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

Tom Filandro - Susquehanna Financial Group Liz Pierce - Brean Capital Bernard Sosnick - Gilford Securities Chris Krueger - Lake Street Capital Markets.

Good day, everyone and welcome to the Destination XL Second Quarter Fiscal 2015 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, Anthony. Thank you everyone for joining us today on Destination XL Group’s second quarter fiscal 2015 call. On our call today are 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 Investors Relations 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 and sales per square foot, earnings per share, store openings and closings and any 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. We are excited about the performance of the DXL store concept. And looking at our second quarter, you can understand why. The outstanding results we announced this morning continued to demonstrate that our long-term plan is working as we delivered improvements in both sales and profitability.

Once again, our DXL retail stores produced a double-digit sales comp of 11.9%, which was on top of an 11.3% comp in the second quarter of last year. DXL stores now have double-digit comps for eight of the past nine quarters. Against the backdrop of a challenging retail environment, these results truly standout.

DXL is one of just a few retail companies that is generating organic sales growth. During the past three years, our sales have increased from $387 million in fiscal 2013 to $414 million in fiscal 2014 and potentially $442 million at the midpoint of our fiscal 2015 guidance.

This growth is a testament to the fact that the big and tall customer is truly connecting to the DXL concept. In fact, our total growth for the first six months of 2015 has already outpaced our customer growth for all of fiscal ‘14.

Sales accelerated during the quarter as we benefited from a combination of favorable weather, increased store traffic, higher average transaction and greater sales to end-of-the-rack customers on a year-over-year basis.

This top line growth translated into EBITDA for the quarter of $6.8 million, an impressive 116% increase from the second quarter of 2014. We said last quarter that the success of our smaller footprint DXL stores gave us optimism for additional growth in our overall store footprint.

As a reminder, the ROI of the smaller stores, which range between 5,000 and 6,500 square feet, is similar to that of our larger DXL format stores, but with lower occupancy costs and capital investment. We introduced the smaller format stores at this time last year.

And together with the recent introduction of the DXL outlets, they are creating an opportunity to significantly more markets than we have previously identified.

We conducted a detailed market opportunity study of our Casual Male and DXL store portfolio and are very excited to announce that we have identified a total of approximately 400 DXL store opportunities nationwide, a mix of approximately 340 DXL retail stores and 60 DXL outlets and that’s up sharply from our previous estimate of 250 DXL stores.

We have identified specific markets for each of these 400 stores as we have done the detailed research. The additional 150 sites consist of three types of markets. First, some are markets, where we have had a Casual Male store that we had previously thought were too small for the larger format DXL stores.

A second type is large, unsaturated metropolitan areas, where we currently have DXL stores, but where there is still room for growth via additional smaller stores. And the third type is new smaller markets with no current store presence that fit our criteria for the smaller footprint stores.

With this expanded DXL rollout opportunity, we now expect to open 30 to 40 DXL stores per year at least through fiscal 2020. By contrast, our previous plan projected the DXL store build-out would start to wind down in 2017.

This announcement does not change our financial forecast in the near term, but we expect these additional stores will translate into even higher revenue and profitability than previously forecasted beginning in 2017. As I mentioned earlier, we have seen tremendous growth in a number of metrics driven largely by the success of our newer DXL stores.

Through the first six months of this year, we have added more active customers to our database than we added all of last year in part because of the success of our spring ad campaign. And the conversion rate of Casual Male customers to new DXL customers increased 12.5% year-over-year.

On a comparable basis, total transactions at DXL stores grew 9.2% in Q2 of 2014 while the average dollars and customer spends per transaction increased 2.5% from a year ago. These statistics give additional support for the strength of our strategy.

From another perspective, our end-of-rack customer base grew to 42.3% of our bottoms business for the second quarter, up from 39.6% during the same period last year. As we focus on increasing our reach into this market, we have learned a lot about the end-of-the-rack guy.

We believe that the smaller wasted more brand conscious shoppers make up nearly two-thirds of the total big and tall market. They also spend more per transaction and they shop more often than our traditional customer base making them our most valuable customer. Before I hand the call over to Peter, I want to leave you with a few key points.

