DXLG - NASDAQ

Good day and thank you for standing by. Welcome to the Destination XL Group Incorporated First Quarter 2023 Earnings Conference Call. Please be advised that today’s conference is being recorded. I would now like to hand the conference over to your speaker today, Shelly Mokas, Vice President of Financial Reporting SEC. Please go ahead.

Thank you, Norma 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.dxl.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 is detailed in the company’s filings with the Securities and Exchange Commission. I would now like to turn the call over to our CEO, Harvey Kanter. Harvey?

Thank you, Shelly and good morning everyone. I am 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 0.6%. While our overall growth has slowed from our record-breaking double-digit comparable sales increases of the past 2 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 expected to be closer to the lower end of that range. As most of you have already seen, first quarter sales results for most apparel retailers had been affected by broader macro challenges. Our slowing comp store growth was in line with what we expected and the question we have been trying to answer is what should we expect for the remainder of the year? I will come back to that shortly. But I do want to acknowledge how very proud I am of how team DXL 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. And while DXL 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, the first quarter has been punctuated by double-digit comparable sales decreases. We have 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 is structurally unique. Our brand is built on a positioning that leverages fit, assortment and experience. And for a consumer that at best has limited options. And dare I say perhaps only one truly immersive option and that is DXL. While many of you have heard this before, the three elements I have referred to are what set DXL apart from our competition. At DXL, big and tall isn’t just a rack in our store, it isn’t just a page in our website, it’s all we do. 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 over the next 2 to 3 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 40s and EBITDA in the low to mid double-digits, a direct comparison to our historic margin in the lower 40s and EBITDA in the low single-digits. Our results over the last 2 plus years have been solid. And these results have been driven by DXL strategic and transformational structural changes. This stands in direct contrast to results 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 who you have not yet experienced the DXL difference. We consistently hear from big and tall consumers 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 a curated and mostly exclusive offer. We have dedicated teams focused solely on developing precise specifications to deliver a unique, ownable and authentic fit and an assortment that looks, feels and moves great for the big and tall consumer. 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 own brands and exclusive arrangements with national brands, over 80% of our assortment is exclusive to DXL. This delivers a product array and quality that stands in stark contrast to our competitors’ offerings 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, DXL is a brand built solely with the big and tall man in mind. And we are engaging in ways no one else can deliver. With DXL, he can satisfy all his wardrobe needs, feel valued, 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 his 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. A testament to this, an 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-70s. For those of you familiar with NPS scores, this is 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 DXL for the first time over the last few years. So, let me get right to the specifics and details for our first quarter performance. As I just mentioned, comp sales in the first quarter were up 0.6%. 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 a comp sales growth rate of 9.1% in February. We fell back to minus 2.8% in March and then finished out the quarter with a minus 1.9% in April. As I am sure many of you are wondering, where is 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 slowed down 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 different levels of performance, I do events and context happening in the world around the consumer. I referenced earlier the consumer psyche and specifically how performance is tied to moments. For example, the SVB banking crisis was just such a moment, where in the days following, we saw business immediately change. Likewise, the looming debt ceiling discussion of late, where 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 reduced spending, inclusive of apparel. Conversely, in our core company-owned channels, it’s worth noting that we continue to see a nice lift in AOV 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 have 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 is we have experienced a 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 have not taken any meaningful price increases. While it 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 have done around the structural positioning in the brand with the consumer is a critically important structural element supporting our transformational strategy. We continue to prioritize the greater development and building of more personalized relationships with consumers over the next 2 to 3 years. Over the past 2 years, we have worked very hard to reposition our brand around the pillars of fit, assortment, and exclusivity, inclusive of the experience in stores. Price is important to our customers. The price is not how we differentiate. We have seen some small level of erosion in the gross margin relative to last year, which was driven by loyalty, shipping and product costs. I will 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 merchandise assortment. As a reminder, our current merchandise assortment is approximately 55% our own brands and 45% national brands. And 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. In sportswear, the top selling brands in our assortment 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 designer brands in big and