Q3 2019 Earnings Call
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19 destination XL Group earnings Conference call at this time all participants are in listen only mode. Later, we will conduct a question answer session and instructions will follow at that time. If you require offered her sister on the program. Please first carbons you're on your touched on telephone I wouldn't like to be Childress conference calls need somebody can you may begin.
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 Cantor, and our executive Vice President and Chief Financial Officer, Peter strategies. During today's call, we will discuss some non-GAAP metrics to provide enough.
Sure so 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 investors that the XL dotcom for an explanation <unk> reconciliation of such measures. Today's discussion also contains certain forward looking statements concerning the companys.
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 could differ materially from those assumptions mention today due to a variety of factors that affect the company information regarding risk and uncertainties as detailed in the car.
And he's filings with the Securities and Exchange Commission I would now like to turn the call over to our CEO Harvey Cantor Harvey.
Thank you need and good morning to you all.
Let me begin today's call with a strong message to all of our stakeholders as I said to each of each of you want to each earnings call since joining the company I believe de excels 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 seven months in my role as CEO DSL I am as enthusiastic today as when I arrived.
As we transformed itself and leverage our history, we are actively pivoting our management team and strategy.
We're rebuilding a management team that is laser focused on engaging consumers through more digitally centric means.
And engaging this with them in this way across all channels.
We're striving to create a memorable experience with big and tall consumers at market. This experience on a scale that no one else in the specialty retail space cab.
We're 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 touched on a result 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 other stores and digital channels.
As we've said, we are redefining and rebuilding our marketing engine, which we collectively defined as a combination of people processes and tools.
We had 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've made meaningful improvements in each of these areas. So why we would typically have evolved the organization first.
He is we have a great team in marketing associates, but we have meter maid greater progress in tools and process then evolving the core skills, we need in marketing leadership.
In Q3, and as we look forward we've had some successes identified further opportunities and experienced learnings to inform 2020 is planning and execution.
Well, we've 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 to head around people and process.
We're very early in delivering any meaningful changes because rebuilding our marketing engine starts with leadership.
To that and we have been working to restructure our market organization.
For the necessary skill set and align our resources to accomplish the work yet at hand.
Over the past four months, we have evolved three quarters of our marketing leadership to ensure we have the right skills required in this journey.
Well, we have made progress in the interim is Ed and flowed you might even say that's been two steps forward and one step back and our progress in the second and third quarter's has been slower than I had hoped for.
With that said I do feel we've made progress I'm very pleased to announce it on October 29, we heard a new chief marketing Officer, Erica Thompson is a digital need of incomes to de excel with a wealth of experience spending digital marketing strategies and campaigns development and management of customer loyalty programs research.
And analytics and so much more around the consumer.
Erika is a 25 year marketing veteran with proven leaders skips skills. She is previously held senior leadership marketing rules at stride Rite Petsmart, New York in company and the home shopping network.
In addition, today, we announced the hiring of whose won't do as our Chief Digital officer.
It was wall well driver overall digital initiatives across the business at across channels to the levels that we think are attainable.
As is well documented today, some 60% to 70% of consumers typically starts searching online before they set forth in a store.
Well it all comes to us with over 15 years of total digital immersion and it's been talking with both pure play retailers and Omnichannel 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 technical work, we've been doing and the actionable plans and quick fixes for the holiday season, we have in place well, we developed a more comprehensive action plan for 2020 and beyond.
I want you to really understand the blocking and tackling elements that I've mentioned before.
These elements are required to be in place. If we are to read achieved the strategic intent to which I referred to so often it was such a great commitment and so now a second bear with me if you will.
Sure goes we increased the loyalty program emphasis which delivered positive results. The greatest impact. It 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 out rich and the beginnings of an improving digital experience.
We have begun using sales forces platforms advanced capabilities in a high to collect data and in 2020 in building. The 2020 plan to leverage through said time optimization for email.
We enhanced digital marketing channel performance and develop new strategic relationship that has created improved leading indicators in our performance.
In September Dx, they'll switch 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 shipped in fluently based on channel performance an opportunity during Q4 cents.
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 FCO focused improvements we revised the top 100 pages on our site and all category page titles.
We upgraded crawl ability through updated products scheme and added FCO medidata.