First, our continued strong financial performance in Q2 provides further evidence that our strategic plan for the DXL rollout is on target. We continue to be on track with our sales and earnings growth plan. We are confident this is the right concept and the right strategy for it.

Second, our smaller footprint DXL stores and now our DXL outlets provided an added, exciting dimension to our success. Because of these two components, based on thorough analysis, we have now identified a total of 400 store opportunities for our rollout, a 60% increase from our previous target.

The 400 stores consist of 340 retail stores averaging approximately 7,200 square feet per store and 60 outlet stores averaging approximately 4,500 square feet per outlet store. And third, the success of our strategy has translated into very strong sales and EBITDA.

We now expect our sales and EBITDA for fiscal 2015 to be toward the upper end of our guidance and we remain on track for its fiscal 2016 goals. We now have an even more favorable view of our growth trajectory after fiscal ‘16 based on our elevated expectations for the rollout. And with that, I will turn it over to Peter for the financial review..

Thank you, David and good morning everyone. To elaborate on David’s comments, our performance in the second quarter further demonstrates that our plan for the DXL concept and rollout is working. The sales comps we are generating are in stark contrast to what is occurring in the overall retail space.

And this gives us confidence that we are able to execute our strategy successfully. We are very pleased with these strong quarterly results and we are on track to meet the upper end of our fiscal 2015 revenue and EBITDA guidance. So now, let me highlight some of our financials for the quarter.

During the second quarter, we reported total comparable sales increase of 6.7% on top of 7% increase in the prior year quarter. We had 111 DXL stores opened for at least 13 months, which drove this growth.

The 111 DXL stores delivered a comparable sales increase of 11.9% on top of 11.3% in Q2 2014 largely as a result of 9.2% increase in the number of transactions. Both traffic and conversion are increasing, which is a very positive sign for sustainable long-term growth.

Turning to gross margin, in the second quarter gross margin including occupancy costs was 47.2% versus 46.3% for the same quarter of fiscal 2014. The 90 basis point increase was largely the result of a 30 basis point reduction in occupancy costs as a percentage of total sales and a 60 basis point improvement in merchandise margin.

Fewer markdowns stemming from the company’s lower clearance inventory levels helped to drive the increase in merchandise margin. SG&A costs for the second quarter were 41.3% of sales compared with 43.3% in the second quarter a year ago. On a dollar basis, SG&A expense increased $2 million year-over-year.

Increased payroll, sales and corporate expenses this quarter were partially offset by a decrease in marketing expense, which was largely driven by favorable media rates during our spring advertising campaign.

Carefully managing our SG&A costs is an important part of our long-term strategy and we expect SG&A as a percentage of sales to continue to decline over the next several years. Next turning to EBITDA, for the second quarter of fiscal 2015, EBITDA from continuing operations was $6.8 million compared with $3.1 million a year ago.

The improvement was primarily driven by our increase in sales for the same quarter of the prior year. Looking at the bottom line, net loss for the second quarter of fiscal 2015 narrowed to $1 million or a loss of $0.02 per share compared with a net loss of $4 million or minus $0.08 per share in the second quarter of fiscal 2014.

On a non-GAAP basis assuming a normalized tax rate of 40%, our adjusted net loss for the second quarter of fiscal 2015 was minus $0.01 per share versus minus $0.05 per share in the second quarter of fiscal 2014.

And next on the capital expenditures, CapEx for the first six months of fiscal 2015 was $17 million, down from $18.9 million in the same period of fiscal 2014. The reduction in CapEx was due in large part to the smaller average DXL store footprint compared with last year.

We opened four DXL retail stores and one DXL outlet store during the quarter, on route to our opening 38 total DXL stores in fiscal 2015, most of which will be opened by the end of Q3. As of the end of the quarter, we have a total of 153 DXL retail stores and five DXL outlets open across the country, which is on track with our plan.

Looking at the balance sheet, inventory at the end of the second quarter was up $7.5 million or 6.5% from the second quarter of 2014. The increased inventory corresponds with the increase in overall selling square footage and a higher mix of branded merchandise as we open new DXL stores.