tall sizes. And as I have already communicated in our prior quarterly call, we have 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 are household names that our customers are going to love. Next up, inventory. Inventory continued 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 and I am happy to report that our inventory turnover is up 25% to pre-pandemic levels. Our clearance inventory at the end of Q1 2023 is 7.8% as compared to 6.9% at the end of Q1 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 continue to employ an eye on the road and an eye on the horizon approach to ensure we deliver solid results, while continuing to build momentum and a modern marketing organization for the future. As such, we will continue to make good progress after we rolled out our campaign of Wear What You Want. The brand positioning launched in early March. As a reminder, this new approach invites our customers to finally shop like everyone else, by choosing the style of apparel that they want, that reflects who they are and fits 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 and own brands, the highest standards of construction and quality, the most style options and it’s an experience you cannot find anywhere else. I am happy to report that the work has been well received by our customers and our DXL associates alike. We have seen increased engagement in our social channels, increase in revenue with our e-mail program, and as a result, a more unified message to customers to wear what they want, our Wear What You Want campaign. We will continue to build on the success of the launch in the coming quarter with an integrated push around the key Father’s Day period that includes all our owned and paid channels as well as introducing new videos until we stop showing via streaming media VidEL that will target new customers. Additionally, we have to continue to engage customers with our DXL rewards club loyalty program since launching it in late October of last year. We are seeing particularly strong results among our Gold and Platinum tiers in both certificate redemptions and sales. In Q2, we have plans to further engage customers and drive acquisition with a focus on the value the program delivers every time you shop. Further, we plan to improve awareness, improve engagement, and customer experience with a more pronounced loyal key emphasis on our site to ensure our customers are taking advantage of this program. But building brand loyalty does not come without a cost. And our program teaches new ways to engage with the brand and leads to more loyalty certificates being issued. This is an extension of our marketing efforts that allows us to stay more connected to our best customers. In 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 DXL for the future regarding more personalized personalization at scale, building our analytic capabilities, and deepening customer engagement. 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 in shopping behavior, insights and predictive modeling. In addition to launching the CDP, we also brought in a new e-mail 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 a more robust remarketing program should benefit us later in the year. We have also begun foundational improvements on our analytic capabilities. 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 speeds. This will enable a democratization of data across the organization, leading to a greater unlock of 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 have leveraged 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 are 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 in 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 and executed our first lease agreement for a new store in Los Angeles, we are very close to our second new store, which will be in the New York market, and we expect to sign at least one more lease for a third store that we expect to open by the end of 2023. We have also begun construction work on four of our casual mail stores that are converting to DXL, and there are six additional casual mail stores that we expect to begin and complete conversion to our DXL store format by the end of the year. This would bring us to 13 new doors, operating under the DXL brand nameplate by the end of 2023. And finally, we have begun to work on remodeling one of our DXL stores in the Chicago market. And we are looking to begin work on remodeling at least four additional existing DXL stores before the end of 2023. Over the next 3 to 5 years, provide you with an SMS scale, we believe we could potentially open up net up to 50 net new DXL stores. We intend to – continue to convert casual mail locations and we continue to evaluate the DXL remodels for incrementality and productivity. The 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 to DXL. And I am 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, in the distribution center, in the corporate office and in the guest engagement center. I want to take a moment and 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 and our pursuit of serving the big and tall consumer and making DXL the place where they can best satisfy that desire to wear what they want. And now, I am going to turn it over to Peter for an update on the 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 0.6%. Our stores, which make up about 70% of our total business, were up by 1.5% and our direct business, which makes up the other 30%, was down 1.6%. 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. The mobile app customer tends to be a more loyal customer who shops more frequently to 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. Decline from last year’s record high margin rate was generally in-line with our expectations. We have maintained a non-promotional posture that emphasizes our superior quality, fit and experience rather than discount prices, and our margin rate in the high-40s remains significantly higher than our historical rate. However, on a year-over-year basis, merchandise margin decreased due to a combination of higher costs off in three areas. First, we decided to absorb the cost increases on certain private label merchandise, especially those at an opening price point level rather than passing these on to our customers through price increases. Second, we have seen an increase in costs related to the fulfillment of our direct to consumer orders. In 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 plan to reflect our sales expectations. Moving on to selling, general and administrative expenses, our SG&A as a percentage of sales increased to 38.5% as compared to 36.5% in the prior year’s first quarter. On 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 year’s annual merit adjustments in the healthcare costs also contributed to the increase. Our add-to-sales ratio also increased slightly to 5.5% from 5.3% in Q1 of the last year. For the year, we expect to spend about 5.7% of sales on advertising. 