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Edited Transcript of DXLG earnings conference call or presentation 19-Mar-20 1:00pm GMT

Q4 2019 Destination XL Group Inc Earnings Call

CANTON Apr 1, 2020 (Thomson StreetEvents) -- Edited Transcript of Destination XL Group Inc earnings conference call or presentation Thursday, March 19, 2020 at 1:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Harvey S. Kanter

Destination XL Group, Inc. - President, CEO & Director

* Peter H. Stratton

Destination XL Group, Inc. - Executive VP, CFO & Treasurer

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Conference Call Participants

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* Timothy Stabosz;Stabosz Asset Management

* Nitza McKee

ICR, LLC - Senior Associate

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Presentation

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Operator [1]

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Ladies and gentlemen, thank you for standing by, and welcome to the Fourth Quarter 2019 Destination XL Group, Incorporated Earnings Conference Call. (Operator Instructions)

I would now like to turn the conference over to your host today, Ms. Nitza McKee. Ma'am, please begin.

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Nitza McKee, ICR, LLC - Senior Associate [2]

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Thank you, Howard, and good morning, everyone. Thank you for joining us on Destination XL Group's Fourth Quarter and Full Year Fiscal 2019 Earnings Call. On our call today is our President and Chief Executive Officer, Harvey Kanter; and our Executive Vice President and Chief Financial Officer, Peter Stratton.

During today's call, we will discuss some non-GAAP metrics to provide investors with useful information about our financial performance. Please refer to our earnings release, which was filed this morning and is now available on our 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 impact of the coronavirus outbreak on the company's business and results in fiscal 2000 -- in fiscal 2020 and actions being taken by the company to mitigate the impact, including reducing operating expenses, capital expenditures, canceling inventory receipts and preserving liquidity, the company's marketing efforts and the wholesale segment. Such forward-looking statements are subject to various risks and uncertainties that could cause actual results to differ materially from those assumptions mentioned today due to a variety of factors that affect the company. Information regarding risks and uncertainties is detailed in the company's filings with the Securities and Exchange Commission.

I would like -- I would now like to turn the call over to our CEO, Harvey Kanter. Harvey?

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Harvey S. Kanter, Destination XL Group, Inc. - President, CEO & Director [3]

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Thank you, Nitza. Let me start by saying on behalf of the DXL family, our thoughts and prayers go out to you and to your loved ones that are dealing with health or other hardships during this incredibly challenging time. These times are unprecedented, and we are all living in unchartered waters. To get through this, we must all stick together, and together, we hope we will overcome this pandemic.

The format of our earnings call today is going to be a little different than how we've approached our calls in the past. I will be the only one with prepared remarks, and I will be fairly brief and cover just 2 items. First, I want to cover the impact of COVID-19 on DXL and to inform you of the steps we've taken to preserve our liquidity, to address expenses and to reduce capital expenditures in fiscal 2020. Second, I want to cover important achievements we've accomplished in fiscal 2019 and talk about the momentum coming out of fourth quarter and touch upon February in spite of the developing COVID-19 pandemic.

Earlier this morning, we filed our fourth quarter and fiscal year-end press release, which contains much more detail on our fourth quarter. So let's start with COVID-19.

This unprecedented global pandemic continues to be a fluid situation. My comments will be limited to what I know factually, and I will not address expectations in regards to what could be, under scenarios we have yet to experience. We are closely watching our business and considering all elements we can imagine as well as learning from others real-time by interacting with the NRF, NACD and fellow CEOs in retail.

First and most importantly, like every company, our first priority is to protect our employees, and the guests, and the communities in which we do business. On Tuesday, we closed our stores temporarily and we have tentatively planned to reopen on March 29, though at this point we believe this is likely overly optimistic. We implemented a work-from-home plan for many of our corporate associates where it makes sense. We have canceled all business travel for the immediate future. We have no in-person meetings and are exclusively using teleconferencing to do our business. We are cleaning and driving hygiene in our stores and distribution center and our corporate office where we still have limited staff on site.

