Good day everyone and welcome to the Destination XL Group’s Fourth Quarter and Fiscal 2016 Earnings Call. Today’s conference is being recorded. At this time, I would like to turn the conference over to Mr. Tom Filandro, Managing Director at ICR. Please go ahead.

Thank you, Laurie, and good morning, everyone. Thank you for joining us today on Destination XL Group’s fourth quarter fiscal 2016 earnings call. On our call today is David Levin, our President and Chief Executive Officer, as well as Peter Stratton, our Senior Vice President and Chief Financial Officer. During today’ 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 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 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 as 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'd like to turn the call over to our President and CEO, David Levin.

Thank you, Tom, and good morning, everyone. No surprise for this audience that 2016 retail environment was one of the most challenging we’ve faced in the recent memory. For the fourth quarter, traffic trends were erratic, and we experienced more pronounced weakness in the middle of the country which resulted in a comp decline of 2.4%. Despite the negative fourth quarter comp, we generated a positive comp of 0.6% for the year and reported EBITDA of $31.6 million, achieving the midpoint of our most recent guidance. Importantly, after five years of borrowing to fund the DXL build out in fiscal 2016 we were able to pay for our 30 new stores with free cash flow and we reduced our debt to $63.1 million, which is approximately 2x EBITDA. We expect to continue to generate strong free cash flow again in 2017. Now that we've largely achieved our DXL men's apparel transformation with over 200 DXL stores in the most attractive markets, a robust destinationxl.com Web site and an integrated omni-channel operation, we entered 2017 enthusiastic that our strategic initiatives set the stage for accelerated performance in our business, notwithstanding the challenging retail environment. Our greatest opportunity is the fact that 6 out of 10 big guys still do not know who we are. And therefore our top priority in 2017 is to increase brand awareness, acquire new customers, and retain existing customers. We intend to tap that opportunity through two key strategic initiatives in 2017. The first is recommitting to an aggressive advertising and marketing vision. The second is to redefine and improve our digital in e-commerce experience. We gain valuable insights following our decision in 2016 to pullback on our marketing spend, including eliminating a fall television advertising campaign. We had assumed that our previous television advertising campaigns coupled…

Thank you, David, and good morning, everyone. As you all know, we announced our fourth quarter and full-year fiscal 2016 earnings this morning. And I’d like to start with a brief summary of those results. In the fourth quarter, net sales were $122.6 million, inclusive of total company comparable sales decline of 2.4% on top of a 3.1% increase in the prior year quarter. Our top line results were negatively impacted by overall weakness in the retail sector and we believe our decision to eliminate a fall television marketing campaign. In the fourth quarter, gross margin including occupancy costs was 44.9% compared with 45.8% for the fourth quarter of fiscal 2015. The decrease of 90 basis points was the result of a 40 basis point decrease in merchandise margin and a 50 basis point deleveraging in occupancy cost as a percentage of total sales. The decrease in merchandise margin was primarily due to an increase in promotional strategies over the peak December selling weeks. At the end of Q3, we were expecting fourth quarter improvement in merchandise margins due to some year-over-year timing differences associated with our clearance merchandise. The increase in fourth quarter promotional activity more than offset the anticipated improvement in the timing differences on clearance merchandise, which caused our gross margin to come in below our expectations. Moving on to SG&A costs, we continue to be disciplined with managing expenses. Our SG&A expenses for the fourth quarter were 36.1% of sales compared with 40% a year ago or an improvement of 390 basis points. On a dollar basis, SG&A expenses declined $5.3 million from Q4 2015, which primarily resulted from reductions in advertising costs and lower performance incentive accruals. As David mentioned, we are planning to increase our marketing and digital expenses by $6.8 million in fiscal…

Thank you. [Operator Instructions] We will go first to Eric Beder with Wunderlich Securities.

Good morning.

Good morning.

Hi. Could you talk -- so how does these changes in terms of slowing down the store growth a little bit affect your overall long-term strategy with stores and what is -- just remind us what is the long-term goal in terms of the store counts?