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% in SG&A expense at 38.5% this brings our EBITDA in at 10.1% or $12.6 million for the first quarter. Although lower than last year is 13.5% or $17.3 million, we are 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. 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. Because our taxable income was offset by our fully reserved net operating loss, carry forwards. 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 carry forwards to reduce our cash taxes and as a result, we will pay very little in 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 in short-term investments of $46 million as compared to $7.5 million a year ago, with no outstanding debt in either period, and availability of $93.8 million under our revolving credit facility. With the seasonality of inventory bills and payments of prior year instead of accruals, do you want us 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 with the use of $5.9 million of cash. We are keeping most of our excess cash or $29.2 million in short-term U.S government treasury bills, which are 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 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 in considering the macro-economic challenges and uncertainties regarding consumer spending seen throughout the retail industry, we are currently trending towards the lower end of our previously reported guidance for fiscal 2023. How we get there is through a low single digit and negative comp for Q2, we are optimistic that we can be flat in Q3 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 in 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. We remain focused on executing the strategies we have spoken about today. And we’re 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 we move on to Q&A, I’d like to just briefly summarize what we believe are the most critically important elements for us and hopefully you as investors as you think about investment in DXL as part of your portfolios. We posted a comp sales increase for the first quarter of plus 0.6% and remain encouraged by our ability to drive another quarter of comp growth. And that growth is now over nine consecutive quarters. Well, DXL is unique on many levels. We’re still impacted by volatility, consumer psyche and sentiment of the economic reality. But believe that our first quarter results have outperformed the broader retail market on a relative basis, and because we can serve by consumer by bringing to market a clearly differentiated brand driven by more personalized, more relevant communication, structurally built on a positioning that leverages fit, assortment and experience and so that we remain optimistic for our long-term ability to take market share. We believe this strength strategic transformational changes we have made our increasing our share wallet and attracting and retaining new customers who have not yet experienced the DXL factor. From a sales and profit – from a marketing and strategic planning perspective. We continue to employ an eye on the road and eye on the horizon in our approach to driving outcomes this year, but also investing for the future. And an operating level, we continue to have a very strong operating process, structure and discipline, and proven out as an example by our lean inventory, which at quarter end was 11% below pre-pandemic levels and turnover which was up 25% over pre-pandemic levels in 2019. We are maintaining our shift away from discounting driving gross margins in the upper 40s 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 2 to 3 years and are prepared to whether this most recent round of volatility. We remain incredibly excited and enthusiastic about the excess 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. 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 in a 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. You noted a couple of reasons for that including the loyalty program costs, higher shipping costs and some occupancy deleverage as well. I wanted to see if you could be a little bit or provide us more color in terms splits of how those components factored into 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 biggest part of the decline in the merchandise margin, it really came in the IMU deterioration. Across the board we saw it, but it was most impactful in wovens and knits. I think the other three pieces the loyalty costs and the shipping cost which are really what we saw on the direct to consumer side, those were more or less offset by the savings that we saw on the ocean freight and the container freight costs that we saw. So the piece that I would point to the most is, again, it’s the product costs. And keep in mind the product, we recognize that cost when we sell through the product. So this is product that we would have taken receipts on upwards of it could have been a year ago, even as much as a 1.5 year ago, 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 where 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 Q2, down low single digits, flattish for Q3, and then returning to positive low single digit and Q4, in terms of getting there. Again, tough environment out there, you guys are clearly doing a lot better than most of the competition. What does it assume in terms of performance on a relative basis to where we are today? This kind of factor in we know that traffic is been the big driver here, your conversion remains strong. And as Harvey, you know the average order value is still strong as well, when we’re building into that and then how does — 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?

