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Destination XL Group, Inc. (NASDAQ:DXLG)

Q1 2014 Results Earnings Conference Call

May 29, 2014, 09:00 AM ET

Executives

Jeffrey Unger - IR

David Levin - President and CEO

John Kyees - CFO (Interim)

Analysts

Laura Champine - Canaccord

Mark Montagna - Avondale Partners

Bernard Sosnick - Gilford Securities

Chris Krueger - Lake Street Capital Markets

Liz Pierce - Ascendiant Capital Markets

Rea Kaul - Kaul Capital

Operator

Good day, and welcome to the Destination XL First Quarter and Fiscal 2014 Earnings Call. Today's call is being recorded. At this time, I would like to turn the conference over to Mr. Jeff Unger. Please go ahead, sir.

Jeffrey Unger

Thank you, Jamie, good morning, ladies and gentlemen. Welcome to Destination XL Group's first quarter fiscal 2014 fiscal results conference call. Today's call is being recorded. At this time, all participants have been placed in a listen-only mode. There will be an opportunity for questions and comments after the prepared remarks.

Good morning, everyone. On today's call is David Levin, our President and Chief Executive Officer; John Kyees, our Interim Chief Financial Officer, and Peter H. Stratton, Jr., who is announced this morning as our new Chief Financial Officer, effective June 1st.

Peter has been with DXLG since June 2009 and is currently Senior Vice President, Finance, Corporate Controller and Chief Accounting Officer.

During today's call, we will discuss some non-GAAP metrics to provide investors with useful information regarding our financial results. Please refer to our earnings release, which was filed this morning and is available on our website at investor.destinationxl.com for an explanation and reconciliation of such measures.

Today's discussion also contains certain forward-looking statements concerning the company's operations, performance and financial condition, including sales, expenses, gross margin, capital expenditures, earnings per share, store openings and closings, and other matters. 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 are detailed in the company's filings with the Securities and Exchange Commission.

I'd now like to turn the call over to President and CEO, David Levin.

David Levin

Thank you, Jeff, and good morning everyone. We're off to a strong start in fiscal 2014. For the first quarter overall comparable sales increased by 3.4% driven by our DXL stores. This was impressive given the challenging environment that just about everyone at retail has been facing.

Much like other retailers February and March were difficult months us. The severe winter weather, particularly in the Northeast and the Midwest, kept many customers out of the stores and we even had 120 locations that were closed for at least one day.

Sales momentum returned in April with an overall 6.8 comp for the month which more than offset the weakness that we saw earlier in the quarter. This positive momentum has continued into May.

In the first quarter our DXL stores continued to deliver strong results for the 12.8% comparable sales increase for the 52 stores that have been open at least 13 months.

I'm proud to report, that we now have four consecutives quarters of double-digit comparable sales at our DXL stores under our belt since we started out national advertising campaign.

DXL sales for the first quarter more than doubled to $36.2 million compared to $17 million in the first quarter of fiscal 2013.

Another very positive metric this quarter was our penetration of the end-of-the-rack consumer, those with waist sizes between 40 to 46 inches. We grew the end-of-rack consumer by 8.3% and increased our penetration from 37.3% last year to 40.4% in Q1 this year.

We expect this growth to increase as we communicate more specifically the sizes that we carry.

During Q1, we opened seven DXL stores and closed 10 Casual Male XL stores. We now have 109 stores across the country and are represented with at least one store in every major metropolitan area.

Our current DXLs roll-out strategy calls us to open approximately 40 DXL stores and close approximately the same number of Casual Male stores in 2014. We're being more selective about the timing, locations, and sizes of our new store opening.

Store openings will be weighted towards the first three quarter's of the year, we plan to open approximately 35 of the 40 stores in the first three quarter's of this year. In comparison, we only opened 25 of the 51 stores last year in the first three quarters.

The overall DXL square footage at year end fiscal 2014 is expected to approximate $1.2 million or 34% increase from the end of fiscal 2013.

Last year DXL sales per square foot were approximately $147. We project this to increase to $160 by the end of fiscal 2014.

The roll-out of 215 to 230 DXL stores is scheduled to be completed by the end of fiscal 2017. In addition, we'll be opening a number of stores with the smaller footprint of 5000 to 6,000 square feet in select smaller markets and in larger markets where an additional presence is warranted.

For example, in Orange County, we closed three stores and added one DXL store in Irvine. However the new Irvine store cannot service the entire county, so we will be looking to open a 5,000 square foot DXL store in a location that is convenient for those regional customers who are furthest away from the Irvine location.

