Q4 2019 Earnings Call

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And gentlemen, please standby your conference call will begin momentarily once again, ladies and gentlemen, your conference calls scheduled to begin shortly please katrina standby. Thank you for your patience.

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Thank you for standing by welcome to the fourth quarter 2019 destination XL Group incorporated earnings Conference call. At this time, all participants' lines are not listen only mode. After the speakers presentation. There will be a question and answer session to ask a question. During this session you would need to press Star then one on your telephone.

I would now like to turn the conference over to yesterday.

Yeah. So mckee ma'am please begin.

Thank you Howard and good morning, everyone. Thank you for joining us on destination XL group's fourth quarter in full year fiscal 2019 earnings call on our call today is our president and Chief Executive Officer Harvey cancer at our Executive Vice President and Chief Financial Officer, Peter shot.

During today's call, we will discuss some non-GAAP metrics to provide investors with useful information about our financial performance. Please refer to our earnings release, which was filed this morning and is now available on our Investor Relations website at Investor Dot de XL Dotcom for an explanation <unk> reconciliation of such measures. Today's discussion also contains certain for.

We're looking statements concerning the impact of the Corona virus outbreak on the company's business and results in fiscal 2000, and fiscal 2020 and actions being taken by the company to mitigate the impact, including reducing operating expenses capital expenditures cancelling inventory receipts and preserving liquidity the company's marketing.

Efforts and the wholesale segment such forward looking statements are subject to various risk and uncertainties that could cause actual results to differ materially from those assumptions much in today due to a variety of factors that affect the company information regarding risks and uncertainties as detailed in the company's filing.

With the Securities and Exchange Commission I would like I would now like to turn the call over to our CEO Harbor Cantor Harvey.

Thank you need so let me start by saying on behalf of the DXL family, our thoughts and prayers go out to you and your loved ones, they're dealing with health or other hardships during this incredibly challenging time.

These times are unprecedented and we are all living in the unchartered waters to get through this we must all sticks together since you did together, we hope we will overcome this pandemic.

The format of our earnings call today is going to be a little different then how we've approached or calls in the past.

It will be the only one with prepared remarks.

Fairly brief and cover just two items.

First I want to cover the impact of covert 19 on D. XL to inform you of the steps we've taken to preserve our liquidity to address expenses and to reduce capital expenditures in fiscal 2020.

Second.

I want to cover important achievements, we've accomplished in fiscal 2019.

And talk about the men bentem coming out of fourth quarter and touch upon February in spite of the developing cobot 19 pandemic.

Earlier. This morning, we filed our fourth quarter fiscal year end press release, which can change much more detail on our fourth quarter.

So let's start with cobot 19.

This unprecedented global pandemic continues to be fluid situation.

My comments will be limited to what I know factually.

And I will not address expectations in regards to what could be.

Under scenarios, we have yet to experience.

We are closely watching our business and considering all elements we can imagine.

As well as learning from others real time by interacting with the NRF and a C D and fellow seatbelt Ceos in retail.

First and most importantly, like every company our first priority is to protect our employees and the guests in the communities in which we do business.

On Tuesday, we closed our stores temporarily and we have tentatively planned to re open our March 29.

At this point, we believe this is likely overly optimistic.

We implemented a work from home plan for many of our corporate associates, where it makes sense.

We have cancelled all business travel for the immediate future.

We have no in person meetings, and our exclusively using teleconferencing to do our business.

We are cleaning and driving hygiene in our stores and distribution center and our corporate office, where we still have limited staff onsite.

From a financial standpoint is just too early to determine the impact of the virus on the year.

At this time our stores are closed.

Leading up to that point over the last 10 days, we experienced significant double digit declines on our topline across stores and online.

At this time, our web site remains open for business and it's only moderately better than the stores performance before we close the source.

With the zero revenue from stores for what is likely a multiple of weeks and the web significantly off there's no question that our sales forecast for the year is going to be significantly impacted.

With the situation at hand, we had and we'll continue to execute our contingency plan.

We began executing this plan in the early part of February and we've greatly intensified and accelerated our efforts in the last two weeks.

We have taken very aggressive steps and acted very quickly to mitigate the declines we began much more meaningfully experiencing in the first week of March.

