Jeffrey Unger – Vice President-Investor Relations David A. Levin – President, Chief Executive Officer and Director Peter H. Stratton, Jr. – Senior Vice President, Chief Financial Officer and Treasurer.

Michael Gorman Richardson – Sidoti & Company, LLC Jack Balos – Focus Research Laura Champine – Canaccord Genuity Inc. Bernard Sosnick – Gilford Securities Inc. .

Good day, and welcome to the Destination XL Group’s Second Quarter Earnings Call. Today’s call is being recorded. At this time, I would like to turn the conference over to Mr. Jeff Unger. Please go ahead, sir..

Thank you. Good morning, everyone. On our call today is David Levin, our President and Chief Executive Officer; and Peter Stratton, our Senior Vice President and Chief Financial Officer. 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 available on our website at investor.destinationxl.com for an explanation and reconciliation of such measures.

Today’s discussion also contains certain forward-looking statements concerning the Company’s operations, performance and financial condition, including sales, expenses, gross margin, capital expenditures, earnings per share, store openings and closings, and other matters.

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 variety of factors that affect the Company. Information regarding risks and uncertainties are detailed in the Company's filings with the Securities and Exchange Commission.

I’d like to now turn the call over to President and CEO, David Levin. .

Thank you, Jeff, and good morning everyone. Our results for the second quarter of fiscal 2014 are impressive, particularly given the challenging retail environment this past quarter. Destination XL’s strong results were driven by the continuing success of our DXL concept.

In fact, this quarter marks our fifth consecutive quarter of double-digit comparable sales increases for DXL stores. What’s particularly noteworthy is that the strong performance at our DXL stores was driven by increased traffic and higher conversion rates of store traffic.

This shift is a strong indicator of the success of our in-store marketing at our Casual Male XL stores, the transition shoppers to the DXL stores. These are very important metrics for the long term success of our strategy.

DXL store sales for the second quarter almost doubled to $41.5 million, compared with $21.5 million in the second quarter of fiscal 2013. Another very positive metric this quarter was our penetration of the end-of-the-rack consumer; those with waist sizes between 40 to 46 inches.

Since the launch of our marketing program in Q2 of 2013 the DXL stores have grown the end-of-rack customers from 39.2% at the end of Q2 2013 to 42.2% for the DXL stores this quarter. We expect even greater growth in this consumer category, as we more proactively communicate the sizes that we carry as we go forward.

There are two new metrics we have identified that are encouraging in the DXL strategy. First, in DXL stores that have comp, the average DXL store has 65% more customers in its active database than the average Casual Male XL store.

Second, again in DXL stores that have been opened greater than 13 months, DXL stores on average have maintained a 26% higher retention rate of customers than the average Casual Male XL store. While we are working hard to re-direct our Casual Male shoppers to the DXL stores, those Casual Male stores have remained opened are also performing well.

Customers that are not yet aware of the DXL stores continue to return to Casual Male XL stores to shop. Earlier this year we slowed the pace of our store closings and today, Casual Male XL stores are serving as ambassadors to direct customers for the new DXL stores nearby, by enticing them with coupons and other DXL marketing materials.

As I mentioned this has been a very successful strategy for us, as we saw growth in our Q2 DXL traffic and conversion rates. In the second quarter, our conversion rate of transferring Casual Male XL customers into the DXL store, increased 18%, compared with the same quarter a year ago.

As part of our marketing strategy, we significantly increased promotional offers to improve our conversion of existing Casual Male XL customers into DXL shoppers. For example, promotions included a free Harbor Bay Polo shirt, followed by a gift card, if they did not convert.

We sent these customers an experience book to introduce the DXL concept and as a result one in three recipients visited DXL store and made a purchase. This had the highest response rate of any direct mail piece we’ve done in the past. At the end of April, we launched our latest DXL marketing campaign on cable, network TV, radio and digital medium.

You’ve probably seen our, You're Looking Good ad that showcases the in-store experience and depth of brands we offer. Our ad last year was about increasing DXL brand awareness. This year’s ad is really about bringing customers into our stores to shop and so far it is working.

