Good day, ladies and gentlemen and welcome to the Fourth Quarter 2018 Destination XL Group Earnings Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session and instructions will follow at that time. [Operator Instructions] As a reminder, this conference call maybe recorded.

I would now like to introduce your host for today’s conference Ms. Lisa McKee. Ma’am you may begin..

Thank you, Ryan, and good morning, everyone. Thank you for joining us on Destination XL Group’s fourth quarter fiscal 2018 earnings call. On our call today is David Levin, our Acting 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 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 core business, comparable sales growth, the wholesale segment, free cash flow, store openings and closings, the impact of its corporate restructuring on future profitability and expected annualized savings form the corporate restructuring, expected future CEO transition cost and the company’s objective to reach 10% EBITDA over time.

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 Acting CEO, David Levin.

David?.

Thank you, Lisa and good morning everyone. I am pleased to report that our fiscal fourth quarter financial results represented another solid quarter of sales growth and improvement in adjusted EBITDA. This was our fifth consecutive quarter of positive comp sales growth.

Our performance has been consistent and broad-based since the fourth quarter of last year and we entered the new fiscal year confident that our momentum will continue as we remain focused on executing against our strategic initiatives.

Before I speak to our strategic initiatives and related performance in greater detail, I wanted to first provide an update on our CEO transition. On February 19, we announced that Harvey Kanter joined the company as an advisor and will officially take over as President and CEO on April 1. He will also be appointed as director of the company.

At that time, I will resign was Acting CEO. Harvey brings a proven track record in leading executive teams, driving strategy, growing profitability and creating shareholder value for consumer-centric brands. Most recently, Harvey was the President, Chief Executive Officer and Chairman of the Board of Blue Nile.

It will be a bittersweet transition for me. While I am looking forward to retirement, I have spent the last 19 years of my life working alongside many great individuals who helped to transform Casual Male into the DXL brand that we all know today.

With over 230 DXL stores, a strong ecommerce business and now a new wholesale segment, the time is right for a new leader to set the course for the future growth of DXL. Let me turn to the fourth quarter and full year sales items. We ended the year on a strong note with a fourth quarter positive comp sales result of 3.1%.

On a 2-year stack basis, our fourth quarter comp sales growth was 7.4%. Our full year comp was a positive 3%. For both the fourth quarter and the full year, we saw increases in both conversion and dollars per transaction, which helped to mitigate slight decline in store traffic.

Strong shopper conversion is clear sign that our assortment is resonating and our store associates continue to deliver an outstanding in-store experience. Our direct business also increased for both the fourth quarter and for the full year.

We launched our new and improved website in the fall and we continue to enhance and refine our digital experience. I will speak more to our digital initiatives in a moment. Before I get into our 2019 initiatives and strategy, I would like to make a few comments about our performance in the first quarter of fiscal 2019.

Like most retailers, February was a difficult month and although our quarter-to-date comp sales are down low single-digits, our comp sales for the month of March have turned positive as spring weather has started to emerge across the country.

What I am most excited about is showing with you some of the new initiatives we have underway and first on that list that we are developing a new wholesale segment. We firmly believe that DXL is the industry expert in the men’s big and tall market, particularly as it pertains to fit and customer experience.

For years, we have been working to showcase that experience on our DXL stores and our e-commerce website. Regardless of how far we are with our DXL stores and digital experience, we know that some big and tall guys may never shop with us.

The wholesale business affords us the opportunity to access new customers who do not currently shop at DXL and increase our exposure to certain female shoppers, gift-givers, budget shoppers and customers who do not have the convenience of a local DXL store. Wholesale creates an opportunity for us to leverage our expertise beyond our retail business.

Our wholesale team is able to call on our sourcing, merchandising and assortment planning capabilities to focus on product development and distribution relationships with key retailers who cater to the big and tall customer.

The wholesale model will allow us to leverage our extensive big and tall experience and industry knowledge with our current product development infrastructure, affording a broader market reach, including new distribution channels and increased brand awareness beyond the current DXL footprint.

