Destination XL Group, Inc. (DXLG) Q2 2019 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen and welcome to the second quarter 2019 earnings call for Destination XL. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session and instructions will be given at that time. [Operator Instructions]. I would now like to turn the call over to Ms. Nitza McKee. Ma'am, you may begin.

Thank you Victor and good morning everyone. Thank you for joining us on Destination XL Group's second quarter fiscal 2019 earnings call. On our call today is our President and Chief Executive Officer, Harvey Kanter and our Executive Vice President and Chief Financial Officer, Peter Stratton. 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.dxl.com for an explanation and reconciliation of such measures. Today's discussion also contains certain forward-looking statements concerning the company's comparable sales growth, the wholesale segment and free cash flow. 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. I would now like to turn the call over to our CEO, Harvey Kanter. Harvey?

Thank you Nitza and once again, good morning to you all. It's now been just over four months since I arrived at DXL. And my learnings of this great company not only continues but in fact has accelerated as we have begun turning actionable insight to defining plans and execution. One thing that has not changed is the incredible passion I felt early on in our team's commitment to creating an engaging experience with big and tall consumers on a scale that no one else can duplicate. I am thrilled to begin talking with you today in greater detail about our plans and expectations for the future. Our first half financial results have been challenging but I think we, as a company, have made great progress with aligning our resources and in developing our plans for the second half of fiscal 2019 and to the future. On our call today, I plan to talk about a number of strategies we are pursuing. These strategies fall within four major initiatives to which our entire organization is now oriented. The essence of our initiatives is grounded in enabling consumers to purchase our products and services where they want, how they want and through whatever channel they want. The first of our four major initiatives is driven from a digital standpoint around engaging our customers in a more meaningful and personalized way. The foundation for this initiative is our new CRM system. This system allows us to segment our customer file and personalizing our message far better than we have in the past. The second initiative is how we develop and execute our working marketing plans. We recognize there is no silver bullet in marketing media mix and we believe utilizing our marketing and promotional dollars across our recipe of media formats done more efficiently and effectively while also strategically shifting dollars in a test, learn and optimized framework will drive consumer behavior as a critical requirement. The third initiative is leveraging our digital platform across commerce and online experiences to drive greater consumer engagement on their terms. Although we have made great progress with our website over the past year, our approach to refining the web experience must always be evolving and improving. Here again, we are pursuing an iterative approach of testing, learning, optimizing and then doing it all over again. And the fourth initiative is building, developing and executing our wholesale business plan. We have been busy developing the plan through the last 90 days and we are now moving forward in a more directed manner. The transformation of our company will not be driven in any one channel, within any unique customer segment. It requires a series of moves across marketing, across channels and across different customer segments to create the momentum we are looking for and for us to get on top. Before I get ahead of myself though, I want to briefly cover our Q2 results. Like many other retailers reporting results this month, the start of second quarter for DXL was challenging with unfavorable weather as the primary culprit. Although we felt the impact of unseasonal weather early in the quarter, our performance improved as the quarter progressed. We ended the second quarter with a flat comp, a sequential improvement from the first quarter. Our direct business outpaced stores and was fueled by a notable increase in mobile traffic. We believe we much continue to be clear and direct in our marketing brand positioning and we are making progress. We have taken a more irreverent approach in our tone of messaging, not taking yourselves too seriously, which we believe is resonating with our customers. As an example, we featured our private label Harbor Bay three-pack underwear in an email in mid-August. We think of underwear as a basic sundry item but our email said, say no to commando. And then we went on to further explain how you can get your skivvies in a bunch. It's playful enough to engage our consumers and one such response we received from a customer was and I quote, "Noticeable difference in the email promotions of late. Very fun. Brought a smile to my face." It's really all about engaging customers and we are pushing to do this more. Now, getting back to the quarter. Our brick-and-mortar sales comp for the quarter was slightly negative but we did see store traffic pickup in July. Although we are reporting an improvement over the first quarter comp, we were disappointed in our results as performance fell short of our internal expectations. That said, we did capitalize on elevated traffic during our semi-annual sale to successfully move through seasonal goods and clearance inventory. This helped liquidate some of our slow-selling inventory but also resulted in a decline in the average order value and a higher markdown rate. Given the sequential improvement in comp trend, the inventory position and our plans for the second half, we are conservatively optimistic for the fall season. Finally, it is worth noting that our second quarter wholesale business delivered $2.7 million in revenue. This was an acceleration from the first quarter's run rate. We feel good about the momentum in our wholesale business and we are making excellent progress on initiatives to build our wholesale presence while also maintaining strong financial discipline. More on the wholesale story in a short few moments. Moving below the line, our second quarter margin and profits were partially impacted by the higher level of discounting. Our promotional pace was a bit higher than we would have liked and was influenced by the lower than expected sell-through of seasonal product. We are all cognizant of protecting our balance sheet and entering each season in a clean high-quality inventory position. Our teams did a good job of appropriately balancing price and promotion to maximize gross profit dollars while stringently managing