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Edited Transcript of DXLG earnings conference call or presentation 22-Nov-19 2:00pm GMT

Q3 2019 Destination XL Group Inc Earnings Call

CANTON Dec 1, 2019 (Thomson StreetEvents) -- Edited Transcript of Destination XL Group Inc earnings conference call or presentation Friday, November 22, 2019 at 2:00:00pm 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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* Bernard Sosnick

Madison Global Partners, LLC, Research Division - Retail Analyst

* Christopher Walter Krueger

Lake Street Capital Markets, LLC, Research Division - Senior Research Analyst

* Eric Martin Beder

Small Cap Consumer Research, LLC - CEO & Consumer Analyst

* Roger L. Feldman

West Creek Capital, Inc. - Principal

* Nitza McKee

ICR, LLC - Senior Associate

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Presentation

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Operator [1]

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Good day, ladies and gentlemen, and welcome to the Q3 2019 Destination XL Group Earnings Conference Call. (Operator Instructions)

I would now like to introduce your host for today's conference call, Nitza McKee, you may begin.

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

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Thank you, Kevin, and good morning, everyone. Thank you for joining us on Destination XL Group's Third Quarter 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 Investors 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 comparable sales growth, marketing efforts, the wholesale segment and free cash flow. 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 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, and good morning to you all. Let me begin today's call with a strong message to all of our stakeholders. As I've said to each of you on each earnings call since joining the company, I believe DXL's opportunity is tremendous. The addressable market for big and tall men's apparel and accessories is considerable, and we have work yet to do. After a little over 7 months in my role as CEO of DXL, I am as enthusiastic today as when I arrived. As we transform DXL and leverage our history, we are actively pivoting our management team and strategy. We are rebuilding a management team that is laser-focused on engaging consumers through more digitally centric means and engaging them in this way across all channels.

We are striving to create a memorable experience with big and tall consumers and market this experience on a scale that no one else in the specialty retail space can. We are working hard to bring this potential into reality. That being said, the view ahead looks far different than the view behind, so please bear with me.

Before I touch on our results for the third quarter, I want to spend some greater time talking about the specific marketing plans we have to take our business to the level I believe is possible. As we've discussed since my earnings -- first earnings call, our core business objective remains to drive repeat and new to file customer traffic to both our stores and digital channels.

As we have said, we are redefining and rebuilding our marketing engine, which we collectively define as a combination of people, process and tools. We have been working to put the building blocks in place, the people, the process and the tools to drive into a successful 2020 and beyond. We have made meaningful improvements in each of these areas. But while we would typically have evolved the organization first, the reality is we have a great team in marketing associates, but we have made greater progress in tools and process than evolving the core skills we need in marketing leadership.

In Q3, and as we look forward, we have had some successes, identified further opportunities and experienced learnings to inform 2020's plan and execution. While we have made some progress over the past few months, specifically around the tools and more specifically around the development of our new CRM system, there is work yet ahead around people and process. We are very early in delivering any meaningful changes because rebuilding our marketing engine starts with leadership. To that end, we have been working to restructure our marketing organization, hire the necessary skill set and align our resources to accomplish the work yet at hand.

Over the past 4 months, we have evolved 3/4 of our marketing leadership to ensure we have the right skills required in this journey. While we have made progress in the interim, it has ebbed and flowed. You might even say it has been 2 steps forward and 1 step back, and our progress in the second and third quarters has been slower than I had hoped for.

With that said, I do feel we've made progress. I am very pleased to announce that on October 29, we hired a new Chief Marketing Officer. Erica Thompson is a digital native and comes to DXL with a wealth of experience spanning digital marketing strategies and campaigns, development and management of customer loyalty programs, research and analytics and so much more around the consumer. Erica is a 25-year marketing veteran, with proven leadership skills. She's previously held senior leadership marketing roles at Stride Rite, PetSmart, New York & Company and the Home Shopping Network. In addition, today, we announced the hiring of Ujjwal Dhoot as our Chief Digital Officer. Ujjwal will drive our overall digital initiatives across the business and across channels to the levels that we think are attainable.

As is well documented today, some 60% to 70% of consumers typically start searching online before they set foot in a store. Ujjwal comes to us with over 15 years of total digital immersion and has spent time with both pure-play retailers and omni-channel retailers.

Now before I circle back to our strategy, I do want to spend a little time in the weeds, so to speak. I want to give you a better sense of the real tactical work we have been doing and the actionable plans and quick fixes for the holiday season we have in place while we developed a more comprehensive action plan for 2020 and beyond.

I want you to really understand the blocking and tackling elements that I have mentioned before. These elements are required to be in place if we are to achieve the strategic intent to which I have referred to so often and with such great commitment. And so now a second, bear with me, if you will.

Here it goes. We increased the loyalty program emphasis, which delivered positive results. The greatest impact, which was only seen in October when greater earned certificate issuance resulted in increased purchases. We achieved continuous gradual improvement in customer count. This growth is attributed to a more efficient media mix approach, CRM outreach and the beginnings of an improving digital experience. We have begun using Salesforce's platforms, advanced capabilities in AI to collect data and in 2020 -- in building the 2020 plan to leverage through send time optimization for email. We enhanced digital marketing channel performance and developed a new strategic relationship that has created improved leading indicators in our performance.

