Tom Filandro - MD, ICR David Levin - President and Chief Executive Officer Peter Stratton - Executive Vice President and Chief Financial Officer.

Peter Rabover - Artko Capital Chris Krueger - Lake Street Capital Markets.

Good day. And welcome to the Destination XL Group Q4 2017 Earnings Call. Today's conference is being recorded. At this time, I would like to turn the call over to Tom Filandro. Please go ahead..

Thank you, Alicia and good morning, everyone. Thank you for joining us on Destination XL Group's fourth quarter fiscal 2017 earnings call. On our call today is David Levin, our President and Chief Executive Officer and Peter Stratton, our Executive 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 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, adjusted EBITDA, gross margin, marketing costs, capital expenditures, earnings per share, free cash flow, store openings and closings, and the Company's ability to execute on its strategic plan.

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 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.

David?.

Thank you, Tom and good morning, everyone. Earlier today, we made three announcements at DXL. First and foremost, we announced our fourth quarter and full year 2017 financial results. Second, we announced that we have just hired a new Chief Marketing Officer, who will be guiding the future growth of our brand.

With Jim Davey, we believe we have found an outstanding individual who will play a major role in growing the top-line.

And finally, after very careful consideration and discussion with our Board of Directors, today I am announcing that I’ve decided to retire as President and CEO of the Company by the end of 2018, and I will address that more in detail later in the call.

First, I would like to highlight our fourth quarter results and talk to you about our strategy for 2018. We were pleased to end the year with a strong fourth quarter total company comp of 4.3%.

This is the highest quarterly comp that we have delivered in the past nine quarters and we believe it is a strong indication that our business is headed in the right direction. Our store associates continue to deliver an outstanding in-store experience that is grounded and exceptional service, selection and fit.

Our store productivity metrics, including dollars per transaction and conversion, were both up for the quarter on flat traffic, which drove the nice increase in transactions for the quarter. Our e-commerce business is also growing as we continue to enhance and refine our Web site experience and our digital marketing initiatives.

Recognizing that we are only seven weeks into new fiscal year, I think it’s worth noting that today our total company comparable sales are trending positive low single-digits and we are encouraged about our prospects for 2018.

A primary reason for the optimism is that we ended fiscal 2017 with high single-digits percentage growth in our customer count compared to a single-digit percentage decline in our year end customer count in fiscal 2016.

As we look forward to fiscal 2018, we’re focused on top-line growth while not sacrificing margins by growing our customer base through acquisition, retention and capturing a greater share of wallet.

And to achieve that growth in our customer base, we have to provide a great guest experience in our stores and online wherever and however the customer decides to shop. In addition, we need to be smart about our merchandise assortment and how we manage it. Lastly, we need to grow our brand awareness for which Mr.

Davey, our new CMO, will bring a fresh outlook. Let me start with our stores.

In keeping with our efforts to be truly omni-channel and servicing our customers in whatever way they wish to shop, we are improving our point-of-sales technology, which makes it easier and faster for our associates to access and sell inventory that resides outside of our stores’ four walls.

Because our assortment is so SKU intensive, it’s impossible to show our entire merchandise assortment in the stores. So our associates have been trained to use the Web portal to sell to customers who are shopping in our stores.

If a customer wants a shirt in three colors but we only have two colors on the floor, with the software improvement rolling out this spring, the associate will be able to go to the Web seamlessly to find that third color.

Prior to this upgrade, while the service was available, the lack of upgraded technology hindered the flow of the sale and resulted in unacceptable wait times for our customers.

Our store associates are very excited about the upgrade and believe that they are having a faster and more efficient process to complete Web sales in the stores will result in additional sales and even higher customer satisfaction. I’ll now turn to the digital experience.

Investing in and upgrading our infrastructure and Web environment has been in our sights during the years we are opening new DXL stores across the country. I am excited to report that in June we’ll launching an upgraded Web site that offers a simpler and more streamlined shopping experience with a focus on the mobile shopper.

Our customer expectations are changing and shoppers are in search of creativity and innovation. With the launch of our redesigned site, we’ll be offering them a truly differentiated online experience, built off of our unique store experience and white glove service.

We have taken our expertise and digital merchandising in our brick and mortar stores and transformed it online. Because the shift towards mobile engagement across the retail industry continues to grow at a rapid rate, we are also taking a mobile first mindset in designing all customer interactions.

