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Edited Transcript of DXLG earnings conference call or presentation 20-Mar-17 12:00pm GMT

Thomson Reuters StreetEvents

Q4 2016 Destination XL Group Inc Earnings Call

CANTON Mar 20, 2017 (Thomson StreetEvents) -- Edited Transcript of Destination XL Group Inc earnings conference call or presentation Monday, March 20, 2017 at 12:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Tom Filandro

ICR, Inc. - IR

* David Levin

Destination XL Group, Inc. - President & CEO

* Peter Stratton

Destination XL Group, Inc. - SVP, CFO & Treasurer

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Conference Call Participants

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* Eric Beder

Wunderlich Securities - Analyst

* Greg Pendy

Sidoti & Company - Analyst

* Chris Krueger

Lake Street Capital Markets - Analyst

* Glenn Krevlin

GHC Capital - Analyst

* Bernard Sosnick

Madison Global Partners - Analyst

* Peter Rabover

Artko Capital - Analyst

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Presentation

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Operator [1]

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Good day, everyone, and welcome to the Destination XL Group's fourth-quarter and fiscal 2016 earnings call. Today's conference is being recorded. At this time I would like to turn the conference over to Mr. Tom Filandro, Managing Director at ICR.

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Tom Filandro, ICR, Inc. - IR [2]

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Thank you, Lori, and good morning, everyone. Thank you for joining us today on Destination XL Group's fourth-quarter fiscal 2016 earnings call. On our call today is David Levin, our President and Chief Executive Officer, as well as 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 and the effectiveness of the Destination XL concept.

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.

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David Levin, Destination XL Group, Inc. - President & CEO [3]

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Thank you, Tom, and good morning, everyone. No surprise to this audience that 2016 retail environment was one of the most challenging we have faced in recent memory. For the fourth quarter traffic trends were erratic and we experienced more pronounced weakness in the middle of the country which resulted in a comp decline of 2.4%. Despite the negative fourth-quarter comp we generated a positive comp of 0.6% for the year and recorded EBITDA of $31.6 million, achieving the midpoint of our most recent guidance.

Importantly after five years of borrowing to fund the DXL build out, in fiscal 2016 we were able to pay for our 30 new stores with free cash flow and we reduced our debt to $63.1 million, which is approximately 2 times EBITDA. We expect to continue to generate strong free cash flow again in 2017.

Now that we have largely achieved our DXL men's apparel transformation with over 200 DXL stores in the most attractive markets, a robust Destination XL.com website, and an integrated omni-channel operation we enter 2017 enthusiastic that our strategic initiatives set the stage for accelerated performance in our business notwithstanding the challenging retail environment.

Our greatest opportunity is the fact that 6 out of 10 big guys still do not know who we are. And therefore our top priority in 2017 is to increase brand awareness, acquire new customers and retain existing customers. We intend to attack that opportunity through two key strategic initiatives in 2017. The first is recommitting to an aggressive advertising and marketing vision. The second is to redefine and improve our digital and e-commerce experience.

We gained valuable insights following our decision in 2016 to pull back on our marketing spend, including eliminating a fall television advertising campaign. We had assumed that our previous television advertising campaigns coupled with an increased store base would maintain and continue to increase our brand awareness. However, while the elimination of the television advertising benefited our expense structure, we experienced a slight decline in our brand awareness scores and our end of rack penetration.

Our first strategic initiative is anchored on increasing over 2017 marketing budget by approximately 40%. The higher spend will include reinstituting television advertising beginning April 2. Utilizing creative content that we know works, our TV advertising will run for 10 weeks for the spring/summer season compared to six weeks last year.

We have a high degree of confidence that this campaign will play a key role in reinvigorating top-line growth and extending our brand reach. We are also committed to a fall television advertising campaign which we expect will increase brand awareness during the critical holiday selling season.

Our second key initiative is built on an unparalleled digital experience for the big and tall guy. That initiative will be led by our recently hired Chief Digital & Information Officer, Sahal Laher. Sahal has over 20 years of senior operational experience with a focus on digital and omni-channel strategies. He joined us from Brooks Brothers where he was most recently Executive Vice President of Digital Innovation & Technology and Global CIO and supported a significant increase in sales through Brooks Brothers' digital channel.