In-store traffic is up 6.5%, transactions grew 13.1% and our conversion rate increased 6.2%. Also, our web traffic conversion improved by 8% in Q2, 2014, compared to Q2 of 2013. In addition, traffic on our destinationxl.com website was up 9%, compared to last year.

Another positive metric was our conversion rate from our mobile visitors was up 67%, compared to last year. While the increased investments in these promotional marketing activities had a slight adverse effect on merchandize margins in the second quarter, it is clear that they are proving successful in terms of traffic, conversion and sales growth.

We believe these investments will ultimately translate into long-term profitable growth for our business. This fall, we launched the next flight of our comprehensive marketing campaign. In an effort to align our media presence with our key selling weeks will be moving our fall advertising, closer to the peak holiday selling period.

Last year, we launched our marketing campaign in late September and it ran until Thanksgiving week. This year we will launch our initial advertising in mid-October. We will air additional television and radio commercials around Thanksgiving and through mid-December.

We know that our marketing strategy works, while running it drives more traffic and transactions at our store and online.

Therefore, with the shift of our timing of our advertisings, our sales in the third quarter fiscal 2014 could be lighter than the same period of 2013 that we expect to more than make up for any loss in sales in Q3 and see stronger sales during the key holiday season of Q4.

In regard to the Casual Male XL business, last year when we decided to accelerate the Casual Male store closings, we also reduced some Casual Male XL store operating hours. During the first quarter of fiscal 2014, we returned to standardized operating hours for all Casual Male XL stores, which is positively affected the business at many locations.

And as a result the 7.1 increase during the quarter for our Casual Male XL retail stores, outlets and Rochester Clothing stores was primarily driven by the comparable sales increase for our Casual Male XL retail stores. Turning to our Direct business, we have begun to seen a turning point in this piece of our business.

During the first two months of the second quarter fiscal 2013, the Direct business still included sales from our catalogs which we stop sending in May of 2013. This created a very difficult year-over-year comparison for the two months of the second quarter fiscal 2014. As a result total U.S.

Direct sales for the fiscal second quarter were up only slightly year-after-year. We expect these comps to continue to improve in the second half of the year when we are no longer comparing to 2013. We want DXL to truly be the destination for our customers and have taken steps towards becoming a true omnichannel retailer.

During the quarter we improve the functionality of our destinationxl.com website and increase the frequency of our digital display marketing and promotional efforts. Also customers who shop online have the convenience of having their orders ship to a DXL store location near them for easy pick up at no costs and with no minimum purchase.

By providing more convenient and cost effective shopping options, we can significantly enhance our customer shopping experience at DXL and increase the likelihood that they will return. We have mentioned in the past that our Direct business with Sears Canada was having a negative impact on our Direct sales.

During the quarter, we notified Sears Canada of our intend to exit the business and began the process of an orderly wind-down, which we anticipate concluding in the fourth quarter of fiscal 2014.

Our DXL roll-out strategy calls us to open approximately 40 DXL stores and close approximately the same number of Casual Male XL stores and Rochester stores in 2014. We are being more selective of the timing, locations, and size of the new store openings. New store openings will be weighted towards the first three quarters of the year.

As of August 2, we had 113 DXL stores opened for business across the United States. We expect our overall DXL square footage at year-end fiscal 2014 to increase by about 34% from the end of fiscal 2013 and at the same time we’re improving our sales per square foot. Last year DXL sales per square foot were approximately $147.

We project this to increase to $160 to $165 by the end of fiscal 2014 and that we could reach $220 a square foot in the longer term. Our initiative that will help us achieve this goal is our plan to open a number of stores with a smaller-footprint of 5,000 to 6,000 square feet in select markets.

The smaller-footprint DXL stores also increased our opportunity for continued store growth beyond the original projected 220 to 250 stores. The economics of the smaller 5,000 to 6,000 square foot store is similar to our DXL larger format.

Smaller box allows us to penetrate markets where we previously thought we cannot be profitable by leveraging improved sales per square foot, occupancy costs, build out costs and CapEx.

