Destination XL Group Inc (DXLG) 2020 Q3 法說會逐字稿

Ladies and gentlemen, thank you for standing by, and welcome to the Third Quarter 2020 Destination XL Group Earnings Call. (Operator Instructions) Please be advised that today's call may be recorded. (Operator Instructions)

I would now like to hand the call over to Nitza McKee. Please go ahead.

Thank you, Michelle, and good morning, everyone. Thank you for joining us on Destination XL Group's Third Quarter Fiscal 2020 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 useful information about our financial performance. Please refer to our earnings release, which was filed this morning and is now 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 ability to withstand the impact of the COVID-19 pandemic on its business and results in fiscal 2020 and to manage through the pandemic, including its efforts to restructure and reduce costs, realize expected annualized savings from the restructuring actions taken in November, manage inventory, rightsize its lease structure, market to its customers to encourage shopping in-store and online and maintain sufficient liquidity to meet its working capital needs for the next 12 months. Such forward-looking statements are subject to various risk 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 risk 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 everyone. I hope you are all healthy, safe and well. I'm grateful for the opportunity to speak with you today about DXL and the progress we are making as we continue to navigate through the pandemic.

For the past 8 months, we have been pivoting and adjusting to withstand the unrelenting impact of the COVID-19 virus on all of us and also on the economy as we strive to position DXL for the long-term recovery and for future growth. Most importantly, and before I begin any remarks in regards to our business, I want to make a few remarks in regard to our associates and their tremendous level of commitment and sacrifice during these most challenging times.

It has been nothing but quite remarkable. I have made mention before of the element that most often keeps me up at night, and it's worth saying again. It is the team, and specifically, keeping the band together. That is the very foundation of a great business. We are so incredibly proud of our associates in our stores, in our guest center, in our distribution center and in our corporate office.

The COVID-19 impact has been incredibly challenging. And despite the deep commitment we have to our team and the culture at DXL based on trust, empowerment and innovation, the pandemic and, in turn, DXL has also impacted many of these very same folks and their livelihood. The incredibly disruptive and challenging impact of COVID has left us no alternative but to reduce headcount, and a number of associates are no longer a part of the DXL team.

More broadly, as we know all too well, COVID has also resulted in many lives lost of love ones who are no longer with us. The world is different in so many ways from what we knew only 8 months ago. And as the CEO of DXL and just as a human being, the challenges to navigate the virus' impact and the negative outcomes for our team and associates of DXL and the decisions we have -- had to make have been very difficult. And for that, I am very sorry. These days, there are many more things that keep me up at night, but the team we have and their commitment is not one of them. We have great people who are the backbone for our cautious but continued optimism for the future of DXL.

Now, and specifically in regards to our business on our call today, I'm going to speak to you about our third quarter performance. I'm also going to update you on the steps we have taken and the steps currently underway to continue to position our financial recovery. But before I begin, I also want to comment on one other important topic, diversity and inclusion. At DXL, as a company, we continue to embrace efforts to combat the challenges of social unrest and racial divide.

In 2017, we implemented our own awareness program, which we call normalizing the brand to address unconscious bias. We have also this year formed a CEO Advisory Council, which meets every other month. And we also have ongoing training programs through our HR departments to heighten awareness with our associates. We remain committed to not just being a part of the conversation but a part of the solution.

Now for today's call, I intend to cover 3 main topics. First, to review what we have accomplished in the third quarter. Second, to discuss the state of our business as well as the current state of the industry. And finally, I will address what we have defined as the critical imperatives to win in this holiday season and into next year. So let's get started with the summary of our third quarter results.

Our overall sales performance in the third quarter continued to be impacted by the pandemic. Comparable sales for the quarter were down 20.5% to last year, which is an improvement from the second quarter when our sales were down 38.6%. For the third quarter, store sales were down 31.5%, and dxl.com was up 28.4%, with total direct up 18.2%. It is important to note that all of our stores were opened by the end of June, and our store performance has sequentially improved each month from June through September with improvements in both traffic and conversion. And overall, direct sales penetrated DXL total sales at 33.4% of retail revenue. Our October sales momentum slowed by 600 basis points across the company sales as flareups from the virus began to resurge, fires on the West Coast and distractions from the election began to materialize.

Our stores continued to lean into the priorities we set out back in May of 2020 as we adjusted our plans through the pandemic environment. First and foremost, to ensure a clean, healthy and safe environment for our guests and for our associates. We've been working to drive the consumer back into the store through the following 3-pronged approach: first, delivering the guest experience that has been DXL's calling card by building relationships, not just sales but also inclusive of maintaining social distancing guidelines. Second, perfecting the visual presentation within the 4 walls of the store such that each store can act as its own salesperson, helping further address social distancing as suggested by the CDC. And finally, enabling each store to act as its own fulfillment center for e-commerce orders. The importance of stores and their ability to support our e-commerce initiatives is critical. Our most valuable customer is the cross-channel shopper, who has shopped with us before.