From a financial standpoint, it is just too early to determine the impact of the virus on the year. At this time, our stores are closed, and leading up to that point, over the last 10 days, we experienced significant double-digit declines on our top line across stores and online. At this time, our website remains open for business and is only moderately better than the store's performance before we closed the stores. With 0 revenue from stores for what is likely a multiple of weeks and the web significantly off, there is no question that our sales forecast for the year is going to be significantly impacted.

With the situation at hand, we have and will continue to execute our contingency plan. We began executing this plan in the early part of February, and we have greatly intensified and accelerated our efforts in the last 2 weeks. We have taken very aggressive steps and acted very quickly to mitigate the declines we began much more meaningfully experiencing in the first week of March.

The 4 specific areas I want to cover on this call are liquidity, SG&A, capital expenditures and inventory. First, liquidity. One of the brighter spots we had in fiscal 2019 is our liquidity. Despite the struggle we had with traffic, we ultimately delivered a positive comp, and our financial position ended the fiscal period in better shape than it was a year ago. We delivered free cash flow of $2.4 million last year, reduced our outstanding borrowings from $56.7 million to $44 million -- $54.1 million. And we had $48.5 million of unused excess capital under our credit facility at the end of the year, which put us in a stronger starting position to now manage the current sales environment.

Our credit facility, which is comprised of $125 million revolver and a $15 million FILO term loan, does not expire until March 2023. In terms of our supplier base across functions, we are working through potential challenges in outgoing payments and requesting extended terms with some success early on.

And finally, we have already led discussions proactively and transparently with our lead bank. Given the volatility and fluidness of the situation, we are reconnecting with them often and will remain very active in our dialogue. We expect they will be great partners, and our conversations have been very positive so far in the partnership. Because the fact of the matter is we don't know how long or how severe the impact of COVID-19 will be, we have modeled a downside scenario, which we believe we represent a path to maintain liquidity within. In this scenario, we believe we can mitigate the sales erosion through reducing operating expenses, capital expenditures and inventory purchases.

Let me talk to each of the 3. First, operating expenses. The stores. We do not know when the stores will reopen with any certainty. At this time, except for the store general manager, store staff have been furloughed, in some cases as we reduced hours and coverage and in all cases as of the point we closed last Tuesday. When we reopen our stores, we have assumed there will be a long ramp back up over a 6- to 9-month period until sales normalize. Given this ramp, we will open with scaled back operating hours, scaled back coverage and both until sufficient traffic returns to the stores.

Where we can, we have almost eliminated paid marketing efforts and expense and expect we will maintain a significant reduction over the remainder of the year until business normalizes. We have formalized an appeal to all our landlords for relief in rent and CAM charges, and we are already in discussion. We have instituted a hiring freeze in our corporate office. We have eliminated training programs in our stores, of course, and a reduction in place for the balance of the year.

We will realize savings in credit card fees, bags and boxes, store commissions and other variable expenses due to the decline in sales. We have eliminated all nonessential travel for the entire year, and we have canceled our national sales conference. We are leaving no stone unturned. We are eliminating all expenses that are not absolutely critical to run this business.

Next, our capital expenses. We have suspended our store rebranding program for the remainder of fiscal 2020. As you might recall, we plan to convert in-place 14 Casual Male stores to the DXL format. We have suspended all capital expenditures in our corporate facility and our stores as well that are not absolutely critical or required by contract. We have virtually eliminated our infrastructure CapEx spend, which included a series of system upgrades and implementations we now believe can be delayed and will only move forward if deemed a critical requirement. Again, the point is we have taken very aggressive steps and acted quickly on capital in an effort to preserve liquidity.

