Q2 2021 Destination XL Group Inc Earnings Call

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Ladies and gentlemen, todays conference is scheduled to begin shortly please continue to standby. Thank you for your patience.

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Ladies and gentlemen, thank you for standing by and welcome to the second quarter 2021 destination XL Group, Inc. Earnings Conference call. At this time all participant lines are in a listen only mode. After the speaker's presentation there'll be a question and answer session.

Ask a question during the session you will need to press Star then one on your telephone.

Please be advised that today's conference maybe recorded if you acquired any further assistance. Please press Star then zero I would now like to hand, the conference over to your host today, Shelly <unk> director of financial reporting and SEC. Please go ahead.

Thank you Sarah and good morning, everyone. Thank you for joining us on destination XL group's second quarter fiscal 2021 earnings call on.

On our call today is our president and Chief Executive Officer, Harvey Kanter, and our Chief Financial Officer, Peter Stratton.

During today's call, we will discuss some non-GAAP metrics to provide investors with useful information about our financial performance. Please refer to our earnings release, which was filed this morning and is now available on our Investor Relations website at Investor Dot EXL Dot com for an explanation and reconciliation of such measures.

Today's discussion also contains certain forward looking statements concerning the company's updated sales and earnings guidance and other expectations for fiscal 2021 SEC.

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, including but not limited to ongoing searches of the Covid Delta variant potential supply chain issues and ongoing labor challenges.

Patient regarding risks and uncertainties as detailed in the company's filings with the Securities and Exchange Commission I would now like to turn the call over to our CEO.

Harvey Kanter Harvey.

Thank you Joanna and good morning, everyone today, Peter and I will share with you. Both the progress we are making with our business and our expectations for a continued recovery.

At a high level I can tell you that we are very pleased with our results.

It's inspiring to see the consumer demand coming back at an accelerating rate even more inspiring to see our customers responding to our ongoing digital transformation, which we began back in 2019 and helped us to respond to the challenges of the COVID-19 pandemic.

Consumer engagement with DSL over the past three months has been remarkable this quarter. It can be considered a very important chapter in the context of the strategy, we've been pursuing and executing and the results we have achieved.

Our digital transformation, which has been steadily developing and is a major underpinning to these results has provided a strong belief that our business was poised for an inflection.

In our second quarter, we saw big and tall customers surge into the stores that onto our website to drive a level of sales and profitability far greater than previously expected.

This is happening across all customer demographics that includes both current and new to <unk> customers, who have not shopped with us before.

We believe there is a material change in how consumers are thinking about EXL.

We know that a lot of new customers are starting their shopping journey digitally finding us and based upon some consumer research. We have conducted we believe we're taking share of market.

We have continued we are seeing continued growth with new to file DXP customers growing 28, 5% in Q2 as compared to the same period in 2019.

Our financial performance in the second quarter surpassed all internal expectations initially forecasted back in mid May.

Year to date for fiscal 2021 we have posted an adjusted EBITDA of $48.0 million.

To put that into context, we have achieved in six months a level of profitability greater than any 12 month results that have been posted in the last 20 years by our company.

This result was driven by improvements in gross margin from our reduced promotional strategy improvements in the occupancy costs from our restructured lease portfolio and improvement in overhead from our restructuring of our selling general and administrative costs that was implemented in fiscal 2020.

All of these elements combined with leverage from greater than expected sales demand contributed to an EBITDA margin for the second quarter in excess of 20%.

While we remain cautious given the ongoing surges of the Covid Delta variant.

The ongoing risk in the supply chain today, we are raising our guidance for the full year and I'm looking forward to talking to you in greater detail about where we believe our business is headed.

Before I get ahead of myself I want to acknowledge and thank all of our frontline associates, who rise every day to make our customer look and feel his best.

Since the beginning of the pandemic our associates in the stores and the distribution center.

Guest engagement center and in our corporate office have answered the call every day, they're amazing team. It is because of them. These results have been created and that is something we must all be thankful for.

You all for your hard work support and dedication to Dx sale at our customer. It is because of you our stores can open on time, our product gets shipped and delivered.

Customers can get answers when they need them.

From the bottom of my heart and our leadership team. Thank you.

Are worthy of our highest esteem.

I'm planning to cover two topics today first I want to talk to you about our second quarter performance and what we're seeing and hearing from our customers and SEC.

I wanted to talk to you about our priorities for the remainder of the year and how we intend to fortify our marketing position to maintain this positive momentum into fiscal 2022.

I am very pleased to announce that our overall comp sales rate for the second quarter was 21, 6% as compared to 2116, 2% as compared to 2020.

Since 2019 was our last normalized year from a financial comparison standpoint, we will be making most of our year over year comparisons to our Q2 2019 results.

Comp sales growth in stores was 13, 1% and comp sales growth and direct was 52, 2% as compared to 2019.

In total second quarter sales were $144.0 million compared to $125.0 million and our adjusted EBITDA for the quarter was $37.0 million compared to $8.0 million in the second quarter of 2019.

And finally, our net income was $29.0 million compared to breakeven in the second quarter of 2019.

These results exceeded our expectations and are a direct outcome of the leverage we have created as we re crafted our strategy and our operating model.

Our plan for the year was constructed on the thesis that business would return gradually during the year, but we have seen an acceleration in the first quarter and business continued to accelerate in the second quarter two levels meaningfully surpass it in 2019.

We have seen successive improvement each month in fiscal 2021, with our most loyal top decile customers returning to shop with us.

We can also report that our sales growth rates for August have continued on a similar trend to what we reported for Q2.

In stores, we saw an acceleration in comps each month as the quarter progressed in may our comp store rate was six 9% in June 14, 7% and in July 18, 2% all compared to 2019.

This was a significant bump from the three 1% comp we experienced in March and April.

Conversion was up 12% dollars per transaction up 10%, but was most encouraging was that traffic continues to work its way back towards 2019 levels.

We exceeded our sales plan and 285 out of 297 stores this quarter, which is 96% of our store portfolio.

Regionally, we saw the southeast Midwest and South central all performing exceptionally well.

The Pacific Northwest Northeast and mid Atlantic have opportunity to improve further.

Quarter, while still having significant positive comps the COSE lagged 600 basis points behind the middle of the country.

All regions had a comparable sales increase in the second quarter as compared to fiscal 2019.

One of the things. We're most pleased with is that our direct business did not fall back as our store comps increased our direct comps not only continued to hold up.

Further accelerated in Q2, our direct growth shows the sustainability of our digital transformation and we believe it is a testament to our ability to stand out as a digital first branch.

Our direct comps by month were 48, 8% in May.

53, 4% in June and 54, 6% in July all once again compared to 2019 direct was 28, 1% of total sales in Q2 as compared to 21, one in Q2 2019, and we expect our direct penetration for the full year to be approximately 30 <unk>.

<unk> as compared to our full year annual printed present penetration in 2019 of 23, 1%.

For the quarter, our direct business was up 52, 2% driven by a combination of improvements in web traffic conversion and basket size, we believe our digital marketing investments and optimization of our digital infrastructure are driving significant inflection in new DSL customers.

Now, let me shift gears, a bit and talk about product margins and product itself.

We saw continued performance in our casual and sportswear categories, but we also saw remarkable resurgence in tailored clothing.

Our merchandise assortment is about 55% private label <unk> 45 per cent designer collections and our sales penetration for the second quarter was relatively consistent with the inventory composition.

We did see slightly higher selling velocity from designer collections, where brands such as polo Nautica and Reebok drove the collection business.

Tailored clothing drove 12, 8% of the Q2 business compared to 16, 7% in 2019, and just six 8% in 2020.

And dress shirts saw the greatest improvement as our customers started to participate in the formal events such as weddings once again.

We believe we are seeing a shift in consumer preference emerging with payors casual and tailored together.

We are even testing a new floor set by integrating our club department, which is primarily dressed aware with more casual sportswear for more relaxed and relevant lifestyle.

How many times have you seen it somewhat aware of sport coat or dress woven shirt with a pair of jeans or even stretch jogger trousers.

Or a fleece vest over this thing it's the new uniforms for many on Wall Street.

If there was one constant challenge throughout the quarter is that we continue to battle to secure more inventory.

Obviously the over performance in sales to our plan in the second quarter had an impact on our inventory positions.

Some stores performance by brand was dictated by inventory availability.

<unk>, where we were in a strong inventory position outperform brands, where we were light on inventory.

We believe customers will continue to buy merchandise at a greater than pre pandemic levels and we are continually chasing to bring in more inventory to keep up with the demand.

Even with our vendors to add more receipts to be in a stronger inventory position at the end of the fall season.

We also continued to work through challenges with ocean freight capacities in the cost of containers, which in some cases, it's three to four times, what they cost pre pandemic and lastly, we continue to consider shipping goods by air to support this growing demand.

Furthermore, shortages of truck drivers have led to delays in price increases for transporting merchandise domestically and we expect this challenge to continue through the second half of 2021.

Despite these challenges in getting goods to the port and ultimately to the sales floor, we have been successful in procuring fabrics to support production.

Our sourcing team began working with our merchants and planning partners to chase goods as early as February.

If we can find a way to ship. It in most cases, we are able to get what we need and then selling through it and ultimately still turning our inventories faster than our historical pace.

The flip side to the inventory challenges that it creates an ideal environment for us to execute one of our primary strategic goals, which is repositioning the <unk> brand to be less promotional.

Our messaging to our customers in the second quarter continued to lean into the brand's positioning built around our proprietary fit.

Curated any largely exclusive assortment of private label and national brands.

And an experience built around their respect and value for big and tall consumers, who trust us.

The direct outcome of this which is the customer who leads our store full of confidence and empowered to face today happy satisfied and belonging to the Dx L community.

This strategy allows us to shift away from a value proposition that is highly promotional and discount driven to a proposition that is grounded in comfort.

And experience.

Our thesis is grounded in personalization and relevant messaging, which we are increasing and at more scale and that enables us to be more relevant without the need to offer our customer anything to engage further.

