Good day ladies and gentlemen. And welcome to the First Quarter 2018 Destination XL Group Incorporated Earnings 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 maybe recorded. I would now like to introduce your host for today's conference Tom Filandro, Managing Director at ICR. Sir, you may begin.

Thank you, Monee and good morning, everyone. Thank you for joining us on Destination XL Group's first quarter fiscal 2018 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 discussions will also contain certain forward-looking statements concerning the company's operations, performance and financial condition, including sales, profitability, EBITDA, adjusted EBITDA, gross margin, marketing costs, capital expenditures, earnings per share, free cash flow, store openings and closings, the corporate restructuring and related cost and savings 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?

Well, thank you, Tom, and good morning everyone. There are few topics I would like to discuss today. First, I'm going to give a quick recap of our first quarter business performance. As many of you saw in our press release this morning, our sales momentum from the fourth quarter continued into fiscal 2018 and our earnings for Q1 have improved significantly from Q1 of last year. We're encouraged by what we are seeing in the business today, and we believe we have some strong opportunities still to come in the second half of the year. There's an update. May has been a stellar month with comp sales anticipating to be in the mid-to-high single digits. Second, I will discuss our plan to improve our operating margins. Two weeks ago, as reported, we initiated a corporate restructuring to accelerate our path to profitability. As a result, we expect annualized cost savings of approximately $10.3 million. The bulk of these savings are from actions taken on or before May 16 when we eliminated 56 positions or 15% of our corporate office workforce. And we'll also discuss our strategic priorities for the remainder of the year and provide an update on our progress against our goals. Finally, I'm very happy to report that on May 24th, we entered into a new senior secured credit facility with our bank group. Peter is going to discuss with you the terms of the deal, but overall our pricing under the new facility is better than the prior facility. Not only will we benefit from the improved terms, we feel this agreement demonstrates confidence on the part of our lenders and our business and then our financial plan. Now our Q1 performance. I'm pleased to report that we delivered positive comparable sales growth of 2.2% for…

Thank you, David, and good morning, everyone. I'd like to start this morning with a brief summary of our financial results. For the first quarter, net sales increased 5.3% to $113.3 million. This increase was driven by a comparable sales increase of 2.2%, a non-comparable sales increase of $3.2 million. We were very pleased to deliver another quarter of positive comparable sales with growth in both our stores and direct channels. And we are encouraged by the trends we're currently seeing in the business. Gross margin for the first quarter inclusive of occupancy costs was 44.7% as compared to a gross margin rate of 45.2% for the first quarter of fiscal 2017. The 50 basis point contraction in our gross margin was below our expectations and was due to a decrease in merchandise margins of 120 basis points partially offset by a 70 basis point improvement in occupancy costs. As David already mentioned, the decrease in merchandise margin was related to increased promotional activity specifically in our direct business as well as an increase in shipping costs. We are currently underway with a comprehensive review of our distribution and shipping strategies and we believe we will bring our margins back in line with some minor adjustments to our direct promotional and shipping offers. Our SG&A as a percentage of sales improved by 270 basis points for the first quarter to 40.2% as compared to 42.9% for the first quarter of fiscal 2017. On the dollar basis, our SG&A expense for the first quarter decreased by approximately $600,000. The lower spend was due to a decrease of $1.6 million in marketing costs primarily due to launching our spring campaign at the end of Q1 this year compared to the beginning of April last year. The lower marketing costs were partially offset…

Thank you. [Operator Instructions] And our first question comes from Alex Silverman with AWM Investments. Your line is now open.

Hey good morning.

Good morning.

Just wondering if you could give us a little -- some more detail around some of the changes on the direct e-commerce business that impacted both margins, I guess sales margins and shipping?

Well, on the shipping costs -- the shipping side of it, a lot of it has to do with where we set the threshold for free shipping, and that's something we're working on right now to manipulate the numbers, so we can still offer free shipping to our best customers but cut back to customers that aren't as loyal and are lower profitable customers for us. So that's certainly one of the areas on shipment. As far as the promotional activity that we've been a little -- we were a little more promotional than we were a year ago, more customers are taking the promotional price points, and that's something we're adjusting going into the back half of the year also. So we think the drop in the margin rate on direct will have that neutralized back half of the year.

