Destination XL Group, Inc. (NASDAQ:DXLG) Q4 2021 Earnings Conference Call March 17, 2022 9:00 AM ET
Shelly Mokas - Director of Financial Reporting, SEC Compliance
Harvey Kanter - CEO and President
Peter Stratton - CFO
Conference Call Participants
Michael Baker - D.A. Davidson
Jeremy Hamblin - Craig-Hallum Capital Group
Good day, and thank you for standing by. Welcome to the Destination XL Group Fourth Quarter 2021 Earnings Conference Call. At this time all participants are in a listen-only mode, after the speaker's presentation there will be a question-and-answer session. [Operator Instructions]. Please be advised that today's conference may be recorded. [Operator Instructions] I would now like to hand the conference over to your host today, Shelly Mokas, Director of Financial Reporting. Please go ahead.
Thank you, Michelle, and good morning, everyone. Thank you for joining us on Destination XL Group's fourth quarter fiscal 2021 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 including, but not limited to, the crisis in Ukraine, supply chain disruption, labor availability and disruption from COVID-19. 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. It is truly a privilege to speak with you today about both our results for 2021 as well as our objectives and momentum for 2022.
Before I speak about where we are heading, I want to take a few moments and acknowledge where we've been. At the onset of the pandemic in 2020, DXL was in survival mode, and we took both meaningful and sometimes difficult actions to ensure that we would live to fight another day. During that time, we also began to set the table, so to speak, to build towards long-term success.
In the first quarter of 2021, signs of hope emerged, consumer demand and traffic returned, as well as a willingness to reengage with apparel and life outside of the home. At that time, emergence from lockdown, stimulus checks and pent-up demand created a confluence of tailwinds, growing demand provided opportunity to leverage our initiatives to drive greater forward progress.
This included more extensive consumer research to continue our repositioning of the DXL brand around the very core of who we are and what we can be, reiterating an unrelenting drive to deliver a differentiated experience built solely for the big and tall consumer, coupled with a transformative digital strategy to create deeper, more meaningful engagements with DXL supported through marketing, technology and merchandising initiatives.
Combining this renewed positioning and bottom line-based discipline from 2020 survival mode, we went from playing previously defense to profitably going on offense in 2021. A reduced reliance on discount and price promotions emerged, allowing for improved merchandise margins. Also, the continued restructuring of our lease portfolio and SG&A costs improved our operating platform. Altogether, these developments create -- contributed to an unprecedented financial outcome in 2021.
We exceeded $0.5 billion in sales for the first time in our company's history. We delivered $76.9 million of adjusted EBITDA, which is more than 3 times what we delivered in 2019, our last normalized year prior to the pandemic. And we generated over $70 million of free cash flow, which allowed us to retire our long-term debt, pay off our revolver and extend our credit facility until 2026 on more favorable terms.
While 2021 was a historic year for DXL, we still have much work to do and much opportunity ahead. The U.S. men's big and tall market is highly fragmented. There are many retailers who dabble in big and tall, offering a piecemeal product here and there to a traditionally underserved customer. We are changing that narrative. At DXL, big and tall isn't a section, it's the entire store, and it is all we do. We believe that the total addressable men's big and tall market is in excess of $10 billion, and we currently hold 5% of that market. Going forward, we believe that we can grow that market share profitably by shifting further away from discounting and integrated differentiation.
Our newest research corroborated once again the three key pillars that differentiate DXL from all of our competition. The first and most foundational is fit. We consistently hear from big and tall customers that fit is the single most important factor in their purchase journey, and we believe our proprietary fit and fit expertise is a strategic asset. As one customer recently told us, we know that big and tall sizing is much more than just pumping air into a size medium, which is why we have dedicated teams focused solely on the development of precise specifications to deliver a unique, ownable and authentic fit that looks, feels and moves great for the big and tall consumer.
Second is our assortment. We offer a thoughtfully curated assortment of designer collections and private label brands, including many exclusive brands and styles that can only be found at DXL. This delivers a product array that stands in stark contrast to the aforementioned piecemeal approach of other players in this space.
Lastly, is the significant signature DXL experience. Whether in-store or online, we create spaces that are built solely for big and tall customers. With DXL, he can set aside all of his wardrobe needs, feel valued and respected throughout his shopping experience and emerge looking great and feeling even better and all in one place. The customer, our guest is at the heart of everything we do. We get him, we respect him, we strive to further his confidence and we want him to be just as inspired by DXL as we are by him.
