Destination XL Group, Inc. (NASDAQ:DXLG) Q1 2024 Earnings Call Transcript

Destination XL Group, Inc. (NASDAQ:DXLG) Q1 2024 Earnings Call Transcript May 30, 2024

Destination XL Group, Inc. beats earnings expectations. Reported EPS is $0.06, expectations were $0.04.

Operator: Good day and thank you for standing by. Welcome to the Q1 2024 Destination XL Group Incorporated 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. [Operator Instructions] Please be advised that today’s conference is being recorded. I would now like to hand the conference over to your speaker, Shelly Mokas, Vice President of Investor Relations. Please go ahead.

Shelly Mokas : Thank you, Operator, and good morning, everyone. Thank you for joining us on Destination XL Group’s First Quarter Fiscal 2024 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 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 sales and earnings guidance, long-range strategic plan, and other expectations for fiscal 2024.

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. 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?

Harvey Kanter : Thank you, Shelly, and good morning, everyone. I let off with this 30-second spot and did so very purposely because one of our key focuses right now is on [catos] (ph) for greater growth and the strategic long-range plan initiatives to accomplish this. In this regard, the first quarter of fiscal 2024 has proven to be two different conversations. We are happy to report that our long-range plan growth initiatives are continuing to progress forward. Conversely, we are disappointed by the first quarter’s tough comp sales performance. While we are energized by our brand campaign that just launched and the greater opportunity to grow market share, I’ll get into the brand, marketing, and campaign details shortly. But know that what you have heard is but one tangible element of our LRP, and specifically an initiative to create greater awareness and access for DXL, with big adult consumers to drive greater growth.

So now, I’ll say thanks again to Shelly, and thank you all for joining us on the call today. For today’s call, there are two major topics that I want to talk about. First, I want to cover our first quarter results. As many of you likely have already seen in our press release, which was issued earlier this morning, our first quarter sales performance was disappointing. We posted a comp sales decrease for the first quarter of negative 11.3%, driven primarily by lower traffic levels to our stores and lower conversion of traffic on our website, while average order value was pressured in both channels. At this point in the year, we are hoping to start to see a greater inflection in sales, but the consumer is pressured and he is just not prioritizing spend on big and tall apparel yet.

With that said, I’ll get into more of the details behind our first quarter performance in a few moments. Second, I’m excited to update you on our long-range plan. As I mentioned on our Q4 earnings call back in March, we are executing an LRP that is comprised of four specific initiatives designed to overcome 4 specific challenges we believe limit our potential for a greater rate of growth in our current business model. Let me remind you of what those are. First is overcoming a lack of brand awareness. We have launched a new brand advertising campaign for the first time since 2017. The brand campaign launched on May 13 in a three-matched market test in Boston, Detroit, and St. Louis. Media includes broadcast television, connected TV, streaming video, audio, pay digital channels, and out of home, as well as owned marketing.

Second is our store footprint. We know there are gaps in our store portfolio. We call it white space. In April, we opened the first of eight stores for fiscal 2024 in Coon Rapids, Minnesota. Our second store is just opened last weekend in Thousand Oaks, California, and we have two more stores expecting to open later in Q2. We will open four more white space stores in the second half of the year. This begins to further address the challenge big and tall men have shared with us and why they do not shop with us with 44% of the time because there is no store near them and 35% of the time because there is no store conveniently near them. The third initiative is improving our digital experience. We are transitioning to a new and improved e-commerce platform through a phased approach.

The first element of this new platform is launching now. A second element will take place in late summer and a final update just after the holidays. The new platform enables us to enhance critically important operating capabilities while serving as the foundation for key growth drivers, specifically improvements in customer experience and user experience. And finally, the fourth initiative is alliances and collaborations. Collaborating with other retailers allows us to overcome the challenge of reaching consumers who may never be exposed to the DXL brand through our organic channels. On April 29th, we announced our latest collaboration with Nordstrom, which will allow us to bring the DXL experience beyond our four walls and directly to the Nordstrom’s consumer.

