The ongoing conversion of Casual Male to DXL stores is proving to be a winning, although not yet profitable, strategy for Destination XL Group.
David Levin, chief executive officer of the Canton, Mass.-based men’s big & tall retail chain, said comparable store sales in the third quarter rose 12.8 percent at the 73 DXL superstores that have been open at least 13 months. This is on top of an 11.3 percent gain in the third quarter of 2013.
He said the average DXL store attracts 82 percent more customers than a Casual Male store. And retention of those customers is higher, Levin said. “We retain 30 percent more in our active database than we do of the customers in a Casual Male store,” he said. Levin also noted that 17 percent more customers were converted from Casual Male to DXL shoppers than last year.
“We are continuing to make progress in growing our sales per square foot in DXL stores, which increased 9 percent to $160 from Q3 last year,” Levin added. “By the end of fiscal 2014, we expect DXL stores’ [sales] per square foot to grow to $165 and our long-term goal is to reach sales per square foot of $220, driven in part by opening stores with a smaller footprint.”
The retailer has been moving away from DXL’s original superstore concept with units over 10,000 square feet, to stores less than 6,500 square feet. This allows the company to enter new markets with “lower occupancy and build-out costs,” he said. “Today, we have seven of the small footprint DXL stores in operation. We anticipate opening this size store in select smaller markets as well as in larger markets, where geographical considerations warrant an additional presence, but not another full-size DXL store.”
Levin also said that increased promotional efforts “to drive customers into DXL stores and improve the conversion of existing Casual Male XL customers into DXL shoppers is paying off.” Buoyed by the use of a $25 coupon in the quarter, “traffic at DXL stores increased by 4.4 percent, conversion of traffic to sales was up 8.4 percent, and we saw substantial rise in the number of active DXL customers in Q3,” Levin said.
He also pointed to increased “traction” in the company’s efforts to attract smaller men, or “end-of-rack guys. This younger, smaller-waisted and more brand-conscious customer can shop at department stores but options at those stores are limited. The end-of-rack target group accounts for approximately 65 percent of the total big & tall market and tends to have a higher spend per transaction.” He said these customers generated 42.4 percent of our DXL sales compared with 33 percent at our Casual Male XL stores in Q3.”
Despite these positive signs, the retailer saw its net loss deepen in the three months ended Nov. 1 to $6.3 million, or 13 cents a diluted share, from a loss of $4.1 million, or 8 cents, in the year-ago period. Excluding special items related to its transition to the DXL format, the loss per share was 8 cents a share, 1 cent less than the 9-cent loss expected, on average, by analysts.
Sales in the quarter rose 5.6 percent to $93.6 million from $88.7 million, helped by a 5.5 percent increase in comparable sales.
Gross margin contracted to 43.3 percent of sales from 44.2 percent in the year-ago quarter as increased promotional activity to attract customers to the DXL stores pressured merchandise margins. Inventories grew just slightly more than sales, expanding 5.7 percent to $126.4 million.
The company provided guidance for the full year for total sales between $413 million and $418 million and for an adjusted loss per share of between 12 and 16 cents, implying fourth-quarter sales of between $118.9 milion and $123.9 million on EPS of 1 to 4 cents. Those figures are within the range of consensus estimates for EPS of 3 cents on sales of $120 million in the fourth quarter, which helped to lift shares of the firm 1.8 percent to $5.19 in Nasdaq trading Friday.
The company expects comps at the DXL stores to rise 12 to 13 percent for the year and gross margin to reach between 45.5 and 46.1 percent, higher than the year-to-date gross margin of 44.8 percent.
In the first nine months, the net loss grew to $13.8 million, or 28 cents a share, from $4.6 million, or 10 cents, in the first nine months of 2013, while sales expanded 4.8 percent to $294.1 million from $280.7 million.
Dextination XL ended the quarter with 128 DXL stores, 175 Casual Male XL retail stores, 49 Casual Male XL outlet stores and nine Rochester Clothing stores. At year’s end, as the transition to DXL and wind-down of Casual Male continue, the firm expects the store counts to be 140, 156, 48 and eight, respectively, decreasing the total unit count to 352 from 361.