Q3 2022 Destination XL Group Inc Earnings Call
The conference will begin shortly to raise your hand during Q&A you can dial star one one.
[music].
The conference will begin shortly to raise your hand during Q&A you can dial star one one.
[music].
John can you with us.
Good day, ladies and gentlemen, and welcome to the destination XL Group incorporated third quarter fiscal 2022 financial results Conference call. Today's call is being recorded at this time I would like to turn the call over to MS. Shelly market, Vice President of financial reporting and F. E C compliance at the XL. Please go ahead.
Shelly.
Thank you Latanya and good morning, everyone. Thank you for joining us on destination XL group's third quarter fiscal 2022 earnings call on our call today is 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 was filed this morning and is available on our Investor Relations website at Investor <unk> Dot Com 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 and other expectations for fiscal 2022.
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 info.
Information regarding risks and uncertainties as 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.
Thank you Shelly and good morning, everyone I'm grateful for the opportunity to speak with you today about the <unk> third quarter results and our continued commitment to the transformational strategy. We have been consistently working towards since 2019 and that is delivering our results.
Since I joined the organization in 2019, the world and macroeconomic conditions have certainly shifted each and every year, but our defined strategy has not and this is driven outcomes in the face of headwinds.
We know who we are we know what we do and we know who we do it for and our commitment to the big and tall consumer is relentless.
<unk> Big and tall is all we do and our positioning is in direct contrast to other retailers.
The big and tall man has largely been ignored by the broader apparel industry few brands fewer styles and sizing based on someone else's definition of regular limit him every time he tried to find clothing.
While most retailers of men's apparel offer some level of big and tall assortment to their customers is often a single rack or a small sub department for no. Other omnichannel retailer is at their top priority.
DSL, we trade on the belief that we offer superior fit superior assortment and an experience to him period. We believe this leads to our relationship with our customers that is built on respect.
Just and belonging.
We exist to provide the big and tall man with the freedom to choose his own style and aware of what he wants to wear.
Now, let me begin with our specific performance around the third quarter.
I am pleased to report that we achieved a comparable store growth of eight 7% over last year and a gross margin rate of 50%.
Coupled with selling general and administrative expenses, which were in line with our expectations at 37, 3% of sales. These factors delivered an adjusted EBITDA margin of 12, 7% for the third quarter.
In addition during Q3, we continue to grow the active file and achieve the highest 12 month active file customer count in the company's history.
These results are driven by numerous factors, including the development of our Omnichannel portfolio, our transformational brand positioning our approach to promotions, our merchandize assortment and inventory management.
We are continuing to make investments in people processes and technology to drive growth.
Before I get into the details of each element and at the risk of being repetitive I want to reiterate that each topic is driven by the framework of an alliance strategy and our relentless commitment to the big and tall consumer.
As we begin to Peel back our Omnichannel approach, let's start by talking about stores.
Doors, where the shining star in Q3, with a plus 10, 1% sales comp versus 2021.
Our brick and mortar stores account for approximately 70% of our revenue and represent a significant touch point with the integrated cross channel customer journey and relationship building experience only available at EXL.
Throughout Q3, and compared to our record 2021 stores delivered accretive monthly sales comp of plus six 1% in August plus 10, 4% in September and plus 13, 6% in October this positive growth trajectory accelerated further from our Q2 results and bodes well in <unk>.
Some of the impact for greater potential results in Q4, and despite the macroeconomic headwinds.
When comparing to 2020 one's abnormal consumer behaviors associated with the countries reopening post pandemic and the accompanying consumer revenge buying driven by both supply chain shortage fears and tend to have demand. We believe this return to stores is even more impressive.
Importantly, Q3 store performance was bolstered by an increase in dollars per transaction as well as markdown levels at an all time low.
Two really important signs of health that I will revisit in the upcoming merchandize assortment and promotional approach topics.
In the direct channel across the browser, the app and marketplace, our direct and online business also showed growth versus 2021 Q3 at plus five 5%.
The direct business comp sales growth was strongest in August and slowed down but remain positive in September and October as store growth accelerated.