Today, we anticipate opening 50 additional 5,000 to 6,000 square foot DXL stores in select smaller markets and also in larger markets where geographical considerations warrants an additional presence, but not another full size DXL stores.

DXL strategy continues to prove successful, giving us confidence that we are on track to further increase our top line, improve profitability, generate cash flow and grow sales per square foot and four wall contribution. With that, I will now turn the call over to Peter..

Thank you, David, and good morning, everyone. I’ll start by highlighting the Company’s results for the second quarter of fiscal 2014, and then provide a review of our full year guidance for fiscal 2014, which we reaffirmed in our news release today.

David provided the high level discussion of our sales for the quarter, so I’ll get right in to the details. Our total comparable sales increase of 7% or $5.6 million included an increase in our retail business of 8.5% or $5.5 million.

The retail increase, which in turn was driven by our 61 DXL comparable stores, had an increase of $2.4 million or 11.3%. We’re seeing an exciting shift in our DXL store metrics. In fiscal 2013, our comparable sales growth was primarily the result of an increase in dollars per transaction.

This quarter, our store traffic, store conversion and number of transactions are all up over last year. In fact, for Q2, dollars per transaction slightly decreased by 1.1% or the number of transactions increased by 13.1%.

And our conversion rate of store traffic into transactions increased 6.2%, primarily as a result of our marketing and in store promotional initiatives. Comparable sales from our remaining Casual Male and Rochester stores increased 7.1%, or $3.1 million.

This increase was driven by our Casual Male XL retail stores which have been performing very well since we returned to standardized operating hours at the end of Q1. In our U.S. Direct business as David mentioned, sales improved slightly with an increase of 0.5%.

But we’re optimistic about stronger, near term growth for this business based on our results in July and that we will no longer have to compare with any catalog sales. Gross margin for the second quarter inclusive of occupancy costs was 45.7%, compared with gross margin of 46.1% for the second quarter last year.

The decrease of 40 basis points for Q2 of fiscal 2014 was the result of a decrease in merchandizing margin of 120 basis points, partially offset by a decrease in occupancy cost of 80 basis points.

A decrease in merchandise margin was due to an increase in our promotional activity which we began in Q1 to encourage our Casual Male XL customers to visit one of our DXL stores. We continued with similar promotional programs and customer acquisition initiatives during the second quarter.

This approach is helping to transition our existing customer base to our DXL stores as evidenced by our increases in DXL store traffic and conversion. On a dollar basis, occupancy cost for the second quarter of fiscal 2014 increased less than 1%, compared with the prior year.

As a percentage of sales, the 80 basis point improvement in occupancy cost is due to a decrease in lease termination costs as we slowed the pace of Casual Male XL store closures, with many of the stores staying open through their natural lease term. We’re closing approximately 60 fewer stores in 2014 versus 2013.

As a percentage of sales, SG&A expenses for the second quarter of fiscal 2014 decreased slightly to 43.6%, compared with 43.9% for the second quarter of fiscal 2013. On a dollar basis SG&A expenses increased by $2.2 million or 5% for the second quarter of fiscal 2014, compared with the prior year’s second quarter.

Increase over last year includes higher marketing costs of approximately $1.1 million and an increase in payroll related cost of $1.1 million due to the additional operating hours in our Casual Male stores.

Pre-opening payroll, training and other incremental cost to support the DXL store openings were $800,000 for the second quarter of fiscal 2014, compared with $1.3 million for the prior year second quarter.

Net loss for the second quarter was $4 million, or a loss of $0.08 per diluted share, compared with a net loss of $1.6 million, or minus $0.03 per diluted share for the second quarter of fiscal 2013.

On a non-GAAP basis, assuming a normalized tax rate for fiscal 2014, the net loss for the second quarter of fiscal 2014 was a loss of $0.05 per diluted share versus second quarter fiscal 2013 net loss of $0.03 per diluted share.

As a result, or as a reminder, as a result of the valuation allowance against our deferred tax assets, we are not recognizing any income tax benefit on our operating losses in fiscal 2014.