With the addition of the 5,000 to 6,000 square foot models, the total number of DXL stores eventually could be higher than our estimated range.

Turning to our direct business. Our direct business in the U.S. is improving over trend with the 1% increase without any support from catalog circulation. However, the challenges of our direct business Canada had a significant negative impact on our direct sales and as a result our overall direct business declined 1.6%.

As a reminder, in the second half of fiscal 2014, we'll anniversary the elimination of our catalog circulation. And we should begin to see year-over-year improvement in our direct sales at that time.

As a key element to our growth plan, we're continuing to escalate our conversion of Casual Male customers to DXL. For stores that we have opened since November, we have increased the conversion of Casual Male customers to DXL by 24% year-over-year.

In each closing Casual Male stores, we have elevated the visual messaging of DXL at least six month prior to its closing. This included expansive DXL displays at the point of purchase, DXL shopping bags and a variety of signage throughout the store promoting DXLs benefits.

Through direct mail, we have improved our targeting of consumers most likely to convert and increased our communication to those customers. Additionally, we are providing more frequent promotional incentives to entice customers to experience DXL stores.

We know that once we get a consumer to experience DXL, they are more likely to come back. In fact, customer retention rate in DXL stores is 18% higher than in Casual Male stores.

Our national advertising has continued to have a positive impact on brand awareness in the marketplace. In the spring of 2013, prior to any national DXL advertising, our aided brand awareness was at 13% and we have seen that awareness increase to 30% in the spring of 2014. This can be attributed with the significant impact of advertising and a larger overall store footprint.

This April we launched our national, latest marketing campaign on cable, network TV, radio and digital mediums. The theme of our new campaign is You're Looking Good. If you haven’t seen it already, I encourage you to check it out on our website.

The television ad delivers on the DXL experience, the breadth of designer brands and most importantly the confidence that can be achieved by shopping in our stores. In this campaign we included a call to action by offering promotional pricing on select private label merchandize.

While it's too early to discuss campaign results, you've seen higher conversion rates online and in store. We're now seeing a more informed customer because the ad showcases the DXL store and its lifestyle offerings for men of size.

Our results this quarter further demonstrates that the transformation to the DXL concept is the right strategy for our company. During the next few years, we expect to increase our topline, improve profitability, generate cash flow, minimize early lease terminations, and grow sales per square foot and four-wall contributions.

Prior to implementing the DXL strategy, we had 445 Casual Male XL stores that were producing $279 million in the annualize sales. For comparison, as of the end of fiscal 2013, we had 99 DXL stores producing $118 million in annualize sales.

Once our plan 230 DXL stores reach maturity, we expect to deliver approximately $410 million in annualized sales. And these figures do not include the potential for additional smaller footprint DXL.

But before I turn the call over to John for the financial review, I'd like to offer him our sincere gratitude on behalf of the board and the entire company for stepping in as our Interim CFO during the past few months.

John's contributions were invaluable and we greatly appreciate his commitment and dedication to the company. John will continue to add as a resource regarding our financial strategies going forward and of course he will continue his contribution as a member of our Board of Directors.

We are also very pleased to announce that Peter Stratton has been selected as our new Chief Financial Officer, effective June 1st. Peter has spent last five years as our Senior VP of Finance and Chief Accounting Officer and has played an integral part in the development and execution of our DXL strategy.

He has an excellent financial background and has demonstrated strong leadership skills throughout this tenure at DXL and we're looking forward to Peter's continued contributions in his new role. Peter will be covering the financial statement beginning on the second quarter call.

But for now, I'll turn the call over to John, to discuss our first quarter results.

John Kyees

Thank you, David, and good morning everyone. I'll start by highlighting the company's results and then provide an update to our guidance for fiscal 2014. David provided the high level discussion of our sales for the quarter, so I'll get right in to the details.

Our total comparable store sales increased - total comparable sales increased 3.4% or $2.5 million included an increase in our retail business of 4.7% or $2.8 million. This was driven by our 99 DXL comparable store sales increase of $2.2 million or 12.8%, by the 52 stores open for at least 13 months.

It’s important to note that last year our DXL comparable store sales were driven by increased dollars per transaction resulting from the increased mix of third-party branded product. This year the DXL comparable store sales increase is being driven increased transaction. Our remaining retail stores had a comparable store sales increase of $0.6 or 1.4%.

