Destination XL Group Inc (DXLG) 2017 Q3 法說會逐字稿

Good day, and welcome to the Destination XL Group Q3 2017 Earnings Call. Today's conference is being recorded, and at this time, I would like to turn things over to Tom Filandro. Please go ahead.

Thank you, Kayla, and good morning, everyone. Thank you for joining us today on Destination XL Group's Third Quarter Fiscal 2017 Earnings Call.

On our call today is David Levin, our President and Chief Executive Officer; and Peter Stratton, our Senior Vice President and Chief Financial Officer.

During today's call, we will discuss some non-GAAP metrics to provide investors with useful information about our financial performance. Please refer to our earnings release, which was filed this morning and is available on our Investor Relations website at investor.destinationxl.com, for an explanation and reconciliation of such measures.

Today's discussion also contains certain forward-looking statements concerning the company's operations, performance and financial condition, including sales, profitability, EBITDA, gross margin, capital expenditures, earnings per share, free cash flow, store openings and closings and the company's ability to execute on its strategic plan. Such forward-looking statements are subject to various risks and uncertainties that could cause actual results to differ materially from those assumptions mentioned today due to a variety of factors that affect the company. Information regarding risks and uncertainties is detailed in the company's filings with the Securities and Exchange Commission.

Now I would like to turn the call over to our President and CEO, David Levin. David?

Thank you, Tom, and good morning, everyone. This morning, I will provide a brief overview of our third quarter operating results and update you on our strategic initiatives. Most importantly, I will share with you the details of our holiday marketing campaign. I'm confident it will signal a new chapter in the DXL journey as it is anchored on engaging, celebrating and expanding our XL community. This is a powerful campaign with new content, new messaging and new ways of changing the conversation with our XL guy.

Let me begin with a few comments on our third quarter performance. Comp sales for the third quarter came in essentially flat, which was at the low end of our expectations. Similar to the first half of the year, we experienced a 5% decrease in store traffic for the quarter but improved our conversion and dollars per transaction.

On a rolling 12-month basis, our direct-to-consumer business experienced continued growth, representing 20.8% of sales at the end of the quarter compared to 19.5% at last year's third quarter.

Overall sales performance was impacted by 2 factors that we were not anticipating. First, the unseasonably warm weather, which was particularly evident in the Northeast, had a noticeable impact on sales. The comp in our stores in the Northeast lagged behind the rest of the country by approximately 400 basis points. Had the Northeast performed in line with the rest of the country, our total comp would have improved by 90 basis points.

As we've said before, the shopping behavior for many of our customers is needs based, and he often defers updating his wardrobe until absolutely necessary. We know the change in season typically represents a shopping catalyst for our customers. Assortment performance for the quarter is a clear indication that the catalyst had not yet occurred. Seasonal product categories, including items such as outerwear, long-sleeve tops and sweaters, trended behind the remainder of our merchandise assortment by over 10% for the quarter and over 20% for the month of October.

The good news is, during the last 2 weeks in October and the first 2 weeks in November, in conjunction with the revival -- arrival of more seasonable weather, we have experienced an acceleration in store traffic and a corresponding lift in sales. This has been a very encouraging shift in trend that we've been anticipating.

The second factor impacting sales this quarter was the hurricanes in Texas and Florida. Let me first say that we're very fortunate that all our employees were safe. Our company rallied in the days and weeks after, both at the corporate office and our local teams to support the communities affected by the storms. I'm very proud of our associates and the compassion and generosity they exhibited.

As for our business, we managed to navigate through both storms without any major damage to our stores. The hurricanes forced the closure of 34 stores for at least 1 day, with the majority of them closed for 3 to 4 days. We estimate that the combined impact from both storms on our sales comp for the quarter was approximately 50 basis points.

Now for an update on our key strategic initiatives. As I highlighted on our second quarter call, we have spent the past 7 years striving to create an unparalleled store experience for the XL community. Our DXL store format was designed to give XL guys a place to shop that they would enjoy. We created a terrific store experience grounded in service, selection and fit. We now have 225 DXL stores, covering every major market in the Continental U.S. and have reached the point where our store rollout is largely complete. There's no change to our real estate plan, which calls for approximately 21 new stores in 2017, down from 30 last year, and a dramatically reduced opening pace in fiscal 2018, with a target of approximately 5 new DXL stores. We also plan to close approximately 22 Casual Male stores in 2017. Our Casual Male fleet remains healthy, with 112 out of the 114 stores in operation generating positive free cash flow.

