Good day, and thank you for standing by. Welcome to the Destination XL Group Third Quarter 2021 Earnings Call. All participants are in a listen-only mode. After the speakers' presentation, there will be a question-and-answer session. [Operator Instructions]. Please be advised that today’s conference is being recorded. [Operator Instructions]. I would now like to hand the conference over to your speaker today, Shelly Mokas, Director of SEC Financial Reporting. Please go ahead.

Thank you, Shannon, and good morning, everyone. Thank you for joining us on Destination XL Group's third quarter fiscal 2021 earnings call. On our call today is our President and Chief Executive Officer, Harvey Kanter; and our Chief Financial Officer, Peter Stratton. During today's call, we will discuss some non-GAAP metrics to provide investors with some useful information about our financial performance. Please refer to our earnings release, which was filed Wednesday afternoon 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 updated sales and earnings guidance and other expectations for fiscal 2021. 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, including, but not limited to, supply chain disruption, labor availability and disruption from COVID-19. 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, Shelley, and good morning to everyone. I look forward to speaking with you today about the progress we are making in our business this year, our third quarter results, which we announced on Wednesday and the greater opportunities as we close out this year and the holiday season. My hope is you hear repetition, consistency and reminders in our messaging, in our tone and in our optimism for the work at hand. As the saying goes, reputation is the mother of all learning. And my hope is from our reputation, we better understand the results from our ongoing transformation as well as the range of possible growth year ahead, but also the risk, given the volatility this holiday season. In just 4 short months from now, it will mark 3 years since we began this transformation journey, and we still the same vision, the same mission and the same strategy. The team is executing well and with a perseverance and tenacity that is inspiring to me and producing meaningful results. Given the pandemic's 20-month detour, the year-to-date performance is all that much more energizing. It was approximately 8 months ago in March that we first started to see signs of the recovery in our business. It is exciting to see how quickly the results have begun to leverage the top line sales, the operating platform reset and the drop to the bottom line. In the second quarter, the acceleration in sales continued to build, and we began to see that our business was not only recovering but accelerating. I'm pleased to report that, once again, our quarterly results have exceeded our expectations and that of consensus as well. We are incredibly happy with our performance in the third quarter, and we see this performance is somewhat remarkable, given…

Thank you, Harvey, and good morning, everyone. Like Harvey, I'm excited by this quarter's performance and our ability to string together multiple quarters of sequential growth. With the seasonality of sales, Q3 has historically been a more challenging quarter for us financially, but this year, we have delivered earnings that we are proud of. Based on the strength of our third quarter performance, we are again increasing our full year sales and earnings guidance, which I will review with you after I discuss the quarter's results. I will also focus my comparisons against Q3 of 2019 for better comparability. I think Harvey has covered the sales discussion in detail already, so I'm going to jump right into gross margin. Our gross margin rate, inclusive of occupancy costs, was 50.2% as compared to a gross margin rate of 36.5% for the third quarter of fiscal 2020 and 41.1% for the third quarter of fiscal 2019. The 910 basis point improvement over 2019 was a combination of 430 basis points of improved merchandise margins and 480 basis points of occupancy leverage. The improvement in merchandise margin was the result of more full-price selling and very low markdown rates. Markdowns for us are primarily comprised of 2 factors: promotions and clearance. We maintained a very low promotional posture throughout the quarter using coupons only in targeting specific customer segments. Our clearance inventory penetration was also very low this quarter, and we even reduced our normal discount tiers to capture a greater share of margin. We expect the adjustment to our clearance pricing levels to be temporary but a lower level of promotions part of our ongoing strategy. Partially offsetting the benefits from lower markdowns were higher freight costs as we sought to limit delays in product shipments by paying more for containers leaving…

