Destination XL Group Inc (DXLG) 2024 Q2 法說會逐字稿

Good day, everyone, and welcome to the Destination XL Group, Inc. second quarter fiscal 2024 financial results conference call.

Today's call is being recorded.

At this time, I would like to turn the call over to Ms. Shelly Mokas, Vice President of Financial Reporting and SEC Compliance at DXC.

Please go ahead, Shelly.

Thank you, operator, and good morning, everyone. Thank you for joining us on Destination XL Group's second quarter fiscal 2024 earnings call.

On our call today are President and Chief Executive Officer, Harvey Kanter, and our Chief Financial Officer. Peter Stratton.

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

Today's discussion also contains certain forward-looking statements concerning the company's sales and earnings guidance, long-range strategic plan, and other expectations for fiscal 2024. 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. As always, I appreciate your spending time with us today regarding our earnings release and communication of our quarterly results.

For today's agenda, there are three topics I will cover. First, the current environment and our quarterly results; second, an update on our strategic long-term initiatives; and third, our expectations for the second half of the year.

Let's start with the current environment. Our customers appear to be still feeling the impact of inflationary pressures and macroeconomic uncertainty. We are seeing customers gravitate towards lower priced goods and select promotions, signaling a consumer who is carefully choosing where and how he spends his money. [Single] spending on his family, his immediate needs, and not necessarily big and tall. Our view is that he is not shopping as much for himself right now, and that is being felt across the entire category.

We believe we are gaining share of wallet, but this share growth isn't an overall down environment for the category. I expect many of you saw our press release this morning, which details our financial results. We mentioned at the last quarterly earnings call that sales performance in May was trending in line with our first quarter performance, which was negative low-double digit comp. Unfortunately, that trend persisted throughout the second quarter and our results reflect the continued softness in the big and tall consumer demand.

Let me now get into some specifics on the quarterly results. Let's start with comparable sales, which declined 10.9% for the second quarter. Stores were down 10%, while direct was down 12.8%. So not much variation in demand between the channels. The progression in comp sales across the quarter was mixed. In May, we saw the combined comp sales declined 11.8%. In June, comp sales improved to negative [8.7%], and in July, comp sales fell back to negative 13.8%.

We believe Father's Day was an occasion for him, our big and tall guy such that the overall business improved even if only for a brief period of time. In stores, the story for Q2 is much the same as Q1. Our struggles continue to be traffic, traffic, and traffic. Did I say that enough?

The store issue is dominated by a lack of traffic while conversion is up and average turns -- and average transaction value is holding its own. Traffic has been constricting our growth now for the better part of a year, and we do not believe this is unique to DXL. We believe the overall men's category is struggling and perhaps worse in big and tall.

In the digital space, a primary reason for our decline in sales was due to a decrease in conversion. We have seen signs such as dwell time on page views significantly decreased year over year. We believe this is an indication of a more discerning and promotional driven customer looking for value and discounts. Perhaps the place we see the brightest line between stores and direct most is in this following regard.

In stores when it takes the time to drive to a store and comes in, he usually purchases plain and simple. He is purpose driven. He is committed to purchasing for whatever reason. Online, we believe it is a different story. Traffic online is far greater than in stores meaningfully better, but conversion is far lower. We see him putting items in his basket or wish list and never executing a transaction. We believe he is cross-shopping and looking for deals and we can see the lack of conversion and the effort he has made to put items in his cart as an intuitive example of the ease of cross shopping for whatever he is looking for.

The commitment of five to six minutes on the site of putting something in his cart and then looking across retail at other retailers is the reality of the direct environment today. And while our assortments are unique and are fit across a meaningful selection is proprietary and unlike what he can buy elsewhere, we believe he is okay with trading down.

And as we have previously noted, we can see this trade down in Adobe data. As we reported last quarter, Adobe noted the growth in the lowest price quartile and a reduction in penetration from the upper price quartile in a material and meaningful way. Underlining our knowledge that men's is tough and I believe intuitively, the big and tall is even tougher was the promotional posture of the second quarter.