The quality of our inventory continues to improve as clearance inventory levels were just 7.2% of our total inventory compared with 8.4% of our total inventory at the end of the second quarter last year.

Total debt as of quarter end was $63.9 million, which includes borrowings under the revolving credit facility of $34.1 million, with excess availability of $73.9 million. Now a few thoughts on our outlook for the remainder of the year, first we are on track with our plan and our financial performance.

We are pleased with our results so far in fiscal 2015 and believe we are trending towards the high end of our previous guidance for sales and EBITDA for the full year. We also remain on track with our fiscal 2016 outlook of $470 million in sales and $35 million in EBITDA.

Lastly, I would like to leave you with a few thoughts on our DXL market opportunity study. As David mentioned, we now believe that when the DXL transition is complete, we will have a total of approximately 400 DXL stores across the U.S. There are a few other important considerations that I want to highlight for you.

First, the additional stores will not affect fiscal years 2015 or 2016. We have said before that one of our primary objectives is to be profitable and generate positive free cash flow in 2016. We are still on track to deliver on that goal.

The study changes our expected store openings in fiscal 2017 through fiscal 2020, from opening 10 to 20 stores per year to now opening 30 to 40 stores per year. Second, the return on investment for the additional stores is consistent with the ROI we have been seeing on our existing store openings.

The smaller footprint model has lower occupancy costs and less capital investment, which allows us to maintain a very healthy ROI. We are not expanding the footprint simply to have more scale. Each store is still subject to hurdle rates and will be expected to generate strong free cash flow.

And third, we do not need to increase our borrowing capacity to execute the extended rollout. We believe that we will be generating sufficient free cash flow in 2017 and beyond to both fund the additional capital investment and begin paying down our debt.

Overall, we are very excited about the market potential for the DXL concept and our performance this quarter is another sign that our strategy is working. We look forward to further demonstrating that success in the future. And with that operator, we will open the call to questions..

Thank you. [Operator Instructions] It appears our first question comes from Tom Filandro from Susquehanna Financial Group..

Hi. Thanks for taking my question and congrats on another solid quarter.

I was hoping you guys can help us better understand the evaluation process that’s giving you the confidence to bump to 400 locations and maybe can you frame for us a long-range view of what the sales contribution or maybe the overall sales outlook would be once you reach the goal and as well as the operating margin outlook for the business, again long range as you approach these additional bump up to 400 locations? Thank you..

Okay. The 400 locations that we came up with was a combination of our marketing department who used our database, our real estate department and our finance department to determine if these stores can meet the thresholds required.

Tom, you asked me to go back, at one point there were 600 Casual Male stores and as we have collapsed the markets, we are leaving a tremendous amount of customers not within reach of the store. And when we did the spotting study, we saw that there are certainly a lot of customers out there, existing customers, that have shopped us in the past.

So I think 400 is a reasonable number, it’s not a crazy number. And each one of these markets, the criteria came into place that we can get the ROI and have the proper sales base. This would not have been possible if we didn’t – if we were not successful with the 5,000 square-foot stores.

It really changed the dynamics of the capital we have to put in, the percentage of rent that we are paying and the profitability of these stores. And really, they have been very successful as we have been opening these for the last year. And it really gives as an opportunity to place a lot more stores in whitespace areas..

And Tom one thing that I will add as is David talked a little bit about the size of those stores over, so when we are done with the build-out, the average size of the DXL retail stores, we think is going to be about 7,200 square feet. And outlet stores, a little bit smaller than that, they will be about 4,500 square feet.

So you can take the number of stores times those square footages to come up with an idea of what we are thinking in terms of total square footage. And we are still on track with – we have been saying for a long time that we think sales per square foot in our DXL stores, is going to reach $220 per foot.

So using those three pieces of information, you can get an idea as to what the sales potential looks like..

Okay.

And then the OPM question, I mean it’s a little harder question to ask, but ultimately when you get there, I would assume you have greater leverage on SG&A, corporate and all the other fixed areas of business, any thoughts…?.

