Destination XL Group Inc (DXLG) 2014 Q3 法說會逐字稿

Good day and welcome to the Destination XL Group third-quarter earnings call. Today's conference is being recorded. All participants are currently in a listen-only mode.

At this time I would like to turn the conference over to Mr. Jeff Unger. Please go ahead, sir.

Thank you, Kyle. Good morning, everyone. On our call today is David Levin, our President and Chief Executive Officer; and Peter Stratton, our Senior Vice President and Chief Financial Officer.

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 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; sales per square foot; 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.

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

Thank you, Jeff. Good morning, everyone. Our results for the third quarter of fiscal 2014 demonstrate that our plan is working and customers are becoming much more aware of the DXL brand. Our increase in revenues for the quarter was driven by 12.8% comparable sales growth at our 73 DXL stores that have been opened at least 13 months.

This metric is particularly impressive when you consider that it compares with an 11.3% third-quarter comp from same-store sales growth in Q3 2013. This is our sixth consecutive quarter of double-digit DXL store comps. And we are pleased that this comp trend has continued in the month of November.

Our decision to increase promotional efforts to drive customers into DXL stores and improve the conversion of existing Casual Male XL customers into DXL shoppers is paying off. We ran one promotional offer during the quarter; it was a coupon to save $25 when the customer spends $75 at DXL. With the assistance of the promotion, traffic at DXL stores increased by 4.4%; conversion of traffic to sales was up 8.4%; and we saw a substantial rise in the number of active DXL customers in Q3.

We are also seeing traction from our efforts to attract the end-of-the-rack guy to our DXL stores. This younger, smaller-waisted, and more brand-conscious customer can shop at department stores, but his options at those stores are limited. The end-of-rack target group accounts for approximately 65% of the total big and tall market and tends to have a higher spend per transaction.

The DXL model is ideal for the end-of-the-rack guy, because we are giving him more brand and style selections. These customers generated 42.4% of our DXL sales compared with 33% at our Casual Male XL stores in Q3. We expect to see continued end-of-rack growth as we continue our marketing to these group of shoppers.

Also, three factors that are contributing to an increase in our customer base is that the average DXL store has 82% more customers than a Casual Male store, and of those customers we retain 30% more in our active database than we do of the customers in a Casual Male store. Lastly, we are converting more Casual Male customers to DXL. Since November of 2013 we have converted 17% more customers than last year.

At our Casual Male stores we continue to see the positive effects of the return to standardized operating hours. In addition, for Casual Male stores that would historically have closed once the DXL store opened in the market, we now keep the Casual Male store open as a clearance store for several months and to serve as brand ambassadors to direct existing shoppers to the new DXL store.

In terms of marketing, this year's comprehensive fall campaign -- which includes television, radio, and digital advertising -- will run through the peak holiday selling period to mid-December, unlike last year, when the campaign ended mid-November. In addition, we have secured higher-quality ad placements within our media strategy. We are running ads during NFL and college football games and pushing more towards the weekend, when our guy is more likely thinking of taking a shopping trip. We also will be running a 15-second spot the week of Thanksgiving that is directed to promotional events that are occurring that week.

We are continuing to make progress in growing our sales per square foot in DXL stores, which increased 9% to $160 from Q3 last year. By the end of fiscal 2014, we expect DXL stores (sic - sales) per square foot to grow to $165. And our long-term goal is to reach sales per square foot of $220, driven in part by opening stores with a smaller footprint. The economics of the smaller-footprint store, typically less than 6,500 square feet, are similar to those of our larger DXL format stores.

However, the smaller box allows us to penetrate markets where we previously thought we cannot be profitable by leveraging improved sales per square foot with lower occupancy and buildout cost. Today we have seven of these small-footprint DXL stores in operation. We anticipate opening this size store in select smaller markets as well as in larger markets where geographical considerations warrant an additional presence, but not another full-size DXL store.

