Q3 2020 Destination XL Group Inc Earnings Call
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Gentlemen, thank you for saying Goodbye and walking through the third quarter 2020 destination XL group earnings call at this time all participants so we know that.
After the speaker's presentation, there will be a question answer session.
Ask a question during the session you really depressed stores than one on your telephone please.
Please be advised of today's call may be recorded income.
Quite additional system plus stores in the world switching operator of my them call of <unk> tended to Vicki. Please go ahead.
Thank you Michelle and good morning, everyone. Thank you for joining us on destination XL group's third quarter fiscal 2020 earnings call on our call today is our president and Chief Executive Officer, Harvey cancer, and our Chief Financial Officer Peter of strategies.
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 Day talk D. XL dotcom for an explanation and reconciliation of such measures.
At least discussion also contains certain forward looking statements concerning the company's ability to withstand the impact of the cold at 19 pandemic honest business and results in fiscal 2020 and to manage through the pandemic, including its efforts to restructure and reduce cost realize expected annualized savings from the restructuring actions taken in November.
Net manage inventory right size its lease structure market to its customers to encourage shopping in store and on line and maintain sufficient liquidity to meet its working capital needs for the next 12 months.
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 risk and uncertainties is detailed in the Companys filings with the Securities and Exchange Commission I would now like to turn the call over to our CEO Harvey Kanter Harvey.
Thank you need to and good morning, everyone.
Hope you are all healthy safe and well.
Grateful for the opportunity to speak with you today about the XL and the progress we're making sales we continue to navigate through the pandemic.
For the past eight months had been pivoting and adjusting to withstand the unrelenting impact of the COVID-19 virus on all of US and also on the economy.
I tried to position the XL for the long term recovery and for future growth.
Most importantly at before I begin any remarks in regards to your business at all.
Want to make a few remarks in regards to our associates and their tremendous level of commitment and sacrifice during these most challenging times it.
It has been nothing but quite remarkable I.
I've made mentioned before the old at that most often keeps me up at night at its worst thing again. It is the team has just civically keeping the band together that is the very foundation of a great business.
We are so incredibly plot of our associates at our stores at our guests at her or distribution center and at our corporate office.
Tobin 19 impact has been incredibly challenging end despite the deep commitment we had to our team at the culture at the XL based on trust empowerment and innovation.
Pandemic at end churn de XL is also impacting many of these very same folks and their livelihood.
The incredibly disruptive and challenging impact of cold. It has less of left us no alternative but to reduce headcount at a number of associates are no longer part of the D. XL team.
More broadly as we know all too well Cove. It has also resulted in many lives lost of loved ones, who are no longer with us.
The world is different in so many ways from what we can do only eight months ago and.
And of the CEO of GE XL adjusted the human beings that.
The challenge is to navigate the virus that impact of a negative outcomes for our team at associates of de XL and the decisions. We have had to make have been very difficult and for that I am very sorry.
These days there are many more things of that keep me up at night, but the team we have and their commitment is not one of them.
We have great people, who are the backbone for cautious but continued optimism for the future of de XL.
No that's specifically in regard to store business on our call today I'm going to speak to you about our third quarter performance.
I'm also going to update you on the steps you have taken steps currently underway to continue to position of lunch or financial recovery, but before I begin I also want to come at a one other important topic diversity and inclusion of.
The XL as a company we continued to embrace efforts to come back at the challenges of social unrest racial divide.
In 2017, we implemented our own awareness program, which we call normalizing the brand.
To address unconscious bias.
We have also this year formed a C O Advisory Council, which which meets every other month.
And we also have ongoing training programs for each year of apartments to heighten awareness with our associates me.
We remain committed to not just being a part of the conversation, but a part of the solution.
Now for today's call I intend to cover three main topics first to review what we have accomplished in the third quarter second to discuss the state of our business as well as the current state of the industry.
Finally, I will address what we had to find is the critical imperatives to win in this holiday season and into next year.
So let's get started with the summary of our third quarter results.
Our overall sales performance in the third quarter continued to be impacted by the pandemic comparable sales for the quarter were down 20.5% to last year, which is an improvement from the second quarter. When our sales were down 38.6 per se.
For the third quarter store sales were down 31.5 per cent and be XL dot com was up 28.4% with total direct up 18.2%.
It is important to know that all of our stores were opened by the end of June at our store performance at sequentially improved each month from June through September with improvements in both traffic and conversion.
And overall direct sales penetrated the XL total sales at 33.4% of retail revenue.
Eric So October sales momentum slowed by 600 basis points across the company sales as flare ups from the buyers of together, we surge fires on the west coast and distractions from the election began to materialize.
