Destination XL Group Inc (DXLG) 2021 Q1 法說會逐字稿

Ladies and gentlemen, thank you for standing by, and welcome to the Q1 2021 Destination XL Group, Inc. Earnings Conference Call. (Operator Instructions) Please be advised that today's conference is being recorded. (Operator Instructions)

I would now like to turn the conference over to your speaker today, Ms. Mokas, you may begin.

Thank you, Angie, and good morning, everyone. Thank you for joining us on Destination XL Group's First 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 now 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 updated sales and earnings guidance and other expectations for fiscal 2021. Such forward-looking statements are subject to various risks and uncertainties that could cause actual results to differ materially from those assumptions mentioned today due to a variety of factors that affect the company.

Information regarding risks and uncertainties is detailed in the company's filings with the Securities and Exchange Commission.

I would now like to turn the call over to our CEO, Harvey Kanter. Harvey?

Thank you, Shelly, and good morning, everyone. It is my pleasure to speak with you today about DXL and the solid progress we are making in our business financially in terms of sales and profit as well as in regards to our ongoing strategic transformation.

On our fourth quarter earnings call in March, I shared with you my perspective that we were starting to see signs of a shift in consumer buying behavior and our optimism for greater recovery in fiscal '21 was growing. In starting today's call, while I have several opening comments, I want to certainly lead off by saying sales in both our stores and direct channels have continued to accelerate, and our first quarter financial results have materially exceeded our internal expectations. This has been a strong quarter for DXL and a quarter we believe is a step forward in a post-pandemic world.

We are both fortunate and grateful that since we last spoke, our teams and the recrafted operating model in place are working well to drive sales back and enhanced levels of profit as we serve the big and tall consumer through our ongoing digital transformation.

Given our first quarter's performance and what we believe is a chapter of greater growth from our initial expectations at the onset of the year, we are raising our guidance for fiscal 2021's annual performance, which Peter will cover in more detail later.

As I noted, before I get into the first quarter business details, there are a few topics that I want to cover off. First, I truly want to thank all of our employees in our stores, in our guest engagement center, in our distribution center and in our corporate supporting departments for your unwavering commitment to our mission of empowering big and tall men everywhere to look good and feel good. And I actually want to pause for a second here and truly acknowledge, not just thank, what the team has taken on their backs to accomplish on behalf of DXL. If not for the dedication and commitment of the teams we have in our stores and our distribution center, our call center and corporate office, we most certainly would have not made it this far.

We strive to be an employer of choice, an employer of choice for all of our associates. We strive to be a place that may not only earn a paycheck but believe and are engaged in who we are and our purpose and the culture that we so often speak about.

I started at DXL just over 2 years ago. To say it has been a very challenging journey is an understatement we all recognize, but to continue to build upon what we have both accomplished and begun to create requires that we all double down on our efforts to do more, be more and not just for our customers but equally for our associates who have helped us to live to see another day.

To be an employer of choice means we are happier, create better outcomes for ourselves and, in turn, our customers. And today, as we embark on growing levels of recovery and hopefully, good fortunes, I want to be equally clear, we strive to be an employer of choice. And together, we are working harder to be just that through ongoing efforts to provide greater growth and development, to provide a culture that is endearing, to better balance life and work, and to be worthy of their esteem and to continue to pursue the shared purpose we all have.

I am hopeful that our continued actions will set us apart both as an employer and as a retailer, creating improved results as we steer to bring our vision and mission to life and return to shareholders.

Our vision and mission at DXL as we endeavor to be THE market leader is to deliver a big and tall shopping experience that fits, fits his body, fits his style and fits his life, to bring a breadth and depth and a level of exclusivity in an assortment of clothing that cannot be found anywhere else. And to create an experience rooted in the value we place in our consumer and the respect we have for him and in our desire to build a trusted relationship, creating a level of satisfaction and happiness that distills as few retailers have a community and belonging, driven by our culture and the very employees who interact with our guests every single day.

We are truly grateful and proud of what our team has accomplished over the past 18 months, and the credit goes to all of you who answered the call day in and day out to serve and support our big and tall guys.

Second, I want to recognize DXL's ongoing discussion to promote inclusion and diversity in the workplace. A little over 3 weeks ago, I, along with DXL, made a commitment to the CEO Action for Diversity & Inclusion coalition. Through this organization, DXL has pledged to take a greater action to cultivate a workplace where diverse perspectives and experience are welcomed and respected, and where employees feel encouraged to discuss diversity and inclusion.

For the past 3 years, we have promoted these values through our own company initiative, which we call "Normalizing the Brand," which helps us recognize and address unconscious bias. But now we have taken another step on this journey by joining a coalition of nearly 2,000 other CEOs and companies who believe that together, we can affect positive change. Our commitment to the coalition is a natural extension of our own internal culture and our prioritization for diversity and inclusion as we continue to evolve.

