Q2 2019 Earnings Call
Once again, thank you for your patience and please standby your conference call will begin momentarily.
Ladies and gentlemen, and welcome to the second quarter 2019 earnings calls for destination XL.
At this time all participants are in a listen only mode. Later, we'll conduct a question answer session and instructions will be given at that time, if anyone should require operator assistance during the call. Please press Star then zero your telephone keypad.
Thank you Victor and good morning, everyone. Thank you for joining us on destination XL group's second quarter fiscal 2019 earnings call on our call today is our president and Chief Executive Officer, Harvey cancer, and our executive Vice President and Chief Financial Officer, Peter Strat.
During today's call, we will discuss some non <unk> 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 Dot the XL dotcom for an explanation and reconciliation of such measures.
Todays discussion also contains certain forward looking statements concerning the company's comparable sales growth the wholesale segment and free cash flow.
Such forward looking statements are subject to various risks and uncertainties that could cause actual results to differ materially from those assumptions mentioned today due to a variety of factors that affect the company.
Information regarding risks and uncertainties is detailed in the Companys filings with the Securities and Exchange Commission.
I would now like to turn the call over to our CEO Harvey Kanter Harvey.
Thank you need and once again good morning to you all.
It is now been just over four months, so sorry did de XL.
And my learnings of this great company not only continues but in fact, it has accelerated as weve begun turning actionable insights into the funding plans and execution.
One thing that has not changed is the incredible passion I felt early on in our teams to commitment to creating an engaging experience with big and tall consumers on a scale that no one else can duplicate.
I am thrilled to begin talking with you today in greater detail about our plans and expectations for the future.
Our first half financial results have been challenging, but I think we as a company have made great progress with aligning our resources and in developing our plans for the second half of fiscal 19 into the future.
On our call today I plan to talk about a number of strategies we are pursuing.
These strategies fall within four major initiatives to which our entire organization is now oriented.
The essence of our initiatives is drowned in enabling consumers to purchase our products and services, where they want it how they want and through whatever channel they want.
The first of our four major initiatives is driven from a digital standpoint around engaging our customers in a more meaningful and personalized way.
The foundation for this initiative is our new CRM system. This system allows us to segment, our customer file and crystallizing, our message far better than we have in the past.
The second initiative, it's how we develop and execute our working marketing plans.
We recognize there is no silver bullet in marketing media mix, and we believe utilizing our marketing and promotional dollars across a recipe of media formats done more efficiently and effectively well also strategically shifting dollars in a test learn and optimize framework will drive consumer behavior as a critical requirement.
The third initiative is leveraging our digital platform across commerce and online experiences to drive greater consumer engagement on their terms.
Although we've made great progress with our website over the past year, our approach to refining the web experience must always be evolving and improving.
Sure again, we are pursuing an iterative approach testing learning optimizing and then doing it all over again.
And the fourth initiative is building developing and executing our wholesale business plan.
We've been busy developing the plans for the last 90 days and we are now moving forward in a more directed matter.
The transformation of our company will not be driven in any one channel with any unique customer segment. It requires a series of moves across marketing across channels and across different customer segments to create the momentum we are looking for and for us to get on top.
Before I get ahead of myself, though I want to briefly cover our Q2 results.
Like many other retailers reporting results. This month the start of second the second quarter for DXL was challenging with and favorable weather as the primary culprit.
Although we felt the impact of on seasonal weather in the early in the quarter our performance improved as the quarter progressed.
We ended the second quarter with a flat comp see sequential improvement from the first quarter, our direct business outpace doors and was fueled by a notable increase in mobile traffic.
We believe we must continue to be clear on directed our marketing brand positioning and making sure that we are making progress we've taken a more irreverent approach in our total messaging not taking ourselves too seriously, which we believe is resonating with our customers.
As an example, we featured our private label Harbor base three tech underwear in an email in mid August .
We think about where as a basic sundry items, but our email said say no to Commando and then we went on to further explain how you can get your skivvies than a bunch.
It's playful enough to engage our consumers and one such response, we received from a customer was and I quote notable so noticeable difference in the email promotions of late very fun brought a smile to my phase end of quote.
It's really all about engaging customers and we are pushing to do this more.
Now getting back to the quarter, our brick and mortar sales comp for the quarter was slightly negative, but we did see store traffic pick up in July .