We were essentially non promotional in the second quarter with only limited targeted promotions ongoing promotional elasticity testing and deeper file promotions engaging lapsed customers.

There was no need for broad based discounting for father's day and memorial day, and that drove stronger merchandise margins and profitability.

We have also reduced the level of clearance merchandise, which we expect to drive more full price selling.

Our reduced promotional posture started in Q3, 2020, and we have been making it more ingrained in our marketing and across all channels.

The evolution has been intentional and it is an important strategic component of our long term strategy.

It allows us allows us to cut down our markdown rates in the second half from two years ago. This has been a huge win and a driver of our second quarter results. Despite all the upside created by being virtually promotion free we do expect there will be certain times of the year, where we will need to resume some level of moderate <unk>.

And we will incur some higher level of markdowns later in the year.

But at this reduced promotional posture has done for us to support the repositioning of <unk>, not as a discount and coupon store, but as a store who understands and honors big and tall Guy is better than anyone else in the market.

And that is what we are really all about.

We know that some level of performance in the second quarter was driven by a tailwind from pent up demand from the pandemic stimulus checks and at some level of revenge spending, but we also know through our CRM system and customer surveys that we are reactivating some of our best customers and we are attracting many customers who.

Shopping at D itself for the first time.

Our CRM data on newly acquired customers shows a few surprises that we believe are long term tailwind.

Like to share some examples with you.

First we are seeing more female customers than we have before.

Tracking the female customer has been elusive for so many years, but we are undoubtedly seeing her more now than pre pandemic.

We theorized that she is helping him get back in the game.

Either dressing up as many of our guests return to the office or just getting back into the world with new clothes and a new look.

We are seeing a greater representation from the middle and upper rack sizes or <unk> and up.

And we do believe this is somewhat the shifting weights lines many of us have experienced while being cooped up during COVID-19 lockdowns.

<unk>, we believe that the outcomes. We are creating are at least partially due to the improvements we've been making for the past two years and how we segment communicate and engage with our customer base and a more personalized and specific way.

Just as a reminder, we believe the total addressable market for our core big and tall sizes to excelling up is north of $10 billion. When you include one XL. We think the total addressable market is north of $15 billion.

Which means there is ample opportunity for us to continue to take market share.

Hopefully you have noticed some not so subtle changes to our marketing strategy first we have been making a greater effort to build on our values of inclusivity and diversity. Our creative messaging is now using more models that represent a broader range of body types we have.

<unk> unique models today for fall.

We used to feature only four different models.

Second we are ramping this further with greater inclusion and being representative of our consumer base in our marketing.

We're also using much more user generated content and some of our newer models, our customers who connected with us through social media.

We're also focusing on more individualized content and storytelling, which is authentic and allows us as a brand to connect more relevantly with our customers on an individual basis.

And third our segmentation based approach gives us greater flexibility to show an individual customers specifically, what he wants to see across different mechanisms like E Mail the web site direct mail and other communication rather than mass marketed generic messaging.

We will also be driving personalization up another level in fall with variable printing capabilities and mailers for more relevant and targeted messaging for different customer cohorts fourth in the second half of the year, we will be focusing more on brand marketing initiatives like connected TV such as <unk>.

Tube, and Hulu and creating relationships with content media companies to drive greater brand awareness without reliance on promotions.

And fifth on the digital technology front, we have invested in outfitting software designed to help customers complete their look.

Most product pages on our E. Commerce website now include outfits that go with with the item to help our customers to see the entire outfit and feel great by looking great.

This will also help build customer trust and <unk> as the brand with the largest most unique and often exclusive selection of apparel merchandise for big and tall man.

And lastly, we have also a new app under construction that will enable us to extend the user experience, which will provide not only a more stable environment.

In a more flexible platform that will allow us to build more functionality and product offerings into the app going forward.

We have conceptually as a team and clearly articulated our vision for the business, bringing this to life now and we'll continue to do so throughout 2021 to further strengthen our defendable position our moat as we have referred to it and we look to greater inflection in 2022 and beyond.

<unk>.

We lead with <unk> positioning in everything we do today and believe it is this positioning its competitive stance that makes us the leading big and tall men's apparel retailer with the greatest possible potential for growth in the consumers' mind share.

And finally, let me give you an update on wholesale in total our wholesale business, which is primarily with Amazon generated sales of $900000 for the second quarter compared to $9.0 million in the second quarter of 2019.

Our sales have fallen back some in our b to B wholesale business with Amazon what is driving this is the ongoing challenge to order what they need when they need it and the teething challenges in trying to build the business together clear.

Clearly impacted like every other business with supply chain challenges. We also continue to search for other opportunities to grow the overall business and with that said I would now like to turn the call over to Peter for an update on financials Peter.

Thank you Harvey and good morning, everyone.

As Harvey discussed the recovery in sales that we began to see in the first quarter continued to accelerate throughout the second quarter and at a rate much faster than we expected.

The operating leverage generated from these higher sales combined with the reduced promotions and cost reductions drove our strong earnings this quarter.

Additionally, the cash flow we have generated this year enabled us to pay off our revolving credit facility and ended the quarter with our lowest total debt level in many years.

Based on the strength of this quarter's performance, we are again, increasing our full year sales and earnings guidance, which I will review with you after I discuss the quarters results.

Due to the significant impact that COVID-19 had on our second quarter 2020 results I'll also compare our results against Q2 of 2019 for better comparability.

So let's start with sales.

Total sales for the second quarter were $144.0 million as compared to $80.0 million in the second quarter of fiscal 2020, and $125.0 million in the second quarter of fiscal 2019.

On a comparable basis.

<unk> increased 21, 6% over the second quarter of 2019.

Stores were up 13, 1% for the quarter and direct was up 52, 2% to 2019 levels. Both channels saw business accelerating month over month as the quarter progressed.

The Dx all dot Com website, which is the biggest contributor to the direct channel was up 66, 4% over second quarter 2019.

From our prior earnings calls most of you are probably familiar with our omni channel capabilities, whereby our stores are able to assist the customer in placing an order.

Online, which we call our universe.

Likewise, our stores play a key role in fulfilling many of our online orders if the merchandise is located in a store rather than our distribution center.

For the second quarter stores assisted either in the origination or fulfillment of 44% of our direct channel transactions.

This is just one of the ways in which our stores have evolved to meet the changing needs of our customer.

Speaking of our stores I would like to give a quick update on where we are with restructuring leases and other reducing occupancy costs.

We continue to engage with landlords to renegotiate leases that are no longer at market rates.

The pace of negotiations has slowed dramatically compared to 2020, but we are pleased with the progress we've made so far.

In the past 18 months, we've restructured 133 individual store leases more than one third of the chain.

Which are expected to deliver over $18.0 million of savings over the life of the leases, including $8.0 million of expected savings in fiscal 2021.

We continue to push hard to reduce lease costs with those landlords, where our rents are out of line with sales.

Our gross margin rate inclusive of occupancy costs was 51, 7% as compared to a gross margin rate of 28, 1% for the second quarter of fiscal 2020, and 44, 3% for the second quarter of fiscal 2019.

The 740 basis point improvement over 2019 was a combination of 390 basis points of occupancy leverage and 350 basis points of improved merchandise margins.

Occupancy costs decreased by $5.0 million as a result of closing unproductive stores and the rent reduction I just talked about.

The improvement in merchandise margin was directly related to the change in promotional strategy that Harvey talked about earlier.

Although we saw higher freight costs due to supply shortages in the transportation market and inflationary pressure as cotton prices are rising the impact of these in the second quarter was more than mitigated by our markdown savings.

Now, let me move on to selling general and administrative expenses.

As a percentage of sales SG&A expense for the second quarter of fiscal 2021 was 31% as compared to 33, 7%, but the second quarter of fiscal 2020, and 38, 5% for the second quarter of fiscal 2019.

The 31% rate was far lower than our historical expense rate and was the result of the cost reduction actions that we implemented in fiscal 2020.

These actions were intended to not only preserve liquidity.

But to lower our operating cost structure long term.

On a dollar basis SG&A costs were down $12.0 million compared to two years ago.

We're being very diligent about preserving as many fixed cost reductions as possible. Despite the fact that certain variable costs will increase as the business accelerates.

We will continue to invest in our store associates to ensure they are properly trained and that our stores are staffed to provide an exceptional DSL guest experience.

But we expect store costs to remain significantly below historical levels.

Customer facing costs were 16, 9% of sales in Q2 as compared to 23, 9% in the second quarter of 2019.

Corporate support costs, which include the distribution center and corporate overhead costs represented 13, 2% of sales in the second quarter compared to 14, 6% of sales in the second quarter of fiscal 2019.

Adjusted EBITDA was $37.0 million for the second quarter compared to a loss of $7.0 million in the second quarter of 2020 and earnings of $8.0 million for the second quarter of fiscal 2019.

Net income for the second quarter was $29.0 million or <unk> 36 per diluted share compared with a net loss of $17.0 million or <unk> 21 per diluted share for the second quarter of fiscal 2020 and breakeven net income for the second quarter of fiscal 2019.

Next I'll turn to cash flow and the balance sheet.

Our free cash flow, which we define as cash flow from operations less capital expenditures for the first six months of fiscal 2021 was proceeds of $45.0 million as compared to a use of $12.0 million for the same period in fiscal 2020, and a use of $13.0 million in fiscal <unk>.

2019.

This improvement is primarily due to our improved earnings.

This free cash flow enabled us to end the second quarter with a zero balance in our revolving credit facility for the first time since fiscal 2012.

If we look at debt net of cash this decreased to $11 million at the end of the quarter from $61 million at the end of Q2 2020.

And $65.0 million at the end of Q2 2019.

Our revolving credit facility had $66.0 million of excess availability at the end of the quarter.

Our revolving credit facility remains in place until May of 2023, and we expect to continue to access it from time to time to support seasonal inventory purchases and other business initiatives.

Our inventory balance at July 31, 2021 was $77.0 million as compared to $91.0 million at August one 2020, and $114.0 million at August 32019.