Our stores continue to lean into the priorities, we set out back in May of 2020, as we adjusted our plans to the pandemic environment first and.
Foremost to ensure a clean healthy sales environment for our guests and for our associates Weve.
We've been working to drive that can sort of back into the store true. The following three pronged approach first delivery of the guest experience that has been DXL sales, calling card by building relationships not just sales, but also inclusive of maintaining social distancing guidelines set.
Second.
Perfecting the visual presentation within the four walls of the store such at each store can act as its own salesperson, helping further address social distancing as suggested by the CDC.
And finally, enabling each store to active its own fulfillment center for ecommerce orders.
The importance of stores and their ability to support our E commerce initiatives is critical.
Most valuable customer the cross channel shopper, who at shop with Us before.
Our direct business anchored by de XL Dot com continued to grow throughout the third quarter.
Our direct channel not only clued sales from DHL book Club, but also sales from online marketplaces and of sales initiated in store, but just filled online via our universe technology.
Lower traffic to the stores drove universe, well below prior year levels universe sales as you likely recall originate in store as our sales associates are trained to off of product extensions that may not be available in that particular store are available on the web.
Given the decline in store traffic universe of sales had been hit hard in contrast, our direct fulfillment of I stores remained materially higher during the third quarter in the third quarter of ours stores fulfilled $10.6 million worth of.
Ecommerce demand, which compares to only 5.7 million last year or an increase of 87.3% in the quarter.
Voltac at Bopis continue to be momentum drivers and this is an area that we will continue to develop book in terms of functionality and user experience.
Today, we offer both back and book is in 311 stores.
Look to optimize this omni channel experience over the coming months, taking a continued to test and learn approach as we look to elevate the comes from experience, while driving increased digital penetration and shopper loyalty.
The XL is positioned to continue benefiting from the shift online we of flexible off mall store base at.
Large and growing platform digitally and compelling differentiated omni channel capabilities.
Which reached not only our existing base of customers, but at a new consumer as well.
Our omni channel customer is five times more productive than a digital only customer and three times more productive than a store only customer we were pleased to see a number of our store only customers become omni channel customers. During this time.
For the past three quarters of talked about how our focus on cash has been relentless.
We are living and breathing with incredible attention to the smallest each sales to ensure we are managing our cash at maintaining liquidity.
Every day, we are making decisions to ride the outcomes that will protect the long term viability of our company at occasionally these decisions are some of the toughest.
On November 2nd we implemented an internal corporate restructuring to further realign our corporate selling general and administrative costs that are lower sales levels that resulted from the pandemic.
We eliminated 45 corporate positions, which we estimate will save $3.8 million on an annualized space.
We also eliminated certain service agreements professional services at certain marketing costs, which we will estimate will save $5.2 million on an annualized basis.
Combined we estimate the restructuring will say 9.7 million at SG at a.
Well at space.
I would like to also point out of the actions of limited on November 2nd are in addition to.
Cost of any actions that were already taken through the end of the third quarter includes.
Inclusive of all the actions executed earlier this year. The company has no eliminated 101 positions from corporate office or 29% of its corporate workforce in the current fiscal year.
Addition, since March of 2020 companies field personnel has been reduced by 1078 positions for 54% of the total field accounts.
We continue to aggressively look to driver as gene expense down to be proper built line to with our expected sales and are managing to a downside case.
<unk> versus a more realistic excuse me at more optimistic recovery.
In addition to the above actions, we remain equally focused on Rightsizing the company occupancy costs.
We've been very active with their landlords to can be theater challenges and strengthened our partnerships with the least think humidity.
As I mentioned last quarter, we are grateful at most of our landlords have been opened to listening to us about the challenges presented by the COVID-19 pandemic and we're willing to assist us with managing cash flow and ultimately the occupancy costs of our retail stores.
Now that we are past the initial surge of having stores closed in April may and part of June we had turned our attention to our forward looking rent structure.
Over the quarter, we performed yet again, an exhaustive review of our lease portfolio given the sales recovery or reality lack there of at the level of we expected.
We are now actively engaged with our landlord group to focus on stores, where occupancy as a percent of sales has moved upward.
Outside an acceptable banned from market rents.
One of the biggest rest of the company's business model is its predominantly fixed rent structure at a lower sales space. We are pushing hard to read this lease costs with those landlords, where our rents are out of line with sales.
Now, let me now shift to a quick update on our merchandising strategies.
In the third quarter casual sportswear and loungewear continued to drive the business well tailored clothing remained extremely challenging.
In the past eight months, we observed observed a dramatic consumer behavior shift that is focused on casual apparel and aligned with work from home lifestyle somebody of in say the Zhou of life.
Comfort functionality and versatility are essential features expected from our customer end embedded in the key categories that will drive the business. This season.
