Jeff Unger - Vice President, Investor Relations David Levin - President and CEO Peter Stratton - Senior Vice President and CFO.

Liz Pierce - Brean Capital Bernard Sosnick - Gilford Securities Michael Gunther - Sterne, Agee Chris Krueger - Lake Street Capital Markets Jack Balos - Focus Research.

Please standby, we are about to begin. Good day. And welcome to the DXLG First Quarter Fiscal 2015 Earnings Call. Today's conference is being recorded. At this time, I’d like to turn the conference over to Mr. Jeff Unger. Please go ahead..

Thank you, Jennifer. Good morning, everyone. Thank you for joining us today for DXL first quarter fiscal 2015 call. 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 conditions, including sales, profitability, EBITDA, expenses, gross margin, capital expenditures, sales per square foot, earnings per share, store openings and closings, and other such 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 our first quarter performance, I want to take a moment to explain where we are in the evolution of the DXL concept. Fiscal 2015 is a pivotal year for us building on a highly successful finished to 2014.

We expect great things throughout this fiscal year and our drive towards profitability in fiscal 2016. There are three key factors that differentiate DXL from our direct competitors in the big and tall men's apparel sector that are helping to drive our success. First, we dominate the big and tall industry.

We are by far largest specialty retailer, both brick-and-mortar and online sales. We have 357,000 stores among our three brands. The next largest competitor has four stores. It’s a huge advantage for us. In online web traffic we now have a 58% traffic share and that figure has been growing steadily each month.

We have all the major brands our customers want, including 22 exclusive brands for big and tall. Other chains with substantially greater resources have tried to enter this segment may have all left the space. We are playing offense now and our future is extremely bright.

Second, between Casual Male and now Destination XL, we have spent years gathering a great deal of intelligence and proprietary knowledge about each individual market in each store within each market. This first-hand knowledge developed from our legacy stores continues to be a crucial success factor in the DXL store rollout.

I can't tell you how much of an advantage this is. We have years of proprietary sales, sizing and customer database based on real experience. That's why when you look at our performance of our 150 DXL retail stores only one store has been identified to be shutdown due to underperformance.

Contrast that with other retailers we have a portfolio of underperforming stores but they are trying to close. We know the formula for where to put these stores. How many replaced in a given market. The correct store footprint for each of our markets in which sizes of each product to stock.

Along the way our experience has enabled us to bring down our average build-out cost as well. Where we use to spend the $100 a foot we have now reduced that to approximately $75 a foot. We are very comfortable with our strategy and it gives us great confidence in the future.

Third, our Destination location model is driving long-term sales growth with strong multiyear comps. When specialty retailers open the store in the mall, these stores mature very quickly. The growth is fueled by existing mall traffic that is highly dependent on co-tendency code.

In contrast, the Destination model takes several years to mature and is not dependent on mall traffic or co-tendency. Our stores continue to produce high sales comps for the first few years.

That's because with Destination real retail stores like DXL, shoppers don't always know where the stores are until they see a commercial or drive by and discover the stores. So the stores customer base increases overtime and until the store matures after five years we can expect strong multiple year comps.

Our goals for the average store in the first five years of comps and this is based on several years experience thus far is 12%, 10%, 8%, 6% and then 4%. So after five years in the comp base our store sales grow approximately 45% greater than the first year the store was open. This is the strength of the Destination model.

DXL stores we opened in 2010 are just now starting to average and mature sales growth rate of low single digits. Also it's important to note that this is a larger account sales base than our legacy stores. In 2013, we opened 51 stores and last year we opened 40 stores.

Those stores will continue to produce strong comps until 2018 or 2019 and this year we expect to open 40 additional stores. So if you look at our financials in three to five years, you would see tremendous earnings power created by this highly differentiated model. No one else in retail is doing this.

It's important that investors take that into consideration as they look at traditional stores versus how they view Destination XL in 2016, 2017 and beyond. You can tell we are excited about the progress we’ve made in the direction we -- in which we are headed.