Yes, it's interesting, because right now we're over 200 stores and we have 140 Casual Male's left out there, but those 140 really only represent 20% of our business today. So, really the bulk, the major markets where we wanted to plant all these stores are done, so we will be slowing down those transfers over time. But again, in total having that number of 350 stores is still intact, but we will be monitoring it through as leases come due, whether we want to make the conversion -- we’ve IRR requirements that we have to meet. But even if some stay, its Casual Male. They continue to perform well and kick out cash flow for us. So, I think over the next few years we’re just going to be very prudent and thoughtful about what we want to convert.

Great. And when you look at the online business, obviously it has done well. Could you talk a little bit about how the difference in the economics there? Is it a better business in terms of overall margins, and kind of where longer-term do you think the number should be in terms of penetration?

Sure. So I'll take that one. So the penetration is about 15% right now and you know we do expect that to grow over time. I think that over the last seven years we've been spending an awful lot of focus on building out the DXL store footprint. And now that we've gotten to a scale that allows us to reach the entire U.S., the focus is obviously going to be more on digital this year. In terms of the profitability of each channel -- if we were going to earn an additional dollar, we would certainly want that additional dollar going to stores, because we’ve got so much of our fixed costs and payroll in occupancy. But overall, we would incur a little bit more cost in the direct channel with the shipping, I would like to remind everyone that we do not take free returns for shipping, so that helps our model a bit.

Also just to add to that to remind everybody where a lot of apparel companies have 20% to 30% return rates, which really bust the model in terms of profitability. Our return rate is about 8%. So we have strong margins coming out of digital which will allow us to really accelerate that as best we can without having a real impact on our margins.

And where do you think it can go? I mean, is it a 25% of total sales potential here?

You know we're not there yet to say where it can grow to. Obviously, we’ve a fairly big base of stores that will make that growth slower. But aspirationally, yes, we could -- we will take it as high as it could go and if its 25% that will be great, but too early for us to predict. But it will be growing and driving as a percent of sales over the next several years for sure.

Congratulations on getting to free cash flow. What is your goal for either debt levels or ratios? Where do you want liquidity to be?

So, I think we're very comfortable with where we are right now at two times EBITDA. I think with announcing the stock buyback today, it is something that we're very excited about, because it gives us more flexibility to balance shareholder return with liquidity management. We think that we are going to generate a significant amount of cash flow this year. The guidance is $15 million to $20 million, and it's important that we're able to balance those two priorities, and do it in the best interest of the Company.

Okay, guys. Good luck for the year. Thank you.

Thanks, Eric.

We will go next to Greg Pendy with Sidoti.

Hey, guys. Thanks for taking my call. Just, I guess, a couple of questions on the outlook on 2017. First of all, did I catch that right that the SG&A, we should think about it going up $6.8 million or was that just the advertising side?

No. So, Greg, it's going to go up more than that. The $6.8 million is just the advertising side. We also are going to see -- we see general increases in SG&A every year in areas such as store payroll, with more DXL stores. We also made a comment earlier about increases in performance incentive accruals. Those accruals were very modest this past year and we expect that next year those numbers will get back to a more normal level that we trended to back in 2014 and '15.

Okay. That’s helpful. And then just another one, I guess, can you kind of remind us where you guys stand? I know you’ve talked about it in the past, but where strategically you guys stand in the online world in the big and tall space? I believe in the past given some metrics on the competitive environment and how much of the -- how much you guys represent of that business?

Yes, that’s difficult to answer, but one of the things that we do monitor is we ask our customers where else they have shopped in the last six months. Have they shopped anywhere else in big and tall. And there's been absolutely no growth by any of our competitors in terms of cutting into our market share and we think our market share continues to grow. But in terms of the total business what percent we’ve, there's nothing out there that really guides us to what that number could be, but I believe our market share is going to grow more. We are, I guess, I’ve said one of our initiatives is to go into more marketplaces. We are on Amazon, a couple programs with Amazon. We are on eBay, we have Bon-Ton. We’ve a lot of more potential growth in doing digital sales outside of our own Web site. So, again very focused on it with a lot of potential, on a lot of programs that we're going to be initiating in the next year.

And then just one more, it seems like just the next you guys are planning on only adding one DXL outlet. Is that primarily a function of the online growth? Are you finding that to be sort of a channel that you can offset some of the inventory if need be?