And third, I want to give a warm welcome to Elaine Rubin, who joined our Board on April 14. With over 25 years of digital experience, Elaine is an e-commerce pioneer with digital insight and expertise in the direct to consumer business and consumer marketing. Elaine is the Founder and President of Digital Prophets Network and her extensive experience, coupled with DXL's strategic digital transformation, which is well underway, leads us exponentially to greater opportunity to further accelerate our business. I have personally known Elaine for over 10 years, and I'm thrilled to have her join our Board of Directors.

And now with that said, let's talk about our business. I am planning to cover 2 topics today. First, I want to talk to you about our first quarter performance and what we are seeing and hearing from our customers. And second, I want to talk to you about our priorities for the remainder of 2021 and how we see our company evolving in a post-pandemic world as we lean into 2022.

I am very pleased to announce that for the first time in 8 years, DXL is reporting meaningful net income for the first quarter. Since 2019 was our last normalized year from a financial standpoint, we will be making our comparisons year-over-year to 2019 results.

Our first quarter sales were $111.5 million compared to $113 million in the first quarter of 2019. Our adjusted EBITDA for the quarter was $13.7 million compared to $4.8 million in the first quarter of '19. And finally, our net income was $8.7 million compared to a net loss of $3.1 million in the first quarter of '19. These results exceeded our expectations and are a direct outcome of the leverage we've created as we've recrafted our operations and drove sales greater than internally expected.

We've held a firm belief that our customers will return as the pandemic began to subside, but we really didn't know when that would actually happen. Our plan for the year was constructed on the thesis that business would return gradually and over the year. But clearly, we have seen a dramatic acceleration in the first quarter to a level consistent with 2019. Again, this has been a truly remarkable start to fiscal 2021 and gives us incredible optimism with our prospects for the balance of the year.

Let me expand a bit on what's been happening with our customer. As many of you know, our greatest challenge in 2020 was store traffic. For part of the year, our stores were closed. And once they reopened, they came in and demand for new clothing accelerated, initially from a very sluggish position. Throughout the pandemic, customers were telling us, "I love your store, but I really don't have anywhere to go, and I'm staying home. I don't need anything from you right now." We started to see that sentiment shift after vaccines were being administered and pandemic restrictions were starting to scale back in different parts of the country. Suddenly, many of our customers are venturing out of the house again. He is socializing, he's resuming activities to enjoy pre-pandemic, and that creates a need to shop for new clothes.

There was certainly a tailwind to some degree of pent-up demand for clothing being relieved in the first quarter's results. We were expecting this to happen at some point, but not so soon and certainly not so dramatically. Another tailwind that had some level of impact on consumer demand were stimulus checks that started hitting bank accounts in mid-March. While it's impossible to quantify how much of the business' acceleration was due to stimulus, it cannot be ignored. We heard more than once from our customers when posing the question, what brought you in today? The answer was "stimmies" and the direct reference to stimulus checks, urban dictionary or perhaps a new Webster definition. The stimulus checks clearly were a driver for consumers getting back out to shop. Fortunately, our sales trends are continuing to surpass 2019 levels. And even now, 10 weeks passed when the last round of stimulus checks were being deposited.

Finally, we cannot ignore the fact that warm spring weather arrived early in much of the U.S. in April and continued into May. We have known for years that the changing seasons are often a catalyst for our customers to come in and shop. Oftentimes, our customers will begin changing from his winter wardrobe to his warm weather clothes and realize some things may not fit or it's just time to replace his clothes. The confluence of these 3 factors all coming together creates an environment ripe for shopping, and we are happy that DXL has been there to serve his needs.

In the month of February, our comparable store sales were down minus 33%. but rebounded to over 3% positive in both March and April as compared to 2019. Meanwhile, on the direct side of the business, overall business continues to improve. Sales on our DXL website were up 55.8% to first quarter 2019 with gains in traffic, gains in conversion and gains in average order value. In both channels, there was a clear acceleration in March and April, and that momentum has continued right into May.

Geographically, we've seen our strongest performance in the first quarter from the Southeast, South Central and Midwest parts of the country. Our business on the coast has trailed behind the middle of the country by approximately 800 basis points, which is similar to what we saw in the fourth quarter of 2020. While traffic to stores has not fully recovered to fiscal 2019, we are seeing more visits with intent to buy, which is being realized, as I noted, through strong growth in conversion and strong growth in dollars per transaction.

Now let me shift to a quick update on our merchandising strategies. We continue to see casual sportswear, active and loungewear drive meaningful business, which was led by Polo, Nautica and Reebok. This is particularly encouraging because it comes at a time when we are leaning in to more full price messaging and less reliance on promotions. Fit, comfort, functionality and versatility are essential features expected by our customer and embedded in the key categories that are driving our spring season.