Sahal's mission is to build digital experiences that transform the way customers engage with DXL men's apparel. Sahal is focused on four key areas: first acquisition, leveraging digital marketing to attract new customers to the DXL men's apparel brand; second retention, driving customer loyalty through targeted engagement in one-on-one offerings; third fit and comfort, curating unique experiences to feature personalized fit as a competitive advantage; and forth marketplaces, expanding the DXL men's apparel brand reach by leveraging strategic business relationships such as with Amazon.

We are also excited to announce that we will launch our first mobile app during the second quarter which represents a key priority in driving customer engagement. The mobile app will provide a platform to engage with shoppers in a personalized manner while offering ease and convenience to shop our entire selection of brands and private-label merchandise.

Our e-commerce sales penetration in fiscal 2016 was approximately 15% of total sales. We expect to experience solid growth in our digital channel in 2017 benefiting from Sahal's strategic action plan while leveraging our already robust omni-channel capabilities and new mobile app. With our return to television advertising and a heightened focus on elevating our digital experience we are well-positioned to retain our existing customers and drive new customer acquisition.

It remains clear that digital commerce is increasingly important to today's consumers and we must continually and quickly adapt to changes in the landscape. As I noted in our holiday sales update at the ICR conference, we experienced a notable migration to online shopping over the holiday season in particular with our Gift Giver. To that end, in 2017 we plan to leverage the scale of our existing store based by elevating our marketing efforts and accelerating our digital engagement and slowing new store growth.

We currently operate 205 DXL men's apparel stores, which now affords us the scale and reach to service our customers across every major market in the US. We have decided to slow our 2017 store growth to 20 stores compared to our 30 stores opened in 2016. And we will continue to slow the growth of new stores for the foreseeable future.

Our decision is strategically and financially in line with our goal of continuing to expand the DXL men's apparel brand reach while targeting strong free cash flow growth. At the same time we plan to close approximately 19 Casual Male locations in 2017 resulting in square footage growth for the year of approximately 2.6%. Our DXL men's apparel stores now represent 76% of the total Company's store footprint and are expected to reach 80% by the end of fiscal 2017.

Importantly, I would like to highlight that our legacy Casual Male stores are still performing well. Out of the 130 Casual Male stores in operation today 128 are generating positive free cash flow. As such, given the current environment, we are taking a more conservative approach to Casual Male conversions.

As you may also be aware, on March 13 we opened a DXL men's apparel store in the Toronto area which is operated by us, not a franchisee. This store represents our first of two Canadian store openings this year. We believe the Canadian market represents a potential growth region for our brand. Canada is our number one export country of DXL men's apparel product and we have extensive experience in serving the Canadian customers from our border stores.

The Toronto opening went smoothly and we are excited to bring the DXL men's apparel experience to that region. We are viewing the two Canadian stores as a test market and an important platform for increased digital distribution and e-commerce in Canada. We will certainly keep you up to date on our progress in the region.

Our cash flow is also being enhanced through better inventory management. In 2016 we embarked on an inventory productivity initiative which resulted in a yearend decrease of 6% or approximately $7.6 million in our inventory balances. This was a great effort to realize these improvements, but we know we have much more opportunity in this area.

As we enter 2017 we remain committed to improving our inventory productivity with a heightened focus on logistics in areas including purchasing, allocation and replenishment. Bottom line, we believe we are positioned to further optimize our inventory in fiscal 2017.

Given the strong free cash flow generated by our store operations, reduced CapEx requirements for new stores and comfortable debt levels, our Board of Directors has authorized a $12 million share repurchase program for fiscal 2017. We take a balanced approach to capital allocation and this authorization provides us with the flexibility to reallocate free cash flow to the opportunistic repurchase of our shares.

To summarize, 2016 was a challenging year, but we are pleased to deliver a positive comp of 0.6%, EBITDA growth of 35.6% and a milestone with the opening of our 200th DXL men's apparel store. As we look ahead to this year, we are focused on our strategic initiatives to drive customer retention and acquisition to increase brand awareness and an improved digital and e-commerce experience.

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

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Peter Stratton, Destination XL Group, Inc. - SVP, CFO & Treasurer [4]

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Thank you, David, and good morning, everyone. As you all know, we announced our fourth-quarter and full-year fiscal 2016 earnings this morning and I'd like to start with a brief summary of those results.

In the fourth quarter net sales were $122.6 million inclusive of total Company comparable sales decline of 2.4% on top of a 3.1% increase in the prior year quarter. Our top-line results were negatively impacted by overall weakness in the retail sector and we believe our decision to eliminate a fall television marketing campaign.