We have truly created a unique experience for our customers and this is driving our robust financial performance. This leaves me to our first quarter results. We began fiscal 2015 with an excellent quarter. We continued to execute well, perform in line with our plan and our successes underscores the potential for the DXL concept.

Our sales for the DXL retail stores continue to be strong. In the first quarter, we reported an 8.7 comparable sales increase in our 104 DXL stores that were opened at least 13 months. This was on top of 12.8 comp in the prior year's first quarter.

Putting our Q1 sales performance in perspective, we accomplished this in a very challenging retail environment, where we believe an 8.7 comp is impressive. In fact, we believe that our Q1 comparable sales would have been even stronger if not for the historically severe winter weather in the Northeast.

Included in our sales results for Q1 was a strong performance from our new smaller footprint DXL retail stores. As we discussed 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 has resulted in the same return on investment as our larger stores but on a smaller base because we continue to tailor our store size. Our ROI each year continues to get better. Our five-year internalized rate of return on our 2010 to 2012 DXL stores is 30% to 32%, 38% on our 2013 stores and 42% on our 2014 stores.

Our ability to successfully roll out the smaller footprint model gives us optimism that we can build the store count greater than we had initially expected after 2017. We will now be able to go into smaller markets or add additional stores in certain markets.

In addition to our smaller footprint DXL stores, our DXL outlet stores have also been a great success thus far. During the quarter, we opened two new DXL outlets.

We’re opening DXL outlet stores where we have an opportunity to expand or move into a space within the same shopping center that could accommodate the larger size of the DXL outlet which is about 5,000 square feet, or about 1,500 square feet larger than a Casual Male outlet store.

We opened two DXL outlets last year and they are performing very well thus far. In addition to our brick-and-mortar stores, we’ve also seen excellent success with our ship-from-store technology StoreNet.

This technology enables our stores to fulfill online orders that cannot be fulfilled by our distribution center, greatly expanding our available online inventory. Our goal has been to provide a seamless customer experience whether he shops at brick-and-mortar store or via computer, smartphone or tablet.

The second phase at StoreNet was to launch shop online pickup in store. And this has allowed customers to make last minute purchases online and pickup items in the closest DXL store. This feature enhances customer relationships by bringing guests into our stores where sales associates can then recommend additional items at the point of sale.

We launched shop online pickup in store in a limited number of stores this month and will be rolling out the balance of the -- the balance of the chain by the end of the second quarter. We’re also excited about our new advertising flight, which began on NFL draft day on April 30th with an ad on ESPN and continues through Father's Day in June.

Our spring advertising includes three vignettes that focus on how man look and how they feel when they shop in our stores. Our marketing of the DXL concept has been highly successful and has been an important component of our steadily increasing performance.

There are handful of key metrics that we follow very closely to ensure our transformation is on track. First, the number of active customers on our database has grown at a very impressive 6% in the past 12 months. Our DXL stores on average have 88% more customers than a Casual Male store.

And the retention rate for those stores is 32% greater than our Casual Male stores. Our end-of-rack customer base continues to grow as well, representing 42.1% of our bottoms business for the first quarter as compared to 39.6% for last year’s first quarter.

These metrics are helping to drive significant increase in transactions, which have grown 6.6% from last year's first quarter. And the amount, customers are spending in stores is also growing with dollars per transaction up 2.1% from Q1 last year.

We’re planning to spend approximately $23.9 million or 5.4% of sales and marketing this year compared to $26 million or 6.3% of sales in 2014. We’re becoming more efficient with our media purchases and our marketing spend will continue to decrease on both the real dollar basis and as a percentage of sales.

Before I turn the call over to Peter for the quarterly financial review, let me sum up with a few thoughts. First, our financial performance in Q1 continues a strong momentum we achieved coming out in 2014. DXL concept is working and we’re on track with our sales and earnings growth plan.

Second, we’ve had very good success with our smaller footprint DXL stores and now with our DXL outlet stores as well. In addition to our brick-and-mortar stores, our StoreNet technology is enabling omnichannel growth, which has tremendous new paradigm, both for our customers and for Destination XL.