All three channels the browser the App and marketplace grew sales in the third quarter with the store integration to digital from universe sales the only declining element of direct.
In terms of specific channel sales the market to replace results led the pack the continued growth of our marketplace business, primarily on Amazon, but also on Walmart and target plus reduced our overall direct dollars per transaction in contrast to the increases seen in stores.
This dollars per transaction erosion erosion is driven by the increased penetration of our big and tall Essentials line on Amazon, which is targeted towards a different consumer than <unk> core customer with lower price points.
We are continuously evaluating marketplace performance and product mix, knowing full well that consumer behavior shifts over the past few years have positioned marketplaces as sharpeville search engines and points of discovery, along overall customer journeys, Conversely, and as noted we did not comp universe sales, but our belief.
Is that with a materially better in stock position in the stores there was meaningfully less need to buy off the integrated web platform, while shopping in our stores.
Now shifting gears I'd like to talk about marketing and at a higher level, our continued and consistent brand repositioning.
The brand's repositioning is built around three key elements why.
And what.
Why do we exist we exist to provide the big and tall man with the freedom to choose his own style. How we do this our go to market strategy, we relentlessly strive to serve that fit and style needs of the big and tall man Big and tall is all we do.
And of course, then what.
What we do tactically factually pragmatically, we are a haven for the big and tall man with the largest assortment of brands and sizes accompanied by unrivaled expertise that creates an experience like no other.
So by now you might be asking yourself why should I believe is what reasons could you would you believe as proof points bear with me. If you will there are five first industry, leading expertise on big and tall sizing offering a fit that he can't get anywhere else second the broadest and deepest assortment of big and tall.
Our national and owned brands, most of which are exclusive to <unk>.
Third the highest standard of construction and quality in our mix.
A collection of brands and products that gives them style options for most any occasion.
Fifth and finally, our level of service that gives them a better experience that he can get anywhere else bar none.
We exist to provide the big and tall man with the freedom to choose his own style to wear what he wants to wear.
Later this onto our two 2022 marketing initiatives that were first referenced way back in during our Q4 'twenty one earnings call loyalty and the CVP platform and it's a powerful story and platform to continue to build upon.
To refresh your memory, our new loyalty program.
Our new loyalty program, which was soft launched in October and is largely now in place as a week. One November was a complete revamping of loyalty. It is a program that encourages and rewards deeper engagement with DSL beyond just shopping while simultaneously, providing greater recognition for our top customers.
And the customer data platform CDP editors as it is often referred to this launch is now underway in earnest and when fully operational in Q1 2023, it will enable greater personalization and segmentation across all CRM touch points, while also unlocking further.
Actionable insights to fuel new customer acquisition and inform targeting.
As the single source of truth, and a repository of many sources of customer behavior. The CDP platform will greatly enhance our current predictive modeling capabilities, while simultaneously consolidating and optimizing our CRM Tech stack.
Let me give you an example, how that manifests in a more tactical level in terms of our promotional approach and gross margin impacts.
When I first joined EXL. The company was Meyer and I use that word purposely mired in a cycle of using broadly available coupons and discounting as the primary method of communicating to customers and driving sales.
Not only did this limit margins and restrict profitability. It also took customers that DSL trades solely on price and promotion and not our unique fit.
Mostly exclusive assortment and an incredibly compelling experience.
We have significantly shifted our promotional stance since those days deploying promotions only when necessary to address customer file inventory opportunities. A stark contrast from the previous and essentially always on and heavy handed promotional approach.
In addition, we are constantly reexamining, our promotional portfolio and testing learning and often pulling back.
Some examples of this occurred within our two four programs and clearance strategies.
During this year, we've seen a resurgence in interest in purchasing of dress wear items, we revisited the constitution of our two four program as.
As rest where items like dress shirts dress pants ties and belts are often occasion based and needs based purchases, we tested and ultimately remove them from our two for promotional program.
It is also applied to underwear, which also qualifies within the need based purchase category. The result has been a 4% increase in average order value without any erosion in unit demand and a pickup in margin directly associated with reduced promotional markdowns.
<unk> a number of elements continues to be an opportunity, but hopefully what I have shared with you gives you a greater insight into our actions and pursuits.
