Good day, ladies and gentlemen, and welcome to the Q3 2019 Destination XL Group Earnings Conference Call. [Operator Instructions]. I would now like to introduce your host for today's conference call, Nitza McKee, you may begin.

Thank you, Kevin, and good morning, everyone. Thank you for joining us on Destination XL Group's Third 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 now available on our Investors 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, marketing efforts, 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 good morning to you all. Let me begin today's call with a strong message to all of our stakeholders. As I said to each of you on each earnings call since joining the company, I believe DXL's opportunity is tremendous. The addressable market for big and tall men's apparel and accessories is considerable, and we have work yet to do. After a little over seven months in my role as CEO of DXL, I am as enthusiastic today as when I arrived. As we transform DXL and leverage our history, we are actively pivoting our management team and strategy. We are rebuilding a management team that is laser-focused on engaging consumers through more digitally centric means and engaging them in this way across all channels. We are striving to create a memorable experience with big and tall consumers and market this experience on a scale that no one else in the specialty retail space can. We are working hard to bring this potential into reality. That being said, the view ahead looks far different than the view behind, so please bear with me. Before I touch on our results for the third quarter, I want to spend some greater time talking about the specific marketing plans we have to take our business to the level I believe is possible. As we've discussed since my earnings -- first earnings call, our core business objective remains to drive repeat and new to file customer traffic to both our stores and digital channels. As we have said, we are redefining and rebuilding our marketing engine, which we collectively define as a combination of people, process and tools. We have been working to put the building blocks in place, the people, the process and the tools to drive into a…

Thank you, Harvey, and good morning, everyone. I'd like to start this morning with a brief summary of our third quarter results. For the third quarter, comparable sales increased 0.2%, while total sales declined by $500,000 or 0.5% to $106.6 million compared to last year's third quarter. The decrease was primarily due to a decrease in sales from closed stores, other revenue and noncomparable sales. The reduced sales were partially offset by an increase in wholesale revenue of $2.5 million. Within our direct-to-consumer channel, our e-commerce sales improved in the third quarter as we registered mid-single-digit sales growth. On a trailing 12-month basis, our direct-to-consumer channel sales increased to 22.4% of our retail segment as compared to 21.2% in the prior trailing 12 months. In our store channel, we continue to experience weaker traffic throughout the quarter, particularly in August, but we did see consistent improvements in conversion all quarter long. Dollars per transaction has been slightly negative for the quarter, which we attribute to two factors. First, as Harvey discussed, we were more promotional as we tried different tactics to revitalize store traffic. Second, we entered the quarter with a higher level of clearance goods, which also negatively impacted dollars per transaction. Looking ahead, we are encouraged by the early reads we are seeing in the business in November, particularly in our cold weather categories, as the recent cold snap has had a positive effect on our business. Keep in mind, however, we are only a couple of weeks into the fourth quarter. And this year, there are unfavorable shifts in the holiday calendar. Gross margin for the third quarter, inclusive of occupancy costs, was 41.1% compared to 44% in the third quarter last year. The 290 basis point decrease was due to 310 basis points of merchandise margin…

Thanks, Peter. This has been a unique and challenging year for DXL. We have undergone tremendous organizational change, not only at the senior executive level, where three of our five named executive officers from last year are no longer with the company, but we have also experienced turnover and changes in rules and responsibilities at our mid-management level. We've laid out a plan to stimulate growth, which we believe will manifest through greater customer counts and increased comp sales. We have made good progress on our wholesale business plan, and we are encouraged for our wholesale prospects in 2020. We believe the opportunity for DXL is immense, and we look forward to completing the foundational changes that we believe are necessary to drive the business to an inflection point. One last comment must be made as we close out the management comments and begin to take questions. Namely, a big thanks to the DXL team. True transformations are never easy. Change is not easy and the DXL team are dedicated, passionate, hard-working crew and on behalf -- all on behalf of the big and tall consumer. From headquarters to the fulfillment team and stores, their desire and commitment is greatly appreciated by me. Investors often ask me what keeps me up at night. What keeps me up at night is losing a great team. Our people are our greatest asset. Together, we look forward to moving the business as together, as a team, we will, in fact, do that. Many of our associates listen on these calls and to all of you and everyone else a big heartfelt thanks. We would now like to take calls.

[Operator Instructions]. Our first question comes from Eric Beder with SCC Research.

I want to talk to you a little about some things there. One is seamlessness between the different brand and between online and offline. You talked about kind of synchronizing some of the promotions. Is that -- when you look at it going forward, is that the way to go? Or is there specific customer bases in between that are large enough to justify having different promotions in different segments?