We are very excited to be launching DXL’s big and tall offering on Nordstrom’s digital marketplace platform. All four of these initiatives are progressing, but the number of new white space stores and the timeline for the development is behind our plans. In fiscal 2023, we opened three new stores instead of the five planned, and in fiscal 2024, we are now expecting to open eight stores instead of the plan 10. Since late in 2023, we have been pursuing steps which have been shared previously, including the hiring of Beta, a commercial real estate transaction and advisory platform, and we are also evolving the organization in an effort to improve the process and outcome. Continuing with the first quarter review, and despite the challenges in sales results, our regimented operating process, structure, and discipline have helped us to deliver gross margins, inventory, and operating expenses better than expected.

At the end of the first quarter our inventory is in great shape. Fresh spring receipts have been flowing into our stores and are available on our website which is setting up a great experience for our customers as we approach Father’s Day. We continue to carefully manage both our operating expenses and capital expenditures while still funding our growth initiatives. Because of this careful cost management, we continue to maintain a fortress balance sheet. And even though results this quarter do not reflect the potential of our brand or the opportunities yet in front of us, we are excited about the future. So let me get right into a few more details about our first quarter performance. Comp sales for stores were down 11.4% while direct was down 11.0% for the first quarter.

Comp sales by month improved ever so slightly, with February down 12.7%, March down 11.1%, and April down 10.4%. For the first three weeks of May, comp sales are essentially mirroring the first quarter. As I stated a moment ago, our first quarter results did not meet our expectations. We are operating in a highly challenged environment and this past quarter did not reflect the potential for our brand. Our results continue to be impacted by broader macroeconomic challenges and an ever tightening share of his wallet. As inflation continues to rise, our customers are pushing more and more of their spending into essentials and consequently that puts pressure on discretionary spending such as apparel. Similar to what we saw in the fourth quarter of last year, our customers bought fewer items, displayed more price sensitivity in their buying behaviour.

On our last earnings call in March, we talked about how our sales expectation for the full year was to be somewhere between $500 million and $530 million. We now estimate sales to be at the lower end of that range. Despite the decline in sales expectations, we are still guiding to an adjusted EBITDA margin of 7% thanks to strong merchandise margins and careful expense management. We still have work to do, but we are cautiously optimistic that we can execute our fundamentals by focusing on what we can control. In stores, the narrative from fiscal 2023 has continued into the start of 2024. Traffic to stores accounts for approximately 90% of the comp sales decline, while [dials] (ph) for transaction and conversion make up the remaining 10%. On a positive note, our three new stores that opened last fall in Queens, New York; Cincinnati, Ohio; and Pasadena, California, are all driving strong dollars for transaction and new to file rates that are approximately 3 times the change average.

Traffic to the stores has been slow to ramp but not unexpected given the difficult consumer environment we are observing with the rest of the store portfolio. Our 11 casual mail stores that were converted to DXL last year have also been a bright spot. Collectively, these 11 stores are roughly flat in sales comp year-to-date as compared to the full portfolio, which I mentioned earlier is down 11.4%. We expect to convert five more casual mail stores to DXL formats by the end of the fiscal 2024, which leaves only 12 anchor stores remaining under the casual mail banner. In merchandising, the overall sales penetration between designer collections and private label brands was relatively consistent with last year. However, we have seen the customer trading down within both categories.

In a recently published report by Adobe Analytics, the authors conclude that consumers have been trading down to less expensive goods across a broad spectrum of categories, including apparel. The research concluded that 55% of apparel units purchased in the first four months of 2024 have come from the lowest quartile of prices, whereas for the same period last year, these goods only represented 35% of units. Likewise, higher price goods have decline in share from approximately 22% of units to this year, consisting of only 8% to 9%. As many of you know, DXL trades in moderate to upper moderate price points, and this report from Adobe offers further perspective for our traffic challenges. We see this as confirmation that inflationary pressures are continuing to drive significant changes in consumer purchasing behavior across multiple product categories, including apparel.