Yes. That’s absolute fact, I mean what this really does is it opens up the growth potential for the next 5 years. So previously, we were thinking by the time we get out to 2017, we will be starting to slowdown the concept.

We would have by that time 210 to 220 stores and if we were only going at 250, it was going to slow down, but now that we can go to 400, it gives us a lot more growth potential in ‘18, ‘19 and ‘20..

And may I ask one more question and I will leave it to the next person? I believe in May was that you launched the ability to see, I think inventory across the system, just confirming that.

And if you did, can you just maybe discuss the implications on what that will have – what you think that will have on the business over the long haul? And did you experience any sales list during the second quarter as a result?.

Yes, that’s our StoreNet concept and it did create a dramatic impact on our business, because prior to that, the only visibility to customers buying online was if we own that product in the warehouse itself. Under the new system all products is live.

So, if we have a shirt in Billings, Montana, the customer doesn’t know where it’s going to be shipped from. We basically setup backroom warehouses for all these stores and it’s done a tremendous positive impact on us. What’s interesting is it really drives clearing out the seasonal goods, because obviously we have pushed all that out of the warehouse.

And now, rather than taking a continual markdown in the stores, we could get that sold usually at the first markdown of 25% off versus in the stores, it could have been 50% or 75% off by the time we sold it. So, it’s been a big win for us. It has impacted our sales positively.

And it’s really reduced the amount of clearance we have in the total company..

Excellent, thank you..

Our next question comes from Liz Pierce with Brean Capital..

Good morning. Congratulations.

Kind of, David, just following up on Tom’s question about the StoreNet and your comment about putting – creating a little bit of a backroom, has that caused any kind of disruption or incremental cost for the stores?.

No, it’s a system that it caps out a specific store on any given day. So, one store won’t get overloaded. So, once it reached its maximum capacity of units, it shuts down and it will go to another store. And look, we have been doing this for a year now and it hasn’t impacted our labor in the stores at all..

Okay, that’s good. I just wanted to clarify.

And then in terms of these additional stores, I am curious about your comment when you some of the stores that – markets that you left, are they going back – will these additional stores be going back into those markets or – so were people already have some recognition of Casual Male or?.

Yes, definitely. If you recall, we closed 100 stores in 2013 and that’s way too impressive and now we are going back and filling in those spaces and we filled in some of them. And again at 5,000 square feet, we are talking about stores that only really need to do in the neighborhood of $1 million in the early years. That’s $200 a foot.

So, that fits our model. And almost all our stores reached that threshold within two years..

Okay.

And then just following up on something you guys had mentioned in last quarter, just making sure that those most productive Casual Male stores, I think 23 of the 25, right, are said to convert, those are still on track?.

Yes, fair, pretty close to that. Again, we can’t always close the deal, but the point is that we have a very strong lineup for 2016. A lot of the stores that we have been trying to get in those markets for several years have opened up finally.

So, we got some of our higher volume Casual Male stores converting next year, which will be a big plus for us..

Okay.

And then on the marketing campaign, so I think as you said last quarter, we will see the same kind of timeframe, same cadence for the second half, but I was curious you said about the advertising rate or you are getting better rate presuming you can continue to carry that forward? And perhaps is there an opportunity to continue to bring that down?.

So, Liz, on the comment that I will make on that is last year, the middle of last year, I think we started talking about the fact that we had gone out and contracted with the new media agency and we were getting some nice savings in the second half of last year.

We have seen them again nice savings in the second half of this year – I am sorry, first half of this year, but we are about to anniversary that. So, it was kind of a one-time event over the second half and first half of this year.

So, while we are going to continue to have good marketing rates going forward, you are not going to continue to see a big drop quarter-to-quarter like we have been seeing..

Okay, thanks for that clarification. That’s helpful. Alright, I will get back in the queue, but if I don’t speak to you, best of luck guys..

Thank you..

Thanks..

Our next question comes from Bernard Sosnick with Gilford Securities..

It’s great to see you on such a positive trajectory. Congratulations..

Thank you..

With regard to the Casual Male stores, has the transition from Casual Male to DXL improved? And is there reason to reduce promotional emphasis to get that transition?.