The $14 million decrease since last year and $37 million decreased over the past two years was directionally in line with our goals of narrowing our assortment focusing on brand exclusivity and driving faster inventory turnover. However.

However, the decrease in inventory over the first six months was a bit more than we would've preferred as Harvey discussed earlier. It has been a constant battle to secure enough inventory with customer demand stronger than we had expected and the challenges of ongoing ongoing global supply chain disruptions.

Nevertheless, we believe our current receipt plans are sufficient to support our sales forecast.

We will continue to chase goods and anticipate the GAAP between this year's inventory and our historical levels to narrow somewhat between now and the end of the year.

At July 31, 2021, our clearance inventory represented eight 9% of our total inventory as compared to 11, 3% at August one 2020.

Our results for the second quarter far exceeded our internal expectations and we are cautiously optimistic regarding our forecast in the second half of the year.

To be perfectly clear our guidance update assumes continued stability and consumer confidence and customer behavior. Despite the ongoing challenges we face from the COVID-19, pandemic and supply chain risks for.

For the full year, we expect sales to range from $490 million to $505 million with an e-commerce penetration expected to be approximately 30%.

We expect adjusted EBITDA to range from 65 million to 72 million and net income for the full year is expected to be 64 cents to.

$78.0 per share.

Finally free cash flow is expected to be in excess of $50 million.

The high end of our sales guidance of 505 million would imply a comp sales rate to 2019 in the low double digits and a gross margin rate in the high 40% range.

We expect Q3 to be our lowest performing quarter of the fiscal year as our customers buying habits are typically lowest in August September and October we.

We do expect to have a strong holiday season, albeit more promotional than the first half due to the time of year. So our gross margin is expected to be slightly lower in the second half of the year than compared to the first half.

In many ways, we've had a positive environment for performance in the second quarter strong sales leverage low promotions and razor thin SG&A expense.

We do not expect that we will be able to hold as low of a promotional environment going forward and we expect to add back some level of SG&A expense.

Our guidance on the high end of $72 million of adjusted EBITDA on $505 million of sales is a 14% adjusted EBITDA margin.

We believe this is a unique year and long term, we are working to sustain an EBITA margin of 10% or greater.

There is still much work to be done and we will continue to drive shareholder value growing DSO into the premier shopping experience for all big and tall man.

Lastly, I would like to provide an update on our common stock listed.

The company has applied to rejoin at NASDAQ and while we have not yet received formal approval, we expect NASDAQ will approve our application and invite us to rejoin the exchange very soon.

With that I would like to turn it back over to Harvey for some closing thoughts.

Thanks, Peter as you hopefully have heard now we remain energized and about the potential that lies ahead.

Despite the ongoing challenges associated with the COVID-19 pandemic, some of which may have not yet fully understood as well as supply chain risks, we remain cautiously optimistic.

We have an incredible team an obsessive focus on our customers that our plan to create a meaningful shareholder return.

<unk> Big and tall is all we do we are not just in the aisle or rack in a store we arent entire store. We believe we have entered a new phase in our company's history and that we are in the most by net solid financial position in recent company history.

Most of all we believe we have a strategy to engage consumers and what we do best creating memorable experiences for big and tall guys to look and feel their best we do that by offering the most extensive and uniquely curated assortment from value price essentials to luxury brands and exclusive designers both on.

Online and in store, giving an underserved customer the be all and all place to shop and interact and finally, we know we have an incredible employee base that is passionate and committed to our customers and that gives us the confidence that we will continue to make inroads into taking.

<unk> share of market and with that we'll now take questions.

Thank you as a reminder to ask a question you will need to press Star then one on your telephone to withdraw your question. Please press the pound key.

Please standby, while we compile the Q&A roster.

Our first question comes from the line of Jeremy Hamblin with Craig Hallum Capital. Your line is now open.

Thanks, and congratulations on a really impressive performance.

I wanted to start by just understanding the composition of.

The acceleration that you've seen in your comp trends. So can you give us a sense Peter for.

That.

Same store sales growth how much of that is growth in average transaction value.

Versus total transactions versus 2019 levels.

Sure I'd be happy to give you a little a little color on that so we definitely saw a slight increase in conversion, we definitely saw a slight increase in average transaction levels, but the biggest level of change really came from traffic coming into the stores.

You know, we as Harvey talked about we've seen new.

New customers coming in we've seen a lot of our returning customers coming back to the stores.

But more than anything it's really just been the sequential improvements in traffic that we saw each month during the quarter.

Thanks, that's really helpful and wanted to get a little more insight I think what I heard.

From Harvey his remarks was that you saw new customer growth of over 28%.

I wanted to get a little more color around.

You know just what type of customer you're seeing.

How youre kind of cleaning that.

Type of information and how much is embedded within that of.

Those new customers are they are they totally new customers to the concept are these.

Inclusive of reactivation of customers.

Yeah, Jeremy Great question I'll try to recap this is harvey the new customer growth that we're seeing is really primarily customers that are not in our file have not been in our file and I alluded to research some that we've done softly and clearing those customers asking is it the first time you shop with us.

If you haven't shopped with us before where have you shops, and if you have a shop with us for where else do you shop and what we're absolutely seeing is a customer that is not shopped with us before coming from the places you would expect maybe not paying as much attention to the big and tall consumer because they have other priorities, which although logical.

Leaves us the opportunity to really take share of market and so we're seeing that through a pretty meaningful level of research about I think 18% of our customers have answered the question and they are coming from places that you would expect other men's apparel businesses to be possible, but not paying as much attention.

To a smaller business number one number two we're seeing it through the query of search and a lot of customers are coming to us and what we're seeing through our own data and some available online data is that our growth is accelerating whereas others is relatively stable and again that alludes to the 28, 5%.

A direct to consumer growth that we're seeing from our file primarily online but also in stores.

Wow.

That's impressive.

Let me I also wanted to just get a little more color on.

The sales trends, which obviously have been accelerating you you had a pretty extraordinary increase in your total sales guidance for the year, and obviously have momentum and clearly confidence in the back half of the year.

Wanted to just get a sense, if you could provide a little bit more detail around the start to Q3.

Whether or not you you indicated that it's similar to what you delivered in Q2.

My sense based on the guidance raise is that it's more likely to be like you saw in July.

And then what you did for the <unk>.

The quarter in total, but any additional color that you might be able to share on the Q3 start.

Yeah sure. So Jeremy this is Peter.

Yes, you're exactly right the performance in August was.

More similar to what we were seeing in July than what we were seeing in May.

The customer has been very resilient.

He's coming into the stores and snapping up product as soon as he can get his hands on it so.

We have not seen a slowdown in so far the performance has been very consistent with what we saw.

June going into July.

The other thing I would add Jeremy is that one of the challenges we've pretty directly addresses the ongoing chasing of goods and the team has done a remarkable job. Both in terms of what was available from pack and hold literally at manufacturers that really work with us in our direct supply chain overseas, we started to receive those goods.

And that helped accelerate but I can honestly tell you that the level of turn on those goods has been remarkable that being said, we're kind of at a low point on our inventory and we expect even by the end of September to materially impact our inventory levels and that will allow us a greater ability to not just sell what's in the store and available.

<unk>, which is which in some respects, it's really remarkable the consumers coming in and I would say, we're selling through clearance and colors that normally would not sell at the levels. They have but there is a need for things like weddings, and what have you, but when we get back into even in a better position and we alluded to things like airing goods in which normally would.

Not be something that would be a cost.

Good cost and cost prohibited really we've been airing goods in but as we have really chase the goods and we expect that each month going forward, we'll be in a better materially better inventory position and hopefully that will be true nothing will be greater hiccup that we expected that will also further hopefully.

Now us to fulfill the guidance that we provided.

Understood.

And I also wanted to.

Get the callout on geographies Pacific Northwest Coast basically.

You mentioned are Comping about 600 basis points below the rest of the chain wanted to understand embedded within your full year guidance are you assuming normalization of that do you.

Do you believe that the differential in comp is simply.

Our reaction to reflection of sentiment around Covid and Covid protocols.

But what's embedded within that guidance do you expect that to normalize by Q4 or do you assume.

That trend continues.

The back half of the year.

Sure. So I'll take that one so with regard to the guidance for the year, we expect that the numbers will start to get closer to one another in fact.

We did see them start to get a little closer in.

In July then they started to separate back to the 600 points in August so, it's really difficult to to get our arms around that but we do think that over time, they're going to neutralize and get closer to where they've been historically, which is very close to one another but it's primarily.

We believe it coincides very much with what youre seeing more socially around.

Some of the Covid risk.

Restrictions the Pacific Northwest and the northeast.

Particularly been lower than the middle of the country.

So.

We are expecting it to get better.

Over the second half of the year.

Great.

And then I wanted to ask a couple of questions around your gross margins, which are truly extraordinary.

In terms of.

You know what you're seeing in freight impact you noted that your merch margins were up significantly over 300 basis points versus 2019 levels, but that's that's despite the impact youre seeing from freight I wanted to see if you could actually.

Be more specific what was the drag from freight.

Either versus last year versus 2019 levels.

Yeah sure. So again, we're making all the comparisons to 2019.

I would probably I would put it at about 100.100 to 200 basis points as the drag on the the freight.

The improvement in promotions.

And the impact that that's had on margin has really been remarkable and it's it's more than than covered that that pressure that we're seeing from.

Some of the supply chain challenges, but.

It's like I said, maybe 100 to 200 basis points.

Got it and then.

The last one on the gross margins.

Your rent, obviously is down significantly both from store closures as well as the.

<unk> of 133.

Stores' leases.

Noting here you've got 119 over the next two years and I think all of those 133 stores, you said $17 million over the life of the lease.

Of the 119 that you have coming up over the next couple of years.

I imagine, you're probably not going to get $17 million.

In savings.

Things, obviously have improved across retail.

What are your expectations how are those negotiations going.

Do you think it's something where you might be able to get $10 million of savings on those next 119 locations.

Yeah, no so I.

