Good day, ladies and gentlemen, and welcome to the Destination XL Group Incorporated, Third Quarter Fiscal 2022 Financial Results Conference Call. Today's call is being recorded. At this time, I would like to turn the call over to Ms. Shelly Mokas, Vice President of Financial Reporting and SEC Compliance at DXL. Please go ahead, Shelly..

Thank you, Latanya, and good morning, everyone. Thank you for joining us on Destination XL Group's third quarter fiscal 2022 earnings call. On our call today is our President and Chief Executive Officer, Harvey Kanter; and our Chief Financial Officer, Peter Stratton.

During today's call, we will discuss some non-GAAP metrics to provide investors with useful information about our financial performance. Please refer to our earnings release, which was filed this morning and is available on our Investor Relations website at investor.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 2022.

Such forward-looking statements are subject to various risks and uncertainties that could cause actual results to differ materially from those assumptions mentioned today due to a variety of factors that affect the Company. 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?.

why, how and what. Why we exist? We exist to provide the big and tall man with the freedom to choose his own style. How we do this? Our go-to-market strategy, we relentlessly strive to serve the fit and style needs of the big and tall man. Big and tall is all we do.

And of course, then what? What we do tactically, factually, pragmatically, we are a haven for the big and tall man with the largest assortment of brands and sizes accompanied by unrivaled expertise that creates an experience like no other.

So by now you might be asking yourself, why should I believe this? What reasons could you -- would you believe as proof points? Bear with me, if you will, there are five.

First, industry-leading expertise on big and tell sizing, offering a fit that he can't get anywhere else; second, the broadest and deepest assortment of big and tall national and owned brands, most of which are exclusive to DXL; third, the highest standard of construction and quality in our mix; fourth, a collection of brands and products that give him style options for most any occasion; fifth and finally, a level of service that gives them a better experience that he can get anywhere else, bar none.

We exist to provide the big and tall man with the freedom to choose his own style to wear what he wants to wear. Layer this on to our 2022 marketing initiatives that were first referenced way back in -- during our Q4 '21 earnings call, loyalty and the CDP platform, and it's a powerful story and platform to continue to build upon.

To refresh your memory, our new loyalty program, which was soft launched in October and is largely now in place as of week one November with a complete revamping of loyalty. It is a program that encourages and rewards deeper engagement with DXL beyond just shopping while simultaneously providing greater recognition for our top customers.

And the customer data platform, CDP, as it is often referred to -- this launch is now underway in earnest. And when fully operational in Q1 2023, it will enable greater personalization and segmentation across all CRM touch points, while also unlocking further actionable insights to fuel new customer acquisition and inform targeting.

As the single source of truth and a repository of many sources of customer behavior, the CDP platform will greatly enhance our current predictive modeling capabilities while simultaneously consolidating and optimizing our CRM tech stack.

Let me give you an example of how that manifests in a more tactical level, in terms of our promotional approach and gross margin impacts.

When I first joined DXL, the Company was mired, and I used that word purposely, mired in a cycle of using broadly available coupons and discounting as a primary method of communicating to customers and driving sales.

Not only did this limit margins and restrict profitability, it also took customers that DXL trades solely on price and promotion and not our unique fit our mostly exclusive assortment and an incredibly compelling experience.

We have significantly shifted our promotional since those days, deploying promotions only when necessary to address customer file inventory opportunities, a stark contrast from the previous and essentially always on and heavy-handed promotional approach.

In addition, we are constantly reexamining our promotional portfolio and testing, learning and often pulling back. Some examples of this occurred within our two-four programs and clearance strategies. During this year, we've seen a resurgence in interest and purchasing of dress wear items. We revisited the constitution of our two-four program.

As dress wear items like dress shirts, dress pants, ties and belts are often occasion-based and needs-based purchases we tested and ultimately remove them from our two-four promotional program. This also applied to underwear, which also qualifies within the need-based purchase category.

The results has been a 4% increase in average order value without any erosion in unit demand and a pickup in margin directly associated with reduced promotional markdowns. Balancing a number of elements continues to be an opportunity, but hopefully, what I have shared with you gives you greater insight into our actions and pursuits.

