Jeff Unger - VP, Investor Relations David Levin - President and Chief Executive Officer Peter Stratton - SVP, Chief Financial Officer and Treasurer.

Greg Pendy - Sidoti Bernard Sosnick - Madison Global Partners Bryan Caronia - Wunderlich Chris Krueger - Lake Street Capital Markets Bill Caton - First Wilshire.

Good day and welcome to the Destination XL Group's second quarter 2016 earnings call. Today's conference is being recorded. At this time, I would like to turn the conference over to Mr. Jeff Unger. Please go ahead, sir..

Good morning and hello everyone. Thank you for joining us today on the Destination XL second quarter fiscal 2016 call. On our call today is David Levin, our President and CEO, as well as 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 Investor 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 condition including sales, profitability, EBITDA, gross margin, capital expenditures, earnings per share, free cash flow, store openings and closings and the company's ability to execute on its strategic plan and the effectiveness of the Destination XL concept.

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 uncertainty is 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 we get into the quarterly results, I would like to take a moment to review with all of you where we are with the DXL transformation. It's hard to believe that we opened our first DXL store in Schaumburg, Illinois six years ago.

Up until the opening of our first DXL store, it was unheard of for a retailer to dissolve one brand and migrate its customer base to an entirely new concept without going through a sale or reorganization.

Well, today we have 187 DXL retail and outlet stores open across the country and we expect to grow that number to approximately 400 stores over the next five to six years. There are a lot of retailers today who are downsizing because the landscape has become over saturated with their stores.

This is especially true in malls where traffic has been declining for years. But that's not true for DXL. We are catering to a niche that is underserved in retail. We believe we have an advantage as a destination concept and we are not dependent on mall traffic like many other retailers as our locations are located in strip centers off mall.

Our customers come to us from all walks of life. They come from different ethnic and cultural backgrounds and all age levels. The DXL brand is not bound to a singular demographic or lifestyle. Our brand was created to provide big and tall guys with a store of their own that has the desirable sought after blend of quality, service and selection.

Our brand awareness has been steadily growing and we are acquiring a new smaller waisted customer who spends more money and shops more frequently. Fiscal 2016 is a milestone year for us as the leverage in our financial model begins to swing in our favor.

This will be the first time in four years that we will have generated positive free cash flow and the top end of our earnings guidance is to breakeven. For the second quarter, we delivered growth in both sales and profitability in a very challenging consumer environment.

We believe our performance while much better than the industry overall was tempered by an increased level of economic and political uncertainty. That uncertainty leads us to caution which influences our customer shopping habits. Macroeconomic factors notwithstanding, we had a solid Q2 performance.

DXL retail stores delivered a comp sales increase of 4.6% on top of 11.9% comp a year ago. This gives a two-year stacked comp of 16.5% of which we are very proud of. Total second quarter sales increased 3.3% from a year ago. We produced a net income of $200,000 versus a net loss of $1 million a year ago.

EBITDA for the quarter was $8.5 million, up 26% from the second quarter of last year. We delivered positive comps for the 13th consecutive quarter increasing sales, cash flow and profit even against a very difficult retail environment. And on a per customer basis, all the major metrics we track improved year-over-year.

In terms of the transformation plan, we opened six DXL retail stores and one DXL outlet this quarter. There's still many markets across the country that have now just been introduced to DXL. So far this year, we have opened our first DXL stores in new markets such as Lexington, Kentucky, Davenport, Iowa, Buffalo, New York and Ann Arbor, Michigan.

We also continued to fill in existing DXL markets with new stores this year in Los Angeles, Philadelphia and Houston. We remain on track to open approximately 31 DXL stores this year, consisting of 28 retail stores and three outlets.

Awareness of the DXL brand has continued to grow generating a year-over-year increase of 9% in the rate of Casual Male customers converting to DXL. At the same time, the valuable end-of-the-rack customer share of our bottoms business rose again to 44.1% from 42.9% in Q2 of 2015. We see these positive trends and other metrics as well.

Number of transactions, items per guest, average spend per guest, all rose from the second quarter a year ago. As a result, sales per square foot has steadily increased to $181 per foot on a rolling 12 month basis, a 5.2% increase from a year ago. The growth in brand awareness has had a direct effect on the performance of our newer DXL stores.

The newer generation of stores has outperformed its predecessors and our plan largely because more people know about DXL. Our newer DXL stores this year are already ahead of plan on sales, profit and return on invested capital. We are also learning more about where we are getting the most of our marketing spend.