Although we are reporting an improvement over the first quarter comp we were disappointed in our results. This performance fell short of our internal expectations that said, we did capitalize an elevated traffic during our semiannual sale to successfully move through seasonal goods and clearance inventory. This help liquidate some of our slow selling inventory that also resulted in a decline in the average order value and higher markdown rate.
Given the sequential improvement in comp trend the inventory position and our plans for the second half we are conservatively optimistic for the fall season.
Finally, it is worth noting that our second quarter wholesale business delivered 2.7 million in revenue. This was an acceleration from the first quarter's run rate.
We feel good about the momentum in our wholesale business and we are making excellent progress on initiatives to build our wholesale presence while also maintaining strong financial discipline more on the wholesale story short few moments.
Moving below the line or second quarter margin and profits were partially impacted by the higher level of discounting or promotional pace was a bit higher than we would have liked and was influenced by the lower than expected sell through of seasonal product.
We're always cognizant of protecting our balance sheet and entering each season in a clean high quality inventory position.
Our teams did a good job of appropriately balancing price and promotion to maximize gross profit dollars, while stringently managing inventories.
Below the gross margin line, we continue to manage expenses quite well with our SGN a expense dollars inline with our expectations.
Total SGN expense was down about 60 basis points from last year, our second quarter. Adjusted EBITDA of 7.1 million came in below last year's second quarter adjusted EBITDA of 8.7 due to a higher planned promotional activity.
Now I'd like to circle back to what I believe is the most important part of our discussion how we are going to create inflection and begin transforming the business.
As I noted our first quarter call, what really defines DXL big and tall is the in store experience and our ability to drive one to one consumer engagement, which materializes as a memorable interaction between our source of associates and our customers.
We do stores really well, it's our bread and butter.
We believe we have created a unique compelling and engaging experience in our DXL store DXL stores, and we must now enhance the customer experience digitally.
And we have to become better at finding and engaging him online.
In today's tech savvy always on consumer in the driving seat environment. We know most consumers start their shopping experience digitally.
Regardless of where they ultimately make the purchase.
In regards to those who have previously shop with US we have to reengage with them on a more personal level that will be driven by digital engagement initiatives.
Although we believe its communication and promotion is more personalized they will shop with us more often our historical approach bachand blast one message fits all highly promotional marketing is just not where consumers are today.
Conversely in terms of new customer acquisition. Once we find him. We are confident he will sharpen does DSL dot com or in our stores. Once he does we need to drive our relationship deeper through more relevant more personalized and engaging content.
We know this ultimately depends on evolving the web marketing and web experience to align with our incredible store experience.
I said as I said on the Q1 call. Our number one objective is to grow our customer file.
And allow me to shop, where when and how he wants in Q2, our customer first orientation did not change, but our capabilities around one to one personalized marketing we're not yet in place.
Our challenge has been and continues to be a lack of traffic more importantly repeat traffic given today's consumer to reverse this trend we need to move away from traditional batch and blast mass communication and to engage him on his terms in ways relevant to him in a personal matter.
The initiatives, we are pursuing all that's far greater capabilities to help us engage the consumer and ultimately create greater revenue growth.
So of course by now you must be asking the question how will we do all this.
How do we accomplish this goal let me try to answer that.
Our first initiative is the deployment of our new CRM system.
Well may well it may not be sexy is table tips to which we have not answer it up.
We launched our first phase of CRM and August seven which enables us to truly segment our customer file.
In our old legacy system, creating a segment could take literally anywhere from eight hours to three days.
And then executing the email deployment in a segmented way can take another four hours to complete.
On August 7th our first segmented email was sent to nine segments and executed within two hours.
Well not landing a man on the Moon. It does feel like a great system limitations that we have addressed and we now have in place.
Now with our new system, we are able to group a single subset of customers based on the specific criteria a matter of minutes.
The segmentation can be based on demographics, geography or behavioral characteristics among others.
Building further on the new segmentation capabilities, we recently switched to a new email service provider, which now gives the ability to use the CRM segmentation to personalize, how we communicate with our customers. Our first step is simply to personalize an email with a customer's name.
Here again, it sounds relatively elementary, but there is power in communicating on a first name basis.
The new email platform as an example provides the ability to AB test our messaging and promotions does the customer behavior change among segments, depending on how and the communication message we send.