The comparable store sales increase was slightly offset by a decrease in our direct business of 1.6% or $0.3 million as David discussed earlier. As a reminder, we eliminated our catalog completely in Q2 2013 and replaced them with more cost effective direct mail pieces.

Catalog sales for the first quarter of fiscal 2013 represented approximately $1 million of our direct sales first quarter last year. Our catalog sales have been eliminated the profit margin from our U.S. direct business continues to improve as we drive sales through a more profitable e-commerce business.

Gross margin for the first quarter, inclusive of occupancy cost, was 45.4% compared with gross margin of 47.2% for the first quarter last year. The decrease of 180 basis points was a result of an increase in occupancy cost of 20 basis points and a decrease in merchandise margin of 160 basis points.

Decrease in merchandise margin for the first fiscal 2014 was due to a higher level of year-end clearance and an increase in our promotional activity. The higher level of year-end clearance was primarily due to the fact that several of our DXL stores open too late to capitalize fully on the Q4 holiday shopping.

We expect that our merchandise margins which have improved more than 170 basis points over the last -- over the past four years will decrease by 60 to 100 basis points as a result of our increase in promotional activity. This activity is geared towards converting our customers to our DXL stores and improving overall store traffic, which we expect will lead to increase top line and strong profitability in the long run.

On a dollar basis, occupancy costs for the first quarter increased 4.6% over the prior year due to the associated pre-opening costs and timing of seven DXL store openings during Q4, as well as the timing of our Casual Male XL store closings.

In fiscal 2014, we are expecting our occupancy costs on a dollar basis to increase by approximately $1.5 million to $1.7 million as a result of the 40 new DXL stores opening this year and the annualization of this year’s stores. However, we expect the occupancy costs will be approximately 50 to 70 basis points lower as a percent of sales in 2014 than in 2013.

As a percentage of sales, SG&A expenses increased to 43% compared to 40.6% for the first quarter of 2013. On a dollar basis, SG&A expenses increased $3.4 million or 9% for the first quarter compared with the prior year first quarter.

The increase of $3.4 million includes incremental cost of approximately $0.9 million related to the pre-opening payroll, training and store operations to support the new DXL stores and a net increase of $0.6 million and the timing of marketing cost associated with launch for our spring 2014 campaign.

The remainder of the increase is primarily due to increased store payroll and increase health insurance costs and worker's compensation claims. Net loss for the first quarter was $3.5 million, or $0.07 per share, which compares with net income of $1.0 million, or $0.02 per share in last year’s first quarter, because we maintain a full income tax valuation allowance, we will not be reporting any income tax benefit on our pretax loss.

Therefore on a non-GAAP basis assuming a comparable tax rate of 40%, the adjusted net loss for the quarter was $2.1 million, or $0.04 per diluted share.

Capital expenditures in Q1 were $11.1 million compared with $8 million for the same period last year. The $3.1 increase is primarily related to the timing of cash outflow for new DXL store construction and management information project during the first quarter of 2014.

In fiscal 2013, our store opening and construction schedule was heavily weighted towards the back half of the year. In fiscal 2014, we are much more balance with the majority of store openings planned in the first three quarters of the year.

From a liquidity perspective, at May 3rd, 2014 we had $5.6 million in cash and cash equivalents, outstanding borrowings of $51.8 million and $67.9 million available under the credit facility.

Our inventory levels at the end of first quarter were up 8%, but unit inventory levels were down 6.5% compared with year ago levels. We are carrying a greater percentage of branded apparel for our DXL stores and this inventory as a higher carrying cost. In addition, our inventory on a square foot basis is down compared with last year.

And now turning to our guidance for next year, we are maintaining our guidance on full year earnings of a net loss of $0.21 to $0.27 per diluted share or $0.12 to $0.16 per diluted share on a non-GAAP basis.

Our sales expectations have improved and we now expect revenues for fiscal 2014 to be in the range of $413 million to $418 million, up from the prior guidance of $405 million to $410 million.

These revenue expectations are based on total company comparable sales increase of approximately 4% to 6% for the year. We anticipate a comparable store increase of between 13%, 15% for the DXL’s -- the 99 DXL stores that will have open at least 13 months.

Gross profit margin is expected to range from 45.5% to 46.1%, down from the original guidance of 46.2% to 46.9%. SG&A costs are expected to be approximately $176 million to $177.6 million primarily related to an increase in operating costs associated with a greater number of DXL stores versus Casual Male stores, as well as the pre-opening costs and payroll.