In September, DXL switched digital marketing agencies, paid digital performance by channel delivered meaningful improvement in Q3 and that momentum has carried into November. We will monitor and optimize across all channels, with spending shifting fluidly based on channel performance and opportunities during Q4. Since the change, paid digital performance metrics have been meaningfully accelerating, which needs to be further scaled in Q4 and beyond into 2020. We have made a number of SEO-focused improvements. We've revised the top 100 pages on our site and all category page titles. We upgraded crawlability through updated product schema and added SEO metadata. We have begun to gain traction with the preliminary results in October for organic traffic, organic revenue and unique landing page views upside.

We executed website and user interface enhancements. These user interface enhancements launched in Q3 with the drill -- goal of driving increases in Q4 conversion. We refined site categorization to focus on the customer and SEO-friendly taxonomy. We added new product bundling capabilities, specifically in suiting of clothing to drive selection across a collection and improve the average ticket. We enhanced mobile navigation by improving menu functionality. Now the big and tall menu is senior-friendly on a mobile device. We simplified the cart checkout experience by removing links from the checkout process to focus on keeping the customer in the conversion queue to the finish. We enhanced site speed for a better customer experience. We optimized site code, images and device types to deliver a faster full site experience. We reduced the critical purchase path flow process to decrease load times. And we are leveraging marketing relationships to drive increased opportunities for holiday programs, the biggest being a rewards program with American Express we launched only on 11/20.

I know quite a bit. And normally, I would, for sure, not take you through this level of detail. I've done this for only one reason and that's because it's important. And my hope is it will give you a greater sense of what blocking and tackling means to informing the strategic direction we have defined.

Now let me take you briefly through our third quarter results. Following that, I will provide an update on our vision and strategic initiatives. And from there, I'll pass it to Peter for a more in-depth discussion of our financials. Our third quarter results were below expectations, but I am pleased to report that comparable sales were positive for the third quarter at 20 bps. Our results were hampered by store traffic, but did not improve as the -- but did improve as the quarter progressed. In fact, our comp sales by month for stores and direct combined in August were minus 2.3%, improved to plus 0.2% in September and closed out October at plus 2.5%. In our direct channel, we were pleased to see solid double-digit percentage increase in site traffic, resulting in mid-single-digit growth in direct sales results, with accelerated growth in September and October.

As I mentioned on the Q2 call, we are aggressively testing different strategies with promotion, loyalty and advertising to spend -- to learn more about how we can influence buying behavior. We are testing, learning, revising and optimizing and then doing it all over again.

This approach has resulted in some nice gains in site traffic, much of which we can attribute to our digital ad spend, including affiliate paid search and e-mail marketing strategies. There is more work ahead of us to refine our strategies, but we view the direct channel growth as a clear indicator that there are big and tall guys out there who have yet to discover the unique and memorable experience DXL has to offer.

This particular area is right in Erica's wheelhouse. And we believe she will be able to offer with Ujjwal an even greater level of insight into how we test and measure our digital practice. I expect this is an area we will continue to evolve as we move into -- move forward in Q4 and into fiscal 2020.

Digging a little deeper into our sales performance. Although store traffic was down, we registered favorable growth in shopper conversion due to the outstanding experience our store associates deliver every day in the stores. Improvements in conversion largely offset a slight contraction in the average order value. The average spend per transaction was primarily attributed to a more aggressive posture towards promotions, which resulted in higher markdowns.

We spent a good deal of the third quarter experimenting with deeper discounts in coupons and loyalty certificates. We also experimented with store-wide promotion, not coupon based to assess whether this tactic could be a meaningful traffic driver.

In the past, we have run a mix of promotional events where some were store only, some were web only and some were omni-channel. Throughout the third quarter, we tested selected promotional events as omni-channel, which had been previously targeted either to only store or web, not being very customer-friendly. The bottom line is that part of the decline in gross margin for the quarter, which I will talk about in a minute, was self-inflicted as the elevated discounting drove higher markdowns, but did not generate the level of increased traffic we were hoping to realize.

For competitive reasons, we will not provide specific details related to the promotional testing, but we've learned a lot about which events work best and which did not across both our brick-and-mortar and digital channels.

Back to our sales for just a moment. Our wholesale division reached $2.9 million in sales for the third quarter, and we continue to see a nice runway for more growth. For the third quarter, the majority of sales were the result of orders placed by Amazon for their Amazon Essentials business. We continue to feel great about the momentum in our wholesale business, and we are making excellent progress on the initiatives to build our wholesale presence with other retailers while also maintaining strong financial disciplines built around the plan we have discussed previously.

Moving further down the P&L. Our third quarter gross margin was lower than we planned due to 4 primary reasons. First, as I already mentioned, we experimented with a number of different promotions in an attempt to drive more store traffic. What we discovered is that there is, without question, a highly promotional customer who shops with us regularly. We needed to do a better job identifying this customer and speaking to them clearly about how we can get the most value -- he can get the most value from our assortment. Second, we saw a higher penetration of clearance selling this quarter as compared to the third quarter of last year. Much of the increased clearance penetration is due to seller -- slower sell-throughs and weak sales in the first quarters of the year. Our merchandise planning and allocation teams have done a great job at managing the assortment despite the sales -- soft sales environment, and we are confident that we will finish the year with less inventory than we had a year ago. Third, we've performed an inventory diagnostic in the third quarter to better understand which product is not turning sufficiently and tying up our working capital. Inventory is our single largest working asset, and we have analyzed the business and determined that we should be more aggressive in addressing aged product.

Peter will talk more about the impact of this change in the quarterly results, but as we position ourselves for the future, this was an important and prudent decision.

