Destination XL Group, Inc.

Q4 2022 Earnings Conference Call

3/16/2023

spk06: Good day, and thank you for standing by. Welcome to the Destination Excel Group Incorporated's fourth quarter 2022 earnings conference call. At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a question and answer session. To ask a question during the session, you'll need to press star 1-1 on your telephone. You will then hear an automated message advising your hand is raised. To withdraw your question, please press star 1-1 again. Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, Shelley Mokas, Vice President of Financial Reporting, SEC. Please go ahead.
spk01: Thank you, Norma, and good morning, everyone. Thank you for joining us on Destination XL Group's fourth quarter fiscal 2022 earnings call. On our call today are our President and Chief Executive Officer, Harvey Cantor, 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.dxl.com for an explanation and reconciliation of such measures. Today's discussions also contain 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 is detailed in the company's filings with the Securities and Exchange Commission. I would now like to turn the call over to our CEO, Harvey Cantor. Harvey?
spk03: Thank you, Shelley, and good morning, everyone. We have made a lot of progress this year, and it is a privilege to speak with you today. about both our results for 2022, as well as our objectives and priorities for 2023. 2022 was a remarkable year in the transformation of DXL as we continue the work of the last several years. As you all can relate to, 2020 was a year of survival, 2021 a year of recovery, and 2022 was a year of sustained progress. Our vision to provide big and tall men the freedom to choose their own style, and the role that DXL plays in their life continues to drive and motivate us. At DXL, big and tall is all we do. Whether he is shopping online or in store, we are that haven where big and tall men are respected, valued, and celebrated. At DXL, he is not an afterthought or a bystander. DXL is big and tall, and in this regard, DXL is a category of one. The progress we've made this past year and the brighter prospects that lie ahead are why we remain incredibly enthusiastic and hopefully why you as an investor are here to listen to the DXL story today. It's truly remarkable and it is my privilege to speak to you today about our journey. The singular focus that we've embraced is to provide big and tall men with the freedom to choose his own style so he can wear what he wants to wear. or as we have coined the phrase from our customer's point of view, wear what you want. This clarity of focus in messaging and digital assets and what we curate and how we engage is now coming to life in more profound ways. And in a way, this is the cornerstone of our plans for 2023 and beyond. We believe the conceptual framework for big and tall men to wear what you want has the potential to propel our business to new heights, and I am excited to tell you more. But first, let me share with you a few milestones and achievements that we accomplished this past year in fiscal 2022. Let's start with sales, a second consecutive year of record-breaking sales, 545.8 million, and now eight consecutive quarters of positive comp sales increases, and adjusted EBITDA margin of 13.5%. free cash flow of over $50 million, a fortress balance sheet with over $50 million of cash in the bank, no debt, and a strong inventory position. We launched a new and improved loyalty program this year with more ways to earn points and greater differentiation in between tiers. We announced the addition of four more national brands to our exclusive portfolio with Vineyard Vines and Nautica at the beginning of the year and Life is Good and Original Penguin Golf at the end of the year. The only place to find these great brands in big and tall sizes is at DXL. We have 281 stores across every major market in the country, and we are actively taking steps to open new DXL stores, remodel existing DXLs, and convert our remaining casual mail stores to DXL. We repurchased 2.9 million shares of stock this past year, which returned $12.7 million of capital to our investors. And perhaps most important of all, We continue to focus on our team and culture to better align company priorities, improve and upgrade talent, and fill gaps to achieve better results even faster. Well, 2022 was another historic year for DXL. Our work is not done. I believe it's worth reiterating the U.S. men's big and tall market is still highly fragmented. There are many retailers who dabble in big and tall, offering piecemeal products here and there to a traditionally underserved customer. We are changing that narrative. At DXL, big and tall isn't a section. It's the entire store. We believe that the total addressable men's big and tall market is more than $23 billion. And while we currently hold a meaningful slice of the better and best market share, we have far greater opportunity. Going forward, we believe that we can grow that market share profitably by maintaining our shift away from discounting it into greater differentiations. while also increasing our share of wallet and attracting and retaining new customers who have not yet experienced the DXL difference. Our differentiation is built on our positioning, our ethos that leverages fit, assortment, and experience. We consistently hear from big Intel customers that fit and style are the most important factors in their purchase journey, and we believe our proprietary fit and expertise is a strategic asset along with our curated and mostly exclusive offering. We