Without question, we are seeing a shift in productivity between television, radio and digital marketing. Recognizing the shift will enable us to target our marketing where it is most effective which is leading to lower SG&A expenses.

For example, in Q2, we reduced marketing expenditures by $500,000 to 6.5% of sales, compared to 7.2% of sales a year ago. For fiscal 2016, we are lowering our goal for marketing expense to approximately 4% of sales, an improvement of 100 basis points from 5.3% of sales in 2015, an approximate savings of $5 million.

In closing, our belief in the DXL transformation has never been stronger. The DXL customer is buying more and spending more per transaction and our average sales per square foot continue to climb. However, we have seen our customers become more cautious in Q2 and our sales forecast for the rest of the year reflects that trend.

We are confident in our ability to leverage our operating model despite the moderated sales expectation and we are confident that we will continue to produce growth in revenue, earnings and EBITDA. Our EBITDA has grown from $7.3 million in 2013 to $15.2 million in 2014 to $23.3 million in 2015.

And we expect it will be approximately $31 million to $35 million in 2016. The prospects for Destination XL are truly exciting and we look forward to bringing you signs of our progress when we speak again next quarter. And on that note, I will turn it over to Peter to review our financial performance..

Thank you David and good morning everyone. As David just mentioned, in terms of the DXL transformation, we are on a solid foundation both operationally and financially. As we have been saying for the past few years, fiscal 2016 is a pivotal year in the financial transformation of DXL.

We have been waiting for the crossover point which we expected to be this year where the company can generate enough free cash flow to fund our DXL store openings and also begin to pay back some of the debt we incurred in order to finance the store buildout in the earlier years.

I am very happy to report today that despite the consumer headwinds David mentioned earlier, we are still on target to achieve that goal in fiscal 2016. So let's move on to the second quarter results. This was a good solid quarter for us despite the macro uncertainty. Overall, our financial performance for the second quarter was positive.

This is the first time in four years we have delivered positive earnings for the second quarter instead of a net loss. During the second quarter, we reported a total comparable sales increase of 2.4% and that was on top of the 6.7% increase in the prior year quarter.

We have 151 DXL stores opened for at least 13 months, which delivered a comparable sales increase of 4.6%, on top of an 11.9% comp sales increase in Q2 2015. The number of DXL transactions increased 3.2% from the second quarter of last year, helping to drive our comp sales growth. But this increase was slightly below our expectations.

In the second quarter, gross margin including occupancy costs was 46.5% compared with 47.2% for the second quarter of fiscal 2015. The decrease of 70 basis points was a result of 110 basis point decrease in merchandise margin, which was partially offset by a 40 basis point improvement in occupancy costs as a percentage of sales.

The improvement in occupancy cost was primarily due to leveraging a higher sales base against relatively fixed occupancy expense. Now before we move on, let me briefly explain the decrease in merchandise margin. Every year, our planning and allocation team initiates a process to roll some of our slow moving inventory from full price to clearance.

We called this rolling the dots. And when we roll the dots, we see an increase in markdowns flow through to our P&L as our clearance levels get replenished and we see a spike in clearance sales. In 2015, we rolled the dots in the fourth quarter and in 2016 we rolled the dots in the second quarter.

Thus there is a bit of a timing adjustment coming through this quarter in markdowns that will normalize in our full year results. Looking at the remainder of fiscal 2016, we expect merchandise margin to decline in Q3 this year from Q3 last year because of the dot roll.

In addition, we are adding one more promotional event this year which will add some markdowns in Q3, but Q4 merchandise margin will be better than last year mainly because of the rolling of the dots that I just explained. So moving on to SG&A. We continue to be disciplined with controlling costs in this area.

Our SG&A costs for the second quarter were 39.3% of sales compared with 41.3% a year ago. On a dollar basis, SG&A expense declined $800,000 from Q2 2015, primarily due to a decrease in advertising costs and incentive approvals. When sales began to trend lower than our historical pattern earlier this year, we responded by tightening expenses.

This strict control over SG&A spending is what has allowed us to maintain our full year EBITDA and EPS guidance despite lower sales expectations for the year. Going forward, we will continue to reduce SG&A as a percentage of sales, but at a slower rate than what we have seen this year.

Our SG&A improvement in 2017 should not be as dramatic as what we are now expecting for full year 2016, because of this shift in expense management. Net income for the quarter was $200,000 or breakeven per diluted share compared with a net loss of minus $1 million a year ago.