Thanks, Peter. As you've hopefully heard now, we are truly pleased with what we have accomplished, and we recognize the far greater potential that lies here ahead. We remain conservative in our projections and cautiously optimistic that our actions to navigate the supply chain and labor issues will allow us to have the product and staffing levels we need to execute our strategic plan. We are in the most solid financial position in our company's history. And most of all, we believe we have a strategy to engage consumers on what we do best, creating memorable experiences for big and tall guys to look and feel their best. We do that by offering the most extensive and uniquely created assortment from value price essentials to luxury brands, exclusive designers online, on our app and in our stores, giving an underserved consumer the be all and all place to browse, shop and interact. And finally, we know we have an incredibly -- incredible employee base that is passionate and committed to our customers and our purpose, and this gives us the confidence that we will continue to make inroads into gaining share of market. And with that, operator, we'll take questions.

[Operator Instructions]. Our first question comes from Michael Baker with D.A. Davidson.

So I think we get the idea of conservative but cautiously optimistic. But I just wanted to -- I hate to be myopically focused on really short-term stuff. But Harvey, you said something along the lines of you think November can rebound until your guidance is low double digits for the fourth quarter, that would be a rebound, I think, from what you saw in October. You said November can rebound, if you get product in. I guess the question is, when do you know if you can get the product in? When does it become too late? And I guess, square that with Peter's comments that checks give you confidence. When does that we actually got the stuff?

Mike, it's a great question, and I'll tell you 2 things. One, at a high level, our first 2.5 weeks of November are very much aligned to Q3. So we feel like that's a good reference point for us to believe that we can get back to where we are and we're receiving goods. But the reason I highlighted that 1 very specific example and hopefully, it didn't pass over people's understanding, it's day to day. When you airfreight goods in, you're expecting that they will come in on a plane on day and move through the pipeline the next day. The reality is 2 weeks to get goods airfreighted in. And so every single day, we are chasing goods, Given the fact that we're 32% behind inventory, our turn is up over 33%, we are, in fact, selling what we bring in. It's almost like cross-stocking it. And so the answer to the question is every single day that, that happens well, we continue to believe that there's even greater and greater likelihood we’ll outperform. But any given day that doesn't happen in the way it's supposed to and once they start stacking up, and we can't catch up, then we fall back to a more conservative outcome. So I'm not trying to be Pollyanna. It's just the reality of the situation. I believe we'll get this done, but there is risk. And that's what we wanted to be clear and confident with what we gave the group as our end of year guidance.

Yes, that's fair. And then just to clarify, November back to third quarter levels or in line with third quarter, not necessarily better than October.

My reference point was that, yes, in fact, our stores have accelerated back to overall in the first 2.5 weeks, what was the quarter's performance as of October, and our total company comp is about where Q3 ended. There is -- but unfortunately, there's a lot of water that is going to have to pass under the bridge. So we're just trying not to get ahead of our skis.

Understood. Makes sense. One more question, if I could. Just on all that marketing, you talked about the top of funnel. I guess there's a quantitative and qualitative question here. From a qualitative standpoint, I think one of the changes you've made is in the past, I think there was a lot of sort of, what do you call, like buckshot marketing rather than shock on a lot of just that bigger brand building...

National broadcast TV.

Yes, exactly. Thank you for helping me articulate that. You moved away from that. Now it sounds like are you moving -- or give us some sense like you're not moving towards what you were doing in the past that wasn't working? And then can you quantify, do we expect marketing dollars to go up by X percent over the next couple of years? Or what's the spend that we're looking at there?

Yes. The 2 specific things I'll tell you, and I gave you a couple of examples, but when you're on streaming TV across Hulu and YouTube as examples, our ability to target our customer is exponentially greater than when you're doing blunt level TV marketing on a national broadcast basis. So that is creating an efficiency to get to our consumer. That being said, we're also pushing streaming among other venues more broadly. And to answer your question, we expect we will push up the percentage of added sales. So from -- upper 4% and change to somewhere North of 5% and South of 6%, and we'll continue to talk about how much we should spend. But if we're going after a larger share of market, the most important way to accomplish that is first the part of the mind share of consumers, creating greater awareness for the brand in your target consumer group, and then, as I said, acquisition turns to trial, trial turns to purchase, and then we're going to go after repeat, repeat, repeat. And so there is top of funnel shift, but it's shifted into targetable marketing spend that should be more productive than, as you said, shotgun approach.