While our clearance Q3 penetration was up slightly in 2022 at 6.7% to 2021's 6.4%, it is important to note that we have reduced our clearance discounting levels. Last year's deepest discount was 75% off, whereas this year's deepest discount is at 40% off.

This has served multiple purposes; one, further protecting margins and markdown rates; and two, allowing for the deployment of occasional additional percentage off clearance promotions to address inventory while also stimulating consumer demand.

As we have been significantly less promotional than any prior year, we do understand that promotions may play a role within the marketing mix, especially in Q4 and during the holiday season.

However, gone are the days of deep and broad promotions just for the sake of having a promotion, we now combine a multiyear disciplined testing and learning approach with a rigorous business, customer inventory monitoring and are consistently scenario planning to activate against near-term trends without creating long-term brand repositioning harm.

Building off of promotions and clearance discussions, I'd now like to talk about our merchandise assortment and inventory management. In terms of merchandise assortment and consumer trends, both contributed favorably to our Q3 business.

The continued reemergence of dress wear and tailored clothing saw greater momentum and contributed 19% of our Q3 sales versus 15% in Q2, while also driving higher price points and more casual categories. In addition, we saw a strong performance in sportswear business with growth in sport shirts and casual bottoms and knits.

And on the brand front, Harbor Bay is our bread and butter, which continues to headline our private label mix in driving sales and margins. In our design collections, we offer exclusive sales from Nautica, Vineyard Vines, Psycho Bunny and Robert Graham, each of which all drove year-on-year increases via fashion forward style assortments.

As I mentioned towards the start of the call, assortment is one of our key ownable differentiators. And in this regard, we are constantly examining our brand mix and opportunities to ensure that our big adult customer can truly choose his own style and wear what he wants to wear.

And to that end, we are launching two new additional exclusive brands as part of our Spring 2023 reassortment. While I'm not at liberty to mention the names just yet, we are incredibly excited about bringing new exclusive additions, and we'll be communicating additional details in the near future. Now inventory.

Inventory on hand is another topic dominating the headlines in recent weeks. At DXL, we are measuring our inventory against 2019, which was the last normal cycle, not affected by the pandemic recovery and supply chain issues. Compared to 2019, our inventory is down 11.1% with a 30% improvement in turnover rates.

If we look more closely at the recent year-over-year comparison to Q3 2021, we have now right-sized our inventory levels and made up inventory, which is much more productive, ending Q3 at a healthy level at $106.8 million, which is a 30% increase to 2021.

Shifting from the brand assortment and inventory discussion, I'd now like to talk about people, processes and technology, all of which apply to marketing.

As you have seen from our recent press releases, in Q3, we shifted the structure of marketing leadership bringing or Jim Rees as Chief Marketing Officer; and John Sainsbury as Chief Digital and Analytics Officer.

Both are leaders with extensive experience and proven track records in the brand -- in the world of brand repositioning, go-to-market strategies, e-commerce and technical disciplines. And their combined presence and expertise significantly bolster DXL's capabilities.

Building upon both Jim and John's background and experience, we will continue to examine in marketing and technology processes, customer journeys, user experience and outputs with two fresh up device.

While the results of the previous marketing leadership drove are commendable, especially navigating through the pandemic, Jim and John's combined presence allowed DXL to shift even further from playing defense to playing offense with a focus towards the future, and as you've heard me reference before on previous calls.

As I close out my comments, I'd like to address some macroeconomic factors and headwinds many of which are consistently appearing in today's headlines.

As we know, 2021 was still a non-normalized year, which also included non-normalized behaviors, whether driven by pent-up demand from 2020's off year, the issue of stimulus payments and supply chain outage fears impacting consumer shopping patterns.

While many of these elements no longer impact 2022, we are very mindful of the new emerging impacts of the macroeconomic environment, and how this year's factors, including recession fears, rising interest rates, inflation and consumer confidence translate to our business and inventory positions.