Another benefit from entering the wholesale market is using the combined buying power of our resale business and wholesale business to negotiate better product clause. As I highlighted at the ICR conference back in January, we were selected as the provider of men’s big and tall sizes for Amazon’s private label, Amazon Essentials.

The Amazon product page showcases Amazon Essentials fit by DXL. While we are still in the very early development stage, we are happy with the initial launch of our wholesale business. In the fourth quarter, we recorded $2.4 million in top line revenue for wholesale.

We are not yet in a position to provide any estimates on expected fiscal 2019 wholesale revenue, but our early reads been positive and we look forward to measuring the progress in 2019 as we expand our assortment and broaden our distribution.

Another exciting area of progress with DXL in fiscal 2018 occurred in customer segmentation and brand positioning. One of our first priorities was develop the better overall understanding of the big and tall market and our customer base.

As I mentioned on our third quarter call to uncover these insights, we completed our first ever segmentation study where we surveyed over 4,000 big and tall customers. This work let us to identify segment of the market we call the fit and style guy who accounts for 28% of the market that represents approximately 55% of all spending.

He is a great match for DXL, because he is interested in fit, style and personal attention. He is looking for both basics and higher end products from us. We believe that aligning on this core target market will help us to focus our marketing, merchandising, digital, and store resources, to recruit more of these high value customers into DXL.

Now, that we have started to develop the better understanding of our target customer, we need to be sure we could find and communicate with him and motivate him to shop with us. We have realized that our existing CRM capabilities are inadequate and in fiscal 2019 we are upgrading our CRM system.

One of our greatest advantages is that we capture customer data on approximately 90% of our transactions. We believe the improvements in CRM will allow us to personalize our promotions, our assortments and our creative media to drive both sales and customer satisfaction.

Our 2018 TV and radio campaigns emphasized the unique features of the DXL brand, including our source, our product and the DXL wardrobing experience. We also tested a high-end catalog in the fall that featured new style driven looks that appeal to our fit and style customer.

This catalog is a great vehicle to showcase our newest brands and to highlight our elevated private label offerings. We are also leveraging the premium creative content featured in the catalog across all DXL touch points including in our stores and digital platforms. We are also focused on our overall marketing costs and return on investment.

This ROI minded approach has resulted in aggressive test and learn process to continually monitor the ROI and marketing dollars and the use of outside tools and data to understand how to redeploy dollars to more productive tactics. And although we have more work to do in this area, I am very proud of the progress the team has made so far.

Now, shifting to our store experience, I want to update you on a new technology we deployed to our stores that we call Clienteling. This is a technology that allows our selling, look into guests’ wardrobe. Using prior purchase history, our selling associates can zero in on why a customer buys shirts from us, but maybe not pants.

It may also tell the associate that the customer really likes spring T-shirts and athletic wear, but not suits and sport coats. Clienteling gives us that extra insight to ensure we can satisfy his needs much more quickly and efficiently. Fiscal 2018 was also an exiting year for our e-commerce business.

As I mentioned, we launched our upgraded website this past September, which not only better showcased the premium position of DXL product and brand experience, but removes customer friction points by way of user navigation, improved checkout and faster response times.

Our direct business continues to inch higher as a percentage of our overall retail business reaching 21.6 of revenue 2018 up 60 basis points. One of the principle reasons for the growth in our direct business in 2018 was our save-to-sale initiative, which is a technology upgrade for our store associates at the point of sale.

This technology allows our store associates to combine an in-store purchase with an online purchase in one seamless transaction. We are now able to service our in-store customers with our full assortment, not just what is on the racks of the particular store.

One final point on our direct business, I am happy to note that in January we acquired the DXL.com domain name. This removes another point of friction for our customers we think of us as DXL rather than Destination XL.

Let me now shift to merchandize, where we have selected, upgraded our private label assortments by infusing our higher level of fashion. In addition, as I mentioned on our third quarter call, we launched two new brands, The North Face and Vineyard Vines.