In the fourth quarter gross margin, including occupancy costs, was 44.9% compared with 45.8% for the fourth quarter of fiscal 2015. The decrease of 90 basis points was the result of a 40 basis point decrease in merchandise margin and a 50 basis point deleveraging in occupancy costs as a percentage of total sales.

The decrease in merchandise margin was primarily due to an increase in promotional strategies over the peak December selling weeks. At the end of Q3 we were expecting fourth-quarter improvement in merchandise margins due to some year-over-year timing differences associated with our clearance merchandise. The increase in fourth-quarter promotional activity more than offset the anticipated improvement in the timing differences on clearance merchandise, which caused our gross margin to come in below our expectations.

Moving on to SG&A costs, we continue to be disciplined with managing expenses. Our SG&A expenses for the fourth quarter were 36.1% of sales compared with 40% a year ago for an improvement of 390 basis points. On a dollar basis SG&A expenses declined $5.3 million from Q4 2015, which primarily resulted from reductions in advertising costs and lower performance incentive accruals.

As David mentioned, we are planning to increase our marketing and digital expenses by $6.8 million in fiscal 2017 and we also expect our performance incentive accruals to return to a more normal level which will contribute to a higher SG&A rate in 2017.

GAAP net income for the quarter was $1.8 million or $0.04 per share compared with a net loss of $1.4 million or $0.03 per share a year ago. Net income on a non-GAAP basis, assuming a normalized tax rate of 40%, improved to $0.02 per share from a net loss of $0.02 per share in Q4 of fiscal 2015.

We are pleased to report fourth-quarter EBITDA growth of 48% to $10.8 million from $7.3 million in the year ago quarter. The increase was a direct result of lower SG&A expenses for the period, much of which can be attributed to not having the fall television advertising campaign. For the full year we registered EBITDA growth of 36% to $31.6 million.

Capital expenditures for 2016 of $29.2 million were down 13% from $33.4 million in 2015. The lower CapEx was due to a decrease in infrastructure projects as well as the opening of five fewer DXL stores in 2016 versus 2015.

Now I would like to turn to our balance sheet. Inventory at the end of the fourth quarter was down $7.6 million or 6% from the fourth quarter of fiscal 2015. This substantial inventory reduction is a direct result of continued inventory initiatives we've been pursuing throughout 2016 to improve timing of receipts and weeks of supply on hand.

We have also identified several opportunities within our merchandise planning and allocation functions that we believe will drive an additional $8 million to $12 million of further inventory improvements in fiscal 2017. We entered the new fiscal year with a clean and current inventory composition. Clearance merchandise was 8% of our total inventory at the end of fiscal 2016 which was in line with our 2015 level.

Total debt at quarter end was $63.1 million, which includes borrowings under the revolving credit facility of $44.1 million with excess availability of $57.1 million. This compares to $68.1 million of total debt a year ago.

Before I turn to our 2017 guidance I wanted to lay out a change to our reporting practices. Now that our DXL men's apparel store fleet represents 76% of our Company store footprint and we are accelerating our efforts to drive digital sales, we will be reporting go-forward comparable sales only on a total Company basis. Our intent is to maintain transparency and we believe this approach aligns our execution of the business to our customers' shopping preferences in which the barriers no longer exist between brick-and-mortar and e-commerce.

It was important in the midst of the DXL transformation to report DXL store performance separately as we tracked progress. But now that the store transition is substantially complete and the majority of our store base is DXL, we believe that the total Company comparable sales will be a more important metric as we move forward.

Now let me turn to our 2017 guidance. As David described, we have adopted clear offensive strategies for 2017 in marketing and digital engagement, which are squarely focused on driving new customer acquisition as well as retention of existing customers. Including in these initiatives is an increase in our marketing spend by approximately $6.8 million combined with digital strategies that we believe will drive accelerated top-line growth.

To this end we are providing the following guidance for 2017. Total sales of $470 million to $480 million. A total comparable sales increase of approximately 1% to 4%. Gross profit margin of approximately 46%. An adjusted net loss on a non-GAAP basis of minus $0.06 to minus $0.14 per diluted share assuming a normal tax benefit of approximately 40%. EBITDA in the range of $24 million to $30 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 $15 million to $20 million. We expect to open approximately 19 DXL men's apparel retail stores and one outlet location. We also plan to close approximately 16 Casual Male XL retail stores and three Casual Male outlet stores.