We are also testing a Casual Male-to-DXL store remodeling program, designed to leverage our broader DXL brand marketing efforts. The first test remodel is located in El Cajon, California. It's a 4,000 square foot store that has been operating in the same location for 33 years. The remodel includes features such as upgrades to the visual presentation, a repositioning of signage to DXL and the addition of some of our better brands to the assortment. This is a less capital-intensive alternative to building out a new DXL store, which allows us to round out some of the Casual Male stores that are too small to justify a relocation to a new DXL store but still capitalize on the investment we are making in the DXL brand. The remodeled store was officially transitioned on September 22, and we look forward to sharing the results of the test once we get past the holiday selling season.

Our real estate efforts in 2017 will result in total company square-footage growth for the year of approximately 2.6%, and we are strategically and financially aligned with our goal of delivering strong free cash flow while continuing to expand the DXL brand. As we go forward, we will manage our store base strategically to optimize sales, brand awareness, inventory management and e-commerce distribution.

Inventory management and merchandise assortment are 2 strategic areas in which we continue to make great progress. We have reduced our inventory by almost 7% since this time last year, and this is allowing us to be much more flexible with our receipt flow. We continue to refine and expand what we call our test, read and react strategy.

For example, last quarter, we highlighted a merchandising initiative we call What's on Tap. What's on Tap showcases the hottest trends in fashion for the younger XL shopper, which leverages our supply chain capabilities as we are reacting in season to generating strong full-priced sell-throughs. What's on Tap, featuring stretch fabrics, distressed looks and camouflage, continues to outperform our initial expectations.

Now I'd like to bring you up to speed on a topic that I'm really excited about: our holiday advertising campaign. I've said many times in the past that the biggest opportunity we have at DXL is increasing our brand awareness. At the end of our spring 2017 campaign, our aided awareness of the DXL brand was 38%. In order to drive that awareness forward, we felt we needed a new and compelling holiday advertising campaign, a campaign that says it's time to change the conversation from big and tall to XL style. I'm very pleased to announce that we took a big step in that direction earlier this month when we launched our campaign that we call Time to XL. The new campaign is focused on evolving our position as the industry champion for the XL community. We celebrate inclusion and diversity in body type. We want the XL community to know that DXL is here for them. We spent the last 7 years building a fleet of contemporary stores and an e-commerce website that are just for him. We want him to know that DXL is a brand that offers superior fit and assortment, is aspirational and offers a premium value for all XL customers.

If you haven't had a chance to see our recently launched social media holiday messaging, I encourage you to do so. We launch our new commercial on television in November 25, and we are the title sponsor for the DXL Bowl, a college bowl game to be played in Frisco, Texas, on December 20.

In the meantime, you can see all our new content on social media, featuring a broad range of brand ambassadors and influencers, including 10-time MLB All-Star David Ortiz; producer and artist DJ Khaled, singer and songwriter Sundance; NHL Stanley Cup winner Hal Gill; and fashion blogger Kelvin Davis. You can find a link to our media page on our website at destinationxl.com.

We highlighted on our second quarter call that we made the decision to increase our marketing budget by roughly an additional $4 million for the second half of the year, with the majority of the incremental spend dedicated to broadening our efforts into branding and social advertising. These efforts are under way, and we have never been better aligned to drive brand awareness and attract new-to-file customers to the DXL brand.

Our messaging is strong, with #XLstyle, and our efforts are fully integrated across our DXL stores and our digital platforms.

I'm excited and confident that our energized marketing efforts will not only drive positive mid-single-digit fourth quarter comps, but this new brand awareness campaign will set the stage for strong momentum, heading into 2018.

And with that, I will now pass the call over to our CFO, Peter Stratton, who will review our financial performance. Peter?

Thank you, David, and good morning, everyone. I'd like to start off today with a brief summary of our third quarter 2017 financial results.

For the third quarter, net sales increased 1.8% to $103.7 million, inclusive of a total company comparable sales decrease of 0.1%. As David mentioned, we were negatively impacted by weak traffic in August and September, but traffic improved significantly in the last 2 weeks of October with the arrival of cold weather, which has continued into November. We are now beginning to experience improved comps, driven by higher traffic and greater penetration into our cold weather merchandise categories.