I mean, we're definitely continuing to renegotiate.

We're seeing some savings, but it's definitely getting more difficult than it was pre pandemic are during the pandemic.

But we're very very comfortable with being able to continue to generate some savings.

And that's essentially what we're going to we're going to continue to do and so Jeremy I'm just going to ask that we move on to the next.

Next question person in the queue and we'd be happy to follow up with you with more questions. Afterwards, thanks, so much guidance.

Thank you.

Thank you. Our next question comes from the line of Eric better with SCC Research. Your line is now finished.

Good morning, congratulations on a great quarter. Thanks.

Thanks, Eric Thank you.

Hum you kind of.

Talk a little bit about this <unk> opportunity you mentioned of about $5 billion.

When you look at that customer. They also have as they get a little bit I guess, the bigger taller they are a little bit more in terms of options and you know what.

What are you seeing and how can you think you can attract and keep that customer.

Going forward.

Yes, Eric we really alluded to a bigger market, but that is not where we're really headed today. We are trying to leverage the share market gains greatest with respect to the core business that is greater than that size range of course, we've talked about that size range extending the opportunity of our market positioning.

But you just specifically and directly really alluded to the fact that it is outside of the core part of what we do and so we recognize that if you look at the addressable the broader addressable market. That's the reference to $15 million, but we believe we have such a meaningful opportunity to really to address the share gains in the 10.

That exists and we understand that customers have actually moved up on that size range not down so not not to say that we won't go there eventually but to your point that is a space that other people are paying as much attention to as part of their core business. Unlike the space that we are referring to where they were there.

Not in the business that we are in at the level of error in it.

Got it that makes sense when you look at I don't want to talk about the new customers P. There you've talked about being much more focused with both your marketing and your <unk> and your merchandising other pieces those new customers and what are you. How are you thinking about leveraging them and keeping them on board and driving them to do even more business with you.

Through E mail through all the different levers that marketing levers that you have.

Yes, we have measurably moves our capabilities in terms of individual quasi one to one marketing and the reason I say quasi wunderman marketing is we literally don't market to each individual consumer but at this point, we have relatively speaking nine consumer segments. So there is active and either casual Carl there's.

While the Wall Street, and those names and references are two unique customer buying categories and our marketing team is interacting with them via email through even how they come to our sites of our new customer came to our site and we have no reference to cookies or experiences on them, we will serve up a different.

Initial website experience that we would for our customers coming back and purchases with us and we will continue to move down that path by representing ourselves uniquely relative to what they bought and what they might be buying I think I've referenced before that where we have historically message to one single message, if a customer and <unk>.

We know this actually today has only bought regular price we would never send them a clearance message at this point if they have only bought purely clearance we would nevertheless send them a one of our greatest brands like Ralph Iran's introduction, because just haven't represented that they by themselves and we're very cognizant of things like really.

A checkout right abandon the rate and even E mail opt in or opt out and what we're looking for is the greatest level of initial open right click through and then obviously conversion so that kind of marketing is materially different than the other thing I would add and the reason I referenced not so subtle elements of marketing is that really if you.

Study, our marketing you will see that is it materially different and more unique each day and how we present ourselves so whether its fall goods or summer goods or specific brands or utilization or fashion and function or features and benefits. We are really talking to why we're relevant in.

Unique ways that address a lot of consumer segments much more so than when we had one mass E mail or one mass marketing message.

Yes.

One more question.

In terms of mass marketing messages. So I know we are entering football season, and historically you guys have done stuff with the NFL and other pieces online and.

On <unk>, how does this year look in terms of your thought process for something like that.

Well, specifically spoke to the fact that we are extending our awareness building and consumer engagement and what we would call streaming and more digital interaction via video and things like that Youtube Hulu et cetera, we don't expect but are still evaluating other broad based campaigns, but the unfortunate.

<unk> is when you execute broad based mass media campaigns, you are really not talking as much to your customer and you are talking to all customers in the productivity of that is just not where it needs to be and so we've continued to leverage and drive a level of efficiency as we've become much more oriented around the digital transformation strategic.

And tactical elements, which obviously are allowing our marketing to resonate with our core customer versus customers that don't care about us.

Great Good luck for fall and holiday seasons.

So much for your interest really appreciate it.

Thank you. Our next question comes from the line of Mike Baker with D. A Davidson your line is now open.

Great. Thanks, guys, Hi, how are you.

I'm wondering if you could pick.

In broad strokes discuss what inning you guys think you're in in terms of the some of the inventory and marketing improvements you've clearly you know come along way how much more is there to go both in terms of financial qualitatively and possibly quantitatively.

Yeah, great questions I think on inventory, there's two different elements to it one of I think we have a world class inventory team, our planning and merchandising and global sourcing teams work in unison in a remarkable way it allowed us to really get out of goods early in the pandemic. It allowed us to very proactively drive decisions to get back in.

The goods early early in the year and I think it is literally a defining element of how we've been able to navigate really supporting the customers' desire to buy product and the demand needs. So I think that's that are quite remarkable I think the other end of the issue on inventory is the fact that demand is just so exceeded our.

Our expectations and our customer has come back so quickly that on a scale of one to 10 I might say were a five or six right now in inventory and we hope and believe as I've alluded to that September will build in October November and we will be back to something more like a seven or eight but we will be chasing goods I think through the balance of.

The year, there's too many variables that I think are challenging in the flip side is as I spoke we have the core skill set to be a nine or 10 on inventory I think the reality is in this environment. The greatest level of capabilities are still being impacted measurably by containers has the ability to get goods or what have you.

That's the first answer the question in terms of marketing we have typically talked about that we think we have moved measurably in our digital transformation and how we market to our customers and although I like to think we've moved measurably in terms of our core capabilities and we absolutely have I think we're in the sixth sixth inning, maybe out of.

A nine inning game, if you will for lack of a better way to say it or on a scale of one to 10, maybe a six.

I think we have lots of opportunities to learn and to continue to really understand how to engage consumers and digitally I think the world is changing and so things like the collection outfitting that I referred to or the future potential of what would be Amit avatars or digital fitting I think are.

Elements that are really critically important and we are chasing understanding what they might mean in addition to AI and ml, which is being will be.

<unk> to be used in our marketing to learn and so I think like anybody else in the direct to consumer space. There's lots of movement on the customer's part and we continue to pursue opportunities to learn to grow and really increase our core skill set.

Yes that makes sense a couple more quick ones one a follow up to that I think you said you think EBITDA margins can be 10% plus over time.

My calculation at least hear about nine eight right now on a trailing 12 month basis, so still a little bit of room to go there and I think that probably speaks to the gross margin comments you just made on the other hand, though and we know there's still some room in occupancy on the other hand, though are there areas you need to reinvest.

Probably payroll I assume as that continues to be a pressure point for a lot of retailers, but any other areas, where we think costs might go up.

Yes, that's another great question. So there's.

There is definitely some SG&A areas that where we addressing so.

Whether that certain areas of.

Overhead.

That we had really cut down and just we're sort of choking those areas, we may need to make some reinvestments in and making sure that we're recognizing our people for the work that they're doing I think beyond that the biggest areas are.

Say, our warehouse and our infrastructure, our marketing efforts and our technology areas.

<unk>.

I think all of those are areas that we have opportunities to continue to invest in and we are.

We're going to we're going to continue to do that.

I'm just going to ask Mike that we just move on to the next caller since we're coming up on the top of the hour, but thank you for your interest absolutely sure. Operator. This will have to be our last question. Unfortunately, we're running out of time and we will be happy to follow up with all of our Investor base offline on call. So last question.

Our last question comes from the line of Williams and Lindsay went to visit narrow Street capital. Your line is now open.

Hi, guys. Congratulations can you hear me.

Yes, we can hear you great I just wanted to double click on the inventory issue I mean, obviously the results today are outstanding but it sounds like inventory was down sequentially and you said that brands that had inventory or.

Driving more sales I guess is there any way to quantify how much higher the sales would have been had we had adequate inventory across kind of the top brands.

I think the answer to the question is we're not sure because quite honestly, what we've seen is a remarkable level of sell through on on goods that may not have sold at the same level, but we think we're fulfilling and satisfy most of the demand what we've really become is incredibly clean and really allowed us to.

Opportunities to chase into new goods in fresh receipts and so we actually feel pretty comfortable with where we are the hope and belief is that we will get what is on order and we will be in a very strong inventory position, but we really have continued to experience remarkable sell through of inventory and equally so sell through of inventory, which.

In some cases, we literally have not sold in a long time, where we are.

And that is a positive outcome for us.

Okay, Great I guess, just can we get a I mean I'm thrilled to hear you guys are gonna uplift to NASDAQ, we get a little bit of.

Can you help explain just how that process will work and associated timeline with that.

Yeah sure. So I guess, what I'll just say on it is we've made the application we've had a number of conversations with NASDAQ and we expect that the approval will be coming very soon so I don't think it's going to be a long wait.

Before we're able to speak to speak about that more comprehensively. Okay. So you would expect for sure the approval come before the holiday timeframe.

Yeah, if youre, referring yes, absolutely okay, yes, we can expect will be well.

Honestly beyond pretty quick with the approval that's what our whole event, that's right I think.

That's going to be a huge catalyst for the stock at the end of the day. Your guidance is conservative your sales would have been higher had you had more inventory and that's going to rectify itself.

It sounds like the full year guide calls from a deceleration from the trends Youre seeing in August and you guys keep finding ways to do better not worse. So when you put all that together and put a multi market multiple on.

I think you guys can do this year I think this is a 20 dollar stock and obviously, we're not going to get there, but the stock on on the pink sheets I appreciate you guys.

Making the move to uplift because I think once that happens the market's going to recognize the value here. So thank you.

Really appreciate the comment that there is probably no more perfect way than an investor telling you have a $20 stock and there is upside. So we really appreciate that we appreciate all the interest that you guys have shown I again want to thank our employee base for the incredible work they've done and we wish you all the great safe and healthy fall season.