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Moving to inventories. We have managed inventories conservatively, and we are down 21.3% from first quarter '19. We have been working very hard to maintain our supply chain and logistics through our global sourcing organization. One of the challenges that emerged in the second half of 2020 continues today are supply chain disruptions from a shortage of containers and vessels available for delivery of overseas products, which I'm sure you've heard often. Our spring receipts were largely unaffected by delays, but the cost of freight has been escalating. We are also seeing increase in costs for certain raw materials, particularly in cotton, which is being exasperated by the humanitarian crisis in the Shenzhen province of China. Right now, we are sourcing less than 5% of merchandise from China and expect to be out of China, sourcing-wise, entirely by the end of the year.

We also continue to have a heightened awareness and concern regarding forced labor and ethical manufacturing through our world-class sourcing organization. We are a member of Sedex, one of the world's leading online platform for companies to manage and improve working conditions and global supply chain, and we are actively partnering with several of the brands and retailers to continue to proactively create a transparent and ethical supply chain.

With regard to occupancy costs, we continue to engage with landlords to negotiate leases that are no longer at market rates. The pace of negotiations has slowed dramatically compared to 2020, but we are pleased with the progress we've made so far. In the first half of 2020, we negotiated approximately $10 million of rent abatements and deferments. In addition, we restructured 115 individual store leases, more than 1/3 of our chain. Since the beginning of 2020, we are expected to deliver over $16.1 million of savings over the life of the lease, including $6 million expected specifically in fiscal 2021. We continue to push hard to reduce these lease costs with these landlords where our rents are out of line with sales.

Now let me shift to the second topic I want to discuss today, specifically how we see DXL in a post-pandemic world and what our priorities are for the remainder of 2021 as we lean into 2022. First, I want to talk about our promotional strategy. Our overall promotional strategy has been shifting for the better part of 9 months from sale discounts and coupons to more full price messaging with a specific focus on differentiated product full of features and benefits to exclusive products and unique selling propositions.

Promotions were fewer, more targeted and overall far more efficient in Q1 than in prior years. Promotions were made available to a much smaller, more targeted audience through our developing segmentation and personalization capabilities with ensuing offers to not being public, meaning not on the website, not on the app and not in stores. Promotions were built around lapsed customers or increasing frequency, but not generalized and communicated broadly in any of our marketing. This strategy drove significant savings in markdown dollars and created an increased gross margin rate and specifically improves our brand's positioning. This is a change we expect to maintain in terms of this promotional posture further into 2021.

Last year, during the pandemic, we were forced to incur deep promotions as you expect to drive traffic to our site and encourage buying. This year, we have taken a much different approach by focusing our marketing dollars on key product differentiation and are uniquely curated and exclusive assortments. We know there's a place for promotions, but as we move forward in 2021, we do not expect to return to levels approximated in 2019, let alone what we're forced to execute during the pandemic toughest days as we drove liquidity outcomes.

Next, let me share with you how we are thinking about our evolving brand's positioning and the addressable market. We have immense learning coming out of 2020, and we leverage a lot of these insights to drive our Q1 2021 performance. As we have discussed, the dxl.com business grew by 55.8% in Q1 to 2019, not only driven by existing customers returning to DXL as they came out of quarantine and started to socialize, but driven by significant growth in new customers. As a business, we acquired 35.7% more new customers in Q1 2021 than in the same period in 2019. A large part of the new-to-file growth is attributed to our enhanced digital marketing capabilities to target prospects in a target market that's growing and converting them efficiently to drive results.

Driving positive outcomes with customers across channels continue to be our top priority, and we have been making great progress on this. Our approach has shifted from wanting to drive customers to the stores or to the web, to driving customers to DXL and being there for them based on how they choose to engage and experience DXL, whether in our stores, on our app, or on our website. Our most loyal customers who have been a focus of our marketing efforts for the past 6 months have shown positive signs of returning to stores, with some of our segmentation initiatives truly paying off.

We discussed our test and learn strategy in our last earnings call, the learnings from -- which not only helped refine our short-term promotional cadence in Q4 2020 and Q1 2021, but have also meaningfully influenced our long-term marketing and brand strategy to create market share and mind share with our customer and with new guests alike. We seek to create a more enduring and comprehensive relationship that is stickier with consumers and creates greater advocacy for DXL more broadly across the retail landscape and in general, business.

Speaking of market share, based on research we have done, we believe the total addressable market for core merchandise we sell is north of $10 billion. While all along we have continued to reposition the DXL brand, we have pivoted from pandemic-driven actions that included more finitely managing our cash, liquidity and credit to a perspective clearly on the offense, driven around approach to acquire customers, the opportunity to grow market share coming out of the pandemic.

We have conceptualized as a team and clearly articulated our vision for the business, bringing this to life now, and we'll continue to do so throughout 2021 to further strengthen our defendable position and our moat as we look to create greater inflection in 2022 and beyond. We refer to this evolving positioning in everything we do today and believe it is the position's competitive stance that makes us the leading big and tall men's apparel retailer with the greatest possible potential for growth in consumer mind share, yet alone market share.