And finally, our growing wholesale division. The wholesale business has naturally lower margins than our retail business. As we continue to penetrate deeper into the wholesale business revenue stream, we will see a shift in the consolidated gross margin rate.

Next, SG&A. SG&A expense for the quarter was also higher than we planned, primarily due to unplanned corporate severance as we further evolve the organization where it made sense, a shift in marketing costs from the fourth quarter to third quarter to support the ongoing testing and an increase in information technology costs as we prepared to launch a new order management system.

In Q3, as we noted, we took measures to further adjust -- address SG&A expense in the organization, and we eliminated the position of Chief Operating Officer.

Factoring in the lower gross margin results and expense deleverage, our third quarter adjusted EBITDA came in at $1.7 million, below last year's third quarter adjusted EBITDA of $6.6 million. Let me be very clear. These results are driven by looking backward at elements I have just spoken of. They are not results we feel proud about, and we are working hard to create the sales inflection in the business we know is possible and drive future financial returns and shareholder returns.

We are rebuilding parts of our infrastructure and our operational foundation by investing in people, in process and tools, which we know are critical to our success. It takes time and resources to accomplish the level of transformation that I believe is required. To a certain degree, we are taking a step backwards to invest in a foundation that is required to execute our vision. There are several elements of our business which are performing well, others are making progress and others that need to continue to be developed. But our vision is clear, and we believe the path forward must be grounded in our -- growing our customer file.

Our customer-first orientation does not change. The opportunity remains in generating incremental traffic, growing conversion and ultimately driving repeat business. The essence of our initiatives remain fully committed to enabling consumers to purchase our products and services where they want, how they want and when they want through whatever channel they need to obtain products. Knowing this, we know it always starts digitally in today's environment.

The foundation of our customer-first orientation is anchored by 4 major initiatives, all beginning from a digital standpoint, to engage with consumers and customers alike in more meaningful and personalized ways. I started talking about these 4 initiatives last quarter, but they are worth repeating. First, it is leveraging our CRM customer relationship management; second, it is defining our working marketing planning in detail; third, it is leveraging our digital platforms; and fourth, it is building the wholesale business unit.

Let me begin with a quick update on our first initiative, which is the development of our customer relationship management practice. CRM really refers to principles, practices and guidelines that an organization follows when interacting with its customers. It is not just a system implementation. From the organization's point of view, this entire relationship encompasses direct interactions with customers, such as sales and service-related processes, forecasting and analysis of customer trends, insights and behaviors. Ultimately, CRM serves to enhance the customer's overall experience with DXL. Our new CRM system now allows us to segment our customer file and personalizing our messaging far better than we have in the past.

Segmenting our customer file and speaking in a more personalized way remains a very critical, important and rich opportunity, but I want to be clear that we are in the early innings of strategizing and capitalizing on this opportunity. Importantly, we are building the right team to get us there. As I've noted earlier, we made a number of personnel changes, specifically in our marketing group in an effort to get the right team in place to lead and rebuild our marketing engine. As noted, we hired a Chief Marketing Officer, and today, we announced the hiring of a Chief Digital Officer. And finally, we are actively pursuing a search for a new Vice President, Consumer, who will oversee the CRM. We view CRM not as a system, but a dynamic process that will evolve over time with respect to knowing and better engaging the consumer in the most relevant ways possible. The more we engage, the more we test and learn, the smarter we will get. These organizational leadership changes bring the right core skills to us as we continue to march down the road of transformation.

Our second initiative is how we develop and execute working marketing plans. We recognize there is no silver bullet in marketing media mix, and we believe that utilizing our marketing and promotional dollars across our recipe of media formats done more efficiently and effectively, while also strategically shifting dollars in a test, learn and optimize framework to drive consumer behavior is a critical requirement. Similar to how I described the way we think about CRM, our marketing plans are anchored on a test, read and learn process. We are reading our marketing results on a daily basis, and we are moving our spend around appropriately. This is a dynamic process, which we will refine upon our new leadership as they dig into the data and analytics.

Our third initiative, leveraging digital platforms across e-commerce and online experiences, both in marketing and site experience to drive consumer engagement on their terms. While we have made changes to our website, we have now locked down the site for holiday selling, but our approach to refining the website experience must evolve, and our plan is to go back at it post holiday.

Here again, we are pursuing an iterative approach, test, learn, optimize and do it all over again. We deployed several changes towards the end of the third quarter, which include overhauling our site categorization. So when someone clicks on our website today, our content is now presented in a more concise manner with less clutter. We've also made our checkout process easier to navigate and our response times on our website performance have improved. Simple and frictionless is where it's all at.

As the fourth initiative, our wholesale business plan, we've been busy further in development of this wholesale business, which today is largely Amazon. In that -- in the development process, we are pursuing additional wholesale relations with a select few retailers. We have made great progress. We have made great progress to diversing our supply chain and building our wholesale infrastructure. We've negotiated effectively with developing new logistics and manufacturing agreements. We have reduced our lead times and made progress in driving speed to market for replenishment. And lastly, we've been able to leverage our existing technology and systems to limit our capital investment as we build new revenue streams with new accounts.

Wholesale is moving. And as much as we expect, as we look forward to updating you on the progress on our business development as new accounts develop and when the time is appropriate. It is important to remember that the transformation of our company will not be driven in any one channel or any unique customer segment. It requires a series of moves across marketing, a series of moves across channels and across customer segments to drive the momentum we are looking for and to get back on top.