have dedicated teams focused solely on developing precise specifications to deliver unique, ownable, and authentic fit, and an assortment that looks, feels, and moves great for the big and tall consumer. Our assortment refers to our thoughtfully curated offering of designer collections and our own brands, including many exclusive brands and styles that can only be found at DXL. In fact, between our brands and exclusive arrangements with national brands, over 80% of our assortment is exclusive to DXL. This delivers a product rate and quality that stands in stark contrast to our competitors and is one of the biggest elements of the DXL difference. Lastly is the signature experience. We call it the DXL factor. Whether in-store or online, we create spaces that are built solely with a big and tall man in mind. With DXL, he can satisfy all his wardrobe needs, feel valued and respected throughout his shopping experience, and emerge looking great and feeling even better all in one place. The customer is at the heart of everything we do. We get him, we respect him, and we strive to further his confidence. And we want him to be just inspired by DXL as we are by him. A testament to this and an objective metric that underlines the success we have in creating this experience is our year-end net promoter score metric, which is solidly in the mid-70s. For those of you familiar with NPS scores, this is a retail industry-leading metric and one we are appropriately proud of. Thank you very much, store associates. Now that I've provided some preliminary context to how we think about our customers and our place in the big internal landscape, I want to provide a little more detail around our Q4 results. Sales in the fourth quarter were ahead of expectations and included a comp increase of 10.8% for the quarter, with stores up 13.2% and our direct business continuing to be up, up 6.2%. Sales momentum started slowly with November comp sales up 2.7%, December up 10.8%, and January a whopping 23.7%. we were very selective in our promotional cadence in a quarter where many retailers q4 is the single most promotional and transactional time of the year our promotions which on occasion we shared publicly were all oriented to addressing customer file and inventory opportunities similar to 2021 dxl relied very sparingly on public promotions and we primarily offered private promotions at lower discount levels to drive retention and re-engage lapsed customers. We did not entertain any public promotions during Black Friday nor Thanksgiving weekend. Ultimately, we believe this strategy paid off as we were able to maintain a high gross margin in Q4 while remaining faithful to our vision of repositioning the DXL brand around differentiators as opposed to discounting. We also made specific progress in our digital business in the fourth quarter in areas of experience and performance marketing. To begin with, we continued to optimize the customer experience by reducing friction points. We were successful in reducing multiple site overlays, pushing sign-up for email, SMS, and app channels. We also attacked customer checkout flows to identify points of frustration and the needs for simplification. We leveraged performance marketing with a heightened attention to clearance levels and investments in paid search to drive traffic. Overall, we were effective at migrating customers through the shopping process, but like anything else, this will require continued evolution and improvements in both the landing experience and in checkout in 2023. I know one question on everyone's mind is how is business performing today? I can share with you that through the first six weeks, we have definitely seen greater volatility and overall trend of slowing. That being said, we are tracking to a low single-digit comp quarter to date, but remain cautious in our belief in the consumer's resiliency. Our customers are feeling the same macro headwinds that you read about and read about every day in the press. And while we do believe we have positioned the company to take more share of market every day, the overall macro environment continues to have the potential to limit revenue growth. Time will tell how resilient the US consumer is in 2023 and how far we push spending for greater growth in the coming year. We'll speak to more specific guidance for 2023 later in the call, but I wanted to give you a brief update on what we've seen the first six weeks. Now, let me share some thoughts on Q4 performance in the context of our merchandise assortment. We continue to see strong sales performance across all categories. As a reminder, Our current virtualized assortment is approximately 55% our own brands and 45% national designer brands, and our sales presentation for the fourth quarter was relatively consistent with that inventory composition. Tailored clothing accounted for 16% of the Q4 business compared to 13% in the fourth quarter last year. This is an area where we aggressively sought to improve our in-stock position with even greater potential upside seen in the number of companies requiring greater returns into offices, plus spring season events and occasions this year. In sportswear, the top-selling brands in our summer continue to see slightly higher selling velocity, including Polo Ralph Lauren, Nautica, and Reebok. In the spring 2023 season, Life is Good and Original Penguin Golf officially joined DXL's growing exclusive brand portfolio, further reinforcing us as the number one destination. for desirable national brands in big and tall sizes. As you may recall, we talked about other brand introductions, and