inventories. Below the gross margin line, we continued to manage expenses quite well with our SG&A expense dollars in line with our expectations. Total SG&A was down about 60 basis points from last year. Our second quarter adjusted EBITDA of $7.1 million came in below last year's second quarter adjusted EBITDA of $8.7 million due to higher planned promotional activity. Now I would like to circle back to what I believe is the most important part of our discussion. How we are going to create inflection and begin transforming the business? As I noted in our first quarter call, what really defines DXL big and tall is the in-store experience and our ability to drive one-to-one consumer engagement which materializes as a memorable interaction between store associates and our customers. We do stores really well. It's our bread and butter. We believe we have created a unique, compelling and engaging experience in our DXL stores and we must now enhance the customer experience digitally and we have to become better at finding and engaging him online. In today's tech-savvy, always on, consumer in the driving seat environment, we know most consumers start their shopping experience digitally, regardless of where they ultimately make the purchase. In regards to those who have previously shopped with us, we have to reengage with them on a more personal level that will be driven by digital engagement initiatives. Although we believe if communication and promotion is more personalized, they will shop with us more often, our historical approach of batch and blast, one message fits all, highly promotional marketing is just not where consumers are today. Conversely, in terms of new customer acquisition, once we find him, we are confident he will shop with us on dxl.com or in our stores. Once he does, we need to drive our relationship deeper through more relevant, more personalized and engaging content. We know this ultimately depends on evolving the web marketing and web experience to align with our incredible store experience. As I said on the Q1 call, our number one objective is to grow our customer file and allow him to shop where, when and how he wants. In Q2, our customer-first orientation did not change but our capabilities around one-to-one personalized marketing were not yet in place. Our challenge has been and continues to be a lack of traffic and more importantly repeat traffic. Given today's consumer, to reverse this trend, we need to move away from traditional batch and blast mass communication and to engage him on his terms in ways relevant to him in a personal manner. The initiatives we are pursuing all have far greater capabilities to help us engage the consumer and ultimately create greater revenue growth. So of course, by now, you must be asking the question, how will we do all this? How do we accomplish this goal? Let me try to answer that. Our first initiative is the deployment of our new CRM system and while it may not be sexy, it is table tips to which we have not anteed up. We launched our first phase of CRM on August 7, which enables us to truly segment our customer file. In our old legacy system, creating a segment could take literally anywhere from eight hours to three days and then executing the email deployment in a segmented way could take another four hours to complete. On August 7, our first segmented email was sent to nine segments and executed within two hours. While not landing a man on the moon, it does feel like a great system limitation that we have addressed and we now have in place, now with our new system we are able to group a single subset of customers based on a specific criteria in a matter of minutes. The segmentation could be based on demographics, geography or behavioral characteristics among others. Building further on the new segmentation capabilities, we have recently switched to a new email service provider, which now gives the ability to use the CRM segmentation to personalize how we communicate with our customers. Our first step is simply to personalize an email with a customer's name. Here again, it sounds relatively elementary but there is power in communicating on a first name basis. The new email platform, as an example, provides the ability to A/B test our messaging and promotions. Does the customer behavior change among segments depending on how and the communication message we send? We can then mine this data to figure out exactly what motivates different customer segments to come and shop with us. This is but one example of the new capabilities of the email platform. Although this is just launched in early August we believe this functionality, along with other platform enhancements, will give us greater insights into how to connect with our diverse customer population. Later in Q3, we will be launching the second phase of the CRM project which is enabling single-use coupons. This feature will give us more flexibility with offering specific promotions to specific customer segments without the risk of coupon abuse. Single-use coupons link the coupon redemption to customer who is buying. While we ultimately know single use coupons will be a margin enhancing tool as we can better control distribution and better predict redemptions as each coupon is now tied to a specific customer, more importantly it will drive repeat customers through enhancement to the loyalty program. The CRM deployment is just one example of the significant change we are making around people, process and data. We are aggressively working to build our analytical backbone and this starts with technology and structure. In order for us to leverage our data to drive better decision making we need to improve the way we collect, organize and manipulate data. As a result, we launched another project in Q2 to centralize all of our critical data. This data today resides in multiple disparate systems, 11 distinct systems if you might be wondering. We are creating a central data repository a.k.a. a data lake, which we expect to be complete by the end of Q4. The goal of this project is to provide relevant data to support immediate marketing and business decision making. By consolidating data, we have one version of the truth. This will allow us to use data and analytics to lean into the one-to-one relationship with our current guests as well as prospective big and tall shoppers. Our second major initiative is to better define and develop our working marketing plans, plans to drive customer retention, plans to drive customer reactivation and plans to drive customer acquisition. Some of you may know, we are actively searching for a new CMO. While we are in transition with our marketing leadership, I am personally leading the charge with our marketing teams and they are working hard to create great outcomes. We are working to implement better blocking and tackling of digital marketing across organic, SEO, paid SEM, display, retargeting, paid social and