No, no. It was just coincidental. Our DXL outlet stores are doing fine. It's just what leases came due, where we saw the opportunity, and it just happen to shake out that way, but there is no agenda that says we're not going to convert DXL outlets in the future as we would our regular price stores.

Okay. Thank you.

Thank you.

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

Good morning.

Good morning.

Just a quick question on -- just on the sales during the fourth quarter, and so far into the first quarter. Any, like regional trends versus -- like the coasts versus the central part of the country or also any -- just anything as far as pre-presidential election versus post-presidential election, just wondering how the patterns were there?

Yes, interesting. On the demographics side, we were experience about a 500, 600 point spread between the middle the country and the East and West coast. In February that narrow down to about 140 basis points. So that does seem to be neutralizing itself, so I think we're pretty good about that. Pre-election, postelection we're not sure, but the business that we experience in the fourth quarter as you’ve heard most retailers speak about the current business, it's bumpy out there and not very predictable yet. And again, we’re really focusing on our TV campaign, which actually is going to break a month earlier than last year, so we should start to see improvements in our comps as we get into the second quarter.

All right. Thanks. That’s all I got.

We will go next to Glenn Krevlin with GHC Capital.

Hey, good morning. Peter, I was wondering if you would give a little bit more clarity on or detail on CapEx. So, last year in your release you said there was $33 million, 20 stores, $13 million infrastructure. Can you tell me the $13 million infrastructure, what were the major programs, what do you expect to get out of them? And then for this year can you break it down into similar buckets in terms of stores gross and net and then infrastructure?

Sure. So, the programs that we spent on infrastructure it's really in two major buckets. The first is IT projects. So improvements to our e-commerce Web site, improvements to different systems that we have -- within our -- the Company whether it's planning and allocation or distribution, that's really the first bucket. The second bucket is. it's really infrastructure improvements to our facilities. So things like, it could be fixing parts of a roof, it could be resurfacing a parking lot, but it's all of the maintenance CapEx costs that we have to incur to keep the business moving. You know where we think it's going to be next year is the CapEx for stores next year is about $22 million. Now that’s before tenant allowances. I’m sorry, $17 million and then tenant allowances. So we’ve -- we are spending roughly $400,000 to $500,000 per store on the DXL store build out still.

And then in terms of infrastructure for this year, what’s the number and what are the projects?

So the infrastructure projects this year, I believe is about $8 million and it's …

And then in terms of the buyback, I mean has the Company sort of had a -- or created a policy here as to sort of what debt-to-EBITDA or what debt-to-EBITDAR ratio the Company is comfortable managing the business at? Are there some metrics you can share with us that the Board has adopted in creating this repurchase authorization?

So one of the big things that we're watching very closely is our availability. We want to make sure that our availability does not fall below a certain level, and we're looking to buy back shares opportunistically. So, we’ve set a number. I’m not sure we're going to give that out on this call, but we're managing that conservatively. The first priority is to make sure that we got plenty of flexibility and availability to run the Company.

Okay. I will let somebody else jump in.

We will go next to Bernard Sosnick with Madison Global Partners.

Thank you. You did a very nice job controlling inventories during a difficult situation, but you say that there is more to come. Could you outline a little bit your plans for inventories?

Yes, Bernie. We have a very slow turning business, it's been our heritage forever, we barely turn two times a year, really reflective of the size management that we have to deal with certain styles, 55 different size combinations, And we have to learn how to rationalize that as we move forward. So we’ve -- we brought in a consultant. We’ve met that out. They’ve been in here for three months and it's just streamlining the inventory that we have in our warehouse more than we have in the stores. We are not going to really lower -- we don't need to lower the inventory that’s in the stores, it's the transitional inventory, how we bring it in, the amount we bring in at one given time and there's just tremendous opportunities as we focus on that to drive it down. As we’ve said, we drove -- we made one big dramatic drop in inventory in one year and that was just things we were able to accomplish on our own. And now bringing in the experts, they’ve identified a lot of programs that just -- we could improve dramatically by streamlining it and changing the way we do it. So we're very excited about it's been a top priority in the Company for the last year and we're confident that the numbers that Peter gave on driving that inventory down are going to happen by the end of this year.