Yes. Eric, it's Harvey. The reality is we believe that the customer has an expectation that they are not going to be limited in any one channel as to what they have available to them. That being said, I don't think there's any -- ever any all or nothing. So we continue to try to understand how to navigate the expectation that you walk into a store and can get the same price online and vice versa. And at the same time, we have found the challenge in doing that across the board. And so it's TBD, unfortunately, not the greatest answer, but part of the test optimizes to understand unique consumer segments and to understand how -- and I'll give you one specific example, we may navigate that uniquely. So the greatest example is probably our loyalty program, where we have been able to offer to our loyalty program membership a unique offer that's limited to online and not a full distribution. So where we stubbed our toe is when we did something potentially online-only, but to everybody, and then they don't have the expectation that they can walk in a store and get that same event. So again, it's the challenge to navigate, but in the best customer experience, we wouldn't define for the customer how, where and when they shop. They would define that to us.

Okay. And I guess then kind of a related question. You've been switching over the casual male stores to Destination XLs with basically maintaining location but changing the goods and the look. What has been the response to that? And is the casual male customer changing and that they're much more in terms of demographics? And what they're purchasing like? What the Core Destination XL customer come purchases?

Sure. So Eric, I'll take that one. It's Peter. We've actually had really nice results from the stores that we have converted over from casual male to DXL in the existing stores. We're going into these stores and giving them a remodel. They're getting some refresh of paint and carpet, but most importantly, they're getting a better assortment. They're getting different inventory, which a lot of times this casual male customer has never seen before. So we're absolutely seeing better comps in these stores. I think he's been responding very well to it. And it's a program that we're going to continue pursuing in 2020.

Okay. And finally, I know that -- I know this is somewhat of a journey. And I don't want financial pieces, but what should we be thinking about and looking at going into 2020 and in 2020 as seeing as kind of signpost that things are changing and becoming more how you think they should be?

And it's Harvey. The ultimate one would be obviously file growth and comps. And the comps, we believe will be driven, first and foremost, online in digital formats and then enhancing the comp performance in stores, which is obviously the lion's share of our revenue today. But you can't -- the challenge is you can't bifurcate that, right? The digital marketing that we're doing today, we firmly believe -- and actually, I would say no, that, that digital marketing transcends the store business. And so driving traffic will happen in stores via digital marketing. And if you can appreciate the organizational changes we've made, our pursuits are clearly oriented towards that. But the markers there will be, obviously, comp and customer file.

Our next question comes from Chris Krueger with Lake Capital.

Looking at your wholesale efforts, I think you said in the call that Amazon is the majority of sales. And I don't know how much detail you can give, but I was curious, as the quarters go by, how many SKUs you have with Amazon? Is that growing? How should we look at that?

I think you should look at it that our pursuits are to grow the business. The SKU count, you can look at on Amazon and you can actually look at that as it exists today. Our expectation -- I'm not going to talk about Amazon specifically as much as I'll talk overall. We have great expectations for wholesale. We would expect that with the success with Amazon, we should be able to grow that business, and it evolves further. And then we are looking, obviously, which we've not just alluded to, but specifically, talked about our biz dev is to expand the account structure. And so when you expand the account structure, we're not -- if you look at Amazon taking to them product, we are producing for them what is their best-selling product in the extended sizes for big and tall. And we're looking to take that format to other retailers.

Any particular products that are -- that stand out at Amazon as far as selling well?

It's really the core basics. When the day's done, Amazon might not be the most fashion-forward house and really the core basics were what we're driving.

Got it. All right. I know I've asked this before, but just so everyone's clear. On the fourth quarter, is it apples-to-apples on the number of operating weeks this year versus last year?

Yes, it is apples-to-apples in the number of weeks, although we have that shift in the holiday that everyone in retail is experiencing. But for a total number of weeks, it is the same this year to last year.

Okay. And then your gross margin in third quarter, you went over all the details as far as what impacted that. Is one of the lower numbers we've seen in a while. In the fourth quarter, would you expect that to improve sequentially or year-over-year?

So the point I guess I would make about that is I detailed out that there's -- there were three different components to why gross margin is down in the third quarter from last year. The one that we're watching most carefully is the 110 basis points due to the promotions and the clearance, which we've kind of talked about at length. The other, there was 80 basis points. That was due to the inventory write-off that we took, that was a onetime charge that -- we don't expect that to be recurring. And then we have the natural shift in sales from retail to wholesale, as we grow more wholesale, that has a lower natural margin than our retail business. So that will continue to next year. So we will continue to see that erosion, but we won't see the inventory write-off again.