the like. By improving the execution of these specific tactics, we will positively influence customer file and growth in traffic. We are monitoring usage and trends daily and have just begun managing our digital spend on a more regular basis to optimize performance. We are not only working our digital marketing plan strategically but managing it much more tactically. We are executing and measuring results day-to-day and channel-by-channel. Not all digital engagement is created equal and we are building an e-commerce plan that defines each channel in its own unique way. This will allow us to better track performance by channel against our expectations for productivity metrics, KPIs and such, such as traffic, conversion, AOV and the like. Here again, this may sound somewhat elementary and basic but in reality, it is the muscle that we need to exercise to be stronger and layer upon this iteratively in a test, learn and optimize way. Our third major initiatives relates to online capabilities and ultimately the online consumer experience, which must evolve. We believe that in doing so we will drive conversion, average ticket and consumer engagement. As I mentioned earlier, most customer engagements starts digitally, whether it is a phone, a tablet or a computer. Last year, we launched our website platform and built a stronger foundation. We need to now build further upon that foundation to achieve the level of conversion and consumer engagement we believe we are capable of. The new and improved website with a cleaner look and feel is easier to navigate and more streamlined in checkout, but compared to others we are not yet at par. And the fact of matter is, being at par is not good enough. An example of where we can improve is our site categorization and taxonomy. When you land on our homepage and want to navigate to a specific style or item, the secondary drop down page lists all of our merchandise categories and sub-categories. We can do better. The site must work harder, must work better from speed and load times which are currently burdened by heavy imagery and too many pages, to marketing interfaces such as categorization and taxonomy which needs to be updated to better achieve the consumer experience we must deliver. Within the site, reducing friction and increasing simplicity for consumer's engagement is critical. As we drive traffic and as consumers traverse the site, the plan is to evolve the experience to be simpler and easier to navigate. As critical as that is, it is really just the beginning. The reality is we are a retailer and a retailer of big and tall men's clothing. We are working to do a better job communicating our value proposition and the incredible merchandise mix our merchants have brought to offer. You just can't get our product features and benefits as well as our proprietary unique DXL spec for fit for the big and tall guy anywhere else. Today, too many consumers think we are just another big and tall shop. In reality, we are that and so much more. Our guests who know us say they love the DXL experience. They say that DXL is very different. They say that DXL is memorable. Add to that mix our secret sauce of a proprietary fit and spec and you can start to appreciate just how much our customers think of us as a differentiated big and tall retailer. All of these changes are underway as we position ourselves to deliver improvement in the back half of 2019 and to create greater inflection in 2020. It may surprise you to hear that there is such amount of heavy lifting that still needs to be done in 2019, but I am confident that this is the path we need to follow. This brings me to the last topic that I wanted to update you in my prepared remarks and that is wholesale. Over the past three months, we have continued to make significant progress in building out our plans for the wholesale business. We believe that there is a meaningfully greater opportunity to leverage our core competencies, our know-how at DXL to bring comfort, style and fit to all big and tall guys, regardless of where they shop and we believe we can expand our reach through strategic alliances. You will likely recall me saying, we need to go slow and execute well. Well, over the past 90 days, we have established the development of a more concrete and definitive business plan, which we are now pursuing. We have begun to stretch our legs and we are very excited about the future. The strategic plan calls for a two-phased approach. First, we have developed a core volume driving assortment which we will manufacture with our proprietary unique DXL differentiated spec. Then we will look to extend this with a complementary fashion driven assortment. We have made great progress in our supply chain in negotiating, setting up manufacturing agreements and reducing lead times, in driving speed to market on our replenishment and diversifying our points of distribution. We have been able to leverage existing technology and systems to begin this development and plan. In time and as this plan builds, we will invest in initiatives that will result in better allocation and shareholder return. As I near the end of my prepared remarks, I want to recap and summarize my thoughts. For many big and tall consumers, it is a challenge to find clothing that truly fits, but our guests know DXL. Our guests know we understand this challenge. Our guests know we help solve problems. At DXL, we are hard at work and begun building a greater infrastructure to drive our ambitious plans and to execute against them. As we strive to empower the XL man to look and feel his best by delivering a memorable experience with a wider assortment of curated men's clothing and shoes, we believe DXL's place in the market as the quintessential specialty retailer of big and tall driven by the most extensive, uniquely curated and size assortment of men's clothing and shoes that are designed and built for his XL proportions. Our clothing is not just scaled up product. As I mentioned, we have a distinctive spec and that is our secret sauce that we use to develop product for every size uniquely fitting each customer in a way other retailers just cannot duplicate. Our mix of value-priced products to higher-end brands and exclusive designers is the work of our great merchant team, experienced in a one-stop shop across all consumer touch points, providing consumers a differentiated and incredibly emotionally connected experience. I believe we have greater opportunity and that by focusing on these initiatives, we have defined and the core consumer we know and the core consumer we love, we will exceed his expectations greater as well as those who purchase for him as gifts. We can and we will drive increased business success and financial creating value for all and all of our stakeholders. And with that, I will now turn the call over to our CFO, Peter Stratton, who will review the second quarter financial results. Peter?