while not exclusive, we're excited to note the introduction of Hey Dude Shoes, and we'll also acknowledge that in fall, we will launch yet again another two exclusive leading menswear brands. Inventory. Inventory continues to be a key priority for us, and we made good progress this year on getting back better in stock positions as compared to the fourth quarter of 2021. As noted before, we would rather be chasing inventory than chasing cancellations. We have a very strong orientation to try to turn faster, and compared to 2021, our inventory levels are up 14%, but compared to 2019, our inventory levels are down 10%. We have been working to improve our inventory return for years, and I'm happy to report their inventory returns are up 30% to pre-pandemic levels. Our clearance inventory at the end of the year is 7.9% as compared to 6% at the end of fiscal 2021. We are very comfortable with our clearance inventory levels where we are still looking at historical targets of 10%. I'm happy to report that we are finally seeing some cost relief in terms of transportation, and container costs have returned to more normalized rates, and we are seeing more overseas shipments arrive on time. In summary, I'm very proud of our team and the sustained momentum that we achieved throughout the year. None of this would be possible without the hard work and dedication of all our people in the stores, in the distribution center, in the corporate office, and the engagement center. And I want to take a moment to just say thank you again. We make a point of recognizing our employees on every earnings call, but that doesn't mean our gratitude today is any less genuine than last quarter. I truly believe that all we have accomplished is because of who we are as a team, as Team DXL. Thank you all for your hard work and your commitment in our pursuit of serving big and tall men and making DXL the place where he can best satisfy his desire to wear what he wants. I'd now like to start shifting the remainder of my prepared remarks to our 2023 objectives. I started out on the call by highlighting the last three years of survival, recovery, and sustained momentum. How do we continue to build the momentum on top of another strong record-breaking year? Despite the caution that so many other retailers are rightly talking about today, we believe we will continue to gain share of market. I am thrilled with DXL's prospects, and the cornerstone of my enthusiasm is grounded in wear what you want. We have been talking about the newly positioned DXL and a new brand ethos. And just last week on March 7th, we unveiled it to our customers and the world. I'll repeat it again. We exist to provide the big Intel man with the freedom to choose his own style. We relentlessly strive to serve the fit and style needs of the big Intel man. And we aspire to deliver a haven for the big Intel man with the largest assortment of brands and sizes and accompanied by an unrivaled expertise that creates an experience like no other place on the planet. Wear what you want is not just a tagline or an idea. Instead, it's an invitation to both our existing customers and those who have yet to experience our brand and to finally shop like everyone else. For too long, the big and tall man has been forced to settle. Settle for less elections, settle for less styles, settle for fewer options and experiences that leave him feeling less than ideal. This is the power of WWYW, our shorthand for wear what you want. It truly represents the freedom to choose the clothes he wants to wear instead of accepting the clothes he's forced to wear. Clothing for most of us is an expression of our individuality, a reflection of our own brand, and even at times, our armor. Think about that. It may sound trite to those who have never had to think about this, but because they simply find clothes that fit and they like, but to our customer, it's something he has never been able to do. His wardrobe can now be an expression of his style, his personality, his mood, his armor. The most powerful and transformational ideas come from simple, honest insights. And when we get it right, it becomes an economic multiplier. We are not simply selling stuff. Instead, we are selling something he cannot buy anywhere else. In so doing, we help him to be who he wants to be to set his own path, and specifically because of what we offer, which is just not available, for the most part, anywhere else on the planet, enabling him to wear what he wants at DXL. It creates a strong relationship, one built on the totality of what I've noted, and creates a strong visceral emotion. We believe he can ask and answer the question, why shop anywhere else? And specifically versus other retailers, simply buying transactions with an assortment and experience far less endearing than a DXL. We call this a brand ethos, and because it is much bigger than an idea, bigger than an advertising campaign. It's an ethos because it really informs everything we do moving forward. How we make our site and the stores a haven for him. How we relentlessly strive to serve his fit and style. how we build our strategies, how we build our plans and buy our assortment, how we design our stores and our website, how we engage our guests, and how we ultimately serve the needs of our big and tall customers. It is bigger because it requires all of us to live it every day for customers to see it and, more importantly, believe it. And when he does, it creates an incredible attachment to DXL. Humans are emotional beings. We make choices emotionally. When we connect with our customers on this emotional level as a