During the second quarter of fiscal 2014, we notified Sears Canada of our intent to exit our business with them and begin the process of an orderly wind-down, which we expect to complete by the end of fiscal 2014. As a frame of reference, Sears Canada represented less than 5% of our direct business in fiscal 2013.

Included in the net loss for the second quarter and first six months of fiscal 2014 is a loss from operations from our Sears Canada business of $1 million or a loss of $0.02 per diluted share and a loss of $1.1 million or a loss of $0.02 per diluted share respectively.

The loss includes a charge reported in the second quarter of fiscal 2014 of approximately $800,000, primarily related to inventory reserves and sales return allowances. Capital expenditures for first six months of fiscal 2014 were $18.9 million compared with $21.1 million for the first six months of fiscal 2013.

The $2.2 decrease is primarily related to the number of store openings during the first six months of fiscal 2014. As of August 2, 2014, we have opened 14 DXL stores compared to 17 DXL stores at August 3 of 2013.

We expect to open approximately 40 DXL stores and close approximately the same number of Casual Male XL and Rochester Clothing stores in fiscal 2014. In addition, the average square footage of the new 2014 DXL store is slightly less than the prior year, which will have a favorable impact on build out costs.

From a liquidity perspective, at August 2, 2014, we had $5.6 million in cash and cash equivalents, total debt outstanding of $48.3 million and $71 million available under our credit facility.

Our inventory levels, at the end of the second quarter were up $8.1 million or 7.5% However, on a unit basis, inventory was down approximately 1%, compared with year ago levels. The increase in our cost basis is due to us carrying a greater percentage of branded apparel for our DXL stores, which have a higher carrying-costs.

In addition, we are making a concerted effort this year to take early receipt of merchandise to insure that we are in a strong in stock inventory position prior to key selling seasons. And now turning to our guidance, we are reaffirming full year guidance for fiscal 2014 today.

To reiterate we expect total sales to be in the range of $413 million to $418 million, comparable store sales increase between 13% to 15% for the 99 DXL stores that will have been open at least 13 months at year end. Gross profit margin to range from 45.5% to 46.1%, SG&A cost to be approximately $176 million to $177.6 million.

Operating margin to be between negative 2% to negative 2.8%. And we expect a net loss of $0.21 to $0.27 per diluted share, or a loss of $0.12 to a loss of $0.16 per diluted share on a non-GAAP basis assuming a normal tax benefit of approximately 40%.

Our net capital expenditures for fiscal 2014 are expected to be approximately $36.4 million after considering expected construction allowances contributed by our landlords on the new DXL sites.

These expenditures will be spent largely on our planned opening of DXL stores, as well as technology projects to continue to improve the e-commerce site and the in store customer experience.

The fiscal 2014 net capital spend of $36.4 million net of tenant allowances will be funded from equipment financing notes, our revolving credit facility and EBITDA generated during the year.

Borrowings at the end of fiscal 2014 are expected to be in the range of $35 million to $40 million under the credit facility with equipment financings of approximately $20 million.

We have adjusted our expected year-end borrowing levels to reflect our intentions to take early receipt of spring merchandise at the end of the fiscal year to insure that we are in a strong inventory position before the season. As a result by the end of the year, we now expect to have a total debt position of approximately $55 million to $60 million.

This concludes my remarks. And we will now take your questions..

Thank you. (Operator Instructions) We’ll take our first question from Mike Richardson with Sidoti..

Yes, good morning and thank you for taking my calls. A couple of quick questions, first I wanted to clarify something on the David said in his prepared remarks.

I believe he said that sales in the third quarter might be a little bit lighter year-over-year, due to a shipment timing of marketing, are you referring to total sales or sales per DXL stores or just sales in the comp base, if you could clarify that, I would appreciate it..

Yes, it’s really on the DXL stores, we have a quarterly shift ending in October. We are forecasting lighter sales, because we are starting the ad campaign almost three weeks later and that’s going to falling from the fourth quarter. So again our total forecast doesn’t change, it’s just a shift of a lighter third quarter and a stronger fourth quarter..