We're seeing the customer of gravitate to categories, such as knits shorts active wear denim underwear and athletic or sketch your EPS shoes.
There is a heightened focus on these categories and on the brands that will meaningfully drive the business.
We're also working on speed to market initiatives, such as exploring with vendor managed inventory for the at lie as it's often repurchase and we are working with factories to hold and died materials for production grayish fabrication as its repurchase in key items that have given us a greater ability to react.
And drives of business as well as grid elasticities at our inventory.
Let me now briefly touch on the topic of gross margins promotions and inventory Peter will provide additional detail, but I am pleased to report that our third quarter gross margin. Although below last year was ahead of revised internal expectations back in the spring specific.
Only in April and May we were running with a highly promotional posture.
Our promotional offers were stronger than any we've offered in the last 10 years. The purpose of that posture was to keep goods flow into customers add to keep cash coming into our company.
For the third quarter, we became much more targeted with our promotions and saw a corresponding drop in our markdown rate.
We have become increasingly oriented to specific consumer behaviors and consumer segments, and we are finding greater opportunity to be less peanut butter spreading of promotions and as a result, we're driving of promotions, which positively impact gross margin dollars and eliminating promotions the dry.
Sales that had no or even negative ultimate bottom line impact.
We know we still have to be promotional and while we expect to return to levels approximating last year overtime. We believe we can outperform these historic rates.
Moving to inventories we of manage inventories very conservatively and are down just over 21% from last years third quarter.
We have been selling down our product and have slowed replenishment as we're being mindful not overextending, our assortment and having to clear through unsold merchandise in the season.
It is also worth noting and we're working very hard to maintain our supply chain and logistics capabilities. One of the challenges we have been grappling with in the third quarter securing vessels in a timely manner from overseas to receipt of product.
There had been some disruptions.
Excuse me.
There had been some disruptions of the global supply chain for reasons, ranging from Covidien hygiene outbreaks in for imports to shortages of best of vessels and shipping containers.
Our fall receipts are down to last year, but in line with Q3 levels, it's actually been quite remarkable how we've seen certain brands and categories performed with sales levels nearly flat in some weeks and yet on inventory levels that are down 40% to 50%.
We continue to push inventory to our stores to satisfy the customer who is continuing to show up in person.
Because of our ship from store technology, we have the capability to fill to fulfill direct orders from any sort in the portfolio.
Next let me share with you some thoughts our marketing digital strategies. The single biggest challenge facing de XL is our ability to drive meaningful traffic into our stores in the current environment and secondarily continuing to drive the growth in traffic onto our website.
Well, we continue to make progress new to file and reactivating customers successfully engaging our best customer highest spending customers continues to be a significant headwind in the current environment.
We have identified and test at strategic and tactical actions in contact and communication of changes to engage with our customers, but the challenge remains significant and must be solved in order for us to make meaningful strides our belief.
If you will is at our very best customers, who bought fashion and shops, albeit for going out or just to shop is no longer shopping the way they did.
They unfortunately are going out less if at all have no weddings no events at our.
Not visiting bars and restaurants at our filling in based on need not based on line.
Our brand in any of our private label assortment have always been quite fashionable and these looks and wearing occasions or just not happening today.
Our Q3 objective was to leverage consumer behavior by testing of learning with spend allocation promotions and other traffic driving mechanisms to lean into this be either we.
We have developed a weekly reporting to you at the eyes to better understand the base of the databases file health at.
End customer sales trends.
We've also improved our email optimization per customer file growth, including segmentation and technology updates on consumer preferences fine.
Finally, we at tested direct mail promotions with a control group to better understand causation versus correlation for greater holiday success at omni channel gross margin impact.
We have tested and measured incremental outcomes learned and changed marketing to optimize targeting and the promotional strategy for Q4.
The brick and mortar retail experience continues to be drastically different during the cold at 19 pandemic.
Our store Creed continues to be engaged to build a relationship or as we refer to it as.
Has he bar, we want to create a memorable experience while practicing social distancing by providing guests at the same in store experience they've grown to love.
We have also launched in test mode, a new tool, which allows store associates to interact virtually but directly with online shoppers.
There's an interactive platform that will bring our exceptional store experience to online customers by allowing in store associates to connect live with an online shopper the allied video chat.
The at provides online customers in in store experience digitally at via video will also allowing the stores dosage earn commissions by creating sales.
Store associates at able to suggest items based on the customers' wants and needs as well at the pictures and videos of items in their stores to guests via chat on the at.
We are currently running a 90 day pilot program with 40 stores at 100 associates.
Based on the results of this test we will consider how to augment this test and at this program warrants moving forward and can evolve further in important ways.