Sorry, just one of the things that I would add to that is on our shipping costs, more and more frequently over the last couple of years we are shipping more from stores and we do have some new software that's going to be deploying in the fall that's going to allow us to be more efficient with how we direct shipments coming from specific stores. So what we want to avoid is stores from one side of the country fulfilling an order on the other side of the country, and this upgrade to software is going to allow us to be much more efficient at that.

Makes a lot of sense. And this is -- you made a comment about Amazon Prime fueling sales. This is not related to neither the promotional pricing on merchandise nor shipping is related to that.

Well, the shipping is because to get the requirements in two days, it's more expensive to do that. But promotionally no, there are no – the prices you would find on Amazon are no lower than you would find in our stores.

Okay. That's helpful. Thank you. Second question, did you say $4.2 million for CEO transition?

Yes. That's correct.

And always what's -- I mean it sounds a lot of money for transition. How are you spending $4.2 million?

So, just a couple of comments on that. First, I'd like to point out that David has agreed to stay on with the company to ensure a smooth transition to the next CEO, and we expect at some point this year that David will separate from the company, and his departure would be governed by the terms of his transition agreement, which was filed in an 8-K a couple of months ago and his employment agreement. The company is also incurring expenses this year to retain a search firm. We're conducting the search, incurring other costs ultimately to install a new CEO. So, I'm not going to get into specifics about what makes up the $4.2 million, but our best estimate right now is all of these costs that we're incurring to ensure a successful and smooth transition. Our best estimate right now is that it's $4.2 million.

I mean that sounds to me like severance.

Well, again, as part of David's employment contract, he would be entitled to certain separation benefits, but that's only one piece of the $4.2 million.

I thought David was retiring.

David again -- David has a transition agreement that we have filed and you can refer to that for the specific terms of this separation, but we are accruing according to the terms of those agreements.

I find that to be somewhat egregious just so you know?

Understood. Thank you.

Thank you. And our next question comes from [Harvey Henner with Orkney] [ph]. Your line is now open.

I have I think two specific questions that I'm a little confused by. The first Peter is, under capital expenditures, the $9.3 million for digital and infrastructure projects, are those capitalized or are those expensed?

Yes. So those are – that’s part of our capital expenditures for the year. So every year we incur costs CapEx related to infrastructure systems implementations and so forth. That number typically runs between $8 million -- in the past, it's been $8 million to $10 million a year. I expect that normalizes at more like a $6 million to $8 million number a year. This year, we certainly have some big projects that are coming on. We have a new site being deployed in the second quarter, and we have some additional operating management system and warehouse management system, which is the back end of the Web site that we'll be deploying in the fall. So to answer your question, that's capital.

Okay. And approximately what -- over what time period is that amortized or depreciated?

Typically, that's amortized over five years.

Okay. Thank you. The second question is -- and I know you've discussed this -- a lot on this call and in other calls, but I'm still confused by it. The amount of savings that you're going to realize from the changes to your SG&A as you described on this call. If we were to look at what you projected at the beginning for 2018 before this initiative, but including the vacant positions that you’ve described, what would be the change for a new year? So in other words, if 2019 would be exactly the way you projected 2018 at the beginning of 2018, what would it look like, I mean would it go from $20 million to $25 million of EBITDA to $30 million to $35 million in EBITDA apples-to-apples. What would that look like? So there are so many numbers that are moving around that I just don't get it.

I understand the question because you are right. There are a lot of numbers, so let me try to answer it as -- I will try to make it as simple as I can. So, the total number of annualized savings is $10.3 million. We had included $2.4 million in our original guidance. So if you are thinking about year-over-year how much is that account for, the old number included $2.4 million, the new number would be $10.3 million, so the incremental amount on an annualized basis would be $7.9 million.

Okay. So, if you project it and I believe it was $20 million to $25 million, I could just add that $7.9 million if I just wanted to say okay. The business is now capable of sustaining this at the same level of operations with fewer costs?

Yes. I think that's a fair statement.

Okay. Well, thank you very much and continue on a positive trajectory.

Thank you.

Thank you. [Operator Instructions] This concludes today's Q&A session. Ladies and gentlemen, thank you participating in today's conference. This does conclude the program. You may all disconnect.