While the customer is at the heart of all that we do, so are our employees. I want to sincerely extend my gratitude to all of our employees for their continued commitment and dedication to being part of a critical mission to serve our big and tall customers. The stresses and challenges that our employees have overcome each and every day are a key reason why DXL is emerging from the pandemic on solid footing, and this must be acknowledged.
Like many companies, we are managing through a very lean labor market and the daily challenges asked of our employees can be overwhelming. I couldn't be more proud of our team for their passion and their commitment that they continue to show for our customer and to DXL. To all of our employees in the stores, to our employees in the distribution center and the guest engagement center and in the corporate office, thank you. Thank you for all your hard work, the support and your dedication to DXL's customers.
I often talk about becoming an employer of choice. And my hope is that this is evidenced not just in words, but through our actions. We truly appreciate you and we strive to be a culture, a company and a team deserving of your immense passion and commitment to DXL's mission.
I also want to extend a warm welcome to our newest Director, Ms. Carmen Bauza, whose experience and expertise gathered over 30 years in retail will be a tremendous asset to our board. Carmen has built a career working growth-oriented companies, including Walmart, HSN and Fanatics. I'm very excited to have Carmen's perspective and her insights as we continue to grow DXL and once again, welcome her to the team.
Now that I've provided some preliminary context to this past year, I want to provide additional color on 2021s performance, including both successes and learnings. I also want to share some of our plans for 2022 and how we are going to continue to build momentum on top of a record-breaking year. We have made tremendous progress recrafting the operating platform, building a stronger balance sheet, deepening our relationship with the customers through acquisition and retention.
We are leaning into the repositioning and successes accomplished last year to build towards a longer-term outlook of what our next three years can look like. I am thrilled with DXL's prospects for 2022 and the future and look forward to sharing more details with you today and throughout the year.
We'll now shift to talking about Q4 results. As 2019 was our last normalized year from a financial comparison standpoint, we will be making most of our year-over-year comparisons for Q4 2021 and the full year using 2019 as the baseline. Sales in the fourth quarter were in line with expectations which included a comp sales increase of 9.4%, with stores flat and direct up 33.1%. Again, this is compared to fiscal 2019.
Relative to our performance in the second and third quarters, we anticipated a slowdown in sales in the fourth quarter for three specific reasons. First, we spent much of the summer telling customers to shop early this holiday season to mitigate potential supply chain challenges in the third and fourth quarter. We experienced strong results in September and October, which we believe is partially attributable to pulling forward fourth quarter demand.
Second, with winter approaching, we were concerned about a resurgence in the pandemic, and we certainly experienced that unfortunate reality. Third, we made a strategic decision to run our business essentially promotional free, with only two very short public tests of offers during the single most important promotional and transactional time of the year for almost all retailers. This was a marked departure from previous discount-driven holiday approaches.
We only offered private promotions at lower discount levels to drive retention and reengage lapsed customers without any public open offers for Black Friday or Thanksgiving weekend. We feel that this strategy paid off as we were able to maintain a very high gross margin rate in Q4 while remaining faithful to our vision of repositioning the DXL brand around differentiation as opposed to discounting.
As it relates to inventory levels, the sharp acceleration in our business in 2021, coupled with lingering supply chain disruptions, made chasing inventory a challenge and a challenge that never let up throughout the year. This impact was directly visible in our clearance inventory levels, which typically approximate 10% of our total inventory, over half of that nearly at only 6%.
Despite all these challenges, we still delivered a positive fourth quarter comp of 9.4%, of which we are very proud. Comp sales in November were up 17.4%, December was up 7.8% and January slowed to 1.8%. We believe the biggest driver of the slowdown in mid-December and January was the Omicron variant, which we have thankfully seen subside.
I'm encouraged for 2022, not just because of the waning COVID variants but by actions taken in multiple key areas during 2021 and early trends in 2022, including new customer acquisition, inventory assortment and gross margin.
New-to-file, or our new customer acquisition, is a key metric that we follow religiously and has significantly rebounded in the last six weeks as the fourth quarter moved into our rearview mirror. Compared to 2019, 2021s Q1 through Q3, new-to-file acquisition rates were 36.2%, 28.6% and 35.3%, respectively. In Q4, the new-to-file rate fell to 13.3%. While still positive, we believe the decrease is attributable to the aforementioned reasons consistent with Q4 comp sales slowdown.
While we are still early in the fiscal year, we did see our new-to-file rate jump back up to 43.3% for the month of February when compared to 2020. The strength of this metric for February is the fruit of our focused efforts that prioritizes new customer acquisition. Business since the start of the year has been very strong, which, again, while still early, is certainly encouraging.