And look forward to regrouping again with you in November and with that operator, we'll call this call to a close.

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

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Ladies and gentlemen, thank you for standing by and welcome to the second quarter 2021 destination XL Group, Inc. Earnings Conference call. At this time all participant lines are in a listen only mode. After the speaker's presentation there'll be a question and answer session.

To ask a question during the session you will need to press Star then one on your telephone. Please be advised that today's conference may be recorded if you acquired any further assistance. Please press Star then zero I would now like to hand, the conference over to your host today Shelly market director of financial reporting and FCC. Please go ahead.

Thank you Sarah and good morning, everyone. Thank you for joining us on destination XL group's second quarter fiscal 2021 earnings call.

On our call today is our president and Chief Executive Officer, Harvey Kanter, and our Chief Financial Officer, Peter Stratton.

During today's call, we will discuss some non-GAAP metrics to provide investors with useful information about our financial performance. Please refer to our earnings release, which was filed this morning and is now available on our Investor Relations website at involved investors thought the X L. Dot com for an explanation and reconciliation of such measures.

Today's discussion also contains certain forward looking statements concerning the company's updated sales and earnings guidance and other expectations for fiscal 2020 one.

Such forward looking statements are subject to various risks and uncertainties that could cause actual results to differ materially from those assumptions mentioned today due to a variety of factors that affect the company, including but not limited to ongoing searches of the Covid Delta variant potential supply chain issues and ongoing labor challenges.

They shouldn't regarding risks and uncertainties as detailed in the company's filings with the Securities and Exchange Commission.

I would now like to turn the call over to our CEO per.

Harvey Kanter Harvey.

Thank you Shelly and good morning, everyone today, Peter and I will share with you. Both the progress we are making with our business and our expectations for a continued recovery.

At a high level I can tell you that we are very pleased with our results. It is inspiring to see the consumer demand coming back at an accelerating rate even more inspiring to see our customers responding to our ongoing digital transformation, which we began back in 2019 and helped us to respond to the challenges that the.

COVID-19 pandemic.

Consumer engagement with DSL over the past three months has been a remarkable this quarter. It can be considered a very important chapter in the context of the strategy, we're pursuing and executing and the results we have achieved.

Our digital transformation, which is steadily developing and is a major underpinning to these results has provided a strong belief that our business is poised for an inflection.

In our second quarter, we saw big and tall customers surge into the stores and onto our website to drive a level of sales and profitability far greater than previously expected.

This is happening across all customer demographics that includes both current and new to <unk> customers, who have not shopped with us before we.

We believe there is a material change in how consumers are thinking about <unk>.

We know that a lot of new customers are starting their shopping journey digitally finding us and based upon some consumer research. We have conducted we believe we are taking share of market.

We have continued we are seeing continued growth with new to file DSL customers growing 28, 5% in Q2 as compared to the same period in 2019.

Our financial performance in the second quarter surpassed all internal expectations initially forecasted back in mid May.

Year to date for fiscal 2021, we have posted an adjusted EBITDA of $48.0 million.

To put that into context, we have achieved in six months a level of profitability is greater than any 12 month result that has been posted in the last 20 years by our company.

This result was driven by improvements in gross margin from our reduced promotional strategy improvements in occupancy costs from our restructured lease portfolio and improvement in overhead from our restructuring of our selling general and administrative costs that was implemented in fiscal 2020.

All of these elements combined with leverage from greater than expected sales demand contributed to an EBITDA margin for the second quarter in excess of 20%.

While we remain cautious given the ongoing surges of the Covid Delta variant and ongoing risk in the supply chain today, we are raising our guidance for the full year and I'm looking forward to talking to you in greater detail.

Where we believe our business is headed.

Before I get ahead of myself I want to acknowledge and thank all of our frontline associates, who rise every day to make our customer look and feel his best since the beginning of the pandemic our associates in the stores and the distribution center.

Guest engagement center and at our corporate office have answered the call every day, they're amazing team. It is because of them. These results have been created and that is something we must all be thankful for.

Thank you all for your hard work support and dedication to <unk> at our customer. It is because of you our stores can open on time, our product gets shipped and delivered and our customers to get answers when they need them.

From the bottom of my heart and our leadership team. Thank you you are worthy of our highest esteem.

I am planning to cover two topics today first I want to talk to you about our second quarter performance and what we are seeing and hearing from our customers and second I want to talk to you about our priorities for the remainder of the year and how we intend to fortify our marketing position to maintain this positive momentum into fiscal 2022.

<unk>.

I am very pleased to announce that our overall comp sales rate for the second quarter was 21, 6% as compared to 2116, 2% as compared to 2020.

Since 2019 was our last normalized year from a financial comparison standpoint, we will be making most of our year over year comparisons to our Q2 2019 results.

Comp sales growth in stores was 13, 1% and comp sales growth and direct was 52, 2% as compared to 2019.

In total second quarter sales were $144.0 million compared to $125.0 million and our adjusted EBITDA for the quarter was $37.0 million compared to $8.0 million in the second quarter of 2019.

And finally, our net income was $29.0 million compared to breakeven in the second quarter of 2019.

These results exceeded our expectations and are a direct outcome of the leverage we have created as we've re crafted our strategy and our operating model.

Our plan for the year was constructed on the thesis that business would return gradually during the year, but we have seen an acceleration in the first quarter and business continued to accelerate in the second quarter two levels meaningfully surpassing 2019.

We have seen successive improvement each month in fiscal 2021, where their most loyal top decile customers returning to shop with us.

You can also report that our sales growth rates for August have continued on a similar trend to what we reported for Q2.

In stores, we saw an acceleration in comps each month as the quarter progressed in may our comp store rate was six 9% in June 14, 7% and in July 18, 2% all compared to 2019.

This was a significant bump from the three 1% comp we experienced in March and April.

Conversion was up 12% dollars per transaction up 10%, but was most encouraging was that traffic continues to work its way back towards 2019 levels.

We exceeded our sales planning 285 out of 297 stores this quarter, which is 96% of the store portfolio.

Regionally, we saw the southeast Midwest and South central all performing exceptionally well.

So just ignore the west northeast and mid Atlantic have opportunity to improve further for a quarter, while still having significant positive comps the coasts lag 600 basis points behind the middle of the country.

All regions had a comparable sales increase in the second quarter as compared to fiscal 2019.

One of the things. We're most pleased with is that our direct business did not fall back as our store comps increased our direct comps not only continued to hold up well.

Further accelerated in Q2, our direct growth shows the sustainability of our digital transformation and we believe it is a testament to our ability to stand out as a digital first brand.

Our direct comps by month were 48, 8% in May.

53, 4% in June and 54, 6% in July all once again compared to 2019 direct was 28, 1% of total sales in Q2 as compared to 21, one in Q2 2019, and we expect our direct penetration for the full year to be approximately 30.

As compared to our full year annual printed present penetration in 2019 of 23, 1%.

For the quarter, our direct business was up 52, 2% driven by a combination of improvements in web traffic conversion and basket size, we believe our digital marketing investments and optimization of our digital infrastructure are driving significant inflection in new DSL customers.

Now, let me shift gears, a bit and talk about product margins and product itself.

We saw continued performance in our casual and sportswear categories, but we also saw remarkable resurgence in tailored clothing.

Our merchandise assortment is about 55% private label, 45% designer collections and our sales penetration for the second quarter was relatively consistent with the inventory composition.

We did see slightly higher selling velocity from designer collections, where brands such as polo Nautica and Reebok drove the collection business.

Tailored clothing drove 12, 8% of the Q2 business compared to 16, 7% in 2019, and just six 8% in 2020.

Suits and dress shirts saw the greatest improvement as our customers started to participate in formal events such as weddings once again.

We believe we are seeing a shift in consumer preference emerging with pairs.

Casual and tailored together, we're even testing a new floor set by integrating our club department, which is primarily dressed aware with more casual sportswear for more relaxed and a relevant lifestyle.

How many times have you seen it somewhat aware of sport coat or dress woven shirt with a pair of jeans or even stretch jogger trousers.

Or a police best over this thing it's the new uniforms for many on Wall Street.

And there was one constant challenge throughout the quarter is that we continue to battle to secure more inventory.

Obviously the over performance in sales to our plan in the second quarter had an impact on our inventory positions.

Some stores performance by brand was dictated by inventory availability.

<unk>, where we were in a strong inventory position outperform brands, where we were light on inventory.

We believe customers will continue to buy merchandise at a greater than pre pandemic levels and we are continually chasing to bring in more inventory to keep up with the demand.

Even with our vendors to add more receipts to be in a stronger inventory position at the end the fall season.

We also continued to work through challenges with ocean freight capacities and the cost of containers, which in some cases, it's three to four times, what they cost pre pandemic and lastly, we continue to consider shipping goods by air to support this growing demand.

Furthermore, shortages of truck drivers have led to delays in price increases for transporting merchandise domestically and we expect this challenge to continue through the second half of 2021.

Despite these challenges in getting goods to the port and ultimately to the sales floor, we have been successful in procuring fabrics to support production.

Our sourcing team began working with our merchant and planning partners to chase goods as early as February.

If we can find a way to ship. It in most cases, we were able to get what we need and then selling through it and ultimately still turning our inventories faster than our historical pace.

The flip side to the inventory challenges that it creates an ideal environment for us to execute one of our primary strategic goals, which is repositioning the <unk> brand to be less promotional.

Our messaging to our customers in the second quarter continued to lean into the brand's positioning built around our proprietary fit a curated any largely exclusive assortment of private label and national brands.

And an experience built around the respect and value for big and tall consumers, who trust us.

The direct outcome of this which is the customer who leads our store full of confidence and empowered to face today.

<unk>.

That aside and belonging to the Dx L community.

This strategy allows us to shift away from a value proposition that is highly promotional and discount driven to a proposition that is grounded in comfort.

Fit and experience.

Our thesis is grounded in personalization and relevant messaging, which we are increasing and at more scale and that enables us to be more relevant without the need to offer our customer anything to engage further we were essentially non promotional in the second quarter with only limited targeted.