Our next question comes from Jeremy Hamblin with Craig-Hallum Capital Group.

I wanted to just get into the inventory a little bit deeper. Can you call out are there particular categories where you are struggling more to acquire inventory, men's suits, other, which it sounds like it's been very strong or other pieces of your tailored clothing? Any insight you can share on that? And then the kind of follow-up question is, how does the seasonal mix look typically in Q4 and kind of your current trend rates on product margin versus what you have in other quarters? Is there any kind of seasonality on product mix?

Yes, it's Harvey. I'll take that. So first of all, it's less about inventory in terms of what we own and more about revenue. And when I say that, our tailored clothing, suits and dress shirts 2 prime examples have just exceeded our expectations. And so now we are chasing goods at a heightened level, our inventories actually were pretty well positioned, but the business has just continued to accelerate. Now that said, one of the greatest things about our global sourcing team and just their capabilities that I find rather remarkable, they have been able to shift really raw materials from, I think, it was Ethiopia. I think it was but don't quote me on that, into Mexico. And the Mexican producer that we work with had capacity to produce, if they could get the fabric, they've then been able to produce goods and goods that were literally headed into the distribution center at the end of December are now shipping Tuesday. So when I talk about agility, speed to market and the dynamics we're doing and even amping the question from Mike before, D.A. Davidson, these are just perfect examples of how fluid the movement of inventory is and our actions are chasing goods. But certainly, back to the core question, I would say tailored clothing overall is not as strongly positioned as we would hope for. And conversely, Ralph Lauren, Nautica, Vineyard Vines, which I called out, have been remarkable at their ability to get us ATS in addition to our typical in order. And what our expectation is, as the weather moves, and we're seeing that very much right now where it's getting a little colder, outerwear business has kicked in with things like Columbia or North Face, our sweater business has kicked in. And so we feel relatively speaking, well positioned, and we just have to keep receiving goods. Normally, I wouldn't say that. But when you're down 32% of inventory and you're turning 33% faster, it's pretty much like a grocery store. And I use that as an analogy more than anything else, but we just have to keep goods flowing.

That's great color. Okay. Turning to another kind of Q4 question. So store hours have continued at this 10 a.m. to 7 p.m., reduced hours from a couple of years ago. As we get really into the thickest part of the holiday season, given the inventory position, are you going to maintain the 10 p.m. to 7 p.m.? Are you going to go to holiday hours in December? And then kind of as a follow-up question, totally understand the marketing investment, but what type of ability do you have if -- to your point about risk and unpredictability, what type of ability do you have to pull back on marketing if it doesn't make sense because you don't have adequate inventories? Or has that money kind of been spent and invested already?

You asked 2 different questions. One, store hours, we are not extending store hours. We have had incredibly robust conversations in multiple time about this. And when the day is done, we actually went out to stores, ask the store managers, ask the RSMs and the regional VPs and really engage them. And we all believe, in totality, literally across every part of the business, that our customers get online, as we've always talked about, and they Google big and tall and specifically, if they're already a customer of ours, they Google DXL, they look at our store hours and they decide when to shop based on that information. And that is part of digital transformation, what I always talk about digital, that's the impact even on stores of digital marketing. And we believe that customers have grown used to our hours. We know that there are a lot of challenges for families and for people shopping, and we're equally concerned and have empathy about our associates. With lighter levels of folks in the stores we are very much cognizant of not pushing them even harder and extending them in terms of the hours. So the long and the short of it is, we do not intend to open more hours. We are comfortable that the hours we're doing and the customers' recognition of that will allow us to do our business. And then the second question you asked was marketing. And in terms of marketing, I would actually go the other way and ask the question, what is our agility to spend even more and lean in even harder to those things that work. I certainly appreciate the question about inventory. And if inventories were bad, we would certainly potentially pull in marketing, but I would tell you that we're looking at ways, especially in Q4, especially given our competitive set, which we believe is better in stocks and better positioning. And if you haven't walked a store, I think what you'd see is that our stores look relatively full, We are lighter in the back rooms, but not on the selling floor. And I think the question really is, where can we lean into marketing when we're getting investments and how fast can we do that?