Our direct business anchored by dxl.com continued to grow throughout the third quarter. Our direct channel not only includes sales from dxl.com but also sales from online marketplaces and sales initiated in-store, but fulfilled online via our Universe technology. Lower traffic to the stores drove Universe well below prior year levels. Universe sales, as you likely recall, originate in-store as our sales associates are trained to offer product extensions that may not be available in that particular store, but are available on the web. Given the decline in, in-store traffic, Universe sales have been hit hard. In contrast, our direct fulfillment stores remained materially higher during the third quarter.

In the third quarter, our stores fulfilled $10.6 million worth of e-commerce demand, which compares to only $5.7 million last year or an increase of 87.3% in the quarter. BOPAC and BOPIS continue to be momentum drivers, and this is an area that we will continue to develop both in terms of functionality and user experience. Today, we offer BOPAC and BOPIS in 311 stores. We will look to optimize this omni-channel experience over the coming months, taking a continued test-and-learn approach as we look to elevate the customer experience while driving increased digital penetration and shopper loyalty.

DXL is positioned to continue benefiting from the shift online. We have flexible off-mall store base, a large and growing platform digitally and compelling and differentiated omni-channel capabilities, which reach not only our existing base of customers but a new consumer as well. Our omni-channel customer is 5x more productive than a digital-only customer and 3x more productive than a store-only customer. We were pleased to see a number of our store-only customers become omni-channel customers during this time.

For the past 3 quarters, I've talked about how our focus on cash has been relentless. We are living and breathing with incredible attention to the smallest details to ensure we are managing our cash and maintaining liquidity. Every day, we are making decisions to drive the outcomes that will protect the long-term viability of our company. And occasionally, these decisions are some of the toughest.

On November 2, we implemented an internal corporate restructuring to further realign our corporate selling, general and administrative costs with our lower sales levels that resulted from the pandemic. We eliminated 45 corporate positions, which we estimate will save $3.8 million on an annualized basis. We also eliminated certain service agreements, professional services and certain marketing costs, which we estimate will save [$5.9 million] (corrected by company after the call) on an annualized basis. Combined, we estimate the restructuring will save $9.7 million in SG&A on an annualized basis.

I would like to also point out that the actions implemented on November 2 are in addition to cost-saving actions that were already taken through the end of the third quarter, inclusive of all the actions executed earlier this year. The company has now eliminated 101 positions from its corporate office or 29% of its corporate workforce in the current fiscal year. In addition, since March of 2020, the company's field personnel has been reduced by 1,078 positions or 54% of the total field count. We continue to aggressively look to drive our SG&A expense down to be properly aligned with our expected sales and are managing to a downside case versus a more realistic -- excuse me, a more optimistic recovery.

In addition to the above actions, we remain equally focused on rightsizing the company's occupancy costs. We have been very active with our landlords to communicate our challenges and strengthen our partnerships with the leasing community. As I mentioned last quarter, we are grateful that most of our landlords have been open to listening to us about the challenges presented by the COVID-19 pandemic and were willing to assist us with managing cash flow, and ultimately, the occupancy cost of our retail stores. Now that we are past the initial surge of having stores closed in April, May and part of June, we have turned our attention to our forward-looking rent structure.

Over the quarter, we performed yet again an exhaustive review of our lease portfolio, given the sales recovery or really lack thereof, at the level we expected. We are now actively engaged with our landlord group to focus on stores where occupancy, as a percent of sales, has moved upward and outside an acceptable band for market rents. One of the biggest risks to the company's business model is its predominantly fixed rent structure on a lower sales base. We are pushing hard to reduce lease costs with those landlords where our rents are out of line with sales.

Let me now shift to a quick date -- update on our merchandising strategies. In the third quarter, casual sportswear and loungewear continued to drive the business, while tailored clothing remained extremely challenging. In the past 8 months, we observed a dramatic consumer behavior shift that is focused on casual apparel and aligned with work-from-home lifestyle. Some might even say the Zoom life. Comfort, functionality and versatility are essential features expected from our customer and embedded in the key categories that will drive the business in this season.

