Jeff Unger - IR David Levin - CEO Peter Stratton - CFO.

Liz Pierce - Brean Capital Bernard Sosnick - Madison Global Partners Chris Krueger - Lake Street Capital Markets.

Good day and welcome to the DXLG Third Quarter 2015 Earnings Call. Today’s call is being recorded. At this time, I would like to turn the conference over to Jeff Unger. Please go ahead, sir..

Thank you, Elizabeth. Good morning, everyone and thank you for joining us today on Destination XL Group’s third quarter fiscal 2015 call. I’d also like to thank everyone from DXLG for your -- enjoy your Thanksgiving for next week and have a joyous holiday season.

On our call today we have 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 Investors Relations Web site 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, international strategy 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 as 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. Our third quarter performance proves again that our DXL transition strategy is working. We delivered solid results during the third quarter meeting our expectations as we continue to execute on our strategic plan.

DXL retail stores produced a sales comp increase of 9.2% and this was on top of 12.8% comp from the third quarter last year. We now have delivered 10 consecutive quarters of more than 8.5% comp store sales at our DXL stores. Overall, sales increased 6.4% from year ago. We also have been steadily expanding gross margin for some time.

In this quarter gross margin inclusive of occupancy cost increased by 170 basis points year-over-year, that’s largely the result of two factors; first, we’re starting to see some improvement in markdowns, we’re seeing higher average dollars per transaction as consumers purchase a greater mix of regular full retail price merchandise in lieu of lower margin promotions.

Second, our global sourcing team has done a great job in obtaining more favorable pricing. As a result of this factors, EBITDA for the quarter was 2.5 million compared with 0.5 million a year ago.

We attributed that growth to the performance and profitability of all three of our DXL platforms, the larger and smaller footprint DXL retail stores and our DXL outlet stores.

As we stated previously, 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 cost and capital investment, that continues the whole true.

During this fiscal year approximately half of the DXL stores we open will be smaller format retail stores or outlet stores. This mix allows us to reduce capital expenditures below our initial guidance for fiscal 2015. In addition to our sales and EBITDA growth other key metrics and have trended well.

For example the conversion rate of Casual Male customers to new DXL customers increased 12.5% year-over-year. Casual Male customer conversion has risen steadily for more than a year since we launched the ambassador store program.

On a comparable basis total transactions at DXL stores grew 5.8% from Q3 of last year while the average dollar a customer spends per transaction increased 3.1% from a year ago. Looking at our customer mix, end-of-rack customers accounted for 42.9% of our bottoms business for the third quarter, up from 40.7% during the third quarter last year.

We believe that the smaller waisted more brand conscious shoppers make up nearly two thirds of the total big and tall markets. They spend more per transaction and they shop more often than our other customers. We’ve done well attracting these guys to our DXL stores and there is still room for us to grow this crucial market segment.

These positive trends are partly the result of our productive marketing efforts. We kicked off our fall marketing campaign in October on the NFL Network with Thursday night football. This campaign has the same timing as our campaign a year ago.

Now I’d like to take a few minutes to update you on another corporate initiative that we spoke to earlier in the year. As many of you know, we have a franchise store in Kuwait City that is successfully delivering the DXL experience to the big and tall population of Kuwait.

Although it’s just one store our experience in Kuwait has given us confidence that the DXL brand can one day have a truly global presence. We believe the big and tall population around the world is currently underserved and that presents an opportunity for DXL.

Earlier today we announced the appointment of Nancy Youssef as Senior Vice President of International Business Development. She’ll be responsible for the international expansion of the Destination XL brand. Nancy is an international franchise veteran having worked for the past six years in a similar capacity with footwear and apparel retailer Genesco.

Her successful experience in international retail franchising makes here the ideal choice to lead our global expansion strategy. Our strategy will be centered on a franchise and licensed model and will require very little capital commitment.

We’re currently exploring opportunities with other global operators and expect to be ready to open our first group of international DXL stores sometime in 2017. Finally, some thoughts on our outlook which Peter is going to discuss in more detail. First, you can see from our results in the third quarter that our DXL rollout plan is on track.