We are continuing to evolve how we engage consumers with more relevant and personalized messages to our different customer segments across all touch points. We believe the goal of not creating -- not only creating short-term behavioral change, but also driving measurable long-term loyalty as judged by NPS scores, Net Promoter Scores specifically, which will result in growing and even greater advocacy at being stickier for the DXL brand with consumers.

And finally, let me give you an update on wholesale. In total, our wholesale business, which is primarily driven by Amazon, generated sales of $3.1 million for the first quarter compared to $2.4 million in the first quarter of 2019. While there are some challenges, wholesale projections, receipt flow and in-stock levels, we continue to work to find a path for our wholesale business that works for DXL and works for Amazon. We also continue to search for new opportunities to grow the overall wholesale business. Thank you.

And now let me turn it over to Peter for an update. Peter?

Thank you, Harvey, and good morning, everyone. I'm very excited to speak with you today about our first quarter results. As Harvey discussed, the turnaround in our sales trends that began in March occurred sooner and more dramatically than we had expected. Along with the increase in sales, we pulled back on promotions and leveraged the many cost reductions that we implemented over the past year, which drove improvements in earnings, cash flow and our balance sheet. Accordingly, we are increasing our full year sales and earnings guidance, which I will review with you after I discuss the first quarter results.

Due to the significant impact that COVID-19 had on our first quarter 2020 results, I will also compare our results against Q1 of 2019 for better comparability. So let's start with sales. Total sales for the first quarter were $111.5 million as compared to $57.2 million in the first quarter of fiscal 2020 and $113 million in the first quarter of fiscal 2019. On a comparable basis, total sales increased 3.7% over first quarter 2019. Stores were down minus 6.7% for the quarter to 2019 levels and improved rapidly from minus 33.1% in February to over plus 3% in both March and April.

Harvey spoke about some of the tailwinds that we believe the stores benefited from this quarter, and there was a strong correlation to store performance, vaccine distribution and relaxing of state-specific COVID restrictions. While it is uncertain how long each of these tailwinds will last, we are please to see similar trends continuing in May. Our direct business continued to build and was up 40.7% over 2019, primarily driven by the dxl.com website, which was up 55.8%. We are especially pleased by the high number of new-to-file customers that have found us through the web. Also worth noting is that even as our store business rebounded in March and April, our website sales also accelerated. So we did not just experience a migration of direct shoppers back to stores, but an overall lift across all channels.

Our gross margin rate, inclusive of occupancy costs, was 45.6% as compared to a gross margin rate of 23.1% for the first quarter of fiscal 2020 and 43.7% for the first quarter of fiscal 2019. The 190 basis point improvement over 2019 was primarily driven by a $2.6 million decrease in store occupancy costs as a result of closing unproductive stores and our ongoing rent reduction initiatives. Even more exciting is the shift in promotional posture that Harvey talked about. Repositioning our brand to be more full price and less reliant on discounts and coupons will continue to benefit us long-term through improved margins and elevation of our brand image with both customers and suppliers.

Now let me move on to selling, general and administrative expenses. As a percentage of sales, SG&A expense for the first quarter of fiscal 2021 were 33.3% as compared to 56.1% for the first quarter of fiscal 2020 and 39.5% for the first quarter of fiscal 2019. The 33.3% rate is far lower than our historical expense rate and is the result of the cost reduction actions that we implemented in fiscal 2020. These actions were intended to not only preserve liquidity but to lower our operating cost structure long term. Most of you will remember that these reductions included reduced store hours and staffing models; reductions in marketing costs, especially through broad-based non-digital channels; a 29% reduction in corporate headcount; and elimination of services, travel and discretionary spending.

We are being very diligent about preserving as many fixed cost reductions as possible despite the fact that certain variable costs will increase as our business accelerates. We will continue to invest in our store associates and store hours to ensure that they are properly trained to provide an exceptional DXL guest experience, but we expect store costs to remain significantly below historical levels. Customer-facing costs were 17.9% of sales in Q1 as compared to 22.6% in the first quarter of 2019. Corporate support costs, which include the distribution center and the corporate overhead costs, represented 15.4% of sales in the first quarter compared to 16.9% of sales in the first quarter of fiscal 2019. On a dollar basis, SG&A costs were down $7.5 million compared to 2 years ago.

Adjusted EBITDA was $13.7 million for the first quarter compared to a loss of $18.9 million in the first quarter of 2020 and earnings of $4.8 million for the first quarter of fiscal 2019.

Net income for the first quarter was $8.7 million or $0.14 per diluted share compared with a net loss of $41.7 million or a loss of $0.82 per diluted share for the first quarter of fiscal 2020, and a net loss of $3.1 million or a loss of $0.06 per diluted share for the first quarter of fiscal 2019. This is the strongest first quarter net income per share that we have delivered in the last 20-plus years.