We are seeing the customer gravitate to categories such as knits, shorts, activewear, denim, underwear and athletic or Skecher-esque shoes. There is a heightened focus on these categories and on the brands that will meaningfully drive the business. We are also working on speed-to-market initiatives such as exploring with vendor-managed inventory, or VMI, as it's often referred to; and we are working with factories to hold undyed materials for production, greige fabrication, as it's referred to; and the key items that have given us a greater ability to react and drive the business as well as create elasticity in our inventory.

Let me now briefly touch on the topic of gross margins, promotions and inventory. Peter will provide additional detail, but I am pleased to report that our third quarter gross margin, although below last year, was ahead of revised internal expectations. Back in the spring, specifically in April and May, we were running with a highly promotional posture. Our promotional offers were stronger than any we've offered in the last 10 years. The purpose of that posture was to keep goods going to customers and to keep cash coming into our company.

For the third quarter, we became much more targeted with our promotions and saw a corresponding drop in our markdown rate. We have become increasingly oriented to specific consumer behaviors and consumer segments, and we are finding greater opportunity to be less peanut butter spreading of promotions. And as a result, we are driving promotions, which positively impact gross margin dollars and eliminating promotions that drive sales that have no or even negative ultimate bottom line impact. We know we still have to be promotional. And while we expect to return to levels approximating last year, over time, we believe we can outperform these historic rates.

Moving to inventories. We have managed inventories very conservatively and are down just over 21% from last year's third quarter. We have been selling down our product and have slowed replenishment as we are being mindful of not overextending our assortment and having to clear through unsold merchandise in the out season.

It is also worth noting that we are working very hard to maintain our supply chain and logistics capabilities. One of the challenges we have been grappling with in the third quarter is securing vessels in a timely manner from overseas to receipt product. There have been some disruptions. Excuse me, there have been some disruptions in the global supply chain for reasons ranging from COVID-19 outbreaks in foreign ports to shortages of vessels and shipping containers.

Our fall receipts are down to last year, but in line with Q3 levels. It's actually been quite remarkable how we've seen certain brands and categories perform with sales levels nearly flat in some weeks, and yet, on inventory levels that are down 40% to 50%. We continue to push inventory to our stores to satisfy the customer who is continuing to shop in person. Because of our ship from store technology, we have the capability to fulfill direct orders from any store in the portfolio.

Next, let me share with you some thoughts on our marketing and digital strategies. The single biggest challenge facing DXL is our ability to drive meaningful traffic into our stores in the current environment, and secondarily, continuing to drive the growth in traffic on to our website.

While we continue to make progress in the new to file and reactivating customers, successfully engaging our best customer, highest-spending customers continues to be a significant headwind in the current environment. We have identified and tested strategic and tactical actions in contact and communication changes to engage with our customers. But the challenge remains significant and must be solved in order for us to make meaningful strides. Our belief, our thesis, if you will, is that our very best customers who bought fashion and shopped, albeit for going out or just to shop, is no longer shopping the way they did. They, unfortunately, are going out less, if at all; have no weddings; no events; and not visiting bars and restaurants; and are filling in based on need, not based on want.

Our brands in our private label assortments have always been quite fashionable. And these looks and wearing occasions are just not happening today. Our Q3 objective was to leverage consumer behavior by testing and learning with spend allocation, promotions and other traffic-driving mechanisms to lean into this behavior. We have developed weekly reporting KPIs to better understand the databases filed health and customer sales trends. We have also improved our e-mail optimization for customer file growth, including segmentation and technology updates on consumer preferences.

Finally, we have tested direct mail promotions with a control group to better understand causation versus correlation for a greater holiday success in omni-channel gross margin impact. We have tested and measured incremental outcomes, learned and changed marketing to optimize targeting and the promotional strategy for Q4.

The brick-and-mortar retail experience continues to be drastically different during the COVID-19 pandemic. Our store creed continues to be engage to build a relationship, or as we referred to it, is -- as EBAR. We want to create a memorable experience while practicing social distancing by providing guests with the same in-store experience they've grown to love.

We have also launched in test mode a new [online] (added by company after the call) tool, which allows store associates to interact virtually, but directly with online shoppers. It is an interactive platform that will bring our exceptional store experience to online customers by allowing in-store associates to connect live with an online shopper via a live video chat. The app provides online customers an in-store experience digitally and via video, while also allowing the store associates to earn commissions by creating sales.

Store associates are able to suggest items based on the customers' wants and needs as well as send pictures and videos of items in their stores to guests via chat on the app. We are currently running a 90-day pilot program with 40 stores and 100 associates. Based on the results of this test, we will consider how to augment this test and if this program warrants moving forward and can evolve further in important ways.