Now with all that being said, we remain a unique retailer with an incredibly compelling position. We offer incredible product, breadth and assortment that is uniquely designed for the big and tall customer. Our assortments span both branded designer and private label goods. We provide a memorable experience like nobody else as appropriate for a store fleet of 246 anchor and outlet locations. We are not leaving any stone unturned as we enter the holidays period with momentum, and we are optimistic about our strategic investments and in taking advantage of the unique opportunity to drive growth and customer acquisition over time and well in throughout 2020.

We believe the investments we are making in the short term will support our strategy to drive profitable growth and returns for our stakeholders.

And now I will turn the call over to Peter, who will take us through our financial results. Peter?

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Peter H. Stratton, Destination XL Group, Inc. - Executive VP, CFO & Treasurer [4]

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Thank you, Harvey, and good morning, everyone. I'd like to start this morning with a brief summary of our third quarter results. For the third quarter, comparable sales increased 0.2%, while total sales declined by $500,000 or 0.5% to $106.6 million compared to last year's third quarter. The decrease was primarily due to a decrease in sales from closed stores, other revenue and noncomparable sales. The reduced sales were partially offset by an increase in wholesale revenue of $2.5 million. Within our direct-to-consumer channel, our e-commerce sales improved in the third quarter as we registered mid-single-digit sales growth. On a trailing 12-month basis, our direct-to-consumer channel sales increased to 22.4% of our retail segment as compared to 21.2% in the prior trailing 12 months.

In our store channel, we continue to experience weaker traffic throughout the quarter, particularly in August, but we did see consistent improvements in conversion all quarter long.

Dollars per transaction has been slightly negative for the quarter, which we attribute to 2 factors. First, as Harvey discussed, we were more promotional as we tried different tactics to revitalize store traffic. Second, we entered the quarter with a higher level of clearance goods, which also negatively impacted dollars per transaction.

Looking ahead, we are encouraged by the early reads we are seeing in the business in November, particularly in our cold weather categories, as the recent cold snap has had a positive effect on our business. Keep in mind, however, we are only a couple of weeks into the fourth quarter. And this year, there are unfavorable shifts in the holiday calendar.

Gross margin for the third quarter, inclusive of occupancy costs, was 41.1% compared to 44% in the third quarter last year. The 290 basis point decrease was due to 310 basis points of merchandise margin contraction, partially offset by 20 basis points of occupancy cost leverage. Of the 310 basis point decrease in merchandise margin, 110 basis points was due to higher clearance selling and promotional activity, 80 basis points for the write-down of certain aged inventory and 120 basis points was due to the growth in wholesale, which carries lower margins than our retail business.

Before we move on, I would like to elaborate on our clearance inventory position and the inventory charge we took in the third quarter. We've spoken on prior earnings calls about the continued casualization of the workplace. Our tailored clothing business has struggled this year and last, as our customers' buying preferences shift more and more to sportswear. This shift, coupled with our decision to close all of our Rochester stores which have a higher mix of tailored clothing, led us to a decision in the third quarter to reexamine our inventory aging policies.

We performed a diagnostic in the third quarter to look very carefully at our inventory aging and the expected sell-throughs of our clearance merchandise. Not surprisingly, much of our clearance assortment is comprised of dress pants, dress shirts, suits and blazers. As a result, the amount of clearance that we have in our stores today is indicative of the market shift away from more formal business attire.

For the third quarter, we elected to take a $900,000 noncash charge to gross margin to address all of our aged inventory concerns. This charge represents 36,000 units of aged inventory that will be marked out of stock in the fourth quarter.

To give you some sense of scale, we have over 6 million units of inventory at just over $120 million at cost on our selling floors and in our distribution center at the end of the third quarter. This write-off represents approximately 0.6 of our units and 0.8 of our inventory costs. We feel this is a prudent decision that will further our efforts to maintain a clean and healthy inventory position.

Now I'd like to move on to our third quarter SG&A expense, which as a rate of sales, were 39.5% compared to 37.8% in last year's third quarter. On a dollar basis, SG&A increased by $1.7 million, primarily due to increases in corporate severance of $500,000, $300,000 in marketing costs, $400,000 in information technology and an increase of $200,000 in expenses related to our wholesale segment.

As we have discussed on the prior 2 calls, as a result of adopting a new lease accounting standard, we are no longer receiving a $400,000 quarterly benefit to SG&A expense from amortizing a deferred gain related to the 2006 sale-leaseback transaction involving our corporate headquarters. Due to the new lease accounting standard, we were required to recognize the remaining deferred gain of $10.3 million in the first quarter of 2019 as a direct adjustment to retained earnings.

I also want to make a few comments about how we spend our SG&A dollars. We view SG&A through 2 primary cost centers, customer-facing costs, which include store payroll, marketing and other store operating costs, represented 22% of sales in the third quarter of fiscal 2019 compared to 21.6% in the third quarter last year. Marketing costs for the quarter were 2.7% of sales compared to 2.4% in the third quarter of 2018. On an annual basis, management targets marketing expenses to be at approximately 5% of sales.

Corporate support costs, which include the distribution center and corporate overhead costs, represented 17.5% of sales in the third quarter of fiscal 2019 compared to 16.2% last year.

Now I'd like to spend a few minutes talking about the wind-down of our London Rochester operation. In the third quarter, the company incurred a charge of approximately $1.7 million related to the closure of the London store. Included in this charge was an $800,000 noncash expense related to the recognition of the accumulated foreign currency translation adjustment. The remainder of the charge worth approximately $900,000 was primarily related to lease termination and inventory liquidation costs.