Next, I'll turn to cash flow and the balance sheet. We spent the past year with relentless focus on preserving and enhancing liquidity. In February, we completed a registered direct offering for 11.1 million shares of our common stock, through which we raised $5 million. Also, in March, we entered into a new $17.5 million FILO term loan, the proceeds of which were used to pay off our existing $15 million FILO. Our new FILO has a higher advance rate and will provide us with additional borrowing capacity of $5 million to $10 million going forward. Both the stock offering and the new term loan provided additional flexibility to liquidity. In addition, our revolving credit facility, which supports our seasonal inventory purchases, remains in place until May of 2023.

Free cash flow for the first quarter, which does not include the financing transactions I just mentioned, improved significantly to proceeds of $7 million as compared to a use of $18.4 million in fiscal 2020 and a use of $20.2 million for the first quarter of fiscal 2019. Most of this improvement is due to our improved profitability as well as improved inventory turn. With our liquidity position fortified, we have returned to our historical practice of utilizing our daily cash inflows to pay down our revolving credit facility. As a result, you will see we have a relatively low cash balance on our Q1 balance sheet, but also a much lower debt balance.

For a more consistent comparison we look at debt net of cash, which decreased to $44.3 million at the end of the first quarter from $68.2 million at the end of Q1 2020 and $72.3 million at the end of Q1 2019. That's an improvement of nearly $30 million from 2019 to 2021. Our revolving credit facility had $51.1 million of excess availability at the end of the quarter. We are very pleased with these improvements to our financial position, lower debt, increased availability and positive free cash flow. We expect to continue using free cash flow generated in fiscal 2021 to pay down debt.

Now just a couple of quick notes on inventory. Our inventory balance decreased to $88.4 million at May 1, 2021, as compared to $108.3 million at May 2, 2020, and $112.3 million at May 4, 2019. Of course, last year's inventory was impacted by the unexpected store closures, but we do believe our current inventory levels are more representative of the improved inventory turnover we should expect going forward.

Since the first quarter of last year, we have been managing our inventory conservatively, narrowing our assortment, while driving meaningfully greater levels of exclusivity with national brands, and at the same time, working to maintain our supply chain and logistics capabilities. At the end of Q1, our clearance inventory represented 10.1% of our total inventory, which is in line with our long-term goals.

We continue to monitor supply chain disruptions across the globe that could delay inventory receipts in the second half of the year. At this time, we don't foresee any sales jeopardy from supply chain disruption. But it is a risk that all retailers are managing as consumption continues to outpace production across a variety of industries.

I also want to address a topic that is top of mind for some of our shareholders and that is whether we plan to return to a National Stock Exchange such as NASDAQ. As many of you know, we elected to voluntarily delist from NASDAQ in December 2020. At the time, we did not meet the minimum listing standards and chose to list our stock with the OTCQX market. Currently, we do not have any plans to apply for relisting on NASDAQ. We are aware of the required listing standards for new applicants, which include a minimum share price of $4 per share. As we do not satisfy that requirement today, we are focusing on executing our business strategy, but will continue to monitor if there are any changes to the listing requirements.

Lastly, I would like to share with you our updated sales and earnings guidance for fiscal 2021. Let me start by saying that we continue to live in a rapidly changing world during a very uncertain time. The impact of COVID-19 continues to be felt in both North America and throughout the world, and there remains -- there remain risks of new variants or a 5th wave of increased infections globally. However, based on the business trends we experienced in the first quarter and our early reads into the second quarter, we believe it is appropriate to increase our financial guidance today.

Our revised guidance for fiscal 2021 is as follows: sales of approximately $415 million to $435 million, adjusted EBITDA of approximately $20 million to $30 million and positive free cash flow. This guidance reflects a level of caution in our outlook for the rest of the year, but we are very pleased by our first quarter results. It is satisfying to see the hard work that our stores, DC, GEC and corporate associates have put in over the past year, start to materialize through our financial results. We are glad that our customer is starting to feel comfortable socializing and gathering outside the house again and are thankful to be here to be able to support him wherever and whenever he chooses to shop with us.

With that said, I would like to turn it back over to Harvey for some closing thoughts.

Thank you, Peter. As you heard or so, we hope, both in my remarks and Peter's, we are quite optimistic and energized. We have an incredible team. We strive to be worthy of their esteem, our customers and to create meaningful returns for shareholders. We believe we have weathered the worst of the storm and challenges, and we believe we have come through a solid financial position. And most of all, we believe we have a strategy to leverage the recovery and to engage consumers in what we do best, creating memorable experiences for big and tall guys to look good and feel good. We do that by offering the most extensive and uniquely curated assortment from value price essentials to luxury brands and exclusive designers, both online, in-store serving the underserved customer the be-all and end-all place to shop, browse and interact, interacting with their friends and our associates, and that is something that cannot be bought. It has to be earned.

And with that, we'll take questions.

(Operator Instructions) Your first question comes from the line of Eric Beder with SCC Research.

Congratulations on a strong start to the year. When you look at some of the gains you have here, I know we're trying to segregate how much of it is stimulus, how much of it isn't. Are you seeing shifts in terms of sizing and other pieces that leads you to believe that even a wider group is looking at your product?

