumer demand coming back at an accelerating rate and even more inspiring to see our customers responding to our ongoing digital transformation. which we began back in 2019 and helped us to respond to the challenges of the COVID-19 pandemic. Consumer engagement with DXL over the past three months has been remarkable. This quarter can be considered a very important chapter in the context of the strategy we have been pursuing and executing and the results we have achieved. Our digital transformation, which is steadily developing and is a major underpinning to these results, has provided a strong belief that our business was poised for inflection. In our second quarter, we saw big Intel customers surge into the stores and onto our website to drive a level of sales and profitability far greater than previously expected. This is happening across all customer demographics and includes both current and new to DXL customers who have not shopped with us before. We believe there is a material change in how consumers are thinking about DXL. We know that a lot of new customers are starting their shopping journey digitally, finding us and based upon some consumer research we have conducted, we believe we are taking share of market. We have seen continued growth with new to file DXL customers growing 28.5% in Q2 as compared to the same period in 2019. Our financial performance in the second quarter surpassed all internal expectations initially forecasted back in mid-May. Year-to-date for fiscal 2021, we have posted an adjusted EBITDA of $43.5 million. To put that into context, we have achieved in six months a level of profitability that is greater than any 12-month result that has been posted in the last 20 years by our company. This result was driven by improvements in gross margin from a reduced promotional strategy, improvements in occupancy costs from a restructured lease portfolio, and improvements in overhead from our restructuring of our selling, general, and administrative costs that was implemented in fiscal 2020. All of these elements, combined with leverage from greater-than-expected sales demand, contributed to an EBITDA margin for the second quarter in excess of 20%. While we remain cautious given the ongoing surges of the COVID Delta variant and ongoing risk in the supply chain, today we are raising our guidance for the full year, and I'm looking forward to talking to you in greater detail about where we believe our business is headed. Before I get ahead of myself, I want to acknowledge and thank all of our frontline associates who rise every day to make our customer look and feel his best. Since the beginning of the pandemic, our associates in the stores, in the distribution center, in the guest engagement center, and in our corporate office have answered the call every day. They are an amazing team. It is because of them these results have been created, and that is something we must all be thankful for. Thank you all for your hard work, the support and dedication to DXL and our customer. It is because of you our stores can open on time, Our products get shipped and delivered, and our customers can get answers when they need them. From the bottom of my heart and our leadership team, thank you. You are worthy of our highest esteem. I'm planning to cover two topics today. First, I want to talk to you about our second 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 the year, and how we intend to fortify our marketing position to maintain this positive momentum into fiscal 2022. I am very pleased to announce that our overall comp sales rate for the second quarter was 21.6% as compared to 2019 and 97.2% as compared to 2020. Since 2019 was our last normalized year from a financial comparison standpoint, We will be making most of our year-over-year comparisons to our Q2 2019 results. Comp sales growth in stores was 13.1% and comp sales growth in direct was 52.2% as compared to 2019. In total, second quarter sales were 138.6 million compared to 123.2 million and our adjusted EBITDA for the quarter was $29.8 million compared to $7.1 million in the second quarter of 2019. And finally, our net income was $24.5 million compared to breakeven in the second quarter of 2019. These results exceeded our expectations and our direct outcome of the leverage we have created as we've recrafted our strategy and our operating model. Our plan for the year was constructed on the thesis that business would return gradually during the year, but we have seen an acceleration in the first quarter and business continue to accelerate in the second quarter to levels meaningfully surpassing 2019. We've seen successes of improvement each month in fiscal 2021 with our most loyal, top, decile customers returning to shop with us. We can also report that our sales growth rates for August have continued on a similar trend to what we reported for Q2. In stores, we saw an acceleration of comps each month as the quarter progressed. In May, our comp store rate was 6.9%, in June, 14.7%, and in July, 18.2%, all compared to 2019. This was a significant bump from the 3.1% comp we experienced in March and April. Conversion was up 12%, dollars per transaction up 10%, but what was most encouraging was that traffic continued to work its way back toward 2019 levels. We exceeded our sales plan in 285 out of 297 stores this quarter, which is 96% of the store portfolio. Regionally, we saw the Southeast, Midwest, and South Central all performing exceptionally well. The Pacific Northwest, Northeast, and Mid-Atlantic have opportunity to improve further. For the quarter, while still having significant positive comps, the coast lagged 600 basis points behind the middle of the country. All regions had a comparable sales increase in the second quarter as compared to fiscal 2019. One of the things we are most pleased with is that our direct business did not fall back as our store comps increased. Our direct comps not only continued to hold up, but further accelerated in Q2. Our direct growth shows the sustainability of our digital transformation, and we believe it is a testament to our ability to stand out as a digital-first brand. Our direct comps by month were 48.8% in May, 53.4% in June, and 54.6% in July, all once again compared to 2019. was 28.1% of total sales in Q2 as compared to 21.1 in Q2 2019, and we expect our direct penetration for the full year to be approximately 30% as compared to our full year annual penetration in 2019 of 23.1%. For the quarter, our direct business is up 52.2%, driven by a combination of improvements in web traffic, Conversion and Basket Size. We believe our digital marketing investments and optimization of our digital infrastructure are driving significant inflection in new to DXL customers. Now, let me shift gears a bit and talk about product