That being said, we did resist the temptation to promote our way to a favorable sales result, and consequently, our merchandise margins have held up better than expected. Inventory management continues to be an achievement of our operating discipline compared to last year, our quarter inventory was down $9.1 million, or approximately 9%, while our inventory turnover has improved by almost 30% from 2019. Clearance levels of 9.7% at the end of the first quarter are in-line with our long-term expectations of 10%. And from a brand perspective, Vineyard Vines, [Freddie] (ph), Hugo Boss, and UNTUCKit have all performed well. Our customers love the new options and styling of our four brands. And UNTUCKit is now available in 30 stores, and we plan to increase to 50 in the fall.

Let me now switch gears and provide you an update on our marketing and our brand campaign launch. We are very excited to have launched our first brand campaign since 2017 on May 13th. As I mentioned we are employing a matched market test in three markets to measure the lift we can expect when we roll out nationally in 2025. The campaign is running in Boston, Detroit, and St. Louis and will be matched in similar markets and similar store density. The initial flight will run through the important Father’s Day season. The campaign is running across multiple channels including broadcast and cable TV, connected TV, streaming video, audio, and paid digital, including social and out of home. Early indications are positive as defined by greater online traffic in those markets.

We conducted consumer research that validated our strategy and insight, as well as the messaging to be sure it resonated with customers. We continue to believe this initiative can be a meaningful catalyst for our business as we introduce more big and tall shoppers to DXL and our unrivaled fit. As I mentioned last quarter, another key initiative in our LRP, is improving our customer digital experience. Replacing the current platform while developing critically imperative operating capabilities, rebuilding the foundation of key growth drivers, and improving the customer experience are all underway and progressing on schedule. This work will reduce friction and simplify the digital shopping experience. We believe this will improve the conversion of traffic on site with the enhanced capabilities of the new platform.

Additionally, these upgrades will provide a more agile, speed-oriented opportunity to increase the pace of change with access to more automation. And finally, it will provide an enhanced level customer search functionality and will better leverage emerging AI capabilities. The first phase of the rollout is happening now and the platform’s evolution will continue to progress in late summer, and then the balance of the change will be executed by year end. The evolution of our tech stack has continued as we endeavor to deliver more relevant messaging to specific cohorts of customers while delivering greater levels of personalization at scale. We have expanded our relationship with Luxor, which we initially engaged in Q2 of 2023, to handle our remarketing emails.

We’re in the process of migrating all of our email program to them, following the outstanding results delivered in our proof of concept work over the last year. We believe this change will yield greater revenue, while providing better analytics and capabilities to better engage our customers. Let me now transition to a topic that we think is going to be a big win for DXL. Last quarter, I mentioned that we were in the final stages of an agreement with another retailer that will allow us to sell our product through a new distribution channel that is aligned with DXL’s leading retail consumer experience. As we reported in our press release at the end of April, I’m very happy that this leading retailer is Nordstrom. We are looking forward to bringing the DXL big and tall offering to Nordstrom’s digital marketplace soon.

We are currently in discovery mode for more collaborative offers with several other brands and we are optimistic that some of these brands could play a role in our assortment in time and similar to the collaboration with UNTUCKit. And with that I’m now going to turn it over to Peter for a review of the financials. Peter?

Peter Stratton : Thank you Harvey and good morning everyone. I’ll start with some additional color around our first quarter financial performance. Net sales for the first quarter were $115.5 million as compared to $125.4 million in the first quarter of last year. A total sales decrease of 7.9% and a comparable sales decrease of 11.3%. The difference between total sales and comparable sales was primarily from two factors, which will continue throughout this year. First, we had an increase in non-comparable sales of $1.8 million, which primarily related to new store openings. And second there is a one-week calendar shift in our comp calculations resulting from the 53rd week in fiscal 2023 which was worth $3 million for the first quarter.

Stores which continue to penetrate about 70% of our total business were down 11.4% in the direct channel which comprises the other 30% of our total business was down 11%. We believe the disappointing sales results are directly tied to the ongoing macroeconomic challenges that our customers are facing. With a cumulative impact of inflation pushing up grocery bills, housing costs, and gas prices, leaving our guy with less discretionary income to spend on himself. As Harvey noted, we are now estimating full year sales at $500 million, which represents a negative 4.5% comp. We expect the second quarter will remain challenging with comps in the mid to high single digit negatives, but with improvement in the second half of the year to approximately flat as our growth initiatives start to have more impact.