And finally, let me give you an update on wholesale. We continue to chase the wholesale business with our in-stock position with Amazon Essentials, but have experienced a slowdown in the market demand for PPE. Amazon Essentials Fit by DXL sales for Q3 came in up 71% to last year at $4.3 million. We continue to chase the business to reduce our stock-outs that peaked in August at 35.5% and have come down to 30% for the balance of the quarter as the additional inventory has been shipped. We have resumed the platforming of key fabrications to reduce our production lead times and partnered with Amazon on an advanced replenishment model with visibility to future forecasting of key programs in order to secure fabrics and production capacity.

And finally, despite the challenge of in-stocks and losing some level of sales, the business opportunity continues to be robust with greater opportunity. Further testament of this for both Amazon and DXL is the launch in Q3 of the second branded program, Goodthreads, line by DXL.

Goodthreads is Amazon's upscale, private brand and differs from the core Essentials brand, better fabrics, more fashion, albeit fashion basics. This launch represents greater opportunity and is DXL's second brand for big and tall with Amazon in their private brands program. It's very exciting and further substantiates the opportunity yet ahead for both companies.

I would like to now turn the call over to Peter for an update on the financials. Peter?

Thank you, Harvey, and good morning, everyone. I'd like to provide you with a summary of our third quarter financial results, and then spend a few minutes highlighting some of the actions we have taken to protect the long-term viability of the company. We have started to see the results of those actions in our third quarter P&L, cash flow and balance sheet. This gives me confidence that we are making the right decisions to get DXL through this pandemic and to emerge from this crisis well positioned to continue serving big and tall guys across the country.

With that said, let me give you an update on our third quarter financial results. Harvey already provided a pretty comprehensive overview of our sales results, so I'm going to jump right into gross margin. Our gross margin rate, inclusive of occupancy costs, was 36.5% as compared to a gross margin rate of 41.1% for the third quarter of fiscal 2019. This 460 basis point decrease in rate was comprised of a 280 basis point decrease in merchandise margins and a 180 basis point deleveraging in occupancy costs against the lower sales base. Although down versus last year, gross margin rate showed significant improvement over the second quarter.

We made progress in markdowns by focusing on more targeted promotions, and margin rates improved each month as the quarter progressed. Shipping costs continue to increase year-over-year due to growth in online sales and free shipping promotions. As I talked about this past quarter, our real estate team was successful in negotiating store rent abatements and deferrals from many of our landlords, which limited the deleveraging of our occupancy costs this quarter. But as Harvey mentioned, the efforts to rightsize our store occupancy costs to our new sales levels are still underway, and we believe we can further close this gap.

Now let me move on to selling, general and administrative expenses. For the third quarter of fiscal 2020, SG&A expenses were $32.8 million or 38.5% of sales versus the prior year third quarter at $42.1 million or 39.5% of sales. This $9.3 million year-over-year decrease is the result of the steps we took earlier this year, including adjusting store hours and staffing models to account for new customer traffic patterns, significantly reducing marketing costs, especially through traditional non-digital channels; eliminating certain corporate positions; and reducing services, travel and any discretionary spending. We continue to assess and rationalize our entire SG&A cost structure.

As Harvey mentioned at the start of the call, we initiated a corporate restructuring earlier this month, which we expect will save the company approximately $9.7 million annually. These were very difficult decisions, but we believe they were necessary to increase our financial flexibility and preserve our liquidity.

During the third quarter, we recorded a $1.2 million noncash gain, primarily related to our decision to close 2 underperforming stores. Both of these stores have been underperforming for some time, and we had previously recorded an impairment charge on the right-of-use assets. In the third quarter, subsequent to the recognition of the impairment charges, we exercised our kick-out rights to terminate the lease. The corresponding discharge of the remaining lease obligation creates a $1.1 million noncash gain, which is classified on our Q3 P&L statement as a reduction to the previously recorded impairment charges. The other $100,000 of gain was recorded as a reduction in store occupancy costs. This is the first time that we've recorded a noncash gain due to the discharge of a lease obligation on a previously impaired right-of-use asset. However, such kick-out rights exist in many of our store lease agreements.

As we look to the next several years ahead of us, we may continue to exercise these kick-out clauses from time to time in situations where occupancy costs are misaligned with sales performance. We have approximately 52 stores with kick-outs or natural expirations coming due in fiscal 2021, 44 stores in fiscal 2022 and the remaining 220 stores in fiscal 2023 and beyond.

Adjusted EBITDA was negative $1.7 million for the third quarter compared to positive $1.7 million for the third quarter of fiscal 2019. Net loss for the third quarter was relatively flat with last year at negative $7 million as compared to negative $7.2 million, both $0.14 per diluted share.