As we've previously disclosed, our London Rochester store has had declining top line volume over the past several years. At the same time, our operating costs continue to escalate, particularly our occupancy costs. We reached the decision over a year ago to close our Rochester store portfolio in 2019 and turn our focus to the DXL brand. London Rochester presented a unique challenge for us. Unlike our U.S. store portfolio, our London customer did not have a local DXL alternative to shop. Unfortunately, the 4-wall economics of the store were just not sustainable. In fiscal 2018, the store's 4-wall cash flow was approximately breakeven. In fiscal 2019, we expected the store to operate at a loss. In fiscal 2020, due to expected market rent escalations, we expected that the store would operate at a loss approaching $500,000.

Our decision to incur the $900,000 cash charge this quarter has a cost avoidance payback of less than 2 years. Again, while this charge is a sizable drag on our Q3 results, we believe it was in the company's best interest to proceed in this manner.

We expect to close our New York Rochester and Beverly Hills Rochester stores in the fourth quarter. We have seen customer migration over time to our DXL stores in these markets, and we are actively engaging in strategies to migrate even more customers to DXL. The London Rochester store had an unusually high exit cost due to the specifics of the lease, U.K. law and other issues involved in closing a foreign entity. These circumstances do not apply to closing the Rochester stores in New York City or Beverly Hills.

Our adjusted EBITDA for the third quarter was $1.7 million compared to $6.6 million in the third quarter of 2018. The decrease in adjusted EBITDA was primarily due to a lower gross margin and higher SG&A expenses for the period. The GAAP net loss for the third quarter was $7.2 million or $0.14 per diluted share as compared to a net loss of $2 million or $0.04 per diluted share in the prior year's third quarter.

On a non-GAAP basis, adjusted net loss for the third quarter of fiscal 2019 was $0.08 compared to an adjusted net loss of $0.02 per diluted share for the third quarter of fiscal 2018.

Now let me turn to our balance sheet and cash flow. Cash flow from operations for the first 9 months of fiscal 2019 was negative $14.4 million compared to negative $1.3 million for the first 9 months of fiscal 2018. The decrease in cash flow from operations is primarily due to lower adjusted EBITDA in the first 3 quarters of fiscal 2019 as compared to last year and the timing of working capital, primarily accounts payable and accrued expenses and incentive payments earned in fiscal 2018 but paid out in fiscal 2019.

Our inventory balance increased by $3.8 million or 3.3% compared to the third quarter of last year. The increase in inventory was primarily due to a wholesale inventory as well as an increase in style presentation levels in our better and best collections as we position our assortments to capitalize on the growing demand for branded collections. We ended the quarter in a clean inventory position with clearance inventory down 10% -- to 10% of total inventory compared to 11.3% at the end of last year's third quarter.

Capital expenditures for the first 3 quarters of fiscal 2019 were $11 million compared to $9.8 million last year. The increase in capital expenditures on a year-to-date basis was related to higher IT infrastructure projects, including our order management system upgrade as well as our new CRM system.

On the real estate side, we have remodeled and rebranded 12 casual male XL retail and 2 casual male XL outlet stores to 11 DXL retail stores and 3 DXL outlet stores. In addition to our store rebranding efforts, year-to-date, we have closed 4 casual male XL stores, 2 of which closed in connection with the opening of DXL stores, and we closed 1 DXL outlet store and 3 Rochester Clothing stores.

Moving back to the balance sheet. At the end of the quarter, total debt was $83 million, which includes borrowings under our revolving credit facility of $68.2 million and $14.8 million outstanding under our FILO facility, net of unamortized debt issuance costs. We ended the third quarter with excess availability of $40.6 million under our credit facility. This compares to $72 million of total debt a year ago, with excess availability of $45.4 million.

In closing, we expect comparable sales in our omni-channel retail business to be flat for the full year and free cash flow to be approximately breakeven. This would imply a low single-digit comp increase in the fourth quarter, which we believe is achievable.

I'd now like to turn the call back over to Harvey for some final thoughts.

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

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Thanks, Peter. This has been a unique and challenging year for DXL. We have undergone tremendous organizational change, not only at the senior executive level, where 3 of our 5 named executive officers from last year are no longer with the company, but we have also experienced turnover and changes in rules and responsibilities at our mid-management level.

We've laid out a plan to stimulate growth, which we believe will manifest through greater customer counts and increased comp sales. We have made good progress on our wholesale business plan, and we are encouraged for our wholesale prospects in 2020. We believe the opportunity for DXL is immense, and we look forward to completing the foundational changes that we believe are necessary to drive the business to an inflection point.

One last comment must be made as we close out the management comments and begin to take questions. Namely, a big thanks to the DXL team. True transformations are never easy. Change is not easy and the DXL team are dedicated, passionate, hard-working crew and on behalf -- all on behalf of the big and tall consumer. From headquarters to the fulfillment team and stores, their desire and commitment is greatly appreciated by me. Investors often ask me what keeps me up at night. What keeps me up at night is losing a great team. Our people are our greatest asset. Together, we look forward to moving the business as together, as a team, we will, in fact, do that. Many of our associates listen on these calls and to all of you and everyone else a big heartfelt thanks. We would now like to take calls.

