Earnings Call: Q2 2022

Aug 31, 2021

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 speakers' presentation, there will be a question and answer Please be advised that today's conference may be recorded. I would now like to hand the conference over to your host today, Shelly Mokas, 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 2nd 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 investor. Dxl.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. 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 surges of the COVID Delta variant potential supply chain issues and ongoing labor challenges. 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. Today, Peter and I will share with you both the progress we are making with our business and our expectations for our 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 and even more inspiring to see our customers responding to our ongoing digital transformation, which began back in 2019 and helped us to respond to the challenges of the COVID-nineteen pandemic. Consumer engagement with DXL over the past 3 months has been remarkable. This quarter can be considered a very important chapter in the context of the strategy we have been 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 was poised for inflection. In our Q2, we saw Big and Tell 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 and includes both current and new to DXL customers who have not shopped with us before. We believe there is a material change in how consumers are thinking about DXL. 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 have seen continued growth with new to file DXL customers growing 28.5% in Q2 as compared to the same period in 2019. Our financial performance in the 2nd quarter surpassed all internal expectations initially forecasted back in mid May. Year to date for fiscal 2021, We have posted an adjusted EBITDA of $43,500,000 To put that into context, we have achieved in 6 months a level of profitability that 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 a reduced promotional strategy, improvements in occupancy costs from structured lease portfolio and improvements 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 Q2 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 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 in the distribution center, in the guest engagement center and in our corporate office have answered the call every day. They're an 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, the support and dedication to DXL and our customer. It is because of you Our stores can open on time, our products get shipped and delivered, and our customers can 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'm planning to cover 2 topics today. First, I want to talk to you about our 2nd 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. I am very pleased to announce that our overall comp sales rate for the 2nd quarter was 21.6% as compared to 2019 97.2% 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 in direct was 52.2% as compared to 2019. In total, 2nd quarter sales were $138,600,000 compared to 123,200,000 And our adjusted EBITDA for the quarter was $29,800,000 compared to $7,100,000 in the Q2 of 2019. And finally, Our net income was $24,500,000 compared to breakeven in the Q2 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 2nd quarter to levels meaningfully surpassing 2019. We've seen successes of improvement each month in fiscal 2021 with our most loyal top decile customers returning to shop with us. We 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 6.9% in June, 14.7% and July 18.2%, all compared to 2019. This was a significant bump from the 3.1% comp we experienced in March April. Conversion was up 12%, dollars per transaction up 10%, What was most encouraging was that traffic continued to work its way back toward 2019 levels. We exceeded our sales plan in 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. Pacific Northwest, Northeast and Mid Atlantic have opportunity to improve further. For the quarter, while still having significant positive comps, The coast lagged 600 basis points behind the middle of the country. All regions had comparable sales increase in the 2nd quarter as compared to fiscal 2019. One of the things we are 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, but 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 percent of total sales in Q2 as compared to 21.1 in Q2 2019 and we expect our direct penetration for the full year to be approximately 30% as compared to our full year annual penetration in 2019 of 23.1%. For the quarter, our direct business is 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 to DXL 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 a remarkable resurgence in tailored clothing. Our merchandise assortment is about 55% private label, 45% designer collections and our sales penetration for the Q2 was relatively consistent with 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 6.8% 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 are even testing a new floor set by integrating our club department, which is primarily dress wear with more casual sportswear for a more relaxed and relevant lifestyle. How many times have you seen someone wear a sport coat or dress woven shirt with a pair of jeans or even stretch jogger trousers wore a fleece vest over the same. It's the new uniform 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 2nd quarter had an impact on our inventory positions. In some stores, performance by brand was dictated by inventory availability. Brands where we were in a strong inventory position outperformed brands where we are 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. We are working with our vendors to add more receipts to be in a stronger inventory position at the end of the fall season. We also continue to work through challenges with ocean freight capacities and the cost of containers, which in some cases is 3 to 4 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 and price increases for transporting merchandise domestically and we expect this challenge to continue through the second half of twenty twenty one. 