Now for modeling purposes I would like to offer the following directional comment. With the reinstitution of our television advertising to start on April 2, we are not anticipating a meaningful improvement in the business until Q2. We do anticipate there will be a continual build as the year progresses. As a result of this factor we would expect adjusted non-GAAP EPS losses in Q1 and Q3 and positive EPS results in Q2 and Q4.

Lastly, before we open the call for questions, I'd like to comment on our capital allocation strategy. The Company is forecasting free cash flow of $15 million to $20 million for fiscal 2017, and I think it's important for our investors to know what we intend to do with that cash.

Earlier today we announced that our Board of Directors authorized a stock buyback program for up to $12 million in fiscal 2017. This authorization provides the Company with additional flexibility to balance debt pay down and shareholder returns. Maintaining adequate access availability under our credit facility remains our top priority and we believe a combination of debt pay down and stock buyback represents the best use of free cash flow in fiscal 2017.

In closing, we have a clear strategic plan of action in place to accelerate our performance in 2017 and we are confident our efforts will continue to strengthen the DXL men's apparel brand, setting the stage for future growth. And with that, operator, we will open the call for questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions). Eric Beder, Wunderlich Securities.

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Eric Beder, Wunderlich Securities - Analyst [2]

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Could you talk -- so, how does these changes in terms of slowing down the store growth a little bit affect your overall long-term strategy with stores? And what is -- just remind us, what is the long-term goal in terms of the store counts?

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David Levin, Destination XL Group, Inc. - President & CEO [3]

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Yes, it's interesting because right now we are over 200 stores and we have 140 Casual Males left out there, but those 140 really only represent 20% of our business today. So really the bulk, the major markets where we wanted to plant all these stores are done. So we will be slowing down those transfers over time.

But again, in total having that number of 350 stores is still intact, but we will be monitoring it through as leases come due whether we want to make the conversion. It's got -- we have IRR requirements that we have to meet. But even if some stay as Casual Males, they continue to perform well and kick out cash flow for us. So I think over the next few years we are just going to be very prudent and thoughtful about what we want to convert.

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Eric Beder, Wunderlich Securities - Analyst [4]

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Great. And when you look at the online business, obviously it has done well. Could you talk a little bit about how the difference in the economics there -- is it a better business in terms of overall margins? And kind of where longer term do you think the numbers should be in terms of penetration?

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Peter Stratton, Destination XL Group, Inc. - SVP, CFO & Treasurer [5]

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Sure, so I will take that one. So the penetration is about 15% right now and we do expect that to grow over time. I think that over the last seven years we have been spending an awful lot of focus on building out the DXL store footprint. And now that we have gotten to a scale that allows us to reach the entire US the focus is obviously going to be more on digital this year.

In terms of the profitability of each channel, if we were going to earn an additional dollar we would certainly want that additional dollar going to the stores because we've got so much of our fixed cost in payroll in occupancy. But overall we would incur a little bit more cost in the direct channel with the shipping. I would like to remind everyone that we do not take free returns for shipping so that helps our model a bit.

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David Levin, Destination XL Group, Inc. - President & CEO [6]

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Also just to add to that, to remind everybody, where a lot of apparel companies have 20% to 30% return rates, which really bust the model in terms of profitability, our return rate is about 8%. So we have strong margins coming out of digital which will allow us to really accelerate that as best we can without having a real impact on our margins.

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Eric Beder, Wunderlich Securities - Analyst [7]

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And where do you think it can go? Is this a 25% of total sales potential here?

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David Levin, Destination XL Group, Inc. - President & CEO [8]

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We are not there yet to say what it could grow to. Obviously we have a fairly big base of stores that will make that growth slower. But aspirationally, yes, we will take it as high as it could go and if it is 25% that would be great. But it is too early for us to predict. But it will be growing and driving as a percent of sales over the next several years for sure.

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Eric Beder, Wunderlich Securities - Analyst [9]

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Congratulations on getting to free cash flow. What is your goal for either debt levels or ratios? Where do you want the liquidity to be?

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Peter Stratton, Destination XL Group, Inc. - SVP, CFO & Treasurer [10]

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So, I think we are very comfortable with where we are right now at two times EBITDA. I think with announcing the stock buyback today is something that we are very excited about because it gives us more flexibility to balance shareholder return with liquidity management. We think that we are going to generate a significant amount of cash flow this year. The guidance is $15 million to $20 million and it is important that we are able to balance those two priorities and do what is in the best interest of the Company.