The North Face exceeded our holiday expectations and in fact we are out of stock in several styles early in the season. This is certainly a brand we will look to grow in 2019. We also continued to see encouraging reads on Vineyard Vines and we look forward to the growth and sales of this brand over the peak spring summer selling seasons.

Next, I would like to update you on our plan for the remaining Casual Male stores and Rochester stores. Over the past 2 years, we remodeled and re-branded 5 Casual Male stores to our DXL format.

And let me be clear, these are not store relocations to new real estate these are remodels of our existing Casual Male real estate, with a lower capital expenditure requirement and with a strong expected ROI. Overall, we have been pleased with the performance and increases in comparable sales that resulted from this remodeled test.

The upgraded product assortment and elevated in-store experience in those remodeled and re-branded stores, is driving a nice increase in shopper conversion and the average order size. We are clearly servicing our customer needs better, while leveraging our DXL branding and awareness efforts.

Of the remaining 96 Casual Male stores in operation, we see a path to re-branding 60 of those locations to DXL over the next several years and are planning to convert 13 of these in 2019. We have also committed to a plan to close our 5 remaining Rochester clothing stores by the end of fiscal 2019.

The growth in our DXL brand has slowly eroded the sales volume and profitability in our remaining Rochester stores, which are located in high rent metro areas. Much of our Rochester assortment will continue to be available on dxl.com and many Rochester brands can be found in DXL stores.

With the exception of London, all of our Rochester stores are located in markets within close proximity to one or more DXL stores. In the U.S., we are working on a customer transfer strategy to encourage our Rochester customers to migrate to nearby DXL stores.

And we’re confident that once our Rochester customers discover the DXL experience, they will become DXL loyalists. The final topic that I’d like to address is our guidance for fiscal 2019. At the beginning of the call, I noted that we will be transitioning to our new CEO in just over a week from now.

And once that transition is complete, I expect that Harvey will complete his own strategic assessment of the company and chart our next course of action. Our core business remains strong and we continue to focus on how to position the company to achieve a 10% EBITDA margin over time.

For fiscal 2019, we expect to deliver comp sales growth in the low single-digits and we expect to generate positive free cash flow.

Given the CEO transition, the strategic review and the launch of the new wholesale business, the impact on which the company’s financial results needs to be fully assessed, the company is not providing detailed earnings or cash flow guidance at this time. The company will however continue to provide forward-looking commentary on business trends.

And with that, I will now pass the call over to our CFO, Peter Stratton, who’ll review our financial performance.

Peter?.

Thank you, David, and good morning, everyone. I’d like to start this morning with a brief summary of our fourth quarter and full-year fiscal 2018 results. For the fourth quarter, which was a 13-week period, total sales decreased 3.2% to $131.2 million from last year’s 14-week fourth quarter.

One less selling week in this year’s fourth quarter combined with lost sales from closed stores accounted for a $10.5 million sales swing year-over-year. Excluding these impacts, total fourth quarter sales increased 5% over the prior year inclusive of a positive comp sales increase of 3.1%.

Our wholesale segment registered fourth quarter revenue of $2.4 million, and our direct business increased to 24.4% of retail sales compared to 23.1% last year. For the fiscal year 2018, total sales increased 1.2% to $473.8 million inclusive of a positive comp of 3%.

Gross margin for the fourth quarter inclusive of occupancy costs was 43.5% compared to 45% last year. The contraction of 150 basis points was the result of a decrease in merchandise margin of 160 basis points partially offset by 10 basis points of leverage in occupancy costs.

Our fiscal year 2018 gross margin was down slightly to 44.6% compared to 45% in 2017. Let me spend a few moments to explain why. There are two primary reasons for the contraction in margin. First, the mix of our assortment has been evolving all year from less core and basics to more fashion and designer brands.

Even in our private label business, we have been adding more fashion in detailing to our assortment and that is having an impact on our merchandise margins. Second, our merchandise margin is impacted by our new wholesale segment. As you would expect, the gross margin on wholesale is lower than the margins in our store and direct channels.

Although we will not be providing specifics on our wholesale margin for competitive reasons, it is an important dynamic to point out as we anticipate a continued mix impact in our gross margin as we look to accelerate the growth of our wholesale distribution.