We've begun to gain traction with 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 and the answer is launched in Q3 withdrawal goal of driving increases in Q4 conversion.
We refined site categories nation focus on the customer and FCO friendly taxonomy.
We had a new product bundling capabilities, specifically in suiting of clothing to drive selection across the collection and improve the average ticket.
We enhanced mobile navigation by men me by improving menu functionality now the big and tall menu is finger friendly on a mobile device.
We simplified the car checkout experience by removing links from the checkout process to focus on keeping the customer in the conversion Q2 the finish.
We enhance sites speed for a better customer experience, we optimize site code images and devices types to deliver a faster full site experience.
We reduced the critical purchase path flow process to decrease low times, and we are leveraging of 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 more in depth discussion of our financials.
Our third our third quarter results were below expectations, but I am pleased to report the comparable sales were positive for the third quarter at 20 Bips. Our results were hampered by store traffic, but did not but did not improve as the but did improve as the quarter progressed.
In fact, our comp sales by month for stores in direct combined in August were minus two three improved two 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 two learned more about how we can influenced by behavior. We're testing learning revising optimizing and then doing it all over again.
This approach has resulted in some nice gains and site traffic much of which we can attribute to a digital AD spend including affiliate paid search and email marketing strategies.
There is more work ahead of us due to refine their 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 experiences DSL has to offer.
This particular areas right and Eric is wheelhouse, and we believe she will be able to offer with whose wall and even greater levels insight into how we test and measure our digital practice I expect this is an area. We will continue to evolve as we move in to move forward in Q4 and into fiscal 2020.
[noise] 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 everyday in stores improvements in conversion largely offset a slight contraction in the average order value.
The average spend per transaction that 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 I'd promotion not coupon days to assess whether this tactic could be.
Meaningful traffic driver.
In the past we've run a mix of promotional events were somewhere store only some were web only and some were omni channel.
Throughout the third quarter, we tested selected promotional events as Omnichannel, 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 essential business.
We continue to feel great about the momentum in our wholesale business and we're making excellent progress on the initiative to build our wholesale presence with other retailers, while also maintaining strong financial disciplines builds around the plants, we have discussed previously.
Moving further down the TNL, our third quarter gross margin was lower than we planned due to four primary reasons first as already mentioned, we experimented with a number of different promotions in an attempt to drive more store traffic.
Well, we discovered is that there is without question, a highly promotional customer who shops us regularly.
We need to do a better job identifying this customer and speaking to him clearly about how we can get the most value. He can get the most value from our assortment.
Second we saw 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 slip seller slow or sell throughs and weak sales in the first quarters of the year.
Merchandise planning and allocation teams have done a great job at managing the assortment. Despite the sales soft sales environment and we're confident that we finished the year with less inventory that we had a year ago.
Third we performed in inventory diagnostic in the third quarter, two vendor 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 at 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 SGN, a Ics SGN 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 third quarter supporting ongoing testing and an increase in information technology costs as weve repair to launch a new in new order management system.
In Q3, as we noted we took measures to further adjust address SGN expense in the organization and we eliminate the position of Cheech Chief operating officer.
[noise] 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, let me be very clear.
These results are driven by looking backward and elements I am just spoken of they're 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're 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're taking step backwards to invest in the 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 and 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.
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 that 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 four major initiatives all beginning from a digital standpoint to engage with consumers and customers like in more meaningful and personalized way ways.
I started talking about these four initiatives last quarter, but they are worth repeating.
First it is leveraging our CRM customer relationship management.
Second is defining our working marketing plan in detail.
Third is levering <unk>, leveraging our digital platforms and fourth is building the wholesale business unit.
Let me begin with a quick update on our first initiative, which is development over customer relationship management practice.
I am really for is to principles practices and guidelines that an organization follows when interacting with customers. It is not just a system implementation.
On the organizations point of view this entire relationship encompasses direct interactions with customers such as sales and service related processes forecasting an analysis of customer trends insights and behaviors.
Ultimately CRM serves to enhance the customers overall experience with DSL.
Our new CRM system now allows us to segment, our customer file and personalizing, our messaging far better than we have in the past.
Segment, our customer file and speaking to 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 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 chief marketing officer and today, we announced the hiring of achieved digital officer and finally, we are actively pursuing a search for a new.