And finally, inventory. Our merchandise planning and allocation, global sourcing teams have been working tirelessly to cancel both spring and address fall on-order. Given the downside scenario we have formulated, we have moved through this process extremely quickly and aggressively. And as of today, have canceled over $55 million of on-order for the balance of the next couple of months and have the opportunity to address a meaningful portion of fall as well. This is an area we are trying to be judicious in. And if our downside scenario is too great and business returns quicker than we expect, we believe we will have plenty of opportunity to chase goods and compared to the alternative which is being overinventoried, we have chosen the path we have.

With regard to our global supply chain, we have not seen any material impact to our receipts. But the bottom line on inventory in totality is we are much less concerned about our ability to receive product and much more focused on the risk of being overbought for the year. Our concerns are primarily about the American consumer, and in reality, when is he going to be interested in buying apparel again.

I will now quickly cover 2019. It was a significant transformation for DXL year. And while our transformation has a ways to go, there were significant accomplishments, and these were achieved while improving the balance sheet. This is a win that the company feels good about. A quick couple of examples. First, the team. In the 11 months since I joined the company, we've gone through a meaningful organizational transformation. The priority was to get the right people in the right positions to drive the strategy. You know we have been very consistent in saying we have a marketing problem, and this thesis to drive growth opportunities strategically is driven around our challenge in the customer file and repeat purchase.

The progress the marketing team has made and is making across the digital front has driven the improving top line sales. Now under Ujjwal Dhoot's leadership and with his global nativity in digital transformations, we expect to further impact growth. In regards to the broader organizational transformation, in the past year, we changed out 3 of the 5 named executives and 3 of the 4 marketing leaders. We eliminated the CEO position and recruited a number of high-caliber VPs, directors and managers. This was the foundation required to leverage the opportunity and give us the developing skills and capabilities to execute the strategy. And it's why our fourth quarter did accelerate and show improvement.

Second, we shut down the 5 remaining Rochester stores. These stores were not profitable, and the decision to shut these stores down was grounded in the store's productivity and efficiency. They were all located in the finest and highest retail markets and overly spacious. The real estate commanding premium pricing, escalating occupancy costs and declining traffic sealed their fate. Closing the U.K. store represented unique challenges with inventory liquidation and lease exit costs, which impacted the P&L. The upside of the Rochester store closings is that most of our customers live within close proximity to a DXL store location. And we are actively targeting those customers to let them know that they can get the same service and selection at the DXL store. By closing the Rochester stores, we have meaningfully reduced operating expenses.

The third success is our inventory position. For the year, we have reduced our inventory from $106.8 to $102.4 million and reduced our clearance. As a percent of the total, it declined from 10.3% to 10.0%. At the end of the third quarter, we further tightened our inventory aging policy. And going forward, we now have a tighter aged market of stock process. The change in the aging standard will keep our inventory cleaner and fresh without jeopardizing sales. As you might recall, we took a $900,000 onetime write-off in the third quarter as a result.

The fourth success I'd like to call out is the Casual Male store rebranding. Over the past 2 years, we remodeled and rebranded 17 Casual Male XL stores to the DXL format. In the first year of operations, these stores returned an average comp sales result of 24% compared to the Casual Male stores, which were flat or slightly negative. This was a win, as the cost to rebrand is approximately $175,000 versus the relocation and development of a new DXL store of $450,000, while not providing the same level of return.

Another big win for 2019 is the operating plan for wholesale. The greatest -- the greater opportunity to accelerate this channel is believed to be in ahead of us. This includes developing the assortment, building a supply chain that included logistic capabilities on both the East and West Coast and bringing product to market that are receiving high customer ratings. Most importantly, we launched a new business that is now generating positive cash flow in the first full year of operations. This has been a strong debut for DXL.

Lastly, I want to call out 2 in Board of Director elements. The company's directors have elected to suspend their compensation for the near term. And as previously communicated, we are reducing our Board size and will nominate no more than 7 directors at our upcoming annual meeting in August. This number is down from 9 that serve on the Board today. We are hoping, in time, to identify a new digitally centric director who will add more digital expertise. But at this moment, we are not pursuing this as a director.