Okay and then, regarding the penetration rate for end-of-the-rack customers, is there a sort of a internal goal, how should we be thinking about that going forward, how high can you, how high do you think you can get that?.

Well from a pure empirical point of view 65% are big and tall guys are in their size range, and now we are up to 42. And remember Casual Male was 25%, so we are clearly moving it in the right direction. But these are big numbers to move, so though we anticipate moving one, two percentage points, year-over-year and they will take time.

But if we ever got to 50% that will be great..

Okay, then just last one then I will let someone else ask a question. The 50 additional DXL stores that you plan to open in the smaller markets.

Are those going to be offset by Casual Male closings and sort of over what timeframe, should we be thinking about those openings happening?.

Yes, it’s still – there were a lot of locations in smaller markets that we were going to really abandon, because we couldn’t make the numbers work and relying that customer to go visit us online. And now that we see this 1,000 square foot store works economically, it’s allowing us to fill in a lot of these stores that would have closed.

But I think this fall is pretty much into the same timeframe over the next several years that we could be – now we could be at a close to 300 stores, as opposed to 220 to 250 stores..

Great, thank you very much and continued success. .

Thank you..

And we will move onto our next question from Jack Balos from Focus Research..

Regarding the Destination XL stores what is the timetable for those stores to become profitable? Like does it take a year or two years, when did they go into the black?And by the black I mean incorporating – corporate overhead not the four wall thing..

Sure, well for many of our stores by year two we’re seeing nice profits from the Destination XL stores. Typically the stores see a very big slight in growth in the year one of conversion. And then after year one the growth starts to settle down a little bit. By the second year we are seeing profitability in the stores..

So the 99 stores that you had in fiscal 2013, did they as a group went to the black this year?.

Yes..

I assume the 48 stores that you had the prior year are going into the black..

Yes, it’s – there is going to be some that are doing better than others, but for the most part yes..

I see.

So, but as a total classification, a little about Destination XL stores as a group are operating a loss right now?.

No. They’re not operating at a loss. Again, it’s a store by store evaluation, but most of our stores, they’re coming out even in year one and they’re doing well and they’re profitable, but our target and what we’re looking for is by two that we’re seeing them turning to profit by year two..

This is David. In consideration, most of these stores start in the hole about $100,000 before we even open the door in year one. And then when you look in year two, these stores are looking for comps in the neighborhood of close to 15%. So by year two you take that impact of initial reopening expenses and put a 15% comp on it.

These stores really should be profitable in year two..

And what does that mean in terms of the entire company going into the black?.

Well, we have – as we’re loading we’re spending a lot of time with our marketing expenses right now and once we see that start to come down over time that’s going to improve our profitability as well..

Okay.

So what year do you expect for the company as a whole to be in the black?.

Within the next two years. Yes..

Two years.

Is it 2015 or 2016?.

Well, we don’t give guidance out that far, but at this January we anticipate going into the black, certainly in 2016..

2016. Okay. Thank you..

We’ll move along to our next question from Laura Champine with Canaccord. .

Thanks guys. So our question is on the shift in advertising.

Did you mention, David, that you think sales, total sales could actually be down in Q3? And what drove the decision to make that timing shift?.

Sales will not be down. We’ve been running five quarters at double-digits. We anticipate a very strong August and September and we’ll give some back in October. It’s still going to be a very good number, but maybe not at the 12s to 15s that we’re talking about. So we’ll get something higher than that.

What precipitated that was looking at last year’s performance, we had a very big comp in October and we had a very bad December. And we had spent all our marketing by November 15.

So we figured balancing it out more, getting the biggest bang for our buck when the customers are coming out and shopping to put some money into the December time period, will give us a better overall performance for the fall season than just repeating what we did before.

It was a lesson we learned that we should have pushed the marketing out a little further..

Got it. Thank you..

(Operator Instructions) We’ll move along to our next question from Bernard Sosnick with Gilford Securities..

Good morning. You mentioned a strong August and September.

Could you give us a clue as to what you have been seeing so far in the month of August?.

