By  on August 25, 2013

Investments to build the Destination XL brand dropped its parent company to a second-quarter loss but paid big dividends in several critical areas for the big and tall retailer.

Among the metrics showing improvement for Destination XL Group Inc. in the quarter were same-store sales, gross margin, sales per square foot and average ticket. Investors looked past the loss and a reduction in earnings and sales guidance for the year and sent shares up 38 cents, or 6.5 percent, to $6.19 on Friday.

In the three months ended Aug. 3, the Canton, Mass.-based retailer had a net loss of $1.6 million, or 3 cents a diluted share, against net income of $1.2 million, or 3 cents, in the 2012 period. Analysts on average expected a break-even performance. While sales descended 2.8 percent to $97.6 million from $100.5 million, comparable-store sales rose 6.9 percent, highlighted by a 16.5 percent comp jump at the 29 of the 65 DXL stores open at least a year. Overall sales for the DXL nameplate rose 28.8 percent.

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Direct channel sales dropped 9.8 percent as the company scaled down its catalogue business, which it has now eliminated in favor of smaller, periodic “brand mailers.” Catalogue revenues were down 51.7 percent in the quarter and e-commerce off 2.7 percent.

The company’s failure to break even was due in large part to a 15.1 percent increase in selling, general and administrative costs, to $43.3 million, as it invested in an institutional television ad campaign in May and bore other expenses related to the DXL rollout as it continued to phase in the concept and phase out its Casual Male format.

“Our campaign had no promotional call to action to prompt any short-term purchase behavior,” David Levin, president and chief executive officer, told analysts during a Friday morning conference call. “We achieved our strong comps on pure brand-building. In fact, market awareness of DXL jumped from 13 percent to 18 percent year-over-year. Now while this is an impressive increase, the fact that we have only 18 percent brand recognition demonstrates the opportunity that we still have before us.”

Levin told WWD that the drop in catalogue circulation — to about 3 million this year from about 14 million a year ago — undoubtedly contributed to the drop in e-commerce business. “What disappointed us is that the TV commercial drew an increase of about 80 percent in Web traffic. The commercials, which have a bit of a surreal quality to them, made customers curious, but we overestimated the conversion rate.”

Meanwhile, gross margin grew to 46.6 percent of sales from 46.4 percent, with merchandise margins up 150 basis points, and sales per square foot reached about $170 on an annualized basis versus $154 in 2012. DXL’s average ticket is up 23 percent from a year ago.

DXL finished the quarter with 65 DXL stores and another 39 scheduled to open by yearend. The Casual Male count of 312 is expected to be down to 252. By February, DXL, with its larger footprint, will surpass Casual Male in total square footage, with about 961,000 versus 885,000. The company opened a flagship in Chicago last week.

Levin asserted that he is sitting out the ongoing buy-one-get-one-free syndrome among major men’s wear retailers, as well as the recent flurry of price promoting. “BOGO is the easy way out,” he said. “We’re at an advantage because we’re in a special market and we’ve built a new model that is very strong.”

Levin noted that private label remains the bulk of the business, accounting for about 70 percent of sales, but brand representation, highlighted recently by an exclusive arrangement for big and tall premium jeans with True Religion, is growing.

“Our sweet spot is turning out to be the same brands that are the strength of the department stores,” he said. “Branded could grow and 40 percent [penetration] would be pretty good. My view is that we’re currently the fastest-growing account for all our brands.”

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