Operating margin is expected to be between negative 2.0% to negative 2.8%. Our capital expenditures for fiscal 2014 are expected to be approximately $36.4 million, after considering expected construction allowances contributed by our landlords on the new DXL sites.

These expenditures will be spent largely on our planned opening of DXL stores, as well as technology project will continue to improve the e-commerce site and the in-store customer experience. Fiscal 2014 net capital spent of $36.4 million, net of tenant allowances will be funded from equipment financing notes, our revolving facility and EBITDA generated during the year.

Inventory levels are expected to be approximately flat with the prior year by the end of fiscal 2014. Borrowings at the end of fiscal 2014 are expected to be in the range of $30 million to $35 million under the credit facility with equipment financing was approximately $20 million.

By the end of the year, the Company expects to have a net debt position of approximately $50 million to $55 million with $50 million to $60 million in excess borrowings availability.

This concludes my remarks. We’ll now take your questions.

Question-and-Answer Session

Operator

Thank you. [Operator Instructions] And we’ll take our first question from Laura Champine with Canaccord. Please go ahead.

Laura Champine - Canaccord

Good morning. Could you talk a little bit more about what gives you the confident to raise your full year sales guidance?

David Levin

Yeah. It’s a couple of different parts that add up to it. But one of the major contributors is the fact that we’ve expanded keeping more Casual Male stores open through the end of year instead of closing them early, and that just automatically adds several million dollars to our sales plan.

Beyond that, our Casual Male stores are actually performing considerably better than we had projected this year and the DXL stores are holding very well to their numbers and in fact all - in total the 2014 stores that we have opened already are even slightly ahead of the plan.

So, it's just a forecast number that we pull all the parts together and it rolled up to a nice improvement over our original forecast.

Laura Champine - Canaccord

And then John, just to make sure I heard you right, is it the overall comp level that you said would be 4% to 6%?

John Kyees

Yes, that's correct.

Laura Champine - Canaccord

Thank you.

Operator

Our next question is from Mark Montagna with Avondale Partners. Please go ahead.

Mark Montagna - Avondale Partners

Hi, just following along with that question about the increased revenue, what about the direct business? Are you - do you have any expectation of that increasing or is everything really centered on better than higher revenues at Casual Male?

David Levin

Our forecast part of direct is pretty well unplanned. We're not looking for an increase to where we previously have projected. However, we do see that number improving quarter-by-quarter.

Our last catalog dropped a year ago, May 22nd. So, right now we're up against the sales of that last catalog and then from there that's it. So, the web business has been strong but it's constantly being offset by the loss of catalog.

And we think going into the third quarter it should be much easier for us to start getting those comp increases. And we've said that before and I think that's going to hold true.

Mark Montagna - Avondale Partners

With the direct business, are you seeing greater strength in the more DXL type merchandise or has the Casual Male type merchandise dropped off? Like, how is that breaking out?

David Levin

I think it's been fairly consistent, I wouldn't say that DXL stores and the DXL store product on the web is showing any more dramatic increase than what we've seen in the past.

Mark Montagna - Avondale Partners

Okay. But are you seeing increased sales in the Casual Male type product?

David Levin

It's been 50-50 pretty much.

Mark Montagna - Avondale Partners

Well, that's good. Then, just a last question I have is, the merchandise margin hit that you had, is that centered more on Casual Male or DXL? Because you guys are talking about promotions in terms of driving traffic, are those promotions what's hurting the merchandise margins, just trying to understand that better.

David Levin

Let me clarify this. The promotions we're running this year really are repeats of what we've done in the past. Where we're seeing the erosion in - the slight erosion in merchandise margin is coming from the strategy of increasing the ability to convert Casual Male customers into the DXL stores.

So we've come up with a much more aggressive long term spread out plan to make sure we're getting those Casual Male customers converted, and we're seeing success.

So, we will get very aggressive. At one point we'll be offering the offer of free $50 gift card for our best customers who have yet to convert. So, again we're seeing - we saw 24% increase, net conversions.

So most of the end margins is coming from that strategy, from the existing direct Male pieces that we have seasonally throughout the year. That's pretty consistent with where we've been before. We're not going any deeper.

And finally part of the impact that we had in Q1 was the overhang of some inventory from Q4, where everybody had some inventory issues.

We had those late store openings and I can't say that we've already had that corrected, and our clearance inventory today, it's clean going into second quarter.

So, I don't see any more movement and problems of - there's no problem in inventory to speak of.