The four specific areas I want to cover on this call our liquidity.

SG, they capital expenditures and inventory.

First liquidity.

One of the brighter spot we had in fiscal 2019 is our liquidity.

Despite the struggle we had with traffic, we ultimately delivered a positive comp and our financial position ended the fiscal period in better shape than it was a year ago.

We delivered free cash flow of 2.4 million last year reduced our outstanding borrowings from 56 million seven to 44 54 million, one and we had 48.5 million of unused excess capital under our credit facility at the end of the year, which put us in a stronger starting position to Mount.

Now manage the current sales environment.

Our credit facility, which is comprised of $125 million revolver, and a $15 million silo term term loan does not expire until March 2023.

In terms of our supplier base across functions, we are working through potential challenges in outgoing payments and requesting extended terms with some success early on.

And finally, we have already led discussions proactively and transparently with our lead bank.

Given the volatility and Fluidness of the situation, we are reconnecting with them often.

And will remain very active in our dialogue.

We expect they will be great partners and our conversations have been very positive so far in the partnership.

Because the fact is a matter is we don't know how long or how severe the impact of cobot 19 will be we have modeled a downside scenario.

Which we believe we represent a path to maintain liquidity within.

In this scenario, we believe we can mitigate the sales erosion to reducing operating expenses capital expenditures and inventory purchases.

Let me talk to each of the three.

First operating expenses.

The stores.

We do not know where the stores will reopen with any certainty.

At this time, except for the store General manager Stuart staff have been furloughed.

In some cases, as we reduced hours and coverage and in all cases as of the point, we close last Tuesday.

When we reopened our stores, we have assumed there will be a long ramp back up over a six to nine month period until sales normalize.

Given this ramp we will open with scaled back operating hours scaled back coverage and both until sufficient traffic returns to the stores.

Where we can we have almost eliminated paid marketing efforts and expense.

And expect we will maintain a significant reduction over the remainder of the year until business normalizes.

We have formalized and appeal to all our landlords for relief in rent and Cam charges and we are already in discussion.

We have instituted a hiring freeze that our corporate office, we have eliminate training programs that are stores of course and a reduction in place for the balance of the year.

We will realize savings and credit card fees bags in boxes store commissions and other variable expenses due the decline in sales.

We have eliminated all non essential traveled for the entire year and we have cancelled our national sales conference.

We are leaving no stone unturned.

We are eliminating all expenses that are not absolutely critical to run this business.

Next our capital expenses.

We have suspended our store rebranding program for the remainder of fiscal 2020.

As you might recall, we plan to convert in place 14 casual male stores the DXL format.

We have suspended all capital expenditures servers in our corporate facility.

And our stores as well that are not absolutely critical or required by contract.

We have virtually eliminated our infrastructure capex spend which included a series of system upgrades and implementations. We now believe can be delayed.

And we'll only move forward if deemed a critical requirement.

Again, the point is we have taken very aggressive steps and acted quickly on capital in an effort to preserve liquidity.

And finally inventory our merchandise planning and allocation global sourcing teams have been working tirelessly to cancel blip spring and address fall on order.

Given the downside scenario, we have formulated we have moved through this process extremely quickly and aggressively and it as of today have cancelled over $55 million of on order for the balance of the next couple of months.

And have the opportunity to address a meaningful portion of fall as well.

This is an area we are trying to be judicious in an effort downside scenarios to great and business returns quicker than we expect we believe we really have plenty of opportunity chase goods and compared to the alternative which is being over inventoried. We have chosen the path we have.

With regard to our global supply chain, we have not seen any material impact to our receipts.

But the bottom line on inventory in totality is we are much less concerned about our ability to recede product and much more focused on the risk of being overboard for the year.

Our concerns are primarily about the American consumer and in reality when is he going to be interested in buying apparel again.

I will now quickly cover 2019, it was a significant transformation for DSL year, and while our transformation as ways to go there were significant accomplishments and these were achieved well while improving the balance sheet.

This is a win that the company feel good about.

A quick couple examples first the team and the 11 months since I joined the company, we've gone through a meaningful organizational transformation. The priority was to get the right people in the right positions to drive the strategy.

