Destination XL Group, Inc. (NASDAQ:DXLG) Q2 2024 Earnings Conference Call August 29, 2024 9:00 AM ET
Company Participants
Shelly Mokas – Vice President of Financial Reporting and SEC Compliance
Harvey Kanter – President and Chief Executive Officer
Peter Stratton – Executive Vice President, Chief Financial Officer and Treasurer
Conference Call Participants
Jeremy Hamblin – Craig-Hallum Capital Markets
Keegan Cox – D.A. Davidson
Operator
Good day everyone and welcome to the Destination XL Group, Inc. Second Quarter Fiscal 2024 Financial Results Conference Call. Today’s call is being recorded.
At this time, I would like to turn the call over to Ms. Shelly Mokas, Vice President of Financial Reporting and SEC Compliance at DXL. Please go ahead, Shelly.
Shelly Mokas
Thank you, operator, and good morning, everyone. Thank you for joining us on Destination XL Group’s Second Quarter Fiscal 2024 Earnings Call. On our call today are our President and Chief Executive Officer, Harvey Kanter; and our Chief Financial Officer, Peter Stratton.
During today’s call, we will discuss some non-GAAP metrics to provide investors with useful information about our financial performance. Please refer to our earnings release, which is filed this morning and is available on our Investor Relations website at DXL Investor Relations for an explanation and reconciliation of such measures.
Today’s discussion also contains certain forward-looking statements concerning the company’s sales and earnings guidance, long-range strategic plan and other expectations for fiscal 2024.
Such forward-looking statements are subject to various risks and uncertainties that could cause actual results to differ materially from those assumptions mentioned today due to a variety of factors that affect the company. Information regarding risks and uncertainties is detailed in the company’s filings with the Securities and Exchange Commission.
I would now like to turn the call over to our CEO, Harvey Kanter. Harvey?
Harvey Kanter
Thank you, Shelly, and good morning, everyone. As always, I appreciate your spending time with us today regarding our earnings release and communication of our quarterly results.
For today’s agenda, there are three topics I will cover. First, the current environment and our quarterly results. Second, an update on our strategic long-term initiatives and third, our expectations for the second half of the year.
Let’s start with the current environment. Our customers appear to be still feeling the impact of inflationary pressures and macroeconomic uncertainty. We are seeing customers gravitate towards lower-priced goods and select promotions, signaling a consumer who is carefully choosing where and how he spends his money.
Think of spending on his family, his immediate needs, and not necessarily big and tall. Our view is that he is not shopping as much for himself right now and that is being felt across the entire category. We believe we are gaining share of wallet, but this share growth is in an overall down environment for the category.
I expect many of you saw our press release this morning, which detailed our financial results. We mentioned on the last quarterly earnings call that sales performance in May was trending in line with our first quarter performance, which was negative low-double-digit comp. Unfortunately, that trend persisted throughout the second quarter and our results reflect continued softness in the big and tall consumer demand.
Let me now get into some specifics on the quarterly results. Let’s start with comparable sales, which declined 10.9% for the second quarter. Stores were down 10%, while direct was down 12.8%, so not much variation in demand between the channels. The progression in comp sales across the quarter was mixed.
In May, we saw the combined comp sales decline 11.8%. In June, comp sales improved to negative 8%. And in July, comp sales fell back to negative 13.8%. We believe Father’s Day was an occasion for him, our big and tall guy, such that the overall business improved even if only for a brief period of time.
In stores, the story for Q2 is much the same as Q1. Our struggles continue to be traffic, traffic and traffic. Did I say that enough? The store issue is dominated by a lack of traffic, while conversion is up and average transaction value is holding its own.
Traffic has been constricting our growth now for the better part of a year and we do not believe this is unique to DXL. We believe the overall men’s category is struggling and perhaps worse in big and tall. In the digital space, the primary reason for our decline in sales was due to a decrease in conversion.
We have seen signs such as dwell time on page views significantly decrease year-over-year. We believe this is an indication of a more discerning and promotional-driven customer, looking for value and discounts.
Perhaps the place we see the brightest line between stores and direct most is in this following regard. In stores, when he takes the time to drive to a store and comes in, he usually purchases plain and simple. He is purpose-driven. He is committed to purchasing for whatever reason, online, we believe it is a different story.