Hey, Jeremy, it is 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 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, we did that. We believe there’s an 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 up to consumers. On one level pretty tactical, but important. But another level at a higher, more strategic perspective, the concept of more personalized marketing and more relevant communication to consumers to ultimately accomplish. What we want to engage consumers about why we are so different is what’s really driving the change. And as more of those things come online, we are hopeful what we will see is greater level of conversion, greater level of potential AOV and not material change in traffic, although we are hopeful that there’s some level of moving in that regard. And unfortunately, that’s the kind of element that is unknown, right? Where we are overall in a business climate? Are things going to get worse? Are they going to get better? We believe at some level, we will be able to push water uphill by some of our own initiatives. And if they’re just neutral to where we are today, we will win. If they deteriorate, there’s obviously the potential fall short. And if they improve, there’s actually the opportunity to be upside. So it’s a challenge. As one of our Board members says 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 I hope like giving you a little bit of perspective around the consumer facing elements, which we think are meaningful.

So, the one piece that I will add to that is we did deliberately try to give you a little more direction on what we are expecting to see quarter-by-quarter. And we typically don’t do that, we typically just stick with an assumption for the year, but we felt it was important to just show how we are thinking of the year relative to other performance. As we said it’s, we are talking low-single digits either negative or positive, which is where we have been trending for the last few months. And it’s not – we are 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 are trying to control from a micro level. Plus, we are hoping we get a little bit of tailwind from hopefully an improving macro environment. But there are elements that we are focusing on the playing here within the company that we think are going to help me do a better second half.

Yes. That’s great context especially on top of last year’s plus 11 comp. I wanted to also just get into your customer support costs, so inclusive of your DC, your corporate overhead that’s I think it was up 110 basis points year-over-year in Q1. In terms of thinking about the environment we are in and we have had enough retailers report now that, there has 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 that employment rates fell a little bit, do you feel like is there a little bit of wiggle room in terms of being able to pull a little bit out of that if you felt like you needed to, but I wanted to just understand I know that you are in a different phase for this company that you are now entering a phase with some unit grow, when you are generating these conversions that are going to be helpful overall. But what’s your ability to potentially nip at that if you felt like you had to pull back a little on the structural cost side?

So again, I will take this one. And it’s a really good question. And we talk about this a lot. I think that we have been pretty transparent with what we are trying to achieve with the company in terms of growing our analytics capabilities, growing our store base. We have 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 really do we really want to stop doing those things and maybe save another $0.5 million or $1 million of expense, I really don’t think that we get the credit for making those kinds of difficult decisions. And then we come out of this a year from now. And we just have to restart everything all over again. So, 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 have done with the brand and the transformation and creating this haven for big and tall guys, that’s going to get us past this moment. And so I don’t think we are looking at – we are 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 markets, it’s a little challenging to say the least navigating quarter-to-quarter. But our Board and management team is very oriented towards growth. And we believe that I have said this before, we believe why aren’t we $1 billion company, let alone something greater than and that’s not guidance in any shape and/or form. But I definitely want to express the fact that our actions and strategy is oriented towards growth over the next 2 years to 3 years. And the challenge is managing quarter-to-quarter.

Got it. Best wishes. Thanks for taking the questions, guys.

Thanks so much. Have a great day.

Thank you. One moment for our next question, please. Our next question comes from the line of Michael Baker with D.A. Davidson. Your line is now open.

Good morning Mike.

Thanks. Hi, how are you? I wanted to ask you a couple questions. But let’s start, I am curious what you are seeing in some of the remodel efforts that you have done. I think you talked about doing one in Chicago, I think you already you are doing a remodel or did a remodel in Warwick, Rhode Island, I believe. What do you – what did you change here, and what are you seeing in terms of sales lift versus cost?

So, in terms of the remodels, we have opened up – we have remodeled two stores. One is in Warwick, Rhode Island. The other is in Troy, Michigan. The third store that we are doing, which is currently underway, is in the Chicago market. We do believe that we are going to get four more underway in this year, I am hoping we can get four finished this year, but I am not sure we will have them all finished by the end of January. But we are definitely going to get four more started and see where they are. The thing I will say about performance is that in both Warwick and in Troy, they have outperformed both 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, it’s only two stores. And that’s why we want to get five more opens. So, we will have a little bit broader sample to make some judgment on. But in all cases, in both cases traffic has improved, our net promoter score has improved in those stores and are new the files improved in those stores. So, we are encouraged, but we still need to learn more.