Well our clearance Q3 penetration was up slightly in 2022 at six 7% to 2020, 164%. It is important to note that we have reduced our clearance discounting levels last year's deepest discount was 75% off whereas this year's deepest discount is at 40% off.
This is serve multiple purposes, one further protecting margins at markdown rates and to allowing for the deployment of occasional additional percentage off clearance promotions to address inventory, while also stimulating consumer demand.
As we have been significantly less promotional than any prior year, we do understand that promotions may play a role within the marketing mix, especially in Q4 and during the holiday season.
However, gone are the days of deep and broad promotions just for the sake of having a promotion.
We now combine a multi year disciplined testing and learning approach with a rigorous business customer inventory monitoring and are consistently scenario planning to activate against near term trends without creating long term brand repositioning harm.
Building off of promotions that clearance discussions I'd now like to talk about our merchandise assortment and inventory management.
In terms of merchandize assortment of consumer trends, both contributed favorably to our Q3 business.
The continued reemergence of dress, where in tailored clothing saw greater momentum and contributed 19.
Percent of our Q3 sales versus 15% in Q2, while also driving higher price points and more casual categories.
In addition, we saw we saw a strong performance and sportswear business with growth in sports shirts, and casual bottoms and knits and on the brand front Harbor Bay is our bread and butter, which continues to headline our private label mix and driving sales and margins.
Our designer collections, we offer exclusive styles from Nautica vineyard vines Psycho Bunny and Robert Graham, each which all drove year on year increases via a fashion forward style assortments.
As I mentioned towards the start of the call assortment is one of our key <unk> Differentiators and in this regard we are constantly examining our brand mix and opportunities to ensure that our big and tall customer can truly choose his own style and where what he wants to wear.
And to that end, we are launching two new additional exclusive brands as part of our spring 2020 is re assortment.
Well im not at Liberty to mention the names just yet we are incredibly excited about bringing new exclusive additions and we will be communicating additional details in the near future.
Now inventory.
Inventory on hand is another topic dominating the headlines in recent weeks and DSL, we're measuring our inventory against 2019, which was the last normal cycle not affected by the pandemic recovery and supply chain issues.
Compared to 2019, our inventories down 11, 1% with a 30% improvement in turnover rates. If we look more closely at the recent year over year comparison to Q3 2021, we have now right sized our inventory levels and made up.
Inventory, which is much more productive ending Q3 at a healthy level at $106 8 million, which is a 30% increase to 2021.
Shifting from the brand assortment and inventory discussion I'd now like to talk about people processes and technology.
All of which apply to marketing.
As you have seen from our recent press releases in Q3, we shifted the structure of marketing leadership.
And on Board, Jim Reef, as Chief Marketing Officer, and Jon Sainsbury, as Chief Digital and analytics officer, both our leaders with extensive experience and proven track records in the brand in the World of brand repositioning go to market strategies ecommerce and technical disciplines and there.
Combined presence and expertise significantly bolstered <unk> capabilities.
Building upon both Jim and John's background, and experience will continue to examine and marketing and technology processes customer journeys user experience and outputs with two fresh sets of eyes.
While the results of the previous the previous marketing leadership drove our commendable, especially navigating through the pandemic, Jim and John's combined presence allowed <unk> to shift even further from playing defense to playing offense with a focus towards the future and as you've heard me referenced before on previous calls.
As I close out my comments I'd like to address some macroeconomic factors and headwinds many of which are consistently appearing in today's headlines as we know 2021 was still a non normalized year, which also included non normalized behaviors, whether driven by pent up demand from 2000 Twenty's off year.
The issue of stimulus payments and supply chain outage fears impacting consumer shopping patterns.
While many of these elements no longer impact 2022, we are very mindful of the new emerging impacts of the macroeconomic environment and how this year's factors, including recession fears rising interest rates inflation and consumer confidence translate to our business and inventory positions.
Two we how we manage through the pandemic our actions will be informed will be purposeful and will be decisive to navigate near term realities without sacrificing long term health.