All I would say is we see continued trends from the last four or five months where we have been very – we’ve been consistently getting those double-digits. We haven’t seen any indicators out there that’s changing that. Again, we are not a back-to-school company. In fact, where most – a lot of specialty retailers, August is a strong month.

It is actually our weakest month in the fall season. Our business really starts to pickup in September. But we feel very good about, because last September we had a fairly weak performance and we’re trending much better this year..

Good. You are saying 13% to 15% same-store sales growth for the 99 DXL stores for the year. That would sort of imply a 20% gain in the fourth quarter..

No, it’s not that high. I mean, the 13% to 15%, yes, but it’s a little lower than 20%. .

Bernie, one of the things to recognize is last year 25 stores of the 50 we opened, opened in Q4. We’re going to get and we know that we get the biggest comp when they first anniversary.

So in Q4, we got 25 DXLs that are going to come strongly, which is going to give us that extra boost in the fourth quarter, that’s not including the marketing factor, that’s just the timing factor. So it’s not 20%, but it’s certainly fourth quarter we anticipate being our best quarter of the year..

Yes..

Okay.

Could you repeat what the inventory increase was?.

Certainly..

So our inventory was $116 million at the end of the quarter..

Yes I have it up $9.8 million I think. I thought you said $7.5 million..

No, let’s see here. It’s up I would call at that 7% to 8%. It’s primarily in the increase penetration in branded product, our units are actually down a little bit. But we are also – we are trying to be in a strong better position prior to the start of the fall season..

Bernie, we took in a considerable amount more inventory in July than we did a year ago. And it’s mostly a timing issue..

Yes, I understand that. I just either my calculation is wrong, or well, let's drop that. Could you reconcile the GAAP and non-GAAP full-year estimates providing the difference of roughly $0.11 to get to the non-GAAP number? I am sure it includes $0.02 from Canada and then tax benefits..

Yes, it’s primarily it’s the tax benefits of 40%. So the $0.02 in Canada is the other piece of that as well. But you can calculate that by just taking 40% of the GAAP number for the tax component and then the $0.02 on Canada..

Okay. As far as the Casual Male stores, you have increased the hours, you have got the sales increase. Are they running at a smaller – are they running at a loss, is it smaller loss? What was the comparison for Casual Male and Rochester stores for the quarter in terms of profitability..

We don’t break it out by division. But I think the best way to answer it is our – the sales for Casual Male without the extended hours, probably would have been consistent with its trend, which has been relatively flat to plus one or two.

And then, we’re forecasting that same trend once we get past the incremental lift we’re getting from the store hours right now. But the lift that we’re getting is almost purely coming from those extended store hours..

Okay.

And you expect the lift to continue through the second half and into early 2015?.

Yes. We should anticipate high single-digit comps in Casual Male stores through March of 2015..

Okay. Very good. Thank you..

Thank you..

(Operator Instructions) And at this time we have no further questions. I’d like to turn the conference back over to our speakers for any additional or closing remarks. However, we have just received another question, if you like to take it..

That’s fine..

Our follow-up question is from Mike Richardson with Sidoti..

Yes, thanks. Just squeeze one more in if I can.

Am I correct in directionally thinking about your gross margin guidance that you are assuming that gross margin is going to be up in the back half of the year? And I guess my question is with trying to reactivate customers and convert the Casual Male customers to DXL stores and what not, how is that going to happen? Or what makes that happen?.

Let me just – I’ll speak of the guidance piece first. So, the range of guidance that we’ve given on gross margin is that we would be between 45.5% to 46.1%. The majority of that range is below last year.

So our promotional cadence that we’ve been seeing in the first half of the year where we’re trying to drive more customers to the DXL stores and reactivate some of our direct customers that haven’t shopped with us in a while, that’s going to continue for the rest of this year.

So, as I said, the range is flat to slightly down and we’ll see how the second half comes out..

And what was the second part of the question?.

No, that was – Peter answered the question. So that’s perfect..

Okay, great..

Thank you..

Okay. If there’s no other calls coming in we’d like to thank you for joining us today, and, again we look forward to a good third quarter and reporting to you later in the year. Thank you very much..

And that concludes today’s conference call. We thank you for your participation..