Next I’ll speak a bit about gross margin which is a bright spot in our first quarter results. Our gross margin rate inclusive of occupancy costs was 48.2% as compared to 48.6% in the first quarter of last year. The 40 basis point decrease was due to a 175 basis point increase in occupancy costs due primarily to the lower sales base, largely offset by a 135 basis point improvement in merchandise margins, and we are pleased with how well our merchandise margins performed in the difficult sales environment. A shift in merchandise mix, favorable shipping costs, a reduction in loyalty expense from adjustments we made to our loyalty program, and a reduction in marketplace commissions, all contributed to the strength of our merchandise margin results.

We continue to focus our limited promotional dollars on areas of slower moving products to minimize our exposure to future markdown liability as we attempt to address ongoing traffic challenges. For the full year, we continue to expect margin erosion in line with Q1 or a range of 30 to 50 basis points. However, in the event we don’t see improvement in our traffic levels, we may need to be more aggressive with our promotions. On the balance sheet, we feel very good about our inventory position, both in terms of total inventory, balance at the end of the quarter, in relation to our turnover rates, as well as our clearance levels. Inventory management continues to be a critical element of providing the best big and tall shopping experience possible, and it’s one where our operating discipline has set us up well for success.

Moving on to selling, general, and administrative expenses, our SG&A as a percentage of sales increased to 41.1% as compared to 38.5% in the first quarter of 2023. The deleveraging rate was entirely based on our lower sales levels as on a dollar basis, SG&A expenses decreased by $800,000 as compared to the first quarter last year. The dollar decrease was primarily due to lower store payroll and performance incentive accruals, partially offset by an increase in advertising costs and investments in our long-range growth initiatives. Our ad-to-sales ratio for Q1 increased to 6.3% from 5.5% in Q1 of last year. This does not yet reflect investments in the brand campaign, which we will start to recognize in the second quarter. For the full year, we still expect to spend about 7% to 7.5% of our sales on marketing costs, up from 5.9% last year.

EBITDA for the quarter came in at 7.1% as compared to 10.1% in the first quarter of last year. This 300 basis point decrease was in-line with our expectations despite the lower than expected sales result. For the full year, we expect an EBITDA margin of 7%. I’ll finish up with a few notes on liquidity. We continue to feel very good about the overall strength of our balance sheet. We finished the quarter with cash and short-term investments of $53.2 million as compared to $46 million a year ago, with no outstanding debt in either period and availability of $79.2 million under our revolving credit facility. With the seasonal build of inventory and payment of prior year incentive accruals, Q1 is typically a quarter with a net cash outflow. This quarter, our free cash flow, which we define as cash flow from operating activities, less capital expenditures, was a use of $7 million of cash as compared to a use of $5.9 million in last year’s first quarter.

We are keeping most of our excess cash were $36.9 million in short-term US government Treasury bills which are earning interest at over 5%. Our fortress balance sheet gives us the ability to continue to pursue our long-term growth initiatives, despite the short-term economic challenges we are facing. We remain focused on executing our growth strategies and executing the day-to-day business with a high level of operating discipline. And now I’m going to turn it back over to Harvey for some closing thoughts. Harvey?

Harvey Kanter : Thanks Peter. I’ll close with this statement. I remain energized by the grit and passion of the entire DXL team to serve the underserved big and tall consumer and despite the challenges. What the team has achieved over the past four years is remarkable and none of this would be possible without the hard work and dedication of all our people in the stores, in the distribution center, in the corporate office, and the guest engagement center. It is because of this talented team and the culture that we’ve created that I want to get up every morning and keep moving on this journey. Thank you for all your hard work and the commitment in our pursuit of serving big and tall men and making DXL, the place where they can choose their own style and wear what they want. And with that, operator, we will now take questions.

Q&A Session

Operator: [Operator Instructions] And our first question will come from Jeremy Hamblin of Craig-Hallum Capital Group. Your line is open, Jeremy.