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 challenge is that it creates an ideal environment for us to execute one of our primary strategic goals, which is repositioning the DXL brand to be less promotional. Our messaging to our customers in the second quarter continued to lean into the brand's positioning built around the proprietary fit and curated and 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 a customer who leaves our store full of confidence and empowered to face the day, happy, satisfied and belonging to the DXL 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 2nd 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 3 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 to cut down our markdown rates in the second half from 2 years ago. This has been a huge win and a driver of our 2nd 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 DXL, Not as a discount and coupon store, but as a store who understands and honors big and tall guys better than anyone else in the market. And that is what we're really all about. We know that some level of performance in the Q2 was driven by tailwinds for pent up demand from the pandemic, stimulus checks and at some level 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 are shopping at DXL for the first time. Our CRM data on newly acquired customers shows a few surprises that we believe are long term tailwinds and I'd like to share some examples with you. First, we are seeing more female customers than we have before. Attracting 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 We're just getting back into the world with new clothes and a new look. 2nd, we are seeing a greater representation from the middle and upper rack sizes or 3 XL and up. And we do believe this is somewhat the shifting weight lines many of us have experienced while being cooped up during COVID lockdowns. Likewise, we believe that the outcomes we are creating are at least partially due to the improvements we have been making for the past 2 years in how we segment, communicate and engage with our customer base in a more personalized and specific way. Just as a reminder, We believe the total addressable market for our core big and tall size of 2XL and up is north of $10,000,000,000 When you include 1XL, we think the total addressable market is north of $15,000,000,000 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 13 unique models today for fall, where we used to feature only 4 different models. 2nd, we are ramping this further with greater inclusion and being representative of our consumer base in our marketing. We are also using much more user generated content and some of our newer models are 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 customer specifically what he wants to see across different mechanisms like e mail, the website, 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 in mailers for more relevant and targeted messaging for different customer cohorts. 4th, in the second half of the year, we will be focusing more on brand marketing initiatives like connected TV such as YouTube and Hulu and creating relationships with content media companies to drive greater brand awareness without reliance on promotions. And 5th, on the digital technology front, We have invested in outstanding software designed to help customers complete their look. Most product pages on our e commerce website now include outfits that go 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 in DXL as the brand with the largest, most unique and often exclusive selection of apparel, merchandise for big and tall men. 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, but will be a more flexible platform that will allow us to build more functionality and product offerings into the app going forward. We have conceptualized that 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 DXL's positioning in everything we do today and believe it is this positioning's competitive stance that makes us the leading big and tall men's apparel retailer with the greatest possible potential for growth in the consumer's mindshare. And finally, let me give you an update on wholesale. In total, our wholesale business, which is primarily with Amazon, generated sales of $900,000 for the Q2 compared to $2,700,000 in the Q2 of 2019. While our sales have fallen back some in our B2B 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 a 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 Q1 continued to accelerate throughout the Q2 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 end 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 quarter's results. Due to the significant impact that COVID-nineteen had on our Q2 2020 results, I will also compare our results against Q2 of for better comparability. So let's start with sales. Total sales for the Q2 were $138,600,000 as compared to $76,400,000 in the Q2 of fiscal 2020 $123,200,000 in the Q2 of fiscal 2019. On a comparable basis, sales increased 21.6% over the Q2 of 2019. Stores were up 13.1% for the quarter and direct was up 52.2% to 2019 levels. Both channels saw business accelerate month over month as the quarter progressed. The dxl.com website, which is the biggest contributor to direct channel, was up 66.4% over Q2 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 Q2, 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'd 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 have restructured 133 individual store leases, more than 1 third of the chain, which are expected to deliver over $17,100,000 of savings over the life of the leases, including $6,200,000 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 Q2 of fiscal 2020 and 44.3% for the Q2 of fiscal 2019. The 7 40 basis point improvement over 2019 was a combination of 390 basis points of occupancy leverage and 3.50 basis points of improved merchandise margins. Store occupancy costs decreased by $3,200,000 as a result of closing unproductive stores and the rent reductions 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 Q2 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 and A expense for the Q2 of fiscal 2021 was 30.1% as compared to 33 point 7% for the Q2 of fiscal 2020 and 38.5% for the Q2 of fiscal 2019. The 30.1% 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 and A costs were down $5,700,000 compared to 2 years ago. We are 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 DXL 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 Q2 of 2019. Corporate support costs, which include the distribution center and corporate overhead costs, represented 13.2% of sales in the 2nd quarter compared to 14.6% of sales in the Q2 of fiscal 2019. Adjusted EBITDA was $29,800,000 for the 2nd quarter compared to a loss of $4,300,000 in the Q2 of 2020 and earnings of $7,100,000 for the Q2 of fiscal 2019. Net income for the Q2 was $24,500,000 or $0.36 per diluted share compared with a net loss of $10,700,000 or $0.21 per diluted share for the Q2 of fiscal 2020 in breakeven net income for the Q2 of fiscal 