Mark Montagna - Avondale Partners

Okay. That's great. Thank you.

Operator

Our next question is from Bernard Sosnick with Gilford Securities. Please go ahead.

Bernard Sosnick - Gilford Securities

Good morning. The weather in California has been much warmer than in the East, and I'm wondering if you see a significant difference in DXL sales regionally?

David Levin

Absolutely, if we carve up the country, if we take the West Coast and we take what we call our tropical stores, our very southern stores, there has been consistently about 10 point differential in our comps, specially in the first quarter.

This quarter it's starting to neutralize more - obviously, there's some pent-up demand, we've had some decent weather. But weather certainly was the driving factor for us, not having the full comp - the comps that we were getting in April and May.

Bernard Sosnick - Gilford Securities

The other question I have is regarding inventory. Yes, I'm glad to hear that there's no clearance overhang, but I'm having a little bit difficulty understanding the level of inventories.

The accounts payable has gone down by about $10 million while the inventory increased. So, it looks as though you're carrying a lot more owned inventory, inventory that's already been fully paid.

And yet you're saying that the units are in good shape. Could you give a little bit more color into the inventory level and why you feel comfortable about that?

David Levin

The accounts payable number really is a reflection of store payables as well. And the new store construction that's been done, and that because we had so much carryover from last year in terms of stores being opened right at the end of the year, unusual appearances on our balance sheet in terms of accrued liabilities and accounts payable that this year because we didn't - we've kind of gotten through a lot of that. We're looking at a different scenario. It's not inventory, its other elements that are…

Bernard Sosnick - Gilford Securities

Okay. That's good to hear. As far as peak borrowings, what do you expect that to be this year?

David Levin

We think we'll probably hit somewhere around on our revolver, somewhere around 60 to 65, 50 to 55 somewhere in that neighborhood at the October timeframe and that will go down immediately in the fourth quarters. So, we'll be back down in that 30 to 35 range at the end of the year.

Bernard Sosnick - Gilford Securities

Okay, great. And, one other thing, on Casual Male you're saying that the stores are doing much better than you expected and they didn't have the benefit of good weather, what do you attribute that to?

David Levin

Well, part of it was we - it cut back some store hours since we're starting to wind down the operation and we've brought those store hours back. That certainly has been a factor.

Outside of that, merchandise assortments are good, the inventory is very clean. Again, they have them surprising us throughout this transition. They've been hanging in there much better than we had thought. I think - we thought that we would be losing a lot more customers on the transition, but, again by keeping them open longer now it's going to positively impact our sales and profitability.

Bernard Sosnick - Gilford Securities

Thank you very much. Good luck as the weather turns warmer in the East.

David Levin

Thank you.

Operator

Our next question is from Chris Krueger with Lake Street Capital Markets. Please go ahead.

Chris Krueger - Lake Street Capital Markets

Good morning.

David Levin

Good morning.

Chris Krueger - Lake Street Capital Markets

Following up on the gross margin question, it sounds like as you convert customers from Casual Male to DXL, that you have $50 gift cards and things like that affect margin. If you're looking at Casual Male stores that you have no plans to close in the next 12 to 18 months where you're not hitting that stage yet, are they holding up at historical gross margin levels?

David Levin

Yes. Very well.

Chris Krueger - Lake Street Capital Markets

Okay. All right. And then next for the smaller 5,000 to 6,000 square foot stores, how many of those do you have right now and how many of the 40, that you're opening this year would you expect to be in that size range?

David Levin

We have none right now. We have some under construction. We're going to do five or six this year. I can describe, Lafayette, Louisiana, Toledo, Ohio, Saint Charles, Illinois, Bakersfield, California, we’ve got a couple that we’re finalizing right now. So, we’ll have them up in a few months and then evaluate the metric list to their profitability.

Chris Krueger - Lake Street Capital

Okay. And you guys said your brand awareness for DXL is gotten up to 30%. And what is the brand awareness on the Casual Male?

David Levin

Okay. Brand awareness on Casual Male is about 40 -- is in the mid 40s, and it’s been around for over 25 years. Coming in at 13% a year ago, and again this is strictly among customers who are big and tall. They have an awareness level of 13%. Obviously, we’re starting with the new brand. I feel very good that we grew it from 13% to 30% in one year.

And the 30% is the pre-awareness, so what that means is prior to our running the spring campaign which started at the end of April, we’re starting it at 30% and then we’ll give the results in the next quarter where our awareness grew to.