As of the consumer who will oversee the CRM.
We use 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 engaged the more we test and learn the smarter we will get these organizational leadership changes bring the right course skills to us as we continue to March down the road of transformation.
Our second initiatives is how we develop and execute working marketing plans. We recognize there is no silver bullet and marketing media mix and we believe that utilizing our marketing and promotional dollars across a recipe of media formats 10, 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're 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 initiatives leveraging digital platforms across e-commerce and online experiences both in marketing and site experience to drive consumer engagement on their terms.
Well, we've made changes to our website, we have now locked down the site for holiday selling but our approach to refining the web site experience must evolve and our plan is to go back ended post holiday.
Here again, we are pursuing pursuing an innovative approach test learn optimize and do it all over again.
We deployed several changes doors that in third quarter, which include overhauling our site categorization. So when someone clicks on our website today. Our content has now presented in a more concise matter with less clutter.
We've also made our checkup process easier to navigate and our response times at our website performance of 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've made great progress we've made great progress diversifying our supply.
Hi, Jane 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 and 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 to new accounts developed and when the time as appropriate.
It is there is an important to remember that the transformation of our company will not be driven in any one channel or is any unique customer segments. It requires a series of moves across marketing a series of moves across channels and across customer segments to drive the momentum, we're looking for and to get back on top.
With all that being said, we remain a unique retailer with incredibly compelling position.
We are off rate 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 experiences like nobody else as appropriate for store fleet of 246 anchor and outlet locations.
We're not only be any stone unturned as we entered the holiday period with momentum and we are optimistic about our strategic investments and taking advantage of the unique opportunity to drive growth and customer acquisition overtime and well in throughout 2020.
We believe the investments, we're making 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.
Thank you Harvey and good morning, everyone I'd like to start this morning with a brief summary of our third quarter results.
Third quarter comparable sales increased two tenths of a percent while total sales declined by $500000 or five tenths of a percent 206.6 million compared to last year's third quarter.
The decrease was primarily due to a decrease in sales from closed stores other revenue and non comparable sales.
Reduced sales were partially offset by an increase in wholesale revenue of 2.5 million.
Within our direct to consumer channel, our ecommerce 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 experienced weaker traffic throughout the quarter, particularly in August , but we did see consistent improvements and conversion all quarter long.
Dollars per transaction has been slightly negative for the quarter, which we attribute to two 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're only a couple of weeks into the fourth quarter and this year there unfavorable shifts in the holiday calendar.
Gross margin for the third quarter inclusive of occupancy costs was 41.1 per cent 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 would move before we move on I would like to elaborate on our clearance inventory position in the inventory charge, we took in the third quarter.
We 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 shipped 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, let us to a decision in the third quarter, two reexamined, our inventory aging policies.
We performed a diagnostic in the third quarter to look very carefully at our inventory agent 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 is higher.
For the third quarter, we elected to take a $900000 noncash charge to gross margin to address all of our aged inventory concerns.
This charge represents 36000 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 cost on our selling floors and in our distribution center at the end of the third quarter.
This write off represents approximately six tenths of our units and eight tenths of our inventory cost.
Phil This is a prudent decision that will further our efforts to maintain a clean and healthy inventory position.
Now I'd like to move onto our third quarter, SGN expense, which as a rate of sales were 39.5% compared to 37.8% in last year's third quarter.
On a dollar basis SGN, a increased by 1.7 million primarily due to increases in corporate severance severance of 500000 300000 in marketing costs 400000 in information technology, and an increase of $200000 in expenses related to our wholesale segment.
As we have discussed on the prior to calls as a result of adopting a new lease accounting standard we're no longer receiving a 400000 dollar quarterly benefit to SGN expense from amortizing a deferred gain related to the 2006 sale leaseback transaction involves 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 SGN $8. We view SGN a through two primary cost centers customer facing costs, which includes store payroll marketing and other store operating costs represented 22% of sales in the third quarter fiscal 2019 compared to 21.6% in the third quarter last.
Sure.
Marketing cost 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 in corporate overhead costs represented 17.5% of sales in the third quarter 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 800000 dollar noncash expense related to the recognition of the accumulated foreign currency translation adjustment.
Remainder of the charge with approximately $900000 was primarily related to lease termination in inventory liquidation costs.