Finally, we’re very optimistic about translating the success of strong EBITDA in accelerating cash flow in 2016 and beyond. And with that, I'll turn it over to Peter for the financial review..

Thank you, David and good morning everyone. As you can tell from David's introductory comments, we've never been more confident in our ability to execute on our strategy. Once again we're very pleased to report a very strong quarterly result to all of you today.

During the first quarter, we reported a total comparable sales increase of 5.5% versus 3.4% in the prior year quarter. Driving this improvement were our 104 DXL stores that have been opened for at least 13 months. These stores delivered a comparable sales increase of 8.7%, spurred by a 6.6% increase in the number of transactions.

We are very pleased to see that sales continued to be driven primarily through traffic and conversion, which we know is much more sustainable long-term than growth from average transaction value. Moving onto gross margin. For the first quarter, gross margin including occupancy costs, was 46.2% versus 45.5% for the first quarter of fiscal 2014.

The 70 basis point improvement was largely due to a 70-basis-point reduction in occupancy costs as a percentage of total sales. Driving that reduction in occupancy costs was a $600,000 one-time reversal of lease exit reserve.

The reserve was reversed because we decided to open a Casual Male outlet store in a previously closed location with the lease term that doesn't expire until fiscal year 2018. SG&A costs for the first quarter were 39.7% of sales, compared with 42.9% in the first quarter of the prior year.

Part of the reason for this 320 basis point improvement is due to the fact that we started our spring advertising campaign much later in the season than last year. The shift in advertising costs is worth approximately $1.7 million quarter-to-quarter.

As David mentioned earlier, we do expect that SG&A will continue to decrease as a percentage of sales as we continue to execute our strategy. So, now let’s turn to EBITDA. As a reminder, we believe this metric 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 to the DXL concept and EBITDA is a key component in evaluating free cash flow. For the first quarter of fiscal 2013, EBITDA from continuing operations was $6.8 million compared with $2.5 million in the first quarter of fiscal 2014.

Looking at the bottom line, net loss for the first quarter was negative $600,000, or minus $0.01 per share, compared to a net loss of $3.5 million, or minus $0.07 per share in the first quarter fiscal 2014.

On a non-GAAP basis, assuming a normalized tax rate of 40%, our adjusted net loss for the first quarter of fiscal 2015 was minus $0.01 per share, compared to a first quarter 2014 loss of minus $0.04 per share. Next onto Capital expenditures.

CapEx for the first quarter of fiscal 2015 was $9.6 million, down from $11.1 million in the same quarter of fiscal 2014. The reduction in CapEx was due in large part to the smaller average DXL store footprint as compared to last year.

We opened 11 DXL retail stores and two DXL outlets stores during the quarter on route to our plan to open 40 total DXL stores in fiscal 2015. We now have a total of 149 DXL retail stores and four DXL outlets open cross the country, right in line with our plan.

We're also excited because 23 of our top 25 remaining Casual Male stores are slated for conversions to DXL over the next two years. Remember that the performance of the legacy Casual Male store is the best indicator we have for expected performance as a DXL store in converting these top stores is a priority for us.

Turning to the balance sheet, inventory at the end of the first quarter was up $8.6 million, or 7.4% from the fourth quarter of 2014. As our DXL store count has increased, our overall selling square footage is increasing and we are also carrying a greater percentage of branded apparel associated with those stores.

Second, as I discussed last quarter, we made a conscious effort to take early receipt of merchandise to ensure sufficient in-stock inventory positions in advance of the spring selling season. Because of this decision, our inventory was in excellent shape for the spring.

Furthermore, our clearance inventory levels are in great shape, representing only 8.2% of our total inventory, compared to 8.4% of our total inventory at the end of fourth quarter 2014 and 9.7% at the end of first quarter last year.

Total debt as of quarter end was $71.8 million, which includes borrowings under the revolving credit facility of $40.1 million with excess availability of $68.3 million. Turning to our outlook.

