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DXL’s Shift Away from Deep Discounts is Working

Destination XL Group appears to be capitalizing on its “underserved” market opportunity so far in 2022, with second-quarter net sales totaling $144.6 million, up 4.4 percent from $138.6 million on net income of $56.9 million.

In a Nutshell: The “big and tall” men’s wear retailer is raising sales guidance for fiscal 2022 to a range of $520 million to $540 million, which would be an increase of 3 percent to 6.9 percent from the $505 million taken in during 2021. Prior guidance called for a sales range of $510 million to $530 million, or a 1 percent to 5 percent sales jump.

DXL reaffirmed its outlook for 10 percent-plus adjusted EBITDA margin for fiscal 2022.

The retailer said its third quarter is off to a solid start as August month-to-date comp sales increases are in the mid-single digits.

Sales for the second quarter exceeded the company’s initial projections, primarily driven by an increase in dollars per transaction, which offset flat traffic, Destination XL Group CEO and president Harvey Kanter told Wall Street analysts in an earnings call last week.

DXL attributed the increase to less markdowns from fewer promotions, deeper penetration in high-ticket categories such as tailored clothing and less clearance inventory.

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Driven by suits and dress shirts, tailored clothing accounted for approximately 15 percent of the Destination XL Group business in the quarter, compared to 13 percent last year, a further signal of the category’s growth and recovery.

Overall, it appears DXL has been able to evade the markdown bug that many in apparel have struggled with over the past two quarters, even as it secures more inventory.

DXL has gotten clearance inventory down to 6.9 percent of total stock, down from 8.9 percent on July 31, 2021 and 10.9 percent as of Aug. 3, 2019.

“Maximum clearance discount is now 40 percent off the original price, whereas in the past, that discount level was 75 percent off, meaning that clearance is going out the door at shallower discounts,” Kanter said.

Overall, inventory turnover is up nearly 20 percent compared to 2021, and up nearly 40 percent when compared to 2019.

“We would rather be chasing inventory during an unexpected demand surge than having to heavily discount inventory and needing to liquidate,” Kanter said. “With this approach, we believe that we are well positioned to maximize sales and minimize risk given the ongoing ambiguity and volatility in the economy with the consumer. In regards to merchandise assortment, we are seeing strong selling in our more formal sportswear categories with sport shirts and casual bottoms, seeing a higher penetration compared to last year and when more seasonal categories, such as swim and shorts saw higher prominence.”

Gross margin rate for the second quarter, including occupancy costs, was 52.1 percent, up 40 basis points (0.4 percentage points) compared to 51.7 percent for the second quarter of fiscal 2021. The increase came from a 50-basis-point improvement in occupancy cost offset by a 10-basis-point decrease in merchandise margins. 

The merchandise margin decline was due to an increase in shipping costs mostly offset by lower promotional markdowns. DXL expects heightened freight and raw materials costs, particularly cotton.

Although at the beginning of fiscal 2022, Destination XL Group expected gross margin to be 200 basis points lower than last year, the company now expects the margin to be flat to last year.

While elevated fuel costs will continue to pressure margin comparisons for the rest of this year, according to chief financial officer Peter Stratton, the supply and demand of containers has started to balance out. Similar to what other retailers have said in recent earnings calls, the company is not seeing the same shipping delays it experienced last year, Stratton said.

DXL plans to open up to 50 net new stores over the next three-to-five years and has closed six of its 290 stores since the end of 2021. Two of the stores were DXL locations, while four were Casual Male XL. The 50 remaining Casual Male stores will be relocated or converted to a DXL store over the next three to five years.

Free cash flow was $19.8 million for the first six months of fiscal 2022 as compared to $40.5 million for the first six months of fiscal 2021. The year-over-year decrease in free cash flow was due to inventory build, the payout of incentive-based awards and an increase in capital expenditures.

For 2022, DXL expect capital expenditures of approximately $10.0-$12.0 million for investments in technology related to marketing and merchandising initiatives. 

At July 30, 2022, total cash was $22.2 million with no outstanding debt, compared to total debt, net of cash, of $11 million at July 31, 2021.  Availability under a credit facility was $85.1 million at July 30, 2022, as compared to $65.1 million at July 31, 2021.

Net Sales: Total sales for the second quarter were $144.6 million, up 4.4 percent from $138.6 million in the second quarter of fiscal 2021.

Comparable sales increased 6.1 percent as compared to the year-ago period. Comparable sales from stores were up 3.6 percent, while the company’s digital commerce operation saw sales uptick of 12.7 percent. E-commerce growth was driven by the website and app, as well as from online marketplaces like Walmart, Target and Amazon, the last of which it is currently exiting.

For the second quarter, total e-commerce sales were $43.7 million, or 30.2 percent of retail segment sales, as compared to $38.7 million, or 28.1 percent of retail segment sales, in last year’s period.

Net Earnings: Net income for the second quarter was $56.9 million, or 85 cents per diluted share, including a tax benefit for the release of its tax valuation allowance of $35.5 million, or 53 cents per diluted share.

The net income more than doubles the 2021 quarter’s total of $24.5 million, or 36 cent per diluted share.

Adjusted EBITDA for the 2022 second quarter was $25.9 million, compared to the prior-year period’s $29.8 million. Adjusted EBITDA margin is 17.9 percent compared to 21.5 percent a year ago.

CEO’s Take: “We continue to sell more products at full price with no public merchandise promotion,” Kanter said. “This shift [away from deep discounting] continues to resonate with customers as evidenced by our sustained sales comps and gross margin rates, which have exceeded our expectations this year…As an aside but perhaps because it is relevant to acknowledge, we have taken some level of price increases, but we would not consider this a material reason for the growth of our average ticket.”