Is there any employer will tell you labor continues to be a challenge in today's climate historically <unk> rate of open positions and stored hovered around 10% today that rate is now closer to 14% and we continue to place great emphasis and are hiring back and looking to gradually improve this trend we know that our <unk>.
Employees are the face of Dx sell to our customers and our organization.
And in that regard my last remarks.
In response to the entire team and to thank the entire team acknowledging our employees and their commitment their effort and the hours that they continue to tirelessly dedicated EXL.
This is a requirement on my part not an option as they are what makes DSL DSL, whether in the stores and the distribution center and our guest engagement center or in the corporate office for their commitment to <unk> and our cause is beyond commendable.
They often talked about making <unk> a true employer of choice in one factory in accomplishing. This is our purpose driven mission, which is <unk>.
The ability to truly make a difference and positively impact our customers' lives is a profound significance and unique in some ways to DSL each and every day I am extremely grateful to be surrounded by fellow employees that choose to believe in what we're doing that choose to believe in who we are doing it for and ultimately choosing a partner alongside.
<unk> in that journey.
I truly cannot thank them enough.
And now I would like to turn the call over to Peter for an update on our financials Peter.
Thank you Harvey and good morning, everyone I'd like to give you some more color around our Q3 financial performance expectations for fourth quarter, and our thoughts on capital allocation.
Sales for the quarter were $129 7 million up six 7% from $121 5 million in the third quarter last year.
On a comparable basis adjusting for closed stores sales grew by eight 7% comparable store sales up 10, 1% and our direct business up five 5%.
Compared to 2019, which was still our last normalized year, our comparable sales for third quarter were up 33, 7%.
Compared to fiscal 2021 sales accelerated as we moved through the quarter with comparable growth of seven 4% in August eight 5% in September and 10, 3% in October .
The continued resurgence of stores was the highlight of our Q3 sales and stores benefited from growth in traffic conversion and dollars per transaction.
Our stores are in a much better inventory position today than they were a year ago with fresh merchandise and fewer out of stock positions and our customer has benefited from that stronger assortment.
The dollars per transaction have also risen as we have further reduced markdowns and seem deeper penetration and higher ticket categories like tailored clothing.
Geographically all regions outperformed their results last year, but the biggest gains continued to be in the southeast.
Sales trends in our direct channel were driven primarily by our <unk> Dot com website, and mobile App and marketplaces continue to scale, even faster than our core business.
Partially offsetting these gains was a decline in our universe sales, which are sales that originate in the store, but are fulfilled online. This.
This decline was tied to the better in stock positions in the stores.
As an omnichannel retailer, we remain ready willing and able to meet the customer on their terms wherever and whenever they choose to shop and we were pleased to again see growth in both the store indirect channels this quarter.
As Harvey mentioned there are many headwinds currently facing the U S economy, and we remain cautious but optimistic in our short term outlook.
We expect a single digit sales growth increase in Q4 and that outlook is embedded in our guidance.
Based on the strength of our Q3 performance in Q4 outlook, we are increasing our sales guidance from a range of $520 million to $540 million to a range of $535 million to $545 million.
Let's look at margin next.
Our gross margin rate inclusive of occupancy costs was 50% for the third quarter as compared to 52% a year ago.
This 20 basis point decrease was the result of a 70 basis point decrease in merchandise margins, partially offset by a 50 basis point of improved occupancy leverage on the higher sales.
The decline in merchandise margin was due to increased product and raw material costs elevated inbound and outbound shipping costs and higher penetration of our marketplace business, which is burdened with third party selling commission charges.
These factors were partially offset by the lower promotional markdowns that Harvey discussed.
The magnitude of the year over year changes in shipping costs and markdowns has become less pronounced in the second half of the year than it was in the first half and this should hold true for the fourth quarter as well.
For the year, we expect gross margins to be approximately 50 basis points higher than last year or approximately 50% of sales on the strength of our sales leverage and brand repositioning.
Turning to selling general and administrative expenses SG&A expense was 37, 3% of sales for the third quarter as compared to 34, 5% of sales in third quarter 2021.
As we've said before our cost structure in 2021 was very lean and not sustainable to achieve our company's 2022 sales goals and long term growth.
