Good day and thank you for standing by. Welcome to the Second Quarter 2023 Destination XL Group Earnings Call. At this time, all participants are in a listen-only mode. After the speakers' presentation, there will be a question-and-answer session. Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, Shelly Mokas, Vice President of SEC Financial Reporting. Please proceed.

Thank you, Catherine, and good morning, everyone. Thank you for joining us on Destination XL Group's second quarter fiscal 2023 earnings call. On our call today are 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 available on our Investor Relations website for an explanation and reconciliation of such measures. Today's discussion also contains certain forward-looking statements concerning the Company's sales and earnings guidance, long-range strategic plan and other expectations for fiscal 2023. 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 risks and factors that affect the Company. Information regarding risks and uncertainties is detailed in the Company's filings with the Securities and Exchange Commission. I would now like to turn the call over to our CEO, Harvey Kanter. Harvey?

Thank you, Shelly, and good morning, everyone. It's great to have this opportunity to speak with all of you today. Today's agenda for our prepared remarks is a little different than our historical practice. As always, I'm going to talk about our quarterly results and then share with you some of our thoughts and expectations for the second half of the year. But equally important, I want to start sharing with you some perspectives today on where DXL is heading and our vision for the next chapter in the DXL story. When I joined the Company back in 2019, what attracted me most to the Company was an incredible business model serving an underserved customer that had the potential to scale. Since late 2020 and despite the pandemic, we have made tremendous progress in building process, structure and discipline, which provides the foundation to position the Company for greater rates of growth. The results we achieved in fiscal 2021 and 2022 illustrate that progress. Given 2023's macroeconomic challenges, the goal of sustained double-digit growth is eluding us, but we do believe it is still to come. Today, we are announcing our plan to meaningfully accelerate growth at DXL through three distinct pursuits, which I'll discuss later in the call. But let me be clear about this. We believe greater growth is on the horizon. My comments in the latter part of our prepared remarks will give you a sense of how we are thinking about greater growth and beginning to define our roadmap for the next three-plus years. But before we talk about the future, let me get started with a quick review of the current quarter's results. On our last earnings call in May, we talked about how we expect our comp sales results for the full year to be approximately flat. And for the second quarter, we expected a low single-digit negative comp. In the second quarter, we did, in fact, post a low single-digit negative comp of minus 1.4% as we guided to. The trajectory of our comp performance improved slightly as the quarter progressed. In May, we saw comp sales decline 2.8%. In June, comp sales improved to a negative 1.7%. And in July, comp sales were positive at plus 1%. In stores, traffic was tepid and our dollars per transaction were down slightly, primarily due to fewer units per transaction and some level of the consumer trading down from national brands into our private brands. This resulted in a second quarter comp decrease of minus 1.4% for stores and in the digital space, a comp sales decrease of minus 1.3%, with traffic to the website and app up slightly while dollars per transaction were down slightly and conversion was roughly flat. Continuing in the second quarter, one of the very brightest areas for this quarter is inventory. We are turning our goods faster, and our Q2 inventory balance is down 9.5% versus last year and down 20.7% versus 2019. Our merchandising, planning, allocation and global sourcing teams have worked proactively to manage receipt flow and strategically execute programs to prevent any bloating of our inventory and our balances. This did lead to a slight increase in markdown levels compared to last year, but we are in a very favorable inventory position as we head into fall with markdown levels that are still very near historical lows. Our clearance inventory at the end of Q2 2023 is 9.3% as compared to 6.9% at the end of Q2 in fiscal '22. We are very comfortable with our clearance inventory levels, which are still less than our target of 10%. From a merchandising perspective, our formal sportswear and tailored clothing categories, such as sport coats, sport shirts, and casual bottoms performed well in Q2. Seasonal product categories such as shorts and swim underperformed our expectations. Sales in tailored clothing increased 4% to last year and made up 16% of the total sales penetration compared to 15% last year. As a reminder, our current merchandise assortment is a balance of private brands and national brands. In Q2, we did experience a shift into our private brands, as I noted earlier, with approximately 55% of our sales driven by our own brand and 45% driven by national brands. As I mentioned