We view wholesale as an opportunity to scale and leverage our big and tall market expertise and reach ultimately driving both top-line and bottom-line growth. SG&A expenses for fiscal 2018 fourth quarter were well managed resulting in a year-over-year dollar decline of 10.3% or $5.8 million, and strong expense leverage of 300 basis points.

The primary drivers to the SG&A leverage included a $3 million decrease in marketing costs, savings from both our previously announced corporate restructuring of approximately $1.8 million and approximately $2.5 million of expenses related to the 53rd week in the prior year.

The SG&A savings were partially offset by increases in incentive accruals and IT operating costs. For the fiscal year 2018, SG&A costs improved 250 basis points to 38.8%. As a reminder back in May of 2018, we executed a corporate restructuring to accelerate our path to profitability by better aligning our expense structure with revenues.

We eliminated approximately 15% of our corporate workforce and combined with a reduction in travel, benefits and non-essential project expenses realized savings of approximately $6 million in SG&A expenses in fiscal 2018 and are expected to realize approximately $10 million of savings on an annualized basis.

We will continue to address our SG&A cost structure with an eye towards improving our EBITDA margins and overall profitability. Our adjusted EBITDA for the fourth quarter adjusted for impairment charges, CEO transition and corporate restructuring costs was $6.8 million compared to $5 million in the prior year fourth quarter.

For the full-year, adjusted EBITDA improved over 60% from $17.1 million last year to $27.4 million in fiscal 2018. GAAP net loss for the fourth quarter was minus $7.2 million or $0.15 per diluted share compared to minus $0.07 per diluted share last year.

On a non-GAAP basis before impairment charges, corporate restructuring, CEO transition costs and assuming a normalized tax rate of 26%, adjusted net loss for the fourth quarter of fiscal 2018 was minus $0.01 per diluted share compared with a net loss of minus $0.05 per diluted share in last year’s fourth quarter.

For the 2018 fiscal year, GAAP net loss was minus $13.5 million or $0.28 per diluted share compared to minus $0.39 per diluted share in fiscal 2017. The 2018 adjusted net loss was minus $0.07 per diluted share compared to minus $0.26 in 2017. Now let me turn to our balance sheet and cash flow.

This is the third year in a row that we have delivered positive free cash flow. That said, our 2018 free cash flow of $2.8 million was less than our original expectations. As we work to get our wholesale business up and running, inventory lead times and payment terms resulted in a $5 million swing in working capital.

We also shifted $3 million of inventory receipts from 2019 to 2018 and purchased the dxl.com URL in January for $1.2 million, which negatively affected free cash flow. Capital expenditures for fiscal 2018 were $13 million down over 40% compared to $22.6 million in fiscal 2017 largely due to fewer store openings.

Capital expenditures of $13 million included $10.8 million of IT and infrastructure projects and $2.2 million for three new stores and three store remodels. Inventory at the end of fiscal 2018 was up $3.5 million or approximately 3.4% from the end of fiscal 2017.

The increase in inventory was due to the acceleration of receipts at year-end, as well as the establishment of our wholesale segment. We entered the new fiscal year with a clean and current inventory composition. Clearance inventory at the end of fiscal 2018 was 10.3% compared to 9.8% at the end of fiscal 2017.

This slight increase correlates with the shift we are seeing with more customers gravitating towards our new full-price merchandise as opposed to last year when we saw higher sell-throughs on clearance product.

Our strategic inventory initiative over the past few years has increased our receipt flow flexibility enabling us to expand what we refer to as our test read and react capabilities. From an assortment perspective, we remain more nimble today than we have ever been with inventory turnover increasing from 2 times in 2016 to 2.5 times in 2018.

Total debt at year-end was $56.7 million, which includes borrowings under the revolving credit facility of $41.9 million with excess availability of $45.6 million. This compares to $59.4 million of total debt a year ago with excess availability of $37.5 million.

Finally, I’d like to let you know that the company is adopting the new lease accounting standard ASC 842 in the first quarter of fiscal 2019. We expect the most significant impact from this adoption to be a material gross up on our balance sheet.