DXL will be well positioned in this regard as we continue to innovate and enhance the site experience. In addition to the transformed Web site, we firmly believe that creating curated digital experiences is the path to enhanced customer retention.

In that regard, we've been working with a strategic business ally to elevate our customer relationship management system or CRM system to feature best-in-class dynamic segmentation capabilities.

This platform will take the 360 view of the customer beyond an omni-channel repository of preferences and prior purchases and will infuse third-party data and insights, including advanced predictive capabilities that anticipate how, when and where they are likely to shop.

We’ll have the ability to engage our customers in more meaningful experiences that are tailored to their unique preferences and needs. This will fuel not only better customer engagement, but also higher frequency interactions between DXL and our customers.

In the past, without these capabilities, our messaging was generic and there was not necessarily a compelling reason for the recipient to read our message. Now this year, we’ll have the capability with personalization of our messaging and segmentation among our diverse categories of shoppers.

Again and keeping with reaching new customers and servicing them no matter how they wish to shop for our product, broadening our reach through marketplaces continues to be a key initiative. We are continuing to elevate our positioning with Amazon and now a large portion of our assortment is available on the site with prime shipping.

Our marketplace selling experience thus far has been strong. Interestingly, the majority of transactions generated from marketplace represent shoppers who have never shopped in our stores or on our site. Now, I would like to turn to our merchandize assortment and how we manage it.

We have over a 100 designer brands and a strong private label offering accounting for 54% of sales and we customized the merchandize selection for every store with the range of private label mix between 20% and 80%.

Our growth of the End of Rack customer, waist 38 inches to 46 inches, continues to bring in a younger, smaller waist shopper who spends more and shops more often.

And we're responding to the demands of this younger customer with our speed source, fashion forward, What’s On Tap collections, highlighting the newest trends and we're also leveraging our sourcing capabilities for more efficient in season replenishment.

Also we see opportunities to deliver more fashion product to our smaller DXL stores, and we're getting better reads and what individual markets are capable of selling, which is enabling us to feed stores with the most appropriate assortments to satisfy demand and maximize productivity.

We recognize that customer facing solutions are constrained by the foundational infrastructure that supports them. In this regard, another key initiative for 2018 is to elevate our order management systems.

This initiative will upgrade our warehouse management and logistic capabilities for enhanced inventory visibility and order fulfillment across the enterprise. This project is part of a significant progression of our service capabilities to make sure our customers have the merchandize with the quality, comfort and fit which they expect and deserve.

A final topic is growing our brand awareness. In the fourth quarter, we launched a TV commercial, Time to XL, which was a stretch for us. And although, we’re excited about it, it did not quite leave up to our expectations.

We realize we still need to be more focused on our strengths when we run TV commercial and our strengths are brands, broad assortments, a great customer experience and being fit experts. Our new campaign for 2018 addresses those key factors and our pretesting results gets the highest scores of any commercial we have run.

So we’re enthusiastic about the launch of our commercial during the NFL draft which DXL will start to regain this year. Our new TV ad will air for six weeks in the spring season and five weeks in the fall. But on a positive note, the Time to XL ad did increase our aided brand awareness scores from 38% to 42%, which is a historic eye.

And while we were pleased with that increase, we believe we can and must do better. Obviously, the more people who are aware of our brand, the more opportunity we have for them to buy from us and we're confident that with our selection of brands, great fits and outstanding customer service, we have a great opportunity to retain them as customers.

And in that regard, I'm thrilled to report that our customer loyalty program continues to excel. I find it incredible that approximately 90% of our transactions are processed through our loyalty program.

During the fourth quarter, our loyalty initiative focused on our top-tier and was designed to elevate our loyal customers' experience is showing them how important they are and us and how much we value them as our customers.

And due to its success, we plan to use similar initiatives this year to attain our loyal customers and earn a greater share of their wallets.

Lastly, with regard to increasing brand awareness and growing our customers through acquisition and retention, as I stated earlier, we'll be looking to the fresh outlook and ideas of Jim Davey, our new Chief Marketing Officer.

Jim has over 25 years of experience building lifestyle brands and categories from toys, entertainment to footwear and apparel. And most recently, Jim was VP of Global Marketing for the Timberland brand where he over saw all wholesale, retail and global marketing for Timberlands' Footwear and apparel business.

I'm very excited and confident that Jim will set a course to grow our brand and market share. With that, I will now pass the call over to our CFO, Peter Stratton, who will review our financial performance.