Inventory continues to be a key priority for us as we continue to manage through various supply chain issues. We've spoken at length and given examples on prior calls about inventory challenges. What I want you to hear today from me is that we believe our current flow of inventory is sufficient to support our sales growth goals. When compared to 2019, our inventory levels are down 20%. However, in 2019, we were both over assorted and over inventory.
While part of this decline is a result of the lay in shipments, a key part is also very deliberate. We have been pushing to improve our inventory turnover for years, and I'm happy to report that improvement occurred in 2021. While we are proactively anticipating and contingency planning for challenges at 2020 with securing vessels, the cost of containers, driver shortages and increased fuel expenses, we continue to work backwards to improved inventory positions and turnover compared to prior years.
Now let me share some commentary regarding our merchandise assortment. We continue to see strong sales performance across all product categories. Our current merchandise assortment is approximately 52% private label and 48% designer collections. And our sales presentation for the fourth quarter was relatively consistent to that inventory composition.
Tailored clothing accounted for 15.3% of the Q4 business compared to 18.4% in the third quarter. This continues to be an area we are aggressively seeking to improve our stock position, with additional upside seen in the greater return of heading into offices, spring season events and occasions this year.
In sportswear, the top-selling brands in our assortment continue to see slightly higher selling velocity, including Ralph Lauren, Nautica and Reebok. In the spring '22 season, Nautica sportswear and Vineyard Vines officially joined DXL's growing exclusive brand portfolio, further reinforcing us as the destination for desirable big and tall designer brands. Adding to this growing brand portfolio of exclusivity, our four quarterly collections by Polo Ralph Lauren, which are also totally exclusive to DXL and the big and tall consumer.
As we are focusing our efforts around DXL's inventory and assortments, I want to also address our wholesale business. For fiscal 2021, wholesale revenues were $5.4 million as compared to $12.5 million in fiscal 2019. Our wholesale business has been primarily driven by our relationship with Amazon. Based on several factors, including volatility in the global supply chain, increasing lead times lower margins and the shifting dynamics of the business, the company and Amazon have agreed to end the wholesale relationship.
With the Amazon wholesale partnership ending, we still believe that our expertise in sourcing and our expertise in fit make us a great partner for anyone seeking to source big and tall products on a wholesale basis. And we will consider future opportunities if and when they are presented to us.
I want to transition to perhaps the most notable story and learnings from Q4, our gross margin performance. This quarter was admittedly a big test for us. We purposely and strategically went into Q4 with virtually no publicly available price-led discount promotions. No promotions on Black Friday, not on Cyber Monday and not in the first two weeks of December. To confirm our approach, we ran a small discount-driven promotional test during the third week of December, which did not provide incremental traffic, further proving that our customer is motivated by differentiation that we offer more than purely price.
Arm with that reinforced knowledge, we continue to prioritize differentiation over discounting focusing on fit, focusing on exclusive assortment and focusing on the DXL-branded experience over coupons in the customer journey and no longer participating in the race to the bottom driven by price.
The results of this approach in Q4 were staggering in a good way. Compared to Q4 2019, DXL delivered a 680 basis point improvement in gross margin. Could we have driven sales volume with promotions? Perhaps. But given our A/B testing, incrementality appears minimal and only at the expense of greater markdowns and lower gross margins. Our accomplishments this year may very well be the trifecta of repositioning of the brand to be less reliant on promotions, driving higher gross margins while simultaneously achieving scale in top line sales in excess of $0.5 billion.
In a few minutes, I will turn it over to Peter, who will walk you through the rest of the financials. But now I'd like to turn my remarks to discuss our plans for 2022 and how we intend to drive further growth coming off a record-breaking year. I've already discussed the ongoing strategy to curate and focus our merchandise assortment. So now let me talk about marketing and technology, followed by real estate and finally, the heart of everything we do, our customer.
Within marketing and technology, there are three key initiatives that we are planning to pursue in 2022. Much like all we do, they are rooted in our customer and engaging him with a relevant personalized way that add value and foster mutually and official long-term relationships. We continue to evolve further away from solely targeting customer’s wallet through discounting to appealing to his heart and his mind as they place the values, respects and powers and most importantly fits him no matter his size, his style or his life.
First up is the reengineered loyalty program. Representing another demonstrative departure from old ways of thinking, to put it bluntly, our current loyalty program is basic at best and overdue for overhaul. It is solely a transaction-based program with limited differentiation between tiers and rewards without any incentives for any behavior except for purchases. We see this as a key opportunity for 2022, not to only fuel greater retention, but also drive greater engagement and evangelization.