We can then minus data to figure out exactly what motivates different customer segments to come and shop with US. This is but one example of the new capabilities that email platform. Although this just launched in early August we believe this functionality along with other platform enhancements will give us greater insight into how to connect with our diverse customer population.
Later in Q3 will be launching the second phase of the CRM project, which is enabling single use coupons.
This feature will give us more flexibility with offering specific promotions to specific customer segments without the risk of future coupon of booze abuse.
Single use coupons linked because the coupon redemption to customer who is buying.
While we ultimately no single use coupons will be a margin enhancing tool as we can better control distribution and better predict redemptions as each coupon is now tied to a specific customer more importantly, it will drive repeat customers through enhancement to the loyalty program.
The CRM deployment is just one example of the significant change we are making around people process and data.
We are aggressively working to build our analytical backbone and this starts with technology and structure.
In order for us to leverage our data to drive better decision, making we need to improve the way, we collect organize and manipulate data.
As a result, we launched another project in Q2 to centralize all of our critical data.
This data today resides in multiple disparate systems 11 distinct systems. If you might be wondering we're creating essential data repository AK. It data Lake, which we expect to be complete by the end of Q4.
The goal of this project is to provide relevant data to support immediate marketing and business decision, making.
By consolidating data one version of the truth. This will allow us to use data and analytics to lean into the wonder unrelated with our current guests as well as prospective big and tall shoppers.
Our second major initiative is to better define and develop our working marketing plans plans to drive customer retention plans to drive customer reactivation and plans drive customer acquisition.
Some of you May know, we are actively searching for a new CMO. While we are in transition with our market leadership I am personally leading the charge with our marketing teams and they are working hard.
To create great outcomes, we are working to implement better blocking and tackling of digital marketing across organic as CEO paid SCM display retargeting paid social and the like.
By improving the execution of these specific tactics, we will positively influence customer file growth and traffic.
We are monitoring usage and trends daily and adjusting to managing our digital spend on a more regular basis to optimize performance, we're not only working our digital marketing plans strategically, but managing it much more tactically, we're executing and measuring adult day to day and channel by channel not all digital engagement is created equal and we are building an E. Commerce plan that defines each channel in its own unique way.
This will allow us to better track performance by channel against our expectations for productivity metrics, Capesize and such such as traffic conversion AOCI and the like.
Here again, this may sound somewhat elementary and basic but in reality. It is the muscle that we need to exercise to be stronger and less then layer. Upon this intuitively that test learn and optimize way.
The third major initiatives relates to online capabilities and ultimately the online consumer experience, which must evolve.
We believe that in doing so we will drive conversion average ticket and consumer engagement.
As I mentioned earlier, most customer engagement starts digitally whether it is a phone a tablet or computer last year, we launched our website platform and build a stronger foundation, we need to now build further upon that foundation to achieve the level of conversion and consumer engagement. We believe we are capable of.
The new and improved website with a cleaner look and feel is easier to navigate and more streamlined checkout, but compared to others. We are not yet at par.
And the fact of matter is being at par is not good enough.
An example of where we can improve is our site categorization and taxonomy when you landowner homepage and want to navigate to a specific styler item. The secondary dropdown page lists all of her merchandise categories and subcategories, we can do better.
The site must work harder must work better from speed and low times, which are currently burdened by heavy imagery and too many pages.
Two marketing interfaces, such as categorization, and taxonomy, which needs to be updated to better achieve the consumer experience we must deliver.
Within the site, reducing friction and increasing simplicity for consumers engagement is critical.
As we drive traffic and as consumers traverse the site. The plan is to evolve the experience to be simpler and easier to navigate.
As critical is that is it is really just the beginning.
The reality is we are a retailer and a retailer of big and tall men's clothing, we are working to do a better job communicating our value proposition and the incredible merchandise mix our merchants have brought to offer.
You just can't get our product features and benefits as well as our proprietary unique DSL spec for fit for the big and tall Guy anywhere else.
Today too many consumers think we're just another big and tall shop.
In reality, we are that and so much more.
Our guess, who know us say they love the Dx sales experience. They say the DSL is very different they see the DSL as memorable.
Add to that mix, our secret sauce of our rights are a fit and spec and you can start to appreciate just how much our customers think of us as a differentiated big and tall retailer.
All of these categories are underway all of these changes are underway as we position ourselves to deliver improvements in the back half from 2019 and to create greater inflection in 2020.