Chris Krueger - Lake Street Capital

Okay.

David Levin

Couple of points, we have two names that we’re talking about awareness, one being Destination XL and one being DXL. And we are moving our strategy into the DXL name, that’s how customers refer to us. That’s what our store says on the store fronts. And the awareness of DXL is a less than Destination XL at this point, but we anticipate that flipping certainly going stronger.

And I feel DXL is a stronger, easier message. We have DSW. We have REI. I think the way our guys speak and we’ve certainly seen it in the Focus groups, they call us DXL. So that’s our strategy going forward.

Chris Krueger - Lake Street Capital

Last, what is your stock compensation expense for the quarter?

David Levin

We have to get back to you on that.

Chris Krueger - Lake Street Capital

Okay. Thanks. That’s all I got.

Operator

[Operator Instructions] We’ll take our next question from Liz Pierce with Ascendiant Capital Markets. Please go ahead.

Liz Pierce - Ascendiant Capital Markets

Thanks, good morning. David, could you just go back and repeat what you said? I'm not sure I understood it. When you said 13% was pre-awareness for DXL and I didn't understand your follow-up on that last question?

David Levin

Okay. This is just basically a statistical survey of several hundred customers. Prior to the marketing campaigns, we do a survey on awareness basically have you ever heard of DXL. And when we started, right prior to our first campaign we came in at 13% awareness. And by the end of the year it moves to 30%.

Liz Pierce - Ascendiant Capital Markets

Okay. Great. So you were talking about the original one a year ago. I thought maybe you were talking about this recent one. That is what I was confused about.

John Kyees

Okay. The 30% year end this year of 2013. So.

Liz Pierce - Ascendiant Capital Markets

Got it.

John Kyees

Actually to clarify that, we ended the campaign at 25% and in that interim period of three months with no marketing, our awareness group actually grew to 30% just through having a bigger footprint out there, people obviously new customers discovering it.

So the awareness grew even in a period when we didn’t have any marketing going on. So that again very encouraging that we’re building these names at a good pace right now.

Liz Pierce - Ascendiant Capital Markets

Yes, that is impressive. So then you said that post this campaign you will provide us with that at the end of Q2 reporting.

David Levin

Right.

Liz Pierce - Ascendiant Capital Markets

Okay. Perfect.

David Levin

Well, I think we’ll take a little step backwards, because again if you really listen to our commercials, we’re now saying DXL, where in the past we said Destination XL.

Liz Pierce - Ascendiant Capital Markets

Right, right. And you said that that is much -- and that was this campaign was the first time you did that, right?

David Levin

Yes.

Liz Pierce - Ascendiant Capital Markets

Okay. And then John another thing, just going back on the peak borrowings, did you said 65 or 55?

John Kyees

Yeah, peak borrowing will be 55 going into the fourth quarter.

Liz Pierce - Ascendiant Capital Markets

Okay. And then David, I know its small, but is there an issue with Canada -- is it the state of the economy or what is happening on the Direct side in Canada that is holding the business down?

David Levin

Well, we’ve had a business with Sears Canada that we had the relationship with. And you could read about their state of business and we’re obviously feeling it as their business has struggle.

Liz Pierce - Ascendiant Capital Markets

Okay, so it has to do with Sears. Okay. And then in terms of the next campaign, do you -- are you going to follow a similar cadence so you will do one September/August or September/October/November for next fall?

David Levin

Yes. Our goal is to push it a little further into the fourth quarter. Last year it ended on November 15 and again we’d like push that out a little further, because December was obviously challenging month for everybody and we want to ensure that we could capture those sales in December. So we’ll probably push it out a little further this year.

Liz Pierce - Ascendiant Capital Markets

Okay. So I think you also said about doing some additional radio, et cetera, right? And you did that in this quarter as well?

David Levin

Yes. And we’re evaluating the results of that before we commit to exactly what we’re going to do with radio in the first quarter.

Liz Pierce - Ascendiant Capital Markets

Okay. And then you haven't really talked about the products. Anything that -- certainly because of weather, I understand, maybe a little bit some moving parts here, but anything stood out in the quarter product wise and what is going on with the tailored and made-to-measure sales? Thanks.

David Levin

Okay. Made-to-measure continues to grow. We’re getting healthy increases every week on that part of the business. We’re in a -- the stores are in the intensive training program right now, learning how to -- really learning how to fit in wardrobe and the made-to-measure.

As far as the other pieces of business, our denim business has been very strong. Our short business is now coming around, which I’m sure was difficult for everybody. Screen tees stick out for us right now.