These wins are important because the fiscal 2019 was a year full of challenge. We developed a mission, vision and strategy and have been testing that strategy. We adopted a test, learn and optimize approach, and we learned a lot. Despite the struggle we had with traffic, we delivered a positive comp. Our financial position ended stronger. We delivered free cash flow of $2.4 million. We reduced our outstanding borrowings from $56.7 million to $54.4 million and ended the year with $48.5 million of unused excess capital, which now helps liquidity.

Now our fourth quarter, we delivered a comp increase of 1.1%, a sequential improvement from quarters 1 through 3 and a 2-year stack of 4.2%. We accelerated growth in our direct-to-consumer business, reaching a 27.4% penetration of our retail sales, up 260 basis points compared to last -- fourth quarter last year.

Given the promotional environment, the achievement of our sales growth was meaningfully greater without promotion, helping us to manage our margin and expenses prudently, resulting in a year-over-year adjusted EBITDA growth of 45% to $9.9 million and, as mentioned, delivered positive free cash flow for the year. Our fourth quarter adjusted net income was $0.05 per share, which compares to a loss of $0.01 per share last year, and was the strongest fourth quarter in adjusted EPS since 2012.

Our direct-to-consumer business, which is a focus area for a clear -- was a clear bright spot in the quarter. Our total company direct comps were up high single digits in the fourth quarter with the strongest performance driven by the dxl.com website, which grew 13%. We drove significantly more visitors through a combination of productive advertising spend and enhanced website features.

During the fourth quarter, we also leveraged our omnichannel capabilities, shift from store program through which we have the ability to fill online demand from all stores. And finally, we made a change in the distribution center to significantly enhance our shipping standards and improve the speed in direct-to-consumer.

And finally, in our wholesale division, we had a great fourth quarter with year-over-year growth of more than 80% to $4.5 million. Our wholesale business has shifted from large seasonal buys to product replenishment. On Amazon, our product reviews remain strong with a 4.4-star customer rating. We see opportunity with wholesale and excited to continue growing our product assortment with Amazon private brands. We managed our wholesale operations with greater financial discipline, which has resulted in a meaningful improvement in our margin structure. We ended fiscal 2019 with $12.5 million in wholesale sales and believe there is momentum for growth in the final -- in the wholesale segment.

I am not going to talk at length about 2020 or provide meaningful forward-looking views, but a quick voice-over. In February, our consolidated comp was flat and our adjusted EBITDA was significantly better year-over-year despite the early impact from COVID-19. While we are in a certain period, the underlying fundamentals of our business are improving, and we remain committed to our strategy built around 4 marketing initiatives. First, data analytics and customer insights; second, CRM or customer relationship marketing; third, driving digital efficiency in digital marketing; and fourth, execution of our digital operations. Beyond this, we remain confident of the greater opportunity in wholesale. At this time, that is all I plan to reference in terms of 2020.

In closing, I would just like to say thank you for your continued support. My hope is you understand the management team and I are laser-focused on our liquidity. And we are very -- working very hard to control our destiny and the future of DXL. We do not know the impact of COVID-19 over the short term, yet alone in the months ahead. As you all know, it is literally changing day by day, but we have a plan. And that is important, and we are executing against that contingency plan. Yet we are acknowledging we know it will evolve further as well.

And now if there's any questions, we will take a few and then call it. Thank you.

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Questions and Answers

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Operator [1]

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(Operator Instructions) We have a question or comment from the line of Timothy Stabosz from Stabosz Asset Management.

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Timothy Stabosz;Stabosz Asset Management, [2]

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I want to thank you for all your comments, your opening comments especially. And we know that you've done a great job with the business here, but we're looking at going forward here. I have just a few quick questions. Do we know yet the legalities of whether a landlord or a mall or whatever closes stores that we don't have to pay rent versus we choose to close stores so we don't -- so we have to eat that and pay the rent? Are those issues from a legal perspective still unclear?

