Jeff Unger - Vice President Investor Relations David Levin - President, Chief Executive Officer, Director Peter Stratton - Chief Financial Officer, Senior Vice President, Treasurer.

Bernard Sosnick - Gilford Securities Liz Pierce - Brean Capital Lee Giordano - CRT Capital.

Good day, everyone, and welcome to the Destination XL Group Fourth Quarter Fiscal Year 2014 Earnings Call. Today's conference is being recorded. At this time, I would like to turn the conference over to Jeff Unger. Please go ahead, sir..

Good morning, everyone. Thank you for joining us today on Destination XL Group's fourth quarter fiscal 2014 call. On our call today is David Levin, our President and CEO; 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, profitability, EBITDA, expenses, gross margin, capital expenditures, sales per square foot, 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 a 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. Now, I would like to turn the call over to our President and CEO, David Levin..

Thank you, Jeff, and good morning everyone. Before I get into the details of the quarter, I want to put our performance into perspective. These results were outstanding and represented a true breakthrough for Destination XL, by a number of measures.

We have reached a new level of performance with the DXL concept, and we are excited about what the success means for us as we move into fiscal 2015. Highlighting our performance this quarter was the 16.4% comparable sales increase and our 93 DXL stores that were opened at least 13 months.

It is important to note that this was a very strong comp on top of a solid double-digit comp in the prior year's fourth quarter. We also achieved our seventh consecutive quarter of double-digit DXL store comps, a very impressive result in what has been a challenging overall retail environment.

Perhaps most importantly, we executed well against the plan we laid out for investors at the beginning of 2014 fiscal year and achieved our financial targets even as many other retailers were forced to reduce their expectations for the year. Our financial performance demonstrates the success of our DXL transformation strategy.

One aspect of the DXL strategy that has been a big success recently was our decision to keep Casual Male XL stores open for several months in markets where we have opened new Destination XL stores. This initiative is really paying dividends as our Casual Male stores are serving as brand ambassadors to direct existing shoppers to the new DXL stores.

In these markets, we are seeing a higher rate of Casual Male customers transitioning to the DXL brand. In fact, 44% of Casual Male customers have now become DXL customers compared with 30% at the start of fiscal 2014. Overall, our 2014 conversion rate is up 19% from the prior year.

Our strong Q4 sales also benefited from the strategic timing of our fall marketing campaign and a successful bounce back promotion. We began the marketing campaign three weeks later this year in order to cover the peak of the season, and this led to a surge in holiday sales.

DXL comparable sales continued to be strong throughout January following the end of the campaign in mid-December. This was in contrast to Q4 2013, when the fall campaign ended in mid-November. We also chose higher-quality ad placements, running ads during NFL and college football games on weekends, when our customers were more likely to go shopping.

Our marketing and promotional efforts helped to increase traffic at DXL stores from the same quarter last year and we converted that traffic to top-line sales, resulting in an increase for the quarter of 13.9% in the total number of transactions. Meanwhile, our Destination XL customer base continues to grow, both overall and on a per store basis.

The total number of DXL customers in 2014 increased to 124%, while the average number of customers per store was up 9% year-over-year and up 88% from the average count at legacy Casual Male XL stores. We are sourcing a substantial increase in our end-of-rack customers.

We believe that these younger, smaller waisted, more brand-conscious shoppers make up nearly two-thirds of the total big and tall market. They also tend to spend more per transaction, so this is a desirable target market for us. We have focused on increasing our reach with the end-of-rack guy and that work is really paying off now.

These customers represented 45% of our bottom business in the fourth quarter, our highest rate to-date. For comparison purposes, end of the rack customers make up only 33% of bottom sales at our Casual Male stores. Another metrics that we are particularly proud of this year is sales per square foot.

At the beginning of the year, we set a goal of reaching $160 in our DXL stores for 2014. I am very pleased to report that we not only achieved that goal, but we exceeded it and finished the year at $165 in sales per square foot compared with the $150 at the end of fiscal 2013.