margins and product itself. We saw continued performance in our casual and sportswear categories, but we also saw a remarkable resurgence in tailored clothing. Our merchandise assortment is about 55% private label, 45% designer collections and our sales penetration for the second quarter was relatively consistent with inventory composition. We did see slightly higher selling velocity from designer collections where branches Polo, Nautica, and Reebok drove the collection business. Tailored clothing drove 12.8% of the Q2 business compared to 16.7% in 2019 and just 6.8% in 2020. Suits and Dress Shirts saw the greatest improvement as our customers started to participate in formal events such as weddings once again. We believe we are seeing a shift in consumer preference emerging with pairs casual and tailored together. We are even testing a new floor set by integrating our club department, which is primarily dresswear with more casual sportswear for a more relaxed and relevant lifestyle. How many times have you seen someone wear a sport coat or dress woven shirt with a pair of jeans or even stretch jogger trousers or a fleece vest over the same? It's the new uniform for many on Wall Street. If there was one constant challenge throughout the quarter, it is that we continue to battle to secure more inventory. Obviously, the overperformance in sales to our plan in the second quarter had an impact on our inventory positions. In some stores, performance by brand was dictated by inventory availability. Brands where we were in a strong inventory position outperformed brands where we were light on inventory. We believe customers will continue to buy merchandise at a greater than pre-pandemic levels, and we are continually chasing to bring in more inventory to keep up with the demand. We are working with our vendors to add more receipts to be in a stronger inventory position at the end of the fall season. We also continue to work through challenges with ocean freight capacities and the cost of containers, which in some cases is three to four times what they cost pre-pandemic. And lastly, we continue to consider shipping goods by air to support this growing demand. Furthermore, shortages of truck drivers have led to delays in price increases for transporting merchandise domestically, and we expect this challenge to continue through the second half of 2021. Despite these challenges in getting goods to the port and ultimately to the sales floor, we have been successful in procuring fabrics to support production. Our sourcing team began working with our merchants and planning partners to chase goods as early as February. If we can find a way to ship it, in most cases we are able to get what we need and then selling through it and ultimately still turning our inventories faster than our historical pace. The flip side to the inventory challenge is that it creates an ideal environment for us to execute one of our primary strategic goals, which is repositioning the DXL brand to be less promotional. Our messaging to our customers in the second quarter continued to lean into the brand's positioning built around a proprietary fit, a curated and largely exclusive assortment of private label and national brands, and an experience built around the respect and value for big and tall consumers who trust us. The direct outcome of this, which is a customer who leaves our store full of confidence and empowered to face the day, happy, satisfied and belonging to the DXL community. This strategy allows us to shift away from a value proposition that is highly promotional and discount driven to a proposition that is grounded in comfort, fit, and experience. Our thesis is grounded in personalization and relevant messaging, which we are increasing and at more scale, and that enables us to be more relevant without the need to offer our customer anything to engage further. We were essentially non-promotional in the second quarter with only limited targeted promotions ongoing promotional elasticity testing, and deeper file promotions engaging lapsed customers. There was no need for broad-based discounting for Father's Day and Memorial Day, and that drove stronger merchandise margins and profitability. We have also reduced the level of clearance merchandise, which we expect to drive more full-price selling. Our reduced promotional posture started in Q3 2020, and we have been making it more ingrained in our marketing and across all channels. The evolution has been intentional, and it is an important strategic component of our long-term strategy. It allows us to cut down our markdown rates in the second half from two years ago. This has been a huge win and a driver of our second quarter results. Despite all the upside created by being virtually promotion-free, we do expect there will be certain times of the year where we will need to resume some level of moderate promotions, and we will incur some higher level of markdowns later in the year. But this reduced promotional posture has done for us to support the repositioning of DXL, not as a discount and coupon store, but as a store who understands and honors big and tall guys better than anyone else in the market. and that is what we're really all about. We know that some level of performance in the second quarter was driven by tailwinds from pent-up demand from the pandemic, stimulus checks and at some level revenge spending. But we also know through our CRM system and customer surveys that we are reactivating some of our best customers and we are attracting many customers who are shopping at DXL for the first time. Our CRM data on newly acquired customers shows a few surprises that we believe are long-term tailwinds, and I'd like to share some examples with you. First, we are seeing more female customers than we have before. Attracting the female customer has been elusive for so many years, but we are undoubtedly seeing her more now than pre-pandemic. We theorize that she is helping him get back in the game. and many more. We believe that the outcomes we are creating are at least partially due to the improvements we have been making for the past two years in how we segment, communicate, and engage with our customer base in a more personalized and specific way. Just as a reminder, we believe the total addressable market for our core big and tall size of 2XL and up is north of $10 billion. When you include one XL, we think the total addressable market is north of $15 billion, which means there is ample opportunity for us to continue to take market share. Hopefully, you have noticed some not so subtle changes to our marketing strategy. First, we have been making a greater effort to build on our values of inclusivity and diversity. Our creative messaging is now using more models that represent a broader range of body types.