We’re on pace to have a 175 DXL retail and outlet stores open at the end of fiscal 2015. However, our business in the fourth quarter is dependent on seasonal sales and certain cold weather categories.

And like many apparel retailers, we have seen a slower than expected sales build in these cold weather assortment due to the un-seasonally warm weather across much of the U.S. I want to emphasize that our slow start in fourth quarter sales isn’t affecting all stores.

Our DXL stores in such space as California, Florida and Arizona which are much less affected by seasonal changes and seasonal product sales, are performing very well through the first part of Q4. The business fundamentals of the DXL concept remain very strong and we continue to be encouraged by our prospects for 2016.

Nonetheless we’re nearing our fiscal 2015 sales and EBITDA guidance at the same time the success of the smaller format DXL stores is resulting in lower capital expenditures than we expected, that’s enabling us to operate at reduced firing levels and increased profitability.

Therefore, we are maintaining our EPS guidance due to an improved forecast for depreciation and interest. And on that note, I’ll turn it over to Peter for the financial review..

Thank you, David and good morning everyone. Our third quarter results provide further support for our strategy in DXL’s significant growth opportunity. We achieved some very impressive results in the same difficult retail environment that is stifling many other operators. So let’s turn to the financial highlights from the quarter.

During the third quarter, we reported a total comparable sales increase of 4.3% which was on top of 5.5% increase in the prior year quarter. We had 119 DXL stores open for at least 13 months and as David mentioned they delivered a comparable sales increase of 9.2% on top of 12.8% in Q3 of 2014.

This was largely the result of 5.8% increase in the number of transactions, which is a good indicator of sustainable long term growth. Turning to gross margin. In the third quarter, gross margin including occupancy costs was 45% versus 43.3% for the same quarter of fiscal 2014.

The 170 basis point increase was primarily the result of 120 basis point improvement in merchandise margin. We saw higher full price sales penetration in the third quarter which allowed us to better control markdowns. Our internal sourcing teams have also done a great job in negotiating favorable pricing which is driving our initial mark-ups.

Lastly, we experienced a 50 basis point improvement in occupancy costs as a percentage of total sales, which further contributed to the improvement in gross margin. Our SG&A costs for the third quarter were 42.6% of sales, compared with 42.8% in the third quarter a year ago.

We continue to expect SG&A as a percentage of sales to decline over the next several years as we further leverage our existing costs over growing DXL sales base. Marketing expense was 4.3% of sales in the quarter and we expected to be about 5.5% for the full year.

This is a decline from 6.3% for fiscal 2014 as we have higher sales and have become more efficient with media purchases. All combined the sales improvement, gross margin improvement and SG&A expense control are resulting in third quarter EBITDA from continuing operations of $2.5 million, compared with just $500,000 in the third quarter a year ago.

Our net loss on a non-GAAP basis assuming a normalized tax rate of 40% was a loss of $0.07 per share compared with a loss of $0.08 per share in Q3 of fiscal 2014. Now let’s turn to the balance sheet and cash flow.

Capital expenditures for the first nine months of fiscal 2015 were 25.4 million, down from 30.8 million in the comparable 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 10 DXL retail stores and four DXL outlet store during the quarter, and we plan to open the total of 36 DXL stores in fiscal 2015. As of today, we have a total of 163 DXL retail stores and 9 DXL outlets open across the country, which is on track with our plan. We expect to open 3 additional DXL stores in the fourth quarter of fiscal 2015.

Inventory at the end of the third quarter was up $6.9 million or 5.5% from the third quarter of 2014. The higher inventory corresponds with the increase in overall selling square footage and a higher mix of branded merchandise as we open new DXL stores. It’s important to note however, that the quality of our inventory continues to improve.

Clearance inventory levels were 9% of our total inventory for the third quarters of both 2015 and 2014. Total debt as of quarter end was 83.9 million, which includes borrowings under the revolving credit facility of 55.9 million, with excess availability of 62.8 million. Finally, I’d like to make a few remarks about our guidance.

