Destination XL Group Inc. Q1 2024 Earnings Call
Okay.
Good day, and thank you for standing by and welcome to the destination XL Group incorporated first quarter 2023 earnings Conference call. At this time, all participants are in a listen only mode.
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Now I'd like to hand, the conference over to your speaker today Shelly makers.
President of financial reporting SEC. Please go ahead.
Thank you norm and good morning, everyone. Thank you for joining us on destination XL group's first quarter fiscal 2023 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 was filed this morning and is available on our Investor Relations website at Investor Day, The X L. 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 2023, 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 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 our first quarter results and our thoughts on how our business is developing this year.
We posted a comp sales increase for the first quarter of plus <unk>, 6%.
While our overall growth has slowed from our record breaking double digit comparable sales increases.
Past two years, we remain encouraged by our ability to deliver our ninth consecutive quarter of comp sales growth.
On our last earnings call in March we talked about how our comp sales expectations for the full year was to be somewhere between flat to plus 5%, but for the first half of the year, we expect it to be closer to the lower end of that range.
Have you already seen four first quarter sales results for most apparel retailers have been affected by broader macro challenges.
Our slowing comp store growth was in line with what we expected.
We have been trying to answer is what should we expect for the remainder of the year.
I'll come back to that shortly but I do want to acknowledge how very proud I am of how team DSO has managed the business during a period of harsh economic realities.
The first quarter news cycle has been dominated by bank failures rising interest rates tighter credit standards inflation and fears of a recession all of which are impacting consumer spending.
Retailers are fighting for a share of an ever tightening consumer wallet. While DSL is an exception on many levels. We are still impacted by the volatility consumer psyche and sentiments of the economic reality.
We do believe that our first quarter results have outperformed the broader retail market on a relative basis.
Because we serve a consumer with limited options and given our clear differentiated positioning. We believe we have continued to take market share and therefore, we remain as optimistic as ever about our growth trajectory over time.
For many retailers and the first quarter has been punctuated by double digit comparable sales decreases we've been fortunate to avoid that outcome and posted another quarter with a comp sales increase, albeit a small increase.
While the consumer climate in May is certainly more challenging than it was in February . We believe the reason we have been able to outperform many of our peers is that our differentiated positioning as structurally unique.
Our brand is built on our positioning that leverages.
Assortment and experience.
And for consumer that at best is limited options and Dare I say, perhaps only one truly immersive option and that is <unk>.
Well many of you have heard this before the three elements I referred to are what sets <unk> apart from our competition.
<unk> Big and tall isn't just a rack in our store it isn't just a page on our website. It's all we do.
We believe that the total addressable men's big and tall market is more than $23 billion.
We currently hold a meaningful slice of the better and best market share we have far greater opportunity.
Going forward, we believe that over the next two to three years, we can grow top line and take market share profitably by driving unique more personalized and more relevant communication, while maintaining our shift away from discounting.
The result is driving gross margins in the upper Forty's.
EBITDA in the low to mid <unk>.
Low to mid double digits in direct comparison to our historic margin in the lower forties and EBITDA in the low single digits.
Our results over the last two plus years have been solid and these results have been driven by <unk> strategic and transformational structural changes.
This stands in direct contrast to result in apparel retail more broadly which were driven in many ways because of government stimulus low interest rates and the like.
We believe the strategic transformational changes, we have made are increasing our share of wallet and attracting and retaining new customers.
You have not yet experienced the DFL difference.
We consistently hear from big and tall consumers that fit and style are the most important factors in their purchase journey and.
And we believe our.
Terry fit and expertise as a strategic asset along with a curated and mostly exclusive offer.
We have dedicated teams focused solely on developing precise specifications to deliver a unique.
<unk> and authentic fit adding assortment that looks feels and moves great for the big and tall consumer.
Assortment refers to are thoughtfully curated.
Offering a designer collections and our own brands, including many exclusive brands and styles that can only be found at EXL in fact between our own brands and exclusive arrangements with national brands over 80% of our assortment is exclusive to DSL.
This delivers a product rate and quality of that stands in stark contrast to our competitors offerings and is one of the biggest element of the DFL difference.
Lastly is the signature experience we call it the Dx Elf factor, whether in store or online EXL as a brand built solely with the big and tall man in mind.
We're engaging them in ways no one else can deliver.
With EXL he can satisfy all his wardrobe needs feel valued and respected and throughout his shopping experience and emerge looking great and feeling even better and all in one place.
We exist to provide the big and tall man the freedom to choose his own style, we relentlessly strive to serve its fit and style needs and when we do this we are a haven for him with the largest assortment of brands and sizes accompanied by unrivaled expertise that creates an experience like no other.
To this end and objective metric that underlies the success, we have in creating this experience is our net promoter score metric, which in stores is solidly in the mid seventies.
Those of you familiar with NPS scores.
A retail industry, leading metric and one which we are appropriately proud.
Our vision of becoming a haven for the Big and tall man is crystal clear and it is what we believe is why so many men have tried EXL for the first time over the last few years.
So let me get right to the specifics of details for our first quarter performance.