We have discussed in prior quarters our Company has been moving towards an omni-channel approach to managing our business. Shopping behavior for our customer continues to evolve across multiple channels, and we are working diligently to meet his needs. Our goal is to provide a seamless customer experience, whether he shops at a brick-and-mortar store, via computer, smartphone, or tablet.

We are starting to see more transactions that begin online but are ultimately completed in-store. This past year we enhanced our web functionality by enabling stores to sell merchandise directly through our destinationxl.com website. If an item cannot be fulfilled from our distribution center, the order is routed to a store that has the item in stock, and the sale is completed at the store level.

Similarly, if a customer visits a store and the item is out of stock, the associate can order the item for the customer through our website. Our buy-online/ship-from-store capability is now in approximately 300 stores. In Q1 of 2015 we plan to launch shop online/pickup in store, which we think will be a real game changer for us, because many of our customers have last-minute needs. This feature brings the guest into the store and provides our selling associates with a chance to recommend additional in-store items.

We are also seeing more customers shopping from their mobile devices. Our website has been optimized for mobile responsiveness to make for a seamless shopping experience on any device.

As a result, the conversion rate from our mobile visitors was up 139% from Q3 last year. And mobile penetration of site visitors has increased from 30% at the end of 2013 to 40% currently. 65% of all emails are now opened on a mobile device.

Because omni-channel engagement is changing the boundaries of where a sale originates and where a sale is ultimately settled, the Company no longer presents comparable sales for its direct business on a stand-alone basis. Direct sales are included in our total comparable sales results instead of providing direct sales as a separate channel. The omni-channel experience continues to evolve, and we believe this paradigm shift will have a profound long-term benefit for the Company, our customers, and our shareholders.

We are really encouraged by our strong third-quarter financial results and positive key DXL performance metrics as we continue to execute on our strategy. As we enter the fourth quarter, we remain focused on driving top-line growth and improving profitability.

And with that, I will now turn the call over to Peter.

Thank you, David. Good morning, everyone. There are a few different topics that I'd like to talk about today. First, I will start by highlighting the Company's results for the third quarter of fiscal 2014. I will then give you a quick update on our new debt facilities that were signed in the third quarter. Finally, I will provide a review of our full-year guidance for fiscal 2014, which we reaffirmed in our news release today.

For the third quarter we are reporting an increase in total Company comparable sales of 5.5% or $4.1 million. Leading the way are our 73 DXL stores that posted a comparable sales increase for the quarter of 12.8% or $2.8 million over third-quarter last year. Our Casual Male stores, Rochester stores, and US direct business had a combined comparable sales increase of 2.3% or $1.3 million for the quarter.

Our store traffic, store conversion, and number of transactions are all up over Q3 last year. Store traffic increased 4.4% over third quarter last year in DXL stores open at least 13 months. Conversion, which we define as the percentage of visits that resulted in a transaction, increased 8.4% in DXL stores open at least 13 months over the prior year's third quarter. Transactions, which are the product of traffic and conversion, increased by 13.1% for the third quarter over prior-year third quarter.

Finally, the dollars per transaction metric for Q3 was flat to last year. Gross margin for the third quarter, inclusive of occupancy costs, was 43.3% compared with gross margin of 44.2% for the third quarter last year. The decrease was the result of a 90 basis point decrease in merchandise margin.

Occupancy cost as a percentage of sales were flat with last year. The decrease in merchandise margin was due to the increase in our promotional activity that David explained earlier. The free polo shirt, the Experience Book, and the October coupon all had favorable impacts on driving traffic to our DXL stores, increasing customer conversion, and driving the top line. Increasing our promotional activity is helping to transition our existing customer base to our DXL stores, as evidenced by our increases in DXL store traffic and conversion.

On a dollar basis, occupancy costs for the third quarter of fiscal 2014 increased less than 6% compared with the prior-year period. As a percentage of sales occupancy costs remained flat. We have decreased lease termination costs as we slowed the pace of Casual Male XL store closures, with many of the store staying open through their natural lease term. We are closing approximately 60 fewer stores in 2014 than in 2013.