Thank you Harvey and good morning everyone. I would like to start this morning with a brief summary of our second quarter results. For the second quarter, comparable sales were flat to last year, while total sales increased $1 million or 0.9% to $123.2 million compared to last year's second quarter. The increase was primarily due to an increase in wholesale revenue of $2.7 million, which was partially offset by a decrease of $1.8 million in our retail business from unproductive stores that closed in the last 12 months. Within our direct to consumer channel, our e-commerce sales improved in the second quarter as we achieved mid single digit sales growth, driven by an increase in digital traffic. On a trailing 12-month basis, our direct to consumer channel sales increased to 22% of our retail segment as compared to 21.2% in the prior trailing 12-months. Gross margin for the second quarter inclusive of occupancy costs was 44.3% compared to 46.3% in the second quarter last year. The 200 basis point decrease was due to a merchandised margin contraction of 270 basis points, partially offset by 70 basis points of occupancy cost leverage. Of the 270 basis point decrease in merchandise margin, 190 basis points was primarily due to higher promotional activity. As Harvey mentioned, given our strategy to enter the fall season in a better inventory position, we took necessary markdowns on slow moving merchandise. This resulted in a higher penetration of clearance merchandise and lower dollars per transaction for the quarter. The remaining 80 basis point decline in merchandise margin was due to the increase in sales mix, given the wholesale segment carries lower margins than our retail business. It's also worth noting that we closed our London Rochester store earlier this month and the inventory liquidation accounted for 20 basis points of the second quarter gross margin rate decrease. Similar to the first quarter, we continue to see an increase in sales penetration from promotionally oriented customers who are looking for discounts. We expect that the investments we are making in our CRM capabilities will allow us to better communicate to our different customer segments and reverse our first half trend which netted a lower merchandise margin. Our second quarter SG&A expense as a rate of sales was 38.5% compared to 39.1% in last year's second quarter. On a dollar basis, SG&A decreased by $300,000, primarily due to a $600,000 reduction in our marketing spend and a $300,000 decrease in current year incentive accruals. The SG&A expense favorability was partially offset by an increase of $200,000 in expenses related to our wholesale business. And finally, as discussed on our first quarter call, as a result of adopting a new lease accounting standard, we are no longer receiving a $400,000 quarterly benefit to SG&A expense from amortizing of deferred gain related to a sale-leaseback transaction. Due to the new lease accounting standard, we were required to recognize the remaining deferred gain of $10.3 million in the first quarter of 2019 as a direct adjustment to retained earnings. I also want to make a few comments about how we spend our SG&A dollars. We view SG&A through two primary cost centers. Customer facing costs, which include store payroll, marketing and other store operating costs represented 23.9% of sales in the second quarter of fiscal 2019 compared to 24.2% in the second quarter last year. Marketing costs for the quarter were 6.2% of sales compared to 6.7% in the second quarter of 2018. On an annual basis, management targets marketing expenses to be at approximately 5% of sales. Corporate support costs, which include the distribution center and corporate overhead costs, represented 14.6% of sales in the second quarter of fiscal 2019 compared to 14.9% last year. Our adjusted EBITDA for the second quarter was $7.1 million compared to $8.7 million in the second quarter of 2018. The decrease in adjusted EBITDA is primarily due to lower gross margin. GAAP net income for the second quarter was $38,000 or breakeven on a diluted share basis compared to a net loss of $1.2 million or minus $0.02 per share in the prior year second quarter. On a non-GAAP basis, adjusted net income for the second quarter of fiscal 2019 was breakeven compared to adjusted net income of $0.01 per diluted share for the second quarter of fiscal 2018. Now let me turn to our balance sheet and cash flow. Cash flow from operations for the first six months of fiscal 2019 was $900,000 compared to $6.8 million for the first six months of fiscal 2018. The decrease in cash flow from operations is primarily due to a lower