And finally, let me give you an update on wholesale we continue to chase the wholesale business, whether in stock position with Amazon essential.
But have experienced a slowdown in the market demand for PDP.
Amazon essential fit the XL sales for Q3 came in at 71% to last year at $4.3 million.
We continue to chase the business to reduce our Stockouts at peaked at August at 35.5% and have come down to 30% for the balance of the quarter as additional inventory has been shipped.
We have resumed the platforming of Keith fabrications to reduce our production of lead times and at partner with Amazon and advanced replenishment model with visibility to future forecasting of key programs in order to secure fabrics and production capacity.
And finally, despite the challenge of in stocks and losing some level of sales the business opportunity continues to be robust with greater opportunity.
Further testament of this for with Amazon end DXL is the launch in Q3 of the second branded program good threads line, but the XL.
Good threads is Amazon upscale private Brad and differs from the core essential spreads.
At our fabrics more fashion, albeit fashion basics. This launch represents greater opportunity end is DXL sales second Brad from big and tall with Amazon in their private brands program, it's very exciting and further substantiates the opportunity at ahead from both companies.
I would like to now turn the call over to Peter for an update on the financials Peter.
Thank you Harvey and good morning, everyone I'd like to provide you with the summary of our third quarter financial results and then spend a few minutes highlighting some of the actions we have taken to protect the long term viability of the company.
We have started to see the results of those actions in our third quarter PML cash flow and balance sheet excuse.
This gives me confidence that we are making the right decisions to get the XL through this pandemic into emerge from this crisis well positioned to continue serving big and tall guys across the country.
With that said, let me give you an update on our third quarter financial results.
Have you already provided a pretty comprehensive overview of our sales results, so I'm going to jump right into gross margin.
Our gross margin rate inclusive of occupancy costs was 36.5% as compared to a gross margin rate of 41.1% for the third quarter of fiscal 2019.
This 460 basis point decrease in rate was comprised of a 280 basis point decrease in merchandise margins at a 180 basis point de leveraging and occupancy costs against the lower sales space.
Although down versus last year gross margin rate showed significant improvement over the second quarter.
We made progress in markdowns by focusing on more targeted promotions and margin rates improved each month as of quarter progressed.
Shipping costs continue to increase year over year due to growth in online sales and free shipping promotions.
As I talked about this past quarter, our real estate team was successful in negotiating store rent abatements end deferrals from many of our landlords, which limited the deleveraging of our occupancy cost this quarter, but.
But as Harvey mentioned the efforts to right size, our store occupancy costs to our new sales levels are still under way and we believe we can further at close this gap.
Now, let me move on to selling general and administrative expenses from third.
Third quarter of fiscal 2020, SGN expenses were 32.8 million or 38.5% of sales versus the prior year third quarter at 42.1 million or 39.5% of sales.
$9.3 million year over year decrease is the result of the steps we took earlier this year, including at you.
Adjusting store hours and staffing model to account for a new customer traffic patterns.
Nipping at reducing marketing costs, especially through traditional non digital channels.
Eliminating certain corporate positions.
And reducing services travel in any discretionary spending.
We continue to assess and rationalize our entire SGN at cost structure as.
As Harvey mentioned at the start of the call we initiated a corporate restructuring earlier this month, which we expect will sit at the company approximately $9.7 million annually.
These were very difficult decisions, but we believe they were necessary to increase our financial flexibility and preserve our liquidity.
During the third quarter, we recorded a $1.2 million non cash gain primarily related to our decision to close two underperforming stores.
Both of these stores have been underperforming for some time and we had previously recorded an impairment charge on the right of use assets.
In the third quarter subsequent to the recognition of the impairment charges, we exercised our kick out rights to terminate the lease.
The corresponding discharge of the remaining lease obligation creates a $1.1 million non cash gain which is classified on our Q3 PML statement as a reduction to the previously recorded impairment charges.
The other $100000 of gain was recorded as a reduction in store occupancy costs.
This is the first time that we've recorded a non cash gain.
To the discharge of non.
Obligation on a previously impaired right of use asset.
However, such kick out rights exist at many of our store lease agreements.
As we look to the next several years ahead of US we may continue to exercise. These kick out clauses from time to time in situations, where occupancy costs are misaligned with sales performance.
We have approximately 52 stores with kick outs for natural expirations coming due in fiscal 2021.
44 stores in fiscal 2022, and the remaining 220 stores in fiscal 2023 and beyond.
Adjusted EBITDA was negative $1.7 million for the third quarter compared to positive 1.7 million for the third quarter at fiscal 2019.
Net loss for the third quarter.
Was relatively flat with last year at negative $7 million as compared to negative $7.2 million, both 14 cents per diluted share.