brand, It becomes a bond much harder to break than a connection based on pure price and deep discounting, which really just undermines the value in the assortment and the mix itself. We have launched Where Would You Want across multiple customer channels, including EMS, excuse me, email, SMS, DXL.com, the DXL app, YouTube, social channels, direct mail, public relations, and in all of our stores. We believe that 2023 will be another year of refining and clarifying the DXL brand positioning and enhanced consumer engagement. We also believe 2023 will be a year where we more clearly define our long-term objectives for the brand with specific strategies and paths to create financial return expectations that we'll be proud of. We have long said there's an opportunity to grow our top line, and we are beginning to converge on what that really means. For example, one of the more tangible strategic imperatives is to grow our customer base by expanding our store footprint. For the past year, we've been slowly restarting our real estate process and store development capabilities, which include investments in people, process, and technology. In fiscal 2023, we expect to open three new DX stores, all of which have been specifically identified and are in various stages of lease negotiation. We expect to convert 10 of our casual mail stores to DXL nameplate with an in-store refresh and remodel, and we also expect to remodel five existing DXL stores and close five stores. In most cases, the DXL remodels will receive an exterior upgrade, a change in the floor set, and the introduction of guest engagement centers. We are optimistic that these remodels will reinvigorate the local markets and drive improvements in store productivity. We have developed a preliminary store plan over the next three to five years and should provide you with an estimate of scale We believe we could potentially open up 50 net new DXL stores. We believe the casual mail conversions could be upward of 30 stores, and the DXL remodels could be more than 50 stores. The bottom line is we see developing stores lead to more customers, and we are going to pursue three avenues and adjust our tactics as we learn. There is much more we're working on behind the scenes, but which we are not yet ready to unveil. We will continue to articulate a clear vision and find specific initiatives to demonstrate how we will grow further as the initiatives come online, so to speak, but we are not sharing what we see as competitive intelligence until the time it makes sense. It's an incredibly exciting time for us at DXL, and I am truly honored and humbled to speak with you today about these opportunities ahead. And with that, I'm now going to turn it over to Peter for an update on Q20, excuse me, an update on 22 financials and how we're thinking about guidance for 2023. Peter.
spk02: Thank you, Harvey. And good morning, everyone. I'm going to start by giving you some more color about our Q4 in full year financial results. Next, I will share some comments on our expectations and full year guidance for fiscal 2023. And I'll close with an update on how we are thinking about capital allocation to drive shareholder value. I also encourage you all to review our 10-K, which will be filed later today, for additional discussion of our results. Let's begin with sales. Sales for the fourth quarter were 143.9 million, up from 133.5 million in the fourth quarter last year. Comparable sales, which are adjusted for closed stores, grew by 10.8% for the quarter. Our comp growth rate included a 13.2% increase in stores and a 6.2% increase in our direct business. We're very pleased with this result, which marks the eighth consecutive quarter of sales growth from both channels. As Harvey mentioned, the holiday shopping season, which began relatively slowly with a comp growth of just 2.7% in November, accelerated to plus 10.8% in December, and we finished the quarter strong at plus 23.7% in January. Despite the slow start, we remained largely non-promotional throughout the holiday season. Regionally, all parts of the country showed gains, but the Southeast and South Central regions continued to be our strongest performers. It was the second consecutive quarter where our store business outperformed our direct business. While we are pleased with the continued growth in our website and mobile app, the surge of customers to stores that we experienced in the fourth quarter reinforces our belief that our stores can serve as a haven for the big and tall man in a way that no other retailer can replicate. For the year, our comparable sales growth was 10.9%, comprised of 11.3% in stores and 9.9% in direct. Let's look at margin next. For the fourth quarter, our gross margin rate inclusive of occupancy costs was 47.7% compared with a gross margin rate of 49.8% for the fourth quarter of fiscal 2021. The decrease of 210 basis points was the net result of a 270 basis point decrease in merchandise margins, partially offset by a 60 basis point improvement in occupancy costs. There were a few factors that contributed to the lower merchandise margin rate, which I'd like to explain. First, we had the launch of our new customer loyalty program. As Harvey mentioned, the new loyalty program is driving more customer engagement, but that also means we pay for that with more loyalty points, which affects our margin. Second, last year's Q4 markdown rate was exceptionally low, and in Q4 2022, we had a slight increase in markdown rate. This was due to a limited number of opportunistic inventory promotions to drive file growth and a higher clearance rate. Lastly, we experienced