Yes. We've been doing a lot of analysis. I don't know if it's the way it's phrased, but the COVID 15, kind of like the Freshman 15 and the belief that some level of -- the amount of time people stayed at home, they have changed sizes. And we're seeing what I would call, is not material, but small shifts in percentages. So 1%, 2%, 3% movement from a, let's say, a size 48 to 49 or 52. So small movement up, but I would characterize it as material.

Okay. And when you look going forward at the stores, the amount of store personnel, are we going to see adjustments kind of or increases in the store personnel and potentially the home office now do support this level of growth?

Yes, for sure, relative to variable expense and variable payroll in our stores, we have taken 2 stabs at increasing payroll commensurate with the revenue. We've tried to be very respectful of maintaining social distancing and the way we've talked about our business.

And I'll remind you the way we've talked about our business is 3 priorities for our stores. First, is to engage the consumer in meaningful ways, but to maintain social distancing as it makes sense. Second, to create the store experience and really visual merchandising that allows the store to basically sell itself because of social distancing and the practices we have in place. And third, is the ability to ship from stores with each store being a mini warehouse, and we are leveraging the inventory through that. When you add three of those up, the one that is most changing is the velocity of sales. And in that case, we are adding payroll as it makes sense, but we are still trying to maintain some level of social distancing and those elements, and specifically not layering up the store with a lot of more sales associates and payroll, which would create crowding in the store.

Great. And one more question. And you actually brought it up a little bit. Ship from store has enabled you -- how has it enabled you to lower inventory? And how has it helped in the overall sales process, the ability for people to pick up and for you to have, as I said, ship from store directly to the customer?

Yes. Eric, it has been something which has been in place pre-COVID. And I think what we've seen is a shift in terms of the consumer sentiment to buy online, pick up in-store or buy online, pick up at curbside. And each store has had the capacity and shipped product. The biggest change, I think we're seeing is buy online, pick up at curbside or in-store, where the customer is actually coming in and we're seeing materially greater levels of incremental purchases in addition to double-digit revenue coming from buy online, pick up in-store and curbside. And we're seeing the growth of that if you will, the add-on sale as they come in and they forgot something or literally want you shop and browse at a different level than historically. Historically, it was very low single digits as a percent of revenue. And today, it's running in very low but still double digits compared to single digits from before.

Our next question comes from the line of Alex Silverman with AWM Investments.

Congratulations.

Thank you.

Thank you so much, really appreciate it.

Three quick questions. First, what are your -- the $415 million to $435 million, what kind of assumptions are you using for store comps to get to those numbers? And what kind of assumptions are you using for direct growth?

Sure. So Alex, I'll take that one. The assumption for the store comps is that there's still going to be slightly negative, but very close to where they were -- slightly negative to 2019, but very close to where they were in 2019. But we do expect to see continued growth in comps in direct, which, as we mentioned in Q1, outpaced stores significantly, and we expect that, that will continue for the rest of the year.

Great. Are you finding that the shopper that's coming in is buying one type of product online now that he's coming in and a different product in the store?

No. We're not seeing materially different. The biggest thing we believe, and we continue to see elements of this is where the customer comes into the store is typically shopping or interacting with our associates. And when they understand a brand they really like and the sizing, they have a greater comfort level of shopping online. When we see a customer that is uniquely only shopping online, they're more spot on and specifically purchasing an item. And obviously, the trifecta is when they do both. And our best customer, the richest lifetime value, we continue to see as the customer that crosses channels between the app, which is our richest customer by far, the browser experience and the store. But relative to specific product, I would not say there's anything material we have yet seen that they're buying online versus in-store that's material.

Got it. That's helpful. And then my last question is, did you find yourself in out of stocks in any broad way in some of your stronger geographies with certain items?

We see, as we mentioned, a material difference in the comps on the coast versus the middle of the country. But obviously, we have a great inventory practice. And between our ability to ship from stores to support the net and the ability to move inventory around based on the DC, we have no out of stocks that I would acknowledge of any kind that are material.

That's pretty amazing that you are able to keep up with surprisingly above plan. So congratulations on that.

Thanks. Our goal is to continue to evaluate turnover performance. But our hope is that we will actually see a growing level of turnover in the mix and more productive use of inventory.

Your next question comes from the line of Mike Baker with D.A. Davidson.

Just two or three for me. One, really following up on that last point, I mean, pretty strong sales here, of course, on very low inventory and cutting promotions. As demand comes back, do you start to maybe lead into those a little bit. I get we want to be efficient with the inventory and the promotions, but it seems to me as if there's an opportunity to maybe start to be a little bit more aggressive to drive even more sales.