Just mentioned comp sales in the first quarter were up.
6%.
I am pleased that this is our ninth consecutive quarter of positive comp sales growth.
But clearly this is not where we want to be.
The quarter started out very strong with comp sales growth rate of nine 1% in February .
We fell back to minus two 8% in March.
And then finished out the quarter with a minus one 9% in April .
As I'm sure. Many of you are wondering where his may's performance month to date. We are currently tracking to a low to mid single digit comp sales decrease.
In terms of the overall high level Kpis the comp sales slowdown in March and April was primarily traffic related with conversion.
And average order values were roughly flat to last year.
And to provide a little more color around traffic what I can share is we literally can see differing levels of performance.
In context happening in the world around the consumer.
I referenced earlier the consumer psyche.
Specifically, how performance is tied to moments.
For example, the SVP banking crisis was just such a moment we're in the days following we saw business immediately change.
Likewise, the looming debt ceiling discussion of late.
Again, we can see and feel the consumer sentiment falling off.
Correlation or causation, we really cannot say, but a clear indication that consumers are affected and this just adds the overall malaise of consumer sentiment and reduce spending inclusive of apparel.
Conversely in our core company owned channels is worth noting that we continue to see a nice lift in <unk> from.
From increased penetration and tailored clothing.
We expect that lift will continue through the second quarter, but starting in fall, we will begin to anniversary that impact within our marketplace. We've seen sales growth from our big and tall Essentials program, but this comes at the cost of a lower price point and consequently lower margins.
The bottom line, because we've experienced discernible difference in the velocity of traffic to both the stores and the website for the first quarter.
Regarding pricing and promotions, we continue to be very selective in how we utilize promotion and we are not taking any meaningful price increases.
Well, if you can be very tempting to lean on promotions to attempt to drive sales in a weaker economy, we have resisted that temptation.
The work we've done around the structural positioning the brand with the consumer is a critically important structural element supporting our transformational strategy.
We continue to prioritize the greater development and building a more personalized relationships with consumers over the next two to three years.
Over the past two years, we have worked very hard to reposition our brand around the pillars of fit.
Assortment.
Exclusive of the <unk>.
Inclusive of the experience in stores price is important to our customers, but price is not how we differentiate.
We've seen some small level of erosion in the gross margin relative to last year, which was driven by loyalty shipping and product costs.
Talk more about our loyalty program in a minute, but there is a cost associated with the program that is impacting the margin.
Let me now share some thoughts on Q1 performance in the context of our merchandize assortment.
As a reminder, our current merchandize assortment is approximately 55% are owned brands and 45% national brands.
Our sales penetration for the first quarter was relatively consistent with that inventory position.
Tailored clothing accounted for 21% of the Q1 business compared to 18% in the first quarter of last year.
This is an area, where we have been improving our in stock position as demand for event driven shopping and continued return to office gains momentum.
Sportswear the top selling brands in our assortment continues to see slightly higher selling velocity, including polo Ralph Lauren.
And Reebok.
In the spring 2023 season life is good and original Penguin golf officially joined <unk> growing exclusive brand portfolio.
Further reinforcing us as the number one destination for desirable national designer brands in big and tall sizes.
And as I've already communicated in our prior quarterly call. We had two more iconic brands joining our portfolio of exclusive offerings in the fall.
We aren't yet ready to reveal who those brands are but they're household names that our customers are going to love.
Next up inventory inventory continue to be a key priority for us and we are in a better stock position today as compared to the first quarter of 2022.
We have a very strong orientation to try to turn faster and we are making great progress here compared to 2022, our inventory levels are up 3%, but compared to 2019, our inventory levels are down 11%.
We have been working to improve our inventory turnover for years that I'm happy to report their inventory turnover is up 25% to pre pandemic levels.
Clearance inventory at the end of Q1, 2023% to seven 8% as compared to six 9% at the end of Q1 in 2022, and we are very comfortable with clearance inventory levels in total which are still less than our historic target of 10%.
From a marketing perspective throughout the quarter, we continued to employ an eye on the road and an eye on the horizon approach to ensure we delivered solid results, while continuing to build momentum and a modern marketing organization for the future.
As such we have continued to make good progress after we rolled out our campaign of where what you want the brand positioning launched in early March.
As a reminder, this new approach and by to our customers to finally shop like everyone else by choosing the style of apparel that they want.
Reflects who they are and each of them uniquely versus simply accepting whatever they can find that covers their body.
We continue to believe we are uniquely positioned to deliver this through our brand pillars of the industry, leading fit expertise the broadest assortment of national brands, the highest standards of construction and quality the most style options.
And experience you cannot find anywhere else.
I am happy to report that the work has been well received by our customers and our associates alike.
We've seen increased engagement in our social channels increased revenue, where our E Mail program and as a result, a more unified message to customers to wear what they want are aware of what you want campaign.
We will continue to build on the.
The success of the launch in the coming quarter with an integrated push around the key fathers day period that includes all of our owned and paid channels as well as introducing new videos, Julie shown via streaming media video that will target new customers.