adjusted EBITDA in the first half of fiscal 2019 as compared to last year, an increase in our inventory balances which I will speak to in a moment and the timing of certain working capital accounts including incentive payments that were earned in fiscal year 2018 and paid out in fiscal 2019. Our inventory balance increased $7.5 million or 7.3% compared to the second quarter of last year and I would like to provide you with a little more color on the increase. First, we accelerated receipts of certain fall merchandise programs that we currently manufacture in China. We believe this was a good decision considering the impending tariffs on Chinese goods set to go into effect in September. Second, we saw an increase in inventory from our wholesale division on orders that will ship in Q3 as part of our Amazon Essentials program. Third, we experienced a delivery disruption when a cargo ship was quarantined and core merchandise delivery was delayed by approximately six months. Due to the delay, we chose to bring in replacement goods that essentially doubled up on our inventory position. Because it was core product, we will sell it down through the remainder of the year. These three reasons, which are all either unusual or the result of a new business, account for about half of the inventory increase compared to last quarter. The other half of the $7.5 million increase came from lower sell-throughs on our spring assortment and from a door-based expansion in certain brands. We call this project best product everywhere and our intention this fall is to expand the door-base of stores that carry many of our better and best brands and to increase the selection and choice counts in stores that already carry some of our designer brands such as Polo, Nautica and Lacoste. Having said that, based on our sell-through forecasts and receipt plan for the second half of the year, we believe we will bring our inventory levels back in line with prior year levels by the end of Q4. Our clearance inventory is a bit higher than last year at 10.9% of total inventory versus last year's second quarter which was 10.1%, but we are not hesitating to use markdown dollars to keep our inventory in line. One last comment as it relates to merchandise receipts is our private label exposure in China. Like many retailers, we have been aggressively repositioning our global sourcing network over the past few years and our exposure in China is limited. We will continue to diversify our supply chain and redirect manufacturing as we deem appropriate for our business. Capital expenditures for the first half of fiscal 2019 were $7.6 million compared to $7.4 million last year. The increase in capital expenditures was related to higher IT infrastructure projects, including our order management system upgrade as well as our new CRM system. On the real estate side, we have remodeled and rebranded five Casual Male XL stores to DXL stores and one Casual Male XL outlet to a DXL outlet. In addition to our store rebranding efforts, we closed two Casual Male XL stores and two Rochester Clothing stores so far this year. Let me give you a quick update on our stores that we have rebranded from Casual Male to DXL. To-date, we have rebranded 10 Casual Male stores. Four of those 10 stores have been operating as a DXL for more than a year and the comp performance in the first year trended 17% higher than the rest of the Casual Male portfolio. We currently have 59 Casual Male anchor stores and 29 Casual Male outlet stores remaining. Many of those stores will convert to the DXL format over time and others will close depending on the real estate and market conditions in each trade area. This strategy allows us to bring the DXL experience to many more markets without the cost of new store real estate and ultimately this strategy unifies our DXL brand in the brick-and-mortar space. Moving back to the balance sheet. At the end of the quarter, total debt was $64.2 million, which includes borrowings under our revolving credit facility of $49.5 million with excess availability of $44.5 million. This compares to $61.2 million of total debt a year ago with excess availability of $41.3 million. In closing, we still expect to deliver comparable sales growth in our omnichannel retail business and we still expect to generate free cash flow in fiscal 2019. We are not providing detailed earnings or cash flow guidance until we have increased visibility into the effectiveness of our initiatives. However, the company will continue to provide forward-looking commentary on business trends and developments. And with that, Victor, we will open the call to questions.