on our last quarterly call, we have two more iconic brands that are set to launch with DXL. I'm very pleased to report that Faherty and Hugo Boss are both joining our portfolio of brands this fall. Both brands will be available in selected stores and online. Faherty is exclusive to DXL in Vigantol sizes, while Hugo Boss is delivering exclusive big and tall product capsules, meaning in both examples, you cannot find this product anywhere else. Also, we are launching a third brand as a collaborative effort with another iconic retailer. In September, we will be launching Untuckit, Fit by DXL in partnership with Untuckit. This brand addition will be exclusively sold by DXL but marketed jointly by both Untuckit and DXL. Driven by our reputation for fit and Untuckit product and brand following, we believe this is going to be a wonderful strategic alliance and a big win for the big and tall man. These brand additions and collaborations give us great confidence that the DXL brand is building a reputation with other great retail brands as the place to be if you want to make your brand available to big and tall consumers. It really is an exciting time for us at DXL, and we are 100% oriented around growing this business. Let me also now touch a bit on marketing and advertising. There are a number of foundational improvements that we have been working on this past year and a few are worthy of highlighting today. One is e-mail deployment which is critical to get right. We continue to make good progress on our long-term goal of developing more sophisticated ways to approach segmentation and personalized communication with our customers, including using modern software platforms such as our CDP. During the quarter, we launched an upgraded capability to deliver more relevant personalized and individual behavior-based e-mail communication to our customers in near real-time. Consumer engagement has been excellent and likewise an improvement in revenue. We look forward to extending these capabilities to additional areas of customer need. This is but one further step in our journey to personalize and drive more uniquely relevant marketing communication based on actual personal shopping behavior. Another example of foundational improvements is the user experience on our app and on our browser-based website. Enhancements on both platforms have been developed and executed to specifically drive increases in conversion and have largely been defined by consumers' actual online engagement. In our app, for example, we've improved the design of our product catalog and product detail pages to address specific points of customer drop-off. And on our site, we've made updates to our navigation to increase customer engagement with our most valuable content. Next is our loyalty program, which was revamped and introduced last November. The loyalty program continues to evolve to increase active engagement, building upon affinity, which is what we envision from the onset. The second quarter was really focused on framing loyalty messaging better and engaging the consumer in more meaningful ways. To do this, we stopped auto-enrollment and doubled down on communicating why they should want to be part of DXL's loyalty program. We did this because we saw meaningful differences in tier levels of loyalty program cohorts and ultimately, it is about the utilization of the program, not absolute membership. Because the loyalty program is about how we treat our customers, our very best customers in unique and engaging ways, we want the loyalty program to mean something special and provide something different to our customers than just shop and save. The elimination of auto enrollment creates a slowdown in loyalty acquisition, but it will, in time, improve brand affinity or so we believe through self-enrollment and then greater engagement, which ultimately leads to greater advocacy. Now let me touch on the second half, which is off to a tough start. So far, through the first three weeks of the third quarter, our combined comp sales rate is down 6.5%. The themes of my business have been tough are the same we have identified already, traffic, ticket and conversion. Despite the slow start to the third quarter, we remain relentlessly focused on five critical areas: file, relevant personalization, traffic, brand awareness and customer experience to engage and serve the big and tall consumer. We are deploying specific tactics in each of these areas to encourage greater visits and avoid customer lapse. Some of our initiatives include path to purchase, the rollout of greater behavior-based e-mail triggers, upper funnel print media in the holiday season and a rebalancing of the paid media investment mix. Our path to success is grounded in improved traffic levels and ultimately, better customer acquisition and retention. We are poised to begin refocusing on the brand's awareness and DXL's unique differentiated position to serve the big and tall consumer like no one else can. And that's really what I want to spend the remainder of my time to talk about with you today. But before I do that, I'm going to ask Peter to run through the second quarter financials and how we are thinking about guidance for the remainder of the year. After that update, I'll come back on and talk to you about the next steps. Peter?