First, we’re on track with our strategic plan and we have performed well in the first three quarters of the year. However, we are taking a cautious approach to guidance for the remainder of fiscal 2015.

We are narrowing our guidance slightly to sales of 438 million to 440 million and EBITDA of 21 million to 22 million versus our previous guidance of sales of 438 million to 443 million and EBITDA of 21 million to 23 million. Our outlook for gross profit margin and SG&A costs remain unchanged.

Depreciation and interest expense are improving slightly which has allowed us to maintain our existing guidance for fiscal 2015 operating margin and non-GAAP earnings per share.

Capital expenditures net of tenant allowances are expected to be $30 million to $32 million and total borrowings are expected to be in the range of $72 million to $76 million at the end of the year. Finally, we are still targeting a fiscal 2016 projection of approximately $470 million in sales, $35 million in EBITDA and positive free cash flow.

We look forward to reporting on our performance when we talk with you again next year. And with that operator, we will open the call for questions..

Thank you. [Operator Instructions] We’ll go first to Liz Pierce with Brean Capital. Your line is open..

Thanks, good morning. Congratulations to you guys, nice job in a tough environment.

So I was curious about on the inventory in terms of how we should think about it for Q4, if the business continue to be -- if we still face the same headwinds and how does the outlet strategy play into that, will you be able to move that and the composition of the clearance inventory right now is that already reflecting seasonal or is that kind of carry over? Thanks..

First of all, it’s a good question about the inventory. When it comes to our seasonal inventory, so far what we’ve seen is that whatever we would consider fashionable seasonal inventory, that product is moving through our stores quite well right now, because our customer understands that that’s here today and gone tomorrow.

Where we’re really seeing the slowdown in our seasonal category, is in our basic programs and what we do with that is, we don’t take the market-downs at the end of the season. We will carry that over and buy around it and pack -- basically pack and hold it till the next season, we’ve been doing that for several years.

So we don’t have that liability of much seasonal product going into the first quarter and in fact last year we had pretty sell through, so there could be some opportunity for us late December and the month of January because we should have -- be in a better inventory position.

As far as the outlook is concerned, they really don’t get much of the seasonal product transferred into their stores that we buy separately for them..

So you’ll just pack it away because what I am hearing inside from the kind of the off price side has so much product that people are -- they are getting it for free almost, so you're just going to keep it.

And then in terms of the frame size situation, can you give us a sense just maybe contextualize timing, what cities, what areas, what you think ultimately this could be, like how big?.

Again we’re going to save that probably for the next call, Nancy just came onboard for -- she has only been onboard for few weeks right now. But generally we see the strong markets, Europe where -- we have the store in London which is our number two volume store in the chain.

We see very strong movement into the Middle East and we’ll be starting that project soon. So we get requests from all over the world, South America, Canada is going to be a strong target, and to Mexico, but we feel very strong about it. In fact today, this year we shipped to a 170 countries so far..

And David so you anticipate that the mix would be fairly consistent like you wouldn’t have to be doing special buys or they wouldn’t -- I mean how does that work?.

Yes, we wouldn’t be doing special buys as we don’t do in Kuwait right now, but there clearly will be a mix towards higher end product more luxury. We know that’s the market that we’re going to start with first because that’s most opportunistic.

So we will probably have a much lower penetration of our entry level private label price points, but we still carry the DXL banner..

I am sorry, would still carry the DXL banner?.

Yes..

Got it.

And then my final question is in terms of the slowdown that you're seeing, I appreciate the fact that you mentioned that these non -- western store is not impacted, what about online is that seeing the same thing?.

Yes, it’s possibly [ph] in very similar patterns, we could clearly identify that whatever shortfalls to revenue we’ve had in the month of November is strictly related to seasonal product.

Our dress clothing business, our bottoms business, our tops business, they are all consistently performing as they have for the last three quarters, it's really coming out of sweaters, outerwear, long sleeve knits..