It may surprise, you to hear that there is such amount of heavy lifting that still needs to be done in 19, but I'm confident that this is the path we need to follow.
This brings me to the last topic, but I wanted to update you in my prepared remarks and that is wholesale.
Over the past three months, we have continued to make significant progress in building out our plans for the wholesale business. We believe that is there is a meaningfully greater opportunity to leverage our core competencies, our know how and gx elder bring comfort style and fit to all big and tall, guys, regardless of where they shop.
And we believe we can expand our reach through strategic alliances.
You will likely recall me, saying, we need to go slow and execute well.
Well over the past 90 days, we have established the development of a more concrete and definitive business plan, which we are now pursuing.
We've begun to stretch your legs and we are very excited about the future.
The strategic plan calls for a two phased approach first we have developed a core volume driving assortment, which we will manufacture with our proprietary unique DHL differentiated spec.
Then we will look to extend this with a complementary fashion driven assortment.
We've made great progress in our supply chain in negotiating today setting up manufacturing agreements in reducing lead times in driving speed to market, our replenishment and diversifying diversifying our points of distribution.
We've been able to leverage the existing technology assistance to begin this development and plan.
In time and as planned builds we will invest in initiatives that will result in better allocation and shareholder return.
As a near the end of my prepared remarks, I want to recap and summarize my thoughts.
For many big and tall consumers. It is a challenge to find clothing that truly fits but our guess no DSL.
Our guests know we understand this challenge our guests no. We help solve problems and do you feel we are hard at work have begun building a greater infrastructure to drive our ambitious plans and execute against them.
As we strive to empower the XL man to look and feel is best by delivering a memorable experience with a wider assortment of curated men's clothing and shoes, we believe dsos placed in the market as the quintessential specialty retailer a big and tall driven by the most extensive uniquely curated and size assortment of men's clothing and shoes that are designed and built for his XL proportions.
Our clothing is not just scaled up product as mentioned, we have a distinct spec and that is our secret sauce.
We used to develop product for every size uniquely fitting each customer in a way others retailers just cannot duplicate.
Our mix of value priced products to higher end brands and exclusive designers is the work of our great merchant team.
Experience in a one stop shop across all consumer touch points, providing consumers a differentiated and incredibly emotionally connected experience.
I believe we have greater opportunity and that by focusing on these initiatives, we have defined and the core consumer we know and the consumer core consumer we love we will exceed his expectations greater.
As well as those who purchased for him as gifts.
We can and we will drive increased increased business success and financial performance, creating value for all and all of our stakeholders and with that I will now turn the call over to our CFO , Peter Stratton, who will review the second quarter financial results Peter.
Thank you Harvey and good morning, everyone I'd like to start this morning with a brief summary of our second quarter results for the second quarter comparable sales were flat to last year, while total sales increased $1 million or nine tenths of a percent to 123.2 million compared to last years second quarter.
The increase was primarily due to an increase in wholesale revenue of 2.7 million, which was partially offset by a decrease of $1.8 million in our retail business from unproductive stores that closed in the last 12 months.
Within our direct to consumer channel, our ecommerce sales improved in the second quarter as we achieve mid single digit sales growth driven by an increase in digital traffic.
On a trailing 12 month basis, our direct to consumer channel sales increased to 22% of our retail segment as compared to 21.2% in the prior trailing 12 months.
Gross margin for the second quarter inclusive of occupancy costs was 44.3% compared to 46.3% in the second quarter last year.
The 200 basis point decrease was due to a merchant merchandize margin contraction of 270 basis points, partially offset by 70 basis points of occupancy cost leverage.
Of the 270 basis point decrease in merchandise margin 190 basis points was primarily due to higher promotional activity.
As Harvey mentioned, given our strategy to enter the fall season in a better inventory position, we took necessary markdowns on slow moving merchandise.
This resulted in a higher penetration of clearance merchandise and lower dollars per transaction for the quarter.
The remaining 80 basis point decline in merchandise margin was due to the increase in sales mix given the wholesale segment carries lower margins than our retail business.
It's also worth noting that we closed our London Rochester store earlier, this month and the inventory liquidation accounted for 20 basis points of the second quarter gross margin rate decrease.
Similar to the first quarter, we continue to see an increase in sales penetration from promotionally oriented customers, who are looking for discounts.