The new program, which is slated to launch in Q2, features rewards for engagement-based behavior, such as subscribing to our e-mail list, visiting a store, engaging with us in social media, writing a review, making an additional purchase and more. This creates a meaningful incentive for customers to more deeply engage with DXL with the program also featuring compelling rewards and meaningful differentiation among the program's tiers to recognize our most loyal and valuable customers.
Second; second is an initiative focused solely on increasing relevancy and personalization at the customer level. We will be launching a new customer data platform, or CDP, that will demonstrably raise our capabilities towards building and actioning against customer profiles via machine learning and deeper data modeling. As a single repository for multiple sources of data, the CDP will unlock greater targeting and predictive modeling capabilities that do not exist today within our current technology infrastructure. Not only will the CDP enhance modeling drive better decisions through and with analytics, it will also fuel downstream channel-level action enabling informed messaging against specific behaviors, propensities and consumer segments.
The third element is focused on reaching out to and engaging with the customer on their own terms. As communication preferences evolve, so too must our CRM contact strategies. In 2022, we are planning to launch an SMS text messaging marketing platform to create an additional complementary touch point alongside our existing e-mail, mobile app and direct mail channels. As mobile devices continue to proliferate pockets, SMS allows for further opportunities to combat e-mail inbox fatigue seeing increased adoption rates among retailers as a way to more visibly engaged consumers with differentiated messaging among the channels.
Similarly, we will also be further refining the DXL mobile app throughout the year, including integrations within our new loyalty program. For several years, marketing spend has directly primarily been ROS-driven attributable channels, such as paid, digital and CRM. With our aligned repositioning and defined differentiators, we are at a pivot point, where we must capitalize on opportunities to both socialize and commercialize our story across a greater continuum of channels to engage with both prospective and existing customers.
You may have seen some of that investment firsthand in brand messaging on Connected TV and streaming platforms as well as gradual testing with influencers in the social space and amplified public relations outreach, resulting in appearances in various trade and lifestyle publications. For fiscal 2022, we are increasing our ad spend from 4.7% of sales in 2021 to 6% of sales in 2022, an investment indicative of our belief in both the brand repositioning and the opportunity to further gain total addressable market share, fueled by further customer acquisition and retention.
Shifting from marketing, I'd now like to talk to you about stores. Many of you are aware of the intense store development campaign launched 12 years ago when we introduced the DXL concept and set about converting our legacy Casual Male stores. With the onset of the pandemic over the past few years, our store development projects were put on hold, but I am very pleased to announce that we are relaunching them for 2022.
While the store development relaunch is far less aggressive than what we occurred 12 years ago, there are a number of opportunities that exist across the portfolio. Today, we operate 235 DXL stores and 54 Casual Male stores. We believe there are three distinct categories of opportunity in regards to store development. First are our Casual Male stores that should be converted in place to a DXL store or relocate it to a new nearby real estate and rebranded as DXL. Second, our DXL stores that should be relocated due to attractive opportunities compared to the existing store.
Whether it be relocating to a better center, a better area of the market or to a rightsized store footprint, most of our DXL stores are thankfully and strategically right locations. But some have opportunities for improvement. Third, we believe there are market gaps in our store portfolio where white space opportunities exist for additional DXL stores. Included in this opportunity would be closing some Casual Male stores that no longer fill a strategic role in the portfolio. We have developed a preliminary store development plan over the next three to five years and to provide you an estimate of scale, we believe we can potentially open up to 50 new stores.
This net new estimate of 50 stores accounts for some planned natural lease expirations within the portfolio, but is also indicative of our view of the size of brick-and-mortar opportunity. We will provide additional details as they become clear, but we are excited about the opportunities that we believe exist through growing our store portfolio and store count and the results that they can yield.
Throughout the call, you've heard me refer to our customers as the heart of our business. Since home is where the heart is, I'm going to bring it home and now talk about our customer. Over the past few months, we have been expanding upon the customer research and our repositioning journey, which I'll remind you, began back in 2019 and which we pivoted back to once again in earnest in Q1 of 2021. The recent projects have been rooted in seeking a deeper understanding of our customer going beyond the purely quantitative to more qualitative research to arrive at the why.
We have always known that our customer prioritizes comfort and fit, which was further reinforced by the recent research. I believe that as we, as a brand, have a greater opportunity to further amplify that messaging and project those core brand attributes within our creative executions. As a brand, we are at a moment of great opportunity. We can and will demonstrably evolve our messaging, doing so in a way that engages and activates customers deeper than ever before. We know who we are, we know what we do, we know who we do it for and why it is important. And those are stories that need to be told.