While we have not fully completed our analysis, we expect to recognize leases as right-of-use assets of approximately $217 million and corresponding lease liabilities of approximately $255 million.

The $38 million difference between the right-of-use assets and lease liabilities will be primarily attributable to the elimination of existing lease-related assets and liabilities upon adoption of the standard.

We also expect to recognize the remaining deferred gain of $10.3 million from a sale leaseback transaction that was completed in 2006 as an adjustment to retained earnings in the fourth quarter of 2019. As a result, we will no longer be recognizing this benefit which reduced our SG&A expense by $1.5 million annually.

We do not expect the adoption of this new standard to have any other material impact on earnings for fiscal 2019. And with that operator, we’ll open the call for questions..

Thank you. [Operator Instructions] Our first question comes from Bernard Sosnick with Madison Global Partners. Your line is open..

Yes. Good morning..

Good morning..

Good morning..

I would just like to ask you to describe what features of the interview process with Harvey Kanter drew the most attention to you.

I know he’s going to want to speak for himself, but you do have impressions that you can share with us with respect to how he might differentiate running the business from what has been done in the past given his experience?.

Yes, well, I got to meet Harvey and we had lot of conversations with him. I think he’s a true merchant and Harvey came up as a merchant. And I think the additive value is his experience on – in multi-channel coming from Blue Nile, where he had a very successful 8-year career.

I think that brings an element that will – certainly has the ability to enhance our multi-channel sales. I think that’s the – I think that’s going to be the biggest win..

Just to give us a little bit more insight in the multi-channel, which is where I expected you to go, what aspects of his experience, which is much deeper than most retailers might he bring to bear, I’m sure he must have discussed some of that with you?.

Yes, I think he – he’s got to come in here and make his own assessments where he thinks those opportunities are. He’s going to come in with a lot of questions and talking to the people here and looking for the opportunities.

I can’t speak for him, where he sees those opportunities yet, I think he’s going to take his time evaluate and then make judgments on what direction to take it to. But again, I think he – that is a strong play for us. We really try and grow that multi-channel business and get our [debt percent] [ph] up.

And I think he’s going to give us a lot of guidance on how to get there..

No, I’m encouraged on that.

Let me ask when do you believe that the wholesale business will begin to ramp up and record its sales?.

I think that’s we’re really going to see it in the fourth quarter. Right now – it’s something that we don’t control on our end. It’s obviously when the retailers want to see the receipts coming in. We’re having lots of conversations, potential great opportunities, but we see a pretty significant ramp-up coming by the fourth quarter of this year..

In that case, why our inventories ramping up for wholesale now?.

Well, inventories are up because we are – we are having orders placed and we are fulfilling orders. I think the reason that we saw a little bit of an increase in inventory at year-end, it was just the difference in timing of when we had brought the inventory in and when we shipped it off to the wholesale partners.

So, I think that, that will continue to increase, but that’s really just the timing difference more than anything else..

I still don’t fully understand.

The gross margin was down in the fourth quarter and the release mentioned the wholesale business is one of the causes?.

Sure, that was absolutely one of the causes. So, I mean, let me just clarify. There’s a couple of reasons for what’s happening with the gross margin in the fourth quarter. And the biggest reason is that, we’re seeing the customer and this is in our core business, is gravitating towards fashion and national brands, which have a lower gross margin.

We also as I mentioned, we had a lower sell-through of clearance product this year and more full-price product compared to last year.

So, more of it is just that our guys are looking for more fashion product, which has lower IMU and then part of it is also that the wholesale sales that we recorded, which was $2.4 million, obviously that’s going to have a lower margin structure than what we have in our stores and direct..

Okay, thank you. I’ll listen into the remainder of the call. Thank you..

Thank you. [Operator Instructions] And with no further questions in the queue, this does conclude our question-and-answer session. Ladies and gentlemen, thank you for participating in today’s conference. This does conclude today’s program, and you may all disconnect. Everyone have a wonderful day..