Similar to how we manage through the pandemic, our actions will be informed, will be purposeful and will be decisive to navigate near-term realities without sacrificing long-term health. As an employer will tell you, labor continues to be a challenge in today's climate. Historically, DXL's rate of open positions in stores hovered around 10%.

Today, that rate is now closer to 14%, and we continue to place great emphasis on hiring back and looking to gradually improve this trend. We know that our employees are the face of DXL to our customers and our organization.

And in that regard, my last remarks is in response to the entire team and to thank the entire team, acknowledging our employees and their commitment, their effort and the hours that they continue to tirelessly dedicate to DXL.

This is a requirement on my part, not an option as they are what makes DXL, DXL, whether in the stores, in the distribution center, in our guest engagement center or in the corporate office, their commitment to DXL and our cause is beyond commendable.

I often talked about making DXL a true employer of choice and one factor in accomplishing this is our purpose-driven mission, which is DXL. The ability to truly make a difference and positively impact our customers' lives is of a profound significance and unique in some ways to DXL.

Each and every day, I'm extremely grateful to be surrounded by fellow employees that choose to believe in what we're doing, that choose to believe in who we are doing it for and ultimately choosing to partner alongside DXL in that journey. I truly cannot thank them enough. And now, I'd like to turn the call over to Peter for an update on financials.

Peter?.

Thank you, Harvey, and good morning, everyone. I'd like to give you some more color around our Q3 financial performance, expectations for fourth quarter and our thoughts on capital allocation. Sales for the quarter were $129.7 million, up 6.7% from $121.5 million in the third quarter last year.

On a comparable basis, adjusting for closed stores, sales grew by 8.7% with comparable store sales up 10.1% and our direct business up 5.5%. Compared to 2019, which was still our last normalized year, our comparable sales for third quarter were up 33.7%.

The Compared to fiscal 2021, sales accelerated as we moved through the quarter with comparable growth of 7.4% in August, 8.5% in September and 10.3% in October. The continued resurgence of stores was the highlight of our Q3 sales and stores benefited from growth in traffic, conversion and dollars per transaction.

Our stores are in a much better inventory position today than they were a year ago with fresh merchandise and fewer out-of-stock positions. And our customer has benefited from that stronger assortment.

The dollars per transaction have also risen as we have further reduced markdowns and seen deeper penetration in higher ticket categories like tailored clothing. Geographically, all regions outperformed their results last year, but the biggest gains continued to be in the Southeast.

Sales trends in our direct channel were driven primarily by our dxl.com website and mobile app. And marketplaces continued to scale even faster than our core business. Partially offsetting these gains was a decline in our universe sales, which are sales that originate in the store but are fulfilled online.

This decline was tied to the better in-stock positions in the stores. As an omnichannel retailer, we remain ready, willing and able to meet the customer on their terms, wherever and whenever they choose to shop and we were pleased to again see growth in both the store and direct channels this quarter.

As Harvey mentioned, there are many headwinds currently facing the U.S. economy, and we remain cautious but optimistic in our short-term outlook. We expect a single-digit sales growth increase in Q4, and that outlook is embedded in our guidance.

Based on the strength of our Q3 performance and Q4 outlook, we are increasing our sales guidance from a range of $520 million to $540 million to a range of $535 million to $545 million. Let's look at margin next. Our gross margin rate, inclusive of occupancy costs, was 50% for the third quarter as compared to 50.2% a year ago.

This 20 basis point decrease was the result of a 70 basis point decrease in merchandise margins, partially offset by a 50 basis point of improved occupancy leverage on the higher sales.

The decline in merchandise margin was due to increased product and raw material costs, elevated inbound and outbound shipping costs and higher penetration of our marketplace business, which is burdened with third-party sell and commission charges. These factors were partially offset by the lower promotional markdowns that Harvey discussed.

The magnitude of the year-over-year changes in shipping costs and markdowns has become less pronounced in the second half of the year than it was in the first half, and this should hold true for the fourth quarter as well.