Now I'd like to move on to cash flow and the balance sheet. We have talked on our last 2 earnings calls about some of the immediate steps we took at the outset of this pandemic, including amending our credit facility, to increase our borrowing base, decreasing our payroll, operating and capital costs to align with the expected decrease in revenues, canceling purchase orders, negotiating extended payment terms with our merchandise vendors and reaching agreements with our landlords to defer abate rent.

I'm pleased to report that our third quarter results demonstrate the effectiveness of these steps. For the first 9 months of fiscal 2020, our free cash flow was a use of $11.6 million as compared to a use of $25.4 million for the first 9 months of fiscal 2019. Due to the seasonality of our business and the buildup of inventory prior to the holiday selling season, it is typical for us to have a use of cash in Q3. However, we were able to significantly reduce that impact this year by aligning our inventory purchases with expected sales levels, closely managing our expenses in vendor payment terms and limiting our capital spending to only that which was necessary for our immediate business needs. This is a meaningful accomplishment and outcome given the situation at hand.

Our capital expenditures for the first 9 months of fiscal 2020 were $2.9 million as compared to $11 million for the same period last year. The spending was focused primarily on initiatives to drive growth in our direct-to-consumer business. We're pleased to report that we had a cash balance of $21.4 million at the end of the third quarter, a slight increase from the $20.4 million, which we ended second quarter.

Our total debt, which is comprised of our revolving credit facility and FILO term loan, is $82.9 million. If we were to look at debt net of cash, our balance was $61.5 million at the end of the third quarter as compared to $77.5 million a year ago. We have $13.5 million of excess availability under our revolving credit facility in addition to our cash on hand.

Circling back to inventory for a moment, our inventory balance decreased by $25.3 million in the third quarter to $94.9 million as compared to $120.2 million a year ago. This decrease rightsized our inventory position for our fourth quarter sales forecast and was accomplished primarily through the cancellation of orders earlier this year. We expect to end the year in a healthy inventory position with less merchandise than last year-end.

As we place our inventory buys for fiscal 2021, we will respond to business changes, buying into categories that are trending upward and pulling back in categories that have slowed down. This will allow us to narrow our assortment while continuing to manage clearance levels.

Despite the challenges of the past few months, at the end of Q3, our clearance inventory levels were down $800,000 from a year ago and comprised 11.8% of our total inventory, just shy of our long-term goal of 10%. That's an accomplishment of which we are proud, especially in light of the reduction in our total inventory balance.

As we continue to navigate through this pandemic, we will maintain a conservative approach to financial planning with an assumption of slow improvement in sales trends in our stores and a continued acceleration in our direct business. We believe that the steps we've taken this year to preserve liquidity and maintain our financial flexibility, represent important and significant steps on our way to a recovery. Given what we know at this point in time, we believe our plan provides us with a path to navigate through the next 12 months. We look forward to the upcoming holiday shopping season and continue to serve our big and tall customers across all of our distribution channels.

With that, I would like to turn it back over to Harvey for some closing thoughts.

Thanks, Peter. As we focus on the balance of 2020 and look to 2021, we are ever hopeful for the health of our nation, and really, humanity; for that vaccine being talked about today to quickly take hold; and over time, we are even more hopeful for some return to normal. However, that is actually defined for the future. For now, I just wish you all a Godspeed and a happy and safe Thanksgiving.

Operator, we'll now open it up to questions.

(Operator Instructions) Our first question comes from Eric Beder of SCC Research.

I have a very near-term question. So we've heard about Black Friday being not as important this year in terms of the actual day, trying to drive traffic early to get customers to shop before, worries about pandemic, worries about shipping. How are you responding to that in the near term in terms of your flow of promotions in terms of getting people into the stores a little bit earlier?

Yes, we, like everyone else, have tried to appreciate probably the biggest single challenge is that folks might not be comfortable coming into the stores to shop and combine that with the level of shipping that is happening in the world today and the recognition that there's going to be a challenge. We have started earlier in some of the things we've done, such as our direct mail vehicle, which normally would have arrived in-home on the Monday or Tuesday before Thanksgiving, has already arrived in-home as early as the 14th of the month. And I think, as of yesterday, we're 83% in-home already.

The promotion itself in that mailer creates 2 things as well: one, atypical to last year, some level of promotion prior to Thanksgiving, which we communicated; then an event for Black Friday, if you will; and then an event after Black Friday. So we've given the consumer a much greater runway to understand our offers and what's available to them when.