<unk> ongoing promotional elasticity testing and deeper file promotions engaging lapsed customers.

There was no need for broad based discounting for father's day and memorial day, and that drove stronger merchandise margins and profitability.

We have also reduced the level of clearance merchandise, which we expect to drive more full price selling.

Our reduced promotional posture started in Q3, 2020, and we have been making it more ingrained in our marketing and across all channels.

Evolution has been intentional and it is an important strategic component of our long term strategy. It allows us allows us to cut down our mark down rates in the second half from two years ago. This has been a huge win and a driver of our second quarter results. Despite all the upside created by being virtually promotion free.

We do expect there will be certain times of the year, where we will need to resume some level of moderate promotions and we will incur some higher level of markdowns later in the year.

But at this reduced promotional posture has done for us to support the repositioning of DSL not as a discount and coupon store, but it is a store who understands and honors big and tall Guy is better than anyone else in the market.

And that is what we are really all about.

We know that some level of performance in the second quarter was driven by tailwind from pent up demand for the pandemic stimulus checks and at some level of revenge spending, but we also know through our CRM system and customer surveys that we are reactivating some of our best customers and we are attracting many customers.

Shopping at <unk> for the first time.

Our CRM data on newly acquired customers shows a few surprises that we believe are long term tailwind and I'd like to share. Some examples with you.

First we are seeing more female customers than we have before.

Tracking the female customer has been elusive for so many years, but we are undoubtedly seeing her more now the pre pandemic.

We fear is that she is helping him get back in the game.

Either dressing up as many of our guests return to the office or just getting back into the world with new clothes and a new look.

We are seeing a greater representation from the middle and upper rack sizes or <unk> and up.

And we do believe this is somewhat the shifting weight slides many of us have experience, while being cooped up during Covid lockdowns.

<unk>, we believe that the outcomes. We are creating are at least partially due to the improvements we've been making for the past two years and how we segment communicate and engage with our customer base and a more personalized and specific way.

Just as a reminder, we believe the total addressable market for our core big and tall sizes to axon up is north of $10 billion. When you include one XL. We think the total addressable market is north of $15 billion, which means there is ample opportunity for us to continue to take market share.

Hopefully you have noticed some not so subtle changes to our marketing strategy first we have been making a greater effort to build on our values of inclusivity and diversity. Our creative messaging is now using more models that represent a broader range of body types we have.

<unk> unique models today for fall, where we used to feature only four different models.

Second we are ramping as further with greater inclusion and being representative of our consumer base and our marketing.

We're also using much more user generated content and some of our newer models, our customers who connected with us through social media. We're also focusing on more individualized content and storytelling, which is authentic and allows us as a brand to connect more relevantly with our customers on an individual.

<unk>.

And third our segmentation based approach gives us greater flexibility to show an individual customers specifically, what he wants to see across different mechanisms like email the web site direct mail and other communication rather than mass marketed generic messaging.

We will also be driving personalization up another level in fall with variable printing capabilities and mailers for more relevant and targeted messaging for different customer cohorts fourth in the second half of the year, we will be focusing more on brand and marketing initiatives like connected TV such as Utah.

Tube, and Hulu and creating relationships with content media companies to drive greater brand awareness without reliance on promotions.

Fifth on the digital technology front.

We have invested in outfitting software designed to help customers complete their look.

<unk> product pages on our E. Commerce website now include outfits that go with with the item to help our customers to see the entire outfit.

And feel great by looking great.

This will also help build customer trust and <unk> as the brand with the largest most unique and often exclusive collection of apparel merchandise for big and tall man.

And lastly, we have also a new app under construction.

It will enable us to extend the user experience, which will provide not only a more stable environment, but would be a more flexible platform that will allow us to build more functionality and product offerings into the app going forward.

We have conceptually as a team and clearly articulated our vision for the business, bringing this to life now and we'll continue to do so throughout 2021 to further strengthen our defendable position our moat as we have referred to it and we look to greater inflection in 2022 and beyond.

We lead with <unk> positioning in everything we do today and believe it is this positioning competitive stance that makes us the leading big and tall men's apparel retailer with the greatest possible potential for growth in the consumers' mind share.

And finally, let me give you an update on wholesale in total our wholesale business, which is primarily with Amazon generated sales of $900000 for the second quarter compared to $9.0 million in the second quarter of 2019.

While our sales have fallen back some in our b to B wholesale business with Amazon what is driving this is the ongoing challenge to order what they need when they need it and the teething challenges in trying to build the business together.

Clearly impacted like every other business with supply chain challenges.

We also continue to search for other opportunities to grow the overall business and with that said I would now like to turn the call over to Peter for an update on financials Peter.

Thank you Harvey and good morning, everyone.

As Harvey discussed the recovery in sales that we began to see in the first quarter continued to accelerate throughout the second quarter and at a rate much faster than we expected.

The operating leverage generated from these higher sales combined with the reduced promotions and cost reductions drove our strong earnings this quarter.

Additionally, the cash flow we have generated this year enabled us to pay off our revolving credit facility and ended the quarter with our lowest total debt level in many years.

Based on the strength of this quarter's performance, we are again, increasing our full year sales and earnings guidance, which I will review with you after I discuss the quarters results.

Due to the significant impact that COVID-19 had on our second quarter 2020 results I will also compare our results against Q2 of 2019 for better comparability.

So let's start with sales.

Total sales for the second quarter were $144.0 million as compared to $80.0 million in the second quarter of fiscal 2020, and $125.0 million in the second quarter of fiscal 2019.

On a comparable basis.

<unk> increased 21, 6% over the second quarter of 2019.

Stores were up 13, 1% for the quarter and direct was up 52, 2% to 2019 levels. Both channels saw business accelerating month over month as the quarter progressed.

The Dx all dotcom website, which is the biggest contributor to the direct channel was up 66, 4% over second quarter 2019.

From our prior earnings calls most of you are probably familiar with our omni channel capabilities, whereby our stores are able to assist the customer in placing an order on online, which we call our universe.

Likewise, our stores play a key role in fulfilling many of our online orders if the merchandise is located in a store rather than our distribution center.

For the second quarter stores assisted either in the origination or fulfillment of 44% of our direct channel transactions.

This is just one of the ways in which our stores have evolved to meet the changing needs of our customer.

Speaking of our stores I would like to give a quick update on where we are with restructuring leases and other reducing occupancy costs.

We continue to engage with landlords to renegotiate leases that are no longer at market rates.

The pace of negotiations has slowed dramatically compared to 2020, but we are pleased with the progress we've made so far.

In the past 18 months, we've restructured 133 individuals store leases more than one third of the chain.

I expect it to deliver over $18.0 million of savings over the life of the leases, including $8.0 million of expected savings in fiscal 2021.

We continue to push hard to reduce lease costs with those landlords, where our rents are out of line with sales.

Our gross margin rate inclusive of occupancy costs was 51, 7% as compared to a gross margin rate of 28, 1% for the second quarter of fiscal 2020, and 44, 3% for the second quarter of fiscal 2019.

The 740 basis point improvement over 2019 was a combination of 390 basis points of occupancy leverage and 350 basis points of improved merchandise margins.

Occupancy costs decreased by $5.0 million as a result of closing unproductive stores and the rent reduction I just talked about.

The improvement in merchandise margin was directly related to the change in promotional strategy that Harvey talked about earlier.

Although we saw higher freight costs due to supply shortages in the transportation market and inflationary pressure as cotton prices are rising the impact of these in the second quarter was more than mitigated by our markdown savings.

Now, let me move on to selling general and administrative expenses.

As a percentage of sales SG&A expense for the second quarter of fiscal 2021 was 31% as compared to 33, 7% for the second quarter of fiscal 2020, and 38, 5% for the second quarter of fiscal 2019.

The 31% rate was far lower than our historical expense rate and was the result of the cost reduction actions that we implemented in fiscal 2020.

These actions were intended to not only preserve liquidity.

But to lower our operating cost structure long term.

On a dollar basis SG&A costs were down $12.0 million compared to two years ago.

We're being very diligent about preserving as many fixed cost reductions as possible. Despite the fact that certain variable costs will increase as the business accelerates.

We will continue to invest in our store associates to ensure they are properly trained and that our stores are staffed to provide an exceptional EXL guest experience.

But we expect store costs to remain significantly below historical levels.

Customer facing costs were 16, 9% of sales in Q2 as compared to 23, 9% in the second quarter of 2019.

Corporate support costs, which include the distribution center and corporate overhead costs represented 13, 2% on sales in the second quarter compared to 14, 6% of sales in the second quarter of fiscal 2019.

Adjusted EBITDA was $37.0 million for the second quarter compared to a loss of $7.0 million in the second quarter of 2020 and earnings of $8.0 million for the second quarter of fiscal 2019.

Net income for the second quarter was $29.0 million or <unk> 36 per diluted share compared with a net loss of $17.0 million or 21 per diluted share for the second quarter of fiscal 2020 and breakeven net income for the second quarter of fiscal 2019.

Next I'll turn to cash flow and the balance sheet.

Our free cash flow, which we define as cash flow from operations less capital expenditures for the first six months of fiscal 2021 was proceeds of $45.0 million as compared to a use of $12.0 million for the same period in fiscal 2020, and a use of $13.0 million in fiscal.

<unk> 2019.

This improvement is primarily due to our improved earnings.

This free cash flow enabled us to end the second quarter with a zero balance in our revolving credit facility for the first time since fiscal 2012.

If we look at debt net of cash decreased to $11 million at the end of the quarter from $61 million at the end of Q2 2020.

$65.0 million at the end of Q2 2019.

Our revolving credit facility had $66.0 million of excess availability at the end of the quarter.

Our revolving credit facility remains in place until May of 2023, and we expect to continue to access it from time to time to support seasonal inventory purchases and other business initiatives.

Our inventory balance at July 31, 2021 was $77.0 million as compared to $91.0 million at August one 2020, and $114.0 million at August 32019.