a shift in merchandise mix away from our own brands and into national brands which carry a lower IMU. These factors were partially offset by lower inbound freight costs, but shipping costs were slightly elevated compared to last year. The fourth quarter seasonally has lower margin rates than other quarters, and for the year we finished at 49.9% gross margin, up 40 basis points from last year. This full year gross margin rate approximates our expectations going forward. Selling general and administrative expenses were 37.8% of sales for the fourth quarter, as compared to 39% in the fourth quarter of last year. On a dollar basis, expenses increased by $2.2 million, primarily due to increases in payroll and marketing costs to support our sales growth. For the year, SG&A expense was 36.4% of sales as compared to 34.2% in fiscal 2021. The increase was primarily due to an increase in advertising costs from 4.7% of sales to 6% of sales to drive customer acquisition and engagement payroll costs to support our sales growth and to fill open roles, and an increase in performance-based compensation. We will continue to focus our SG&A investments on people, process, and technology to support our brand and growth initiatives. Advertising dollars are planned around flat for fiscal 2023 and will represent approximately 5.7% of sales. Our adjusted EBITDA for the fourth quarter was 14.2 million or 9.9% of sales and net income was 8.3 million or 13 cents per diluted share. These results are like last year's historically strong fourth quarter and mark our eighth consecutive quarter of positive adjusted EBITDA and net income. For the year, we generated an adjusted EBITDA of 73.8 million or 13.5% of sales. Our full year's net income of $89.1 million or $1.33 per diluted share included a one-time benefit from the reversal of our tax valuation allowance of $31.6 million or $0.47 per diluted share. For next year, we expect our tax rate to return to a more normalized rate of approximately 26%, but our cash taxes will remain low as we continue to utilize our historical tax net operating losses. I'd now like to offer a few comments on our outlook for fiscal 2023. As we've highlighted for you throughout this call, we believe we are taking market share in exposing new customers to DXL every day. Having said that, we are acutely aware of the challenging macro environment, especially how inflation is influencing consumer behavior. On a relative basis, we believe we are outperforming other retailers, but on an absolute basis, The current macro environment is challenging for a growth company like DXL. We are providing guidance based on our strategic initiatives in the clear volatility and challenges which we believe will be present at least through the first half of 2023. While we are hopeful there is upside, there could also be downside risk. Therefore, our guidance for fiscal 2023 is as follows. Sales of 550 to 570 million. net income of $41 million to $47 million, and an adjusted EBITDA margin of 12.5% to 13.5%. Implicit in our sales guidance is a comp sales rate of flat to plus 5%. We expect that in the first half of the year, we will be closer to the lower end of the range, and in the second half of the year, we will be towards the higher end of the range. Fiscal 2023 is a 53-week financial reporting year, and we believe that the 53rd week is worth approximately $6 million in sales and $1 million in adjusted EBITDA. I'd like to finish with an update on cash flow, our balance sheet, and approach to capital allocation. We feel very good about the strength of our balance sheet heading into the new year. We have managed to avoid the excess inventories that plagued some other retailers this past year, and have built up cash reserves that will allow us to invest in our future growth. For the year, we generated free cash flow of $50.3 million, which was comprised of cash from operations of $59.9 million, less capital expenditures of $9.6 million. Our capital expenditures for 2022 were focused primarily on technology projects that support our stores, website, marketing, and merchandising capabilities, all of which contribute to enhancing the guest experience. At year end, we held $52.1 million in cash and cash equivalents, most of which was invested in short-term U.S. government treasury bills and money market accounts. We remained debt-free throughout the year and had $78.4 million of credit available to us at year end. Although we do not expect to use our credit facility in the near term, it is in place until October 2026. Going forward, our priority with capital allocation will be investing in our business to drive growth opportunities with a high return on investment. These investments will expand beyond technology as we refocus more investments in our store portfolio. We expect our capital expenditures for fiscal 2023 to increase to a range of $19 to $21 million, which will still leave us with significant cash and free cash flow. To provide us with flexibility and agility for share repurchases, our board of directors has authorized another $15 million share repurchase program effective for the next 12 months. We are not actively repurchasing shares right now, but this authorization gives us the flexibility to act if conditions are right to execute a buyback and deliver a compelling return for our investors. We believe share buybacks can return shareholder value when the conditions are right and we will continue to explore other uses of capital that support our mission, vision, and strategy. I would like to now turn the call back over to Harvey for some closing remarks. Harvey?