2019. Next, I'll turn to cash flow in the balance sheet. Our free cash flow, which we define as cash flow from operations less capital expenditures for the 1st 6 months of fiscal 20 21 was proceeds of $40,500,000 as compared to a use of $11,100,000 for the same period in fiscal 2020 and the use of $6,700,000 in fiscal 2019. This improvement is primarily due to our improved earnings. This free cash flow enabled us to end the Q2 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 $11,000,000 at the end of the quarter from $61,000,000 at the end of Q2 2020 $58,700,000 at the end of Q2 2019. Our revolving credit facility had $65,100,000 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 $73,400,000 as compared to $87,400,000 at August 1, 2020 and $110,400,000 at August 3, 2019. The $14,000,000 decrease since last year and $37,000,000 decrease over the past 2 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 6 months was a bit more than we would have 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 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 gap 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 8.9% of our total inventory as compared to 11.3% at August 1, 2020. Our results for the Q2 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 in consumer confidence and customer behavior despite the ongoing challenges we face from the COVID-nineteen pandemic and supply chain risks. For the full year, we expect sales to range from 490,000,000 to $505,000,000 with an e commerce penetration expected to be approximately 30%. We expect adjusted EBITDA to range from $65,000,000 to $72,000,000 and net income for the full year is expected to be $0.64 to $0.76 per share. Finally, free cash flow is expected to be in excess of $50,000,000 The high end of our sales guidance of $505,000,000 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 October. 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 2nd quarter, strong sales leverage, low promotions in razor thin SG and 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 and A expense. Our guidance on the high end of $72,000,000 of adjusted EBITDA on $505,000,000 of sales is a 14% adjusted EBITDA margin. We believe this is a unique year and long We are working to sustain an EBITDA margin of 10% or greater. There is still much work to be done and we will continue to drive shareholder value growing DXL into the premier shopping experience for all big and tall men. Lastly, I would like to provide an update on our common stock listing. The company has applied to rejoin 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 COVID-nineteen 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 and obsessive focus on our customers and a plan to create a meaningful shareholder return. At DXL, big and tall is all we do. We are not just an aisle or rack in a store, we are an entire store. We believe we have entered a new phase in our company's history and that we are in the most solid financial position in recent company history. Most of all, we believe we have a strategy to engage consumers in 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 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 share of market. And with that, we'll now take questions. Thank you. 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 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. As Harvey talked about, we've seen 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's 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're Seeing, how you're kind of gleaning that type of information and how much is embedded within that of Those new customers, are they totally new customers to the concept? Are these inclusive of reactivations of customers? Yes, 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 In clearing those customers asking, is it the first time you shop with us? If you haven't shopped with us before, where have you shopped? And if you have shopped with us for where else do you shop? And what we're absolutely seeing is a customer that has 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 queried customers have answered the question and they're 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 1. Number 2, 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% of 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 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 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, than what you did for The quarter in total, but any additional color that you might be able to share on the Q3 start? Sure. So Jeremy, this is Peter. And 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. We have not seen a slowdown and 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 pretty directly address is 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 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, which in some respects is really remarkable. The Consumer is coming in and I would say we're selling through clearance and coals 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 a cost in a good cost and cost prohibitive really. We have been airing goods in, but as we have Really chased the goods and we expect that each month going forward will be in a better materially better inventory position And hopefully that will be true. Nothing will be a greater hiccup than we expected. That will also further hopefully allow us to fulfill the guidance that we provided. Understood. And I also wanted to get The call out on geographies, Pacific Northwest, the 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 believe that the differential in comps is simply a reaction to a 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 in 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 July, then they started to separate back to the 600 points in August. So it's really difficult 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 you're 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 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 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 despite the impact you're seeing from freight. I wanted to see if you could actually be more specific. What was the drag from freight, either versus last year or versus 2019 levels? Sure. So again, we're making all the comparisons to 2019. I would put it at about 100 basis points to 200 basis points is the drag on The freight, the improvement in promotions and the impact that that's had on margin has really been remarkable. And it's more than covered 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 renegotiation of 133 stores leases. You note in here you've got 119 over the next 2 years. And I think Of those 133 stores, you said $17,000,000 over the life of the lease. Of the $119,000,000 that you have coming up over the next couple of years, I imagine you're probably not going to get $17,000,000 in savings. 