Peter?.

Thank you, David and good morning everyone. I'd like start this morning with the brief summary of our fourth quarter and full year fiscal 2017 results. For the fourth quarter, net sales increased 10.5% to $135.5 million. This increase was primarily driven by an extra week of sales for fiscal 2017.

The 53rd week accounted for approximately $6.9 million of additional sales this quarter. However, we also saw a strong 4.3% lift in comparable sales for the quarter. This quarter was the strongest comparable sales increase that we’ve experienced in the last nine quarters.

Gross margin for the fourth quarter, including occupancy costs, was in line with our expectations at 45% compared to 44.9% for the fourth quarter of fiscal 2016. Occupancy cost as a percentage of sales leveraged 90 basis points and were largely offset by merchandise margin contraction of 80 basis points.

The reduction in merchandise margin was primarily due to increased promotional strategies over the peak December selling weeks. Our SG&A expense for the quarter increased by approximately 27% or $11.8 million over Q4 of fiscal 2016.

As we’ve discussed on previous calls, the increase was driven primarily by $7.1 million increase in marketing costs related to our holiday advertising campaign and our digital marketing initiatives. In addition, we recorded approximately $2.5 million of expenses associated with the 53rd week.

Our adjusted EBITDA for the fourth quarter adjusted for impairment charges was $5 million compared to $10.8 million in the prior year quarter. The primary driver to the decline in adjusted EBITDA compared to last year was $7.1 million increase in marketing costs.

GAAP net loss for the quarter was $3.3 million or $0.07 per share compared to a net income of $1.8 million or $0.04 per share a year ago. The net loss on a non-GAAP basis before impairment charges and assuming a normalized tax rate of 26% was $0.05 on a per share basis compared to a net income of $0.03 in Q4 of fiscal 2016.

Before we move on, let me spend a few minutes talking about income taxes. Our tax accounts reflect the impact of the Tax Cuts and Jobs Act enacted in December. This legislation reduced the federal corporate income tax rate from 35% to 21%.

On a non-GAAP basis, we are reporting our net loss assuming a normalized effective tax rate of 26%, which we believe is the most useful as it reflects our expected effective tax rate on a go forward basis. We have also revalued our deferred tax assets at 26% in accordance with the legislation.

Because the reduction in the value of the deferred tax assets was entirely offset by a reduction in a full valuation allowance associated with those assets, there is no impact to our income tax expense. However, another provision in the legislation includes a repeal of the corporate alternative minimum tax.

The repeal of AMT causes existing alternative minimum tax credits to become refundable over the next four years. DXL has an AMT credit carry forward of approximately $2.1 million which we have recognized as a tax benefit in the fourth quarter. Now let me turn to our balance sheet and cash flow.

This is the second year in a row that we have delivered positive free cash flow. Capital expenditures for fiscal 2017 were $22.6 million, down over 20% compared to fiscal 2016 at $29.2 million, largely due to fewer store openings. Inventory at the end of fiscal 2017 was down $14.1 million or 12% from the end of fiscal 2016.

This substantial inventory reduction is a direct result of continued inventory initiatives that we have been pursuing since 2016 to improve timing of receipts and weeks of supply on-hand. Over the past two years, we have reduced our inventory position by approximately $22 million and we believe there is still some opportunity in fiscal 2018.

We are entering the new fiscal year with a clean and current inventory composition. Our strategic inventory initiative has increased our receipt flow flexibility enabled us to expand our test, read and react capabilities. Simply stated from an assortment’s perspective, we are more nimble today than we have ever been.

Total debt at quarter end was $59.4 million, which includes borrowings under the revolving credit facility of $47.4 million with excess availability of $37.5 million. This compares to $63.1 million of total debt a year ago with excess availability of $57.1 million.

Now, let me turn to our 2018 guidance, which does not include consideration of additional costs that maybe incurred in connection with Mr. Levin’s retirement and the engagement of a successor as CEO. Our total sales for fiscal 2018 are expected to range between $462 million to $472 million.

This requires some explanation because of the low end of our guidance is $6 million less than our total sales for fiscal 2017. There are three components of sales guidance that I would like to highlight. First, we are expecting a total company comparable sales increase of positive 1% to positive 3%.