Our long-term expectation is that the DXL stores will reach $200 to $220 in sales per square foot as each store reaches maturity. In fact, during fiscal 2014, 27 DXL stores have already achieved this target with sales greater than $200 per square foot.

It is also worth reminding everyone that sales per square foot calculations may differ among other retailers in the industry, and therefore are not necessarily comparable to those at DXL stores. At DXL, we measure sales per square foot based on the store square footage that is build out during construction.

This includes non-selling square footage such as break room, stock rooms, and tailor shops. Our new smaller footprint, DXL stores will help drive this metric. The economics of the smaller stores which range between 5,000 and 6,500 square feet are similar to those of our larger DXL format stores, but with lower occupancy and CapEx costs.

This results in the same return on investment of our larger stores, but on a smaller basis. We now have seven of these smaller DXLs in operation and we expect to open 16 additional smaller stores in fiscal 2015. In addition to our brick-and-mortar DXL expansion, we are also making a substantial investment in technology to drive online sales.

One example of this investment was the launch in 2014 of our shift from store technology, store net. Since we rolled out store net at the beginning the year, we have seen a tremendous new paradigm, both for our customers and for Destination XL.

This technology enables our stores to fulfill online orders that cannot be fulfilled by our distribution center. In fact, it expands our available online inventory and gives our Internet customer visibility to all our inventory in the chain, including merchandise that is only available in a small number of stores.

This investment is improving the customer experience and allowing us to capture increased sales at higher merchandise margins. Our goal has been to provide a seamless customer experience whether he shops at a brick-and-mortar store or via computer, smartphone, or tablet.

To further enhance the customer experience, we are excited to announce that in May of this year, we are on track to launch shop online pickup in-store. This will allow our customer to make a last-minute purchase on line and pickup items in the DXL store closest to him.

This feature enhances the customer relationship by bringing guests into our stores, where sales associates can then recommend additional items at the point-of-sale.

For the past three-and-a-half years, we have been perfecting our DXL stores and redefining the men's big and tall shopping experience, we have now created several store formats that are both economically successful and have the ability to satisfy all big and tall customers from waist 38 inches and up.

Casual Male and Rochester stores was never able to satisfy the breadth of the big and tall customers' wardrobe needs, we made minor changes and adjustments along the way and these have only strengthen our enthusiasm for the DXL concept.

We have now opened more than 140 stores and expect to open another approximately 100 stores by the end of fiscal 2017, and we opened our first DXL store in Manhattan last week on 6th Avenue on 23rd Street, and we will be holding and analysts and investors store tour on Thursday, April 16th and hope to see many of you there.

We are clearly excited about our outstanding fourth quarter financial results and very positive key DXL performance metrics for the year. Going forward, we are building on this success by driving strong sales growth at existing DXL stores and opening an additional 40 DXL stores this fiscal year.

As we scale our business through increased volumes, we expect to further expand operating margins through a more advantageous cost structure. Our solid strategic execution in 2014 gives us great optimism for continued broad-based success in 2015. With that, I will turn the call over to Peter..

Thank you, David. Good morning, everyone. There are few different topics that I would like to talk about today. First, I will start by highlighting the company's results for the fourth quarter of fiscal 2014. Then I will go through our new guidance for fiscal 2015.

Lastly, I would like to talk a little bit about our long-term outlook for the company and more specifically our expectations for fiscal 2016. First, let me start with telling all of you how extremely pleased we were with our fourth quarter performance as sales exceeded our expectations.

For the quarter, we reported a total comparable sales increase of 8.9% versus just 4.2% in the fourth quarter of fiscal 2013. At the heart of this improvement were our 93 DXL stores that have been opened for at least 13 months.

These stores delivered a comparable sales increase of 16.4%, which is the highest quarterly comp that we have seen in the DXL stores since the second quarter of 2013, when we launched our first DXL television and radio commercials. This quarter also represents our seventh consecutive quarter with double-digit DXL comp sales growth.