That being said, and as we've talked about, our offers and mailers communicate different offers to different folks through segmentation, and ultimately, is not Uber promotional. It's certainly not more promotional than last year because we believe and our experience has demonstrated most recently that the customer coming into the store is coming in on their terms. And we don't believe, so far, we've been able to demonstrate to ourselves the ability to drive incremental traffic that is either incrementally profitable, and in some cases, profitable at all. So you won't see us -- and my hope is the world around us be as promotional as people might anticipate, but time will tell.

Kind of on that vein, so I've seen the return of some TV advertising. How does that fit into the overall DXL marketing universe?

Yes. It's a great question. We believe that the digital marketing is our core marketing lever, if you will, and it gives us the greatest ability to interact with 3 core constituents, if you will: the current customer we have, the customer that's lapsed and customers that either don't know us or haven't shopped with us before. And all of that is accomplishable digitally, whether it's digitally through an e-mail, digitally through display marketing, digitally through specific search, organic or paid.

But in addition to that, certainly, as consumers come back to looking to buy gifts, there is an opportunity for us to continue to drive down the path of looking to take share of market. And we are on TV more frequently. We started, I think, our first TV was on the 9th. We are predominantly in places that you would expect to see us around football and the NFL.

We have some extensions into what I would call either syndicated or current live TV in the evening, the drive times, but primarily, in places that our either target or active customer needs to be reminded that we're still here, and those are being done more frequently with an attempt to both create incremental reach and -- incremental reach and frequency or TRPs, as it's referred to, and our hope is that it will address the casualization element as well. So if you remember, prior year ads and looked at this ad specifically, you'll see a much stronger orientation around casual and much less, if really any, specifically referring to tailored clothing.

Great. And final question. So inventories. You've ramped up buy online, pick up from store, and you've ramped up ship from store. Both those pieces, in many respects, allow you to be less aggressive in terms of inventory holdings. Should we be thinking about what it -- should we be thinking that the new permanent -- when the world somewhat normalizes that the new permanent inventory levels should be lower? And kind of -- what kind of should we think about how they can be maximized going forward?

Well, there's 2 -- great question. There's 2 inherent elements, for sure, in there. One is the nature of the shopping behavior and the dynamics of how that's shifting. And inherently, there's a shift to out-of-tailor clothing, which is suits, sport coats, dress slacks, even dress shoes. Those all turned meaningfully slower. So number one, we're investing less in categories that turned slower. So that should help create incremental turn in and of itself when everything else is the same.

And then in addition to that, to your point, we're trying to balance the maximization of revenue and the opportunities that exist with really the challenges and risk inherent in situations like COVID flare-ups and how fast the customer will come back to stores and what have you. So we're being relatively conservative in placing receipts, but as you might appreciate, if you don't have goods, you're not going to create business. So we're not so conservative that we don't think we'll be able to drive the revenue. We are expecting a small improvement in churn. Most of our churn improvement would come out of the shift in consumer behavior as opposed to not buying goods and trying to run lighter in total inventories.

Our next question comes from Bernard Sosnick of Madison Global.

Congratulations on maneuvering and adjusting so well. What I'd like to do is get a little bit of coloration on sales in October, and so far, in November?

So as you might imagine, and I think it's been widely published, we actually had what I would qualify, and I stress the word qualify, a good September. We measurably beat what we expected would happen in September. It caught us by surprise in a good way. And then I would say equally so, October trailed off in an unexpected way, not materially from our expectations, but it wasn't as strong as September. And that started a little bit in the beginning of October, but definitely accelerated in the second half of October. The fires in the West definitely had an impact; the COVID flare-ups, we saw that; and then, unfortunately, the last week of October with the election malaise, and as people have -- are referring to CNN watching non-stop, all of that conspired in the end of October and the first couple of weeks of November to be pretty tough.

Interestingly enough, as I've heard a few others talk about, I would say within the last, I think, it's 4 days, a material change like a light switch. And we are hopeful that those days will allude to what is possible in -- as we move into Thanksgiving and then Christmas because the magnitude of the change, it's not something that just like a light switch happens. I think it's really a function of the consumer, the volatility of the world we're living in today, with things like the election and fires and COVID.

But anyway, the long and the short answer of what you asked for is October went backwards. We did never really got out of that negative downward trend, and it continued into early November, but as I've noted, we've seen a material -- truly, a material change this week as we get closer to Thanksgiving, more back towards the September period almost.

That's very helpful. The other question I have is on accrued expenses. They're up around $3 million versus a year ago. What is the composition of that?

Sure. So the accrued expenses, you're right, it's up last year. They were at about $25 million. This year, about $28 million. I believe it has to do with -- it might be some accruals around some of the restructuring that we did and some other long-term incentive accruals, I believe. I can get back to you on that, but it is up a couple of million dollars, which I believe is due to those 2 reasons.