As we previously disclosed our London Rochester store has had declining topline volume over the past several years.
At the same time, our operating costs continue to escalate, particularly our occupancy costs.
Weve reached the decision over a year ago to close our Rochester store portfolio in 2019 in turn our focus to the DXL brand.
A lot London, Rochester presented a unique challenge for us.
Unlike our us store portfolio, our lending customer did not have a local DXL alternative to shop. Unfortunately, the four wall economics of the store, we're just not sustainable.
In fiscal 2018 stores four 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 $500000.
Our decision to incur the 900000 dollar cash charge. This quarter has a cost avoidance payback of less than two 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 and strategies to migrate even more customers to DSL.
The London, Rochester store had an unusually high exit costs due to the specifics of the lease UK law and other issues involved in closing a foreign entity.
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 SGN expenses for the period.
The GAAP net loss for the third quarter was 7.2 million or 14 cents per diluted share as compared to a net loss of $2 million worth four cents per diluted share in the prior years third quarter.
On a non-GAAP basis, adjusted net loss for the third quarter of fiscal 2019 was eight cents compared to an adjusted net loss of two cents per diluted share for the third quarter fiscal 2018.
Now, let me turn to our balance sheet and cash flow.
Cash flow from operations for the first nine months in fiscal 2019 was negative 14.4 million compared to negative 1.3 million for the first nine months of fiscal 2018.
The decrease in cash flow from operations is primarily due to lower adjusted EBITDA in the first three 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 were 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 and are better and best collections as we position ourselves it means 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 three quarters of fiscal 2019 were up 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 infrastructure projects, including our order management system upgrade as well as our new CRM system.
On the real estate side, we've remodeled and rebranded 12 casual male XL retail into casual male XL outlet stores to 11, DXL retail stores in three DXL outlet stores.
In addition to our store rebranding efforts year to date, we have closed for casual male XL stores, two of which closed in connection with the opening of DXL stores and we closed one dx so outlet store in three 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 in 14.8 million outstanding under our Fila 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 Omnichannel 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. Thanks. Peter This has been a unique and challenging year for DSL, we've undergone tremendous organizational change not only at the senior executive level were three of our five named executive offices from last year are no longer with the company, but we're also experienced turnover and change.
Isn't roles 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've made good progress in our wholesale business plan and we are encouraged for our wholesale prospects in 2020.
We believe the opportunity for DHL 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 up the management comments and begin to take questions, namely a big thanks to the DXL team.
Through transformations are never easy changes not easy and the DXL team, our dedicated passionate hardworking crew and on behalf on behalf of the big and tall consumer from headquarters to the fulfillment team and stores that are desire and commitment is greatly appreciated by me.
Investors often asked me what keeps me up at night, what keeps me up indicted losing is losing a great team our people 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 loose on these calls into all of you and everyone else a big heartfelt. Thanks, we would now like to take calls.
Ladies and gentlemen, if you have a question or comment at this time. Please press Star then one key on your Touchstone telephone. If your question has been answered you wish to yourself from the Q. Please press the pound Q.
Our first question comes from Eric Feder with SCC research.
Good morning.
Good morning.
Thank you for on the very detailed presentation.
Really interesting.
We're comfortable about some things there I'm wondering seamlessness between the different.
Brands and between online and off when you talked about kind of synchronizing some of the.
Promotions.
That when you look at it going forward is that two way to go or is there specific customer bases in between that are large enough to justify having different promotions in different.
In different segments.
Yes, Hey, arrogance Harvey.
The reality is we believe that 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 theres any ever any all or nothing. So we continue to try to understand how to navigate the expectation that you walk into a store in can go.
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 a 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 never 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 is limited online and not a full distribution, so where we stubbed. Our toe is when we did something potentially online only bought two every.
Buddy and then they don't have the expectation that thing walk in the store and get that same event. So again, it's it's a challenge to navigate but in the best customer experience, we wouldn't defied for the customer where and when they shop, they would define that to us.
Okay, I guess it kind of related question, you've been switching over the casual male stores to destination XL with basically maintaining location, but changing goods to the look what has been there was bonds to that is the casual male customer.
Changing in that they're much more in terms demographics and what their purchasing like what's the debt coordination and sell customer purchases.