The $14 million decrease since last year and $37 million decreased over the past two years was directionally in line with our goals of narrowing our assortment focusing on brand exclusivity and driving faster inventory turnover.

However, the decrease in inventory over the first six months was a bit more than we would've preferred as Harvey discussed earlier. It has been a constant battle to secure enough inventory with customer demand stronger than we had expected and the challenges of ongoing ongoing global supply chain disruptions.

Nevertheless, we believe our current receipt plans are sufficient to support our sales forecast.

We will continue to chase goods and anticipate the GAAP between this year's inventory and our historical levels to narrow somewhat between now and the end of the year.

At July 31, 2021, our clearance inventory represented eight 9% of our total inventory as compared to 11, 3% at August one 2020.

Our results for the second quarter far exceeded our internal expectations and we are cautiously optimistic regarding our forecast in the second half of the year.

To be perfectly clear our guidance update assumes continued stability and consumer confidence and customer behavior. Despite the ongoing challenges we face from the COVID-19, pandemic and supply chain risks.

For the full year, we expect sales to range from 490 million to $505 million with an e-commerce penetration expected to be approximately 30%.

We expect adjusted EBIT to range from 65 million to $72 million and net income for the full year is expected to be 64 to 76 cents per share.

Finally free cash flow is expected to be in excess of $50 million.

The high end of our sales guidance of 505 million would imply a comp sales rate to 2019 in the low double digits and a gross margin rate in the high 40% range.

We expect Q3 to be our lowest performing quarter of the fiscal year as our customers buying habits are typically lowest in August September and October we.

We do expect to have a strong holiday season, albeit more promotional than the first half due to the time of year. So our gross margin is expected to be slightly lower in the second half of the year than compared to the first half.

In many ways, we've had a positive environment for performance in the second quarter strong sales leverage low promotions and razor thin SG&A expense.

We do not expect that we will be able to hold as low of a promotional environment going forward and we expect to add back some level of SG&A expense.

Our guidance on the high end of $72 million of adjusted EBITDA on $505 million of sales is a 14% adjusted EBITDA margin.

We believe this is a unique year and long term, we are working to sustain an EBITA margin of 10% or greater.

There is still much work to be done and we will continue to drive shareholder value growing the XL into the premier shopping experience for all big and tall man.

Lastly, I would like to provide an update on our common stock listed.

The company has applied to rejoin at NASDAQ and while we have not yet received formal approval, we expect NASDAQ will approve our application and invite us to rejoin the exchange very soon.

With that I would like to turn it back over to Harvey for some closing thoughts.

Thanks, Peter as you hopefully have heard now we remain energized and about the potential that lies ahead.

Despite the ongoing challenges associated with the COVID-19 pandemic some of which we have not yet fully understood as well as supply chain risk we remain cautiously optimistic.

We have an incredible team and obsessive focus on our customers that our plan to create a meaningful shareholder return.

<unk> Big and tall is all we do we are not just in the aisle or rack in a store we arent entire store. We believe we have entered a new phases in our company's history and that we are in the most by net solid financial position in recent company history.

Most of all we believe we have a strategy to engage consumers and what we do best creating memorable experiences for big and tall guys to look and feel their best we do that by offering the most expensive and uniquely curated assortment from value price essentials to luxury brands and exclusive designers both on.

Online and in store, given an underserved customer the be all and all place to shop and interact.

And finally, we know we have an incredible employee base that is passionate and committed to our customers and that gives us the confidence that we will continue to make inroads into taking share of market and with that we'll now take questions.

Thank you as a reminder to ask a question you will need to press Star then one on your telephone to withdraw your question. Please press the pound key.

Please standby, while we compile the Q&A roster.

Yeah.

Our first question comes from the line of Jeremy Hamblin with Craig Hallum capital.

Line is now open.

Thanks, and congratulations on a really impressive performance.

I wanted to start by just understanding the composition of <unk>.

The acceleration that you've seen in your comp trends. So can you give us a sense Peter for <unk>.

Is that the same.

Same store sales growth how much of that is growth in average transaction value.

Versus total transactions versus 2019 levels.

Sure I'd be happy to give you a little a little color on that so we definitely saw a slight increase in conversion, we definitely saw a slight increase in average transaction levels, but the biggest level of change really came from traffic coming into the stores.

You know, we as Harvey talked about we've seen new customers coming in we've seen a lot of our returning customers are coming back to the stores.

But more than anything it's really just been the sequential improvements in traffic that we saw each month during the quarter.

Thanks, that's really helpful and wanted to get a little more insight I think what I heard.

From Harvey remarks was that you saw new customer growth of over 28%.

I wanted to get a little more color around just what type of customer you are seeing.

How youre kind of cleaning that.

Type of information and how much is embedded within that of.

Those new customers are they are they totally new customers to the concept are these.

Inclusive of reactivation of customers.

Yeah, Jeremy Great question I'll try to recap this is harvey the new customer growth that we're seeing is really primarily customers that are not in our file have not been in our file and I alluded to research some that we've done softly and clearing those customers asking is it the first time you shop with us.

If you haven't shopped with us before where have you shops, and if you have a shop with us for where else do you shop and what we're absolutely seeing is a customer that is not shopped with us before coming from the places you would expect maybe not paying as much attention to the big and tall consumer because they have other priorities, which although logical.

Leaves us the opportunity to really take share of market.

So we're seeing that through a pretty meaningful level of research about I think 18% of our <unk> customers have answered the question and they are coming from places that you would expect other men's apparel businesses to be possible, but not paying as much attention just to a smaller business number one number two we're seeing.

Through the query of search and a lot of customers are coming to us and what we're seeing through our own data and some available online data is that our growth is accelerating whereas others is relatively stable and again that alludes to the 28, 5% of direct to consumer growth that we're seeing from our file <unk>.

Merrily online, but also in stores.

Wow.

That's impressive.

Let me I also wanted to just get a little more color on.

The sales trends, which obviously have been accelerating you you had a pretty extraordinary increase in your total sales guidance for the year, and obviously have momentum and clearly confidence in the back half of the year.

Wanted to just get a sense, if you could provide a little bit more detail around the start to Q3.

Whether or not you you indicated that it's similar to what you delivered in Q2.

My sense based on the guidance raise is that it's more likely to be like you saw in July.

And then what you did for the <unk>.

Quarter in total, but any additional color that you might be able to share on the Q3 start.

Yeah sure. So Jeremy this is Peter.

Yes, you're exactly right the performance in August was.

More similar to what we were seeing in July than what we were seeing in May.

You know the customer has been very resilient, he's coming into the stores and snapping up.

Product as soon as he can get his hands on it so.

We have not seen a slowdown in so far the performance has been very consistent with what we saw June.

June going into July.

The other thing I would add Jeremy is that one of the challenges we've pretty directly addresses the ongoing chasing of goods and the team has done a remarkable job. Both in terms of what was available from pack and hold literally and manufacturers that really work with us in our direct supply chain overseas, we started to receive those goods.

And that helped to accelerate but I can honestly tell you that the level of turn on those goods has been remarkable that being said, we're kind of at a low point on our inventory and we expect even by the end of September to materially impact our inventory levels and that will allow us a greater ability to not just sell what's in the store and available.

<unk>, which is which.

<unk> is really a remarkable the consumers coming in and I would say, we're selling through clearance and colors that normally would not sell the levels. They have but there is a need for things like weddings, and what have you, but when we get back even in a better position and we alluded to things like airing goods in which normally would not be something that would be okay.

Cost.

Good cost and cost prohibitive really we.

<unk> been airing goods in but as we have really chase the goods and we expect that each month going forward, we'll be in a better materially better inventory position.

That will be true nothing will be a greater hiccup that we expected that will also further hopefully allow us to fulfill the guidance that we provided.

Understood.

And I also wanted to get.

Get the callout on geographies Pacific Northwest Coast basically.

You mentioned are Comping about 600 basis points below the rest of the chain wanted to understand embedded within your full year guidance are you assuming normalization of that.

Do you do you believe that the differential in comp is simply a reaction to a reflection of sentiment around COVID-19 and COVID-19 protocols.

But what's embedded within that guidance do you expect that to normalize by Q4 or do you assume.

That that trend continues.

The back half of the year.

Sure. So I'll take that one so with regard to the guidance for the year, we expect that the numbers will start to get.

Closer to one another in fact.

We did see them start to get a little closer in.

In July then they started to separate back to the 600 points in August so, it's really difficult to to get our arms around that but we do think that over time, they're going to neutralizing get closer to where they've been historically, which is very close to one another but it's primarily.

We believe it coincides very much with what youre seeing more socially around.

Some of the Covid.

Restrictions the Pacific Northwest and the northeast have particularly been lower than the middle of the country.

So.

Where are we are expecting it to get better.

Over the second half of the year.

Great.

And then I wanted to ask a couple of questions around your gross margins, which are truly extraordinary.

In terms of.

You know what you're seeing in freight impact.

Notice that your merch margins were up significantly over 300 basis points versus 2019 levels, but that's that's despite the impact youre seeing from freight I wanted to see if you could actually.

Be more specific what was the drag from freight either versus last year versus 2019 levels.

Yeah sure. So again, we're making all the comparisons to 2019.

I would probably I would put it at about 100 to 100.200 basis points as the drag on the the freight.

The improvement in promotions.

And the impact that that's had on on margin has really been remarkable and it's it's more than than a cut.

That that pressure that we're seeing from.

Some of the supply chain challenges, but.

Like I said, maybe 100 to 200 basis points.

Got it and then.

Last one on the gross margins you're you ramp obviously is down significantly both from store closures as well as the renegotiation of 133 stores.

Stores' leases.

You'll note in here, you've got 119 over the next two years and I think.

Those 133 stores, you said $17 million over the life of the lease.

Of the 119 that you have coming up over the next couple of years.

I imagine, you're probably not going to get $17 million.

In savings are things, obviously have improved across retail.

But what are your expectation how are those negotiations going.

Do you think it's something where you might be able to get you know 10 million of savings on those next 119 locations.

Yeah no so.