For the year, we expect gross margins to be approximately 50 basis points higher than last year or approximately 50% of sales on the strength of our sales leverage and brand repositioning. Turning to selling, general and administrative expenses. SG&A expense was 37.3% of sales for the third quarter as compared to 34.5% of sales in third quarter 2021.

As we've said before, our cost structure in 2021 was very lean and not sustainable to achieve our company's 2022 sales goals and long-term growth.

On a dollar basis, expenses increased by $6.4 million, which was primarily due to investments advertising to drive customer acquisition and engagement, store corporate payroll to support our sales growth and fill open roles, and an increase in performance-based incentive accruals.

Advertising for the quarter increased to 5.9% of sales, up from 4.5% last year as we seek to balance return on ad spend with customer file growth. Our full year advertising goal remains at 6.2% of sales, which provides us with the opportunity to further increase our investment in the fourth quarter.

What this all means for the third quarter bottom line adjusted EBITDA of $16.4 million or 12.7% of sales and net income of $10.5 million or $0.16 per diluted share. The third quarter is historically challenging from a profit standpoint due to the seasonality of our business.

So, we feel this is a strong result, and it marks our seventh consecutive quarter of double-digit EBITDA margins. Our business has transitioned from last year's post pandemic surge to a more sustainable operating model that we believe will support long-term growth and market share and create value for our shareholders.

On the strength of our third quarter results, we are increasing our earnings guidance for the year to an adjusted EBITDA range of 12.5% to 13.5% of sales from our initial guidance of greater than 10%. I'd like to end with a brief discussion of cash flow and capital allocation. We ended Q3 with a cash balance of $23.5 million and no debt.

Through the first nine months of 2022, we have generated $30.2 million of cash from operations. This was primarily the result of our adjusted EBITDA of $59.6 million, partially offset by inventory investments of $25 million to get us back to better in-stock positions in our stores.

As a reminder, based on our historical net operating losses, we owe very little cash taxes on our earnings, so more of this cash is available to reinvest into the business.

We have invested $7.9 million of our cash flow into capital projects most of which has been in technology projects that support our stores, website and marketing and merchandising capabilities, all of which ultimately enhance our guest experience. For the full year, we expect CapEx to increase to $10 million to $12 million.

We did not need to use our credit facility this year -- this quarter, which had availability of $90.2 million and is in place until October 2026. Nor did we repurchase any more shares this quarter under our share repurchase program.

As we look to future uses of capital allocation for DXL, I'm excited by the opportunities that lay before us, especially within our store portfolio. We have 283 stores today, of which 234 are DXL and 49 are casual male. It has been a few years since we have undertaken any significant store expansion.

And during that time, our footprint has slowly declined as we have edited down our portfolio to only our most productive stores. There are three concurrent paths we will pursue as we deploy some of our capital into stores in the future.

First, there are pockets of the country where that are white space to us with no current DXL presence, but whose market demographics and our own analytics indicate strong support for a DXL store. We believe we could open up to 50 new stores over the next three to five years, and we are actively seeking real estate opportunities in such markets.

Second, we will use this opportunity to finish uniting the store portfolio under the DXL banner by converting or relocating our remaining Casual Male anchor stores. This is a proven and predictable model that has demonstrated a strong return on investment by capitalizing on the DXL brand.

And third, we are reviewing our existing DXL portfolio to determine which stores might benefit from a remodel to introduce some of the more modern elements to the customer experience through updates to the layout, branding and assortment.

We just recently launched the grand reopening of the first of these stores in Warwick, Rhode Island and the early feedback from customers has been tremendous. There are three elements to the Warwick model that I want to call out.

First, we have opened up the exterior windows to provide a more appealing line of sight into the store, and we have changed the store signage from DXL men's apparel to DXL Big & Tall.

Second, we have reset much of the interior to showcase lifestyle, fashion and exclusivity of brands in addition to creating digitally interactive guest engagement centers to enable a more consultative and integrated commerce opportunity and checkout experience.

Lastly, we refreshed the visual merchandising to provide more focused support of brand identification and we have created a department for our Harbor Bay label, which now has a more clear identity than simply everyday value.