We expect that the investments we are making in our CRM capabilities will allow us to better communicate to our different customer segments and reverse our first half trend, which netted a lower merchandise margin.
Our second quarter SGN, a expense as a rate of sales was 38.5% compared to 39.1% in last years second quarter.
On a dollar basis SGN a decreased by $300000, primarily due to a $600000 reduction in our marketing spend in the $300000 decrease in current year incentive accruals.
Yes, Gionee expense favorability was partially offset by an increase of $200000 in expenses related to our wholesale business.
And finally as discussed on our first quarter call as a result of adopting a new lease accounting standard we are no longer receiving a $400000 quarterly benefit to SGN a expense from amortizing a deferred gain related to a sale leaseback transaction.
Due to the new lease accounting standard we were required to recognize the remaining deferred gain of $10.3 million in the first quarter of 2019 as a direct adjustment to retained earnings.
I also want to make a few comments about how we spend our SGN $8.
We view SGN eight through two primary cost centers customer facing costs, which includes store payroll marketing and other store operating costs represented 23.9% of sales in the second quarter fiscal 2019 compared to 24.2% in the second quarter last year.
Marketing costs for the quarter were 6.2% of sales compared to 6.7% in the second quarter of 2018.
On an annual basis management targets marketing expenses to be at approximately 5% of sales.
Corporate support costs, which include the distribution center and corporate overhead costs represented 14.6% of sales in the second quarter of fiscal 2019 compared to 14.9% last year.
Our adjusted EBITDA for the second quarter was $7.1 million compared to $8.7 million in the second quarter of 2018.
The decrease in adjusted EBITDA is primarily due to lower gross margin.
GAAP net income for the second quarter was $38000 or breakeven on a diluted share basis compared to a net loss of $1.2 million or minus two cents per share in the prior year second quarter.
On a non-GAAP basis, adjusted net income for the second quarter of fiscal 2019 was breakeven compared to adjusted net income of one cents per diluted share for the second quarter of fiscal 2018.
Now, let me turn to our balance sheet and cash flow.
Cash flow from operations for the first six months of fiscal 2019 was $900000 compared to $6.8 million for the first six months of fiscal 2018.
The decrease in cash flow from operations was primarily due to a lower adjusted EBITDA in the first half of fiscal 2019 as compared to last year.
An increase in our inventory balances, which I'll speak to in a moment.
And the timing of certain working capital accounts, including incentive payments that were earned in fiscal year 2018 and paid out in fiscal 2019.
Our inventory balance increased $7.5 million or 7.3% compared to the second quarter of last year and I'd like to provide you with a little more color on the increase.
First we accelerated receipts of certain fall merchandise programs that we currently manufacturer in China.
We believe this was a good decision considering the impending tariffs on Chinese goods set to go to go into effect in September .
Second we saw an increase in inventory from our wholesale division on orders that will ship in Q3 as part of our Amazon essential program.
Third we experienced a delivery disruption when a cargo ship was quarantined in core merchandise delivered.
Core merchandise delivery was delayed by approximately six months.
Due to the delay we chose to bring in replacement goods that essentially doubled up on our inventory position.
Because it was core product, we will sell it down through the remainder of the year.
These three reasons, which are all either unusual or the result of a new business account for about half of the inventory increase compared to last quarter.
The other half of the $7.5 million increase came from lower sell throughs on our spring assortment and from a door base expansion in certain print certain brands. We call. This project best product everywhere and our intention. This fall is to expand the door base of stores that carry many of our better and best brands and to increase the selection in choice counts in stores that already carry some of our designer brands, such as Paulo, Nautica and lower cost.
Having said that based on our sell through forecasts and receive planned for the second half of the year. We believe we will bring our inventory levels back in line with prior year levels by the end of Q4.
Our clearance inventory is a bit higher than last year at 10.9% of total inventory versus last year's second quarter, which was 10.1%, but we are not hesitating to use markdown dollars to keep our inventory in line.
One last comment as it relates to merchandise receipts as our private label exposure in China.
Like many retailers, we have been aggressively repositioning our global sourcing network over the past few years in our exposure in China is limited we will continue to diversify our supply chain and redirect manufacturing as we deem appropriate for our business.
Capital expenditures for the first half of fiscal 2019 were $7.6 million compared to $7.4 million last year.
The increase in capital expenditures was related to higher infrastructure projects, including our order order management system upgrade as well as our new CRM system.