[Operator Instructions]. Our next question comes from Roger Feldman with West Creek Capital.

I wonder if you guys could talk about the urgency toward profitability. I know that's more pedestrian. But when you make your business decisions, where does that rank? And if you could talk a little bit about the wholesale business. And how -- when we start making money from that? And is it possible to make money from that?

Which one? I'll talk about -- the number one thing -- Peter and I'll share this. The number one thing that is our orientation is growth. Without growth, we're just managing a business. And we're driving growth. That -- our expectation is in 2020 to drive comp store growth and file growth and ultimately, growth will leverage against the P&L and drive EBITDA and profitability.

Yes. I would say that we're continuing to address the cost structure as much as we can. Again, this has been a very unique year for us with all of the personnel changes that are going on. We did have an elimination of a pretty significant role in the third quarter. We've got new positions that are starting, but the cost orientation is something that we're continuing to be focused on.

So just -- so I understand, how much growth do we need in order to be able to make money? And how much tolerance is there for -- I mean how much money -- how much flexibility do you feel you have in terms of, call it, investment or losing money on the way to the positive outcome?

Yes. So I think it's -- Harvey has been pretty clear that we need to grow. And that's what the majority of the comments that we talked about in our prepared remarks was that we need to grow. So I think we do have some tolerance for the fact that we're going backwards a bit before we can go forward. But I would certainly expect that in the near term, we're going to start to see some progress.

Roger, one thing -- it is Harvey. One thing we've been really transparent about. And good, better and different, we've been very transparent about this. Our belief is that we need to grow, and we will bring to market a plan and share with the investor base a plan. The fact of the matter is, and I talked about it very directly, we're behind where I thought we would be. We expected to be further along in our marketing initiatives and to be able to articulate -- to go-to-market and articulate, for lack of better ways, that in a nonroad show, road show. We're behind in our expectations to answer some of your questions definitively will be in fiscal 2020, where the learning we have from Q3 and Q4 as we informed the 2020 plan will inform expectations. And we were -- to be quite honest, we're not trying to be opaque. Its -- there's a fair amount of learning that will come out of Q4 with the adjustments we made coming out of Q3, and we have acknowledged, and we've talked about it pretty directly, a change in sales August to September, September to October, and we've acknowledged there is some momentum in November. The -- so the little bit of the roll of the dice that I think everyone in retail is facing is the compression of the calendar and what impact that ultimately is going to have. Barring that conversation, our expectation is normalized improvement on the sales curve will allow us to feel very strongly about some of the direction and tactics we're taking that add up to the strategy. And in so doing, we would then be able to come to market with a plan that we would discuss really directly, as I said, and we're just behind in that time line because of some of the work we've done around the organization and rebuilding as opposed to the traction we've been able to get in Q2 and Q3.

So I guess this is -- then this -- you don't have respond to this, I guess I understand all that. But just from an investor's perspective, it would be nice to understand. And in my own experience with turnarounds, is there -- there is some more easily explained financial discipline around where things are. And I guess I would love to understand at least what the goals are. When do you think you become profitable? What is the -- what are the Board's expectations for profitability? So just something -- I mean that would make me happy. I may be alone in that on the call. So as a second question. We're a pretty small company and not wildly profitable. So what are we -- what are we fighting for in wholesale? And when does that start to make money? And given all of the balls in the air, is that a worthwhile resource allocation today?

Yes. So it's Harvey again. So what we've articulated, I think at this point, moderately broadly is that we believe that there is a larger addressable market out there, many more customers that are not the core DSO customer. And what we don't want to do is retrade with the core customer and get more out of every one of them. We want to expand the addressable market vis-à-vis what we're bringing to market. The wholesale business for us demonstrates an ability to go after what I would define as the less affluent customer base with a different product mix and to tap into a much broader addressable market. And in so doing, if you look at the Amazon, the core business that we're doing with Amazon, as we've talked about, it's a core product. It's khakis, it's knits, it's T-shirts, it's Polos, and it's selling quite well. If you actually look at the ratings on Amazon, it's about a 4.4. I think it's 4.43 and that is a remarkable result in seven short months. And so we feel really good about both the response of the consumer in product that is not the same as product we're selling at DXL. And our belief is that -- and you can probably imagine there are a number of other scale retailers that have a mix that is more similar to Amazon and similar to what I would define as a more curated upscale, I would like to almost aspirationally refer to a Nordstrom-esque mix in our big and tall offer in terms of service and quality and curation that is less a general merchant and more a specialty store. And so we see a bright line between what we're bringing to the wholesale business and the opportunity which we haven't talked about publicly, but we see as material and meaningful and far greater than what you see on the page today, given the biz dev work we hope to bring to market, and then we'll talk to when we get that done. And we see it distinctly different than DXL to the point where, as you said, allocation of resources. Today, we're struggling through appropriately giving enough expense SG&A to that business to get it moving, but very cautiously monitoring the amount of that investment we make, it's not getting the cart in front of the horse, so to speak. So again, as transparency -- we can't talk to it, I'm trying to address your comments, I think they're very good. The questions are valid. We're just not at a point that we can be quite as articulate. It's biz dev that work has to be done.