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Harvey S. Kanter, Destination XL Group, Inc. - President, CEO & Director [3]

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We are not in any malls, so to speak. So I think the question was relevant to the malls?

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Timothy Stabosz;Stabosz Asset Management, [4]

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Well, partly, I guess, I'm showing my ignorance on that part, but to the degree we elected to close our stores, does that make us -- I guess, we're still on hook for the rent by definition?

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Harvey S. Kanter, Destination XL Group, Inc. - President, CEO & Director [5]

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I believe that, that's a question that, obviously, is a work in progress on many levels for most retailers at this point in the entire United States.

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Timothy Stabosz;Stabosz Asset Management, [6]

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Are there any jurisdictions across the United States where the localities or the states ordered us to close our stores or have our closings been elective?

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Harvey S. Kanter, Destination XL Group, Inc. - President, CEO & Director [7]

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Yes. There's 4 locations where there has been shelter in place, mandatory closings, San Francisco, Reno, New Jersey and Philadelphia.

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Timothy Stabosz;Stabosz Asset Management, [8]

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Okay. Do you -- I appreciate the comments about the bank support. Can you summarize for us? It matters related to covenants in this call.

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Peter H. Stratton, Destination XL Group, Inc. - Executive VP, CFO & Treasurer [9]

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Sure. This is Peter. So as Harvey mentioned, we've got $48.5 million of excess availability. The biggest covenant that we have is we have to maintain a minimum level of excess availability, which is defined in our credit facility as 12.5% of our borrowing base. So that's really the only one that we're focused on.

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Timothy Stabosz;Stabosz Asset Management, [10]

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And this is why both capital expenditures and inventory management, as you discussed in the call, are a key part of adhering to that?

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Peter H. Stratton, Destination XL Group, Inc. - Executive VP, CFO & Treasurer [11]

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Yes, exactly. We're just doing everything that we can to manage the cash outflow of the business so that we can preserve as much of that availability as we can.

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Timothy Stabosz;Stabosz Asset Management, [12]

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And then finally, the insiders are buying stock at $1.15 or $1.20 a couple of months ago, times have changed. I hear you say that you're going to essentially fight for -- to control your destiny and protect the shareholders, obviously. Does the -- will the insider buying window open normally after whatever it is 48 to 72 hours? I'm not sure what it is for our company. I am a shareholder, by the way, myself.

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Peter H. Stratton, Destination XL Group, Inc. - Executive VP, CFO & Treasurer [13]

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So yes, you're correct. We -- all of our insiders have been in blackout, but the window will open after we have released all of our information.

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Harvey S. Kanter, Destination XL Group, Inc. - President, CEO & Director [14]

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After close of trading on Friday.

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Peter H. Stratton, Destination XL Group, Inc. - Executive VP, CFO & Treasurer [15]

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After close of trading on Friday.

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Timothy Stabosz;Stabosz Asset Management, [16]

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Okay. That's all I think I have. Best of luck, and congratulations on the successes. It's most regrettable that we have to have noise here for a while before we can see your strategies, the effects of them. But I have confidence that you're dealing with this in the most aggressive fashion possible. So thank you.

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Harvey S. Kanter, Destination XL Group, Inc. - President, CEO & Director [17]

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Thank you.

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Operator [18]

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Thank you. I'm showing no additional questions in the queue at this time. I'd like to turn it back over to management for any closing remarks.

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Harvey S. Kanter, Destination XL Group, Inc. - President, CEO & Director [19]

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Our only closing thoughts are for the entire globe with respect to COVID-19 and hopefully, speedy recovery from this challenge. And with that, we'd like to say thank you and carry on.

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Operator [20]

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Ladies and gentlemen, this concludes today's conference call. Thank you for your participation. You may now disconnect. Everyone, be safe.