You know we have been very consistent in saying, we have a marketing problem and the thesis to drive growth opportunities strategically is driven around our challenge in the customer file and repeat purchase.

The progress the marketing team has made it is making across the digital front has driven the improving top line sales now under whose well do its leadership and with his global Nate Tivity in digital transformations, we expect to further impact growth.

In regards to the broader organizational transformation in the past year, we changed out three of the five named executives and three of the for marketing leaders, we eliminated the CEO position and recruited a number of high caliber Vps directors of managers. This was the foundation required to leverage the opportunity and give us the developing skills and keep.

The abilities to execute the strategy and it's why our fourth quarter did accelerate and show improvement.

Second we shut down the five remaining Rochester stores. These stores were not profitable and the decision to shut these stores downwards grounded in the stores productivity and efficiency. They were all located in the finest at highest retail markets an overly spacious the real estate commanding premium pricing escalating occupancy cost and declining traffic.

Field there fate.

Closing the UK store represented unique challenges with inventory liquidation and lease exit costs, which impacted the TNL.

The upside of the Rochester at store closings that most of our customers live within close proximity to a DXL store location.

And we are actively targeting those customers to let them know that they can get the same service and selection at the DXL store.

By closing the Rochester stores, we have meaningfully reduced operating expenses.

The third success is our inventory position for the year, we reduced our inventory from 106.8 million to one or 2.4 million and reduced our clearance as a percent of the total is it declined from 10.3 to 10.0.

At the ended the third quarter, we further tightened our inventory aging policy and going forward. We now have a tighter aged market of stock process. The change in the aging standard, we'll keep our inventory cleaner and fresh without jeopardizing sales.

As you might recall, we took a 900000 dollar onetime write off in the third quarter as a result.

The for success I'd like to call out as the casual male store rebranding over the past two years, we remodeled and rebranded 17 casual male XL stores to the DFL format in the first year of operations. These stores returns an average comp sales result of 24% compared to the casual male stores, which were flat.

At or slightly negative.

This was a win as the cost to rebrand is approximately $175000 versus the relocation and development of a new DXL store of $450000, while not providing the same level of return.

Another big win for 29 to any of the operating plan for wholesale the greatest the greater opportunity to accelerate this channel is believed to be in ahead of US. This includes the developing the assortment building a supply chain that included logistic capabilities on both the east and West coast and bringing products to market that are receiving high customer ratings mode.

Most importantly, we launched a new business that is now generating positive cash flow in the first full year of operations. This has been a strong debut for DSL.

Lastly, I want to call out to import in board of director elements.

The company's directors have elected to suspend their compensation for the near term.

And as previously communicated we are reducing our board size and we'll nominate no more than seven directors at our upcoming annual meeting in August.

This number is down from nine that serve on the board today.

We are hoping in time to identify new digitally centric director, who will add more digital expertise, but at this moment, we are not pursuing this as a director.

These wins are important because the fiscal 2019 was year full of challenge, we developed a mission vision and strategy and that have been testing that strategy, we adopted a test learn and optimize approach and we learned a lot. Despite the struggle we have a traffic we delivered a positive comp our financial position ended stronger we.

Delivered free cash flow of two point filmed million, we reduced our outstanding borrowings from 56.72 54.4 million and then ended the year with 48.5 million of unused excess capital, which now hopes liquidity.

Now our fourth quarter, we delivered a comp increase of 1.1, a sequential improvement from quarters, one through three and a two year stack of 4.2%.

We accelerated growth in our direct to consumer business, reaching a 27.4% penetration of our retail sales up 260 basis points compared to last fourth quarter last year.

Given the promotional environment the achievement over sales gross growth was meaningfully greater it without promotion, helping us to manage our margin and expenses prudently, resulting in a year over year adjusted EBITDA growth of 45% to $9.9 million and as mentioned delivered positive free cash flow for the year.

Our fourth quarter adjusted net income was five cents per share, which compares to a loss of one cents per share last year and was the strongest fourth quarter and adjusted EPS and 2012.

Our direct to consumer business, which is a focus area for a clear it was a clear bright spot in the quarter.

Our total company direct comps were up high single digits in the fourth quarter with the strongest performance driven by the DXL Dotcom website, which grew 13%.

We drove significantly more visitors through a combination of productive advertising spend and enhanced website features.