Well, I was wondering whether or not -- where the adjustments in rentals show up, because these would seem to be, in my mind, accrued liabilities for where there's been deferral of rental?

Yes. So you'll see those in the operating leases, which last year, it was $233 million. This year, it's $196 million. So all of the adjustments to the leases are coming through that operating lease line on our P&L -- on our balance sheet.

But as you deferred rental payments during 2020, are some of these going to become due in '21 as additional expense?

Well, there'll be due as additional cash. So that's part -- that's been part of our cash management strategy and part of the reason why we've been able to maintain such a robust cash balance is because we have not had to make those payments this year, but they are deferred to next year. So they remain as accrued liabilities, but we were able to preserve the cash this year.

And Bernie, in terms of the deferral, just so we're clear, our deferrals run very distinctly different for every landlord. In some cases, the deferrals could have started to come back in the fourth quarter from the second quarter. They could have been in 2021. They could be through the entire lease. So there was never one-size-fits-all. Our deferrals, because we have so many unique one-off landlords, are very unique to each landlord's agreement and partnership.

Well, I understand that. The input that you provided is very helpful. Let me ask this, given where you are right now in November with the light switch having been turned on, assuming all things remain the same, what are the probabilities of you reaching your sales goals for the quarter?

We feel really good about our expectations. We -- our miss in October was not material. It just -- the biggest miss was the overachievement in September, and then going backwards, the other way in October. But relative to what we expected, October was actually pretty close. The recovery in November, we always knew that the election has never been "a friend," and with the unfortunate dynamics happening right now around that, the first couple of weeks have been challenging. But we're literally, right now, in the last 4 days, ahead of the "expectation" for the month and the question will be what happens. And unfortunately, I can't predict that, but 4 days versus the first 2 weeks, it's like complete -- 2 different ends of a continuum.

That's interesting. And what are your targets with regard to the ability to generate cash flow in the fourth quarter?

Sure. So we feel very good about our ability to generate cash flow because it's our richest cash point of the year. We've been getting our stores ready, and our inventory is in a good position. We're just waiting to see how aggressively customers come into the store and come on to our website in this all critically important holiday shopping season. So I would say we feel very good about it.

One of the things, Bernie, you might not have caught, I know I covered a lot of remarks, but it's remarkable in some specific cases, some of our very best brands, our inventories literally are down 40% and 50%. And we're chasing them incredibly well. In some cases, we canceled; in some cases, they didn't produce. But in spite of that, we have been, in some weeks, flat on negative 40% and 50%. And as we chase and receipt more goods, that obviously is a win.

The other thing is between our inventory levels, which no matter what will be down versus last year, and the reduction of expense and the reduction of lease, with just a little bit of sales momentum and a little bit greater than expectation, we will create incredible leverage. And we really have concentrated on giving ourselves the greatest opportunity from an operating standpoint to rightsize the business. And in the downward environment, we think we've rightsized it. So we feel great about that. But if there is upside to what we expected, that downsizing will pay back measurably in leverage.

I, indeed, did catch the 50% down in inventories and flat sales. I was wondering, unless -- since you brought up that point, whether it changes your viewpoint on inventory structure overall?

Well, our goal certainly is to narrow, and I think we've talked about this pretty publicly. Literally, our vendor base for 2021 has almost been cut in half. And Allison is our Head, Merchant; and Katie, our Leader of Planning. The 2 of them have put their heads together and really narrowed in the assortment, really invested in the most meaningful parts of the mix. And our merchants have done a phenomenal job working with our really important brands.

As you might imagine, Ralph Lauren, Vineyard Vines, Psycho Bunny, all the brands that we continue to really drive into, and they have been great partners in helping it steer. So we do expect that between the curation of the mix, which is greater than it's ever been before, and the specific intent to try to turn faster, there is meaningful upside, and yet, we're balancing that risk appropriately.

Okay. And one final question, if I may. Could you amplify a little bit on the Amazon relationship. I didn't catch all of the details in terms of the bumps along the way, but it seems as though the relationship has a lot of potential looking forward. What would you say about that?

Yes. I would concur completely. I mean the reality is Amazon has been no different than us in some respects, and specifically, trying to understand the customer and how fast they'll buy. In our case, the Amazon Essentials program initially had some challenge, no different than anybody else. It came back very strong, so strong that it created the highest level of out of stocks we've ever seen for the program. Those out of stocks, given the manufacturing, supply chain, logistics, vessels and what have you, were -- we chased them hard. And as we've gotten back in stock, I would not say we're where we want to be at negative 30% in terms of out of stocks, but the business is trending measurably ahead of last year. And as those out of stocks get reduced further and further, we think there's upside.