Jeremy Hamblin: Thanks for taking the questions. I wanted to start with the investments in the business. So you are progressing forward with the marketing investments. And in terms of thinking about matching the slower sales trends with that investment, and thinking about what you’re looking for in terms of response on the marketing or probably better put like the timing of response of when you would expect to see some inflection here from the new media campaign. How should we think about the kind of the jump in expectations where you’re guiding to a mid-single to high single digit decline in Q2 and then seeing that get back to a flattish level in the back half of the year, how quickly are you expecting a response?

Harvey Kanter: Jeremy, it’s Harvey Kanter. Thanks for the question. It’s a great question, one we’ve debated a lot in terms of how to present it, but it’s pretty simple. The fact of the matter is we have done a lot of consumer work in 2022 and most importantly in 2023, and that insight is that consumers provided two perspectives and without addressing those two perspectives, we might have a much more limited opportunity to take share of market. Those perspectives are factually that 7% to 8% of consumers in an unaided context know who DXL is. I would expect if you’re at a dinner party and you somehow get to a coverage conversation and you say among others you cover DXL, mostly 90 plus percent of men, unless you offer them something, won’t know who we are.

And in an aided awareness, it’s less than 30%. The other factual basis of our insight is that over almost 50% — it was actually 44% in the last brand study – of men said they do not shop with us because there’s no store near them or 35% said no store conveniently near them. And the reason I stress both these elements and then I’ll answer your question is that they are catalysts for change. And we would not and should not have great expectations for double digit growth which we ultimately are striving for in a period of time which I’ll discuss in a moment, unless there is something that is going to change the opportunity that we believe is present for us. We’ve obviously been at this. I’ve been with the company now in my sixth year. We’ve had some very big success.

We’ve managed to grow the EBITDA rate, EBITDA dollars at multiple points in time. Even with our current update, we will still be meaningfully over 2019. But a catalyst for greater growth is dependent on strategic actions and investments which we’re making. Now, a direct answer to your question on marketing, it’s not a light switch. We have communicated previously, and I’ll re-communicate here, that we see it as a two to three year investment. It’s a long term gain over time, but just because we advertise, doesn’t mean people are going on run in the store, and are believed, whether it’s based on Adobe’s Insight, whether it’s our own knowledge, whether it’s our current traffic, whether it’s some of the comparables around us, or even our own year-over-year, two-year stack, we absolutely know there are challenges in our business greater than we anticipated.

But the advertising will take time to spool up. What we’re doing to specifically measure it online today is really about sessions and traffic to the website. After that it’s the core team. Did they come to the website? Did they convert? Did we hold the average order value? And those are downstream of the traffic. The advertising is its entire intent is to drive awareness and trial. And trial is they came to the website, that’s what the advertising did, then do they find something there to buy, and do they buy something at a traditional conversion level and a traditional AOV. We’re not looking for material change in conversion or material change in AOV. We are looking for material change in traffic. The same can be said in our stores and our stores may see some greater revenue growth but in reality, it’s all about traffic and once that traffic comes to a store it’s all about having the right product in the right size at the right price and creating a compelling experience which if you look at our most recent quarter, we haven’t published this, but our most recent quarter was an 80% NPS in the store, which last year was about 79%.

So it continues to grow the level of experience being communicated to us by our consumers once they come in the store. But most importantly, in both cases, if we don’t drive traffic with the advertising, we won’t win. That investment we’re making is driven by fact, not opinion. And the ultimate mark of that success will be traffic. We won’t probably report material traffic details, but we will report thematically traffic over time. Remember, two weeks into the ad campaign, there’s not a whole lot to report. I can tell you the first blush is exciting, but in reality, it has to move meaningfully greater than the first blush.

Jeremy Hamblin: Understood. That’s a helpful color. I also wanted to follow up on the point that you made. I think you said 55% of units sold are coming from the lowest quartile of price point. And think about putting that in context of how you expect that to potentially impact your channel mix. In terms of what you see from your online business, from your store business, is this potentially, I think you’ve said that at times your online customer can be a bit more price sensitive. But wanted to just see how you expect that to potentially impact your mix of business.