Sales for the quarter were propelled by a 13.9% increase in transactions both, traffic and conversion which we define as a percentage of visits that resulted in the transaction, contributed to this increase.

The growth in traffic and conversion is a very positive indicator for our business, because it proves that not only are we building customer awareness with the DXL, but we are also improving our sales productivity.

Moving on to gross margin, for the fourth quarter gross margin including occupancy cost was 47.9% versus 44.8% for the fourth quarter of fiscal 2013. The 310-basis point improvement was largely due to a gain on the termination of our lease at our former Rochester San Francisco store.

The termination fee was $2.5 million in and was based on approximately two years that was remaining on the lease term. As a result, total occupancy cost for the quarter declined 370 basis points.

This decline was partially offset by a 60-basis point decline in merchandise margins, which is due to our aggressive promotions to convert our Casual Male customers to the DXLs store format. Together, these two components, account for the 310-basis point improvement for the quarter.

SG&A cost for the fourth quarter increased by $700,000 in large part due to the shift in the timing of our fall marketing program as well as an increase in payroll costs for the 41 new DXL stores.

However, these increases were partially offset in the quarter-to-quarter comparison by the fact that the fourth quarter of fiscal 2013 included a charge of approximately $2.3 million for severance costs. As a percent of sales, SG&A improved, declining 380 basis points from 44.1% of sales last year to 40.3% of sales this year.

Next, I would like to talk to you briefly about EBITDA. We follow EBITDA very closely, because we believe it provides a good representation of the underlying business fundamentals and therefore is a meaningful indicator of financial performance.

Cash management is important for us during our transition of the DXL concept and we believe EBITDA is a key component in evaluating free cash flow. For the fourth quarter of fiscal 2014, EBITDA from continuing operations was $9.1 million compared to $800,000 in the fourth quarter of fiscal 2013. Now, let us turn to the bottom-line.

Net income for the fourth quarter was $1.6 million or $0.03 per share compared to a net loss of $55.1 million or loss of $1.14 per share in the fourth quarter of fiscal 2013. Keep in mind that last year, we established a tax valuation allowance which resulted in a $51.3 million non-cash charge to the GAAP loss last year.

On a non-GAAP basis, adjusted income from continuing operations for the fourth quarter 2014 was $0.02 per share compared to a fourth quarter loss last year of $0.04. Next, just a few quick comment on capital expenditures. CapEx for fiscal 2014 was $40.9 million, down from $54.1 million in fiscal 2013.

The reduction in CapEx was due in large part to the decision we outlined at the start of the fiscal year to open approximately 40 DXL stores in 2014 versus the 51 DXL stores we opened in 2013. CapEx net of tenant allowances was $30.9 million in fiscal '14 and $44.2 million in fiscal 2013.

We opened 39 DXL stores and two DXL outlet stores, meeting our original plan to open 40 stores. We now have a total of 138 DXL stores and two DXL outlets open across the country. Turning to the balance sheet, inventory at the end of the year was up $9.6 million or 9.2% from the fourth quarter last year. The reason for this increase is two-fold.

First, with 41 additional DXL stores, we carried a greater percentage of branded apparel. Second, we made a conscious effort in 2014 to take early receipt of merchandise to ensure sufficient in-stock inventory positions in advance of the spring selling season. Our inventory is in excellent shape.

As David described earlier in the call, we now have the capability of offering our in-store merchandise to our online customer. This has created a tremendous opportunity for us to sell through our clearance merchandise at a much higher rate than in the past.

Our clearance inventory now represents 8.4% of total inventory compared with 10.3% in Q4 last year. This puts us in a much cleaner position as we head into 2015. Total debt as of year-end was $53.5 million, which includes borrowings under the credit facility of $19.4 million with excess availability of $77.9.

Now I would like to discuss our 2015 guidance, which we are introducing today.