Amazon, as we shared on our opening comments, felt so good about the business and the opportunities for the business, we have expanded that to the Goodthreads line, which the Goodthreads line is literally a second private brand within their private brands program. And I wouldn't go on to characterize how many private brands they have, but if you look at their business, there's not that many. It's a pretty narrow finite group of companies that work with to create their private brand program. And because we have 2 and we have -- we're getting behind one and we'll drive the second, I feel great about the opportunity. They are a great partner, addressing a customer base that, for us, is different from our core customer. And as a result, we believe it's additive and not cannibalistic.

Our next question comes from Timothy Stabosz of Stabosz Asset Management.

Well, gentlemen, considering the overall leverage of the company at the time the pandemic started, you've done a magnificent job of preserving liquidity. You've stated 12 months of liquidity. You have preserved optionality for shareholders. I want to congratulate you, and frankly, say that as a shareholder, I'm one of your biggest fans.

So that all set aside, you, I believe, had said at the previous conference call in, what I would call, a somewhat cryptic way, although you can take me to task for using that terminology for it, about the notion of raising capital in ways I wasn't completely clear about. I don't believe that was mentioned here. I don't know if the Q is out yet, so I haven't read it. Can you talk about that -- talk about the relationship with your lenders. Again, you said 12 months of liquidity. So that really hasn't changed from 3 months ago, which is good. Can you speak to the broad aspects of what I'm talking about here?

Sure. So I think when the pandemic first hit, this was one of our very first and highest priorities, was making sure that we were leveraging our credit facility to the highest extent possible. We did make some modifications to our credit facility back in the spring. And we really -- we feel like we've had a great relationship with our banks, and our banks have been very supportive of DXL throughout the pandemic. I don't think that there is much else that we are interested in pursuing right now in terms of any type of equity financing to the point that we stated earlier that we do have a plan to get us through the next 12 months, and that's being driven by just really strong working capital management.

So the ongoing sales that we are delivering, we've rightsized and restructured our expense base, and to Harvey's point, we're starting to see more operating leverage, which is a key point to getting through that. When you look at our balance sheet, which the Q will be out later today, you'll see that our debt position net of cash is actually significantly down from where it was a year ago. So we feel relatively good about the capital structure right now, and the big thing that we continue to watch is sales. We can control expenses and we can manage expenses, but we need to keep a close eye on sales, and that's how we plan to get through the next 12 months.

I am excited as a shareholder about what you've talked about regarding the operating leverage in the business should those sales come and containing the cash burn. One final question around that is back in January before this horrible thing struck, COVID, the insiders were buying stock in the open market as high as $1.15 to $1.20, I believe. It has been very quiet and no man's land of neither insiders buying nor selling the stock in the open market.

Considering that operating leverage and considering that there's a vaccine and considering that you may very well have 12 months of liquidity, it would be wonderful to see that broad-based affirmation of management in your ability to potentially turn this thing around. Does that window open up a few days after the earnings release as is customary? Or is there something that frankly has been going on, which I understand you couldn't tell me for months on in that precludes either buying or selling by insiders in the common stock of the company because I think you've got a really great chance here of creating value?

Yes. I think the reality is the window is not materially different. Quite honestly, we've had our heads down, and the greatest win we, as employees, will create, is in keeping this business moving forward and creating our own future. And each one of us makes decisions differently, so I can't speak for anyone. I certainly was in the market before and buying, and I expect that some of us will be again at some point in time.

Tim, the other thing I wanted to circle back on your comment -- I did want to circle back on your comment relative to optionality, if you will, I think the part of what we've done and communicated, as you referred to cryptically in terms of fundraising and what have you, has been nothing more to continue to create optionality. We have been very aggressive on making sure that decisions can be made in a timely way versus on a reactive way. And our greatest success is giving ourselves the optionality and being agile. And we continue to do that in every part of what we're looking at. So in terms of any fundraise or what have you, I wanted to be clear, it's all about optionality.

Congratulations, again, and we've seen a lot of very, very difficult things happening in the retail space. And the fact that you guys are still in control of your destiny is a testament to your skill sets and the quality of this management team.

Well, thank you very much. Operator, I think that's the end of the questioning today. I would just like to suggest everyone, stay safe, stay home, wear your mask and hug your loved ones, and thank you very much. Have a wonderful Thanksgiving.

Ladies and gentlemen, this does conclude the conference. You may now disconnect. Everyone, have a great day.