Additionally, we have continued to engage customers with our <unk> rewards club loyalty program since launching it in late October of last year.
We are seeing particularly strong results among our gold and platinum tears and both certificate redemptions and sales in Q2, we have plans to further engage customers and drive acquisition with a focus on the value of the program delivers every time you shop.
Further we plan to improve awareness improve engagement and customer experience with a more pronounced loyal T emphasis on our site to ensure our customers are taking advantage of this program.
Building brand loyalty to dock come without a cost and our program features new ways to engage with the brand and leads to more loyalty certificates being issued.
<unk> is an extension of our marketing efforts.
It allows us to stay more connected to our best customers.
Q1, we continued our efforts to build a more robust.
Modern marketing organization.
As we have previously discussed we have continued to work to better position DXP for the future regarding more personalized personalization at scale building, our analytic capabilities and deepening customer engagement and.
In April we launched our customer data platform or CDP as planned and on schedule.
Over time this new capability will further improve our customer targeting with ability with a more sophisticated approach to segmentation through audience creation.
Deeper customer insights and a path to even greater relevant personalization at scale.
Throughout the coming quarter, we will be utilizing this tool across our marketing channels to better engage our customers based on shopping behavior insights and predictive modeling.
In addition to launching the CDP. We also brought in a new email partner to help manage our remarketing program based on individual shopping behavior. These trigger E. Mails have historically been a significant revenue driver and we believe they become even greater part of our mix in the near term.
The combination of better segmentation audience identification with the CDP and then more robust remarketing program should benefit US later in the year.
We've also begun foundational improvements on our analytic capabilities move.
Moving to the near term to an improved holistic cloud based architecture will enable a more robust data infrastructure that delivers complex analytics at significantly greater speed.
This will enable a democratization of data across the organization, leading to a greater on lockup customer understanding new ways to think about our business and make better investment decisions behind marketing drivers.
As I already mentioned, we saw store traffic begin to soften throughout the quarter to combat. This we are leveraging data to better utilize our digital investment drive both online and offline traffic and revenue.
Additionally, we will be bolstering traffic by highlighting local store inventory to meet customer demand in any given trade area.
We believe we have made significant progress in Q1 and while our work is not done we have laid out where we're going in the coming months and the balance of the year to deliver a sustained marketing improvement.
I also want to touch on our real estate and store development objectives earlier. This year, we talked about the opportunity to grow our store base and I am pleased to report we are starting to see movement on this front.
We have come to terms that executed our first lease agreement for a new store in Los Angeles, We're very close to our second new store, which will be in New York market and we expect to sign at least one more lease for third store that we expect to open by the end of 2023.
We've also begun construction work on four of our casual male stores that are converting to <unk> and there are six additional casual male stores that we expect to begin and complete conversion to our <unk> store format by the end of the year.
This would bring us to 13, new doors operating under the <unk> brand nameplate by the end of 2023.
And finally, we have begun work on remodeling one everyday XL stores in the Chicago market and we are looking to begin work on remodeling at least four additional existing <unk> stores before the end of 2023.
Over the next three to five years and Dubai provide you with an estimate of scale.
We believe we could potentially open up net up to 50 net new <unk> stores.
We intend to continue to convert casual male locations and we continue to evaluate the DFL remodels for incremental <unk> and productivity.
Bottom line is we see store development, leading to more customers and we are pursuing these three avenues and we will adjust our tactics as we learn.
It's an incredibly exciting time for us at EXL, and I'm honored and humbled to speak with you about these opportunities yet ahead of us.
In summary, I am very proud of our team and what we have achieved this quarter.
None of this would be possible without the hard work and dedication of all our people in the stores and the distribution center in the corporate office.
And in the guest engagement center.
Want to take a moment to just say thank you.
I truly believe that all we have accomplished is because of who we are as a team.
Thank you for all your hard work and your commitment.
Our pursuit of observing the big and tall, consumer and making <unk> the place where they can best satisfied the desire to where what they want.
And now I'm going to turn it over to Peter for an update on our first quarter financials, and how we are thinking about guidance for the remainder of the year Peter.
Thank you Harvey and good morning, everyone.
Net sales for the first quarter were $125 4 million as compared to $127 7 million in the first quarter of last year.
On a comparable basis adjusting for closed stores sales grew by six tenths of 1%.
Our stores, which make up about 70% of our total business were up by one 5% and our direct business, which makes up the other 30% was down one 6%.
As Harvey noted our sales growth slowed in March and April due to a slowdown in traffic, which we believe is consistent with the overall macro environment.
Although our direct channel was down slightly overall, we continue to see sales growth in our mobile app and online marketplaces.
Mobile app customer tends to be a more loyal customer who shops more frequently. So we are excited to see growth in this channel.
Moving over to gross margin, our gross margin rate inclusive of occupancy costs was 48, 6% as compared to 50% in the first quarter of last year.
This 140 basis point decrease was a combination of 110 basis points in merchandise margin and 30 basis points in occupancy costs, primarily due to the deleveraging of sales.
The decline from last year's record high margin rate was generally in line with our expectations we.