We’re having a tremendous run, especially with all these powerhouse movies coming on, anything we logo with the new movie has had very high sellthroughs. And again, our clothing business is outperforming. Our sportswear business as we start to develop something that was very a small percentage of our sales, it’s getting the biggest increase.

Our sport coat business has been fantastic. Suits are doing very well. Anything -- and dress shirts. We’re pleased to see there is a business that we never were able to really grow because we didn’t have the space and expertise to be in that business. But we’re finding that our customers really enjoyed coming into our stores to buy dress clothing.

Liz Pierce - Ascendiant Capital Markets

Great. Thanks guys and best of luck. John, best of luck. We will miss you. But Peter welcome.

Operator

Our next question is from Rea Kaul with Kaul Capital. Please go ahead.

Rea Kaul - Kaul Capital

Good morning. Thank you. Just two related questions. I believe about quarter of sales at the DXL stores are transactions were women are the buyers on the behalf of men. Can you just explain what you’re trying to do to increase that number substantially or maybe women might be a third or half of the buyers in the future?

And then, just the second question is regarding the $50 gift card you provide to try and help good customers migrate to the new DXL brand. When do you think that absolute dollar amount of promotional spending will peak as you transition the store base?

David Levin

Okay. Let me go back to the first question. As far as women, yeah, obviously we are the inverse of what traditional men’s apparel is, about 30% of our transactions are to women where I believe about 70% of all men’s apparel is brought by the female shopper.

We just conclude Focus group suit women where we’re starting to lighten up the look. We’ve been testing some direct mail pieces that are geared more towards to the female customer. And even if you follow our commercial, there’s a key part to it.

There’s a segment of the commercial where the wife is looking at her husband very pleasingly the way he’s dress and he winks back at her and that’s with intent. And we think these things are going to start to resonate and grow that sector.

As far as the gift cards, its a willing target. We give them about 90 days if they haven’t come in to get that $50 gift card. If they don’t come in after that then they fall into our regular rotation. But we constantly going to have this going on, because we’re opening 40 stores a year, so its really isolated into those stores that are closing to get them converted.

So, the $50 gift card has been out in the stores for about a week. It’s too early to give any statistic on it. But we’ve done a lot of testing. And right now, we have our introductory move to get the customers into DXL stores, is a free Harbor Bay Polo shirt, which is one of our most popular items.

And we compared that to giving a gift card for value and the conversion rate on the Polo shirt has doubled what we’re experiencing with a free $20 coupon. So, we’re constantly testing to find the right message to get these guys converted into store. Because once we in the store, we turn it off.

We got that customer. He is connected. He is loyal and again once he gets in there, we’re retaining him at a much, much better rate than we did in our Casual Male stores.

Rea Kaul - Kaul Capital

Thank you.

John Kyees

You'll see going forward in this, but because -- obviously we’re building our DXL store base and we’re having conversions happening. So at some point in time, each year as we continue to try to convert customers from all Casual Male with the new DXL, it will be a smaller percentage of our business, because we have a bigger percentage of DXL stores already opened with the conversion already taking place.

Rea Kaul - Kaul Capital

Great. Thank you.

Operator

We have a follow-up question from Mark Montagna. Please go ahead.

Mark Montagna - Avondale Partners

Hi. Looking at the DXL stores in the comp base, has the penetration of branded merchandise increased year-over-year. And then, what is that penetration?

John Kyees

Yeah. Its definitely increases year after year as the awareness goes up, the new to file customer who we clearly identified is younger. He is smaller waisted. He is more brand-conscious. That’s what stimulating a lot of our new customers.

And again going back to the commercial, at the end of the commercial, you see all the banners of the brands. This is the first time we’re telling our customers in a marketing campaign that we have brands and brands also mentioned in the radio commercial.

On the average, the stores are going to be somewhere between 20% to 30% branded. And that number could jump over 50% some locations. But generally we start them at about 20% t 30% and then they slowly -- they grows over time, but again I don’t think it will ever go past 35%, 40% at the most, because -- again most of our customers are value driven. They will always be driven in our powerhouse of private label brand will always be the top sellers.

Mark Montagna - Avondale Partners

Your commercials on the NBA broadcast, those are really good. I like -- they work. At least to me, they work.