We are on track with our plan in our financial performance and we are narrowing our previous EBITDA guidance for fiscal 2015 that we provided on our fourth quarter call. SG&A expenses are now estimated to be approximately $180.5 million, down from $181.5 million we reported last quarter.

EBITDA is now estimated to be in the range of $21 million to $23 million. compared with $19 million to $23 million reported last quarter. Net loss is now estimated to be in the range of minus $0.20 to minus $0.23 per share, compared with minus $0.20 to minus $0.27 per share reported last quarter.

Assuming a normalized tax rate on a non-GAAP basis, the adjusted net loss for fiscal 2015 is expected to be in the range of minus $0.12 to minus $0.14 per share as compared with our original guidance of minus $0.12 to minus $0.16 per share. Once again, our results this quarter further proved that our plan is working.

We continue to demonstrate our ability to execute to our plan and we are growing more confident as we progress towards the sales of $470 million and EBITDA of $35 million in fiscal 2016. With that operator, we will open the call for questions..

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

Good morning. Congratulations to you guys what a phenomenal quarter in light of the current environment.

So David just thinking about the data that you have in terms of your customer base, what are you seeing in terms of some of the original what’s caught in the first two years, the first kind of 2010 or '11 stores in terms of average tickets? Like how often are these guys coming back, and what are they buying?.

We haven’t changed the buying pattern very much. They still tend to shop 2.2, 2.3 times a year. But again we are always gravitating towards a higher percent of brands and that’s really coming from the new customers versus our existing customers. And we are just showing our new [Technical Difficulty] continues to grow as we open new stores.

We get more new customers. I think it’s mostly because of the awareness to the marketing over the last few years. And what we can identify with the new customer he is clearly younger. He spends more money and he does shop more often.

So this has always been the master plan was how do we attract this younger guy who didn’t want to really shop in the traditional big and tall environment and offering up the DXL concept. He is really -- he loves what he is seeing..

Okay.

And then in terms of the advertising, could you just -- I was a little bit confused I guess you started later this year, is that what I just -- I didn’t have a chance to go back and look?.

Yes, Liz. So we started the ad campaign on Thursday night last week of the quarter which was the NFL draft. So the campaign was only in this quarter for three days, whereas last year we started the campaign about a week earlier. So there was more expense in the first quarter last year than there was this year..

So how should we think about that for impacting SG&A in Q2 on the basis point kind of round number?.

So the shift in SG&A, the amount was about $1.7 million. And as you think about the rest of the year, the majority of the decrease in SG&A from last year to this year is coming in the first quarter. So you should think about Q2, Q3 and Q4 similar to last year..

Got it. And that’s really helpful. And then one more and get back in the queue.

What about the plans for advertising for Q4, how does that match up with last year?.

It matches up the same. We are going to be running it at the same timeframe we ran it this year..

So rate around Black Friday and then extending through the break before holiday, the actual Christmas?.

It will take us through mid-December..

Mid-December.

And there is nothing then in between when this one ends on Father’s Day and Black Friday or…?.

That’s correct. We have two flights a year, each one about six weeks long, the one that starts in May and then the one that really starts in November..

Okay. I will get back in. I have some more things. But you guys great job and best of luck..

Thank you..

We will go next to Bernard Sosnick with Gilford Securities..

Good morning.

I’d like to just touch on the end of the rack customer, what percentage of sales does that represent in the first quarter versus a year ago?.

Yes. It was fourth -- rounding about 42% this year versus 39% last year..

Okay.

And what are your findings with regard to spring advertising campaign, which is much different, much more dynamic? What are your readings in terms of awareness and responsiveness?.

Okay. So to clarify what you’re saying is what we did this year is we have three 15 second spots that rotate sometimes as 115, that can sometimes is 215 second back to back. And clearly what we’re noticing is the tremendous lift in web traffic.