Net income on a non-GAAP basis assuming a normalized tax rate of 40% was also breakeven on a per-share basis, up from a net loss of $0.01 per share in Q2 of fiscal 2015. EBITDA was $8.5 million, up from $6.8 million in the comparable quarter in 2015 or an improvement of 26%.

Capital expenditures for the first six months of 2016 were $13.8 million, down from $17 million in the second quarter of 2015. The lower CapEx was due to opening 12 stores through Q2 of 2016 as compared to 18 stores through Q2 of 2015. As of July 30, we had a total of 176 DXL retail stores and 11 DXL outlets opened across the country.

Inventory at the end of the second quarter was down $2.3 million or 1.8% from second quarter 2015. The lower inventory level is a direct result of the inventory initiatives we discussed on our Q1 call to improve timing of receipts and weeks of supply on hand.

Clearance merchandise was 7.7% of our total inventory for the second quarter of 2016 compared with 7.2% of inventory for the same quarter in 2015. Total debt at quarter end was $63.6 million, which includes borrowings under the revolving credit facility of $41.2 million with excess availability of $66 million. Finally let's turn to our 2016 guidance.

The company is revising its full year sales guidance for fiscal 2016. However our current EBITDA and earnings per share expectations remain within the range of our previous guidance for fiscal 2016 as a result of our disciplined SG&A expense management that we discussed on this call.

For the 2016 fiscal year, we now expect total sales in the range of $457 million to $463 million compared with our previous guidance of $465 million to $472 million, a total company comparable sales increase in the range of approximately 2% to 4% compared with our previous guidance of 4.8% to 5.5%, gross profit margin at the low end of the range of approximately 46.2% to 46.5%.

The remainder of our guidance for fiscal 2016 remains unchanged.

We still expect an adjusted net loss of minus $0.05 per diluted share to breakeven, assuming a normalized tax benefit of approximately 40%, EBITDA in the range of $31 million or $35 million, capital expenditures of approximately $30 million with approximately $20.6 million invested in new DXL stores, borrowings at the end of fiscal 2016 in the range of $59 million to $64 million, GAAP cash flow from operations of $35 million to $40 million and free cash flow before DXL capital expenditures of approximately $25.6 million to $30.6 million, resulting in total free cash flow in the range of $5 million to $10 million.

Finally, in 2016 we continue to expect to open approximately 31 DXL stores and close approximately 26 Casual Male retail stores and three Casual Male outlet stores. In closing, we are confident in our ability to leverage our operating model in the current uncertain retail environment.

We continue to make progress across the business and we look forward to the second half of a pivotal year where free cash flow turns positive and we begin to pay down our debt. And with that, operator, we will open the call for questions..

[Operator Instructions]. And will go first to Greg Pendy with Sidoti..

Hi guys. Thanks for taking my question.

Can you just go into, I guess, within the reduced sales guidance where you are seeing that from a customer basis? I know last quarter, you mentioned the more of the wear now customer was a little bit absent, but can you just give us a little bit more color on where you see the pockets of strength and where the pockets of weaknesses are within the lowered sales guidance? Thanks..

Sure. We look at all our key metrics. So in the current quarter, our transactions, our spend per guest, items per guest, Casual Male conversion, end-of-the-rack growth, sales per square foot were all meeting and exceeding our expectations. So we clearly don't see this as a DXL problem.

It's more of that macro issue, the uncertainty and on the scheme of things, we have taken our sales down about 2% and we think that that's going to have an impact probably in Q3. We don't know about Q4 yet. But we are just taking this conservative approach.

But we have seen no other behavior of our existing customers other than some of them are holding back and making their trip to our stores. But outside of that, we are very confident in that we don't need to really tweak our model or make any changes to our promotional schedule that we have to get through the rest of the year..

All right. That's helpful. And if I could just get one more question.

Is there any update, I know, it's a ways out the projections, but just on the international franchising opportunities?.

No. We don't have any updates at this time, other than we will be entering the Canadian market next spring. We are finalizing our leases right now. And on the international part, outside of North America, there's a lot of discussions. We have made several trips around the world and talking to a lot of interested investors.

But it's a slow process and we are walking through it very conservatively and making sure we find the right partners..

That's helpful. Thank you..

And we will take our next question from Bernard Sosnick with Madison Global Partners..

Good morning. First I would like to say, each time I read your press release in the quarter, I am impressed and you do a very good job as you just did with the verbal summation. So thank you for that.