On a dollar basis expenses increased by $6 4 million, which was primarily due to investments in advertising to drive customer acquisition and engagement.
Store corporate payroll to support our sales growth and fill open roles and an increase in performance based incentive accruals.
Advertising for the quarter increased to five 9% of sales up from four 5% last year as we seek to balance return on AD spend with customer file growth.
Our full year advertising goal remains at six 2% of sales, which provides us with the opportunity to further increase our investment in the fourth quarter.
What this all means for the third quarter bottom line is an adjusted EBITDA of $16 $4 million or 12, 7% of sales and net income of $10 5 million or <unk> 16 per diluted share.
The third quarter is historically challenging from a profit standpoint due to the seasonality of our business. So we feel this is a strong result, and it marks our seventh consecutive quarter of double digit EBITDA margins.
Our business has transitioned from last year's post pandemic surge to a more sustainable operating model that we believe will support long term growth and market share and create value for our shareholders.
On the strength of our third quarter results, we are increasing our earnings guidance for the year to an adjusted EBITDA range of 12, 5% to 13, 5% of sales from our initial guidance of greater than 10%.
I'd like to end with a brief discussion of cash flow and capital allocation. We ended Q3 with a cash balance of $23 5 million and no debt through.
Through the first nine months of 2022, we have generated $32 million of cash from operations. This was primarily the result of our adjusted EBITDA of $59 6 million, partially offset by inventory investments of $25 million to get us back to better in stock positions in our <unk>.
Stores.
As a reminder, based on our historical net operating losses, we have very little cash taxes on our earnings. So more of this cash is available to reinvest into the business we.
We have invested $7 $9 million of our cash flow into capital projects, most of which has been in technology projects that support our stores website, and marketing and merchandising capabilities all of which ultimately enhance our guest experience.
For the full year, we expect capex to increase to $10 million to $12 million.
We did not need to use our credit facility. This year this quarter, which had availability of $92 million and is in place until October 2026, nor did we repurchase any more shares this quarter under our share repurchase program.
As we look to future uses of capital allocation for DSL I'm excited by the opportunities that lay before us, especially within our store portfolio.
We have 283 stores today of which 234, our DSL and 49, our casual male.
It has been a few years since we have undertaken any significant store expansion and during that time, our footprint has slowly declined as we have edited down our portfolio to only our most productive stores.
There are three concurrent paths, we will pursue as we deploy some of our capital into stores in the future.
First there are pockets of the country, where there are white or white space to us with no current dx cell presence, but whose market demographics and our own analytics indicates strong support for a <unk> store. We believe we could open up to 50, new stores over the next three to five years and we are actively.
Seeking real estate opportunities in such markets.
Second we will use this opportunity to finish uniting the store portfolio under the <unk> banner by converting or relocating our remaining casual male anchor stores. This is a proven and predictable model that has demonstrated a strong return on investment by capitalizing on the <unk> brand.
And third we are reviewing our existing DSL portfolio to determine which stores might benefit from a remodel to introduce some of the more modern elements to the customer experience.
Through updates to the layout branding and assortment.
We just recently launched the Grand reopening of the first of these stores in Warwick, Rhode Island, and the early feedback from customers has been tremendous.
There are three elements to the war with the model that I want to call out first we have opened up the exterior windows to provide a more appealing line of sight into the store and we have changed the store signage from DSL men's apparel to DSL big and tall.
Second we have reset much of the interior to showcase lifestyle fashion and exclusivity of brands. In addition to creating digitally interactive guest engagement centers to enable a more consultative and integrated commerce opportunity and checkout experience.
Lastly, we refreshed the visual merchandising to provide more focused support our brand identification and we have created a department for our Harbor Bay label, which now has a more clear identity than simply everyday value. It.
It is still very early and we will provide more updates on the remodels in the future, but we believe there is an opportunity to push this remodel out to many more stores in the future.
The surge in our store business. This year demonstrates that our customers still looks to stores to play a key role in their shopping journey and each of these store initiatives will help us to fulfill our mission of helping them, we're helping him to wear what he wants rather than us having to settle for whatever is available in a big box store.