Now I'd like to move on to cash flow and the balance sheet.
We have talked on our last two earnings calls about some of the immediate steps we took at the outset of this pandemic, including amending our credit facility to increase our borrowing base.
Decreasing our payroll operating and capital costs to align with the expected decrease in revenues.
Cancelling purchase orders.
Negotiating extended payment terms with our merchandise vendors in reaching agreements with our landlords to defer or beat guidance.
I'm pleased to report that our third quarter results demonstrate the effectiveness of these steps.
For the first nine months of fiscal 2020, our free cash flow was a use of 11.6 million as compared to a use of $25.4 million for the first nine months of fiscal 2019.
Due to the seasonality of our business and the buildup of inventory prior to the holiday selling season. It is typical for us to how they use of cash in Q3. However.
However, we were able to significantly reduce that impact this year by aligning our inventory purchases with expected sales levels closely managing our expenses and vendor payment terms and limiting our capital spending to only that which was necessary for our media business needs.
This is a meaningful accomplishment and outcome given the situation at him.
Our capital expenditures for the first nine months of fiscal 2020 were 2.9 million as compared to $11 million for the same period last year.
The spending was focused primarily on initiatives to drive growth in our.
Our direct to consumer business.
We're pleased to report that we had a cash balance of $21.4 million at the end of the third quarter.
The increase from the $20.4 million, which we ended the second quarter.
Our total debt, which is comprised of our revolving credit facility and file a term loan is 82.9 million.
If we were to look at debt net of cash our balance was 61.5 million at the end of the third quarter as compared to $77.5 million a year ago.
We at 13.5 million of excess availability under our revolving credit facility. In addition to our cash on hand.
Circling back to inventory for a moment, our inventory balance decreased by $25.3 million in the third quarter to 94.9 million as compared to $120.2 million a year ago.
This decrease right sized our inventory position for our fourth quarter sales forecast and it was accomplished primarily through the cancellation of orders earlier this year.
We expect to end of year end healthy inventory position with less merchandise than last year end.
As we place our inventory buys for fiscal 2021, we will respond to business changes buying into categories that are trending upward and pulling back in categories that have slowed down.
This will allow us to narrow our assortment, while continuing to manage clearance levels.
Despite the challenges of the past few months at the end of Q3, our clearance inventory levels were down $800000 from a year ago end comprised 11.8% of our total inventory just shy of our long term goal of 10%.
That's an accomplishment of which we are proud, especially in light of the reduction in our total inventory balance.
As we continue to navigate through the end damning, we will maintain a conservative approach to financial planning with an assumption of slow improvement in sales trends in our stores and a continued acceleration in our two ft.
Business we.
We believe at the steps we've taken this year to preserve liquidity and maintain our financial flexibility represent important and significant steps on our way to recovery.
Given what we know at this point in time, we believe our plan provides us with a path to navigate through the next 12 months.
Look forward to the upcoming holiday shopping season, and continue to serve our big and tall customers across all of our distribution channels.
With that I would like to turn it back over to Harvey for some closing thoughts.
Thanks Peter.
As we focus on the balance of 2020 and look to 2021, we're at all ever hopeful from the health of our nation and really humanity for.
For the vaccine being talked about today to quickly take hold and over time, we are even more hopeful for some return to normal.
However that is actually the fine for the future and now I just wish you all godspeed at a happy and safe Thanksgiving.
Operator, we'll now open it up to questions.
Thank you as a reminder from question. Please press Star then one.
If your question has been answered you like to look at yourself from the queue press the pound key.
Our first question comes from Eric better of FCC Research. Your line is open.
Good morning.
Good morning, good morning.
Hi.
Hi.
That's very near term question, so we've heard about.
Black Friday being honest important this year in terms of the EPS will day.
Trying to drive traffic early to get customers to shop before worries about pandemic for is about shipping how are you responding to that in the near term in terms of your flow of promotions in terms of getting people into the stores a little bit earlier.
Yes, we like everyone else have tried to do appreciate probably the biggest single challenge is that folks might not be comfortable coming into the stores to shop and combine that with the level of shipping that is happening in the world today and the recognition that there's going to be challenge we have started earlier.
In some of the things we've done such as our direct mail vehicle, which normally would is that arrived in a home on the Monday or Tuesday before Thanksgiving.
As already arrived in home as early as the 14th of the month and I think as of yesterday, we are 83% in the home already the promotion itself in that Mailer creates two things as well one eight simple to last year some level of promotion prior to Thanksgiving, which we communicate it.
Then in event for Black Friday, if you will and then event after black Friday, So we've given the consumer a much greater runway to understand our offers and what's available to them when that being said and as we've talked about our offers and mailers communicate different offers a different folks through sales.