Well, quite honestly, we are going to hang on the evolution of the positioning as long as possible. And I would define as long as possible forever if we can drive sales with a different brand positioning. And we truly believe that if you think about the 3 elements we spoke about fit and our proprietary fit, which you really can't get elsewhere. We don't just grade product, we actually develop proprietary fits for every size. Secondarily, the experience of the assortment, which is exclusive in many cases and certainly unique in most cases. And then last but not least, the experience we're creating.

And our hope is by bringing marketing to life in different ways and much more confidently in the words we use and the creative we execute and all the variables we've talked about through segmentation and personalization, that we will actually not return even remotely to the level of promotion we've had historically. And we're actually okay selling less units strategically and a higher average ticket. The belief is that if we live by the great mix we have and the experience we're creating, unlike traditional retailer, which I think is not a secret to anybody, there's always been a race to the bottom in promotion. We won't return to that level of promotion. And then specifically, accomplishing greater level of sales if we pull that off, which we too really believe we can, we will continue to push on inventory. The good news is that our inventory management team has really gone very aggressively at and allowed us in Fall to accelerate our revenue if the customer comes in, and we're managing the risk and reward of those 2 variables.

Okay. That makes sense. Well, perhaps a follow-up to that, that would be the implied EBITDA margin in your guidance for this year is just under 6% as you sort of do more with less. Is it too early to talk about the art of the possible, what could that be over time?

Yes. I think when we put out the guidance for this year, where, as I mentioned, we're trying to be cautious with it. We think that the $20 million to $30 million is absolutely something that's achievable. But it's just really hard to tell what's going to happen in the second half of the year. And I think we're going to be in a great position with inventory. We've certainly got customers coming to our website, coming to our stores. And if we can hang on to that, through the end of the year, then yes, there should be -- there could be upside to that EBITDA number. But there's still a lot of water that has to pass under the bridge.

Yes. I think I want to double down on that because I think that one of the things that Peter just said, and I hope you recognize, the cautious optimism we have. We have multiple variables that we're literally, as that saying goes, flying the plane while we build it. And this brand's repositioning, which really has been the better part of 9 months in this evolution from -- away from promotion is a big bet. And so there's a lot of variables that come into that, our ability to drive revenue, grow our margins, et cetera, et cetera, and then inventory.

So I think we're being pretty prudent and pragmatic with what we've provided as guidance and pretty thoughtful about the risk that's inherent in our results.

Okay. Makes sense. Two more quick ones, if I could. Not to hog the phone line here. But I'm intrigued by the coast being so far behind the rest of the country. I presume that's just because of the timing of reopening. And so do we think those ramp up over time to look more like the middle part of the country? And then related to that, are you seeing any slowdown in the middle part of the country as they move past that perhaps initial surge with the reopening?

So yes, Mike, your understanding is correct. We saw that surge in the middle part of the country, and it has just continued since beginning of March when we first started seeing it. The coasts, we believe, have been just a little bit slower to respond, and we link that very much to the tighter restrictions and maybe less comfort with going out and resuming life like some parts of the middle of the country have found. But we do expect that the coast will catch up.

Okay. And so importantly, that you said the middle part of the country isn't seeing a slowdown, which is good. One more little one here, and this is just math, and maybe I got it wrong. But if you look at your gross margins and then -- versus 2 years and subtract out the occu, so they're up 190 basis points. I think the occupancy saved 230-or-so basis points. Would that imply that the merchandise margins are down versus 2 years ago? Or is something -- am I missing something in my math there?

Yes. No, the merchandise margins are down just a little bit, and it's primarily due to the shifting mix, that we're doing more business in direct, and you've got some added shipping costs. So it's not a huge amount. I think we had put it in the press release that it was 30 basis points. But that's what the difference is. It's the change in direct sales penetration.

Your next question comes from the line of Raphi Savitz with RYS Advisors.

Harvey, a really masterful leadership over the course of the last year. Thank you, on behalf of shareholders.

That's very kind of you. I will tell you, let's be really clear. We have thousands -- a couple of thousand people doing heroically good work and their commitment to our customer is pretty amazing. So really appreciate the comments. But my hats off to our group and our employee population. I'm just one of the team helping get through this.

Absolutely. And it was great to hear the comments about winning new customers. What can you tell us about that new customer and what have been your learnings there? How are those customers differ than kind of your existing customers? And then I have a follow-up as well.

Yes. I'd say at a very high level, they don't seem to be materially different. I think what we're experiencing is, at some level, kind of two elements. One, the customer that might have shopped at another retailer, and I won't go through the names, but that might be under more pressure and might not have the in-stocks or the assortments and they're looking elsewhere. And the way we're really winning there is through our digital strategies where the marketing team is really pushing hard on being where the customer is looking. It's not a secret that nearly 90% of consumers start their shopping process today regardless of channel shopping online.

And then -- and when they're doing that, they're either searching for a specific product or big and tall apparel, and we are popping up there in meaningful ways. And regardless of whether it's for store or web, that's where the customers shop today. And I think a lot more customers, what we see as a perfect example, where direct putting in dxl.com that business is not weak, but it's not as strong as search. And search for us implies that a customer might have shopped elsewhere and is now looking to obviously come to us because they haven't found what they want or the ability to buy it at another retailer.

