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Destination XL to Slow Rollout

Fourth-quarter loss larger than projected in Feb. 2 profit warning.

Destination XL Group Inc. is tapping the brakes on the conversion to its superstore format and closure of its Casual Male stores, a process now expected to be completed in 2017, two years later than planned.

David Levin, president and chief executive officer, told analysts Friday that while same-store sales at its DXL concept “dramatically” outperform those of Casual Male, “our initial concerns about declining productivity and erosion of our customer base of the remaining Casual Male XL stores did not materialize.” As a result, the company will scale back its plan to close all of the Casual Male stores in an accelerated fashion.

“The long-term goal was to have 215 to 230 DXL stores open and to have closed all of our Casual Male stores, excluding outlets, by 2016. We now believe that we should be opening approximately 40 DXLs and close approximately the same number of Casual Male stores in 2014 and extend the rollout through the end of 2017,” Levin said.

Currently, the retailer operates 102 DXL stores around the country and those stores represented 25 percent of total business in fiscal 2013, up from 11 percent the year before. There are 250 remaining Casual Male XL units.

Levin said the company learned that “the conversion to DXL was certainly the right strategy for the company. DXL comps, customer reaction and new store margins give us continued confidence in the strategy. Since initiating the DXL rollout nearly three years ago, we’ve made tremendous progress.”

However, in 2013, the company closed Casual Male stores that contributed $16.2 million to revenues and weren’t subsequently replaced by a DXL unit, he explained. “We are therefore slowing down the Casual Male closings, and will keep more Casual Male stores opened for a longer period of time.” Those stores will “serve as ambassadors for the DXL brand,” he said, and will add marketing kiosks that provide details about the location of the nearest DXL store.

This strategy also will allow the company to be “more selective about real estate decisions,” Levin added. “By accelerating the closing of our Casual Male stores, we were incurring unnecessary expenses related to early lease exit penalties. Immature DXL stores in certain geographies were not able to offset debt expense and recoup the loss of cash flow of the Casual Male stores. This is especially true when a DXL store was opened in the fourth quarter — stores that opened during the fourth quarter generally don’t have enough time for sell-through of the fall holiday inventory before it is put into clearance, thus negatively affecting the store’s profitability. Therefore, going forward, DXL store openings will be weighted toward the first three quarters of the year.”

Levin also said the size of the typical DXL store will be modified. Instead of 8,400 square feet, a “smaller footprint” of 5,000 to 6,000 square feet will be used. This will enable the company to “significantly reduce our net build-out cost, improve our sales per square foot and increase the four-wall contribution in smaller markets.”

He stressed that the ultimate plan to convert to an all-DXL format remains in place and is expected to “achieve double-digit operating margins in three years to five years.”

The situation wasn’t as strong in the fourth quarter.

In the 13 weeks ended Feb. 1, the Canton, Mass.-based retailer’s net loss was $55.1 million, or $1.14 a share, versus net income of $4.2 million, or 9 cents in the 14-week 2012 period. Stripping out $1.10 in charges, mostly for the establishment of a full valuation allowance, the adjusted loss was 4 cents a share, 1 cent below the bottom end of the range of a loss of between 1 and 3 cents implied in its Feb. 2 profit warning.

Revenues were down 5.5 percent to $108.5 million from $114.9 million during the longer year-ago quarter. However, comparable sales rose 4.2 percent, with same-store sales up 4.9 percent and direct sales ahead 1.2 percent and sales of the 48 DXL stores open more than a year up 13.6 percent on a comp basis.

Shares fell 4.8 percent to $5.54 Friday.

For the full year, the company swung to a net loss of $59.8 million, or $1.23 a diluted share, from a net profit of $6.1 million, or 13 cents, in 2012. Sales declined 2.9 percent to $388 million.

The company expects an adjusted loss for the new year of between 12 and 16 cents a diluted share, translating to a loss of between 21 and 27 cents on the basis of generally accepted accounting principles. Comps are expected to increase about 5.6 percent with net sales growing between 4.4 and 5.7 percent to between $405 million and $410 million.