Plantation and ultimately is not over promotional.
It is it's certainly not more promotional of the last year, because we believe and our experience is demonstrated most recently that the customer coming into the store is coming in on their terms and we don't believe so far we've been able to demonstrate to ourselves the ability to drive incremental traffic that is either incrementally per.
Profitable and in some cases profitable at all so you won't see us and my hope is the world around us be as promotional of people might anticipate but time will tell.
Kind of on that vein type seem the return of from TV advertising how does that.
At into the overall.
TX Hill marketing universe.
Yes, it's a great question you know, we we believe that the digital marketing is our our core marketing lever if you will.
Gives us the greatest ability to interact with three core constituents. If you will the current customer we have the customer that lapsed end customers that either don't know is there haven't shopped with us before and all of that is accomplishable digitally whether its digitally through at email digitally through display marketing digitally through specific search organic.
Or paid but in addition to that certainly as consumers come back to looking to buy gifts. There is an opportunity for us to at continued to drive down the path of looking to take share of market and we are on TV more frequently we started I think our first TV was on the nights we are predominantly.
In places that you would expect to see us around football and the NFL, we have some extensions into what I would call either syndicated or current lives.
Maybe in the evening drive times, but primarily in places that are either target or active customer needs to be reminded that we're still here and those are being done more frequently with an attempt to both create incremental reach and incremental freed should reach and frequency or t. Rps as it's referred.
Two and our hope is that it will address the casualization element as well. So if you remember prior your ads and looked at this at specifically you will see a much stronger orientation around casual and much less if really any specifically referring to tailored clothing.
Great and final question so inventories.
You've ramped up buy online pick up from store your breath of ship from store book.
Of those pieces in many respects to allow you to be less aggressive in terms of inventory at holdings.
We'd be thinking about what.
Are you thinking that the new permanent when the world somewhat normalizes at the new permanent inventory levels could be lower end kind of what kind of how should we think of and how they can be maximized going forward.
Well, there's two great question, there's two inherent elements for sure in there one is the nature of the shopping behavior and the dynamics of how that shifting and inherently there's a shift out of tailored clothing with suits sport coats dress slacks, even dress shoes, those all turn meaningfully slower.
So number one we're investing less in categories that turn slower so that should help create incremental turn in of itself at everything else at the same and then in addition to that to your point, we're trying to balance the maximization of revenue and the opportunity that exists with really the of the challenges at risk inherent.
Front end situations like covert flare ups and how fast the customer will come back to stores or what have you. So we're being relatively conservative in placing receipts, but as you might appreciate if you don't have goods, you're not going to create business. So we're not so conservative that we don't think we'll be able to drive the revenue we are expecting a small.
All improvement in terms of most of our churn improvement would come out of the shift in consumer behavior as opposed to not buying goods and trying to run lighter in total inventories.
Great. Good luck for the holiday season.
Thanks, so much appreciate the support.
Our next question comes from our fastener of Madison Global Your line is open.
Thank you congrats.
Congratulations on maneuvering instead of just thing so well.
Well I'd like to do is get a little bit of.
Coloration on sales in October and so far in November.
So as you might imagine at I think it has been widely published we actually had what I would qualify and I stress the word to qualify a good September we measurably beat what we expected would happen in September.
It caught us by surprise at a good way and then I would say equally so October trailed off in an unexpected way not materially from our expectations, but it wasn't as strong as September and that started a little a little bit at the beginning of October but definitely accelerated in the second half of October the fires.
In the West definitely had an impact the cobot flare ups, we saw that and then unfortunately, the last week of October with the election Molaison as few of leverage at referred to CNN watching non stop all of that conspired in the end of October and the first couple of weeks of November to be pretty tough.
Interestingly enough as I've heard a few others talk about I would say within the last I think it's four days.
A material change like a light switch and we are hopeful that those days will allude to what is possible in as we move into Thanksgiving and Christmas.
Because the magnitude of the change it it's not something that just like a light switch happened that I think it's really a function of the consumer the volatility of the world. We're living in today with things like the election at fires and co of it.
But anyway, the long end store short answer of what you asked for is October.
Went backwards.
We did never really got out of that negative downward trend and it continued into early November but as I've noted, we've seen a material truly a material change.
This week as we get closer to Thanksgiving more at more back towards the September period almost.
Thank you that's very helpful. The other question I have is on accrued expenses.
They were up around $3 million versus a year ago, one of the composition of that.
Sure so.
The accrued expenses, you're right. It's up last year. They were at about 25 million. This year about $28 million I believe it has to do with it.
It might be some accruals around some of the restructuring that we did.
In some other.
Long term incentive accruals I believe I can get back to you on that but.