I'm now going to turn it back over to Harvey for some closing thoughts RV. Thanks, Peter wrapping up todays comments I'd like to offer some additional perspective in closing thoughts. While we are proud of the results delivered in Q3, we are by no means complacent.
Zelle is consistent and aligned strategy has not wavered, nor has our relentless focus on the big and tall customer.
Has we have reset our brand positioning we are all so reset our promotional cadence and strategy.
Purpose of planning and inventory management has ensured that we are well positioned for the holiday season.
And while we create short term impacts we are simultaneously committed to long term growth and making strategic investments in people processes and technology that are all focused on delivering the immense opportunities yet ahead for DSL.
The sales transformation over the past four years is just beginning we know the opportunity ahead are significant and we are committed to growth and the teams who will get us there and now we will take your questions.
Certainly ladies and gentlemen, if you do have a question at this time. Please press star one on your telephone please.
Please standby, while we compile the Q&A roster.
And our first question will come from Mike Baker of D. D. A Davidson your line is open.
Hey, Mike.
Hi, Thanks, guys. So you gave a lot of good detail and metrics in terms of comp trends.
Through the quarter, but.
Wondering maybe more from a maybe.
More of a qualitative standpoint, just your view on the consumer heading into the holidays.
There's been a lot of.
Different data points out there, suggesting some weakness, particularly in the first week of starting after the first week of October .
And then you gave us plenty of metrics. So we can see those but but just curious what the way youre thinking about the holidays consumer spending all those types of bigger picture macro ideas.
Yes, Mike I would say our answer is going to be no different than they've been spent literally for the last two years. We believe we can push water uphill.
Our seventh quarter in a row of success topline and Bottomline demonstrates that the size of the file being the highest its ever been in the history of the company demonstrates that and the continued evolution of exclusivity of brands demonstrates that the wholesale community believes that we are the <unk>.
The choice for Big and tall expansion I think the reality is though as we've always been conservative our optimism is tainted. If you will for lack of a better way to say it by the ongoing consumer elements right the recession.
The elements of inflation mortgage rates.
Those issues are not beyond us and so while we believe we can push water uphill, we're pretty conservative and we believe that we will continue to grow. This business. We are oriented around growth both short term and long term, but we are definitely cognizant of the macro economic headwinds and we have tempered that in our guidance by even though we've taken it up.
Our guidance is from a product.
As to nearly 10 and so we've given a range of performance to acknowledged that there is the ongoing issue of volatility in the marketplace and obviously with the consumer.
Okay.
Fair enough one more.
If I could just looking ahead, maybe it's too early to think about this but looking ahead to 2023.
The margins there so well this year. So you had a huge margin last year. When this year began you said well that's all sustainable at all it could be around 10, now youre clearly going to beat that.
I get why cycling the unsustainable pandemic margins.
It made sense, but from here from this new level, if we hit a new level, we grow margins continually from this 12 five to $13 five level or are there one time things this year that won't repeat such that it might be down next year.
At a very high level I'm going to start this and then Pierre will pick up at a very high level I think the answer the question has to be embedded in how we think about the business.
First and foremost, we think about growth and so Peter's alluded to a multiple number of expenses and capital utilization elements in terms of cash that we'll think about that and also in that context. They could affect EBITDA margins. If we think there is a greater opportunity to make investments and grow and invest in the business, where the acceleration of EBITDA may not be as great next year.
Because we believe that there are really material opportunities to degree of those opportunities are not balanced well enough. We may not make those investments and of course that will create impact on margin. So I'm not giving you an answer specifically, but I think it is embedded in how we think about growth and the investments, we're making I think thats a TBD based on how we come out of fourth quarter.
<unk>.
Yes, I mean, the only thing that I would add is I think we've reached a point with our gross margins, where we're really happy with the promotional cadence that we're on we've still got some headwinds that we're dealing with with elevated freight costs and certainly inflation in production costs, but we feel pretty good about where those are and believe that those are sustainable, but I think the heart.
<unk> point, it's where do we continue to invest in the business. So we've said that marketing expenses are going to be we're targeting six 2%. This year, we haven't said anything about where that's going to be next year, but.