[Operator Instructions]. Our first line will come from Eric Beder from SCC Research. You may begin.

Good morning.

Good morning.

Good morning. Thank you for the color. It was quite helpful. Could you talk a little bit about the catalog business and how that kind of fits into this mosaic of kind of marketing and other pieces?

Yes. This is Harvey. The catalog, we executed two catalogs last year. They were actually incredible brand bodies of work and while they engage the consumer in the test and control format that we executed them, we will likely reinvest in a different way our direct strategy relative to direct in mail format. So whether it's catalog or other format to direct mail, more effective, more efficient vehicles than the 28 and 56 page catalog, which just didn't increment the business enough versus the control to move forward in that same format. We will still have a direct mail component as I talked about the recipe, if you will, but it will be in a more efficient, I guess I would say, less cost impactful way. And we believe that it's a part of kind of a tri-party way to engage consumers, both in-stores, online and through direct mail formats.

Okay. And as you look going forward, how should we be thinking about the ideal number of stores that you need, given that you are becoming much more, I won't say focused, just much more refined in how you are doing your online business?

Sure. So I will take that one. I think as I think about stores, the biggest change to think about going forward is the remodel program that we have going on. So we have roughly 237, 238 DXL stores today. There is another I think 88 Casual Male stores. And so, many of those stores are going to convert over to the DXL format, which we have seen has been pretty effective with the first 10 or so stores that we have opened up. I think the great thing about this strategy is, it will finally unite the brand and we will not be a company that's still operating Casual Male stores under a separate format than the DXL stores. So as I think about it going forward, there will probably be a small handful of stores and new real estate that we would do every year as conditions warrant. But by and large, it will be conversion of existing Casual Male stores and remodeling in the same real estate.

Okay. And when you look at the split, I know you talked a little about adding more designer product, how should we be thinking about that split between designer and the kind of your core basic/private label product going forward? And how should we be thinking about that in terms of ability to maintain margins if you are increasing the designer product?

Well, I think when the day is done, it's all about satisfying the consumer and the consumer, as I mentioned a couple of times, is really in the driver's seat. It is an area that, as we talk about balance of sale and a little bit of margin pressure that we are experiencing, driven by the fact that the consumers are in fact choosing some of the brands that the merchant team continues to bring to market and we are continuing to bring really new brand offerings to market. Vineyard Vines is an example, North Face is an example where both were brought in, in late fall, early spring and we will extend that distribution even greater this fall and that success-driven by consumer engagement is really what drives our merchandise strategy. We believe that the private label business is still very meaningful and while there is greater margin upside, when the day is done, it's about dollars and really GMROI. So well, margin may be under pressure slightly from mark-up or gross margin on brand versus private label, when the day is done, it's about driving dollars per square foot in the box, productivity online and converting that in dollars, not percents.

Great. And last question, how do you look upon this as being able to attract new customers? It sounds like you are doing a tremendous job in terms of being able to cut, slice and dice the people you have. How do you look upon this as driving new people who are big and tall and just haven't gone to a DXL or other store into the store?