We're definitely continuing to renegotiate.

We're seeing some savings, but it's definitely getting more difficult than it was pre pandemic are during the pandemic.

But we're very very comfortable with being able to continue to generate some some savings.

And that's essentially what we're going to we're going to continue to do and so Jeremy I'm just going to ask that we move on to the next the next question person in the queue and we'd be happy to follow up with you with more questions. Afterwards, thanks, so much guidance.

Thank you.

Thank you our next.

Question comes from the line of Eric better with SCC Research. Your line is now finished.

Good morning, congratulations on a great quarter.

Thanks, Eric Thank you.

Hum you kind of.

Talk a little bit about this one XL opportunity you mentioned of about $5 billion.

When you look at that customer. They also have as they get a little bit I guess, the bigger taller they are a little bit more in terms of options and you know what are you seeing and how can you think you can attract and keep that customer.

Going forward.

Yes, Eric we really alluded to a bigger market, but that is not where we're really headed today. We are trying to leverage the share market gain greatest with respect to the core business that is greater than that size range of course, we've talked about that size range extending the opportunity of our market positioning.

But you just specifically and directly really alluded to the fact that it is outside of the core part of what we do and so we recognize that if you look at the addressable the broader addressable market. That's the reference to $15 billion, but we believe we have such a meaningful opportunity to really to address the share gains in the 10.

That exists and we understand that the customers have actually moved up on that size range not down so not not to say that we won't go there eventually but to your point that is a space that other people are paying as much attention to as part of their core business. Unlike the space that we referred to whether it's worth it.

Not in the business that we are in at the level we're in it.

Got it that makes sense when you look at I Wonder you talked about the new customers P. There you've talked about being much more focused with both your marketing and your each and your merchandising and other pieces those new customers now what are you. How are you thinking about leveraging them and keeping them on board and driving them to do even more business with you.

Through E mail through all the different levers that marketing levers that you have.

Yes, we have measurably moves our capabilities in terms of individual quasi one to one marketing and the reason I say quasi one on one marketing as we literally don't market to each individual consumer but at this point, we have relatively speaking nine consumer segments. So there is active and either as casual Carl theirs.

Wally Wall Street, and those names and references are two unique customer buying categories and our marketing team is interacting with them via email through even how they come to our sites of our new customer came to our site and we have no reference to cookies or experiences on them, we will serve up a different.

Initial website experience no it would for our customers coming back and purchases with us and will continue to move down that path by representing ourselves uniquely relative to what they bought and what they might be buying I think I've referenced before that where we have historically message to one single message if a customer and we.

We know this actually today has only bought regular price we would never send them a clearance message at this point if they are only about purely clearance we would never send them a one of our greatest brands like Ralph and Ren introduction, because just they haven't represented that they by themselves and we're very cognizant of things like really.

At checkout right abandoned the rate and even E mail opt in or opt out and what we're looking for is the greatest level of initial open right click through and then obviously the conversion so that kind of marketing is materially different than the other thing I would add and the reason I referenced not so subtle elements of marketing is that really a few.

Study, our marketing you will see that is it materially different and more unique each day and how we present ourselves so whether its fall goods or summer goods or specific brands or utilization or fashion and function or features and benefits. We are really talking to why we're relevant in.

Unique ways that address a lot of consumer segments much more so than when we had one mass E mail or one mass marketing message.

Yeah, I don't want to.

One more question.

In terms of mass marketing messages. So I know we are entering football season, and historically you guys have done stuff with the NFL and other pieces online in.

On CV, how does this year look in terms of your thought process or something like that.

Well I, specifically spoke to the fact that we are extending our awareness building and consumer engagement and what we would call streaming and more digital interaction via video and things like that Youtube Hulu et cetera, we don't expect but are still evaluating other broad based campaigns, but the unfortunate reality.

Audi is when you execute broad based mass media campaigns, you were really not talking as much to your customer you are talking to all customers in the productivity of that is just not where it needs to be and so we've continued to leverage and drive a level of efficiency as we become much more oriented around the digital transformation strategic.

And tactical elements, which obviously are allowing our marketing to resonate with our core customer versus customers that don't care about us.

Great Good luck for fall and holiday seasons. Thanks.

Thanks, so much for your interests really appreciate it.

Thank you. Our next question comes from the line of Mike Baker with D. A Davidson your line is now open.

Great. Thanks, guys, Hi, how are you.

I'm wondering if you could.

In broad strokes discuss what inning you guys think you're in in terms of the some of the inventory and marketing improvements you've clearly you know come along way how much more is there to go both in terms of financial qualitatively and possibly quantitatively.

Yeah, great questions I think on inventory, there's two different elements to it one I think we have a world class inventory team, our planning and merchandising global sourcing teams work in unison in a remarkable way it allowed us to really get out of goods early in the pandemic. It allowed us to very proactively drive decisions to get back in.

The goods early early in the year and I think it is literally a defining element of how we've been able to navigate really supporting the customers' desire to buy product and the demand need. So I think that's been quite remarkable I think the other end of the issue on inventory is the fact that demand is just so exceeded our.

Our expectations and our customer has come back so quickly that on a scale of one to 10 I might say, we're a five or six right now in inventory and we hope and believe as I alluded to that September will build in October November and we'll be back to something more like a seven or eight but we will be chasing goods I think through the balance of the.

A year, there's too many variables that I think are challenging and the flip side is as I spoke we had the core skill set to be a nine or 10 on inventory I think the reality is in this environment. The greatest level of capabilities are still being impacted measurably by containers, the ability to get goods or what have you.

That's the first answer the question in terms of marketing we have typically talked about that we think we had moved measurably in our digital transformation and how we market to our customers.

Although I like to think we've moved measurably in terms of our core capabilities and we absolutely have I think we are in the six sixth inning, maybe out of a nine inning game. If you will for lack of a better way to say it or on a scale of one to 10, maybe a six.

I think we have lots of opportunities to learn and to continue to really understand how to engage consumers and digitally I think the world's changing and so things like the collection outfitting that I referred to or the future potential of what would the avatars or digital fitting I think are.

Elements that are really critically important and we are chasing understanding what they might mean in addition to AI and ml, which is being will be continue to be used in our marketing to learn and so I think like anybody else in the direct to consumer space. There is lots of movement on the customer's part and we.

To pursue opportunities to learn to grow and really increase our core skill set.

That makes sense a couple more quick ones I wanted to follow up to that I think you said you think EBITDA margins can be 10% plus over time.

My calculation at least hear about nine eight right now on a trailing 12 month basis, so still a little bit of room to go there and I think that probably speaks to the gross margin comments you just made on the other hand, though we know there's still some room in occupancy on the other hand, though are there areas you need to reinvest probably payroll I assume as that continues to be a pressure.

For a lot of retailers, but any other areas, where we think costs might go up.

Yes, that's another great question. So you know there's.

There's definitely some SG&A areas that where we addressing so.

Whether that certain areas of.

Overhead.

We had really cut down and just where sort of choking those areas, we may need to make some reinvestments in and making sure that we're recognizing our people for the work that they're doing I think beyond that the biggest areas are.

I'd say, our warehouse and our infrastructure, our marketing efforts and our technology areas.

<unk>.

Thank all of those are areas that we have opportunities to continue to invest in and we're going to we're going to continue to do that.

I'm just going to ask Mike that we just move on to the next caller since we're coming up on the top of the hour, but thank you for your interest absolutely sure. Operator. This will have to be our last question. Unfortunately, we're running out of time and we'll be happy to follow up with all our investor base offline on calls so last question.

Our last question comes from the line of Williams Levy went to visit narrow Street capital. Your line is now open.

Hi, guys. Congratulations can you hear me.

Yes, we can hear you great I just wanted to double click on the inventory issue I mean, obviously the results today are outstanding but it sounds like inventory was down sequentially and you said that brands that had inventory or <unk>.

Driving more sales I guess is there any way to quantify how much higher the sales would have been had we had adequate inventory across kind of the top brands.

I think the answer to the question is we're not sure because quite honestly, what we've seen is a remarkable level of sell through on on goods that may not have sold at the same level, but we think we're fulfilling and satisfy most of the demand what we've really become is incredibly clean and really allowed us the opportune.

Please to chase into new goods in fresh receipts and so we actually feel pretty comfortable with where we are the hope and belief is that we'll get what is on order and we will be in a very strong inventory position, but we really have continued to experience remarkable sell through of inventory and equally so sell through of inventory, which.

Some cases, we literally have not sold in a long time, where we are.

That is a positive outcome for us.

Okay, Great I guess, just can we get a I mean I'm thrilled to hear you guys are going to uplift to NASDAQ can we get a little bit of.

Can you help explain just how that process will work and associated timeline with that.

Sure. So I guess, what I'll just say on it is we've made the application we've had a number of conversations with NASDAQ and we expect that the approval will be coming very soon so I don't think it's going to be a long wait.

Before we were able to to speak to speak about that more comprehensively.

So you would expect for sure the approval come before the holiday timeframe.

Yeah, if youre, referring yes, absolutely okay.

We expect it will be.

Honestly beyond pretty quick with the approval that's what our hope it is that's great I think that you know.

That's going to be a huge catalyst for the stock at the end of the day you know your guidance is conservative your sales would have been higher had you had more inventory and that's going to rectify itself.

It sounds like the full year guide calls from a deceleration from the trends Youre seeing in August and you guys keep finding ways to do better not worse. So when you put all that together and put a multi market multiple on what I think you guys can do this year I think this is a $20 stock and obviously, we're not going to get there, but the stock on the pink sheets I appreciate it.

Guys.

Making the move to uplift because I think once that happens the market is going to recognize the value here. So thank you.

Really appreciate that comment there there is probably no more perfect way than an investor telling you you have a $20 stock and Theres upside. So we really appreciate that we appreciate all the interest that you guys have shown I again want to thank our employee base for the incredible work they've done and we wish you all a great safe and healthy fall season.

And look forward to regrouping again with you in November and with that operator, we'll call this call to a close.

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