We have maintained a non promotional posture that emphasizes our superior quality fit and experience rather than discount prices in our margin rate and the high forties remains significantly higher than our historical rate.
However, on a year over year basis merchandise margins decreased due to a combination of higher costs in three areas.
First.
Second we have seen an increase in costs related to the fulfillment of our direct to consumer orders and third the success of our new loyalty program means that there are more customers redeeming loyalty certificates for a discount on their purchase.
These three factors were partially offset by lower inbound freight costs on receipts from overseas.
Although these elements will all persist at varying levels through the rest of the year, we expect them to moderate to the point, where gross margin rates for the year should be approximately 100 basis points lower than last year as compared to the 140 basis points, we saw in Q1.
Most importantly, we feel very good about our inventory position both in terms of total inventory balance at the end of the quarter and in relation to our turnover rates as well as our clearance levels.
Inventory management is especially critical in our business with a variety of styles and sizes that we offer.
I won't repeat the numbers, which Harvey already covered but we feel like our inventory position at the end of Q1 sets us up for future success, and we have adjusted our receipt plans to reflect our sales expectations.
Moving on to selling general and administrative expenses or SG&A as a percentage of sales increased to 38, 5% as compared to 36, 5% in the prior year's first quarter.
On a dollar basis SG&A expense increased by $1 7 million approximately split between customer facing costs and corporate supporting costs.
The increase was primarily due to payroll related costs from new positions added in the past year to support our long term growth initiatives, including new store development.
Last years annual merit adjustments and the healthcare costs also contributed to the increase.
Our AD to sales ratio also increased slightly to five 5% from five 3% in Q1 of last year.
For the year, we expand we expect to spend about five 7% of sales on advertising as.
As you might expect we are beginning we are being very judicious with expense management, but we remain committed to investing in the people and technology necessary for future growth and success.
With gross margin at 48, 6% and SG&A expense at 38, 5%. This brings our EBITDA at 10, 1% or $12 6 million for the first quarter.
Although lower than last year's 13, 5% or $17 3 million, we're pleased to be able to deliver another quarter of double digit EBITDA performance in the current macroeconomic environment.
I want to spend a moment on income taxes. Since this is an area where our year over year results require adjustment to be comparable.
Last year, we had virtually no tax expense in the first quarter.
Our taxable income was offset by our fully reserved net operating loss carryforwards.
With the release of our valuation allowance in the second quarter of last year. We have now returned to a more normal tax rate of approximately 26%. However, we are still able to utilize our remaining net operating loss carryforwards to reduce our cash taxes and as a result, we will pay very little in <unk>.
Federal or state income cash tax in fiscal 2023.
Moving on to liquidity, we feel very good about our cash position and the overall strength of our balance sheet at the end of Q1, we had cash and short term investments of $46 million as compared to $7 5 million a year ago with no outstanding debt and either period, an availability of $93 eight.
Under our revolving credit facility.
With the seasonality of inventory build in payments of prior year incentive accruals you want it's typically a quarter with a net cash outflow.
This quarter, our free cash flow, which we define as cash flow from operating activities less capital expenditures was a use of $5 $9 million of cash.
We are keeping most of our excess cash were $29 2 million in short term U S government Treasury bills, which were earning interest at approximately 5%.
In March our board of directors authorized a $15 million stock repurchase program and we expect to begin to execute purchases of our common stock on the open market in the second quarter of this year.
We believe this is a prudent use of our cash and at our current stock price and allows us to put our free cash flow to work for our shareholders by reducing the number of shares outstanding.
I'll close with an update on our financial outlook for fiscal 2023.
Based on our results for the first quarter and considering the macroeconomic challenges and uncertainties regarding consumer spending throughout the retail industry. We are currently trending towards the lower end of our previously reported guidance for fiscal 2023.
Can we get there is through a low single digit negative comp for Q2.
We are optimistic that we can be flat in Q3 and.
And back to a low single digit positive comp in Q4.
Accordingly for the 53 week period, we are guiding to sales of approximately $550 million and an adjusted EBITDA margin of approximately 12, 5%.
Our outlook assumes that the sales trends we have seen in March April and May will continue to persist through the second quarter, but we are expecting to see small sequential improvement from consumer driven marketing initiatives, which come online over the months ahead.
We believe these efforts will drive a return to positive comps in the second half of the year.
And focused on executing the strategies, we have spoken about today and we are optimistic that this will allow us to outperform the broader apparel market.
I would now like to turn it back over to Harvey for some closing thoughts Harvey.
Thanks Peter.
Before I move on to Q&A I'd like to just briefly summarize what we believe are most critically important elements for us and hopefully you as investors as you think about investment in <unk> as part of your portfolios.
We posted a comp sales increase for the first quarter of plus 6% and remain encouraged by our ability to drive another quarter of comp growth and that growth is now over nine consecutive quarters.
<unk> is unique on many levels, we are still impacted by volatility consumer psyche and sentiments of the economic reality, but.
We believe that our first quarter results have outperformed the broader retail market on a relative basis and because we can serve the consumer we're bringing to market a clearly differentiated brand driven by more personalized more relevant communication structurally built on our positioning that leverages fit assortment and experience and for that we remain optimistic.