With regard to sales, retailers saw weak sales in the first quarter and that quarter ended with sales weak after having been more robust early in the first quarter. The same was happening with you. But during the first quarter call, you noted that your sales weakness was in the East and it still hadn't brought in the seasonal shopper.

The weather turned better and I am wondering, what the rhythm of sales was month-by-month during the quarter?.

Sure. So that's right that in the first quarter we definitely saw performance was a little bit better in our warm climate stores. In the second quarter, what we saw really across the country was, May was a weak month, June got a bit stronger and then it softened up again in July.

So I think, as David just alluded to, the people that are coming into the store, the response has been very positive. It's more, the sales shortfall or the reduction of sales guidance, is more due to the fact that we have just seen a bit of a slowdown in traffic, which I think a lot of other of our peers are noticing as well.

So that leads us to believe that it's not anything to do with the DXL concept. It's more the macro issues that are surrounding us right now..

All right. So in other words, you didn't get as much lift when the weather turned warm in the East as you had expected.

And [indiscernible] the goods for clearance at the end of the first quarter was somewhat higher than a year earlier and you ended the second quarter in the same situation despite taking heavier markdowns and accelerating the markdown pace.

Could you give a little bit of enlightenment about the clearance issue?.

Yes. It's really a non issue for us. It's strictly a matter of timing because when we roll our markdowns, they fall into the clearance. So by taking them earlier, it was just a higher percentage, not significant 9.7% versus 9.2% a year ago. That will all catch up by the end of the year. So that really cost is a non-issue.

We don't really have any more clearance than we did a year ago. We haven't taken any more aggressive markdowns than we did a year ago. It's really just a matter of timing. It'll washout..

Well, I want to congratulate you on the steps with inventory control and the backroom and expense control and getting to the crossover point this year, let's hope. Thanks..

Thanks Bernie..

[Operator Instructions]. We will go next to Eric Beder with Wunderlich..

Yes, Good morning everyone. This is Bryan Caronia, on for Eric.

The first question we had was, we were hoping you could give some insight into the cadence of performance across product segments within the stores, specifically noting perhaps, how suiting did, but overall I would say, we would be interested in to see if there was any deviation or distinction between performance amongst tops and bottoms and different fashion trends over the last three months?.

Okay. Clearly, our suiting business, which we will have our suits, sport coats, dress shirts and ties, dress pants, has been the stellar performance for us. And that's really a result of, when we open a DXL store we have a much bigger presentation in the clothing area than we did in our Casual Male stores. So they get a dramatic lift.

We got in our Casual Male store, they may have a choice of two or three options in buying a suit and we have a full suit selection and sport coat selection in the DXL stores. So that remains consistent. Our footwear business is very strong. And outside of that, everything is pretty predictable.

We are definitely seeing some great movement in our younger men's styling and we are chasing that product. Actually, it's more of a West Coast phenomenon, but it's starting to shift throughout the country.

And that's great for us because this clearly is a younger customer that again, the DXL is starting to certainly cater more to that guy as the age of our customer comes down. But those are the highlights..

Great.

And I guess as an extension of that, even if it's not I guess specifically quantified numbers, do you have any insight in terms of the split and I guess sales trends of the products being branded or private label? And whether that is commiserate or perhaps a bit deviated from what your long term plans are in terms of trends in either segment and product mix?.

Yes. So I mean, right now we are 55% branded, 45% private label. That is going to remain pretty consistent and maybe moving a point or two per year. But we have so many stores opened right now. We really pretty well have that balance laid out. So I think branded may grow as a percent, but nothing dramatic.

I think we have got - and again, our private label still is a big driver of our business regardless of the locations throughout the country..

Perfect. Thank you very much. And I will step back in the queue..

And will go next to Chris Krueger with Lake Street Capital Markets..

Hi. Good morning..

Good morning..

Can you talk a little bit about how your smaller units are performing? The ones that allowed you to kind of enter in smaller markets and kind of fill in some larger markets?.

Sure. The small format stores have been performing very well. I think as many of you know, that's one of the key reasons why we have been able to grow our long term projections to get to 400 stores is because that smaller store allows us to penetrate so much more deeply across the U.S. But they have been performing very well.

In fact, in 2015 and 2016, most of the stores that we have opened this year have been performing beyond their initial projections. So we think part of that is a due to the fact that these stores opening today are benefiting from the higher brand awareness that we have out there versus the stores opening a few years ago didn't have that benefit.

So they are still doing very well, still on track and they will be the substantial portion of stores that we are opening going forward would be that smaller format..

Okay.