[Operator Instructions] We’ll take a question from Bernard Sosnick with Madison Global Partners. Your line is open..

Good morning.

Last year in the fourth quarter you had a very strong gross margin, I haven’t worked through all of the numbers yet based on the annual guidance, but what are you expecting for fourth quarter gross margin versus a year ago?.

So Bernie, the -- one thing that you want to keep in mind when you're looking at gross margin was last year we had -- I’ll call it an unusual transaction, where our San Francisco Rochester store we decided to exit that lease and we recognized a $2.5 million one-time occupancy gain.

So that’s obviously not happening again this year, so you need to back that out as you're working through your model.

But then in terms of margin, just regular merchandise margin for the fourth quarter, I think that we’re going to continue to see some leverage on occupancy as we’ve seen throughout the year as we’ve got this growing sales base over our existing costs which are not increasing as much and our markdown should be following a similar pattern to as we’ve been seeing all year.

So I would characterize it as slight to moderate increases in merchandise margin, but we’re going to have that big one-time item that you need to keep in mind for occupancy..

So could you help out how much was the San Francisco occupancy transaction as a contribution to EPS last year?.

It was $2.5 million..

Translate that’s about a $0.01?.

Its a few cents, about $0.03..

So if you take out that transaction are you looking for a decrease in profits in the fourth quarter?.

Well, we’re certainly -- as David has been talking about, we’re seeing a slowdown in sales. I think as you look at our guidance that we put out there for the full year, the gross margin is unchanged, the SG&A is unchanged and our EBITDA we still -- we feel very confident that we’re going to commit at that $21 million to $22 million.

The only thing that’s really changing is that the sales are trending towards the lower end of our range, are the early reads that we’re getting for this quarter..

Yes I feel very good about the strategic plan and the path you’re on. I just want to be certain that there are no surprises when fourth quarter results are released.

So are you actually in your numbers thinking about a decrease in profitability in the fourth quarter?.

I am going to just talk to you about EBITDA. So for EBITDA we’re looking at 21 million to 22 million..

For the year?.

Correct..

But it also means if you have a fourth quarter number in there, which we’re kind of skipping over and if I do my math correctly quickly, it looks like you’re looking at a decrease in earnings..

Well, we are. But again that’s because we had that $2.5 million onetime --..

So just make that clear, so that nobody is surprised when fourth quarter is also reported. Thank you..

We’ll take our next question from Chris Krueger with Lake Street Capital Markets..

Just a couple of quick questions, first how many of your DXL concept stores are the smaller footprint and how many of the openings from this year are in the smaller footprint?.

So Chris this year we’re opening about 35 stores, the number of those stores that are in that smaller footprint is about 12 or so, it’s roughly half of the stores are going to full sized, the rest are the smaller format and the outlets..

And my other question is, now that you’ve had the DXL concept in place for several years, can you give us some kind of a metric how the store openings maybe three or four years ago are trending year-over-year versus where the new ones are at, the sales reflector or some kind of metric?.

That’s a good question, because we basically called in the class of 2013, ’14, and ’15, every year the openings get stronger. In fact this year the DXL openings are about 20% better than the previous year which is getting -- 15% to 20% better than the ’ 14s, and the ‘14s are better than the ’13s.

So what we’re getting is the leverage of finally the marketing is starting to get leveraged and the awareness level. So we open up in new markets, that we haven’t had a DXL store before, we’re getting a much stronger response because they’re more aware from the television, advertising, the radio about DXL, they’ve heard about it.

So we are definitely gaining momentum year-after-year the initial store openings exceed the previous years..

And gentlemen, at this time, we have no questions remaining. I’ll turn the call back over to you..

Thank you all for joining our call today. And as I always do, I’d like to invite -- inviting you to visit one of our DXL stores, experience what we’ve built in the Destination concept. And if you would like to visit any of our stores, please let us know and we’ll be happy to give you a tour and we look forward to speaking with you next year.

Thank you very much..

Ladies and gentlemen that does conclude today’s conference. We thank you for your participation..