We have an outstanding associates and fit experts working in our stores who communicate that story very well, but we need to bring the story to life across all touch points within the customer journey, whether it be on the website, our mobile app, or marketing communications. We distinctly know that fit, sizing and comfort are key priorities for our guests, but they can inherently also be key points of friction.
Leveraging and clearly communicating our big and tall fit expertise and the consistency developed within our own product offerings can alleviate these problems. There are many more insights like this one further revealed from our extensive research, and I'm excited to continue to learn more that our customers' need and how the brand of DXL can best serve the big and tall community.
In closing, I'll summarize. As a team, we have accomplished and conceptualized and clearly articulated our vision for the business and the opportunities that lie ahead. We must further strengthen our defendable differentiation or our moat, as we have previously referred to it. In the not-too-distant past, we were discount-driven as a company whose main point of communication was solely around price competition. Today, we are leading with our redefined positioning and our competitive differentiation of a fit, exclusivity of the assortment and the DXL-branded experience, all of which ladder up to make DXL both the leading men's big and tall apparel retailer today as well as the one with the greatest runway potential for growth in consumer mind share tomorrow.
I will now turn it over to Peter for an update on financials. Peter?
Thank you, Harvey, and good morning, everyone. I'm going to spend a few minutes today on our fourth quarter and full year financial results. Then I'd like to share some thoughts about the stock repurchase program we announced today and how we're thinking about capital allocation. Finally, I'll close with some comments on our full year guidance and expectations for 2022. I'll limit my comments to comparisons to 2019 as that was our last normalized year, but I would encourage you to review our 10-K, which will be filed later today for a discussion and reconciliation of our full year results.
So let's begin with sales. Total sales for the fourth quarter were $133.5 million, up from $131.2 million in 2019. On a comparable basis, sales in the fourth quarter increased 9.4% as compared to 2019. Comp growth by month was 17.4% for November, 7.8% for December and 1.8% for January. I am happy to report that the sales slowdown in January seems to have been short-lived. And through the first six weeks of 2022, we are back up to plus 20.1% in comp growth versus 2019 levels. This is very encouraging in light of the macro level uncertainties that we are carefully monitoring and have factored into our outlook for fiscal 2022.
Our gross margin rate, inclusive of occupancy costs, was 49.8% for the fourth quarter as compared to a gross margin rate of 43% for the fourth quarter of fiscal 2019. The 680 basis point improvement over 2019 was a combination of 410 basis points of improved merchandise margins and 270 basis points of occupancy leverage. The improvement in merchandise margin was a result of full-price selling and very low markdown rates, a consistent theme for us this past year.
Markdowns for us are primarily comprised of two factors: promotions and clearance. We maintained a very low promotional posture throughout the quarter even during Black Friday and Cyber Monday. Our clearance inventory also remained very low and made up a smaller percentage of our total sales, especially in January when clearance levels are normally higher. Customer buying behaviors have proven to be quite resilient even as we pulled back on coupons and promotions, which we expect to continue as part of our ongoing strategy.
Partially offsetting the benefits from lower markdowns were higher freight costs throughout the supply chain, which added a little less than 100 basis points to our cost of goods for the full year. We expect that we will continue to experience elevated freight costs throughout the coming year and have also continued to see an increase in raw material price increases. Altogether, we expect the impact on 2022 gross margin rates to be upwards of 200 basis points after factoring in freight, markdowns and merchandise cost increases, partially offset by occupancy leverage.
Store occupancy costs for the fourth quarter decreased by $3.3 million as compared to 2019 as a result of closing unproductive stores and rent reductions we have negotiated since the beginning of the pandemic. We have talked about this now for the past two years, but the savings are real and ongoing. Between closing unproductive stores and reducing rents in markets where we were overpriced, we reduced occupancy costs by $12.5 million or 17.7% as compared to 2019.
Now let me move on to selling, general and administrative costs. As a percentage of sales, SG&A expenses for the fourth quarter of fiscal 2021 were 39% as compared to 35.4% for the fourth quarter of fiscal 2019. On a dollar basis, SG&A costs increased by $5.6 million from 2019 levels. This increase was primarily driven by higher incentive-based accruals, which tend to be back loaded to the fourth quarter as the company exceeded its full year performance metrics on both annual incentive plans and long-term incentive plans.