For the 2015 fiscal year, we expect total sales to be in the range of $438 million to $443 million, a total comparable sales increase of approximately 5.6%, gross profit margin of approximately 45.9%, SG&A costs of approximately $181.5 million, depreciation and amortization expense of approximately $28.5 million, EBITDA in the range of $19 million to $23 million, operating margin to be between negative 2.2% and negative 1.2% and we expect the GAAP net loss of $0.20 to $0.27 per diluted share for a loss of minus $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 2015 are expected to be in the range of $33 million to $35 million after expected tenant allowances contributed by our landlords on the DXL sites.

These expenditures will be made 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.

Total borrowings at the end of fiscal 2015 are expected to be in the range of $72 million to $76 million, consisting of the range of $45 million to $49 million under the credit facility, $14 million under the term loan and approximately $13 million in equipment financings.

Lastly, I would like to talk for a few minutes about our long-term outlook, specifically as it relates to fiscal 2016. Traditionally, we have only given detailed guidance one year at a time and it' is very difficult for a retailer to project beyond one year, because the second year is so dependent on the first year.

However, 2015 is going to be a transformational year for Destination XL, and we believe it is important to share our current high level outlook for 2016 with you. Our total sales outlook for 2016 is approximately $470 million.

We expect the company will have opened approximately 210 DXL stores by the end of 2016 and we will be approaching a more normalized pace of DXL openings. Our EBITDA outlook for 2016 is approximately $35 million. This is a significant lift from our EBITDA guidance for 2015 of $19 million to $23 million.

Two important factors are contributing to the significant improvement. First, the incremental SG&A expense in 2016 will be very modest. Second, we will begin to see slightly more occupancy leverage on our gross margin rates as we move into 2016.

Over the past two years, we have seen a clear acceleration in EBITDA from $7.3 million in 2013 to $15.2 million in 2014. We believe that that acceleration is going to continue in 2015 and into 2016. To summarize, we are very pleased with our fourth quarter and full-year financial results.

These results demonstrate the success of our DXL concept and the solid execution of our strategy and we expect even better results in 2015, with accelerated revenue and EBITDA performance in 2016. With that, operator, we will open the call for questions..

Thank you. [Operator Instructions] We will take our first question Bernard Sosnick with Gilford Securities..

Good morning and congratulations for the successful season..

Thanks, Bernie..

I would like to focus a little bit on the projection for expenses. You said that the incremental expense increases are going to be modest. Could you fill in a little bit why there will be only modest increases when in fact you are going to be opening more stores.

Will it be the leveling off of marketing expenses? What else will be contributing to that?.

Sure. That is a great question Bernie. A couple of things on that, as we talked about, we are going to be opening 40 stores in 2015. Then in '16, that number is coming down to 30 stores, so we are starting to see a drop-off in those one-time conversion costs as we slowdown.

No, I should not say slowdown, but as we near completion of getting all these stores built out, so we are going to be dropping off some of those conversion costs such as store set up, pre-opening rents, some of our training costs, and so forth.

We are also going to be seeing a little more leverage in occupancy as we get out to 2016, so that is going to help on the gross margin side. We are starting to reach that high point in SG&A, so that that is certainly going to level off..

Bernie, this is David. Also, you made the reference to the leveling off of marketing and that is true.

We took our marketing from 4% up to 7% to get the awareness level up and that is definitely coming down, so our marketing costs are definitely becoming more rationalized and even coming down as a total net spend beyond the fact on the percentage basis..

I have not yet figured out what the expense ratio would be, but you have been running over 40% in recent years, and I presume that you are going to be going under 40, perhaps even under 39 by 2016.

Do you foresee reaching 38% by 2016?.

Yes..

…and continuing down?.

That is right, Bernie. You know as we said, $181.5 in SG&A costs for next year. If you extend that out to 2016, and say "Okay. We are going to be maintaining that amount to a slight increase on sales of $470 million", then you certainly see that percentage coming down to 40% and sub-40..

Okay. Thank you very much..