Well, I guess I will leave you -- I'll make a comment then. I just wonder -- I mean I imagine that there is great potential there, but it just seems like you have the successful turnarounds that I've been an observer to, you tend to narrow the focus and do the things that have near-term impact. And this sounds like a -- I mean I think you've got -- I should say I'm incredibly supportive. I go in the stores, I think you guys are doing a great job. The websites wonderful. The pictures that you have on there are just amazing. The engagement -- I mean I think the whole thing is terrific. I just wonder if you wouldn't -- if we wouldn't be better off narrowing the focus until you start to make the core business profitable?

Yes, Roger, I might take one more crack at this because there is that one other perspective, I'm absolutely happy to share. You're actually talking in a way that is appropriate. But in reality, you might not realize the way we think about wholesale from a supply chain. We believe that our supply chain, ownership and IP is incredibly meaningful, and our ability to engage, what we would call big and tall factories that are exclusively big and tall factories, where many of the retailers we're talking to are actually engaged in factories that are not big and tall specific, and they're struggling to make product. And we believe we have IP around supply chain and spec that is very powerful. And the brand of DXL, as demonstrated by Amazon, which is Amazon Essentials by DXL has tremendous value. For DXL, specifically, we are using that supply chain knowledge to leverage product with other retailers, but actually, it works in our favor because as we become bigger and bigger as a supply chain expert. We will leverage that scale against our cost of goods sold in addition to growing revenues with others. And so the investment we're making is actually for lack of a better way is doubling down on both the revenue side as well as demonstrating our supply chain leadership that will come back to DXL as cost reductions potentially and really make us that much more powerful and important to the factors we're doing business with.

So I should see our gross margins going up.

You will. You will in -- and that's not a commitment next quarter, but that is a belief. A very strong belief that you will see leverage by our supply chain leadership.

Okay. I wish you guys luck. I would encourage some greater urgency around generating some cash, but I wish you guys luck.

Our next question comes from Bernard Sosnick with Madison Global.

You spent a lot of time and effort, getting things straightened with regard to your ability to market in a much more effective way. The hiring process is just falling into place a little bit later than you expected, I assume. But in the meanwhile, there has been the cost of installing the CRM system, the technology related to it. My thought -- my question relates to when can the CRM system become employed to, not necessarily optimal levels, but effective levels because it takes time to program the system to develop data to support the system to personalize. All of these things can be done much more effectively with the new system you put in place, but you're not there yet and when might you'll be there fully?

Yes. Well, I think fully is probably a question that would -- I would almost say never. The reality is it's an evolving process, right? The CRM system is a system but the CRM practice is much more global and comprehensive than a system. And so we will continue to use the CRM platform across a number of different elements. The loyalty program, the e-mail interaction, the consumer insights and knowledge, we have analytics. The reality is, I think, by the second half of next year, I believe we'll be at a point where we'll actually see leverage in sales and profitability. And what we've communicated previously on the last earnings call, is by the end of Q1, the system would be primarily executed in terms of the platform. But what we're experiencing now is beginning of learnings. And as we go through the fourth quarter, first quarter into second quarter, those learnings will be incorporated into really the development of a much richer, more profound relationship with our consumers. But you are right. It is a platform that gives us great opportunity to demonstrate whether it's file or repeat or engagement or advocacy, a different level of interaction with consumers that ultimately has to drive profitability on the bottom line and revenue on the top line.

And I'm not showing any further questions at this time.

I wish everyone a happy Thanksgiving, safe holidays, and we appreciate your time and energy on the call, and we will talk to you in a short 90 days.

Ladies and gentlemen, this does conclude today's presentation. You may now disconnect and have a wonderful day.