On the real estate side, we have remodeled and rebranded five casual male XL stores to DXL stores, and one casual male XL outlet to a DXL outlet.
In addition to our store rebranding efforts, we closed two casual male XL stores into Rochester clothing stores. So far this year.
Let me give you a quick update on our stores that we have rebranded from casual male to DXL, though.
To date, we have rebranded 10 casual male stores.
Four of those 10 stores had been operating as a DSL for more than a year in the comp performance in the first year trended, 17% higher than the rest of the casual male portfolio. We currently have 59 casual male anchor stores in 29 casual male outlet stores remaining.
Many of those stores will convert to the DXL format overtime, and others will close depending on the real estate and market conditions in each trade area.
This strategy allows us to bring the DXL experience to many more markets without the cost of new store real estate and ultimately this strategy unifies, our DXL brand in the brick and mortar space.
Moving back to the balance sheet at the end of the quarter total debt was $64.2 million, which includes borrowings under our revolving credit facility of $49.5 million with excess availability of 44.5 million.
This compares to $61.2 million of total debt a year ago with excess availability of 41.3 million.
In closing, we still expect to deliver comparable sales growth in our omnichannel retail business and we still expect to generate free cash flow in fiscal 2000 that we're not providing detailed earnings or cash flow guidance until we have increased visibility into the effectiveness of our initiatives. However at the company will continue to provide forward looking commentary on business trends and developments.
And with that Victor we will open the call to questions.
Yes, Sir.
Ladies and gentlemen, if you have a question at this time.
Please press Star then the number one key on your telephone keypad.
If your question has been answered you wish to remove from the Q.
Press the pound key.
So again Thats star one for questions Star one.
Our first.
Our first line will come from Eric.
Better from FCC Research you may begin.
Good morning.
Good morning.
Good morning. Thank you for the color is quite helpful.
Could you talk a little bit about.
The catalog business and how that kind of fits into this.
Mosaic of kind of marketing and other pieces.
Yes. This Harvey the catalog we executed two catalogs last year, they were actually incredible brand bodies of work and well they engage the consumer in the test and control format that we executed them, we will likely reinvest in a different way our direct strategy relative to direct in mail formats, so whether its catalog or other formats of direct mail more effective more efficient vehicles than the 28 and 56 page catalog, which just did an increment the business enough versus the control to move forward in that same format. We will still have a direct mail component as I talked about the recipe if you will but it will be in a more efficient.
I guess I'd say less cost impactful way and we believe that is a part of kind of a tri party way to engage consumers both in stores online and through direct mail formats.
Okay, and as you look going forward, how should we be thinking about.
The ideal number of stores that you need given that you are becoming much more.
And with that focus much more a find you know you're doing your online business.
Sure So I'll take that one.
I think as I think about stores is the biggest change to think about going forward is the remodel program that we have going on.
So we have.
Roughly 237, 238 DXL stores today Theres. Another I think 88 casual male stores in so many of those stores are going to convert over to the DXL format, which we have seen.
Has been pretty effective with.
The first 10 or so stores that we've opened up I think the great thing about this strategy is it will finally unite the brand and we will not be a company that's still operating.
Casual male stores under a separate format than the DXL stores.
So as I think about it going forward, there will probably be a small handful of stores in new real estate that we would do every year as as conditions warrant, but by and large it will be conversion of existing casual male stores and remodeling in the same real estate.
Okay and when you look at this but I know you talked a little about adding more designer product how should we be thinking about that split between designer and kind of your core basics less private label product going forward and how should we be thinking about that in terms of ability to maintain margins, if you're increasing the designer product well I think when the day is done it's all about satisfying the consumer and the consumer as I mentioned, a couple times is really in the driver's seat.
It is.
An area that as we talk about balance of sale a little bit of margin pressure that we're experiencing driven by the fact that the consumers are in fact, choosing some of the brands that the merchant team continues to bring to market and we are continuing to bring really new brand offerings to market vineyard vines as an example, north face. An example, where both were brought in in late fall early spring and will extend that distribution, even greater this fall and that success driven by consumer engagement is really what drives our merchandise strategy. We believe that the private label business is still very meaningful and while there is greater margin upside when the day is done it's about dollars and really Martin GM ROI. So we well margin may be under pressure slightly from mark up or gross margin on brand versus private label. When the day is done it's about driving dollars per square foot in the box productivity online and converting that in dollars not percentages.