Yes. It's actually a really great question and although many of you would think we were going to do a big advertising campaign and create greater awareness, my own belief, our belief internally is that the greatest path to creating more customers is to create a compelling experience for those that come in and it starts to driving traffic. That's why we continue to talk about traffic not brand building and marketing awareness. Drive traffic to the box. Convert that traffic either online or in a store. Have an incredible experience which we get high watermarks for. And then I am sure you are familiar with NPS, Net Promoter Score, the greatest ability for us to drive greater growth is because people will talk about us. And the viral element of that experience is way more authentic and genuine than us creating a marketing campaign to just get our name out there in a more meaningful way and not have people come into our store or as the website evolves, come onto our website and have that incredible experience. So the belief we have is that by engaging consumers into actually shopping with us, we will create a viral experience that is efficient and actually much more capable of creating greater number of customers than knowing who we are. You know a guy is at a party, he's a big and tall customer, he looks great, so when the conversation travels and he said oh, yes, I had this the greatest experience at DXL store. That is actually not happenstance. That happens more regular than you would imagine and our belief is that traffic and conversion will ultimately drive that.

Great. Thank you and good luck for the holiday season.

Thanks so much.

And our next question comes from the line of Chris Krueger from Lake Street Capital. You may begin.

Hi. Good morning.

Good morning.

Hi. Back in mid-June, you announced that you are working with Infor Customer Engagement Solutions. Are they heavily involved with the CRM project? Or are they more involved with future things to come?

No. They are very heavily involved in the backbone of the CRM project.

Is it safe to say that you were already working with them prior to that announcement? Or is this all happening this quickly?

It really was Q1, Q2. The team before I arrived was under with David and what have you, went through a pretty extensive process in really handpicking the platform to launch CRM, among other things. Infor is actually far greater than just that CRM component. And when I arrived really was when we agreed to move forward with them as the partner and we have accelerated those efforts tremendously in the last 90 days to the point where literally I think it's about 120 days from signing a contract to implementing this program. So we have moved really fast. The marketing team has done a yeoman's job at really executing that CRM platform. But again, that Infor system and platform provides us much more than just that. Single-use coupon is another example that it's really not the CRM system, it's a different way to execute our promotional strategy.

Got it. Okay. And then on marketing, are you guys pulling back on TV advertising to focus more on digital in general this fall?

You know, I would prefer not to talk about that quite that directly in a public format. I would tell you that, as I have said, it's a recipe and we expect that, as the recipes go, there are many ingredients and we will continue to add TV as part of the mix. But in terms of trying to qualify the level, I think I would leave that alone at this point.

Got it. Any new brands coming on?

I think the biggest thing we would talk about is the extension of brands that we have dipped the toe in the water. Vineyard Vines and North Face are two great examples of that. While we do have a couple of new brands in the mix, they are light in distribution and I think it would be misleading to tell you that a brand in the box at 10 store distribution right now is important and worth mentioning. But the merchant team is continuing to push hard in understanding, what I would call on trend, not necessarily fashion, but on trend in terms of the casualization of America and our core consumer and looking for brands that resonate with that customer.

Okay. Then you guys mentioned the China tariff situation. What percent of your sourcing comes from China, if you can say it?

You know, I wouldn't suggest we will talk about that level of detail here again, but I would tell you that, the takeaway that you should have is the global sourcing team has done an incredible job over the course of really the last year or two at continuing to drive quality and really the lowest cost provider. And I would say in the last six months we have accelerated that tremendously. But really, while we are still in that part of the world, we have moved out of China in a very meaningful way and we really have a very minimal challenge, if you will, in terms of the tariffs. The other thing we have done relative to that is really pushed hard to move up the timeline with our resources and we will be receiving most of the goods in front of those marker dates. So the takeaway you should have is, it's minimal impact in terms of where we are. And then for 2020, it will be very light what will actually remain in China.

Okay. Last question. Can you just refresh my memory of how many weeks were in the fourth quarter last year versus number of weeks in the fourth quarter this year?

So I believe it was 13 in the fourth quarter of this year and 13 in the fourth quarter of last year. It was two years ago that we had the extra week, a 1fourth week.

Okay. Thank you.

Thank you.

Thank you. And our next question comes from the line of Sam Poser from Susquehanna. You may begin.