Harvey Kanter: Yeah, Jeremy, the question about the insight that we shared, which was Adobe, I want to stress that was Adobe reported information of recent weeks. And that insight was 55% of consumers are now shopping the lowest quartile and that compared with 32% a year ago. So ultimately it means there’s been a shift down in price points being shopped at. It’s not a huge surprise at some level. The largest part of the big and tall market is the mass market. The largest part of the 20-plus-billion-dollar addressable market is in the mass. The consumer’s pressure that we believe the economic challenges, whether it’s gas or mortgage rates or food or what have you, are putting on the consumer is at the level he’s choosing to shop, which we think is down, but at the level he is, we believe that Adobe was representative of where the market’s going.

And I reference specifically the DXL is traditionally a moderate or even upper moderate price point brand. So think about things like UNTUCKit or Ralph Lauren or Vineyard Vines. Those are price points that are not mass market price points. And so, by definition we are losing a customer that is under pressure, excuse me, and has options in the mass market. That being said, we are not trying to be all things to all people because that would be the kiss of death and when I say that we’re not going to now add 15 or 20 brands that are lower price points because if you try to be all things to everybody you’re nothing to no one that cliche is Real, but we are evolving our mix with what we would say are barriers to entry today, which is potentially price points, by augmenting the current assortment with select brands that have lower entry prices to try to address that.

If it became a more meaningful conversation, which we don’t believe over time it will be more meaningful for DXL, then we would have to more significantly evaluate the nature of the mix and how we assort the brand. You know, there’s lots of conversations and there has been, unfortunately, for probably 12, 18, 24 months. Are we in a recession? Are we in an economic down win conversation? When will it come back? We can’t demonstrably change our entire assortment to address barriers to entering price point, but we absolutely can and are addressing more brands that are more opening-oriented price point without trying to be all things to all people. And when I say that, again, we have – you may or may not recall this – historically, back a couple, 2, 3 years ago, we had 200 brands in our mix.

Today we have something north now of just 100 brands. But if we were to take the 100 brands and add 30 brands of low price point product, where would it go? What we have to get rid of, et cetera, et cetera. And DXL is absolutely set up to successfully navigate what we would define as our customer that nears $100,000 average income, and it’s a moment in time, which we can’t spin on a dime, if you will, and materially change the entire assortment overnight. Hopefully that was a lot more color than you asked for but demonstrative of what we’re doing or not doing.

Jeremy Hamblin: No, it’s helpful. Last one for me and I’ll hop out of the queue. Just want to come to the Nordstrom collaboration and get a sense for, in terms of timing of the launch on the marketplace, in getting a sense for when you, kind of the first timeframe that you expect that that could have a potential benefit on sales. I’m going to assume that there’s probably pretty little included in your 2024 sales guidance, but just wanted to understand the timing of when that potentially could really show up — as a result.

Harvey Kanter: Yeah, I’m incredibly excited to literally tell you that it’s live now. It is live on their site. It has been a challenge for both us and Nordstrom’s. We both have a lot going on, but we became live about 36 hours ago. I think we went live like 04:00 on Tuesday afternoon, and what’s really amazing is I think 12.01 A.M. On Wednesday morning, which was obviously yesterday, we sold 3 pants. And we were very excited at how quickly we sold something. The plan right now is something in the vicinity, let’s say, you know, maybe a couple thousand units, approximately, styles that will double over time by fall. And our hope and belief is that it will spool up. I would not call it material this year, but that’s not material, as you said, in our guidance.

We are hopeful that we will be surprised. Nordstrom’s is an incredible retailer. Their relationship with the consumers is a hallmark of retail, and one we’re incredibly excited to align with if you think about our net promoter score and our offer online in the digital marketplace. If you search now, you will see a number of styles that are available. It’s kind of a process and for lack of a better word, it’s a birthing process. So we are seeing more and more styles come online every hour and it won’t probably be complete probably until sometime next week on the first pass but it will be a meaningful assortment across sportswear and tailored clothing and one — I’m both incredibly proud of the merchant team and the marketing team for the efforts to get it across and that was turned over to our tech team who is now working incredibly diligently with Nordstrom’s to get it all up and running.

And that’s where the opportunity is to understand how quickly the consumer will respond.

Jeremy Hamblin: Great, thanks for taking my questions and good luck this year.

Harvey Kanter: Thank you so much for your time.