SG&A expenses for the third quarter of fiscal 2014 decreased to 42.9% of sales compared with 46.2% for the same period a year ago. On a dollar basis SG&A expenses decreased by $800,000 year over year, primarily due to the shift in the timing of our fall advertising campaign. Preopening payroll, training, and other incremental cost to support our DXL store openings were $1.1 million for the third quarter of fiscal 2014 compared with $1.5 million in the prior-year third quarter.

Net loss for the third quarter was $6.2 million or a loss of $0.13 per diluted share compared with a net loss of $4.1 million or $0.08 per diluted share for the third quarter of fiscal 2013. On a non-GAAP basis, assuming a normalized tax rate for fiscal 2014, the net loss for the third quarter of fiscal 2014 was $3.7 million or a loss of $0.08 per diluted share versus third-quarter fiscal 2013 net loss of $4.1 million or $0.08 per diluted share. As a reminder, as a result of the valuation allowance against our deferred tax assets, we are not recognizing any income tax benefit on our operating losses in fiscal 2014.

For the third quarter of fiscal 2014, EBITDA was $300,000 compared with a loss of $1.8 million EBITDA for the third quarter last year. We want to speak to this number because we believe EBITDA provides a good representation of the underlying business fundamentals and therefore is a meaningful indicator of financial performance. As we progress through the DXL transition, cash management is critical for us, and we believe EBITDA is a key component in evaluating free cash flow. Therefore, we will be providing updates of this metric going forward.

Capital expenditures for the first nine months of fiscal 2014 were $30.8 million compared with $38.2 million for the first nine months of fiscal 2013. The $7.4 million decrease is primarily related to the slightly smaller square footage of our 2014 stores, which corresponds to a lower buildout cost. As of November 1, 2014, we have opened 29 DXL stores compared with 26 DXL stores at November 2, 2013.

Our goal at the beginning of the year was to avoid opening any stores during the critical holiday shopping season, and we are very pleased to report that as of today, we have successfully opened 41 stores this year compared to our original plan to open 40 stores in fiscal 2014. We now have a total of 140 DXL stores open across the country.

Our next store opening will not be until Q1 fiscal 2015. We expect to continue the pace of opening approximately 40 DXL stores and closing approximately the same number of Casual Male XL stores for the next two years.

Our inventory levels at the end of the third quarter were up $6.9 million or 5.7% from third-quarter last year. The increase in our cost basis is due to our carrying a greater percentage of branded apparel for our growing number of DXL stores. On a unit basis, however, inventory was down approximately 2% from year-ago levels. In addition, we are making a concerted effort this year to take early receipt of merchandise to ensure that we are in a stronger in-stock inventory position prior to key selling seasons.

Also noteworthy is the fact that our clearance merchandise is down 17% compared to Q3 of last year. Our clearance inventory now represents 9% of total inventory compared to 12% in Q3 last year.

Earlier, we talked about our enhanced online inventory management technology that enables us to offer merchandise in the stores to our online customer. This has had a very favorable impact on the sellthrough of clearance merchandise, and as a result our clearance inventory position is much cleaner heading into the fourth quarter than in the prior year.

In late October we announced that we increased our existing asset base revolving line of credit with Bank of America by $25 million to $125 million and entered into a new agreement with Wells Fargo Capital Finance for a $15 million, five-year senior secured second-lien term loan. This was a very opportune time to increase our borrowing capacity on favorable borrowing terms. As you know, we're spending a lot of cash on building out the new DXL stores, and these agreements give us the flexibility to complete the rollout by the end of fiscal 2017 without having to worry about any excess availability.

Keep in mind, these agreements did not increase our debt level; rather, they just increased our capacity. The $15 million term loan proceeds immediately paid down the revolving line of credit, therefore changing the composition of the debt but not increasing our total debt level. For the quarter from a liquidity perspective, we had $6.1 million in cash and cash equivalents; total debt outstanding of $73.9 million; and $75.1 million in excess availability under our credit facility at November 1, 2014.