Sure So Eric I'll take that when it's Peter we've actually had really nice results from the stores that we have converted over from casual male to Dx sell in the existing stores, we're going into these stores and giving them a remodel theyre getting some some refresh of paint and carpet, but most importantly, they're getting a better assort.
They are getting different inventory, which a lot of times. This this casual male customer has never say never seen before so we are absolutely seeing better comps in these stores.
I think has been responding very well to it and it's a program that we're going to continue pursuing in 2020.
Okay, and finally I know that.
I know this is somewhat of a journey.
I don't want financial piece of what should we be thinking about and looking at going into 2020 and in 2020 as seeing us kind of signposts that things are.
Changing and becoming more how you think they should be.
Well I just 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 share of our revenue today, but you can't the challenges you can't bifurcate that right. The digital marketing that we're doing today, we firmly believe and actually I would say no that digital marketing transcends the store business and so driver.
In traffic will happen in stores via digital marketing and if you can vary sheet. The organizational changes we've made our pursuits are clearly oriented towards that but the markers there will be obviously comp and customer file.
Great. Good luck for the holiday season.
Thank you.
Our next question comes from Chris Krueger with Lake Street capital.
Hi, good morning.
Good morning, good morning.
Hi, I'm looking at your wholesale.
Efforts I think you said in the call that Amazon as the majority of sales and I don't know how much detail you can give us I was curious as according to go by how many.
How many skews you have with Amazon is growing.
How should we look at that.
I think you should look at it that are pursuits art to grow the business. The SKU count you can look at on Amazon and you can 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 ended evolve further and we are looking obviously, which weve 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.
Any particular products that are that stand out at Amazon as far as selling loans.
It's really the core basics.
When the days done Amazon might not be the most fashion forward house and really the core basics, where what we're driving.
Got it.
I don't have asked this before but just so everyone is clear.
On the fourth quarter.
It apples to apples on the number of operating weeks this year versus last year.
Yes, it isn't it is apples to apples on the number of weeks, although we have that shift in the holiday that every everyone and retail is experiencing but for total number of weeks that has the same this year to last year.
Okay.
Any gross margin in third quarter, you went over all the details as far as what what.
Back to that is when the lower numbers, we've seen in while in the fourth quarter would you expect that to improve sequentially.
Or year over year.
So the point I guess I would make about that as I detailed out that there is there were three different components to why gross margin is down in third quarter from last year.
The one that we're watching most carefully is the 110 basis points due to the promotions in the clearance, which we've kind of talked about athletics. 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.
Okay got it thank you.
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Our next question comes from retrofitted with West Africa.
Hey, guys. Good morning, Thanks, Thanks for all the detail.
I Wonder if you guys could talk about.
The.
The urgency toward profitability I know, that's more pedestrian but but when when you make your.
Business decisions.
Weird, 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.
That's right.
I'll talk about the number one thing.
Peter 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 piano and drive EBITDA on profitability.
Yes, I would say that we're continuing to address the cost structure as much as we can again. This is 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 new positions that are starting but the cost orientation is something that were continued to be to be focused on.
So so just so I understand how much growth do we need.
Order to be able to.
Make money and how much tolerance is there.
Before I mean, how much.
Money, how how much flexibility do you feel you have.
In terms of.
Paul It investment or losing money on the way to the to the.
To the positive outcome.
Yes, so I think its target has been pretty clear that we need 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 solid some tolerance for the fact that.
You know, we're going backwards a bit before we can go forwards, but I would certainly expect that.
In the in the near term.
We're going to we're going to start to see some progress Roger one thing.
It is hardly one thing we've been really transparent about and good better in 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 facts as a matter as that I talked about a very directly were behind where I thought we would be we expected to be farther along in our marketing initiatives and to build.
Good to articulate.
So you go to market and articulate for like better was that a non rojo roadshow were behind in our expectations and some of your questions definitively will be in fiscal 2020, where the learning we have from Q3 in Q4 as we informed to 2020 plan will inform expectations and we were two quite honestly.
Not trying to be opaque is there's a fair amount of learning that we will come out of Q4 with the adjustments we made coming into Q3, and we have acknowledged and we've talked about a pretty directly a change in sales August September September October and we've acknowledged there is some momentum in November .
The little bit of the roll the dice. It 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 were 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 being.