When this commercial run, Bernie, you are right it’s more dynamic, it’s more entertaining, and it’s driving a lot more web traffic than we have over last campaign. So we love what the commercial is doing for us and again we will be running that commercial in the back half of the year also. So it’s nothing positive.

As far as awareness, we don’t know that at this point in time until after we finish the campaign..

Okay. Then a question on gross margin. If you take out the lease reversal, the gross margin, merchandise gross margin would seem to increase -- have increased only slightly and that’s against the quarter a year ago where the gross margin was pretty heavily depressed.

What could you tell us a little bit more about the gross margin ex the lease reversal cost?.

Sure. So Bernie, the gross margin is going to continue to improve over the course of the year. One thing to keep in mind is when you are looking at our guidance for the full year, gross margin is flat in the guidance to what we gave last year.

But keep in mind we did have $2.5 million one-time lease exit gain that’s in that number last year to make sure you’re comparing against. So we are continuing to make strides on it with driving IMU and controlling markdowns and that’s going to continue to uptick throughout the year..

Could you give us a little bit of a picture on the top casual male stores that are going to be converted in terms of the average size and productivity?.

Yes. The top 25 casual male stores that we have today are all basically $900,000 or higher. They range from $900,000 to $1.4 million. Now that’s compared to the average Casual Male of $650,000.

So, again, if we just start looking and trying to get 40%, 50% increases on a one-for-one conversion, is going to have much more topline power force, because these stores that are doing $1 million should come out of the box at $1.4 million, $1.5 million.

So it's very exciting to us that most of the big ones that we have left to convert are going to be happening in the next year. We've been trying to get these stores converted for few years. It just the way it's turned out that most of them will convert into -- by to -- at the end of 2016, so we got a great lineup for next year..

And what was the average footage?.

The average footage of this Casual Male’s that we’re converting is probably 3,500 to 3,800 square feet. And they will be -- most of these will be bigger than the five cases, so most of these will average about 7,000, 7,500 square feet..

Okay. Thank you very much..

We’ll go next to Lee Giordano with Sterne, Agee..

Hi. Good morning, guys. It’s Michael Gunther on for Lee.

Couple questions, first back to the end of rack customer, obviously that continues to grow as a percentage of overall sales? How high do you think that can go long-term?.

Well, I think, like, we tend to move -- continue to move the needle, now based on [NPD] [ph] studies, 65% of the big and tall market is in what we call end of the rack. Now we’ll never achieve that simply because there’s certainly more competition in a 40-inch waist than a 50-inch waist. But we continue to see it grow at a nice clip.

Every quarter seem to increase and I think that's the power of DXL. How high? I don't know. It is difficult to put a number on that..

And then turning back to marketing, obviously, that’s coming down as a percentage of sales from the 7% peak.

I think you mentioned the target longer-term might be to bring it back to 4%? How long do you think it might take to get back to that point?.

By the end of next year, we have got....

Okay. Great. And then one more, the New York City store that was recently opened, look great.

How the performance has been so far?.

We're very pleased. We've been trying to get put a store and we are glad how to put a store in Manhattan for many years and we found a right location at a very reasonable rent structure and its one of our flagship stores.

And we’re getting a lot of awareness there now and they’ll continue to build overtime, but that’s definitely going to be one of our top stores in chain..

Great. Thank you..

We’ll go next to Chris Krueger with Lake Street Capital Markets..

Good morning. Nice quarter..

Thank you..

Thanks, Chris..

Yeah. In your press release, you mentioned that, you outperformed your sales plan, despite the severe winter weather and difficult economic climate.

Just wonder if you can give us any more insight into that, whether it's certain regions that underperformed or months-to-months sales or anymore insight there?.

I think we pretty followed what every other retailer went through in the first quarter. There were some very tough weeks with the weather. We do have -- we are weighted a little heavier in the Northeast and we have the same problem everybody else did.

But just from what we saw out there with the results of other retailers, we feel very good the way we performed..