The only other thing I will 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 have 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 you check out where the cash registers are, if you will, the POS terminals are at the front of the store. And we have 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 have done is embed in the store for lack of a better way to say it two small kitchens. And when I say kitchens, as most people recognize that when they have a party at their house, everyone seems to all hang out in the kitchen around the island. And we have two islands embedded deeper in the stores and those islands given the opportunity with a POS terminal, a digital consumer interface to show our universe offering which is all of the things offered online where color extensions and size extensions and style extensions exist. And the ability to be right near the fitting room so that we can interact with consumer in a more one-on-one relationship and actually create that relationship by sitting down. So, that center island has barstools. It has a 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 are obviously looking to drive AOV, we are looking to drive UPTs and ultimately become stickier. And so that they remember not just that they purchase something and made a transaction. But they worked with Bob and had incredible experiences and might even refer to Bob as their friend at DXL. It’s a different way to think about it, but in the business that we do with such an underserved consumer and such a fear relationship in most retail stores where they don’t serve this consumer the way we do, we think that the strategic intent of the remodel is really an important variable.

Yes. It makes sense. So, I think they look great. A couple 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 have 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 are typically a little bit higher end, but any impact there? Is that sort of now fades into the background that whole tax refund issue?

So, I will take that one, Mike. I think to some degree, yes, that’s impacting us, but not nearly as much as what I have 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 consumers wallet and that gets impacted by what’s the cash coming in so that he can make his discretionary purchases. I don’t think it’s as pronounced for us as it is at other retailers. But I would say there is certainly some elements of that that we saw in the first quarter results.

Fair enough. And then a longer term question you talked – you personally, you said gross margins high-40s. I think in the past you had said about 50 subtle change. But what is this something changed 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 top line sales number should be over the next couple of years? And then the third part of that is, you said EBITDA low to mid-teens. I think that mid is higher than you got certainly this year, what can drive you back to that mid-teen number? Thanks.

Sure. So, I am on the EBITDA the low to mid-teens. We have said from day one, many years ago, we want to have a sustained EBITDA margin that is in excess of 10%, we have clearly been well beyond that. I think as we have talked about with the investments that we are making in marketing, real estate and store development, that comes out the short-term expense of margin. So, I would expect that in these years where we are 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 are saying low to mid-double digits, that’s 10% to 15%. So, we are 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, that it makes us a more a more powerful company.

Yes, fair enough. What about gross margins a little bit lower?

Sorry. So, for gross margins, yes, I mean we said for this year, we are 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 are thinking we are going to be around 49%. And again, it’s all three factors that I mentioned before. It’s the lower IMU. It’s the cost of loyalty that those are the bigger pieces of it. But that’s what we are assuming this year.

Well, yes, I guess just to push on that, though I think on your last call correct, if I am wrong, but the target was closer to 50. So, it’s down a little bit and so all those things that you outlined, I guess a lot of those, you could have – what has changed, but what is making it worse is it just less leverage on the occupancy, if you are at the lower end of sales or to shine through what change versus a few months on the gross margin?

Yes. 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 in combined with lower leverage on lower of a sales base initially we were at 550 to 570 range. And now we are 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 all together, have just let us to, we think we are going to be down about 100 basis points.

And Mike, I would stress that 100 basis points from the 50 is in direct comparison to let’s just say 43 and change. So, it’s not like we are in any shape and/or form suggesting renewed back to where we have historically. But to be at this point, there is a lot of variables that were challenged to address and there were high watermarks at 50.

Yes. Makes sense. Understood. Thank you.

Thank you. Our next question comes from Raphi Savitz with – he is a private investor. Your line is now open.

Hi Harvey. I guess you have been at the helm for 4 years or so. And can you maybe take a moment to reflect on what’s gone according to plan and what hasn’t met your expectations in your time there?