The promotional retail posture of general menswear retailers and retail brands selling big and tall became much more pronounced in the second quarter. More specifically, multiple core national brands began ratcheting up their promotion offers leading up to Father's Day.

Our understanding is their business is soft and they are being challenged, given the softer business to manage their inventories and as such, they are turning to greater promotion or in some cases promotion, which they typically never do.

It is our brands and not retailers and their brands we sell. This was DXL in a difficult position because these brands are very much the product we sell in our stores, which can now be found discounted on the brand's website. This environment forced us to promote more than we intended, which led to more markdowns, which we are fortunately able to offset through improvement in shipping and loyalty costs.

That being said, I do want to share a few comments on some of the elements we believe we have control well despite the challenging environment around us. Our inventory balance at the end of Q2 was $78.6 million as compared to $87.5 million last year for a decrease of over 10% at $8.9 million. And in comparison to 2019, our inventory was down 23.2%.

It is worth reiterating that our focus on controllable elements of our business such as inventory is a testament to our operating regimen. Despite the weak sales demand, our clearance penetration at 10.4% remains in line with our long-term target of 10% and only up slightly from 9.3% in the second quarter of 2023. Much of the credit for keeping our inventory clean goes to our outstanding merchandising, planning, and allocation and global sourcing teams at DXL.

Despite the decline in sales demand, our teams have reacted to the situation and together aggressively manage what we have on order. By recasting our receipt flow and managing our roster of exceptional vendors, we have been able to avoid any buildup in excess inventory and in fact, we expect to finish the year with materially less inventory than we had on hand last year.

Shifting over to the assortment. Business was down in virtually every category. Again, the reality of lower-than-expected traffic at stores and lower-than-expected conversion online. We also observed more customer migration from higher price brands to more entry-level brands such as [Harbor Day], the combination of lower traffic and then more of that traffic shifting a lower price point is compounding the sales challenge.

Sportswear continues to be accounting for approximately 77%, tailored clothing accounts for 19%, and footwear accounts for 4%. As a reminder, our current merchandise assortment is a balance of private brands and national brands. And in Q2, we did experience a shift into our private brands.

The second topic I want to update you on is around our strategic long-term initiatives, including the brand campaign, new stores, distribution alliances, and the new web platform as well as a few updates and operating elements we have been pursuing to evolve and improve our results all around. In terms of our strategic initiatives first is our brand advertising campaign which we experienced meaningful learnings from in the brand tests leading up to Father's Day.

Let me now recap to you the learnings we had from our brand campaign that we launched in May. But first, I wanted to clarify exactly what we did. The brand campaign test was a six-week market match test in Boston, Detroit, and St. Louis. We invested in linear TV, connecting TV, online video, social media, and radio with accompanying brand assets being deployed on the homepage in e-mail and through digital banners. We then compared our results in each market to our system market and the overall chain.

Overall, our three test markets outperformed the control markets and traffic in sessions and in customer acquisition. This was the positive outcome we had hoped for and the test gave us confidence that the brand campaign can create more awareness that will drive greater traffic and bring new customers to DXL. The lift in revenue was less than that of traffic, a scenario we expected since it is not like a light switch. While traffic popped customers did not come in and buy a historical rate in conversion in DBT. But in time, we believe this ramp and like a flywheel will begin to spend first on its own and then over time, spend faster but for certain we know that revenue is a lagging indicator, so we need time.

Let me give you a few specifics, if you will, on the metrics. Online sessions were plus 30% versus control market. New user sessions were plus 60% and store traffic improved between 5% and 10% as compared to the control market. We also acquired new creative and media learning's, which will allow us to be more efficient in 2025.