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Eric Beder, Wunderlich Securities - Analyst [11]

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Okay, guys. Good luck for the year. Thank you.

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Operator [12]

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Greg Pendy, Sidoti.

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Greg Pendy, Sidoti & Company - Analyst [13]

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Just I guess a couple of questions on the outlook on 2017. First of all, did I catch that right that the SG&A, we should think about it going up $6.8 million? Or was that just the advertising side?

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Peter Stratton, Destination XL Group, Inc. - SVP, CFO & Treasurer [14]

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No. So, Greg, it is going to go up more than that. The $6.8 million is just the advertising side. We also are going to see -- we see general increases in SG&A every year in areas such as store payroll, with more DXL stores, we also made a comment earlier about increases in performance incentive accruals. Those accruals were very modest this past year and we expect that next year those numbers will get back to a more normal level that we have trended to back in 2014 and 2015, so --.

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Greg Pendy, Sidoti & Company - Analyst [15]

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Okay, that is helpful. And then just another one I guess. Can you kind of remind us where you guys stand? I know you have talked about it in the past, but where strategically you guys stand in the online world in the big and tall space? I believe you've, in the past, given some metrics on the competitive environment and how much you guys represent of that business?

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David Levin, Destination XL Group, Inc. - President & CEO [16]

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Yes, that is difficult to answer. But one of the things that we do monitor is we ask our customers where else they have shopped in the last six months. Have they shopped anywhere else in big and tall? And there has been absolutely no growth by any of our competitors in terms of cutting into our market share and we think our market share continues to grow.

But in terms of the total business, what percent we have, there is nothing out there that really guides us to what that number could be. But I believe our market share is going to grow more. We are -- as I said, one of our initiatives is to go into more marketplaces. We are on Amazon, a couple programs with Amazon; we are on eBay, we have Bon-Ton.

We have a lot of more potential growth in doing digital sales outside of our own website. So again, very focused on it with a lot of potential and a lot of new programs that we are going to be initiating in the next year.

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Greg Pendy, Sidoti & Company - Analyst [17]

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And then just one more. It seems like just the mix, you guys are planning on only adding one DXL outlet. Is that primarily a function of the online growth? Are you finding that to be sort of a channel that you can offset some of the inventory if need be?

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David Levin, Destination XL Group, Inc. - President & CEO [18]

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No, it was just coincidental. Our DXL outlet stores are doing fine, it is just what leases came due, where we saw the opportunity and it just happened to shake out that way. But there is no agenda that says we are not going to convert DXL outlets in the future as we would our regular price stores.

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Greg Pendy, Sidoti & Company - Analyst [19]

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Okay, thank you.

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Operator [20]

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Chris Krueger, Lake Street Capital Markets.

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Chris Krueger, Lake Street Capital Markets - Analyst [21]

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A quick question on -- just on your sales during the fourth quarter and so far into the first quarter. Any like regional trends versus -- like the coasts versus the central part of the country? Or also anything as far as pre-presidential election versus post-presidential election? Just wondering how the patterns were there.

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David Levin, Destination XL Group, Inc. - President & CEO [22]

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Interesting on the demographic side is we experienced about a 500-600 point spread between the middle of the country and the East and West Coast. In February that narrowed down to about 140 basis points. So that does seem to be neutralizing itself. So I think we are pretty good about that.

Pre-election, post-election we are not sure. But the business that we experienced in the fourth quarter, as you have heard most retailers speak about the current business, it is bumpy out there and not very predictable yet. And again, we are really focusing on our TV campaign which actually is going to break a month earlier than last year, so we should start to see improvement in our comps as we get into the second quarter.

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Chris Krueger, Lake Street Capital Markets - Analyst [23]

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All right, thanks. That's all we've got.

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Operator [24]

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Glenn Krevlin, GHC Capital.

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Glenn Krevlin, GHC Capital - Analyst [25]

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Peter, I was wondering if you would give a little bit more clarity on or detail on CapEx. So last year in your release you said there was $33 million, 20 stores, $13 million infrastructure. Can you tell me, the $13 million infrastructure, what were the major programs, what you expect to get out of them? And then for this year can you break it down into similar buckets in terms of stores gross and net and then infrastructure?