Thank you, Harvey, and good morning, everyone. I won't rehash the comps that Harvey already spoke to and are available in the press release we filed this morning. However, I will note that net sales for the second quarter were $140 million as compared to $144.6 million in the second quarter of last year. Our sales in the second quarter were impacted by lower dollars per transaction because customers purchased fewer units and in some cases, traded down to lower-priced options, which we believe is a result of inflationary pressures impacting discretionary spending. The sequential improvement in sales as the quarter progressed was a result of improved traffic to our stores in growth in our mobile app and e-mail marketing. Traffic, ticket and conversion are core KPIs we will continue to pursue as we look to drive results in the second half of the year. Moving on to gross margin. Our gross margin rate, inclusive of occupancy costs was 50.3% as compared to 52.1% in the second quarter of last year. This 180 basis point decrease was a combination of 110 basis points in merchandise margin and 70 basis points in occupancy cost, primarily due to the de-leveraging of sales and increased rents from lease extensions. The margin rate decline from last year's record high levels was in line with our expectations. We have remained low promotional, choosing to emphasize our superior quality, fit and experience rather than discount prices, and our margin rate remains significantly higher than our historical rate. However, on a year-over-year basis, margins decreased due to a combination of higher costs in three areas, consistent with last quarter. First, we decided to absorb the cost increases on certain private label merchandise, especially those at an opening price point level, rather than passing these on to our customers through price increases. Second, costs related to the fulfillment of direct-to-consumer orders continue to be elevated. And third, the success of our new loyalty program means that there are more customers redeeming loyalty certificates for a discount on their purchase. These three factors were partially offset by lower inbound freight costs on receipts from overseas. Although each of these elements will persist at varying levels through the rest of the year, we expect them to moderate to the point where gross margin rates for the year should be approximately 100 basis points lower than last year. Turning next to selling, general and administrative expenses. Our SG&A expense as a percentage of sales decreased to 33.9% as compared to 34.2% in the prior year second quarter. On a dollar basis, SG&A expense decreased by $2 million, allowing us to improve by 30 basis points despite the lower sales. The decrease was primarily from lower performance-based incentive accruals and marketing costs, partially offset by new positions added in the past year to support our long-term growth initiatives, including new store development. Our add to sales ratio decreased slightly to 5% from 5.4% in Q2 of last year. For the year, we still expect to spend about 5.7% of sales on advertising. And as you might expect, we are being very judicious with expense management, but we remain committed to investing in the people and technology necessary to support our future growth plans. With gross margin at 50.3% and SG&A expense at 33.9%, this brings our adjusted EBITDA in at 16.4% or $22.9 million for the second quarter. Although lower than last year's 17.9%, we are pleased with this result of being able to deliver a mid-double-digit adjusted EBITDA margin rate for Q2 in the current sales environment. I want to spend a minute on one unusual transaction that occurred this quarter and will have some limited impact later this year as well. We are taking advantage of the unique opportunity to strengthen our balance sheet and reduce P&L volatility. We are terminating our legacy pension plan, which was frozen over 20 years ago, and has been on our radar for quite some time. Due to the current interest rate environment, the termination gap between our pension liability and our pension assets is at its lowest level in at least the last 10 years. During Q2, we made a cash contribution of $1.6 million to the plan, and we recognized a non-operating charge of $4.2 million to flow the previously unrealized loss through the P&L. As of July 29, 2023, approximately 78% of the pension obligation has been paid with the remaining 22% expected to be paid in the fourth quarter. At that time, we'll recognize the remaining charge which we are estimating at approximately $1.5 million and proceed with finalizing the termination of the plan. Capitalizing on the current interest rate environment to eliminate this variability from our books is a prudent and opportunistic use of some of our excess cash, which will benefit our shareholders. Speaking of cash, the balance of our cash and short-term investments grew to $62.8 million as compared to $22.2 million a year ago, with no outstanding debt in either period and availability of $81.8 million under our revolving credit facility. This improvement was on the strength of our free cash flow, which we define as cash flow from operating activities less capital expenditures, which was $21.6 million for the six months to date. We continue to keep our excess cash invested in short-term U.S. government treasury bills, which are earning interest at approximately 5%. We also use some of this free cash flow to repurchase our stock on the open market. Over the course of the quarter, we spent $10.8 million to repurchase 2.2 million shares at an average cost of $4.81 per share. At the end of the quarter, that left us with approximately $4.1 million of our Board's original $15 million authorization, which we have already fully utilized in the first three weeks of the third quarter. At the moment, we do not have plans for further repurchase activity this year. Harvey is going to talk in a minute about our growth plans, and we are very happy to have this cash available and the financial flexibility to fund and execute those growth plans. Before I conclude with our outlook for the second half, I just want to spend a moment on income taxes since this is an area where our year-over-year results require adjustment for comparative purposes. Last year, our second quarter results reflected a tax benefit of $35.1 million, which included the release of $35.5 million or $0.53 per share in valuation allowance reserves. Now that those valuation allowances have been removed, we have returned to a more normal tax rate of approximately 26%. However, we are still able to utilize our remaining net operating loss carry-forwards to reduce our cash taxes, and as a result, we'll pay very little in federal or state cash income tax in fiscal 2023. As a reminder, we began the year with $78.9 million in federal net operating loss carry-forwards. Finally, I'll close with an update on our financial outlook for fiscal 2023 and which we are trending today in response to the difficult macro-environment and ongoing volatility we expect in the second half of the year. Our updated guidance is for net sales of $535 million to $545 million and an adjusted EBITDA margin of approximately 11% to 12% on a 53-week basis. Our sales guidance implies a low single-digit negative full year comp sales growth rate. Through six months, we're at a year-to-date comp of negative 0.5% and we believe the third quarter will be a mid-single-digit negative and the fourth quarter could claw back close to flat. There is a deteriorating sales curve and not one of momentum which causes us to pause, the slight sequential improvement built into this guidance for Q4 assumes that the macro environment will stabilize and that our consumer-driven marketing initiatives will begin to show progress. We are feeling our customer pulling down, but that certainly hasn't dampened our long-term prospects or our vision for the future of DXL. I would like to turn the call back over to Harvey to elaborate a bit more on that vision.