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

And finally in our wholesale division, we had a great fourth quarter with year over growth year over growth of more than 80% to 4.5 million or wholesale businesses shifted from large seasonal buys to product replenishment on Amazon our product reviews remains strong with a 4.4 star customer rating.

We see opportunity with wholesale and excited to continue growing our product assortment with Amazon private brands, we managed our wholesale operations with greater financial discipline, which has resulted in a meaningful improvement in our margin structure. We ended fiscal 2019 with $12.5 million in wholesale sales and.

Believe there's momentum for growth in the final in the in the wholesale segment.

I'm not going to talk at length about 2020 will provide meaningful forward looking views, but a quick voiceover.

In February our consolidated comp was flat and our adjusted EBITDA was significantly better year over year. Despite the early impact from Cobot 19.

While we are in an uncertain period, the underlying fundamentals of our business are improving and we remain committed to our strategy built around for marketing initiatives.

First data analytics and customer insights second CRM or customer relationship marketing third driving digital efficiency in digital marketing and fourth execution of our digital operations beyond this we remain confident of the greater opportunity in wholesale.

At this time that is all I plan to talk to reference in terms of Twentytwenty.

In closing I would just like to say thank you for your continued support.

My Hope is you understand the management team and I are laser focused on our liquidity.

And we are very working very hard to control, our destiny and the future of DSL.

We do not know the impact of covert 19 over the short term yet alone in the months ahead.

As you all know it is literally changing day by day, but we have a plan and that is important and we are executing against that contingency plan. Yet we are acknowledging we know it will evolve further as well.

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

Ladies and gentlemen, as a reminder to ask a question you need to press Star then one or your telephone to withdraw your question Preston town.

Please standby, where we can probably can run a roster.

We have a question or comment from the line of Tim If you strip votes from Starbucks asset management. Your line is open.

I want to thank you for your comments your opening comments, especially and we know that you you've done a great job with the business here, but you know.

We're looking at going forward here I have a just a few quick questions.

Do we know yet the legalities of whether a landlord or a mall or whatever closes stores that we don't have to pay rent versus we achieve choose to close stores. So we don't so we have to eat data pay the rent are those issues for legal perspective still unclear.

We're not in any malls so to speak so I think the question was relative to the malls.

Well, partly I guess I'm, showing my ignorance on that part but.

So degree we elected to close our stores does that does that make us I guess first on hope for the rent by definition I believe that that's a question that obviously is work in progress on many levels for most retailers at this point in the entire United States.

Are there any jurisdictions across United States, where the localities or the states ordered us to close our stores or heads have our head of our closings been elective, yes, theres four locations, where there has been shelter in place mandatory closing San Francisco Reno, New Jersey in Philadelphia.

Okay.

Do you.

I appreciate the comments about the banks support can you summarize for us.

It matters related to covenants in this call.

Sure. This is Peter so as Harvey mentioned, we've got $48.5 million of excess availability.

The biggest covenant that we have is we have to maintain a minimum level of excess availability, which is defined in our credit facility as 12.5% of our borrowing base. So.

That's that's really the only one that that.

We're focused on.

And this is why both capital expenditures and inventory management as you discussed in the call. Our are a key part of that hearing to that.

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

And then finally, the insiders repaying stock at $1.15 or dollar 20, a couple months ago times have changed.

I hear you say that you're going to essentially fight for to for took control your destiny and protect the shareholders. Obviously of does the will the insider buying window opened normally after whatever it is 48 to 72 hours I'm not sure what is for our company.

I'm a shareholder by the way.

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

Right after close of trading on Friday.

Okay. That's all I think I have a best of luck congratulations on the successes. It's most regrettable of that we have to have noise here for awhile before we can see your strategies the effects of them, but I have confidence that you're dealing with this.

In the most aggressive fashion possible. So thank you.

Thank you.

Thank you.

I'm showing no additional questions in the queue at this time I'd like to turn it back over to management for any closing remarks are only closings clothing closing thoughts are for the entire globe with respect to covert 19, and hopefully speedy recovery from this challenge and with that will like to say, thank you and carry on.

Ladies and gentlemen, this concludes todays conference call. Thank you for your participation you may now disconnect everyone be safe.

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