And now turning to our guidance, we are reaffirming our full-year EPS guidance for fiscal 2014 today. To reiterate, we expect total sales to be in the range of $413 million to $418 million, a comparable-store sales increase of between 12% to 13% for the 91 DXL stores that have been open at least 13 months at year-end, gross profit margin to range from 45.5% to 46.1%, SG&A costs to be approximately $176 million to $177.6 million, EBITDA in the range of $12.4 million to $15.6 million, operating margin to be between negative 2% to negative 2.8%. And we expect a net loss of $0.21 to $0.27 per diluted share, or a loss of $0.12 to a loss of $0.16 per diluted share on a non-GAAP basis, assuming a normal tax benefit of approximately 40%.

Our net 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 projects to continue to improve the e-commerce site and the in-store customer experience.

Fiscal 2014 net capital spend of $36.4 million net of tenant allowances will be funded from cash from operations, equipment financing notes, and our revolving credit facility. Total borrowings at the end of fiscal 2014 are expected to be approximately $55 million to $60 million, consisting of a range of $20 million to $25 million under the credit facility, $15 million under the term loan, and approximately $20 million in equipment financings.

This concludes my remarks. We will now take your questions.

(Operator Instructions) Thomas Filandro with Susquehanna International Group.

Good job on the quarter, guys. And love the commercials. A couple quick questions -- David, the comment you made about that incremental promotion -- I think you said it was incremental, the 25/75 threshold -- curious -- with the strong results you achieve with that, are you planning to deliver more of those type of promotions, either in the holiday season or next year?

Peter, maybe can you address a little bit what -- on the port comment, I think you said you made some adjustments. But did you guys experience any issues related to the ports? How should we think about AUC?

And my other question was related to private-label performance. Any update for the quarter?

Okay, let me start with the promotions. No; next year we are pretty much going to be anniversarying our existing promotions. We try and do one every quarter. I don't see any need for us to put more emphasis on the promotions we had. Last year we had not had a promotion that was very effective in that time period. So that was a plus for us to do that. But outside of that, anniversarying everything will be the norm.

On the question on the ports, not an issue for us. We don't take receipts out of the West Coast. And we also had hold up of a lot of our receipts earlier, before a lot of this happened. So we are pretty well complete on our receipt flow. So I would say it really had no impact on our business with the port situations.

And finally, private label -- we are doing extremely well. It continues to perform against the brands. We haven't seen a whole lot of shift going on. But again, as we open new DXL stores, the branded penetration goes up; because, again, this is product that we never could have offered our customer in the past in these markets. So our private-label business continues to be very healthy. And, of course, it drives much more profitability than the brands in the end.

David, can you just remind us what the percentage mix is of private versus brand currently?

Yes. In a DXL store it's about 70% to 75% private label and the rest being the brands. And it does very dramatically by stores. We have stores as low as 15% penetration of brands, and some stores could be as high as 40% to 50%.

But we don't dictate what it's going to be. The customers in those demographics are telling us what percent of brands they want. But we do see the brands growing year after year within the markets, because a lot of that is where we are getting these new customers. They are hearing about the fact that we have a Polo shop; we have Lacoste; we have Brooks Brothers and 40 other great brands out there.

One new note to offer -- we did launch on our website and going into some stores UnderArmor. And we really like the results of that. That was a missing brand for us, and our customer is responding quite well.

And just the AUC question?

Pardon?

I was acting about average unit costing. How should we think about average unit costing currently and heading into 2015 with cotton prices being lower?

Yes; we feel pretty good about it. We have already established some nice savings for 2015 in our private-label programs. One of the positives that we've moved towards is we've grown our percent of global sourcing internally as opposed to using third parties. Within our own global sourcing process right now, we are negotiating directly with the mills to supply the materials to the factory, which -- we have been finding cost savings there. But our global sourcing team has done an outstanding job, and they continue to take over programs that we have previously used outside vendors for.