Traffic online is far greater than in stores, meaningfully better, but conversion is far lower. We see him putting items in his basket or wish list and then never executing a transaction. We believe he is cross-shopping and looking for deals and we can see the lack of conversion and the effort he has made to put items in his cart as an intuitive example of the ease of cross-shopping for whatever he is looking for.
The commitment of five to six minutes on the site of putting something in his cart and then looking across retail at other retailers is the reality of the direct environment today. And while our assortments are unique and our fit across a meaningful selection is proprietary and unlike what he can buy elsewhere, we believe he is okay with trading down.
And as we have previously noted, we can see this trade down in Adobe data. As we reported last quarter, Adobe noted the growth in the lowest price quartile and a reduction in penetration from the upper price quartile in a material and meaningful way.
Underlining our knowledge that men’s is tough and the belief intuitively that big and tall is even tougher was the promotional posture of the second quarter. The promotional retail posture of general menswear retailers and retail brands selling big and tall became much more pronounced in the second quarter.
More specifically, multiple core national brands began ratcheting up their promotion offers leading up to Father’s Day. Our understanding is their business is soft, and they are being challenged, given the software business, to manage their inventories. And as such, they are turning to greater promotion or, in some cases, promotion, which they typically never do.
These are brands and not retailers, and they are brands we sell. This puts DXL in a difficult position because these brands are very much the product we sell in our stores, which can now be found discounted on the brand’s website.
This environment forced us to promote more than we intended, which led to more markdowns, which we are fortunately able to offset through improvements in shipping and loyalty costs.
That being said, I do want to share a few comments on some of the elements that we believe we have controlled well despite the challenging environment around us. Our inventory balance at the end of Q2 was $78.6 million as compared to $87.5 million last year or a decrease of over 10% at $8.9 million.
And in comparison to 2019, our inventory was down 23.2%. It is worth reiterating that our focus on controllable elements of our business such as inventory is a testament to our operating regimen.
Despite the weak sales demand, our clearance penetration at 10.4% remains in line with our long-term target of 10% and only up slightly from 9.3% in the second quarter of 2023. Much of the credit for keeping our inventory clean goes to our outstanding merchandising, planning and allocation and global sourcing teams at DXL.
Despite the decline in sales demand, our teams have reacted to the situation and together aggressively managed what we have on order. By recasting our receipt flow and managing our roster of exceptional vendors, we have been able to avoid any buildup in excess inventory. And in fact, we expect to finish the year with materially less inventory than we had on hand last year.
Shifting over to the assortment, business was down in virtually every category. Again, the reality of lower-than-expected traffic to store and lower-than-expected conversion online. We also observed more customer migration from higher priced brands to more entry level brands such as Harbor Bay.
The combination of lower traffic and then more of that traffic shifting at lower price points is compounding the sales challenge. Sportswear continues to be accounting for approximately 77%, tailored clothing accounts for 19% and footwear accounts for 4%. As a reminder, our current merchandise assortment is a balance of private brands and national brands. And in Q2, we did experience a shift into our private brands.
The second topic I want to update you on is around our strategic long-term initiatives, including the brand campaign, new stores, distribution alliances and the new web platform, as well as a few updates on operating elements we have been pursuing to evolve and improve our results all around.
In terms of our strategic initiatives, first is our brand advertising campaign, which we experienced meaningful learnings from in the brand test leading up to Father’s Day. Let me now recap for you the learnings we had from our brand campaign that we launched in May.
But first, I want to clarify exactly what we did. The brand campaign test was a six-week market-match test in Boston, Detroit and St. Louis. We invested in linear TV, connected TV, online video, social media and radio with accompanying brand assets being deployed on the home page, in e-mail, and through digital banners.
We then compared our results in each market to our sister markets and the overall chain. Overall, our three test markets outperformed the control markets in traffic, in sessions and in customer acquisition. This was the positive outcome we had hoped for and the test gave us confidence that the brand campaign can create more awareness that will drive greater traffic and bring in new customers to DXL.
The lift in revenue was less than that of traffic, a scenario we expected since it is not like a light switch. While traffic popped, customers did not come in and buy at a historical rate in conversion and DPT. But in time, we believe this ramp, and like a flywheel, will begin to spin first on its own, and then over time, spin faster.