Thanks, Peter. And now I want to get into the topic of where DXL goes from here. What's in store for the Company over the next three to five years? I want to let you all know that we have been actively working as a leadership team and with our Board to define the road ahead. To set the table for where we see the business headed in the next three to five years, we need to start with the fact that DXL is fundamentally in a different position today as compared to where we were pre-pandemic. Over the past two years, we've essentially recapitalized the Company. At the height of the pandemic, we were in heavy debt with no cash to speak of on the balance sheet, too much excess inventory and negative shareholder equity. Today, we have no debt, over $60 million of cash and investments on the balance sheet, and our shareholder equity is over $150 million. We have achieved a level of operational excellence, more profitable margins with strong free cash flow, faster inventory turnover and newly developed digital muscles to match our store expertise and experience. We have a world-class merchandise assortment carrying every major brand a guy can want from private brands to national designer brands. We have recruited and developed a first-class leadership team that understands the big and tall consumer, understands his needs, understands his challenges and understands what makes him tick. We believe that all this work to complete the foundational improvements were necessary to create the opportunity that is now before DXL. And during our most recent board meeting, there was unanimous support in the belief that over the next three to five years, we can increase our growth rate, and we can take this company to the next level. And so here we are. That goes for me, too. Some of you may have seen the announcement a little over a week ago that I have agreed to extend my contract as President and CEO into August of 2026. That commitment ensures I will be here another three years to see our growth initiatives through. So, let me get right into the three distinct priorities and opportunities that DXL is pursuing and which we believe can significantly raise the growth trajectory of this company in the next three to five years. Perhaps the greatest opportunity that we have in front of us is the opportunity to address our brand's overall awareness levels. This isn't a new revelation that we recently discovered. Awareness level has been a challenge for some time. What's different is that for all the reasons I just outlined, now we are able to do something about it. According to our most recent consumer research, brand awareness represents one of our greatest opportunities. The customers who know us love the experience and our offer. However, many customers in the sector simply do not know who DXL is. This coupled with a new compelling differentiated and own-able positioning provides us the opportunity like never before to share our story, connect with customers and invite them into an engaging relationship. Historically, one of the reasons we have struggled with awareness is that we haven't rooted our messaging in a differentiated position and couldn't justify the brand spend, this on an absolute and consistent spending level. For the past several years, we pushed our ad-to-sales ratio from sub-5% to sub-6%. While we are not ready yet to commit to a hard and fast number for ad to sales ratio for the next three years, we know it is going to increase. We know we need to invest more in brand building and top of funnel marketing to grow our customer file. This cannot be a one and done exercise to build awareness. We need a consistent, steady message in the marketplace. As I already noted, part of the reason for not doing this sooner is that we were just not confident that we have the right brand strategy in place, but we are confident now. Another reason is that we are still getting our financial house in order and building a war chest, both in marketing expertise and financial resources to invest in our own future growth. We can go back and pull out multiple brand awareness campaigns that DXL has historically tried over the years. But the harsh reality is that DXL never had a relevant, consistent marketing campaign. Today, our marketing and positioning are driven by DXL's position as defined by him and not by us. And now with appropriate funding that we will invest over time and over multiple seasons that will change. What's different today? First, a little less than a year ago, we added a Chief Digital and Analytics Officer, in addition to our Chief Marketing Officer, effectively doubling our expertise in the marketing suite. We also brought in some stellar supporting team members to augment and fortify our capabilities. We've invested in market research and customer inception studies that have clearly led us to a path that began with our trademark call to action where what you want or #WWYW as we often refer to it. And now we have a better understanding of what motivates our different customers in different