spk03: Thanks, Peter. Wear what you want. Wear what you want. For those of you on this call who are not our customers, you may not understand the magnitude and importance of this statement. If you are of average build, you can shop virtually anywhere and at any price point. You can virtually define your style, Google it, browse it, shop, and check it out, and look and feel the way you want. For the big and tall consumer, this was not true. This was not true until now. DXL recognizes the urgency to bring to market what he wants in the sizes he needs and the sit spec he needs across a broad assortment and an assortment we have handpicked for him and which we believe will truly define our stores, the app, and our website as a haven to experience all that he is looking for to wear what he wants. Wear what you want. It's not a slogan. It's why we exist. And it creates a meaningful investment opportunity with materially greater growth yet ahead. And now we will take questions. Thank you.
spk06: Thank you, Mr. Cantor. As a reminder, to ask a question, you'll need to press star 1-1 on your telephone. To withdraw your question, please press star 11 again. Please wait for your name to be announced. Please stand by while we compile the Q&A roster. One moment for our first question. Our first question comes from Jeremy Hamlin with Craig Hallam. Your line is now open.
spk04: Thanks and congratulations on a really impressive year in Q4 as well. I wanted to start by getting some color and perspective on the performance of the retail stores versus the direct business. First, is that trend continuing where you're seeing more of your business flowing through your retail stores as opposed to direct stores? And, you know, how do you expect that to play out over the next year or two? Do you expect retail stores to continue to be your outperforming segment?
spk03: Yeah, Jeremy, it's a great question. I think what we are seeing and I think what traditionally seems like an oxymoron to say that traditionally direct-to-consumer companies are seeing is the need to create a more definitive live interactive experience. And so there's a relevant opportunity. element of that experience that can only happen in stores and customers are literally looking to have that greater level of interaction. I think, unfortunately, coming out of COVID and at whatever level you say we're out of COVID, which hopefully we are primarily out of it, they are returning to stores and they're returning for that experience. In our case, I want to remind you that our customers have an exceptionally low return rate. Our overall return rate is an industry-leading metric in apparel that is not typical. He likes to come in He doesn't love to shop, and he comes in, he makes a purchase, he doesn't return it, and part of that is the fact that he puts it on. And so we believe that over the time that we have and will continue to grow our direct business, we will see continued growth of the direct side of the business, but we appreciate and recognize that he has potentially even a stronger desire to come in and try clothes on. And the long and the short of it is that we expect, as we've communicated previously, that we will continue our march forward from 20% to now over 30% and from 30% towards 40%. And then we ultimately over the next three to five years, we'll grow our business online faster, but we recognize that stores today are really important in the mix and creating that experience in terms of fit and how the customers want to shop.
spk04: Great. That's really helpful. And then also wanted to just dig in a little bit further on, uh, The plans on unit growth, you know, in the 50 net new stores, and thanks for the color on the conversions for casual mail as well. You know, in terms of thinking about this as it relates to 2024, I think that you had previously talked about maybe somewhere in the 15 to 25 net new store openings in 2024. And I know this is a bit forward-looking, but wanted to just see if that timeline that you'd laid out before where you were thinking about kind of a three-year period for this increase, does that still hold true?