Great and last question.
How do you how do you look upon this as being able to attract new customers. It sounds like you're doing a tremendous job in terms of being able to cut slice and dice. The people you have how do you look upon this is driving new people or begin to all and just haven't gone to a DSL or others or into the store.
It's actually a really great question and although many people would think we were going to do a big advertising campaign and create greater awareness my own belief our belief internally is that the greatest path to creating more customers is to create a compelling experience for those that come in and it starts to driving traffic Thats why we continue to talk about traffic not brand building marketing awareness drive traffic to the box convert that traffic either online or in a store have an incredible experience, which we get high watermarks for and then I'm sure you're familiar with NPS net promoter score the greatest ability for us to drive greater growth is because people talk about us and the the viral element of that experience is way more authentic and genuine thus, creating a marketing campaign to see in our name out there in a more meaningful way and not have people come into our store or as the website evolves come onto our website and have that incredible experience.
So the belief we have is that by engaging consumers into actually shopping with us we will create a viral experience that is efficient and actually much more capable of creating greater number of customers that knowing who we are.
Hi, guys at a party is the big and tall customer may looks great. So.
The conversation travels and he said, yes, I have the greatest experience a DXL store that is actually not happenstance that happens more regular than you would imagine and our belief is that traffic and conversion will ultimately drive that.
Great. Thank you and good luck for the holiday season. Thanks, so much.
And our next question comes from the line of Chris Krueger from Lake Street Capital you may begin.
Good morning.
Good morning.
Hi.
Back in mid June you announced that you are working with in for customer engagement solutions.
Are they heavily involved with the CRM project.
Or.
Are they more involved with future things to come.
There they are very heavily involved in the back one of the CRM project.
Is it safe to say, we are already working with them prior to that announcement or is this all happening this quickly.
This it really was a Q1 Q2.
The team before I arrived would under did with David and what have you went through a pretty extensive process in really hand picking the platform to launch CRM. Among other things in four is is actually far greater than just that CRM component.
And when I arrived really was when we agreed to move forward with them as the partner and we've accelerated those efforts tremendously in the last 90 days to the point, where literally I think it's about a 120 days from from signing a contract implementing this program. So we've moved really fast the marketing team has done a yeoman's job it really executing that CRM platform, but again that in force system and platform provides us much more than just that single use coupon is another example of that is really not the CRM system, it's a different way to execute our promotional strategy.
Okay, and then on on marketing you guys pulling back on TV advertising to focus more on digital.
In general I prefer not to talk about that quite that directly in a public format. I would tell you that as I've said, it's a recipe and we expect that it as the recipes go there are many ingredients and we will continue to have TV as part of the mix, but in terms of trying to qualify the level I think I would leave that alone at this point.
Got it.
Any new brands coming on.
I think the biggest thing we would talk about is the extension of brands that we have dipped a toe in the water vineyard vines in north face are two great. Examples of that well, we do have a couple of new brands in the mix there light in distribution and I think it would be misleading to tell you that a brand in the box at 10 store distribution right now is important and worth mentioning but the merchant team is continuing to push hard and understanding what's what I would call on trend that nestle fashion, but on trend.
In terms of the Casualization of America at our core consumer and looking for brands that resonate with them with that customer.
Good.
Then you guys mentioned that China tariff situation what percent of.
Theres sourcing comes from China, If you can say.
We I wouldn't suggest we'll talk about that level of detail here again, but I would tell you that what the take away that you should have is the global sourcing team has done an incredible job over the course of really the last year or two and continuing to drive quality and really the lowest cost provider and I would say in the last six months, we've accelerated that tremendously, but really in while we're still in that part of the world. We've moved out of China in a very meaningful way and we really have a very minimal challenge. If you will in terms of the tariffs. The other thing weve done relative to that is really pushed hard to move up the timeline with our resources and will receive the most of the goods in front of those marker dates so that the take away should have is it's minimal impact in terms of where we are and then for 2020, it will be very light and what we actually remain in China.
Hey, good last question.
Can you just refresh my memory of how many weeks where in the fourth quarter last year versus number of weeks in the fourth quarter. This year.
So I believe it was it was 13 in the fourth quarter of this year and 13 in the fourth quarter of last year. It was two years ago that we had the extra week the 14th week.