segments. Perhaps the most important of all, we are now on firm financial footing that will allow us to properly invest in this kind of long-term brand pursuit. We believe that the total addressable market in big and tall men is $23 billion, and we now have the financial flexibility to do something about our lack of market share. While we currently hold a meaningful slice of the better and best market we have far greater opportunity. That decision won't be without trade-offs. We have already targeted a 10% adjusted EBITDA in the past. In the last few years, we have achieved that milestone but we were still not growing sales to the level we believe is attainable. If we are going to invest 3% to 4% in more brand-building marketing, that growth will come out of adjusted EBITDA margins. We believe that over the next three to five years, we can scale and grow the top line in low double digits and take market share profitably, but it is unlikely to be at the greater than 10% adjusted EBITDA margins that we have enjoyed over the past two years. We are faced with the prospect of being a $550 million to $600 million company at 12.5% EBITDA or aiming higher and emerging over the next three to five years with a significantly greater top line and greater scale to then leverage our operating model. This is a watershed moment for DXL, and we are all in on building the business to create a far greater scale. The second opportunity that we believe is going to push our top line is store development. I'm happy to report that later this year we'll be opening our first of three new stores since 2018. One store will be in New York, one in Los Angeles and one store in Cincinnati. We believe the number of new DXL stores is going to grow to 10 stores in 2024 and at least 15 to 20 in 2025. Overall, we believe there are upwards of 50 net new store opportunities, and as we hone our plans, we will look to drive even more. The new store development addresses another critical limiting factor to our growth. While we have stores in every major metro market across the U.S., there are certainly voids where big and tall consumers are not being serviced by DXL. In our most recent consumer research across 2,500 customers and non-customers, 49% self-reported they do not shop with us because a store is not near to them while 37% self-reported that they do not shop with us because a store is not conveniently located near them. As we have shared previously, we believe there is a path to open new stores with strong sales per square foot, strong sales to invested capital and a sufficient return on investment. In addition to new stores, we are close to completing six conversions of Casual Male XL stores to DXL, and we expect to complete four more by the end of 2023. And finally, we've begun work on our lab concept remodel, and we expect to begin work shortly on one of our DXL stores in the Chicago market, while working to evolve the customer experience in at least four additional existing DXL stores before the end of 2023. The third opportunity we see is through collaborations and retail alliances. We believe examples like Untuckit are only the beginning and we are working in real time and at least a couple of more retail brand alliances. We are confident that our fit authority is a leading reason for our being and as brands realize the difficulty of pursuing greater diversity and inclusion initiatives for their brands and in their offer, our core capabilities to develop and execute products that serve the big and tall consumer and his needs will be more in the bull's eye of many other great brands. In the same regard, as an alternative means, we are pursuing something I have referred to often and that is specifically the initiative around fit technology and size mapping. Currently in two stores and rolling out to an additional 10 stores by the end of this month is a technology platform that will create a compelling in-store and online shopping experience with the use of body scanning for better accuracy of fit and solving for the needs of the big and tall consumer. We look forward to this in time to be both in-store in concept across our physical footprint and in time, a digital feature capable of execution from home as well. And finally, given consistent is defined as what is consistently done, I could not close without acknowledging how inspired I remain for the DXL team we work with every day and the family we have built and achieved over the past four years. None of this would be possible without the hard work and dedication of our people in the stores, in the distribution center, in the corporate office and the guest engagement center. It is because of a great team and culture that we've created that I want to get up every morning and keep moving on this journey. Thank you to the entire DXL team for your hard work and commitment in our pursuit of serving big and tall men and making DXL the only place where they would ever choose their own style to wear what they want. And with that, operator, we will now take questions.