spk02: Thanks for the question, Jeremy. Yeah, I think that that does still hold true. As we mentioned, we're restarting the store development engine, and At this point, we have, I think we're up to five stores that we have approved and we're working on. We would love to get all five of them open this year. I feel really confident we'll get three. And then in 2024, I think that's where we will really start to accelerate. So, you know, do we get another 15? That feels like a good number. I'd like to say it would be more. But, you know, I think it really just comes down to we're going to try to get these stores open as quickly as we can. We know that there's opportunities across the portfolio where there's either opportunities in markets that we haven't explored before or backfilling or infilling markets that already have a DXL presence but are deserving of another store. So I think the plan is still it's probably three to five years. And, yeah, I think it will be 15 and 24 is where I think we'll be.
spk04: Great. And then I wanted to just get a little bit of color on, you know, the FY23 guidance as it relates to EBITDA margins. So you saw some impact here on gross margins in Q4 related to loyalty, related to, you know, normalizing markdown rates. In terms of thinking about the split here on gross margin versus SG&A impact, I know that you've invested in the business, but what are your expectations around gross margins specifically for 2023? Should we assume that that's going to be down maybe 100 basis points as you get some more typical normalization and impact from loyalty programs?
spk02: Yeah, I don't think it'll be higher than 2022. You know, what we think is that it'll be roughly the same. That's roughly our expectation going forward is that we will be upwards of 50%. I think we finished this year at 49.9%. As we move forward, I think where the spread comes in, it's on SG&A. And a perfect example is what we were just talking about with developing stores. That requires that we need to bring on project managers and site selectors and design people and legal and admin support to make sure that the leases are all getting vetted and signed. So there is an investment that we're making this year in longer-range projects growth plans, which unfortunately the investment needs to be made now, but the return on that comes when we get the stores open, which we won't be feeling that until 24 and 25. So I think as you think about gross margin, we still feel very confident in our ability to deliver the kind of margins we showed this past year. But I think SG&A is what we're going to try to continue to manage so that we can Make sure we have the resources to get our objectives moving and initiatives going, but still manage that as best we can.
spk04: Great. Super helpful. I'll hop out of the queue. Thanks. Thank you.
spk06: Thank you. One moment for our next question. Our next question comes from the line of Michael Baker with DA Davidson. Your line is now open.
spk05: Hey, guys. Thanks. So one very long-term question, one very short-term question. On the long-term side of it, Harvey, you said in talking about the market share, I think you specifically said that you have meaningful share in, I think you said, better and best. What can you do? We talked about the overall TAM, the $23 billion. Any thoughts on maybe attacking a different part of that over time uh, entry level as an example. And as part of that, can you talk about what you're seeing with your Amazon business and how that plays into that?
spk03: Yeah, Mike, I will talk about it, honestly, at a very high level that there's an element of competitive intelligence embedded in, in a deeper answer. But I think the way we think about the addressable market is that we say it's 23 billion and we know it is, we know that that 23 billion runs across from mass to, um, really better and better may be defined as either Nordstrom's or even above Nordstrom's in terms of, you know, price points and what have you. We believe we play in that space primarily to think about our assortment. You know, the assortment we have is moderate, upper moderate, and beyond that, or if you think about it in good, better, best terms, it's better and best. And really, you know, the nature of that is Ralph Lauren is one of our greatest brands, Vineyard Vines, Lacoste, those brands are great value, but they're in more upper moderate price point, better and best. And there's an opportunity, you know, represented by some of the things we're doing with things like the DXL BTE program, which is the Big Intel Essentials program, which is a product that we feel very proud of. It has our unique proprietary fit and each independent size is uniquely fit, just like our core assortment. But that is product not sold in our stores and not sold on our website and addressing another part of the market. And we're continuing to work to build that. And that is represented on Amazon's marketplace today, among others. There are far greater opportunities, some of which we might prioritize within the framework of your maybe long-term view. And we're just not at liberty to go into much more detail. But yeah, there's another part of the addressable market that we can go after in a more meaningful way. it all becomes about priorities and understanding the volatility of the marketplace and timing. And I think right now we have our heads down to execute where, what you want, which we believe is a game changing element of how we interact with customers and are concentrating on the better and best part of that mix to do it and extending our footprint through things like Walmart and Target and Amazon with the big and tall program and other private brands that we carry, which might be somewhat lower in price point than, brands like the national brands of Ralph Lauren and Vineyard Vines and what have you.