In 2017, we registered a positive comp of 0.9% despite spring and fall advertising campaigns that fell short of expectations. Second, fiscal 2018 is a 52 week year which we are comparing to fiscal 2017, which was a 53 week year. The 53rd week in fiscal 2017 was worth approximately $6.9 million.

Finally, we expect to have a net decrease of nine stores, which is worth $5.3 million in top line sales. Gross margins are expected to be approximately 45%. Our margins between stores and direct are fairly consistent.

Over the next few years, we expect to see some leverage on our store margins as we grow comparable sales, while our occupancy costs remain relatively fixed. On the direct side, we have a more promotional oriented customer where shipping costs and special offers impact the gross margin.

But overall, we see the increasing leverage in gross margin from stores, neutralizing the shipping and special offer costs in direct business. This brings us to a consistent gross margin number in both channels of approximately 45%.

EBITDA is expected to range from $18 million to $24 million and net loss is expected to range from $0.12 per share to $0.22 per diluted share on a non-GAAP basis. In 2016, we spent only $18 million in marketing and in 2017, we spent $29.5 million.

For 2018, we are planning to spend $24 million, which will allow us to fund our digital initiatives as well as a full television flight in both spring and fall. We are also looking very carefully at our SG&A cost infrastructure, and working to tighten up every area of the SG&A cost base.

Capital expenditures are expected to be approximately $11.4 million before tenant allowances of $1.1 million with approximately $2.1 million invested in new DXL stores and $9.3 million for infrastructure. This includes three new DXL stores and two additional casual male stores, which we are remodeling to be DXL stores.

And our infrastructure CapEx, which primarily include investments in our digital e-commerce platform and investments in our distribution infrastructure and facilities. Finally, cash flow from operating activities is projected to raise from $20.5 million or $26.5 million and free cash flow to range from $9.1 million to $15.1 million.

Before we open the call for questions, I'd like to turn it back over to David..

Now today, we announced that I plan to retire as CEO by the end of 2018. It has truly been an amazing journey.

Over the past 18 years, under my leadership, the company has transformed itself from a dated brick and mortar and catalog business to DXL, a fresh and dynamic omni-channel retailer serving XL guides around the world with their preferred brands.

I believe that now is the right time for a new CEO to take the helm and lead DXLG in its next exciting phase or growth. I want to thank our Board of Directors for supporting me and my management team throughout this transformation and having the vision to invest in our dream.

The board will be initiating a search to identify my successor from both internal and external candidates. And I will be working closely with the board to ensure a smooth transition. I am so proud of all that our team has accomplished both at corporate and in the field.

We've created a new brand, built an optimal fleet of new stores and developed the wining e-commerce strategy that now accounts for over 20% of our sales. With our platform, we are confident that DXL will continue to gain brand awareness and market share and will be a dominant player in the big and tall men's apparel market.

I've been so fortunate to have work side-by-side with so many talented people inside our organization and the 25,000 field employees who execute our vision every day. I also want to thank the vendors community who supported our goal to offer 100 national brands in big and tall sizes.

We have succeeded with our core vision to make a life of an XL guy easier by providing and replace where he can satisfy all of his wardrobe needs. And with that operator, we will open the call for questions..

[Operator Instructions] We'll go first to Peter Rabover of Artko Capital..

So I have a question, and if I'm wrong please correct me. But it looks like you spent $7.1 million in extra marketing in SG&A this quarter and another $1 million in occupancy or merchandising discounts like you said promotionals are 8.1. And looks like you only got $5.3 million in same store sale.

So am I missing something, it seems like a very bad return on invested capital.

So can you maybe elaborate on that?.

Well as we said, we were disappointed in the end and how the marketing campaign came through.

Even though -- we had a nice comp for the quarter with at 4.3 but the commercial we ran, again we think it was a stretch, it was a high level commercial and we missed a lot of the key elements that have historically driven our customers into the store, which is brands, brand assortment, the power of the store.

And again, we tried something different and did not give the payback. But I do want to reiterate that we’ve come back with a new commercial which was actually filmed this week and the testing scores were the highest we’ve had. So we feel very good about that. And we go forward from there.

But yes, we were disappointed, but I think we’re back on track with a very strong message for the next commercial..

And then maybe you guys can talk about your free cash flow usage going forward. I hope I assume it’s to pay down debt..

So I think last year, our Board of Directors had authorized a share buyback program and we repurchased about 1.9 million shares of stock in Q1 and Q2. We executed about 40% of that program for a little less than $5 million at a time when I think we were expecting our free cash flow to be higher than it ended up.