Thanks for the comprehensive update. Happy Thanksgiving. Best of luck over the holidays.

Laura Champine with Canaccord.

The guidance implies a pretty big reversal in gross margin in Q4. And I know that you got easier comparisons. But can you give us more color into how you expect to achieve better gross margins in Q4?

Laura, where we have been in Q3 is we are down about 90 basis points from last year. As we move into the fourth quarter, our clearance inventories are actually in a much better shape than they have been in the past.

One of the points that I had mentioned was clearance inventory is about 9% of our total inventory compared to 12%, where we were a year ago. So we also see that in Q3 we had the big promotion with the October coupon, whereas in Q4, much of our traffic and sales that we are expecting are going to be coming from the national ad campaign.

And one thing I would add to that is if you look at -- the job we have done in getting these stores open on a timely basis has dramatically improved over last year. At this point last year, we still had 25 stores that we opened between now and the end of the year, and that carried with it a lot of fall product that we did not have a good opportunity to liquidate. So we had margin pressures in Q1 of last year liquidating that inventory. Again -- emphasizing the fact that our inventory is clean, the stores are open and operating, we should see margin improvement going into next spring.

Got it, thank you.

Liz Pierce with Brean Capital.

Nice job, you guys. David, could you just go over some of the comments that you made in the very beginning on 82% more customers in Casual? I just didn't quite follow it. If you wouldn't mind repeating that for me?

Well, yes. What I'm saying is that when we compare a Casual Male store to a DXL store, the database within that store, we have 82% more customers in a DXL store than we had in a Casual Male store, which is great.

The other part is that of any existing customer in DXL, what we look at in our database is -- to be active, you have to have shopped within the last 12 months. And in a DXL store, we retain them at 30% greater than we did in the Casual Male store, which is critical. So not only are we getting more customers, we're getting them back more often. It's got a lot more stickiness to it.

They are (technical difficulty) they are seeing, they are coming back again. So what's exciting is, as we start to extract this out over time, we really see what's going to happen is our customer base is going to grow significantly over the next few years, because, again, we're getting more customers; and they stick around longer; and they shop more often.

So those are new metrics that we haven't said publicly before, but we are very excited at the rate they are growing. So, again, very promising numbers to look at.

And so that 82% more customers -- those are people that have actually spent? Right?

Yes, yes. It's not based on traffic; it's on being in our active database.

Okay. And then, question on what you said on the stores that you are keeping open longer. I guess you call them clearance stores.

If we look at the -- I think you are going to be closing like 48 stores this year. Are there more that you would close? I guess I'm trying to get my arms around how many more might close next year than the 40 that you have kind of talked about.

Yes. Well, let me give a little color on that. First, so we have now opened all the DXL stores this year. We currently have 20 of the Casual Male stores that would have been closed, because we used to close them five days prior to the new store opening. We've kept those 20 stores open as clearance stores till the end of the year. Then they will close.

On one hand -- the leases were probably up, most of them, to close at the end of the year. So it's lowering our lease exit cost; plus, it's allowing customers that go into those stores to be told where the new store is. So this is -- we try and give it like three months to keep that store open.

So that's why --

Next year we'll probably -- pardon?

Go ahead. I'm sorry.

Next year we'll follow the same pattern. We're going to -- when we opened 40, probably, and closed 40, as we get to the end of the year, we will probably keep 20-some -- it's too early to say -- open as clearance stores for that three-month process. It's a good transition for us. The cost to keep that existing store open -- it's not that meaningful.

Okay. So that's why there's more in the back -- in the fourth quarter, then?

Yes, because most of our leases are due at the end of the year.

Right. And then a question on the end-of-the-rack guy -- so it's 42.4% versus 33%. Was that year over year? I just want to make sure I have the right compare.

Yes; that's comparing it to last year at the same quarter.

So at Q3. Okay. And then --

And let me --

I'm sorry. Go ahead.

Let me add something to it, because that's one way to look at it. That's comparing it to a Casual Male store. But also, compared to a DXL store, I think it was about 40 --

40.5%.