Yes. I think there is three things that I am incredibly excited about. One, a 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 clothes that fit them and styles they want. And we have, I think not evolved assortment as much because I think the assortment was pretty powerful. But we have 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 DXL factor is driven by the experience in a unique fit that clothes really fit them in ways that they didn’t recognize before. We have really done a good job or not where we end up ultimately want to be. But we are continuing to work against that marketing element. And that is a really important strategic element and shift from the way we have 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 and most of the things we did for the 2 years or 3 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 yeoman’s work. And the fact of the matter is that in accountability and ownership, we have spread that throughout the organization. So, our storage group is incredibly passionate, they know what they are responsible for, they are bonus in that sense that 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 are making, I think we have made really important investments, one might say that we had technical debt, we have addressed so many of those elements with changes in the CRM system and the loyalty program that the technical debt and the other investments with stores and marketing, you look at the shift in marketing, we have historically been a 4% in changing marketing company today, we are closer to 6%. We have done what we needed to do, I think to really engage and communicate in the ways I just referred to. So, I think when you – kind of sort of the way Peter talked about margin, there is 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 the 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 that company to execute against those. We empower them, the folks and then we hold them accountable and inclusive of myself. So, hopefully that was some sense of what it is we have done.

Yes. That’s helpful, Harvey, and maybe on that point. You think about kind of the go forward strategy here. What would you say the major risks are in that strategy? And how are you doing your best to mitigate those?

I think that – I would say the most major risk is really the economy. I think we believe we are in the first fourth year of a non-normal year. The unfortunate reality is in my first seven months, we had a strategy, we executed against the way I just referred to it. We made small, but 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 yet. And literally since basically, February and March of 2020, no year, 1 year to the next has looked the same. And so we are trying to navigate this an incredible level of ambiguity. And mind you we have gone from $23 million EBITDA to $75 million EBITDA. We have gone from $473 million of revenue to $500 million, and let’s say $550 million. And we have measurably moved EBITDA from 10%, double digits, excuse me, single digits to 10% and north of that. So, it’s just an incredibly challenging period of time for every retailer and quite honestly, probably every business and humanity to navigate the issues that we are all facing, no matter whether you are in business or 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 you are getting that growth today, or where you think you will get that growth in the future. I mean is it primarily taking it from, let’s say, department stores that aren’t servicing these men as well as you are, or is the expectation that you think you are creating a much better experience and ultimately, these folks that aren’t really shopping and aren’t really buying that much will be buying those will be spending more than their disposable income on clothing because of DXL?

Yes. Our belief is that there are a lot of players in the space that dabble in this, we have often referred to, they have a fixture or some version of number of web pages that represent the product to serve the underserved consumer. But in reality, we are the only ones literally that are at the full service across stores and web. And we believe we will take share from a lot of different places. But we ask the question, and I didn’t flippantly say, why aren’t we a $1 billion. We ask the question, why aren’t we a $1 billion. Why don’t – we something north of that. We have a meaningful market share. But I often say we are an 800-pound gorilla. But the reality is, we are probably 100-pound gorilla with a lot of 20 pound chimpanzees around us. We are just not as big as we should be. And there is incredible opportunity to grow. And I think we started that process. So, I really appreciate the question.

Thanks Harvey.

You bet. We have time for one last question, and then we will have to roll.

Thank you. And next question, one moment, please. Our next question comes from the line of P. Johnson with Johnson inks. You line is now open.

Yes. Good morning. You have a fair amount of cash on the balance sheet. And I think you have said that you didn’t buyback any shares recently, is part of the concern, perhaps that the overhang from two of your biggest investors, AWM and Wolf Hill have been selling shares recently, and you want to wait for that overhang to pass?

So, I will take that one. And I guess the only comment I will make on the buyback is as I have 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 weeks or five weeks, six weeks, seven weeks, that it’s come down much more meaningfully. So, we do fully intend to start executing on that very soon.

Okay. And has the other AWM or Wolf given you any sense of their sort of medium to long-term plans?

That’s just something unfortunately, we wouldn’t comment on. And I thank you for the question, but we just won’t make a comment on that.

Okay, fair enough. But you certainly have enough cash in your balance sheet to be able to put some aside for the buyback at this point, I would say?

Indeed, and that’s why the Board has supported that initiative and we expect we will be more than likely in 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.