I think first and foremost we consider ourselves a growth company. So all of our actions and decisions are grounded in what can we do to grow the top line because we believe that's going to deliver the best results for shareholders and for our customer long term yes.
Yes, Okay that makes sense and so at least to me it sounds a little different than a year ago.
The answer to a similar question may have been the <unk>.
15% EBITDA margin from from 'twenty to 'twenty. One is just not sustainable this sounds a little bit different than that.
Yes, I would not say that our expectations just to be very clear our debt will generate 15% EBITDA margins that is not our expectation. We continue to think about being north of 10% and we will continue to balance the level of investment in SG&A things like of that nature that will could affect EBITDA, but I think <unk>.
15%, we would not today author that we would expect to be there.
Fair enough I appreciate the color. Thank you.
Thank you.
And our next question will come from Jeremy Hamblin Hamblin, Craig Hallum. Your line is open.
Hey, Jeremy.
Hey, good morning, and congratulations on some really impressive performance, especially in light of.
What we're seeing from some other retailers.
I just wanted to make sure to clarify come.
Come back to the kind of it sounds like quarter to date trends have continued to be actually pretty strong.
But I wanted to just also clarify Peter I think.
If our notes are right the compares get actually substantially easier throughout.
The quarter I believe that November is the toughest comparison, followed by December and then January but I wanted to just start by clarifying that.
Yes, so compared to last year fourth quarter was the most difficult quarter that we had so the compares in Q4 are a little bit a little easier than Q2 and in Q3.
But I think as Harvey was mentioning when you when you look at our guidance of $5 35 to $5 45.
That would imply a 2.5% to 10% comp for Q4, so I think that wide range is still.
It just takes into consideration that there is still so much uncertainty out there and while we do believe that we can push water uphill as Harvey was saying.
It's still it's difficult to predict what's going to what's going to happen, but we feel really confident that we will be able to deliver a single digit.
Increase somewhere between call it two intend for for the fourth quarter.
Understood.
Okay, I wanted to come back to the capital allocation.
You guys are in kind of an exciting point here, where you have multiple pathways to growth.
With store growth now part of the equation rather than store shrinking like it's been the last four years.
Remodels relocating and then obviously your your marketplace EXL Big and tall essentials sounds like that is doing really well.
I wanted to come to that the cost.
You highlighted the Warwick, Rhode Island remodel.
And see if you could share a little bit more color around as you do that remodel what's the potential range of costs for a remodel and what kind of the type of.
Return that you get on that or sales lift.
As compared to let's say.
The costs associated with.
Relocating a casual.
Converting our casual male.
<unk> fell versus the costs or.
Opening just a new white space.
Okay.
Yeah. So so.
So let me just start Jeremy with.
We don't want to get too far ahead of ourselves because we have one of these stores open we actually actually just opened.
Our second remodel in Troy, Michigan.
A couple of days ago. So what we are trying to do is to really learn test and learn right now and to see what that can do.
So while we do believe that there is a significant opportunity its been very very early the Warwick store has been open a little more than a month as a remodel in the Troy store. It really just a few a few days so.
Yeah.
We're not we're not talking about the same kind of cost too.
Open a new a new store at significantly less than that.
But.
What we're trying to do is figure out how much are we going to see a lift in stores by changing the sign from DSL men's apparel to <unk> big and tall and more clearly identifying who we are and what we do.
Trying to.
Have an experience in the store that allows for better consultation and lay downs and being able to leverage our universe.
Giving harbor Bay its own identity Theres, a lot of things that we think we can benefit from and keep in mind a lot of these stores.
Some of them are approaching 10, 11 12 years old so to some degree there is just simply they're in need of a refresh their need of updated lighting and paint and carpets are different just maintenance items that we need to we need to take care of them. So I think we're going to be coming back to you with more information on that as we learn more but it's still.
Pretty early but we're excited about it and wanted to let you know that at least it's on the horizon.
Got it maybe just clarify the expected.
A range of.
Cash cost.
For opening a new greenfield location.
Yes, so historically when we opened a new store it was upwards of half a million dollars now that was a few years ago. So in today's market with increased construction costs and just where the market is it's going to be higher than that but.
