It was a tough third quarter for Destination XL Group.
On Friday, the largest men’s big and tall specialty retailer reported net losses for the period rose to $7.2 million from a net loss of $2 million in the prior year’s quarter. The company attributed the higher loss in large part to the closure of its Rochester Clothing store in London, which incurred a charge of about $1.7 million, including a non-cash expense of $800,000 in foreign currency translation adjustments and $900,000 for lease termination and inventory liquidation costs.
In the earnings call, chief financial officer Peter Stratton said: “Our London Rochester store has had declining top-line volume over the past several years. At the same time, our operating costs continue to escalate, particularly our occupancy costs. We’ve reached the decision over a year ago to close our Rochester store portfolio in 2019 and turn our focus to the DXL brand. London Rochester presented a unique challenge for us. Unlike our U.S. store portfolio, our London customer did not have a local DXL alternative to shop. Unfortunately, the four-wall economics of the store were just not sustainable. In fiscal 2018, the store’s four-wall cash flow was approximately breakeven. In fiscal 2019, we expected the store to operate at a loss. In fiscal 2020, due to expected market rent escalations, we expected that the store would operate at a loss approaching $500,000.”
As a result, closing the store and taking the charge is in the company’s best interest, he said. The remaining Rochester stores, in Beverly Hills and New York City, will be shuttered in the fourth quarter.
Overall in the period, DXL reported adjusted EBITDA of $1.7 million compared to $6.6 million in the prior-year’s quarter and sales comparable-store sales increased 0.2 percent. Total sales were down to $106.6 million from $107.1 million the year before.
Harvey Kanter, president and chief executive officer, said the comp increase was the company’s first for the year. “This is a small win for us and a first step in the right direction.” A bright spot was the company’s direct division, which posted a single-digit growth rate in the period, he added. In addition, the wholesale business — most of which is with Amazon — also saw a slight uptick in sales to $2.9 million from $2.5 million the prior year. “Although overall DXL sales performance is still not to the level that I believe we are capable, we remain cautiously optimistic and expect greater inflection in the coming quarters,” he said.
Kanter admitted that the new promotional events the company tested during the quarter “were unsuccessful in driving the sales results we had hoped for.” He said that while traffic increased, that did not lead to the sales result the company had hoped to attain.
He said clearance merchandise did have a higher sell-through in the quarter, but gross margins were impacted by a change to the company’s inventory aging policy. Kanter said in recent years, tailored clothing sales have been impacted by a consumer preference toward sportswear and the “inventory diagnostic” implemented in the third quarter to clear inventories, particularly in tailored clothing, led to a $900,000 non-cash charge to gross margins which fell to 41.1 percent from 44 percent in the third quarter of 2018.
On a more positive note, the company has beefed up its team with several hires, including Erica Thompson as chief marketing officer and Ujjwal Dhoot as chief digital officer.