For our long term ability to take market share.
We believe that the strength strategic transformational changes we have made are increasing our share of wallet in attracting and retaining new customers, who have not yet experienced the <unk> factor.
From a sales and profit from our marketing and strategic planning perspective, we continue to employ an eye on the road and I on the horizon in our approach to driving outcomes. This year, but also investing for the future and an operating level we can.
But very strong operating process structure and disciplined and proven out as an example by our lean inventory, which at quarter end was 11% below prepay debt kind of demick levels and turnover, which was up 25% over pre pandemic pandemic levels in 2019.
We are maintaining our shift away from discounting driving gross margins in the upper Forty's and EBITDA in the low to mid double digits and we believe we are setting ourselves up to continue to navigate meaningful growth over the next two to three years and are prepared to weather. This most recent round of volatility we.
We remain incredibly excited and enthusiastic about <unk> prospects in the year ahead, and as a market leader as an incredibly important brand serving an incredibly underserved consumer and with that operator, we will now take questions.
Thank you.
As a reminder to ask a question you will need to press star one on your telephone.
Draw. Your question. Please press Star one again, please wait for your name to be announced please standby, while we compile the Q&A roster.
One moment for your first question.
And our first question comes from the line of Jeremy Hamblin with Craig Hallum Capital Group. Your line is now open.
Thanks, and congrats on the strong results.
Tough environment.
So I wanted to just start by asking about your gross margin.
And making sure that I understood in terms of the.
Roughly 140 basis points or so year over year decline.
A couple of reasons for that including the royalty program costs.
Higher shipping costs, and some occupancy deleverage as well.
Wanted to see if you could.
Be a little bit.
Provide us more color in terms of.
Flip of how those components factored into that the year over year decline and what you expect to have on that guidance for down 100 basis points on the year.
Sure. So I'll take that one Jeremy I think the big.
Part of the decline in the merchandise margin it really came in the IMU deterioration.
Across the board, we saw but it was most impactful in woven and knits.
I think the other three pieces.
<unk>.
The loyalty costs and the shipping cost which are.
Really what we saw in the direct to consumer side.
Those were more or less offset by the savings that we saw on the ocean freight in the container.
Freight costs that we saw.
The piece that I would point to the most is again, it's the product cost and keep in mind the product we recognize that cost when we sell through the product. So this is product that we would've taken receipts on.
Upwards, it could've been a year ago.
A year and a half ago, when when cotton prices were higher and some of the other prices were a bit higher.
But hopefully that gives you just a little more clarity on on where.
There are some of the splits are coming from.
Yes, that's definitely helpful.
And then in terms of your same store sales color and expectation for the year I think you said.
In Q2 down low single digits flattish for Q3, and then returning to positive low single digit in Q4.
Terms of.
Getting there.
Again tough environment out there you guys are clearly doing well.
Better than most of the competition.
What does that assume in terms of.
<unk> on a relative basis to where we are today.
Is this kind of factor in we know the traffic has been the big driver here your conversion remained strong.
And.
Average order value is still strong as well.
When we were building into that and then Howard.
How are you factoring in.
Let's say the new stores and.
Some of these conversions, which I would assume but also have a positive benefit here in the second half of the year, Jeremy It's Harvey I'll address that from a customer facing perspective, and then Peter might add a little value in terms of some of the underlying kpis, but we as you know and then very oriented around transformation really restructuring how we engage consumers.
And whether it's the things we've already done like the beginning of the loyalty program, which I'll remind you is literally not going to anniversary itself until really the first of November . It was mid October when we did that we believe there is upside in elements such as that we also believe that the new trigger email program is another example, as well as the CDP.
And I use the words more personalized more relevant marketing communication and ultimately we have some small expectation we might be able to impact traffic by things like localized inventory advertising, where we can literally advertise based on searches and local inventory in stores and then serve that.
The consumers on one level pretty tactical, but important but on a level another level at a higher more strategic perspective, the concept of a more personalized marketing and more relevant communication to consumers to ultimately accomplish what we want to engage consumers about why we are so different.
What's really driving the change and as more of those things come online. We're hopeful hopeful what we'll see is greater level of conversion greater level of potential ILD and not material change in traffic. Although we are hopeful that theres some level of movement in that regard.
Unfortunately, that's the kind of the element that is unknown right, where we where we are overall in the business climate are things going to get worse. So that you can kind of get better. We believe at some level will be able to push water uphill by some of our own initiatives and if theyre just neutral to where we are today will win.
Deteriorate, there's obviously the potential fall short and if they improve there is actually the opportunity to be upsides. So is that challenge is one of our board members is often if we could predict the future we probably wouldn't be doing what we're doing and I think if anyone could truly predict the future at this moment in time.
It would be remarkable so.
Hopefully I've given you a little bit of perspective around the consumer facing elements, which we think are meaningful.
The one piece that I'll add to that is.
We did deliberately tried to give you a little more direction on what we're expecting to see quarter by quarter.
And we typically don't do that we typically just just stick with a an assumption for the year, but we felt it was important to just show how we're thinking of the year.