[Operator Instructions] We will go to next Liz Pierce with Brean Capital..

Good morning. Congratulations to you guys, great job.

David, just to pick up on that subject just a little bit, can you share with us what the plans are for marketing for next year?.

For 2015?.

Yes. For this current year, sorry. Yes..

The plan is, we are going to be anniversarying our commercials during virtually the same time periods that we did last year. The spend is down somewhat, but not dramatically, the bigger drop in the spend as a percent of sales comes in '16, but we are pretty much going to be duplicating our advertising campaign that we did last year..

Okay.

Will it continue to be T.V., I mean, the same mediums?.

Yes. Again, a little more weighted towards T.V. versus radio..

Okay.

Then on the small market stores, can you just share with me any kind of detailed insight what you are seeing on those stores and customers, conversions, new customers etcetera?.

We are extremely pleased. The customers, again, are seeing this concept for the first time. The DNA of the store look looks the same, so the fact that it is 5,500 square feet versus 8,000 square feet, the customer experiences the same and we are getting a higher return on investment on these new stores.

They are exceeding their plan in the first 12 months, so we are very excited about it. Again, you could tell we are accelerating that ratio by opening up 16 of the 40 stores this year will be in that small format, so very pleased with the results..

David, has this opened.

I think that was one of the things that you felt originally opened up more markets for you, so that number, the end number of DXL stores, has that changed because of this?.

Yes. It is certainly going up.

Again, we only are saying by 2017, we will add 210, but that number is going to go up, because we still have a lot of single-store markets that now will be able to convert to DXL versus abandoning those markets, so we have not put a new number out there, but it is definitely going to increase now that we have the success of the 5,000 square foot stores..

Then just quickly last question, and I will get back in the queue.

Are you going to open another store in San Francisco?.

No. It is not on our schedule at this time..

Okay..

One of the things, Liz, we have seen is that a lot of that traffic from San Francisco, the customers do shop other stores, so we do see that they are going to Pleasant Hill, they are going to San Jose, and they also will shop our other stores around the country.

We get a lot tourist traffic, or we got a lot of tourist traffic in the San Francisco store..

Okay. All right. I will get back in the queue guys, but great job and best of luck..

[Operator Instructions] We will go next to Lee Giordano with CRT Capital..

Thanks. Good morning, everybody. Just a question on your capital structure, just wondering how you feel about your liquidity position, this year looks like you are going to take out some more money on your credit facility. Do you anticipate the need to increase the size of that facility and just any thoughts on the capital structure would be helpful.

Thanks..

Hi, Lee. It is Peter. As you know, we restructured our debt back in the end of the third quarter beginning of the fourth quarter of this year, and we feel very comfortable that that is going to be sufficient to get us through the completion of the DXL conversion.

Yes, we will be continuing to spend more cash this year as we are opening 40 more stores, but that number starts coming down once we get into 2016, and the pace of openings gets closer to the finish line..

Great, and just on the merchandise margins in the promotional environment, how are you thinking about merchandise margins this year in 2015? Do you think that if you are having the same level of marketing that it can level off, I guess, what are your thoughts there? Thanks..

We do not anticipate any erosion in our gross margins for this year.

We have done the extremely good job in our global sourcing, our internal department that places most of our private label goods adds cost advantages in the placements for this year, promotional cadence is very similar to last year, so we do not see any of merchandise margin erosion for 2015..

Great. Thank you..

We have no further questions in the queue, [Operator Instructions] Gentlemen it appears we have no further questions at this time..

Okay. Thank you all for joining our call today. As I always do, I would like to end by inviting you to visit one of our DXL stores. As I stated, on April 16th, we are going to have an Investor Analyst Day at our new store in Manhattan. We encourage all of you to come for a nice tour. We are very proud of the store we have put there.

Again, if you like to visit about any other store, please let us know and we will give you a tour and we look forward to speaking with you next quarter. Thank you very much..

Thank you. That does conclude today's conference. Thank you for your participation..