Okay. Thank you.
Thank you.
Thank you and our next question comes from the line of Sam Poser from Susquehanna.
You may begin good morning. Thank you for taking my question I'm fairly new to this but.
Inventory turn that you guys.
Wanted to see over the long term because.
I just noticed going in stores that you go in there and you see the same stuff repeatedly over the long.
So what is the kind of inventory turns you foresee down the road here as you get as you move through.
Process season.
Initiatives you're doing.
So it's a pretty low turn right now that's one of the things that were working on improving.
I don't want to throw a specific number out there, but it's a pretty low turn that we have but that's something that we had been improving over the last couple of years, especially as.
We had a large inventory initiative in 2016 2017.
Our inventory levels have come down quite dramatically over the last two years. This quarter, we were elevated a bit for some of the reasons I highlighted.
But but inventory turn is low, but getting better and one of the one of the things I think it's actually a great question. One of the things that I think is really important, especially being new to the mix is as I talked about some of the unique elements of DSL. We have a comprehensive breadth of size runs and most of our competitors not literally all but most of our competitors without naming them specifically or more ended the rack and you can go into any of those larger competitors that are.
Let's say department store ask and see 38, or 39, or 44, and you might have black and 44 in gray in 38, but they're really end of the rack and one of the challenges as being the be all end all really for the big and tall customer is our size runs across the number of sizes. We carry in all of the colors, we carry which is an ongoing challenge of balancing efficiency versus being the place to go and the only place really important.
Well I mean, I can just say that I am one of your customers as well. So I have personally shopping your stores for myself and I find it that if I go in every two months I'm thinking about 90% of the same product two months earlier and I want to see new stuff I. Appreciate I can always find my size, but I have already bought most of the stuff I like.
I want to go back and buy something new and that's where the challenge that that's why I asked you about concern.
And I had one other question as well, yes, one other comment I just would tell you on that and hopefully you will add on to how long you've been shopping us more of the important point is like Psycho Bunny is a perfect example, where for a Psycho Bunny, we which is one of our fashion brands, we will rotate through the Gs and there's kind of a collector level of involvement it for lack of a better way to stay with our core consumer that comes in every four to eight weeks looking for a new t.
Vineyard vines north face the extension North face. There's other examples of that which are more demonstrative across a broader distribution of stores, but to your point, we understand the challenge.
Good bad or indifferent.
Our customers not quote unquote at the same speed with which women's apparel moves and so our inventory Gordon how quickly your shop may or may not turn as fast as you would like but it's an ongoing challenge of trying to drive efficiency.
Of inventory and turnover.
And just one other point that all add Sam is that first thanks for being one of our customers secondly.
When I was talking earlier in the prepared remarks about our best product everywhere strategy. That's exactly the reason that you just quoted is exactly the reason that we're pursuing this is because there are certain stores, where let's say, we have a polo assortment or nautica assortment.
But it may not be up to the.
The presentation levels that we would like to see it at so we're adding more styles into those stores. This is something where we have to be careful we can't over extend ourselves, but we I think it's important to call out that we are recognizing that there are people that are coming into our stores and are looking for more choice and more selection.
And that's one of the things that you should see.
In some of our stores that we are trying this best product everywhere strategy.
Okay. Thank you and then lastly, I mean, just follow up on the China question I believe your answers were around your own private brand product can you talk about sort of the overall percentage exposure of overall purchases that are coming from China from the branded goods as well as.
Your own.
The stuff you're doing yourself.
Yes, I would tell you two things one there is for sure a greater challenge in branded goods. Many of our resources. After in I would say just great due diligence as you might imagine any retailer worked their way to this point is trying to understand that better haven't done what we've done maybe not quite at the pace. We've done it and those that have not for the most part and not every one of them, but for the most part are holding their prices and eating and now I don't know would long term where that will end up but I think our exposure at least through the end of the year and beginning of next year is still remains relatively minimal.
Theres a few key brands that are really heavily in China and while they have held price I have an expectation if they can resource that that will be a greater challenge as we look down down the road.
Thank you very much and good luck. Thanks, so much and thanks again for shopping with us.
Pleasure.
And I'm showing no further questions at this time.
Ladies and gentlemen, thank you for participating in today's conference.
This does conclude the program and me all disconnect everyone have a great day.
Thank you everyone have a great day talk to you next quarter.