So relative to how we're getting that customer, I think it's a combination of both our digital transformation strategies as well as some of the other retailers have had. And relative to what they're buying, we're not actually seeing a materially different, actually, outcome in terms of the assortment. We are seeing some of our private label brands, which are greater value brands, penetrating pretty meaningfully. And the expectation is a lot of the other retailers that I would referred to might not be carrying Ralph Lauren, Psycho Bunny, Vineyard Vines, what we would call, collections that are somewhat more affluently oriented versus Harbor Bay and Oak Hill and value brands that are part of our mix.

Got it. Okay. And I guess, as you think about this business over the next few years, let's say, I mean, what aspects of the business, or what portions of the business do you ultimately think will create the most shareholder value? And what I'm getting at, is it acquiring new customers? Is it selling more to visiting customers? Is it the merchandising mix? Is it resizing the store fleet? What's really going to move the needle for you guys over the next few years?

I'd say, other than your last comment of resizing the store fleet, which will not materially move the business, that's a different conversation. I would say yes, yes and yes. So our belief is that there is no silver bullet. There's a lot of heavy lifting that we've been doing as we go through this digital transformative process. It's the assortment, it's the experience of creating the store, it's how we market ourselves to customers in a broad way and then a very specific way relative to segmentation of personalization to create productivity. And there is no silver bullet.

I think the greatest excitement we have is the ability to demonstrate what I talked about, which is we're there to create the fit, the lifestyle and the relationship with consumers to be an incredible brand and business, not just incredible retailer, not just a big and tall company, but actually being a really sticky retailer that creates belonging community for a customer that is underserved, who we greatly respect. It's our only business. It's not a business as a sideline, it's all we do.

Your next question comes from the line of Seymour Holtzman with Luxury Swiss.

Congratulations on an incredible quarter. And I have one quick question for you guys. So I was curious, you had mentioned that you are closing unproductive stores and was wondering where you guys were, where you are and where that's looking like in terms of retail locations?

Sure. I'll take that one. So we are continuing to close unproductive stores. But every store is evaluated on a one-for-one basis. So each store and the affect of the 4-wall economics of each store need to be able to carry their own weight. So I think we started the year at 314 stores. We're down to 300 -- just over 300 today. We will close a few more stores this year. And there's something like 150 stores that have lease expirations or kick outs over the next 2 years. Obviously, there are many, many great stores within that 150 number, but there are some that we'll have to take a real hard look at. And the bottom line is that each store needs to be able to carry its own weight. And if the stores cannot be productive, then we're going to think really hard about should those stores be closed.

Your next question comes from the line of Joshua Goldman, private investor.

Congratulations on a phenomenal quarter. Keep up the good work -- hard work. Okay, my question pertains to any buyout offers or mergers, has DXL entertained or been approached about a possible buyout of the company in the last, let's say, 12 to 18 months?

So I'll take that one. We're not engaged in any conversations about that.

Okay. But have you ever been approached in the past 12 to 18 months? Is it possible that a company approached you? That's exactly my question. And maybe, obviously, it didn't happen yet, but my question pertains to has any company or maybe a big buyout firm, private equity approach to you guys about purchasing the entire company.

Josh, we appreciate that question, but it's just not something we would ever touch base on and comment on.

And one more follow-up regarding the NASDAQ relisting. So you say that the NASDAQ requires a $4 -- a consistent $4 share price to apply for relisting?

Correct. That's one of the listing requirements is a $4 share price. So as I had mentioned in the comments, we had moved to the OTCQX. We're actually quite happy there right now. And with where the stock is right now, we're just -- we're not thinking about it because we're not close to that $4 share price.

Okay. How long does the $4 share price has to be maintained for NASDAQ to entertain that application or accept it?

Yes, that's a good question. I'm not sure exactly, but it might be like you have to have a 30-day -- 30 days above $4. I don't know exactly what it is.

Okay. And if that share price for DXLG would hit $4 for a consistent 30 days or more, the company would consider relisting at that point?

No. I'm not necessarily saying that. I guess all I'm saying is that we've been happy where we are. It's kind of a moot point because of the $4 requirement, but it's something that we're watching, and we will consider and have discussions with our Board in the future as to whether we want to do that.

Operator, we have one last question, I believe, and then we'll wrap this.

Your final question comes from the line of Seymour Holtzman, private investor.

Great job. Somebody told me that with the endemic that 40% of the adults have gained like -- something like 29 pounds or something like that. Did you ever hear a number like that?

We've definitely seen some published data that adults have gained weight. That was my reference to the COVID 15. I don't think we've seen the magnitude that you're referring to. And what we've seen in our results is a small movement in nearly every size up by a couple of points, but again, not material.

Operator, I think we're done.

This concludes today's conference call. You may now disconnect.