40.5%. So, you know, it's still going up. That's a big lift for us, because that's a pretty difficult number to move in total.

Okay. So that makes more sense. I didn't have that 43% number. So that is Casual Male?

Right. I'll just repeat it again. It's 42.4% this year versus 40.5% a year ago at the same quarter.

All right. DXL to DXL, quarter to quarter?

Yes.

Okay. And then on the advertising that you are doing, or not -- to reactivate the customers, the free polo or the $50 coupon, what are you seeing is the most effective? Is it the $50, the free one?

Well, that's a good question. It's kind of like a one-two punch. The $50 one is very strong. But again, the free polo has been doing really well.

So what we do is we start with the free polo. If they redeem that promotion, then they would not get the free $50 and the Experience Book. But the combination of the two is what's really driving that increase in conversion. It's a compelling offer.

And what we track more is, okay, they came in for the free polo; did they come back and shop? And we haven't given that number out, but it's more than exceeding our expectations. That customer who is getting that first-time, very aggressive offer is coming back, which is telling us he likes the experience.

Right. I guess that was my question, and I didn't phrase it correctly. In terms of driving the customer back after they redeem whatever one they do, which one has been more effective? Are they about equal?

I think they have been fairly equal.

Okay. Okay. All right. That's all I have. Thanks and best of luck for the holiday, guys.

Mark Montagna with Avondale Partners.

A question about the advertising -- how many fewer weeks of advertising did you have here in the third quarter versus last year?

Three.

Okay. And then what is the total ad spend going to be for this year's fall campaign versus last year's fall campaign?

Well, it's actually down about 30% in dollars. It's down about 18% in hit rate, in response to what customers are actually seeing. We got a much better rate on our investment this year, which is very positive. But the dollars are down about 30% from a year -- from last year's fall campaign.

Okay. And then looking at the smaller stores versus the larger stores, if you look to next year, roughly how many smaller stores do you think you are going to open, and then how many of the larger stores? And what would be the average square footage of these larger stores?

Okay. So I think we'll have about 10 of the smaller stores and 30 of the larger stores. And the square footage of the larger stores now are coming in the range of 7,000 to 9,000 but averaging under 8,000 square feet.

Okay. And what was -- the smaller stores are 5,600 square feet?

They are 5,000 to 6,000 square feet, generally.

Okay. All right. Then looking out to next year, do you think it's possible to have a breakeven year?

Well, Mark, that's a good question. You may recall we were asked this last quarter. And we are going to give you guys an update on guidance in Q4 on our next call. But right now we are not going to talk about 2015.

Okay. And just kind of a housekeeping question -- did you say that the direct comp is now part of the Casual Male comp? Or how are you accounting -- which category -- what are you --?

Sure. So the direct comp has always been in our total comps. It's still in there now. The only thing that we've done differently this quarter is we are not giving direct comp as a single stand-alone channel. So what we are talking about is -- we gave the total comps, which were 5.5%, the DXL comps, and then everything else.

Okay. But does the DXL comp include any direct -- any sales from direct?

No. The DXL comp of 12.8% is just the stores.

Okay. All right. Excellent, thank you.

Jack Balos with Focus Research.

The order online -- do you also pick up in stores as well as being able to distribute from the stores?

The order online/pickup in stores will be available approximately next March. We are in the design and development stage of that right now.

And as I said, we are looking forward to that, because our customer often buys on need and wants something that day. So we think it's going to be a good enhancement for us. Plus, once we get them into the store to pick up that item, our salespeople will be ready to add onto that purchase.

The additional spending for advertising for the fourth quarter -- how does that compare with the fourth quarter last year?

It's about the same because of the shift in the dollars. As David said, we are spending less overall, but because we are moving some of those dollars into the fourth quarter, it comes out relatively the same.

The same? Okay. I was also wondering, do you have any plans to open a store in Manhattan?