On a full year basis, SG&A costs were down significantly at just 34.2% of sales as compared to 38.1% in 2019. The full year decrease reflects the various cost savings initiatives and reductions in payroll and related costs that we implemented in 2020 and largely maintained through 2021 as sales recovered.
Adjusted EBITDA was $14.3 million for the fourth quarter compared to $9.9 million for the fourth quarter of fiscal 2019. For the full year, adjusted EBITDA was $76.9 million as compared to $23.5 million in 2019. Net income for the fourth quarter was $9.9 million or $0.14 per diluted share compared with net income of $2.4 million for the fourth quarter of fiscal 2019. For the full year, net income was $56.7 million or $0.83 per diluted share compared to a net loss of $7.8 million in 2019.
Next, I'll turn to cash flow and the balance sheet. Free cash flow, which we define as cash flow from operations less capital expenditures, was proceeds of $70.3 million as compared to a use of $5.5 million in fiscal 2020 and proceeds of $2.4 million in fiscal 2019. The significant improvement is primarily due to our improved earnings. As we talked about last quarter, this free cash flow enabled us to pay off all of our outstanding debt, and we have ended the year debt-free for the first time since 2012.
Our cash balance at the end of the year was $15.5 million as compared to a debt balance net of cash of $55.4 million at the end of 2020 and $49.8 million at the end of 2019. We also have $68.9 million of excess availability and our credit facility offers favorable rates and is locked in place until October of 2026.
I'm also pleased to announce that the Board of Directors has authorized a $15 million share repurchase program. I want to be very clear with regard to how we think about capital allocation. Our number one priority, is to continue to pursue investments in customer growth initiatives that will allow us to take a greater share of market. We are not taking our foot off the gas when it comes to investing in the business. At the same time, we believe our stock is undervalued. The repurchase program will give us flexibility to return shareholder value when the stock price is compelling.
Given our current liquidity, projected excess cash balance and substantial debt capacity, we believe this modest buyback, which is approximately 5% of our market cap at the $15 million maximum amount authorized, can provide another layer to create shareholder value alongside our strategic initiatives designed to grow our market share.
Finally, I'd like to share with you our financial outlook for 2022 which we issued this morning. We experienced a remarkable recovery and growth in sales for fiscal 2021. We certainly expect to grow our top line in fiscal 2022, but we also recognize that our business benefited from some level of pent-up demand in fiscal stimulus policy last year. In addition, the continuing uncertainty with respect to the crisis in Ukraine, supply chain disruption, labor availability and disruption from COVID-19 may also impact our business in fiscal 2022.
In light of this uncertainty, we are taking a cautious approach to offering a sales range in which we feel confident. Accordingly, we are guiding to sales of $510 million to $530 million and an adjusted EBITDA margin in excess of 10%.
This concludes our prepared remarks. We appreciate your attendance on our call today, and we look forward to a successful year in fiscal 2022. And now we will take your questions.
[Operator Instructions] And our first question comes from the line of Mike Baker with D.A. Davidson. Your line is open. Please go ahead.
Thanks. First, I wanted to ask just a bigger picture question. With the margins having now more than fully recovered, it seems to me as if you're back to play offense, but can you talk about -- you've given some guidance for 2022, but I'm more thinking longer term, what are your initiatives? Or what's your view on market share? How big can it get? What's a normal or reasonable annual growth rate for the top line to think about beyond 2022, which I understand is impacted by strange comparisons? Just how should we think about your market share gain and how big you can get over some period of time? Thanks.
Mike, this is Harvey. Thanks for the question. The way we would characterize it is important to understand contextually, we're not providing long-term guidance but a characterization. So that being said, the way we think about our business is that our direct digital business to the consumer, we believe taking share of market means that we will grow faster than average. And according to which metric you look at, whether it's 12% or 14% or 16%, there's some number around that, that would be the overall direct-to-consumer growth rates that people expect. And we believe our business online should grow faster than that.
In our stores, you can make the same characterization that somewhere 1% or 2%, most retailers would probably be at least moderately happy with that growth rate of continuing to comp, and we believe we should grow in excess to that. So whether that's 3% or 4% as a baseline growth rate, we would expect to take share of market, we will grow in excess of the average growth rate of what moderate retail growth rate would be as an expectation.
So if you think about our business on a 60-40 or 70-30 relative reference point in that context, you can kind of triangulate in and expect that we will grow 6%, 7%, 8%, something along that line as a baseline growth rate. And we believe that, that is a baseline growth rate. We have other initiatives, which, over the course of the year, we will share more broadly that talk about a greater opportunity to take share of market as well as actually approach other markets through other means to further accelerate on top of the baseline. And hopefully, that, at this point, is sufficient for perspective.