Our first question comes from Michael Baker with D.A. Davidson. Your line is open.

Okay. Thanks, guys. So we love the new store growth, but also of the buybacks. It costs you less than $1 million, I think, to open a new store, seems like even if you do 10 or 20, you have plenty of cash left to continue to buy back stock. So just wondering, maybe this is a question for the Board, but the Board's appetite to ink or redo another buyback authorization and keep buying back stock here at the current levels?

Sure. Thanks for that question, Mike. I'll take that. So you're right. We were pretty aggressive with buying back the stock this past quarter. We feel like that was something that we committed to doing at the beginning of the year and were glad to get that completed. Actually, just yesterday, I think we finished up the remainder of the $15 million authorization. I think with regard to buybacks for the rest of the year, what we are doing for the moment is we're putting together our plans, which Harvey just talked about pretty extensively about starting to work on longer-term growth plan. And I think what we're really focused on is building that, as Harvey said, war chest of cash that we can then figure out what's the best way to deploy that to grow the customer. As I said, buybacks I think are great, and we'll continue to do those when we see the times opportunistic. But for right now, we're mostly focused on getting the growth story going.

Okay. But so I guess it doesn't necessarily rule out buybacks is what I'm hearing. Okay. If I could ask another question, just on the guidance, so you didn't change your gross margin guidance. And I think, with my math, implies a much better second half gross margin, I think, down about 20 basis points in the second half versus the first half. So, if you could sort of talk about why you think that with business weakening a little bit, is there not markdown risk? We get, you don't want to be promotional? But presumably with sales coming in maybe a little bit lower than you thought. Is there not excess inventory? Do you not need to mark that down? Just how do we think about gross margin in the back half inventory levels, markdown risk?

There are two key points I want to highlight regarding the gross margin rate for the first half, which should see some improvement in the second half. First, we will start to see the effects of the loyalty programs that were initiated last fall, which should be beneficial. Additionally, we've noticed a recent trend where customers are increasingly choosing private label products, which typically yield a higher margin than our national brands. Therefore, we do anticipate some improvement in margin during the second half of the year, and these are the two main reasons for that expectation.

The other thing I'll talk about is inventory. We are incredibly comfortable with our inventory is as we talked about, it's nearly 10% under last year and over 20% under pre-pandemic, and we're turning goods fast we're managing inventory. As we mentioned, we had a slight uptick in markdowns because we're managing inventory in the season. It's not a surprise. You probably heard elsewhere things like shorts and swim were a little difficult. But even with those difficult seasonal businesses, what we said is our markdown rate was nearly at a historical low. So we are confident and comfortable with our inventory. You may recall that we said last quarter, we would rather be chasing goods than chasing cancellations, and the merchandising and global sourcing team with the allocation partners are just doing a truly phenomenal job at managing inventory. It is the least of our concerns.

Okay. If I could ask one more, I did want to ask about the loyalty program now, I guess, not quite at year-end, but 8 or 10 months into it. You're making some changes. How would you characterize the success of that program since November? Are you getting the expected return on investment on that? Are you making changes because it's not working out as well as you thought? Just if you could sort of talk about that?

Yes, it's Harvey. The outcomes are quite varied. To be candid, our platinum and gold customers are performing significantly better than anticipated in the loyalty program. Their revenue contribution is exceeding our expectations when compared to their overall participation. On the other hand, our silver and bronze customers, who are our least engaged segments, seem to be buying more out of necessity rather than desire, which is affecting their participation. We are reshaping how points are earned and making the program more relevant to customers to encourage more engagement from those at the lower tiers. Points essentially serve as a small discount on our products, but they cannot typically be directly used to make a purchase. The main objective of the program is to foster loyalty and strengthen our relationship with customers. Regardless of whether customers utilize $15, $30, or $45 worth of certificates, our average spend remains above $150. This is where we see the challenge, as our more engaged customers are actively spending their discretionary income with us, whether driven by need or desire. We're focused on leveraging our better customers while also finding ways to reengage our lower-tier customers more effectively. I hope this provides some clarity.

Yes, it really does.

Thank you one moment for our next question. We have a question from Jeremy Hamblin with Craig-Hallum Capital Group.

Thanks and congrats on the strong Q2 results. First, I just wanted to start with a clarifying question on the gross margin. So, you did a 49.5% gross margin in the first half of the year. I think, Peter, your guide and suggestion that's implied would suggest like back half of the year average is about 48.5%. So, I know on a relative year-over-year basis, that's better than what you saw in the first half of the year. But on an absolute basis, the second half, I just want to make sure that's projected in about 48.5% range. Is that correct?