Okay. Then with your new smaller footprint that you’re, kind of, working towards, you talked about entering [Technical Difficulty] markets and that there is a potential for greater number of stores that maybe [indiscernible] plan.

Have you begun to enter smaller markets with that footprint or you still sort of filling in current markets with that?.

We’re entering smaller markets on Shreveport, Louisiana and I could go on. But now we’ve been doing that for couple of quarters now..

Okay. And then on the competition front, you mentioned there is really no other nationwide retailer targeting the big and tall market. I think you have mentioned that the largest one has four stores.

Has there been a sign of any others like going away in the last year or so?.

Well, in the last year, JCPenney’s concept the boundary. They had 10 stores and they closed all their stores by last year’s fourth quarter. And really it’s small, independent mom-and-pops that slowly over time have closed their stores. When we come, bring a DXL store into a market, it's very difficult to compete with it..

All right. That’s all I got. Thanks a lot..

We’ll go next to Jack Balos with Focus Research..

I have a question regarding borrowings under credit facility. That amount in January of 2014 was $9 million. Then it increased to January of 2015 to $18.8 million. And as of May of this year, it's up to $40 million.

My question is why is that increasing so rapidly? Do you have a limit in terms of your capacity to borrow? And what do you expect it to get to by the end of this year?.

Sure. So Jack, the number that the revolver balance at the end of this quarter was $40.7 million. And the reason that that's going up is our revolver is serving two purposes. One is the primary source of funding for our seasonal inventory purchases.

So as we stock up on our inventory moving into the end of the spring season that’s going to put pressure on the revolver. The other component is the fact that we’re using the revolver to fund the CapEx on the new DXL stores. So that number is going to increase this year. I think it's going up total about $20 million from last year.

And then next year in 2016, we should be relatively neutral. And then in 2017, we start paying that back down. The key to that equation is making sure that we have enough availability. And our availability at the end of Q1 is almost $70 million.

So we do feel very confident that we’ve got an adequate liquidity structure in place to make sure that we can not only meet our inventory requirements but also to finish building out the DXL stores..

Okay. Thank you..

We’ll go next to Liz Pierce with Brean Capital..

Thanks for taking my follow-up question.

So David and Peter, regarding those top 25 stores, Casual Male stores that are converting, given how productive those stores are, were you guys or have you been doing any additional kind of marketing around that to make sure that the customer is aware, like basically getting it a little bit more attention so you don’t lose the sale?.

Yes. As soon as we identify that we have a lease working pretty well down the road, we start the ambassador program where we bring in the video of the new store, the shopping bags come in, the signage comes in. We are way ahead of the curve where we used to be a few years ago.

And the other part of that is to the detriment short-term for the DXL store, we’re going to keep that Casual Male store open for -- could be two, three months to continue to drive the customers that come in the existing store over to the new store. And again, our conversion has improved about 24% this year over last year. So, we’re all over that.

We know that's critical and as soon as we get -- assign that the stores are going to convert, we’ve put into an action plan..

Okay. So basically doing what you've done before. Nothing extra for these larger-volume stores, I guess that was my question.

No. No. I think we've got a good program right now and it’s nothing different..

Okay. And they will stay open post the DXL opening, which I think is beneficial. And then what about on the international front? I think you’ve talked before that you have been approached by various operators.

Any update on that and your thoughts about perhaps pursuing it on a franchise basis?.

Yeah. We are under discussion right now. I think in the next quarterly call, we will have a little more color on that to talk about..

Okay. Okay. Perfect. That’s all I have. And again, I will add my congrats and best of luck..

Thank you..

And at this time, there are no further questions..

Okay. Well, thank you for joining us on our call today. As I always do, I’d like to end by inviting you to visit one of our DXL stores and experience what we’ve been, what we’ve built into this concept. We are pleased to see many of you at our tour of our Manhattan store recently.

And if you like to visit that store, which is convenient to many of you or any of our stores, please let us know and we will be happy to give you a tour. Look forward to speaking with you next quarter and thank you very much for joining us today..

This does conclude today's conference. We thank you for your participation..