Well, we have definitely seen improvement in conversion. And when we talk about conversion, it’s how many existing Casual Male store customers shop at the DXL store within the coming year. And we have improved that every quarter as our marketing techniques have gotten more honed in on what really motivates this guy to come in to see the new store.

But that’s been very strong for us and we will continue to be that. From a marketing point of view, we have pretty weaned down our promotional calendar. We are seeing a tremendous response to full price selling these days and we are not – we don’t anticipate any real change in that cadence to use promotional events to drive traffic to the stores.

It’s more just getting them in the store the first time. And what’s happening is when it comes in the store the first time, he stays longer within our database, more active. And that’s been the big win. And as I said, our customer accounts are going up dramatically.

And previously that was always our previous problem was keeping the customers in the stores..

Still with regard to Casual Male, how have those stores been performing, because for a while, you are citing better performance than you had anticipated?.

They have held up extremely well and they are still in the positive territory in the comps, low single-digit comps, which is all we expect from them and they have continued to deliver that even as the DXL stores start to cannibalize the real estate space. Casual Male stores have been very resilient..

I am glad to see that success across the board.

With the conversion of higher volume Casual Male stores, casual for next year, how might that affect the DXL stores as they start up and how many of these high volume stores do you have transferring?.

Well, we still have, as David was saying, Bernie, we think it’s 20 plus stores this year and next year of our higher volume stores are transferring over. That’s certainly helping to drive our growth this year and next year. So, we have said that next year, we are targeting $470 million in sales and we feel very good about that number at this point..

Okay. And finally on the branded side of DXL, the inventories are up, I presume. It’s an indication of strong demand for branded goods.

Could you give a little bit of color with regard to branded goods and your plans to increase private label as a means of enriching your gross margin?.

Well, we have said this before, the brands are about 30 – they are only about 30% of our sales in the DXL stores. We continue to be very driven by our private label brands, but the newer customer coming in, the younger customer is definitely more brand conscious.

One interesting point on that, because it’s always been a concern as we grow out these stores, what’s going to happen to our margins and we have actually shown margin improvement even as our percent of brands has grown, we have been able to offset that with more full-priced selling, less promotional and better terms with our branded vendors..

Well, congratulations again..

Thank you..

Thank you..

Our next question comes from Chris Krueger with Lake Street Capital Markets..

Good morning..

Good morning, Chris..

Hi, can you talk about the timing of this year’s advertising campaign or television advertising campaign versus last year for the kind of important holiday period?.

It mirrors what we did last year. It’s just we are on the same cadences for the fall season as we did in 2014..

Okay.

And then my only other question is anything new on the competitive front, I mean it seems like others have kind of gone away, has anybody emerged year-to-date?.

Not that we know off, no. We continued to dominate the market and we haven’t seen anybody making any strategic moves..

Okay, that’s all I got. Thank you..

[Operator Instructions] Our next question comes from Liz Pierce with Brean Capital..

Thanks.

Just a follow-up question, how should we be thinking about the closing down now of the Casual Male, like is there any change in the way we should be modeling the number of stores per year?.

Liz, that’s a great question. So when we get to the 400 DXL stores, which are both outlet and retail stores, there is still going to be a very small group of Casual Male stores that are still open, call it about 30 right now. And we still have our three biggest Rochester stores in London, Beverly Hills and New York.

So the smaller Casual Male stores, the reason that they are still in there is that even as we have gone down to a 5,000 square foot store, there is still that group of 30 that we are not sure yet if they could make it as a DXL. So as long as they have healthy sales and they are generating positive free cash flow, we will keep them open..

Okay.

And is that a mix between Casual Male outlet and Casual Male retail?.

Yes. It’s about 15 retail and 15 outlet..

15 retail, 15 outlet. Okay, that’s all I had. Thanks and best of luck again..

And it appears we have no phone questions at this time..

Okay. Well, thank you, all for joining our call today. And as I always do, I would like to end by inviting you to visit one of our DXL stores and experience what we have built in the Destination concept. And if you would like to visit any of our stores, please let us know, we will be happy to give you a tour.

And we look forward to speaking with you next quarter. And thank you very much..

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