Yes, that's correct, Jeremy. Overall, it should be about 100 basis points lower than last year's 49.9%. For some of the reasons I mentioned in the previous question, we do anticipate some improvement in the second half of the year.

Okay. And then let's focus on the future growth strategy because you went through a few things here, and I know that plan is still being developed. But I just wanted to make sure that I heard some of the things correct. It sounded like you were planning maybe to invest 3% to 4% of sales in improving brand awareness and that kind of certainly at least FY '24 and maybe FY '25, we should be thinking about EBITDA margins that are under 10%. Did I hear that correctly?

Yes. Conceptually, what we hope and envision is that we will invest in marketing. Part of that investment will be leveraged to the P&L through greater sales, and clearly, at least on the onset, part of that marketing will be SG&A increases and affect the P&L in the short term. When we think about this, and it may be a little hard as a public company, but in reality, we need to invest in this business we clearly understand what's important to the consumer. We clearly have a positioning that's really important to him based on his terms, and we need to get that message out. And the only way to grow sales is to grow share of market and the other way to create share of market is share of voice. So yes, you heard it correctly. But in time, we absolutely expect leverage and to grow the top line meaningfully greater.

And Jeremy, in response to Harvey's question, I would add that any incremental investment in marketing, such as increasing from 6% to 9%, which is a 3% increase on a 12% EBITDA margin, would reduce it to 9% using simple math. This is with the assumption that there is no sales growth at all. Our hope is that we will see some return from that investment over time. We certainly believe that as we invest, we will begin to experience small rates of growth.

For sure. This process always takes some time. I believe your advertising budget for this year is in the $30 million to $35 million range. So, just doing a quick calculation, you're looking at maybe a $15 million to $20 million increase for next year. Clearly, you need to allow some time for an initiative like this, which is presumably set for at least the next 12 months. Do you have a target over a three-year period where you think sales can reach a specific number? Is that number around $700 million? Or can you provide some insight into what you believe this incremental investment can achieve?

Yes, it's Harvey. I want to be careful not to reveal competitive insights, but you can expect to see increased advertising focused on positioning and branding, which will take some time. This won't involve more SEM digital marketing. You should be able to connect better through broader yet targeted media communication. Our previous comments indicated we expect to see low double-digit growth sustained for some time as this advertising engages consumers. While I won't give a specific number, you can consider a potential increase to $700 million from a base of $550 million over several years, factoring in double-digit growth, new store openings, and stronger comp performance than average. Typically, a good consumer retail business runs comps by one or two points, and we expect to exceed that. Historically, our digital business has seen growth rates between 10% and 15%, despite challenges during the pandemic. We expect to surpass that as well. So, with a significant comp base—over 3% in stores and over 15% online—plus new market share, we anticipate achieving double-digit growth rates. We've defined this as low double-digit growth, but our definition of growth might differ from yours; however, we believe it reflects meaningful growth.

That's super helpful color. And certainly, low double-digit growth that's for sure, a growth company in retail and…

The only other thing I want to caution you about, Jeremy, is that while I can't share competitive intelligence, we expect to see sustained low double-digit growth year after year. The key question is when that will be fully set up. Given the last four months of this year, we won't be making that investment now. Therefore, you can expect to see increased investment in 2024, leading to sales growth in 2024 and 2025, and hopefully, we can maintain that level of low double-digit performance.

No, understood. Clearly, it doesn't happen overnight. I wanted to get a little more insight, Peter, Harvey, on the unit growth, and I appreciate the additional information on what next year might look like. Regarding the timing of the 10 openings for next year, can you provide some details on whether that is likely to be more concentrated in the latter half of the year? I'm not certain about your lease commitments and what your real estate teams are forecasting for how that might unfold in 2024.

Sure. We're excited about opening the first three locations this fall. For next year, we have identified seven potential openings. Although we haven't signed the leases yet, we feel confident about these locations. Some are expected to open in the first half of the year and some in the second half, but they won't all be concentrated in the third and fourth quarters. I would anticipate around four openings in the first half and six in the second half.

Got it. That is helpful color. I'll hop out of the queue, but congrats and best wishes.

Thanks, Jeremy.

Our next question will come from Raphi Savitz with RYS.