Yes, we do. It should -- we are opening a store actually at 23rd and 6th. It's a great area for us. We've got a lot of big retailers on that block. And we will be opening that store in spring.

Oh, in the spring of next year?

Yes.

Okay.

It's already -- it's under construction right now.

Oh, good, good. Okay, thank you.

Mike Richardson with Sidoti.

I just want to actually follow up on a couple of previous questions. The first is with regard to the smaller stores. I know it's a pretty small sampling, and it's early. But can you talk a little bit about the sales performance there? And then longer-term, with adding the smaller DXL boxes, how are you thinking about the longer-term footprint of DXL stores?

Okay. The smaller-store markets -- in case any of you are traveling -- St. Charles, Illinois; Lafayette, Louisiana; Toledo, Ohio; Temecula, California; Bakersfield, California; Topeka, Kansas; and Franklin, Tennessee. But all these stores opened within the last 30 to 45 days. So it's premature for us to give any numbers out on it. But I can tell you, we are very pleased with the early results on the sales so far.

Going forward, we just keep tightening up the stores the best we can, because it has a dramatic impact on our pro forma, and profitability, and return on investment, and all those great things. So going forward, as we said, 7,500 square feet really gives justice to just about any market.

A market like Manhattan would be different; that requires a larger box. But we've made a dramatic shift. Currently our stores average 8,900 square feet. And again, we've whittled that down. And again, we've reengineered the fixtures and the display areas to really not have a sacrifice in having the number of units in the store.

It's just creating an environment where we could have the same DNA of these big stores and do it in a smaller box. So it has been going extremely well for us in getting these stores sized properly.

And one thing that I just wanted to add was, as David was saying, the real benefit for going with these 5K stores is that we can still achieve the same kinds of performance metrics that we can in the larger stores that we otherwise may not have been if we had built a larger store here. So, for example, sales per square foot, which is a number we have been really happy with this year -- overall this year, sales per square foot is going from $147 up to $165 at the end of this year, which is a great improvement.

And part of that reason is when we open these 5K stores, if we were building it out at 8,500 square feet, the sales per square foot would just not be at an acceptable level for us. So now that we've put it in at 5,500, 6,000 square feet, we can make the numbers work.

Okay, that's helpful. How about in terms of number of DXL stores longer-term? What is the opportunity there? Are we still talking about 300?

Yes, we are very comfortable in that 300. And then we have to look to fill in markets. The number could go higher. And I think on our next-quarter call, we will have a better understanding of the exact store count for next year.

Okay, great. And then just a last one from me -- what percentage of sales are fulfilled from the DC as compared to stores? And is there any concern that doing some e-comm fulfillment from the stores will leave some of those stores under-inventoried with the most popular merchandise?

That's something that we think about all the time. But we have very strong replenishment system, where we replace one for one. So we don't do a lot of prepack. So if the store sells a 3XL of a certain item, they are going to get shipped back that item within that week. So we don't feel that's going to be a major issue. What was the first part of the question?

What percent of e-comm -- yes.

It's less than 10%.

Okay, so it's a small portion. Okay. Thanks, guys, very much, and best of luck for holiday.

Chris Krueger with Lake Street Capital Markets.

Just one question -- you talked about how your new technology is enabling 300 stores to fulfill the online orders that you can't fulfill from your distribution center, and that this omni-channel experience is evolving. Can you -- I was just curious on the timing of this. Is this a recent initiative, or is it something that just keeps building every quarter? Or did you flip a switch a few months ago to really kick it in? Or how should we look at that?

Yes; well, we did, in a way, flip a switch. We started it in a limited number of stores starting in April of this year. And we are basically adding 20, 30 stores at a time, and it just keeps building.

And what's fascinating about what's taking place is 40% to 50% of our transactions in that category are clearance items, which kind of makes sense. Because if the warehouse has it in stock, it's going to have the priority to ship it out of the warehouse.