Yes. The stores look good on our stores walk for sure. Last one for me and then I could turn it over. In terms of one thing you didn't talk about a ton here you've been pretty excited about a new exclusive brand relationship for '22. I think the term you've used as a Top 5 brand. Is there any more color you can provide around that, not necessarily the brand itself, but is it for XXL and above? When will you expect product for that to be in stores? And do you have to make room on the floors yet to take other brands out? What kind of percent of the mix could it be?

Yes, Jeremy, I think you've actually might have misunderstood what we've said. The top 5 brand is a top 5 brand of ours today. It's 1 of our top 5 selling brands. What I'm really excited about is based on the success of the brand's repositioning really as a regular priced company, engaging ways with -- engaging consumers in what I would call brand-centric ways as opposed to coupon and discounting, this brand nationally and actually globally distributed is pulling the brand out of other retail distribution. And we, and along with them, will be the only retailer selling it. And so just to be very clear, we sell it today. It's revenue for DXL as 1 of the top 5 revenue brands, and we expect it will sell tremendously more as consumers have only 2 outlets to buy from in Big + Tall, which is us and the brand itself. And I'm specifically only referring to Big + Tall. In normal sizes or non-Big + Tall sizes, it will continue to be distributed across other retail entities.

That's helpful. So XXL on above is where the exclusivity comes in?

Yes. And that we will announce that in next year. Honestly, it's done, but it's just not something until next year we want to announce a partnership with the brand.

Our next question comes from Mike Baker with D.A. Davidson.

Yes, double dip and figure I'd come back with 1 more. Why not? It's a Friday. The store count comments, Peter, that you made are interesting. We get asked a lot about what's the right store count. I think at 1 point -- and correct me if I'm wrong about this, I have my notes that you had said 275 for year-end. That seems a little low because I don't think it will get there. So I guess can you talk about what's the right long-term store count now? It sounds like you might even open some stores, which I guess your sales are really strong, does make some sense. But I think that's an interesting comment. And then is there any opportunity for rebranding or remodeling. You still have some of these older Casual Male stores, what are you doing with those? Do those eventually become DXLG stores or DXL stores?

Yes. Great question, Mike. Thank you. So the 275 store count, no, that we will not be at 275 at the end of this year, but it's possible we could be there at the end of next year. This is actually something that we're looking at very, very carefully because, as I said, there's a couple of different parts of the store equation that we're trying to figure out and where to prioritize. One, as I alluded to, is gaps in the portfolio where we could be in a market that's highly populated, highly dense and we don't have enough stores and maybe we want to go from 1 store to 2 stores. I think those opportunities are modest. I don't think it's across the country, but there are some opportunities there. And then you also talked about the casual male stores and what ultimately happens with the casual male stores. As I mentioned, we've got an awful lot of those stores that come up for lease expiration and renewal over the next couple of years. So we'll be looking at them on a case-by-case basis. In some cases, they will be getting remodeled. In other cases, we'll be looking at do we want to relocate. So I think overall, the message is the store count is going to come down, but not at a precipitous rate. Where we eventually end up, I could see us at about 275, but it's a very fluid and dynamic question that, as I said, we'll continue to evaluate each store on its own merit and make choices as to what we do with each store as those come up for renewal.