It is up a couple of million dollars, which I believe is due to those two reasons well I was wondering whether or not where where the adjustments and rental show up because these of would seem to be at my mind accrued liabilities for where there's been deferral of rental.
Yes, So you will see those in the operating leases, which last year. It was 233 million this year at 196 million.
So so all of the adjustments to the leases are coming through that operating lease line on our piano on our balance sheet.
But as you deferred.
Oh payments during 20 Twond to our.
Some of it is going to become due and 21.
This additional expense.
Well there'll be there'll be do as additional cash. So that's part of that's been part of our cash management strategy and part of the reason why we've been able to maintain such.
Such a robust cash balance is because we have not had to make those payments. This year, but they are deferred to next year. So they remain as accrued liabilities.
But we were able to preserve the cash this year.
Okay and burn in terms of the deferral just so we're clear our deferral run.
Run very distinctly different for every landlord at some kids the deferrals of could have started to come back in the fourth quarter from the second quarter. They could have been in 2021, they could be through the entire lease. So there was never one sites at all our deferral because we have so many unique one off landlords are very unique to each.
Landlords agreement at partnership.
Well I understand that.
The.
The input from still you provided is very helpful. Let me ask the.
Given where you are.
Right now in November with of light switch having been turned on.
Assuming all things remain the same.
One of the probabilities of view, reaching your.
Sales goals for the quarter.
We feel really good about our expectations. We are our Miss in October was not material at just the biggest Miss was the Overachievement in September and then going backwards. The other way in October but relative to what we expected October was actually pretty close the their recovery.
In November we always knew that the election is never been quote unquote, a friend and with the unfortunate dynamics happening right now around that the first couple of weeks of been challenging, but we're literally right now in the last four days ahead of the quote unquote expectation for the month end. The question will be what happens and unfortunately I can't.
I can't predict that but four days versus the first two weeks, it's like complete two different end of a continual.
Well it's interesting.
And one of the targets with regard to the ability to generate cash flow in the fourth quarter.
Sure. So no we feel very good about our ability to generate cash flow because it's our it's our our richest cash point of the year, we've been getting our stores ready and.
Our inventories in a good position, we're just waiting to see how aggressively customers come into the store income onto our website.
At this all critically important.
The holiday shopping season, so I would say, we feel very good about it.
One of the things Bernie one of the things bring you might not have caught I know I covered a lot of remarks, but it's a remarkable in some specific case at some of our very best brands. Our inventories literally are down 40, and 50% and we're chasing them incredibly well in some cases, we count flow in some case they did produce.
But in spite of that we have been in some weeks flat and negative 40, and 50 and as we chase and receipt more goods that obviously is a win the other thing is between our inventory levels, which no matter what will be down versus last year and the reduction of expense and the reduction of lease.
Just a little bit of sales momentum and a little bit greater than expectation, we will create incredible leverage and we really have concentrated giving ourselves the greatest opportunity from an operating standpoint to rightsize the business and in the downward environment, We think weve right sized at so we feel great about.
At that but if there is upside to what we expected that downsizing bill pay back measurably in leverage.
Hi, Andy to catch the 50 per cent down in inventories and flat sales.
I was wondering on less since you brought up that point, whether it changes your viewpoint on inventory structure overall.
Well, we are our goal certainly is to narrow and I think we've talked about this pretty publicly literally our vendor base for 2021 has almost been cut in half and Allison is our head merchant of.
And Katy our leader of planning of the two of them of put their heads together and really narrowed in the assortment really invested at the most meaningful parts of the mix at our merchants of done a phenomenal job working with are really important brands as you might imagine routes of rent vineyard vines Psycho Bunny all the all the brands that we've continued to really drive into and they have been great partners that help.
At steer so we do expect that between the Curations of the mix, which is greater than it's ever been before and the end the specific intend to try to turn faster there is meaningful upside and yet we're balancing that risk appropriately.
Okay and one final question if I may.
Could you amplify a little bit on the Amazon relationship.
I didn't catch all of the details in terms of the.
You know the bumps along the way, but it seems as though of the relationship.
A lot of potential looking forward, what would you say about that.
Yeah, I would I would concur completely I mean, the reality of Amazon has been no different than us in some respect that at the Civically trying to understand the customer and how fast they'll buy in our case the Amazon essentially program. Initially had some challenge no different than anybody else. It came back very strong so strong that at created.
The highest level of out of stocks, we've ever seen for the program those out of stocks given the manufacturing supply chain logistics of vessels and what have you, where we chase them hard and as we've gotten back in stock I would not say, we're where we want to be at negative 30% in terms of out of stocks, but the business is trending measurably ahead of.