Relative to other performance.
As we said, it's we're talking low single digits, either negative or positive.
Which is where we've been trending for the last few months and.
It's not we're not looking for a herculean change.
In the business, but we definitely are expecting that the second half of the year for all of the reasons that Harvey just laid out that we're trying to control from a micro level, whilst we're hoping we get a little bit of.
A little bit of tailwind from hopefully an improving macro environment, but there are there are elements that we are focusing on deploying here within the company that we think are going to help help lead to a better second half.
Yes, that's great context, especially on top of last year's plus 11 comp.
Wanted to also just get into your customer support costs. So inclusive of your DC your corporate overhead.
That's a I think it was up 110 basis points year over year in Q1.
In terms of thinking about the environment, we're in and we've had enough retailers report now.
There's been a softening across the board.
In terms of thinking about the ability if you felt it was necessary that there was some additional slippage in the economy.
Employment rates fell a little bit.
Do you feel like is there a little bit of wiggle room in terms of being able to.
Probably a little bit out of that if you felt like.
You needed to but I wanted to just understand I know that you're in a different phase.
For this company that you are now entering a phase with some unit growth when youre generating these conversions that are going to be helpful. Overall, but.
What's your ability to potentially nip it that if you felt like you had.
Back a little on that.
The structural cost side.
So again I'll take this one and it's a really good question and we talk about this a lot I think that we've been pretty transparent with what we're trying to achieve with the company in terms of.
Growing our analytics capabilities growing our store base.
<unk> been upgrading our roster and bringing on great people that are going to help really propel the business.
On the other side of the coin you could say alright, well if we if we really do we really want to stop doing those things in and maybe save another half a million dollars a $1 million of expense I really don't think that we get the credit for making those kinds of.
Difficult decisions.
Then.
We come out of this a year from now.
And we just have to restart everything all over again.
I think that it's important to just be clear that we do believe this is a moment in time with where the economy is and we think that what we've done with the brand and the transformation in creating this haven for big and tall Guy that's going to that's going to get us past this moment.
No.
I don't think we're looking at we're not looking at making drastic cuts.
Because it's just going to leave us empty and not have those initiatives when we do come out of this.
Yes, Jeremy I want to underline what Peter said and make sure you heard the most important thing we are trying to position ourselves for growth and it's in the public market. Its a little challenging to say, the least navigating quarter to quarter, but our board and management team is very oriented towards growth.
We believe that I've said this before.
We believe why arent, we $1 billion company, yet alone something greater than that and thats not guidance in any shape manner or form, but I definitely wanted to express the fact that our actions and strategy is oriented towards growth over the next two to three years and the challenges managing quarter to quarter.
Got it no message.
Yeah.
Thanks for taking the questions guys.
Thanks, so much and have a great day.
Thank you one moment for our next question. Please.
Yeah.
Question comes from the line of Michael Baker with D. A Davidson your line is now open.
Good morning, guys. Thanks, Scott Hi, how are you I wanted to ask you a couple of questions, but let's start I am curious what youre seeing in some of the remodel efforts that you've done I think you talked about doing one in Chicago I think you already you're doing a remodel or did a remodel and work, Rhode Island I believe.
What are you what did you change here and what are you seeing in terms of the sales lift lift versus cost.
So in terms of the Remodels, we've opened up we've remodeled two stores one in Warwick, Rhode Island, the others in Troy, Michigan. The third store that we're doing which is currently underway is in the Chicago market we.
We do believe that.
We're going to get four more underway this year.
Im hoping we can get for finished this year, but I'm not I'm not sure we'll have them all finished bye bye.
By the end of January , but we're definitely going to get four more started and see where they are the thing I'll say about performance is that in both Warwick and in Troy They have outperformed both there.
Their regional store peers and the chain in total.
So I think it's still early for us to make any real definitive conclusions because again its only two stores and that's why we want to get five more open. So we will have a little bit broader of a sample to make some judgment, but in all case in both cases.
Traffic improved.
Our net promoter score has improved in those stores and our new to files improved in those stores. So we're encouraged but we still need to learn more.
The only other thing I'll add Mike is the strategic intent of our remodel is to create a stronger relationship with consumers and the best example of that is literally if you've been in our stores, which obviously I know you have in most stores the cash wrap for lack of a better way to say it where your checkout, where the cash registers RV.
Will the POS terminals are at the front of the store and we've actually dismantled that entire front of the store. It is now all window. It is open to the world, we have great lighting and great visibility into the store and what we've done is embedded in the store for lack of a better way to say it too small kitchens and when I say kitchens as most of you will.
Recognize that when they have a party at their house everyone's themes.
All hang out in the kitchen around the island and we had two islands embedded deeper in the stores and those islands given the opportunity with a Pos terminal digital consumer interface to show our universe offering which has all of the things offered online where color extensions in size extensions in style extensions exist.
And the ability to be right near the fitting rooms, so that we can interact with consumer and a more one on one relationship and actually create that relationship by sitting down so that that center island has bar stools.