Operator: [Operator Instructions] Our next question will be coming from Michael Baker of D.A. Davidson. Michael, your line is open.

Harvey Kanter: Hey, Mike.

Michael Baker: Hey, how are you? A couple bigger picture than shorter-term, and maybe you kind of answered this, so maybe there won’t be any more color to add. But in Boston, I’ve seen the advertising campaign. I think it looks great. Commercials are good. Is it too early to have any insight as to how customers are thinking about those, are responding, or anything like that in the [test] (ph) markets?

Harvey Kanter: Yeah, I would tell you, I want to make sure we don’t get ahead of ourselves, but what we are seeing in the markets, St. Louis, Detroit, and Boston, against the three match markets is I would say material upside in initial first-plus obsessions. And when I define material upside, we didn’t have an expectation, literally, it was going to be a light switch. Like all of a sudden, we’re going to do an advertising and everyone’s going to come to the website. But we are seeing what we would call a catalyst change in the number of sessions in those markets. And there’s a lot of variables, right? So we have Father’s Day coming, which obviously was a timing we executed. Will it last after the advertising goes away? It will come back for holiday.

We’ve been challenged by the level of investment in a perfect world, I was so excited. We wanted a front roll, all of the holiday into Father’s Day and go farther deeper, but the team appropriately challenged me and said let’s not get ahead of our skis. So we’re seeing some movement and we expect it will continue to grow, but it’s a long road. You know, building awareness is a long road and that’s why we’ve articulated a two to three year run rate and we’ve specifically said that national rollout, full blown national rollout at the millions of dollars that we’ll take will be 2025 with an expectation between now and then we prove to you and ourselves and our investors that we are getting a return that will continue to grow and ultimately generate revenue because we’ll bring people in and convert and drive an AOV that is similar to what we have.

Michael Baker: Yep, makes sense. If I could ask a question for Peter, just on the guidance, can you sort of walk us through how sales can be at the low end, but you maintain the EBITDA margin, particularly with the gross margin, I think you’ve basically reiterated your plan, maybe drop the low end a little bit. So I presume, I guess the difference is, you must be taking out a lot of costs or something. But if you could just sort of square that circle how you can still generate the same 7% EBITDA margin with sales at the low end and the growth margin outlook virtually unchanged?

Peter Stratton: Yep, happy to do that, Mike. I would agree with what Harvey has said throughout. Sales is the most difficult piece for us to control, but I think over the last several years, we’ve really developed our capabilities at exercising different levers, depending on how sales responds. So to your point, we are trying to scale back everywhere that we can, whether that’s in SG&A. You know, we’ve had, as you’ll see in the results this quarter, our merchandise margins were really good. We had some good news in our shipping costs. The mix of product was a little bit better, what sold. So I guess without getting into the specific details, the general answer to your question is yes, we are throttling back on every controllable area that we possibly can within SG&A, occupancy, and margin.

Harvey Kanter: Yeah, Mike, The thing I would add to that, and you’ll appreciate this, and hopefully our investor base will, we’re trying to navigate something very difficult, which is how do you grow a business and have factual-based insights that are required, a catalyst. And so we’re doing what we need to do, and we’re very protective of the long-term investments because without those investments, why would we have any expectation to change the sales trajectory? So, as Peter said, SG&A, merchandise margin, shipping costs, There’s no stone unturned at this point and reality, hopefully, we will continue to balance that appropriately.

Michael Baker: Great. Makes sense. Appreciate the time.

Operator: And I’m showing no further questions. I’d now like to hand the call over to management.

Harvey Kanter: Well, operator, thank you for your time and thank you — from the investor base for being on the call with us as well as our analysts. We appreciate your looking to hear our insights and perspective. We hope that we will continue to make progress in our initiatives. We are very excited about that and hopefully you’ve heard that enthusiasm. I also want to underline the operating regimen that we have that Peter referred to is one of the cornerstones that I think give us some belief that we know how to run the business successfully and we just need to go after those things that are identified by consumers as reasons why they don’t shop with us. And with that, I wish you all a happy Father’s Day, hopefully a good summer, and we will talk to you in August.

Operator: And this concludes today’s conference call. Thank you for participating. You may now disconnect.