We're not talking about million dollars.
But I wouldn't be surprised if a new store cost us six 700000.
Great. That's Super helpful. And then just you guys are.
Really building quite a.
A strong balance sheet.
And it looks like Youre going to end this year, probably roughly around $1 a.
Sure.
At our Capex range.
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Let's call it $10 million to $15 million for next year.
You'd end up with $2 a share by the end of next year, but in terms of thinking about Peter the range of Capex investment now that Youre clearly triggering a different growth element for your real estate portfolio.
Can you give us a sense for what that potential range is is it something more like $15 million to $25 million next year on a capex investment.
Anything that might share a little bit of color on that would be helpful.
Yes, I appreciate it Jeremy we're not quite ready to come out with that information yet, but we certainly will be talking about that in Q4, as we put together our 2023 plants.
Okay got it and then.
Coming back to gross margins here for a second as well.
So really strong performance.
Noted I think that.
Supply chain costs down like that.
Is off the peak.
As we look forward and thinking about other pieces of it you noted that raw materials costs are up.
We do think that some of those input costs have actually started to come down as well in the recent months.
But can you give us a sense for where.
Kind of the timing of.
Inventory cycles coming true.
Turnover rate, where do you think that you might.
Kind of get some relief from the supply chain cost side are we looking at.
Q2 of next year Q1 of next year.
Additional color on that would be helpful.
Well I think what you started with is absolutely correct is that we are seeing that.
Freight and shipping costs are less of an impact on the comparisons that we're seeing now in Q3 and Q4 than they were in the first half of the year. So that's definitely definitely moderating I think that as we get into into next year.
We've.
We've pushed promotions pretty hard I don't think that we're going to get a heck of a lot more relief and less promotion. So eventually that's going to cycle and anniversary.
So when you look at our gross margins at around 50% that feels really good to me I feel like we traditionally pre pandemic, we were $43 44 now.
Now getting that up to $49 50, I think feels feels great and that's what we're going to be continuing to target in the future.
Yeah, No question really strong.
Okay, just last thing here coming back to the unit growth for a second I think you had previously talked about roughly five locations to open up next year.
There's been a lot of restaurants retailers that have run into permitting delays construction delays et cetera.
Is there any update that you have any change to that that number.
As a result of the kind of current construction environment.
Yes, so the number we're still working towards the goal of five for next year and I completely agree with you on the challenges in real estate and construction and permitting in.
We've behind the scene has been doing a lot of work in our real estate team is doing a fantastic job with getting out and canvassing the country and identifying where are the opportunities that we want to be looking into so.
It's a long.
Turnaround process, which this is I think the third quarter in a row that we've been we've been talking about look we think we can we can open new stores and we're looking at five for next year, but.
It's typically a 12 month process once we identify a store so we're getting up to that point.
Where by the end of fourth quarter beginning of.
<unk> first quarter next year, we're going to we're going to have a much better line of sight on are we going to be able to get five or not next year, but that's the plan is five next year and then in 2024 and 2025, we're probably in the 10% to 20% type of range.
Yeah.
Okay, Great. That's super helpful. Congrats guys on the excellent result.
Thanks, So much happy Thanksgiving to you.
Same to you.
And our next question.
Will come from Marc Hoffman of dual core company Mark Your line is open.
Okay.
Hi, Mark.
Mark.
Okay.
Hello.
Hello, Seymour how are you.
Right great job. Thank you very much.
Well, thanks, so much and thanks for your continued investment in the firm.
Okay.
So loans, 6%.
Okay. Thanks, very much okay.
Take care.
Okay.
Yes.
Greater it appears it appears that's done I think.
I'm showing no further questions.
Okay. Well, then we would just like to wish everyone, a happy and healthy Thanksgiving stay safe, we look forward to reconvene with you shortly.
Shortly after the holidays, which will do a pre release and then in the fourth quarter and the fourth quarter Conference call.
And this concludes today's conference. Thank you for participating you may now disconnect.
Okay.
The conference will begin shortly to raise your hand during Q&A you can dial star one one.
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