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Questions and Answers

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Operator [1]

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

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Eric Martin Beder, Small Cap Consumer Research, LLC - CEO & Consumer Analyst [2]

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I want to talk to you a little about some of the things there. One is seamlessness between the different brands and between online and offline. You talked about kind of synchronizing some of the promotions. Is that -- when you look at it going forward, is that the way to go? Or is there specific customer bases in between that are large enough to justify having different promotions in different segments?

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

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Yes. Eric, it's Harvey. The reality is we believe that the customer has an expectation that they are not going to be limited in any one channel as to what they have available to them. That being said, I don't think there's any -- ever any all or nothing. So we continue to try to understand how to navigate the expectation that you walk into a store and can get the same price online and vice versa. And at the same time, we have found the challenge in doing that across the board. And so it's TBD, unfortunately, not the greatest answer, but part of the test optimize is to understand unique consumer segments and to understand how -- and I'll give you one specific example, we may navigate that uniquely.

So the greatest example is probably our loyalty program, where we have been able to offer to our loyalty program membership a unique offer that's limited to online and not a full distribution. So where we stubbed our toe was when we did something potentially online-only but to everybody, and then they don't have the expectation that they can walk in a store and get that same event. So again, it's the challenge to navigate, but in the best customer experience, we wouldn't define for the customer how, where and when they shop. They would define that to us.

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Eric Martin Beder, Small Cap Consumer Research, LLC - CEO & Consumer Analyst [4]

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Okay. And I guess then kind of a related question. You've been switching over the casual male stores to Destination XLs with basically maintaining location but changing the goods and the look. What has been the response to that? And is the casual male customer changing in that they're much more -- in terms of demographics and what they're purchasing like but they're just core Destination XL customer come purchases?

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Peter H. Stratton, Destination XL Group, Inc. - Executive VP, CFO & Treasurer [5]

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Sure. So Eric, I'll take that one. It's Peter. We've actually had really nice results from the stores that we have converted over from casual male to DXL in the existing stores. We're going into these stores and giving them a remodel. They're getting some refresh of paint and carpet, but most importantly, they're getting a better assortment. They're getting different inventory, which a lot of times this casual male customer has never seen before. So we're absolutely seeing better comps in these stores. I think he's been responding very well to it. And it's a program that we're going to continue pursuing in 2020.

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Eric Martin Beder, Small Cap Consumer Research, LLC - CEO & Consumer Analyst [6]

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Okay. And finally, I know that -- I know this is somewhat of a journey. And I don't want financial pieces, but what should we be thinking about and looking at going into 2020 and in 2020 as seeing as kind of signpost that things are changing and becoming more how you think they should be?

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

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Well -- and it's Harvey. The ultimate one would be obviously file growth and comps. And the comps, we believe will be driven, first and foremost, online in digital formats and then enhancing the comp performance in stores, which is obviously the lion's share of our revenue today. But you can't -- the challenge is you can't bifurcate that, right? The digital marketing that we're doing today, we firmly believe -- and actually, I would say no, that, that digital marketing transcends the store business. And so driving traffic will happen in stores via digital marketing. And if you can appreciate the organizational changes we've made, our pursuits are clearly oriented towards that. But the markers there will be, obviously, comp and customer file.

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Operator [8]

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Our next question comes from Chris Krueger with Lake Street Capital.

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Christopher Walter Krueger, Lake Street Capital Markets, LLC, Research Division - Senior Research Analyst [9]

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Looking at your wholesale efforts, I think you said in the call that Amazon is the majority of sales. And I don't know how much detail you can give, but I was curious, as the quarters go by, how many SKUs you have with Amazon? Is that growing? How should we look at that?

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Harvey S. Kanter, Destination XL Group, Inc. - President, CEO & Director [10]

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I think you should look at it that our pursuits are to grow the business. The SKU count, you can look at on Amazon and you can actually look at that as it exists today. Our expectation -- I'm not going to talk about Amazon specifically as much as I'll talk overall. We have great expectations for wholesale. We would expect that with the success with Amazon, we should be able to grow that business, and it evolves further. And then we are looking, obviously, which we've not just alluded to, but specifically, talked about our biz dev is to expand the account structure. And so when you expand the account structure, we're not, if you look at Amazon, taking to them product, we are producing for them what is their best-selling product in the extended sizes for big and tall. And we're looking to take that format to other retailers.

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Christopher Walter Krueger, Lake Street Capital Markets, LLC, Research Division - Senior Research Analyst [11]

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Any particular products that are -- that stand out at Amazon as far as selling well?

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Harvey S. Kanter, Destination XL Group, Inc. - President, CEO & Director [12]

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It's really the core basics. When the day's done, Amazon might not be the most fashion-forward house and really the core basics were what we're driving.

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Christopher Walter Krueger, Lake Street Capital Markets, LLC, Research Division - Senior Research Analyst [13]

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Got it. All right. I know I've asked this before, but just so everyone's clear. On the fourth quarter, is it apples-to-apples on the number of operating weeks this year versus last year?

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Peter H. Stratton, Destination XL Group, Inc. - Executive VP, CFO & Treasurer [14]

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Yes, it is apples-to-apples in the number of weeks, although we have that shift in the holiday that everyone in retail is experiencing. But for a total number of weeks, it is the same this year to last year.

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Christopher Walter Krueger, Lake Street Capital Markets, LLC, Research Division - Senior Research Analyst [15]

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Okay. And then your gross margin in third quarter, you went over all the details as far as what impacted that. Is one of the lower numbers we've seen in a while. In the fourth quarter, would you expect that to improve sequentially or year-over-year?