Yes, thanks. That's a great perspective. One more, just clarification. I want to ask Peter about the gross margin comment. So I think you said down 200 basis points for 2022 on the gross margin, then offset by some initiatives. So for 2022, can we think about -- or offset by leverage, right? Can we think about 2022 gross margins down -- but down something less than 200 basis points, is that a sort of a reasonable place to start for 2022 gross margin outlook?
Yes. So great question. So the 200 basis points is where I would say we would start at. And I think that's based on -- it's really it's a number of things. It's increased freight costs, which we are certainly seeing a lot of conversation right now about fuel surcharges and cost of fuel. There's product cost inflation that we're dealing with. There's another issue we talked a little bit about where our clearance levels were last year.
And we are going to have -- we will be back to a more normalized clearance level, which is higher markdowns. And then there'll be some level of promotions. We talked about revamping the loyalty program and other customer acquisition tactics. So the 200 basis points is sort of where I would start at. That was sort of net of all the pieces together, including the occupancy leverage.
Okay. If I could follow up one more on that. Just as you said, normalized clearance and promotions. I presume that means far less than you were historically. So what does normalized mean? And are you seeing others within apparel and broadly speaking. So everyone's talking about being getting back to more promotions next year, that's sort of a common refrain among retailer’s apparel and otherwise. Are you starting to see it yet? Or is this just what everyone's expecting?
Mike, yes, this is Harvey. I would not characterize our expectations the way you characterize perhaps what might be more broadly expected. We have worked really hard to engage the consumer in ways that are not around price. We've tested numerous times at this point, engaging the consumer based on some form of discount. And when the day is done, we do not see incrementality and any incrementality we see is offset by deterioration in margin.
And we believe, based on the initiatives that I've outlined today and others that are in queue that we will have promotion really driven around seasonal liquidation, provided choices that when the day is done, didn't work at the level we expected and just clearing goods, and ongoing clearance. We do not expect to "normalize" in a backward-looking way, a heightened level of promotion or discounting at any level at this point in time.
That’s a great clarification. Thank you for that.
[Operator Instructions] And our next question comes from the line of Jeremy Hamblin with Craig-Hallum Capital Group. Your line is open. Please go ahead.
Thanks and congrats on an amazing year and a strong update. Let me ask about the store development and I think the comments around potential for 50 new locations. In terms of thinking about '22, in terms of your ending store count at 290 locations, are you thinking about store count actually up for '22? What's your CapEx needs for the year? And then I guess let's just start with that in terms of kind of some new stores in addition to whatever your closures would be.
Sure. So thanks for the question, Jeremy. Let me start with that one. So with regard to store count this year, I actually expect that our store count will be slightly down this year. And I say that because although we are very much off to the races with store development, the lead times on opening a new store are typically 12 months out.
So we are spending a lot of time right now, particularly using -- really using data and analytics. We've engaged a top flight real estate advisory firm who's helping us leverage data and analytics to figure out what the store development plan should look like. But it is a little bit further out. So that's how I would think about stores for this year. And sorry, what was the second part of your question?
The CapEx guidance that would have to be...
Exactly. Good -- another good point. So for the last two years, our CapEx, it's been around $4 million, $5 million, $6 million. If you were to look back to 2019, I think we were $13 million. I would say that we're probably going to be more like $10 million to $12 million this year. Again, it's -- we are starting to invest in building stores out, but we're not necessarily going to have as many open as we would like by the end of this year, but it's definitely something that will be in process this year.
Okay. And then a related question, based on where your sales guidance, the $510 million to $530 million for the year, you ended at roughly $82 million in the inventory for the year. So Harvey and Peter, in terms of thinking about your store count at the end of the year, which is going to be down just slightly your sales plan for the year, would you expect your absolute dollars of inventory at the end of '22 to be up slightly? I know that, in particular, tailored clothing that you are not where you want to be on your inventory levels. But are we thinking something like $90 million in inventories to end the year as a target? Or how are you thinking about that?
Yes, definitely. Inventories will be up a little bit. I think $90 million, that's probably on the high side. Maybe it's $85 million, $85 million to $90 million. But we are definitely still working to get back into a better inventory position in certain categories. And you called out tailored clothing is a great example. We've seen such a resurgence in tailored clothing over the last six months. So yes, inventories will be up slightly, but I wouldn't -- I certainly -- I wouldn't say it's over $90 million, I would say it's less than $90 million.