With regard to your investments in marketing, certainly understandable and I agree with it, but the Company has come to the point of having enough stores so that, while you’re not mature, you’ve reached a level of maturity that should produce profitability some time soon. So, 2017 is going to be another investment year in that respect given your guidance. What are your thoughts looking a little bit beyond that? I know it is a very difficult market environment, but could you stretch your thinking a little bit, please?

Honestly we are feeling very good about our business right now. Taking that marketing out, had an impact and putting it back in is going to have a positive impact. We are going to be going to in the back half of this year with marketing against no TV a year-ago and that should give us a substantial improvement in the back half of the year. But the key thing is, for these guys to pay attention to who we are isn't on their -- top of their priority. Every customer that we get to walk in the store it's a win. They come in, they enjoy the experience and we own them. The cost of acquisition of that customer is expensive, but the good news is that the money we're investing today has long-term positive profitability to it, because we have a good stickiness to this marketing. We get him in this year and we spend the money, we’re going to own that guy for the next four or five years. So it pays itself over time. So, putting that money back into marketing is going to be great. We got -- we’re bringing back our top commercial that only ran for 12 weeks in 2014, it scored extremely high. We’re very excited about bringing that back. It resonated with our customers very well. It was the year we’ve the biggest comps in DXL. So, we spent a lot of time trying to figure out how we are going to get that customers back in the store. We feel very good about our strategy.

Thank you.

Thank you, Bernie.

[Operator Instructions] We will go next to Peter Rabover from Artko Capital.

Hey, guys. I got a -- I’ve a couple of questions. So first on the SG&A and the marketing spend, should we consider this more of a run rate going forward or is that is a one-time increase that you might pull back on in 2018?

No, I would consider it a run rate going forward. Over time as we grow sales, the rate as a percentage of sales will come down, but we’re committed to the advertising and customer acquisition and retention is absolutely the highest priority this year.

Okay. And then on the same-store sales guidance, is that coming mostly from traffic that you think will come as a result of advertising?

Yes, and the growth of digital. That digital -- our digital plan this year is aggressive and we're already seeing a run rate where digital is outperforming our stores. So that's going to be a big part of the comp too.

Do you guys have any idea how much of your digital comes from people who have visited your stores like from your, I guess, in person customers?

There is different metrics out there. One that we saw over the holiday period, 60% of the customers in our stores were on a mobile device prior to coming into the store. So it's interesting. Even though he could have easily clicked on to buy our customer still like to come in the store, try things on. They’re more challenging to get the right fit. So, our omni-channel strategy is really melding these businesses as close as we can together, because they do work hand-in-hand. We like them to go on digital and then we like them to follow-up in the store where we could build on that customer's purchase through enhanced wardrobing.

Okay. And then I’m just kind of curious if you can give any color on how you guys went about deciding on the stock buyback. Was it from the Board level or was that from you guys? Was there a higher number or a lower number from each side? I would appreciate any color.

Sure. I'd be happy to. So, this really stemmed from the fact that we're giving guidance for $15 million to $20 million in free cash this year. And it's really a capital allocation question where we can invest that money in more stores, we can invest that money in paying back debt, we felt that given where the price is today, authorizing the stock buyback gave us more flexibility to manage the business better. So now we can balance shareholder return with debt pay down.

Okay. But did that come from the top or did that come from you guys?

I think it was -- this was a joint decision. We go in with an agenda and we said okay, we’ve got free cash flow, something we haven't seen in many, many years and what's our best strategy and there was consensus between the Board and management that with the stock price where it is, we think it's a good return on investments as its going to be at a -- at this price range. So, the alignment was there between the Board and management.

Great. And then just one more. You said it on the call, maybe I missed it. How many of your Casual Male stores you said were generating positive free cash flow today?

All, but two of them.

All but two of them and you -- I assume you plan on closing those two this year?

Yes, we will have to check when the leases are, but we’d be closing those when we can get out of the leases.

Great, thanks. That’s all I have.

Thank you.

That concludes our question-and-answer session. I will turn the conference over to David Levin for any additional or closing remarks.

Thank you all for joining us today and we look forward to speaking with you next quarter. Have a great day.