The computer terminal and we literally look to kind of share a cup of coffee and talk about the product we present the product on that island.
It's a much more engaging relationship and we're obviously looking to drive.
We're looking to drive <unk>, and ultimately become stickier and so.
That they remember not just they purchase something and meda transaction, but they worked with Bob and had incredible experience and might even refer to Bob is their friend that DSL.
It's a different way to think about it but in the business that we do with such an underserved consumer and such.
Your relationship at most retail stores, where they don't serve as consumer the way. We do we think the strategic intent of the Remodels is really an important variable.
Yes, it makes sense I think they look great.
Couple of other questions. One let me ask a short term question and then a long term question.
In the short term of all the factors you highlighted that are impacted comps, which I think are pretty well known but what about tax refunds do you have any data to suggest that that impacts your customer I know your customers typically a little bit higher and but but any impact there.
Is that sort of now fades into the background that whole tax refund issue.
So I'll take that one Mike I think.
To some degree yes, that's impacting us, but not nearly as much as what I've heard other retailers talking about.
Relative to that I think one of the things that Harvey talked about in his prepared remarks was that all retailers are fighting for that ever tightening share of the consumer's wallet and that gets impacted by.
Whats the cash coming in so that he can make is discretionary purchases I don't think it's as pronounced for us as it is at other retailers, but.
I would say, there's certainly some element of that that we saw in the first quarter results.
Fair enough and then a longer term question you talked a got first of all you said gross margins high <unk> I think in the past you had said about 50 subtle change but.
Did something change in your long term, even this year and then long term gross margin perspective, but then you talked about growing sales over the next couple of years can you frame. What you think a proper topline sales number should be over the next couple of years.
Third part of that as you said EBITDA low to mid single sorry low to mid.
Teens, I think that mid is higher than your guidance certainly this year, what can drive you back to that mid teen number. Thanks.
Sure.
On the EBITDA piece, the low to mid teens.
We've said from day one.
Many years ago, we want to have sustained EBITDA margin in excess of 10%, we've clearly been well beyond that I think.
As we've talked about with the investments that we're making in marketing and real estate and store development.
That comes out the short term expense of margin so I would expect that.
In knees.
Years, where we're continuing to try to build out 50 stores and build out our analytics practice.
It will be in the.
I don't want to get into specific numbers, but if we're saying low to mid double digits.
10% to 15%.
We're going to continue to be floating in that space as we continue to build out but the whole purpose of that is to make the right investments now so that we.
Emerge a few years from now with a bigger stronger store portfolio digital practice direct to consumer business.
<unk>.
It makes us a more powerful company.
Yeah fair enough, what about gross margins a little bit lower.
Oh, sorry.
Gross margins, yes, I mean, we said for this year, we're expecting them to be down.
About 100 basis points from last year. So I think last year, we were right at 50%.
So this year, we're thinking we're going to be around 49%.
And again, it's all three factors that I mentioned before it's it's.
The lower IMU, it's the cost of loyalty.
<unk>.
Those are the bigger the bigger pieces of it.
But that's what we're assuming this year.
Well, yes, I guess, just just to push on that though I think on your last call correct, if I'm wrong, but the target was closer to 50.
So it's down a little bit and so of all those things that you outlined I guess.
One of those.
What has changed what is making it worse is it just less leverage on the occupancy if you're at the lower end of sales or just trying to figure out what what changed versus a few months on the gross margin.
Yeah. So.
There is no I wouldn't point to any one thing I would say all three of them have come in.
A little bit.
Lower than what our initial expectations were.
That and combined with lower leverage on lower sales base.
Initially we were at.
$550 to $5 70 range and now we're coming in at the low end of that so.
There is no one silver bullet that suddenly blew up in our face. It was all a lot of little things that altogether have just led us to we think we're going to be down about 100 basis points.
And Mike I would stress that that 100 basis points from the 50 is indirect comparison to let's say 43 and change.
So it's not like we're in any shape manner or form, suggesting rent them back to where we've historically, but to Peter's point, there's a lot of variables that were challenged to address.
And there were high watermarks at 50.
Yeah makes sense understood. Thank you.
Thank you.
As a reminder, ladies and gentlemen that star one wanted to ask your questions.
For our next question.
Our next question comes from Rafi Savage with he's a private investor. Your line is now open.
Hey, Harvey.
I guess you've been at the helm for for four years or so and can you can you maybe take a moment to reflect on what's what's gone. According to plan and what Hasnt met your expectations in your time there.
Yes, I think there's three things that I'm incredibly excited about one of our recognition of our place in the market and building a strategy to execute against that we have a customer that historically has not been honored and respected in a way that most individuals that are let's say more of average bills can shop anywhere they want with the <unk>.
Close that fit them in styles, they want and we have I think not evolve the assortment as much because I think the assortment was pretty powerful, but we've really evolved the way, we engage and communicate and marketed the business and whether it's the lack of promotion with the recognition that the <unk> factor is driven by the experience.
And a unique fit that closed really fit them in ways that they didn't recognize before.
We have really done a.
Good job, we're not where we ended up ultimately want to be but we're continuing to work against that marketing element and that is <unk>.