And finally, in our most recent brand tracker, the work done post campaign, we also saw a lift in brand perception metrics within the test markets with increases tied to fit tied to comfort, quality sizing and the assortments fashions offered. Despite these encouraging signs, we are pivoting the remaining brand investment in the second half of 2024 to address specific challenges in which we expect we'll deliver a more immediate return.

On the brand campaign directionally display the results that we had hoped for and expected reproducing the learnings of another three-market test will not materially prove sales and that does not work given the context right now. So given this and the cognizance of the sales pressure on the business, we are pivoting to strategies and tactics which we believe can have a more immediate impact for fall.

These would fall under the header of areas we can control conceptually. Think promotion, advertising spend, inventory, pricing, owned marketing are areas we do not control, but yet we believe we can navigate in some way. Think working with national brands promoting their product, reasons to buy something discretionary versus spending on travel experiences or women's or kids' apparel.

Some combination of these will take greater marketing dollars, greater promotional dollars or loyalty expenses. And we believe this shift back will make sense short term. Once we feel confident in the timing and the macro environment is on more solid footing, scaling to a national campaign from a regional campaign will lower costs and increase overall returns.

Now subject to our strategic long-term initiatives, our whitespace store open. In terms of store openings and the development programs in May, we opened our second whitespace store this year in Thousand Oaks, California, and we still expect to open a total of eight new whitespace stores in fiscal 2024.

In total, at the end of the second quarter, we had five whitespace stores up and running, including the three stores opened last year. All five stores are performing, albeit less than our initial pro formas, but we attribute at least a portion of this lower performance to the same issues that the rest of the store portfolio is suffering from, traffic or lack thereof.

We believe this initiative is like in the movie Field of Dreams. If you build it, he will come, but it's a waiting game, just like in the movie. The new whitespace stores are driving higher levels of new-to-file and the customer reaction has been overwhelmingly positive. We also relocated our store in the Chelsea neighborhood of Manhattan. Some of you may remember that our loan store in Manhattan was located in below ground retail space. There was exceedingly difficult to drive traffic and awareness.

After 10 years in this space, our lease was expiring and we seized an opportunity to relocate one block south on the same street to a beautiful ground-level, open-floor plan with soaring interior and lots of windows to the sidewalks. And I'm thrilled with the new store which opened in late June and early indications suggest that this is going to be a major improvement over the old Chelsea location.

The next topic I want to update you on is our distribution alliance and collaboration with Nordstrom. After two years of discussing, planning, and negotiating; we are now living and on the Nordstrom's marketplace site. Initial sales are encouraging as customers are financed organically, and we will formally, more formally launch in September. This collaboration with Nordstrom's in marketing to their broad customer base of who we are and what is our product offering.

We are currently offering 30 brands and over 800 styles in casual sportswear and tailored clothing. And in the coming months, we will be adding more brands and over 1,000 styles. It is still very early in the venture and we are not yet prepared to put a number on what this collaboration could mean to our business, but we are very happy with the results thus far and look forward to seeing how the business can grow over the second half of this year.

As outlined in our previous calls, our strategic marketing priorities remain focused around growing DXL brand awareness, which I just covered developing imperative operating capabilities and our website platform continuing to build a better foundation of key growth drivers, think loyalty, which I'll give you an update on in a minute and deepening our customer intelligence segmentation.

As you know, we are currently working on replatforming our website. The first phase of this project went live on May 30, which addressed our homepage and static content pages and much larger secondary lease is going to deploy in Q3, which will address headers, improved search functionality, and product detail pages and baskets. The final release will happen post-holiday and address the all-important functionality of checkout.

We are already seeing significant improvements in latency times and the overall speed of transactions. The new website is powered by Commercetools. And we think this project is going to be a huge win for easing the friction in our e-commerce business.

In loyalty, we made updates to the program in April 2024 with the goal of balancing loyalty expense while maximizing customer value. Overall, the expense is meaningfully less than before, and those consumers taking advantage of the program are meaningfully engaged at a higher level. The program itself is just not seen by consumers as compelling enough to be our most important platinum customer.

