Destination XL Group Inc (DXLG) 2014 Q1 法說會逐字稿

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.

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. (Operator Instructions) 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 was announced this morning as our new Chief Financial Officer effective June 1.

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 would now like to turn the call over to the President and CEO, 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 DXLG stores. This is impressive, given the challenging environment that just about everyone in retail has been facing.

Much like other retailers, February and March were difficult months for 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 am proud to report that we now have four consecutive quarters of double-digit comparable sales in our DXL stores under our belt since we started our 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-the-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 DXL rollout 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 a new store openings. Store openings will be weighted toward the first three quarters of the year. We plan to open approximately 35 of the 40 stores in the first three quarters 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 2014 is expected to approximate 1.2 million or a 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 rollout of 215 to 230 DXL stores is scheduled to be completed by the end of fiscal 2017.

In addition, we will be opening a number of stores with a smaller footprint of 5,000 to 6,000 square feet in select smaller markets and in larger markets were 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 to 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 US is improving over trend with the 1% increase without any support from catalog circulation. However, the challenges of our Direct Business in 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 will 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 months prior to its closing. This included expanse of DXL displays at point-of-purchase; DXL shopping bag; and a variety of signage throughout the store promoting DXL's benefits.

Through direct mail, we have improved our targeting of consumers most likely to convert and increased our communication to this customer. 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 rates in DXL stores was 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 to the significant impact of advertising on 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 merchandise.

While it is too early to discuss campaign results, we have 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 top line, 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 have 445 Casual Male XL stores that were producing $279 million in annualized sales. For comparison, as of the end of fiscal 2013 we had 99 DXL stores producing $118 million in annualized sales. Once our planned 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 DXLs.

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 act as a resource regarding our financial strategies going forward. And of course, he will continue his contributions 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 1. Peter has spent the 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 his tenure at DXL and we're looking forward to Peter's continued contributions in his new role.

Peter will be covering the financial statements beginning on the second-quarter call but for now, I will turn the call over to John to discuss our first-quarter results.

Thank you, David, and good morning, everyone. I will start by highlighting the Company's results and then provide an update to our guidance for 2014.

David provided the high level discussion of our sales for the quarter, so I will get right into the details. Our total comparable sales increase of 3.4% or $2.5 million included an increase in our retail business up 4.7% or $2.8 million. This was driven by a DXL comparable-store sales increase of $2.2 million, or 12.8% by the 52 stores open for at least 13 months. It is 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 products.

This year, the DXL comparable-store increase is being driven by increased transactions.

Our remaining retail stores had a comparable sales increase of $0.6 million, or 1.4%. The comparable 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 catalogs completely during 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. While catalog sales have been eliminated, the profit margin from our US Direct Business continues to improve as we drive sales to our more profitable ecommerce business.

Gross margin for the first quarter, inclusive of occupancy costs, was 45.4% compared to 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 costs of 20 basis points and a decrease in merchandise margins of 160 basis points. The decrease in merchandise margins in the first quarter of 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 opened too late to capitalize fully on the Q4 holiday shopping season.

We expect that our merchandise margins, which have improved more than 170 basis points 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 toward converting our customers to our DXL stores and improving overall store traffic, which we expect will lead to increased topline and stronger 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 preopening costs and timing of seven DXL store openings during Q1 as well as the timing of our Casual Male XL store closings. In fiscal 2014, we're expecting our occupancy costs on a dollar basis to increase by approximately $1.5 million to $1.7 million as the result of the 40 new DXL stores opening this year and the annualization of last year's store openings. However, we expect 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 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 to the prior year first quarter. The increase of $3.4 million includes incremental cost of approximately $0.9 million related to a preopening payroll, training, and store operations to support the new DXL stores and a net increase of $0.6 million in the timing of marketing costs associated with the launch of our Spring 2014 campaign. The remainder of the increase is primarily due to increased store payroll and increased health insurance costs and workers compensation items.

Net loss for the first quarter was $3.5 million, or $0.07 per share, which compares with net income of $1 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 million increase is primarily related to the timing of cash outflow for new DXL store construction and management information projects during the first quarter of 2014. In fiscal 2013, our store opening and construction schedule was heavily weighted toward the back half of the year. In fiscal 2014, we're much more balanced with the majority of store openings planned in the first three quarters of the year.

From a liquidity perspective at May 3, 2014, we had $5.6 million in cash and cash equivalents; outstanding borrowings of $51.8 million; and $67.9 million of payables under our credit facility. Our inventory levels at the end of the first quarter were up 8% but unit inventory levels were down 6.5% compared with the year-ago level. We are carrying a greater percentage of branded apparel for our DXL stores and this inventory has 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 sales increase of between 13% and 15% for the 99 DXL stores that will have been opened 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 preopening 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 stores. These expenditures will be spent largely on our planned opening of DXL stores as well as technology projects to continue to improve the ecommerce site and the in-store customer experience.