One thing I wanted to just double down on that, as I've often talked pretty publicly that we -- when I joined, we didn't have a digital muscle, so to speak. I always say that it did at atrophy, we just didn't have one. And I talked a lot about data and analytics and the digital practice that we have brought to market via our who all do. And one of the things we're really working hard at is looking at our Internet-based metrics, distribution of customers by geography, revenue per capita against geography and looking for either white space or fill-in opportunities. So to Peter's point, a lot of our potential for store openings will be driven by the recognition that the consumer is in the driver's seat. And if they're shopping online, and we have opportunities in markets, there will be greater opportunities to consider store openings where those are. Now as Peter said, I don't think it will be heroic store counts, but it does allude to the opportunity to both grow markets in stores -- with stores that are not fully penetrated yet.

Makes sense. Very clear. One more and maybe 60 seconds to last, if you are willing to give this data, maybe not. But you gave us the comps by month by direct and in stores, we can do some math based on the percentages to come up with an estimate of total comp by month, but if you add it, it might make everyone's life easier.

Peter.

Yes. So sorry, Mike. So I'm not quite sure what comp are you looking for?

So total company -- the number -- the monthly numbers you gave, as I understand it, were store comp and direct comp, but you can also have a total company comp that’s sort of weighted on…

For sure. I think we did mention that in there somewhere. For Q3, the total comp was 22.9.

Sure. Sure. No, I meant the monthlies. You gave the monthlies by each segment. But I don't recall -- I don't know if you gave the monthlies in total, maybe did and I missed it.

Got it. Okay. So for August, it was 25.9. September, it was 23.8. And for October, it was 19.2. 19.2%.

Just I would caution you that -- we absolutely, as I said before, we believe that the trailing level was as inventories didn't grow enough, they maintained where they were, they grew some, but they just didn't grow enough. And our expectation is we are now seeing an acceleration of receipts. And if that continues, that creates the expectation we'll be back to where we are. And we have time for one last…

So I was just going to say, going from 25 to 19, there's no shame in that. Like that's a pretty strong trend throughout the quarter.

Well, we appreciate that. I think we have time for one last question, and then we have to wrap.

Our last question comes from Jeremy Hamblin with Craig-Hallum Capital Group.

You guys have done a remarkable job of reshaping the balance sheet. You also have a huge run at NOL, about $300 million and given your relatively low CapEx needs. By our projection, you're going to have like almost $200 million in cash by 2023, that's like 40% of your market cap. What do you do on a go-forward basis? I know it's probably -- it's not a problem the company has been used to, but with all that cash, how do you think about capital allocation is their thought that -- some of that can go back to shareholders via buybacks or special dividends, et cetera? Or are there other investment opportunities? Obviously, you're not going to build out a ton of stores even if you add some new ones that you would look at...

Jeremy, it's Harvey. I'm going to handle that really quickly at a high level. First and foremost, there's no question it's technology-driven, and it's customer-facing technology. The example I give often is that we continue to look at digital sizing and digital showrooms and digital in terms of a showroom in terms of not a store front, but how do we interact with consumers. Technology will allow them to make a decision about what size they need or even made the measure. That still is not at a point where it's, in our view, commercial enough, but it's an example of digital technology to enhance the consumers' relationship with us. The second big investment would be technology driven around infrastructure. And the third one would be in extending our business. So things like infrastructure to get speed to market and delivery. We have 1 distribution center on the East Coast. We're evaluating their need for that. After that, we would look at other elements that would potentially be more direct return to shareholders, which any great Board or any great company will continue to look at. But those are all good decisions that are forthcoming and by no means are they at a point where we're able to articulate in detail what we are planning to do.

And with that, unfortunately, we are a couple of minutes over. And I thank everyone for their interest. I wish everyone a safe, healthy and Happy Thanksgiving. Hopefully, an opportunity to be with your family and the same for Christmas and the holiday season in front of us. Be well, stay safe, and we look forward to talking to you at the end of Q4.

This concludes today's conference call. Thank you for participating. You may now disconnect.