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Peter Stratton, Destination XL Group, Inc. - SVP, CFO & Treasurer [26]

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Sure. So the programs that we spend on infrastructure, it is really in two major buckets. The first is IT projects. So, improvements to our e-commerce website, improvements to different systems that we have within the Company whether it is planning and allocation or distribution. That is really the first bucket.

The second bucket is -- it is really infrastructure improvements to our facilities. So things like -- it could be fixing parts of a roof, it could be resurfacing a parking lot, but it is all of the maintenance CapEx costs that we have to incur to keep the business moving.

Where we think it is going to be next year is the CapEx for stores next year is about $22 million. Now that is before tenant allowances. I'm sorry, it is $17 million and then tenant allowances. So, we are spending roughly $400,000 to $500,000 per store on the DXL store build out still.

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Glenn Krevlin, GHC Capital - Analyst [27]

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And then in terms of infrastructure for this year, what is the number and what are the projects?

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Peter Stratton, Destination XL Group, Inc. - SVP, CFO & Treasurer [28]

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So the infrastructure projects this year I believe is about $8 million. And it is -- right.

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Glenn Krevlin, GHC Capital - Analyst [29]

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And then in terms of the buyback, I mean has the Company sort of had a -- or created a policy here as to sort of what debt to EBITDA or what debt to EBITDAR ratio the Company is comfortable managing the business at? Are there some metrics you can share with us that the Board has adopted in creating this repurchase authorization?

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Peter Stratton, Destination XL Group, Inc. - SVP, CFO & Treasurer [30]

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So, one of the big things that we are watching very closely is our availability. We want to make sure that our availability does not fall below a certain level. And we are looking to buy back shares opportunistically. So we have set a number, I am not sure we are going to give that out on this call. But we are managing that conservatively. The first priority is to make sure that we have got plenty of flexibility and availability to run the Company.

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Glenn Krevlin, GHC Capital - Analyst [31]

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Okay, I will let somebody else jump in.

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Operator [32]

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Bernard Sosnick, Madison Global Partners.

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Bernard Sosnick, Madison Global Partners - Analyst [33]

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You did a very nice job controlling inventories during a difficult situation, but you say that there is more to come. Could you outline a little bit your plans for inventories?

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David Levin, Destination XL Group, Inc. - President & CEO [34]

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Yes, Bernie. We have a very slow turning business, it has been our heritage forever, we barely turn two times a year, really reflective of the size management that we have to deal with, certain styles, [kept] 55 different size combinations. And we have to learn how to rationalize that as we move forward.

So we brought in a consultant, we have mapped it out, they've been in here for three months. And it is just streamlining the inventory that we have in our warehouse more than we have in the stores. We are not going to really lower -- we don't need to lower the inventory that is in the stores, it is the transitional inventory, how we bring it in, the amount we bring in at one given time and there is just tremendous opportunities as we focus on that to drive it down.

And as we said, we made one big dramatic drop in inventory in one year and that was just things we were able to accomplish on our own. And now bringing in the experts, they have identified a lot of programs that just -- we could improve dramatically by streamlining it and changing the way we do it. So we are very excited about it. It has been a top priority in the Company for the last year. And we are confident that the numbers that Peter gave on driving that inventory down are going to happen by the end of this year.

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Bernard Sosnick, Madison Global Partners - Analyst [35]

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With regard to your investment in marketing, certainly understandable and I agree with it. But the Company has come to the point of having enough stores so that, while you are not mature, you have reached a level of maturity that should produce profitability some time soon.

So 2017 is going to be another investment year in that respect given your guidance. What are your thoughts looking a little bit beyond that? I know it is a very difficult market environment, but could you stretch your thinking a little bit, please?

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David Levin, Destination XL Group, Inc. - President & CEO [36]

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Honestly we are feeling very good about our business right now. Taking that marketing out had an impact and putting it back in is going to have a positive impact. I mean, we're going to be going in the back half of this year with marketing against no TV a year ago. And that should give us a substantial improvement in the back half of the year.

Look, the key thing is for these guys to pay attention to who we are isn't on the top of their priority. Every customer that we get to walk in the store it is a win. They come in, they enjoy the experience and we own them. The cost of acquisition of that customer is expensive.

But the good news is the money we are investing today has long-term positive profitability to it because we have a good stickiness to this marketing. We get him in this year and we spend the money we are going to own that guy for the next four or five years. So it pays itself over time.