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Peter H. Stratton, Destination XL Group, Inc. - Executive VP, CFO & Treasurer [16]

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So the point I guess I would make about that is I detailed out that there's -- there were 3 different components to why gross margin is down in the third quarter from last year. The one that we're watching most carefully is the 110 basis points due to the promotions and the clearance, which we've kind of talked about at length. The other, there was 80 basis points that was due to the inventory write-off that we took, that was a onetime charge that -- we don't expect that to be recurring. And then we have the natural shift in sales from retail to wholesale, as we grow more wholesale, that has a lower natural margin than our retail business. So that will continue to next year. So we will continue to see that erosion, but we won't see the inventory write-off again.

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Operator [17]

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(Operator Instructions) Our next question comes from Roger Feldman with West Creek Capital.

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Roger L. Feldman, West Creek Capital, Inc. - Principal [18]

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I wonder if you guys could talk about the urgency toward profitability. I know that's more pedestrian. But when you make your business decisions, where does that rank? And if you could talk a little bit about the wholesale business. And how -- when we start making money from that? And is it possible to make money from that?

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

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Which one? I'll talk about -- the number one thing -- Peter and I'll share this. The number one thing that is our orientation is growth. Without growth, we're just managing a business. And we're driving growth. That -- our expectation is in 2020 to drive comp store growth and file growth and ultimately, growth will leverage against the P&L and drive EBITDA and profitability.

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Peter H. Stratton, Destination XL Group, Inc. - Executive VP, CFO & Treasurer [20]

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Yes. I would say that we're continuing to address the cost structure as much as we can. Again, this has been a very unique year for us with all of the personnel changes that are going on. We did have an elimination of a pretty significant role in the third quarter. We've got new positions that are starting, but the cost orientation is something that we're continuing to be focused on.

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Roger L. Feldman, West Creek Capital, Inc. - Principal [21]

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So just so I understand, how much growth do we need in order to be able to make money? And how much tolerance is there for -- I mean how much money -- how much flexibility do you feel you have in terms of, call it, investment or losing money on the way to the positive outcome?

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Peter H. Stratton, Destination XL Group, Inc. - Executive VP, CFO & Treasurer [22]

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Yes. So I think it's -- Harvey has been pretty clear that we need to grow. And that's what the majority of the comments that we talked about in our prepared remarks was that we need to grow. So I think we do have some tolerance for the fact that we're going backwards a bit before we can go forward. But I would certainly expect that in the near term, we're going to start to see some progress.

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Harvey S. Kanter, Destination XL Group, Inc. - President, CEO & Director [23]

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Roger, one thing -- it is Harvey. One thing we've been really transparent about and -- good, better and different, we've been very transparent about this. Our belief is that we need to grow, and we will bring to market a plan and share with the investor base a plan. The fact of the matter is, and I talked about it very directly, we're behind where I thought we would be. We expected to be further along in our marketing initiatives and to be able to articulate -- to go-to-market and articulate, for lack of better ways, at a nonroad show road show. We're behind in our expectations to answer some of your questions definitively will be in fiscal 2020, where the learning we have from Q3 and Q4 as we inform the 2020 plan, we'll inform expectations. And we were -- to be quite honest, we're not trying to be opaque. Its -- there's a fair amount of learning that will come out of Q4 with the adjustments we made coming out of Q3, and we have acknowledged, and we've talked about it pretty directly, a change in sales August to September, September to October, and we've acknowledged there is some momentum in November. The -- so the little bit of the roll of the dice that I think everyone in retail is facing is the compression of the calendar and what impact that ultimately is going to have.

Barring that conversation, our expectation is normalized improvement on the sales curve will allow us to feel very strongly about some of the direction and tactics we're taking that add up to the strategy. And in so doing, we would then be able to come to market with a plan that we would discuss really directly, as I said, and we're just behind in that time line because of some of the work we've done around the organization and rebuilding as opposed to the traction we've been able to get in Q2 and Q3.

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Roger L. Feldman, West Creek Capital, Inc. - Principal [24]

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So I guess this is -- then this -- you don't have respond to this, I guess I understand all that. But just from an investor's perspective, it would be nice to understand. And in my own experience with turnarounds, is there -- there is some more easily explained financial discipline around where things are. And I guess I would love to understand at least what the goals are. When do you think you become profitable? What is the -- what are the Board's expectations for profitability? So just something -- I mean that would make me happy. I may be alone in that on the call.

So as a second question. We're a pretty small company and not wildly profitable. So what are we -- what are we fighting for in wholesale? And when does that start to make money? And given all of the balls in the air, is that a worthwhile resource allocation today?

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Harvey S. Kanter, Destination XL Group, Inc. - President, CEO & Director [25]

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Yes. So it's Harvey again. So what we've articulated, I think at this point, moderately broadly is that we believe that there is a larger addressable market out there, many more customers that are not the core DXL customer. And what we don't want to do is retrade with the core customer and get more out of every one of them. We want to expand the addressable market vis-à-vis what we're bringing to market. The wholesale business for us demonstrates an ability to go after what I would define as the less affluent customer base with a different product mix and to tap into a much broader addressable market. And in so doing, if you look at the Amazon, the core business that we're doing with Amazon, as we've talked about, it's a core product. It's khakis, it's knits, it's T-shirts, it's Polos, and it's selling quite well.