It is still very early, and we will provide more updates on the remodels in the future, but we believe there is an opportunity to push this remodel out to many more stores in the future.

The surge in our store business this year demonstrates that our customer still looks to stores to play a key role in their shopping journey and each of these store initiatives will help us to fulfill our mission of helping him to wear what he wants rather than his having to settle for whatever is available in a big box store.

I'm now going to turn it back over to Harvey for some closing thoughts.

Harvey?.

Thanks Peter. Wrapping up today's comments, I'd like to offer some additional perspective and closing thoughts. While we are proud of the results delivered in Q3, we are by no means complacent. DXL's consistent and aligned strategy has not wavered, nor has our relentless focus on the big and tall customer.

As we have reset our brand position, we have also reset our promotional cadence and strategy. Proposal planning and inventory management has ensured that we are well positioned for the holiday season.

And while we create short-term impacts, we are simultaneously committed to long-term growth and making strategic investments in people, processes and technology that are all focused on delivering the immense opportunities you had ahead for DXL. DXL's transformation over the past four years is just beginning.

We know the opportunity ahead is significant, and we are committed to growth and the teams who will get us there. And now, we will take your questions..

[Operator Instructions] And our first question will come from Mike Baker of D.A. Davidson. Your line is open..

So, you gave a lot of good detail and metrics in terms of comp trends through the quarter, but wondering maybe more from a maybe more qualitative standpoint.

Just your view on the consumer heading into the holidays, -- there's been a lot of different data points there suggesting some weakness, particularly in the first week of -- starting after the first week of October. Again, you gave us plenty of metrics so we can see those.

But just curious what -- the way you're thinking about the holidays, consumer spending, all those types of bigger picture macro ideas..

Mike, I would say our answer is going to be no different than it's been literally for the last two years. We believe we can push water uphill. I think our seventh quarter in a row of success, top line and bottom line, demonstrates that. The size of the file being the highest it's ever been in the history of the Company demonstrates that.

And the continued evolution of exclusivity of brands demonstrates that the wholesale community believes that we are the choice for big and tall expansion.

I think the reality is, though, as we've always been conservative, our optimism is tainted, if you will, for lack of a better way to say, by the ongoing consumer elements, right, the recession, the elements of inflation, mortgage rates. Those issues are not beyond us. And so while we believe we can push water uphill, we're pretty conservative.

And we believe that we will continue to grow this business. We are oriented around growth both short term and long term. But we're definitely cognizant of the macroeconomic headwinds, and we have tempered that in our guidance. But even though we've taken it up, our guidance is from approximately [Technical Difficulty] to nearly 10.

And so we've given a range of performance to acknowledge that there is the ongoing issue of volatility in the marketplace and obviously with the consumer..

Okay. Fair enough. One more, if I could. Just looking ahead -- maybe it's too early to think about this, but looking ahead, to 2023 in the margins there. So, this year -- so you had a huge margin last year. When this year began, you said, well, that's not sustainable, and it could be around 10%.

Now you're clearly going to beat that I get why cycling the unsustainable pandemic margins made sense.

But from here, from this new level, have we hit a new level where you can grow margins continually from the 12.5% to 13.5% level? Or are there one-time things this year that won't repeat such that we might be down next year?.

So, at a very high level, I'm going to start this and then Peter will pick up. At a very high level, I think, the answer to the question has to be embedded in how we think about the business. First and foremost, we think about growth.

And so Peter has alluded to a multiple number of expenses and capital utilization elements in terms of cash that we'll think about that.

And also in that context, it could affect EBITDA margins if we think there's a greater opportunity to make investments and grow and invest in the business where the acceleration of EBITDA may not be as great next year because we believe that there are really material opportunities.

To the degree those opportunities are not balanced well enough, we may not make those investments and of course, that will create an impact on margins. So, I'm not giving you an answer specifically, but I think it's embedded in how we think about growth and the investments we'll make. And that's a TBD based on how we come out of fourth quarter..