But what they are finding is, as we are turning on these 300 stores, they have product that has been sitting in their back room or on a clearance rack for the last year or two, and suddenly it's visible to the whole buying community -- that they can buy that marked-down item in a store that's 300, 400 miles from their home.

So it's just been an excellent vehicle. And that's why our clearance inventory has dropped dramatically. It's an excellent way to keep our stores clean.

Good, that's very helpful. My other questions have been answered. Thanks a lot.

Liz Pierce with Brean Capital.

Hi, just a couple follow-up questions. David, on the incremental promotion that you did this year, is the reason you didn't do it last year was because you were running the ad campaign? I just wanted clarification.

Well, actually, it was really not a strong event. We ran a points promotion a year ago, where if you made purchases, we gave you additional points through the loyalty program. And with our customer, he'd prefer to see the cash.

So it was just a much better improvement on what we did a year ago. It was a lesson to learn for us that the points-driven promotions aren't going to drive customers into our stores.

Okay. He wanted you to show him the money. And then the seven stores, the small stores -- are all of them similar to the St. Charles store, where it opened fairly close? Or did you have to move it a fair distance away?

It varies. Lafayette, Louisiana -- it's probably seven miles. They do vary.

Okay.

Topeka -- looking at the list, they do move. There's no -- again, it's more likely to move, because in these smaller markets where we've had a store for 25 years, the real estate is probably not very good. It's probably in a strip center that's got a lot of vacancies. And we are moving all these stores.

Even in the smaller markets, they do have new trade area where all the retail moved to. And we are moving those stores to wherever that strong trade area is.

Okay. And then, actually, one other thing on the promotion -- was it sent strictly by email? Or was there any kind of direct mail piece?

It was direct mail.

It was both. It was both? That's how you delivered it, email and direct mail?

So, Liz, there was really three ways to get that promotion. We had direct mail, we had emails, and we also had the offer up on the site. So any one of three ways that people could have gotten to it.

Okay, perfect. All right, thanks. Best of luck again.

(Operator Instructions) Mark Montagna with Avondale Partners.

Just a follow-up on the e-commerce with fulfilling from stores -- is your intention -- if you have -- if the computer system tells you that we have the product both in the fulfillment center and in the store, what is the computer going to default to as far as fulfillment?

So, Mark, the way that that works is if the product is in our centralized DC, that's where we want to fulfill from. We get the best shipping efficiencies from there. But if the product is not in our DC -- and so, for example, if it's sitting on a clearance rack out in a store, then it will then default to the store. But we would ship from the DC first.

And once it defaults to the stores, it's based on location. We want to ship it from a store that's close to where that customer is.

Right. So it sounds like this is more of an opportunity for getting rid of -- you know, selling through clearance as opposed to fuller-priced merchandise. Is that true?

Yes. And it also allows a lot of the higher-priced goods that gets into limited distribution. Certain price points are prohibitive for us to put into some markets; but now that customer could see that product, because we don't keep a lot of that in the warehouse. So it goes a lot of ways. But again, it is a real driver for that value customer who is looking for deals.

Okay. And then just -- you have your custom suits. And those could be bought by anybody who is not really a big, involved customer. Do you do anything to try to promote that to the general public, to let them know what a great value these custom suits are?

No. It would be cost prohibitive for us to take that approach. We got our hands full really trying to build our database of our big and tall guys out there.

And again, it's not a significant part of our business. It's a great feature to have; it gives credibility to our clothing department. But there's nothing on our agenda to go in that direction.

Okay, thank you.

And we have no further questions in queue at this time. I would now like to turn the call back over to David Levin for any additional or closing remarks.

Yes. I would just like to thank everybody for being on this call. And as always, we always invite you to visit one of our DXL stores. We know it's a great experience, especially compared to what we had in our Casual Male stores.

So give us a call if you would like to inquire about a store location or would like a tour. And, finally, we look forward to speaking with you on the next quarter. Thank you very much.

Happy Holidays for everyone. Enjoy your Thanksgiving, as well.

And this does conclude today's conference call. Thank you all for your participation. You may now disconnect.