If you actually look at the ratings on Amazon, it's about a 4.4. I think it's 4.43 and that is a remarkable result in 7-short months. And so we feel really good about both the response of the consumer in product that is not the same as product we're selling at DXL. And our belief is that -- and you can probably imagine there are a number of other scale retailers that have a mix that is more similar to Amazon and similar to what I would define as a more curated upscale, I would like to almost aspirationally refer to a Nordstrom-esque mix in our big and tall offer in terms of service and quality and curation that is less a general merchant and more a specialty store. And so we see a bright line between what we're bringing to the wholesale business and the opportunity which we haven't talked about publicly, but we see as material and meaningful and far greater than what you see on the page today, given the biz dev work we hope to bring to market, and then we'll talk to when we get that done.

And we see it distinctly different than DXL to the point where, as you said, allocation of resources. Today, we're struggling through appropriately giving enough expense SG&A to that business to get it moving, but very cautiously monitoring the amount of that investment we make, it's not getting the cart in front of the horse, so to speak. So again, as transparency -- we can't talk to it, I'm trying to address your comments, I think they're very good. The questions are valid. We're just not at a point that we can be quite as articulate. It's biz dev that work has to be done.

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Roger L. Feldman, West Creek Capital, Inc. - Principal [26]

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Well, I guess I will leave you -- I'll make a comment then. I just wonder -- I mean I imagine that there is great potential there, but it just seems like you have -- the successful turnarounds that I've been an observer to, you tend to narrow the focus and do the things that have near-term impact. And this sounds like a -- I mean I think you've got -- I should say I'm incredibly supportive. I go in the stores, I think you guys are doing a great job. The websites wonderful. The pictures that you have on there are just amazing. The engagement -- I mean I think the whole thing is terrific. I just wonder if you wouldn't -- if we wouldn't be better off narrowing the focus until you start to make the core business profitable?

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Harvey S. Kanter, Destination XL Group, Inc. - President, CEO & Director [27]

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Yes, Roger, I might take one more crack at this because there is that one other perspective, I'm absolutely happy to share. You're actually talking in a way that is appropriate. But in reality, you might not realize the way we think about wholesale from a supply chain. We believe that our supply chain ownership and IP is incredibly meaningful, and our ability to engage, what we would call big and tall factories that are exclusively big and tall factories, where many of the retailers that we're talking to are actually engaged in factories that are not big and tall specific, and they're struggling to make product. And we believe we have IP around supply chain and spec that is very powerful.

And the brand of DXL, as demonstrated by Amazon, which is Amazon Essentials by DXL has tremendous value. For DXL, specifically, we are using that supply chain knowledge to leverage product with other retailers, but actually, it works in our favor because as we become bigger and bigger as a supply chain expert, we will leverage that scale against our cost of goods sold in addition to growing revenues with others. And so the investment we're making is actually for lack of a better way is doubling down on both the revenue side as well as demonstrating our supply chain leadership that will come back to DXL as cost reductions potentially and really make us that much more powerful and important to the factories we're doing business with.

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Roger L. Feldman, West Creek Capital, Inc. - Principal [28]

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So I should see our gross margins going up.

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Harvey S. Kanter, Destination XL Group, Inc. - President, CEO & Director [29]

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You will. You will in -- and that's not a commitment next quarter, but that is a belief. A very strong belief that you will see leverage by our supply chain leadership.

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Roger L. Feldman, West Creek Capital, Inc. - Principal [30]

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Okay. I wish you guys luck. I would encourage some greater urgency around generating some cash, but I wish you guys luck.

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Operator [31]

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Our next question comes from Bernard Sosnick with Madison Global.

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Bernard Sosnick, Madison Global Partners, LLC, Research Division - Retail Analyst [32]

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You spent a lot of time and effort, getting things straightened with regard to your ability to market in a much more effective way. The hiring process is just falling into place a little bit later than you expected, I assume. But in the meanwhile, there has been the cost of installing the CRM system, the technology related to it. My thought -- my question relates to when can the CRM system become employed to, not necessarily optimal levels, but effective levels? Because it takes time to program the system, to develop data, to support the system, to personalize. All of these things can be done much more effectively with the new system you put in place, but you're not there yet and when might you be there fully?

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Harvey S. Kanter, Destination XL Group, Inc. - President, CEO & Director [33]

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Yes. Well, I think fully is probably a question that would -- I would almost say never. The reality is it's an evolving process, right? The CRM system is a system but the CRM practice is much more global and comprehensive than a system. And so we will continue to use the CRM platform across a number of different elements, the loyalty program, the e-mail interaction, the consumer insights and knowledge, we have analytics. The reality is, I think, by the second half of next year, I believe we'll be at a point where we'll actually see leverage in sales and profitability. And what we've communicated previously on the last earnings call, is by the end of Q1, the system would be primarily executed in terms of the platform. But what we're experiencing now is beginning of learnings. And as we go through the fourth quarter, first quarter into second quarter, those learnings will be incorporated into really the development of a much richer, more profound relationship with our consumers. But you are right. It is a platform that gives us great opportunity to demonstrate whether it's file or repeat or engagement or advocacy, a different level of interaction with consumers that ultimately has to drive profitability on the bottom line and revenue on the top line.

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Operator [34]

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And I'm not showing any further questions at this time.

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Harvey S. Kanter, Destination XL Group, Inc. - President, CEO & Director [35]

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I wish everyone a happy Thanksgiving, safe holidays, and we appreciate your time and energy on the call, and we will talk to you in a short 90 days.

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Operator [36]

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Ladies and gentlemen, this does conclude today's presentation. You may now disconnect and have a wonderful day.