Yes. I mean the only thing that I would add is I think we've reached a point with our gross margins where we're really happy with the promotional cadence that we're on. We've still got some headwinds that we're dealing with, with elevated freight costs and certainly inflation in production costs.

But we feel pretty good about where those are and believe that those are sustainable. But I think to Harvey's point, it's where do we continue to invest in the business. So we've said that marketing expenses are going to be -- we're targeting 6.2% this year. We haven't said anything about where that's going to be next year.

But I think first and foremost, we consider ourselves a growth company. So all of our actions and decisions are grounded in what can we do to grow the top line because we believe that's going to deliver the best result for shareholders and for our customer long term..

Yes. Okay. That makes sense. And so at least to me, it sounds a little different than a year ago when the answer to a similar question may have been the 15% EBITDA margin from 2021 is just not sustainable. This sounds a little bit different than that..

Yes. I would not say that our expectations, just to be very clear, that we'll generate 15% EBITDA margins. That is not our expectation. We continue to think about being north of 10%, and we will continue to balance the level of investment, SG&A, things like -- of that nature that could affect EBITDA.

But I think 15% we would not today author that we would expect to be there..

And our next question will come from Jeremy Hamblin of Craig Hallum. Your line is open..

Congratulations on some really impressive performance, especially in light of what we're seeing from some other retailers. So, I just wanted to make sure to clarify -- come back to the kind of -- it sounds like quarter-to-date trends have continued to be actually pretty strong.

But I wanted to just also clarify, Peter, I think if our notes are right, the compares get actually substantially easier throughout the quarter. I believe that November is the toughest comparison followed by December and then January, but I wanted to just start by clarifying that..

Yes. So compared to last year, fourth quarter was the most difficult quarter that we had. So, the comparisons Q4 are a little easier than Q2 and Q3. But I think as Harvey was mentioning, when you look at our guidance of $535 million to $545 million, that would imply a 2.5% to 10% comp for Q4.

So, I think that wide range is still -- it just takes into consideration that there is still so much uncertainty out there.

And while we do believe that we can push water uphill, as Harvey was saying, it's still -- it's difficult to predict what's going to happen, but we feel really confident that we will be able to deliver a single-digit increase somewhere between, call it, 2% and 10% for the fourth quarter..

Understood. Okay. I want to come back to the capital allocation and it's -- you guys are in kind of an exciting point here where you have multiple pathways to growth, with store growth now part of the equation rather than storage shrinking like it's been the last four years, remodels, relocating.

And then obviously, your marketplace, your DXL big and tall essentials, sounds like that is doing really well. I wanted to come to that -- the cost.

You highlighted the Warwick, Rhode Island, remodel, and see if you could share a little bit more color around as you do that remodel, what's the potential range of costs for a remodel? And what's kind of the type of return that you get on that or sales lift as compared to, let's say, the costs associated with relocating a Casual -- or converting a Casual Male into a DXL versus the cost for opening just a new white space location?.

Yes. So let me just start, Jeremy, with we don't want to get too far ahead of ourselves because we have one of these stores open. We actually just opened a second remodel in Troy, Michigan, a couple of days ago. So what we are trying to do is to really learn -- test and learn right now and to see what that can do.

So while we do believe that there is a significant opportunity, it's been very, very early. The Warwick store has been open a little more than a month as a remodel, and the Troy store really just a few days. So, we're not talking about the same kind of costs to open a new store. It's significantly less than that.

But it's -- what we're trying to do is figure out how much are we going to see a lift in stores by changing the sign from DXL men's apparel to DXL Big & Tall and more clearly identifying who we are and what we do.

Trying to have an experience in the store that allows for better consultation and lay downs and being able to leverage our universe giving Harbor Bay its own identity. There's a lot of things that we think we can benefit from. And keep in mind, a lot of these stores -- some of them are approaching 10, 11, 12 years old.

So, to some degree, there is just simply they're in need of a refresh, they're in need of updated lighting in paint and carpets or different just maintenance items that we need to take care of.

So, I think we're going to be coming back to you with more information on that as we learn more, but it's still pretty early, but we're excited about it and wanted to let you know that at least it's on the horizon..