Gross margin for the third quarter, including occupancy costs, was 43.2% compared with 44.4% for the third quarter of fiscal 2016. Occupancy costs as a percentage of sales were flat, and our merchandise margin decreased by 120 basis points. The reduction in merchandise margin was primarily due to higher markdowns related to our inventory productivity initiatives, which we discussed on our second quarter call. We made good progress in the third quarter at liquidating some of our slow-moving inventory, and we expect merchandise margins in the fourth quarter to return to normalized levels, consistent with the prior year's fourth quarter.

We continued to reduce our inventory on hand, which declined by approximately $8 million compared to this time last year. I am also pleased to report that we are on track for a significant year-end inventory decrease of $12 million to $15 million compared to last year.

Now turning to SG&A costs. Our SG&A dollars increased year-over-year by approximately 1.4% or $600,000 from Q3 of 2016. The increase was driven by higher store payroll and other supporting costs associated with a larger DXL store base and e-commerce initiatives this year compared to last year. Our advertising costs in Q3 were flat to last year, and costs associated with the new campaign will be expensed in the fourth quarter as the media plan gets under way.

GAAP net loss for the quarter was $5.7 million or minus $0.12 per share compared to a net loss of $4.5 million or $0.09 per share a year ago. The net loss on a non-GAAP basis, assuming a normalized tax rate of 40%, was $0.07 per share compared to a net loss of $0.05 in Q3 of fiscal 2016.

Our EBITDA for the third quarter was $2.8 million compared to $3.9 million in the prior year quarter. The primary drivers to the decline in EBITDA compared to last year were lower gross margin related to our inventory efficiency initiative as well as higher payroll and store costs.

Capital expenditures for the first 9 months of fiscal 2017 were down over 15% compared to the first 9 months of 2016 at $18.4 million, largely due to fewer store openings this year.

Total debt at quarter end was $81.4 million compared to $83.3 million at the end of the third quarter last year and includes borrowings under the revolving credit facility of $68.2 million, with excess availability of $38.2 million.

As I mentioned earlier, our inventory initiatives are tracking well, and our efforts to improve timing of inventory receipts and weeks of supply on hand are expected to result in a significant year-over-year inventory dollar reduction of $12 million to $15 million this year. Also of note, our inventory composition is healthy and current, with clearance merchandise representing only 7% of our total inventory at the end of the third quarter compared to 9% for the same period last year.

Now let me turn to our 2017 guidance, which we are updating today: total sales of $466 million to $470 million; total company comparable sales rate of flat to an increase of 2%; gross profit margin of 45% to 45.5%; SG&A expenses as a rate of sales to increase by 280 to 310 basis points over the prior year; and adjusted net loss of $0.21 to $0.25 per diluted share, assuming a normalized tax benefit of approximately 40%; EBITDA in the range of $16 million to $20 million; capital expenditures of approximately $22 million before tenant allowances of $5 million, with approximately $13.7 million invested in new DXL stores; free cash flow in the range of $9 million to $13 million.

Lastly, before we open the call to questions, I'd like to update you on our capital allocation strategy, including our share buyback. Our Board of Directors previously authorized a stock buyback program for up to $12 million in fiscal 2017. As of the end of the third quarter, the company has repurchased approximately 1.9 million shares for approximately $4.7 million or roughly 40% of the board authorization.

Because we are investing more dollars into our new Time to XL marketing campaign, we do not expect to make any further repurchases during the remainder of fiscal 2017. Maintaining sufficient excess availability under our credit facility is our top priority, and we will be monitoring our free cash flow carefully to balance debt paydown with shareholder return.

And with that, operator, we will open the call to questions.

(Operator Instructions)

Okay, well, what I'd like to do if there are no questions, I'd like to wish those on the call, our stakeholders and our employees, a happy and healthy holiday season. I'm confident in our strategic initiatives and particularly excited about our renewed advertising campaign. We're happy to answer any follow-up questions you may have. Feel free to reach out to our IR partners at ICR to coordinate callbacks. And thanks, and have a happy holiday, everyone.

That concludes today's conference. We thank you for your participation. You may now disconnect.