Fiscal 2014 net capital spend of $36.4 million, net of tenant allowances, will be funded from equipment financing notes, our revolving credit 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 financings of 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 will now take your questions.

(Operator Instructions) Laura Champine, Canaccord.

Could you talk a little bit more about what gives you the confidence to raise your full-year sales guidance?

Yes, it's a couple of different parts that add up to it but one of the major contributors is the fact that we have extended keeping more Casual Male stores opened through the end of the 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 our numbers. And in fact, in total, the 2014 stores that we have opened are already are even slightly ahead of the plan.

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

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

Yes, that is correct.

Great. Thank you.

Mark Montagna, Avondale Partners.

Just following along with that question about the increased revenue, what about the Direct Business? Do you have any expectation of that increasing or is everything really centered on better than higher revenues at Casual Male?

Our forecast part of Direct is pretty well on plan. We're not looking for an increase to where we previously had projected. However, we do see that number improving quarter by quarter. Our last catalog dropped a year ago, May 22, so right now we're up against the sales of the last catalog and then from there, that is it. The Web business has been strong but it is 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. We said that before and I think that is going to hold true.

With the Direct Business, are you seeing greater strength in the more DXL-type merchandise? Or has the Casual Male-type merchandise dropped off? How is that breaking out?

I think it has been fairly consistent. I wouldn't say that the DXL stores product on the Web has shown any more dramatic increase than what we have seen in the past.

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

It has been 50-50, pretty much.

Okay, well, that is good.

And then the 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 promotions in terms of driving traffic. Are the promotions what is hurting the merchandise margin? Just trying to understand that better.

Let me clarify this. The promotions we are running this year really are repeats of what we have done in the past where we are seeing the erosion, 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 have come up with a much more aggressive, long-term spread-out plan to make sure we are getting this Casual Male customers converted. And we are seeing success.

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

So most of that margin is coming from that strategy. From the existing direct-mail pieces that we have seasonally throughout the year, that is pretty consistent with where we have 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 already have that corrected and our clearance inventory today, it is clean going into second quarter. So I don't see any more movement and problems -- there's no problem inventory to speak of.

Okay, that is great. Thank you.

Bernard Sosnick, Gilford Securities.

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.

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 a 10 point differential in our comps, especially in the first quarter.

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

The other question I have is regarding inventories. I'm glad to hear that there is no clearance overhang but I'm having a little bit of 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 are carrying a lot more owned inventory, inventory that has already been fully paid. And yet, you are 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?

The accounts payable number really is a reflection of store payables, as well, in the new store construction that has 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, [its] unusual appearances on our balance sheet in terms of accrued liabilities and accounts payable that this year because we didn't -- we have gotten through a lot of that, we're looking at a different scenario. It is not inventory. It is other elements that are --.

Okay, that is good to hear.

As far as peak borrowings, what do you expect that to be this year?

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

Okay, great. And one other thing, on Casual Male, you are 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?

Part of it was we had cut back some store hours as we were starting to wind down the operation and we brought those store hours back. That certainly has been a factor. Outside of that, the merchandise assortments are good; the inventory is very clean. Again, they have been surprising us throughout this transition. They have been hanging in there much better than we 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 is going to positively impact our sales and profitability.

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

Chris Krueger, Lake Street Capital Markets.

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

Yes, very well.

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

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; St. Charles, Illinois; Bakersfield, California; and we've got a couple that we are finalizing right now. So we will have them up in a few months and then better evaluate the metrics as to their profitability.

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

Brand awareness on Casual Male is about 40 -- in the mid 40s. And it has been around for over 25 years. Coming in at 13% a year ago -- and again, this is strictly a model customers who are big and tall -- they have an awareness level of 13% which obviously we're starting with the new brands.

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 in at 30%. And then we will give the results in the next quarter of where our awareness grew to.

A 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 is how customers refer to us. That is what our stores say on their storefronts.

And the awareness of DXL is 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 have certainly seen it in the focus groups, they call us DXL. So that is quite strategy going forward.

Okay. Last, what was your stock compensation expense for the quarter?

I think we may have that, hang on. We will have to get back to you on that.

Okay, thanks. That's all I got.

(Operator Instructions) Liz Pierce, Ascendiant Capital Markets.

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.

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 prior to our first campaign, we came in at a 13% awareness. And by the end of the year it moved to 30%.

Okay, 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.

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

Well actually, to clarify that, we ended the campaign at 25%. And in that interim period of three months with no marketing, our awareness grew actually 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 again, very encouraging that we are building this names at a good pace right now.