John Kyees

We’ve been hearing a very good feedback. The first commercial was really about creating interest, getting people connected to something new out there. But the commercial, while it was very entertaining, did not say anything about what Destination XL was other than we had sizes of big clothing. This commercial, we’re in the store. They are seeing the dressing room; they are seeing for guys’ wardrobe completely differently.

They are seeing the brands. So, that’s why our conversion is much stronger, customers coming in. They are more aware about what it is now and they are more ready to shop. And certainly online we’re seeing a dramatic change. Web traffic is not as strong as it was a year ago, because people were just going to the website, because they are curious about what the heck that they just see.

The web customers coming in off this commercial are ready to shop. And we're seeing a significant increase in conversion this time.

Mark Montagna - Avondale Partners

So, just real quick, the radio ads, I can't recall, are you broadcasting brands or not on the radio ads?

David Levin

We mentioned three brands in the radio spots.

Mark Montagna - Avondale Partners

Okay. Perfect. Thank you.

Operator

We have another follow-up question from Liz Pierce. Please go ahead.

Liz Pierce - Ascendiant Capital Markets

Thanks. David I was curious when the women - are the women's transactions valued? Are they spending more about 30% than the men's?

David Levin

I don't know spend by gender. We could look into that for you though?

Liz Pierce - Ascendiant Capital Markets

Okay. Very curious to find out. All right, thanks.

Operator

We'll take another follow up question from Bernard Sosnick. Please go ahead.

Bernard Sosnick - Gilford Securities

Yes, with regard to the end-of-the-rack customer, you've mentioned that the penetration is up to 40.4% versus 37.3%. What exactly are you measuring with penetration?

David Levin

I'm not sure I understand that Bernie.

Bernard Sosnick - Gilford Securities

Is that 40% of - 40% of total sales are coming from smaller-waisted men?

David Levin

Okay. To be specific, when we're giving that number, we're looking at bottoms because that's the easiest thing to identify. So, what we're saying is this year 41.5% of our customers bought pants 46% or less, and last year it was 39%.

So those are those metrics we're using. And that - when we can move anything like one point it's huge for us. It's a lot of inventory that we've had to make adjustments for.

Bernard Sosnick - Gilford Securities

All right, that's fair. I mean, that's very encouraging. I wanted to be sure that we're talking about moving towards 50% of your business for the younger customer which is what you hadn't been - for the smaller customer, which you hadn't been getting at Casual Male.

David Levin

Now, I'm comparing DXL to DXL. If I was talking about Casual Male, that 46% or less would be under 30%. So, it's dramatically different compared to Casual Male but what's very encouraging in our existing DXL stores, it's like a comp to us. We are comping much stronger in those smaller waist sizes which means there's a lot of opportunity for us to continue to grow.

Bernard Sosnick - Gilford Securities

Okay. Now what about the conversion rate from Casual Male to DXL, have it been running very low below your expectations? Are you somehow seeing something more recurring in terms of transference of customers?

David Levin

Yeah. This is by far the biggest challenge is getting these customers converted because they're just not aware. But what is very encouraging since we started this campaign, putting the signs in the stores six month earlier, changing the shopping bags, putting - doing all of these things.

The stores that we opened in the last quarter, the conversion rate was 24% greater than a year ago, stores that were being converted the same time.

So we are clearly winning at improving on getting that conversion rate up and we're very focused on it and we think we're going to continue to show dramatic improvements and get there to where we wanted it to be.

My goal was to increase 500 basis points for the year and we were already 500 basis points in the first quarter. So, we're feeling very good that we're finally - we're figuring it out how to keep counting them, and our customers at the stores closing, and we got a new store opening somewhere in the same area.

John Kyees

We also have the situation of keeping the Casual Male store open. So we have the ambassadors in the old Casual Male store directing the customer to the new stores. That's an important element that we just now are starting to experience results on that.

Bernard Sosnick - Gilford Securities

Great. You made a lot of changes over the last few months, I see they're working. Congratulations on that. Thank you.

David Levin

All right. Thank you, Bernie.

Operator

[Operator Instructions]

John Kyees

One other thing that I just wanted to get back to Chris Krueger on that question on stock based compensation, it's around $700,000.

David Levin

Okay. All right. Thank you all for being on the call. We look forward to the next call where we'll have the results of our current campaign. And we continue to move forward and I think we've shown a lot of great progress, and again based on what's happening in May, we're more optimistic about the coming year.

Thank you very much.

Operator

And that concludes today's conference. Thank you for your participation.

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Source: Destination XL's (DXLG) CEO David Levin On Q1 2014 Results - Earnings Call Transcript
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