And in that timeline because of some of the work we've done around the organization rebuilding as opposed to the traction we've only get in Q2 in Q3.
So I guess this is Dennis you don't have responded I guess I understand all that but just from an investors perspective, it would be nice to understand.
And I would my own experience with.
With turnarounds is there there is some.
Okay.
More easily explained financial discipline around around where where things are and I guess I would love to understand.
At least what the goals or when when do you think you become profitable what does the what are the board's expectations for profitability.
So just something up.
I mean that would make me happy I may be alone in that on on the call.
So as this as the second question, we're pretty small company and not.
Not wildly profitable said, what what are we.
What are we fighting for 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, yes, so it's hard to 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 DSL customer and what we don't want to do as retreated with the core customer get more out of every one of them we want to excel.
Fan.
Addressable market vis-a-vis, what we're bringing to market the wholesale business for us demonstrated 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 its knits, it's T shirts, its pillows and its 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 results in seven short months and so we feel really good about both the response of the consumer in.
Product that that is not the same as product, we're selling a DSL and our belief is that you can probably imagine there are a number of other scale retailers that have a mix that is more similar to Amazon than similar to what I would define as a more curated upscale I would like to almost aspirationally referred to a nordstrom esque mix.
In our big and tall offer in terms of service and quality and Curations that is less the general merchandise and more specialty store and so we see a bright line between what we're bringing to the wholesale business and the opportunity, which we havent talked about publicly but we see is material and meaningful and far 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 DSL to the point, where as you said allocation of resources today, we're struggling through appropriately giving enough expense SGN a to that business to get it moving but.
Very cautiously monitoring the amount of investment we make it not getting the carton had upfront in front of the horse so to speak so again as transparency that we can talk to it I'm trying to address your comments I think they're very good.
Questions are valid we're just not at a point that we can be quite as articulate its biz Dev that work that work has to be done.
Well I guess I I will leave.
Comment than I just wonder.
I mean, I I imagine.
Theres great potential.
There, but it just seems like you have.
The successful turnarounds that I've been in an observer too.
You tend to narrow the focus and do the things that have near term.
Impact and this sounds like a.
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 by the web sites wonderful all 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.
If you wouldn't if we wouldn't.
Be better off narrowing the focus until you start to make the core business profitable yeah, Roger I might take one more crack of this because there is one other perspective, Oh, absolutely happy to share.
Your your 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 were talking to our 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 in spec that is very powerful and the brand of DSL as demonstrated by Amazon wishes Amazon essentially by DSL has tremendous value for DHL.
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 they 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.
He is actually slightly better ways, the doubling down on both the revenue side as well as demonstrating our supply chain leadership that will come back to DSL as cost reductions potentially and really make us that much more powerful and important to the factors were doing business with.
So I should see our gross margins going up.
If you will you will in no that's not a commitment next quarter, but that is that is the belief at very strong belief that you will see leverage by our supply chain leadership.
Okay.
I wish you guys look I would encourage.
Some greater urgency around.
Generating some cash, but but I wish you guys look thank you.
Thank you.
Anything else. Our next question comes from Bernard Sosnick were medicine global.
Good morning.
Spent a lot of time and effort.
Getting getting things straight and.
With regard to your ability to market and a much more effective way.
The hiring process is just falling into place a little bit later than a than you expected I assume.
But of the Meanwhile, there's been the cost of installing the CRM system the technology related to it.
My thought is my question relates to.
One can the CRM system be come.
Employed.
To not not necessarily optimal.
Levels, but effect of levels because it takes.
Time too.
Program the system to develop data to support the system.
Personal wise.
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 they're fully.
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 Dennis system and so we will continue to use the CRM platform across a number of different elements. The loyalty program the email interaction the consumer insights and knowledge.
As 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 in 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 were.
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 relations with our consumers, but you are right hits it is a.
Platform that gives us great opportunity to demonstrate weather's file or repeat more engagement or advocacy different level of interaction with consumers that ultimately has to drive profitability on the bottom line in revenue on the topline.
Thank you.
And I'm not showing any further questions at this time.
I wish everyone, a happy Thanksgiving save holidays, and we appreciate your time and energy on the call and we will talk to you in a short 90 days.
Ladies and gentlemen. This concludes todays presentation you may now disconnect have a wonderful day.