Okay. And then just coming back to the point, so I think under those levers, you would create pretty significant free cash flow for the year, probably well in excess of $55 million or $60 million just based on those figures. So in terms of thinking about I totally understand investing in customer acquisition, but that would build a tremendous amount of cash on your balance sheet as well. Do you feel like if -- let's say, the share price were to languish in the current level, do you feel like there's some reception to getting maybe a little more aggressive as part of your capital allocation plan should shares stay in kind of the current range?
Yes, for sure. I mean the reason we put the share repurchase program in place was to give us that flexibility. But I do want to stress that our first preference on using cash is for all of the items that we just talked about. It's marketing and technology, it's stores, it's infrastructure. And so we talked about in marketing and technology, we talk about a loyalty program, upgrades to the website and the app and SMS and the CDP, I think we are getting aggressive there.
And even on the -- just the marketing expense side, Harvey had mentioned in his comments that we're going to be spending 6% of sales on marketing costs this year as opposed to 4.7% last year. So it's a meaningful increase. We talked a little bit about the capital that we're investing in stores. And then the third area that I would point to is infrastructure. So it's looking at distribution and fulfillment, network optimization, logistics and then there's an entire layer on IT upgrades, software enhancement.
I think there's plenty of opportunities for us to be investing cash in growth and making sure that we're positioning the business for long-term success. So I think all of those initiatives, coupled with the flexibility to buy back shares when the price is undervalued, when we believe it's undervalued, I think is the strategy we're going to pursue.
Peter, do you want to comment a little bit on Jeremy's characterization of free cash flow and maybe touch on that in terms of -- in comparison of what he noted?
Yes. So thanks, Harvey, for that. So we did not specifically give a guidance number for free cash this year. But there's two major pieces, I guess, that I would call out when you're thinking about the difference between EBITDA and free cash because we did give some direction on EBITDA of greater than 10%. We mentioned that gross margin could be down a couple of hundred basis points. And I just mentioned that marketing is going to be higher by another, call it, 130 basis points.
So when you're reconciling EBITDA to free cash flow, the two pieces that I would call out are, one, we just talked about inventory that we are going to be investing a little bit more in inventory. Secondly, I would just mention the CapEx that if we're spending $10 million, $11 million on CapEx, that's also going to contribute to the difference between where we are landing on EBITDA and where we end up landing on free cash flow.
Understood. Appreciate that. I also wanted to just get some clarification here on the quarter-to-date trends, I think I just want to make sure it was versus 2019, but I think you had indicated that same-store sales up roughly 20% versus 2019 levels. Now your store count is down about 12.5%, 13% versus Q1 of 2019 and you're getting rid of the wholesale business, which I think contributed about $2.5 million in Q1. So would that kind of have you projected in, let's call it, maybe $115 million to $120 million range for Q1?
Yes. I mean that feels about right. I think we definitely said the trend so far year-to-date that comps are up 20%. I'm really happy with that considering that from November to December and January, we were seeing downward pressure on the comps. And we highlighted a number of reasons for why that is, but I also think that we have a lot of reasons to be optimistic this year, and we're certainly seeing it in the first six weeks of the year.
That's great. Last one for me. Harvey, so as you have clearly kind of stepped to the forefront of this category, you've struck some really nice new exclusive deals. Are you getting more inbound interest from some other brands in terms of thinking about potentially exclusive relationships after you kind of locked in Vineyard Vines and Nautica? Is that generating potentially more interest?
It's a great question. On one level, I want to say, in a moderate way, yes. But also the challenge, which I don't know that people truly appreciate, is the big and tall consumer and the proprietary spec or just literally the spec is not something everyone wants to go after. It's a smaller piece of the market, and it takes a lot of energy around building a spec and then unique factory sourcing. It's not something you can just build on a traditional production line. Most of the factories that our private label products that are in, have dedicated big and tall lines if they're not literally a dedicated big and tall factory.
And so it goes back to our global sourcing initiative and how much we talk about that world-class element of what we do, and it underlines the challenge for a traditional average-sized retail brand to go into the big and tall business. It's a great question. It's not as easy as one would expect.
Understood. Thanks for taking my questions. Best wishes this year.
Thanks so much. Operator, I believe that's the end of the call's questions today. I don't see anything else in the queue. So for those that were in attendance today, I want to thank you very much for your continued interest in DXL and wish you a happy and healthy, hopefully, safe 2022, and we look forward to talking with you again in about 90 days.
This concludes today's conference call. Thank you for participating. You may now disconnect.