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 $10,000,000 of savings on those next 119 locations. Yes. No. So 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 or during the pandemic, but we're very comfortable with being able to continue to generate some savings, and that's essentially what we're going to continue to do. And so Jeremy, I'm just going to ask that we move on to The next question person in the queue and we'd be happy to follow-up with you with more questions afterwards. Thanks so much guys. Thank you. Thank you. Our next question comes from the line of Eric Beder with SCC Research. Your line is now open. Good morning. Congratulations on a great quarter. Thanks, Eric. Thank you. I have a few kind of I want to talk a little bit about this One XL opportunity you mentioned of about $5,000,000,000 When you look at that customer, they also have as they get a little bit, I guess, Bigger or taller, they have a little bit more in terms of options. 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 $15,000,000 but we believe we have such meaningful opportunity really to address the share gains and the $10,000,000 that exists. And we understand that customers have actually moved up on that size range, not down. So 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 where they're Where they're just 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 want to talk about the new customers there. You talked about being much more focused with both your marketing and your merchandising and other pieces. Those new customers, 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 emails, through all the different levers, the marketing levers that you have? Yes. We have measurably moved our capabilities in terms of Individual quasi 1 to 1 marketing. And the reason I say quasi 1 to 1 marketing is we literally don't market to each individual consumer. But at this point, we have relatively speaking 9 consumer segments. So there's Active Andy, there's Casual Carl, there's Wally Wall Street And those names and references are 2 unique customer buying categories and our marketing team is interacting with them via email True, even how they come to our site. So if a 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 than we would for a customer who is coming back and purchases with us. And we'll 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 messaged one single message. If a customer and we know this factually today has only bought regular price, We would never send them a clearance message at this point. If they've only bought purely clearance, we would never send them a one of our greatest Brands like Ralph Lauren introduction because just they haven't represented that they buy themselves and we're very cognizant of things like really Checkout rate, abandon rate and even email opt in or opt out. And what we're looking for is the greatest level of initial open rate 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 it is materially different and more unique each day And how we present ourselves. So whether it's 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 email or one mass marketing message. Yes. I want to one more question In terms of mass market 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 TV, how does this year look in terms of your thought process for something like that? Well, I specifically spoke to the fact that we are extending our awareness building and consumer engagement in what we would call streaming and more digital Interaction via video and things like that, YouTube, Hulu, etcetera. We don't expect, but are still evaluating other broad based campaigns. But The unfortunate reality is when you execute broad based mass media campaigns, you are really not talking as much to your customer, you're talking to all customers and 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. Thanks 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. Thank you, guys. Hi, how are you? 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 Clearly come a long way. How much more is there to go both in terms of if you can answer qualitatively and possibly quantitatively? Yes, great questions. I think on inventory, there's 2 different elements to it. 1, 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 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 customer's desire to buy product and the demand needs. So I think that's been quite remarkable. I think the other end of the issue on inventory is the fact that demand has just so exceeded our expectations and the customer has come back so quickly That on a scale of 1 to 10, I might say we're a 5 or 6 right now on inventory and we hope and believe as I've alluded to that September will build and as will October, November and we'll be back to something more like a 7 or 8, but we will be chasing goods I think through the balance of the year. There's too many variables that I think are challenging. And the flip side is, as I spoke, we have the core skill set to be a 9 or 10 on inventory. I think the reality is This environment, the greatest level of capabilities are still being impacted measurably by containers and the ability to get goods or what have you. So that's the first answer to 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 information 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 6th inning maybe out of a 9 inning gain, if you will, for lack of a better way to say it or on a scale of 1 in 10, maybe a 6. 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 collections outfitting that I referred to or the future potential of what would be 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 customers' 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. I want to follow-up to that. I think you said you think EBITDA margins can be 10% plus over time. My calculation, Elyse, you're about 9.8 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 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 cost might go up? Yes, that's another great question. So there's definitely some SG and A areas that we're readdressing. So whether that's Certain areas of overhead that we had really cut down and just were 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, I would say, our warehouse and our infrastructure, our marketing efforts in our technology areas. I think all of those are areas that