So putting that money back into marketing is going to be great. We are bringing back our top commercial that only ran for 12 weeks in 2014, it scored extremely high. We are very excited about bringing that back, it resonated with our customer very well. It was the year had the biggest comps in DXL. So we spent a lot of time trying to figure out how we are going to get that customer back in the store and we feel very good about our strategy.

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Bernard Sosnick, Madison Global Partners - Analyst [37]

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Thank you.

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Operator [38]

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(Operator Instructions). Peter Rabover, Artko Capital.

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Peter Rabover, Artko Capital - Analyst [39]

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I have a couple questions. So first on the SG&A and the marketing spend, should we consider this more of a run rate going forward or is that is a one-time increase that you might pull back on in 2018?

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Peter Stratton, Destination XL Group, Inc. - SVP, CFO & Treasurer [40]

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No, I would consider it a run rate going forward. Over time as we grow sales the rate as a percentage of sales will come down, but we are committed to the advertising and customer acquisition and retention is absolutely the highest priority this year.

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Peter Rabover, Artko Capital - Analyst [41]

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Okay. And then on the same-store sales guidance, is that coming mostly from traffic that you think will come as a result of advertising?

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David Levin, Destination XL Group, Inc. - President & CEO [42]

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Yes, and the growth of digital. Digital -- our digital plan this year is aggressive and we are already seeing a run rate where digital is outperforming our stores. So that is going to be a big part of the comp too.

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Peter Rabover, Artko Capital - Analyst [43]

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Do you guys have any idea how much of your digital comes from people who have visited your stores like from your I guess in person customers?

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David Levin, Destination XL Group, Inc. - President & CEO [44]

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There is different metrics out there, one that we saw over the holiday period. 60% of the customers in our stores were on a mobile device prior to coming into the store. So it is interesting, even though he could have easily clicked on to buy, our customers still like to come into the store, try things on. They are more challenging to get the right fit.

So, our omni-channel strategy is really melding these businesses as close as we can together because they do work hand in hand. We like them to go on digital and then we like them to follow up in the store where we could build on that customer's purchase through enhanced wardrobing.

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Peter Rabover, Artko Capital - Analyst [45]

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Okay. And then I am just kind of curious if you can give any color on how you guys went about deciding on the stock buyback. Was it from the Board level or was that from you guys? Was there a higher number or a lower number from each side? I would appreciate any color.

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Peter Stratton, Destination XL Group, Inc. - SVP, CFO & Treasurer [46]

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Sure, I would be happy to. So, this really stemmed from the fact that we are giving guidance for $15 million to $20 million in free cash this year. And it is really a capital allocation question where we can invest that money in more stores, we can invest that money in paying back debt. But we felt that given where the price is today, authorizing the stock buyback gave us more flexibility to manage the business better. So now we can balance shareholder return with debt pay down.

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Peter Rabover, Artko Capital - Analyst [47]

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Okay, but did that come from the top or did that come from you guys?

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David Levin, Destination XL Group, Inc. - President & CEO [48]

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I think this was a joint decision. We go in with an agenda and we said, okay, we have got free cash flow something we haven't seen in many, many years and what is our best strategy? And there was consensus between the Board and management that with the stock price where it is we think it is a good return on investment if it is going to be at this price range. So, the alignment was there between the Board and management.

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Peter Rabover, Artko Capital - Analyst [49]

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Great. And then just one more. You said it on the call, maybe I missed it. How many of your Casual Male stores you said were generating positive free cash flow today?

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Peter Stratton, Destination XL Group, Inc. - SVP, CFO & Treasurer [50]

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All but two of them.

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Peter Rabover, Artko Capital - Analyst [51]

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All but two of them. And I assume you plan on closing those two this year?

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Peter Stratton, Destination XL Group, Inc. - SVP, CFO & Treasurer [52]

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Yes, we will have to check when the leases are, but we would be closing those when we can get out of the leases.

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Peter Rabover, Artko Capital - Analyst [53]

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Great, thanks. That is all I have.

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Operator [54]

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That concludes our question-and-answer session. I will turn the conference over to David Levin for any additional or closing remarks.

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David Levin, Destination XL Group, Inc. - President & CEO [55]

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Thank you all for joining us today and we look forward to speaking with you next quarter. Have a great day.

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Operator [56]

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That does conclude today's conference. Thank you for your participation.