And as you look ahead to the next few months with your advertising spending, how do you look at that this year versus last year as far as spending levels and also the timing of your ad spend?.

Yes. Well, a good part of our ability to maintain our earnings is we have lowered our marketing expense. And we were driven by TV and radio, very expensive, not very targeted. And we have seen really a seismic shift in how our customers are responding to our marketing. There is something dramatic going on and we are trying to get ahead of it.

Our smartphone traffic is up 42% this year from a year ago. And our online revenue from the smartphones are up over 30%. So now over 50% of our traffic is coming from mobile versus 40% a year ago. So we are making a conscientious aggressive move to go off of the TV, radio marketing and move more into a digital world.

This is really not a lot different than when we were a catalog house with 16 drops a year, a few years ago. We got rid of the catalog. We replaced all that business. And we really feel a shift into digital is where customers are moving. It's much more targeted. It's much less expensive. Our cost per thousand views is $10 versus TV was $30.

So yes, that's where we are going to be spending our money going forward and it also allows us to protect our earnings more..

Okay. And a last question.

Anything new on the competitive front as far as other concepts or other brands or anything there?.

No. Certainly in brick-and-mortar, we don't anticipate anybody trying to come at us from competitor point of view. There's always more on the Internet. But nothing that we have seen that we could identify as changing our percentage of market share on the Internet at this time..

All right. Thanks. That's all I got..

[Operator Instructions]. We will go next to Bill Caton with First Wilshire..

Hi. Good morning. Curious on the end-of-rack customer.

As your bottoms business continues to grow with them, up over 44%, is there any statistic you could give around? Are these guys only going in to buy bottoms? Or are they buying other things in the store? And what are just some statistical trends on the end-of-rack, if you could share any more information?.

Yes. Sure. First of all, the only reason we identified bottoms because it could kind of distinguish what size this guy our tops are a little more challenging for us. So that's just an indicator. But it's across the board, spending is going on.

And the most important thing is, when we designed this DXL concept, we wanted to get this end-of-the-rack guy in our stores, but we didn't really understand how powerful he is. So our current trend is, the guy who is 40 to 46 inch waist, is spending 100% more than the guy from 48 inch and up. So he is really worth two of our customers.

He is shopping 46% more than our guy who is 48 inch and up. So this has been a huge win for us and to me, the exciting part is, today only four out of 10 guys that size has ever even heard of DXL.

And as the marketing and the awareness grows, once he comes into the store, he loves what he is seeing and he is going to be a loyal customer of us for a long time. So we got a lot of loose guy out there to really grow this customer because again it's all about awareness. Once we get them in, we own them..

Okay.

So the end-of-the-rack guys, 40% type of brand name recognition or customer awareness and the 48 inches and above, in terms of branding recognition, DXL versus your older generation Casual Male, what's the breakdown on that?.

We don't track it anymore, but Casual Male awareness was, I think, closer to 60%. And we haven't marketed Casual Male since we started the DXL. We haven't put any of our marketing money there because all the stores are going to be converting over..

Okay.

And in light of weakness in consumer confidence or I don't know if that's a new story, but if that continues to persist and linger longer term, would you consider not rolling out as many stores or extending the rollout? Or you feel you are sticking to the plan despite any macro headwinds absent anything drastic?.

We are not at that point yet. We are planning on opening quite a few stores next year. Those are in the queue already. We feel very good about it. Again, the new stores are doing the best of any of our stores. They are clearly beating our projections. So we are going to continue on this path.

Again depending on what happens out there in the world, certainly we may change. But right now, we have no plans to deviate from our current strategies..

And one thing that I would just like to add is that we have talked a little bit about our positive free cash flow that we are going to have this year. This is the first time in four years that we are going to be generating significant positive free cash flow of $5 million to $10 million this year.

And you have seen it in our Q1 and our Q2 results where we are profitable on a bottom line basis year-to-date. So despite some of the weakness on the topline, we think that we have made the right corrections to ensure that the cash in the bottom line come in where we are expecting them to come in..

Okay. Well, thank you. Congrats on the profitability this quarter. Good quarter. Thank you..

And we have no further questions in the queue at this time..

All right. Okay. Thank you all for joining us today. And as I have said before, as a reminder, I really would open to invite all of you to visit one of our DXL stores and experience what we have built into our concept. And if you would like to visit any of our stores, please let us know and we will be happy to give you a tour.

We look forward to speaking with you next quarter and have a great day..

Again, that does conclude today's presentation. We thank you for your participation..