As the year progressed, the business wasn’t responding the way that we’d anticipated. And once we saw that the business wasn’t responding, we stopped buying back stock and focused on protecting the business and protecting our access to capital. So I think we’re in a similar position today.

We’re not announcing a share buyback program today, which means that any excess cash we generate would be used to pay down debt..

And then I guess I will make a comment you guys don’t need to answer this, per se. But it sounds like you’ve tightened up SG&A costs and obviously things are not going as well as had hoped. So I would only comment that we keep the retirement cost pretty low that you had mentioned, because I don’t know if that deserve that.

So thank you I appreciate it..

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

Your direct business continues to perk up as a percent of total sales, I think it was 99 a year ago to 21 this year.

Is there an ultimate goal as far as where that percentage can go?.

We talked about that a lot and it gets more challenging as we get to bigger base. But there’s nothing to say that our direct business can’t be 25%, 30% overtime. I mean all the reports that we’re reading that seems to be in line with where the omni-channel will start to mature. But we’re pushing it forward.

Our plans for this year are significantly higher comp on direct than in our stores. And we’re allocating a lot of our resources and capital to that endeavor and as you heard me through the speech.

We have some technology that we’ve been waiting for years that we believe is going to really vault our sales on direct based on the ease of shopping, all that we’re putting into the mobile experience, customization, segmentation. These are all big drivers for us.

And if could improve that customer experience, speed it up, make it more efficient and simplify the check out process, we anticipate seeing a nice lift in our business I would say really third quarter of this year.

Second quarter things being implemented give us a couple months to get it running smoothly, but I think in the back half year, we should be in very good shape and look for another bump in our direct sales as a percent of total sales..

And then in your comments, you talked about the Time to XL ad not working as maybe as well as you hoped.

How about the -- now let's separate from the celebrity ads of David Ortiz and DJ Khaled and all that, right?.

No, that was the same -- that’s the same commercial..

It’s the same campaign, okay.

Was there some evidence that it drove new customers into the stores?.

Not to our expectations. It did create awareness, because we did get up to 42%, which is the highest we’ve ever had. But it did not drive the traffic into the stores as we had anticipated.

Yet, we still had a very strong comp, we came back, we called an audible, did some special promotion for our loyalty members, which covered a lot of the shortfall of traffic. That promotion did drive a lot of traffic to our stores.

So again, I think we reached a little too high for who our customer is, really focusing on the messaging we have great looking stores, we have brands, we have broad assortments, and great customer service. And you’ll see the next commercial, which is breaking with the NFL draft, identifies each one of those points.

And again our copy testing that we do before we run a commercial, comparing this to not only Time to XL, but another one of our strong promotions, the results exceeded every commercial we've ever run. So I think we learned a lot and have a high degree of confidence that this new commercial breaking is going to be driving traffic to the stores..

Will the new commercial, does that still have some of the same celebrities or is it not a celebrity thing?.

It’s not a celebrity driven thing. It's talking about who we are. Again there's customers out there that just still don't understand what DXL is all about. We win once they step in the door. We’ve accomplished what we need to do. Once they’re in the door, they love what they see. And again, it’s still that driving that awareness.

Again, when we started this several years ago, our awareness was 12%. We're at 42% and it continues to grow. And as that grows, our traffic grows, our comp sales grows and we're very driven on that imitative..

You stated that your brand awareness is 42%, up from 38%.

Is that a year-over-year improvement or what's the timeframe on that?.

That was from the previous quarter..

From the beginning, right, so before we launched the Time to XL campaign, it was 38% after the time to XL campaign, it was 42%..

Last question, if you guys were -- if you performed at the midpoint of your guidance range, is that you just provided today.

Where do you think you debt would be in one year?.

So if we performed at the midpoint of the guidance range, I would look to the midpoint of the free cash flow range, which is $19 million to $15 million. So take $12 million as the midpoint, debt would be about $12 million less than it is at the end of 2017..

We have no further questions. I would like to turn the call back over to David Levin for any additional or closing comments..

Well, thank you all for being on the call. We are excited about 2018. A lot of initiatives that we've been looking for to over the last several years are going to come to fruition this year. And again, we think we're going to have a stellar year.

So thank you all for listening and look forward to talking to you on the next call?.

That does conclude our conference for today. We thank you for your participation..