Good morning. Thank you for taking my question. I am fairly new to this, but what is the inventory turn that you guys want to see over the long term because I just noticed going in the stores that you go in there repeatedly and you see the same stuff repeatedly for over longs period of time. So what is the kind of inventory turn you foresee down the road here as you move through all the processes and initiatives you are doing?

So, it's a pretty low turn right now. That's one of the things that we are working on improving. I don't want to throw a specific number out there, but it's a pretty low turn that we have. But that's something that we have been improving over the last couple of years especially as we had a large inventory initiative in 2016, 2017. Our inventory levels have come down quite dramatically over the last two years. This quarter we were elevated a bit for some of the reasons I highlighted. But inventory turn is low, but getting better.

Sam, one of the things and I think it's actually a great question. One of the things that I think is really important, especially being new to the mix is, as I talked about some of the unique elements of DXL, we have a comprehensive breadth of size runs and most of our competitors, not literally all, but most of our competitors without naming them specifically are more end of the rack and you could go into any of those larger competitors that are, let's say, department store X and see 38 or 39 or 44 and you might have black in 44 and gray in 38, but they are really end of the rack. And one of the challenges as being the be-all, end-all really for the big and tall customer is our size runs across the number of sizes as we carry in all of the colors we carry, which is an ongoing challenge of balancing efficiency versus being the place to go and the only place really important.

Well, I mean I could just say this. I am one of your customers as well. So I have personally shopped at your stores for myself and I find it that if I go in every two months, I am seeing about 90% of the same product I saw two months earlier and I want to see new stuff. So I appreciate I can always find my size, but I have already bought most of the stuff I like and want to go back and buy something new and that's where the challenge comes in. That's why I asked you about the turn. And I had one other question as well.

Yes. So one other comment I just would tell you on that and hopefully you will, I don't know how long you have been shopping with us, but one of the important points is like Psycho Bunny is a perfect example where for Psycho Bunny which is one of our fashion brands, we will rotate through the tees and there is kind of a collector level of involvement, for lack of a better way to say, with our core consumer that comes in every four to eight weeks, looking for a new tee. Vineyard Vines, North Face, the extension to North Face, there is other examples of that, which are more demonstrative across the broader distribution of stores. But to your point, we understand the challenge, good, better and different. Our customers are not, "at the same speed" with which women's apparel moves. And so our inventory, according to how quickly you shop, may or may not turn as fast as you would like. But it's an ongoing challenge of trying to drive efficiency of inventory and turnover.

And just one other point that I will add, Sam, is that, first, thanks for being one of our customers. Secondly, when I was talking earlier in the prepared remarks about our best product everywhere strategy that's exactly, the reason that you just quoted is exactly the reason that we are pursuing this. It's because there are certain stores where, let's say we have a Polo assortment or a Nautica assortment, but it may not be up to the presentation levels that we would like to see it at, so we are adding more styles into those stores. This is something where we have to be careful. We can't overextend ourselves but I think it's important to call out that we are recognizing that there are people that are coming into our stores and are looking for more choice and more selection. And that's one of the things that you should see in some of our stores that we are trying this best product everywhere strategy.

Thank you. And then lastly, I mean, just a follow-up on the China question. I believe your answers were around your own private brand product. Can you talk about sort of the overall percentage exposure of overall purchases that are coming from China from the branded goods as well as your own, the stuff you are doing yourself?

Yes. I would tell you two things. One, there is for sure a greater challenge in branded goods. Many of our resources after, I would say, just great due diligence, as you might imagine, any retailer worth their weight at this point is trying to understand that better, have done what we have done, maybe not quite at the pace we have done it and those that have not, for the most part and not every one of them, but for the most part, are holding their prices and eating it. Now I don't know long term where that will end up, but I think our exposure at least through the end of the year and beginning of next year still remains relatively minimal. There's a few key brands that are really heavily in China and while it held price, I have an expectation if they can't resource it, that will be a greater challenge as we look down the road.

Okay. Thank you very much and good luck.

Thanks so much. And thanks again for shopping with us.

My pleasure.

And I am showing no further questions at this time. Ladies and gentlemen, thank you for participating in today's conference. This does conclude the program and you may all disconnect. Everyone have a great day.

Thank you everyone. Have a great day. Talk to you next quarter.