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

Right. So I think we will take a little step backwards because, again, if you really listen to our commercials, we are now saying DXL where in the past we said Destination XL.

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

Yes.

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

Yes, peak borrowings will be 55 going into the fourth quarter, yes.

Okay. And then David, I know it is 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?

We have had a business with -- it is Sears Canada that we have had the relationship with. And you could read about their state of business and we're obviously feeling it as their business has struggled.

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?

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 to push that out a little further because December was obviously a challenging month for everybody and we want to ensure that we can capture those sales in December. So we will probably push it out a little further this year.

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

Yes, and we are evaluating the results of that before we commit to exactly what we're going to do with radio in the first quarter.

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 productwise and what is going on with the tailored and made-to-measure sales? Thanks.

Made-to-measure continues to grow. We are getting healthy increases every week on that part of the business. We are in a -- the stores are in an 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 the 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 a new movie has had very high sellthroughs.

And again, our clothing business is outperforming our sportswear businesses as we start to develop something that was very -- a small percentage of our sales is getting the biggest increase. Our sport coat business has been fantastic. Suits are doing very well. Anything -- and dress shirts.

We're very pleased to see that there is a business that we never were able to really grow because we didn't have the space and the expertise to be in that business but we are finding that our customers really enjoy coming into our stores to buy dress clothing.

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

[Rea Kaul], with Kaul Capital.

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

And 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?

Let me go back to the first question. As far as women, 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 bought by the female shopper. And we just concluded a focus group with women. We're starting to lighten up the look. We have been testing some direct mail pieces that are geared more toward the female customer.

And even if you follow our commercial, there is a key part to it. There is a segment of the commercial where the wife is looking at her husband very pleasingly, the way he is dressed and he winks back at her. 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, it is a willing target. We give them about 90 days if they haven't come in to get that $50 gift cards. If they don't come after that then they fall into our regular rotation. We constantly are going to have this going on because we're opening 40 stores a year. So it is really isolated into the 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 really give any statistics on it, but we have done a lot of testing and right now we have our introductory move to get the customers into the DXL stores. There is a free Harbor Bay Polo shirt, which is one of our most popular items. And we compare that to giving a gift card for value and the conversion rate on the Polo shirt is double what we were experiencing with a free $20 coupon.

So we are constantly testing to find the right message to get these guys converted in the store. Because once we are in the store, we turn it off. We've got that customer. He is connected. He is loyal. And again, once he gets in there we are retaining them at a much, much better rate than we did in our Casual Male stores.

Okay, thank you.

What you will see going forward in this is that because obviously we're building our DXL stores base and we're having conversions happening, so at some point in time each year as we continue to try to convert customers from the old Casual Male to the new DXL, it will be a smaller percentage of our business because we have a bigger percentage of DXL stores already open with the conversion already taking place.

Great. Thank you.

Mark Montagna.

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?

It definitely increases year after year after 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 is what is 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 brand. So it is the first time we are telling our customers in a marketing campaign that we have brands and brands are also mentioned in the radio commercial.

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

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

We have been hearing very good feedback.

Yes.

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 are in the store. They are seeing the dressing room; they are seeing for guys' wardrobe completely differently. They are seeing the brands. So that is why our conversion is much stronger of customers coming in. They are more aware about what it is now and they are more ready to shop.

And certainly online we are 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 were curious about what the heck did 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.

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

We mention three brands in the radio spots.

Okay, perfect. Thank you.

Liz Pierce.

David, I was curious, are the women's transactions the values, are they spending more? About 30% than the men?

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

Okay. I would be curious to find out. All right, thanks.

Bernard Sosnick.

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

I'm not sure I understand that, Bernie.

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

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

And that -- when we can move anything like 1 point, it is huge for us. It is a lot of inventory that we've got to make adjustments for.

All right. That is 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.

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

Okay. Now what about the conversion rate from Casual Male to DXL? It had been running very low. Below your expectations. Are you somehow seeing something more occurring in terms of transference of customers?

Yes, this is by far our biggest challenge is getting these customers converted because they are just not aware of. But what is very encouraging, since we started this campaign, putting the signs in the stores six months early; changing the shopping days; doing all 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 at 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 that to where we want it to be.

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

We also have the situation of keeping their Casual Male store opened so we had the ambassadors in the all Casual Male store who were directing the customer to the new stores. That is an important element that we just now are starting to experience the results on that.

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

All right. Thank you, Bernie.

(Operator Instructions)

One another thing I just wanted to get back to Chris Krueger on that question on stock-based compensation. It is around $700,000.

Okay. All right. Thank you all for being on the call. We look forward to the next call where we will have the results of our current campaign. And we continue to move forward. And I think we are showing a lot of great progress. And again, based on what is happening in May, we are more optimistic about the coming year. Thank you very much.

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