Maybe one bigger picture question for Harvey and then a couple of quick financial questions for Peter. Harvey, how do you think about kind of the longer-term impact on the business from kind of the new class of weight loss drugs, especially as they become more available, lower cost and maybe in a pill form kind of over time?

Yes, Raphi, great question. It's actually been the number one question I kid you not on every investor call for the last 90 days. We actually think it is potentially a catalyst for our business. It's unfortunate, and I say that it's unfortunate because although those drugs are absolutely helping and we've heard about great stories, if you're 5x you have the potential to become a 3x, but you're not going to move from a 5x to a large. If you're at 3x, you're going to maybe move to a 1x. So there is, first of all, a catalyst for as you diet and lose weight, you need new clothes. The other part that is interesting, and I'm not sure it's unfortunate, it just what it is, it really requires lifestyle change. And so, I don't think anyone intends to be on that drug forever. And if you don't change your lifestyle, it unfortunately creates a yo-yo, and we've heard that already. We've heard a couple of our investors literally say they've been on it they needed to go back to their doctor, get a prescription refill and their doctor wanted to chat with them before that. It took them three weeks and they gained five pounds back. And I tell you all that because that's more catalyst for the unfortunate reality of going up and down. And our consumer, first of all, is big and tall and if you're 6.5 and 280, you're not going to go to 6.5 and 180. It's unlikely you'll ever get below a big and tall size. You just might change your size. And then equally, potentially unfortunate if you're on it and you get off it and you don't have lifestyle changes, you potentially could gain way back. So for us, as a business, we see it as a catalyst we're hopeful that our consumer becomes healthier, loses weight and all those things, which, of course, you would want. But in reality, the practical reality is not going to move out of big and tall in most cases. He's just going to really require new clothes for a loss in weight and potentially might require new clothes for a gain back of some of that. So, hopefully, that helps you understand how we're thinking about it. We really haven't baked anything in. But as we talk and explore this, we do think it's a catalyst for greater business opportunity just because of changing sizes.

Very helpful context. And then, Peter, just a couple of hopefully quick financial questions, I guess from a capital allocation standpoint, like how are you thinking about hurdle rates for these various investments, whether it's the stores, whether it's kind of brand investments or any other investments you're kind of making in the business? And then just a simple one on cash taxes, you talked about cash taxes this year, but how do we think about cash taxes out for the next few years?

Sure. I'll address the last question first. The cash tax outlook for the next couple of years will depend on our net income. I expect this year will see very low cash taxes, and next year should also be low. However, after 2024, we will begin to reach the end of our net operating loss utilization. Therefore, by 2025 and 2026, we anticipate returning to a more typical cash tax situation. Regarding investments, we maintain a high standard, especially when opening new stores. We aim for our new locations to achieve sales per square foot that are in the top quartile of our portfolio, and while we need to wait and see the actual performance, we set clear expectations going in. We also carefully evaluate sales against invested capital, ideally seeking a return of $1.50 for every $1 invested. Finally, we look at the internal rate of return, and typically consider investments yielding over 25% IRR to be good. Ultimately, our focus is on how we can responsibly grow our top line while ensuring our investments are effective.

In terms of the new stores, as you consider a few stores this year and possibly about 10 next year and more after that, how many leases do you anticipate signing in the near term compared to waiting to see how this group of new stores performs before committing to a larger development program?

Yes, we have been discussing the addition of 50 new stores, with three set to open this year and 10 next year. That brings the total to 13 of the 50 by the end of next year. By then, we should have a good understanding of how these stores are performing. In the following year, we anticipate adding another 15 to 20 stores. However, it may take us a little while to get a clear picture of their actual performance. We are optimistic about this expansion, as our customers have indicated that a significant barrier to shopping with us is the lack of a nearby store or the inconvenience of traveling to the nearest location.

Thanks, Rafi. Listen, it's Harvey and Peter and we'll sign off now. We want to thank everyone for attending the call today. We greatly appreciate your interest in DXL, and we're excited about the opportunities ahead. And hopefully, as we've articulated, we'll navigate through these continuing challenging times well and well enough to really get to the bigger opportunity of double-digit growth and meaningful engagement with a broad-based customer. So thanks much. Have a great early fall, and we will talk to you in 90 short days.

This concludes today's conference call. Thank you for participating. You may now disconnect.