Got it.

Maybe just to clarify the expected range of cash cost for opening a new greenfield location?.

Yes. So historically, when we opened a new store, it was upwards of $0.5 million. Now that was a few years ago. So in today's market with increased construction costs and just where the market is, it's going to be higher than that. But we're not talking about $1 million. But -- I mean I wouldn't be surprised if a new store cost us $600,000, $700,000..

Great. That's super helpful. And then just -- you guys are really building quite a strong balance sheet -- and it looks like you're going to end this year probably roughly around $1 a share. And at a CapEx range of, let's call it, $10 million to $15 million for next year, you'd end up with $2 a share by the end of next year.

But in terms of thinking about, Peter, the range of investment now that you're clearly triggering a different growth element for your real estate portfolio, can you give us a sense for what that potential range is? Is it something more like $15 million to $25 million next year on a CapEx investment? Just anything that might share a little bit of color on that would be helpful..

Yes. I appreciate it, Jeremy. We're not quite ready to come out with that information yet, but we certainly will be talking about that in Q4 as we put together our 2023 plans..

Okay. Got it. And then coming back to gross margins here for a second as well. So really strong performance. You noted, I think, that supply chain costs sound like that is off the peak. As we look forward in thinking about other pieces of it, you noted that raw materials costs are up.

We think that some of those input costs have actually started to come down as well in the recent months. But can you give us a sense for where kind of the timing of inventory cycles coming through and turnover rates.

Where do you think that you might kind of get some relief from the supply chain cost side? Are we looking at Q2 of next year or Q1 of next year? Any additional color on that would be helpful..

Well, I think what you started with is absolutely correct is that we are seeing that freight and shipping costs are less of an impact on the comparisons that we're seeing now in Q3 and Q4 than they were in the first half of the year. So that's definitely, definitely moderating.

I think that as we get into next year, we've -- I think we've pushed promotions pretty hard. I don't think that we're going to get a heck of a lot more relief and less promotion. So eventually, that's going to cycle an anniversary. So when you look at our gross margins at around 50%, that feels really good to me.

I feel like we -- traditionally, pre-pandemic, we were 43, 44, now getting that up to 49, 50, I think feels great, and that's what we're going to be continuing to target in the future..

Yes. No question, really strong. Okay. Just last thing here, coming back to the unit growth for a second. I think you previously talked about roughly five locations to open up next year. There's been a lot of restaurants, retailers that have run into permitting delays construction delays, et cetera.

Is there any update that you have? Any change to that number as a result of the kind of current construction environment?.

Yes. So the number -- we're still working towards a goal of five for next year.

And I completely agree with you on the challenges in real estate and construction and permitting and -- we've, behind the scenes, been doing a lot of work and our real estate team is doing a fantastic job with getting out and canvassing the country and identifying where are the opportunities that we want to be looking into.

So, it's a long turnaround process, which -- this is, I think, the third quarter in a row that we've been talking about. Look, we think we can open new stores and we're looking at five for next year. But it's typically a 12-month process once we identify a store.

So, we're getting up to that point where by the end of fourth quarter, beginning of first quarter next year, we're going to have a much better line of sight on are we going to be able to get five or not next year. But that's the plan, it's five next year. And then in 2024 and 2025, we're probably in the 10 to 20 type of range..

And our next question will come from [Mark Hoffman of Jewel Core Company]. Mark, your line is open..

[Indiscernible].

Hello Seymour, how are you?.

Good. Great job. Thank you very much..

Well, thanks so much, and thanks for your continued investment in the firm..

Okay. I'm still on 6%. Okay, thanks very much..

Take care. Good luck..

Okay..

Okay.

It appears that's done, I think?.

Yes, I'm showing there's no further questions..

Okay. Well, then we would just like to wish everyone a happy and healthy Thanksgiving. Stay safe. We look forward to reconvening with you shortly after the holidays, which we'll do a pre-release and then in the fourth quarter -- end of fourth quarter conference call..

And this concludes today's conference. Thank you for participating. You may now disconnect..