spk05: Got it. Okay. Makes sense. The short-term question, I guess in a way, is related because I wanted to ask you about the slowdown that you're seeing in the first quarter, which frankly isn't that surprising. But are you seeing, is it units, is it traffic, is it conversion? Are your customers maybe trading down to or looking for lower-end product? If you could flesh out the trade down a little bit and then I'm going to come back with one more.
spk03: Yeah, I would say overall it is mostly traffic, a little bit of conversion and a very small element of any given day, potentially average order value. But I'd say average order value is not the material driver. It's more traffic. Absolutely. Just less people coming into the stores and less people getting on the website. And then when they get on, we're just seeing conversion and, I don't think the lower price point part of our business is holding up better than the upper. To be quite honest, we're seeing things like the tailored clothing business, which is actually one of the more expensive parts of our business, just from a pure price point for a sport coat or suit, holding up really well. And I think that the flip side is we're seeing some parts of our business like active and golf and denim and green t-shirts where customers don't have the same need they had over the last couple of years. in many cases going back to work and they're just choosing to spend their money differently. And I think we're just seeing the overall macro. And then unfortunately I would say that any given day, you know, the last four or five days with SVB among others, you know, and credit Swiss this morning and last night, I mean, it's just one more thing after another that in the consumer's mind creates, you know, psyche elements where trying to read the tea leaves and figure out what's going on is nearly impossible. So, you know, You think about that and consumer debt being up and all the variables, interest rates and mortgage rates, and the consumers being more cautious, I think, when the day is done. That's really the bottom line.
spk05: Sure. Okay. One more if I could real quick. Why not buy back stock? Is it that you don't see the stock as a value? Is that you're preserving cash? Why not?
spk03: I'll attempt that, and Peter can jump in if he wants any more. I think when the day's done, we are trying to make sure that we look at this as an opportunity to grow. And we want to make sure we have the cash to grow and invest in this business. And that means, you know, when it makes sense to go even deeper into a brand campaign on wear what you want and expose that to a broader part of the audience, we're looking at ways to do that. But We will never just do that in a blunt way, so we're working our way through how do you do that in effective ways that are measurable and definable? And that's just one element of investments and growth. Another one Peter already mentioned is stores. You know, we are building the stores, but if we continue down the path we hope we will, we will have to layer more in in terms of staff and SG&A. And, you know, that's a balancing act, right? You front load elements like that before the stores open and create revenue. But when the day is done, it requires certain elements. So we are trying to be agile and keep our options open. Our number one priority is to invest for growth. To the degree that we've already articulated our free cash flow and the cash we're sitting on, we have the opportunity to do buybacks, but we're going to make sure that those buybacks are the absolute best use of capital. And those are ongoing conversations with the board and management in terms of how we invest in our business or in return to shareholders.
spk05: Fair enough. Thank you.
spk06: Thank you. I would now like to turn the conference back over to Mr. Harvey Cantor for closing remarks.
spk03: Thank you, Operator. Hey, listen, we appreciate you getting on the call today, all of you. We know there will be ensuing follow-up. We are very excited about our business. We hope you see the enthusiasm we have warranted by the performance we've delivered and the prospects for the future, and we look forward to getting back together with you on the next earnings call in approximately 90 days. Thank you so much. Be safe. Take care. Be well.
spk06: That's today's conference call. Thank you for your participation. You may now disconnect. Everyone have a wonderful day.
Disclaimer

This conference call transcript was computer generated and almost certianly contains errors. This transcript is provided for information purposes only.EarningsCall, LLC makes no representation about the accuracy of the aforementioned transcript, and you are cautioned not to place undue reliance on the information provided by the transcript.

-

-