Last year and as the out of stocks get reduced further and further we think there is upside Amazon as we shared on our opening comments felt so good at about the business and the opportunities for the business. We have expanded that to the good thread line, which the goods Red line is literally a second private brand within their private brands program.
And I wouldn't go on to characterize how many private brands they have but if you look at their business, there's not that many it's a pretty narrow find at group of companies. They worked with the great. Their private brand program and because we had to and we have we're getting behind one end will drive the second I feel great about the opportunity there.
They are a great partner addressing of customer base that for us is different from our core customer and as a result, we believe its additive and not cannibalistic.
Well.
Thank you very much.
Let's get book group of everything you've been doing.
The environment.
Thanks, so much of a safe and healthy holiday.
Okay.
Our next question comes from Timothy Staples of stimulus asset management. Your line is open.
Well gentlemen, considering the overall leverage of the company at the time of the pandemic started youve done a magnificent job of preserving liquidity.
You've stayed at 12 months of liquidity.
You of preserved Optionality for shareholders.
I want to congratulate you at frankly see that as a shareholder of one of your biggest fans.
Thank you so that.
All set aside you I believe had said at the previous conference call at what I would call it somewhat cryptic way of.
You can take the the task for using that terminology for at about the notion of of raising capital in in ways I wasn't completely clear about I don't believe that was mentioned here I don't know of accuse out yet so I haven't read it can you talk about that talk about the relationship of your with your lenders again, you said 12 months of liquidity.
So that really hasn't changed.
Oh from three months ago, which is good.
Can you speak to the broad aspects of what I'm talking about here.
Sure. So I think when when the pandemic first hit this was one of our very first and highest priorities.
What was making sure that our.
We were we were leveraging our credit facility to to be at the highest extent possible. We did make some modifications to our credit facility back in the spring.
And we really we feel like we've had a great relationship with our banks and our banks have been very supportive of of the XL throughout the pandemic.
You know I I don't think that there.
There is much else that we are interested in pursuing right now.
In terms of any type of equity financing to the point that we stated earlier that we do have a plan to get us through the next 12 months and that's being driven by.
Just really strong working capital management so.
Ongoing sales that we're we're delivering we've rightsized and restructured our.
Our expense space into Harvey's point, we're starting to see more operating leverage which is a key a key point to.
Getting through that when you when you look at our balance sheet.
Which the Q will be out later today, you'll see that our our debt position.
Net of cash is actually significantly down from where it was a year ago. So we feel relatively good about the capital structure right now and you know the the big thing that we continue to watch it sales.
We can control expenses and we can manage expenses, but.
But we need we need to keep a close eye on sales and that's how we plan to get three next 12 months.
Thank you for the answer I am excited as a shareholder about what you've talked about regarding the operating leverage in the business should those sales come and containing the cash burn of one final question around that is back in January before this this horrible things struck co of it.
Insiders are buying stock in the open market is high the dollar 15 of dollar 20, I believe it has been very quiet a no man's land of neither insiders buying or selling at.
The stock in the open market, considering that operating leverage and considering that there is a vaccine and considering that you may very well have 12 months of liquidity.
It would be wonderful to see that at broad based affirmation of management in at your ability to potentially.
Turning this thing around does that window opened up a few days after the earnings release as is customary or is there something that frankly has been going on which I understand you couldn't tell me.
For months on end that precludes either buying or selling by by insiders and the common stock of the company because I think you've got to a really great chance here of.
Creating value.
Yes, I think the reality is the window is not materially different quite honestly, we have at our heads down and the greatest when we as employees will create isn't keeping this business moving forward and creating our own future and and each one of us makes decisions differently. So I can't speak for anyone.
I, certainly wasn't the market before and buying and and I expect that some of us will be again at some point in time.
The other of the other thing I wanted to I wanted to circle back on your comment.
I did want to circle back on your comment relative to Optionality. If you will I think that part of what we've done and communicated as you referred to Cryptically in terms of fund raising and what have you has been nothing more to continue to create optionality. We we have been very aggressive on making sure that decisions can be made in a timely way versus out of reactive way in.
Our greatest success is giving ourselves optionality and being agile and we continue to do that in every part of what we're looking at so in terms of any any fund raise or what have you at I wanted to be clear, it's all about optionality.
Thank you.
Congratulations again, and we've seen a lot of very very difficult things happening in the retail space and the fact that you guys are still in control of your Destiny is a testament to your skill sets and the quality of this management team. Thank you.
Well. Thank you very much operator, I think thats the end of the questioning today I would just like to suggest everyone's day, they stay at home where year masking the hub of your loved ones and thank you very much of a have a wonderful Thanksgiving.
Ladies and gentlemen, this doesn't because of the conference you may now disconnect everyone have a great day.
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