Really important strategic element and shift from the way, we've communicated and marketed the business before if you have tracked literally the business. Prior to my arrival, we were very promotional maybe almost 100% promotional on most of the things we did for the two or three years prior to my arrival. The second thing is really.
I think really engage and empower the team we have an incredible group of people today that are doing really a yeoman's work and the fact of the matter is that in the accountability and ownership we've spread that throughout the organization. So our stores group is incredibly passionate they know what they are responsible for they are.
<unk> and incentive against those elements, we provide them a different level of tools and marketing messaging and execution that we haven't done before and then last but not least is obviously I think the investments we're making I think we've made really important investments one might say that we had technical debt. We've addressed so many of those.
<unk> with changes in the CRM system in the loyalty program.
The technical debt and the other investments with stores in marketing you look at the shift in marketing, we have historically been a 4% and change marketing company today, we're closer to six.
We've done what we needed to do I think to really engaged in communicating the ways I just referred to so I think when you kind of sort of the way Peter talked about margin, there's no one silver bullet.
I believe that it's.
The combination of multiple elements and a lot of heavy lifting and I might even go so far as to say a greater level of blocking and tackling to recognize execution is everything. So we have a plan. We know what it is we have objectives for every person in the company to execute against those we empower them.
And then we hold them accountable and inclusive of myself. So hopefully that was a some sense of what it is we have done.
Yes, that's helpful Harvey and maybe on that on that point.
Do you think about kind of the go forward strategy here.
What would you say the major risks in that strategy and how are you doing your best to mitigate those.
I think.
I'd say the most major risk is really the economy I think we we believe we're in the first.
Fourth year of a non normal year.
Unfortunate reality in my first seven months, we had a strategy we executed against the way I just referred to it we made small but meaningful.
Meaningful growth. So we went from a negative comp to a positive comp. We went from single digit growth online to double digit growth online and then the pandemic hit and literally since basically February March of 2020, no year, one year to the next is look the same and so we're trying to navigate an incredible level of ambiguity and mind you we've gone from a $23 million.
EBITDA to $75 million EBITDA, we've gone from $473 million of revenue to 500, let's say $5 50, and we have measurably move to EBITDA from 10%.
Double digits excuse me single digit to 10% and north of that so.
It's just an incredibly challenging period of time for every retailer quite honestly, probably every business entity to navigate the issues that we're all facing no matter, where they are in business, they're not in business just navigating the world today.
And maybe my last question here.
I guess in terms of kind of market share growth, either kind of where we're getting that growth today or where you think you will get that growth in the future.
Is it primarily taking it from let's say department stores that arent servicing these men as well as you are or is it.
Or is the expectation that you think you are creating a much better experience and ultimately these folks that arent really shopping and arent really buying lot much we'll be buying those will be spending more of their disposable income on clothing because of <unk>.
Our belief is that there are a lot of players in this space that dabble in this we've often referred to they have a fixture or some some version of a number of web pages that represent product to serve the underserved consumer but in reality, we're the only ones literally.
The full service across stores and web and we believe we'll take share from a lot of different places, but we asked the question I didn't Flippantly say why aren't we have $1 billion. We ask the question is why aren't we are building, what we something north of that we have.
Meaningful market share, but I, often say, we're 800 pound gorilla, but the reality is we're probably at a 100 pound gorilla with a lot of 20 pounds chimpanzees around us.
Just not as big as we shouldnt be and there's incredible opportunity to grow and I think we started that process. So I really appreciate the questions.
Thanks Harvey.
You bet operator, I think we have time for one last question and then we'll have to roll. Thank you. Our next question one moment. Please.
Our next question comes from the line of P. Johnson with Johnson, Inc. Your line is now open.
Yes, good morning.
You have a fair amount of cash on the balance sheet. I think you said that you didnt buyback any shares recently.
As part of the concern perhaps that the overhang from two of your biggest investors.
<unk> been selling shares recently and you want to wait for that overhang to pass.
<unk>.
So I'll take that one and I guess, the only comment I'll make on.
The buyback is as I said we.
Plan to start executing that in Q2.
When we started the quarter I think our stock was up over $7 at the beginning of the year and so as it's been slowly coming down it's certainly a much more attractive.
Price for us to acquire at so.
It's really been the last four or five weeks six seven weeks that it has come down.
Much more meaningfully so we do fully intend to start executing on that very soon.
Okay.
Has either AWS or wolf.
Given you any sense up there.
Sort of a medium to long term plans.
Yes, Thats just something unfortunately, we wouldnt comment on.
Thank you for the question, but we just won't make a comment on that.
Okay fair enough, but you certainly have enough cash on your balance sheet to be able to put some aside for the buyback at this point I would say.
Indeed, and Thats why the board has supported that initiative and we expect it will be more than likely end market.
Excellent. Thank you.
Operator with that we are a little over we really appreciate everyone's support I wish you all a wonderful memorial day safe and sound and we look forward to talking to you in our next quarterly earnings call.
This concludes today's conference call. Thank you for your participation you may now disconnect everyone have a wonderful day.
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