But for certain, we know that revenue is a lagging indicator. So we need time. Let me give you a few specifics, if you will, on the metrics. Online sessions were plus 30% versus control markets. New user sessions were plus 60% and store traffic improved between 5% and 10% as compared to the control markets.
We also acquired new creative and media learnings, which will allow us to be more efficient in 2025. And finally, in our most recent brand tracker, the work done post campaign, we also saw a lift in brand perception metrics within the test markets, with increases tied to fit, tied to comfort, quality, sizing and the assortments fashions offered.
Despite these encouraging signs, we are pivoting the remaining brand investment in the second half of 2024 to address specific challenges, which we expect will deliver a more immediate return.
While the brand campaign directionally displayed the results that we had hoped for and expected, reproducing the learnings in another three market tests will not materially produce sales, and that does not work, given the context right now.
So, given this and the cognizance of the sales pressure on the business, we are pivoting to strategies and tactics, which we believe can have a more immediate impact for fall. These would fall under the headers of areas we can control conceptually.
Think promotion, advertising spend, inventory, pricing, owned and marketing or areas we do not control, but yet we believe we can navigate in some way. Think working with national brands promoting their product, reasons to buy something discretionarily versus spending on travel, experiences or women’s or kids apparel.
Some combination of these will take greater marketing dollars, greater promotional dollars or loyalty expenses. And we believe this shift back will make sense short-term. Once we feel confident in the timing and the macro environment is on more solid footing, scaling to a national campaign from a regional campaign will lower costs and increase overall returns.
Now, subject two of our strategic long-term initiatives are white space store openings. In terms of store openings and the development programs, in May, we opened our second white space store in this year in Thousand Oaks, California, and we still expect to open a total of eight new white space stores in fiscal 2024.
In total, at the end of the second quarter, we had five white space stores up and running, including the three stores opened last year. All five stores are performing, albeit less than our initial pro formas, but we attribute at least a portion of this lower performance to the same issues that the rest of the store portfolio is suffering from traffic or lack thereof.
We believe this initiative is like in the movie Field of Dreams – If You Build It, He Will Come. But it’s a waiting game, just like in the movie. The new white space stores are driving higher levels of new to file and the customer reaction has been overwhelmingly positive.
We also relocated our store in the Chelsea neighborhood of Manhattan. Some of you may remember that our lone store in Manhattan was located in below ground retail space that was exceedingly difficult to drive traffic and awareness.
After 10 years in this space, our lease was expiring, and we seized an opportunity to relocate one block south on the same street to a beautiful ground level open floor plan with soaring interior and lots of windows to the sidewalks. And I’m thrilled with the new store, which opened in late June, and early indications suggest that this is going to be a major improvement over the old Chelsea location.
The next topic I want to update you on is our distribution alliance and collaboration with Nordstrom. After two years of discussing, planning and negotiating, we are now living on the Nordstrom’s marketplace site. Initial sales are encouraging, as customers are financed organically.
And we will more formally launch in September. This collaboration with Nordstrom’s and marketing to their broad customer base of who we are and what is our product offering. We are currently offering 30 brands and over 800 styles in casual sportswear and tailored clothing.
And in the coming months, we will be adding more brands and over 1,000 styles. It is still very early in the venture, and we are not yet prepared to put a number on what this collaboration could mean to our business, but we are very happy with the results thus far and look forward to seeing how the business can grow over the second half of this year.
As outlined in our previous calls, our strategic marketing priorities remain focused around growing DXL brand awareness, which I just covered, developing imperative operating capabilities and our website platform, continuing to build a better foundation of key growth drivers, think loyalty, which I’ll give you an update on in a minute and deepening our customer intelligence, think segmentation.
As you know, we are currently working on replatforming our website. The first phase of this project went live on May 30th, which addressed our homepage and static content pages. A much larger second release is going to deploy in Q3, which will address headers, improve search functionality and product detail pages and basket.
The final release will happen post-holiday and address the all-important functionality of checkout. We are already seeing significant improvements in latency times and the overall speed of transactions. The new website is powered by commercetools, and we think this project is going to be a huge win for easing the friction in our e-commerce business
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