Given this myopic and limited consumer level of engagement, we are in the final stages of development for an improved loyalty program and working with a new provider. And we are well underway in rolling out an approved program for fiscal year 2025.

The new program is expected to drive key customer behaviors, including top customer retention, improved AOV and frequency, and positive incremental ROI. Customers will enjoy multiple new benefits that will be driven from a test-and-learn approach that gives them a voice in determining perks outside of the core offering.

Additionally, the new program will provide greater personalization to allow customers to tailor the program to their own shopping preferences. Rewards will come with greater flexibility as well. Beyond the customer facing components of the program, we have also improved the foundational elements that will lead to better financials. The new program has been built with robust economic modeling at its core to drive the intended outcomes.

The financial models are also expected to deliver measurable improvements versus the current program while maintaining an acceptable expense ratio. Considerable progress has also made to provide better customer instrumentation that will drive deeper customer intelligence and produce actionable insights. In an alliance with an external provider, we have identified a solution for customer segmentation that relies an actionable understanding of key customer cohorts based on behaviors, psychographics, and demographics.

And the objective of this customer segmentation work was to identify naturally occurring customer segments and how they differ based on underlying needs, attitudes, behaviors, and beliefs, including [gifters] to develop and deploy more personalized and resident experiences that will drive increased traffic and lifetime value from key audiences across the customer lifecycle. The segments will be prioritized based on their economic potential and their receptivity towards DXL. While there is still a work-in-progress to be done, we are well on our way to tapping into this next-level understanding which will drive an unheralded level of personalization in our future marketing efforts.

Third, and lastly, I want to talk to you about our plans and expectations for the second half of the year. On our last earnings call, we leaned into the long-range growth initiatives we were executing, which are intended to drive revenue and scale for our top line. The two biggest drivers of that plan are the brand advertising campaign and new store development. Both of these initiatives require upfront financial investments with deferring financial returns.

As stores mature and when the advertising campaign achieves greater awareness and trial then sales and profits materialize. We knew this plan was going to be difficult in the current environment. That being said, the consumer insight work we have done over the last 18 to 24 months points to the need for a catalyst to achieve growth. The alternative, which is to do the same thing expecting a different result as Albert Einstein is often quoted is insanity.

The initiatives that we are pursuing are in fact not doing the same thing, and we do expect to get better results in the outcomes from these two initiatives. I stress fact bases often for both initiatives with general unaided awareness in single digits and nearly half the consumers saying they do not shop with us because no stores near them that fit all the great merchandise and the DXL experience will be of no matter unless they know who DXL is and where we are located and that be near to them.

Given that as you know, we have executed against both of these initiatives. We believe that we could execute our plans and still deliver a minimum EBITDA margin rate of 7%. What we did not expect was our business to fall as sharply as it did in the first quarter and then continue into the second quarter. And that reality is eroding our EBITDA margin rate. We believe that the sales environment will improve. But given the first two quarters and the knowledge that our guy is perhaps reprioritizing is spent improvement will not likely be a light switch and sales will take time to return to productive enough levels to support the heightened level of planned investment spend we have envisioned.

We have determined that it would be prudent to slow down on both the next leg of the brand campaign and our capital investments concerning new stores. To ensure I'm not understood in what I am stating, let me be clear. We are not abandoning our growth initiatives, just slowing down the road. We are still incredibly enthusiastic about our long-term prospects. We have been pragmatic in focusing greater and rebalancing spending in the short term on tactics that we expect will enhance our results in the second half of the year and until such time when the big and tall consumer sentiment improves and he is ready to shop.

Now having somewhat covered the initiatives in the second half, I want to transition to pure operations and running the business. The business has achieved historic results coming out of the pandemic and our results, despite the downward cycle, remain at the higher end of DXL's historical performance. Given the downward cycle, our primary focus is managing the elements that are within our control and making sound decisions as we execute our fundamentals.

We know that we have a customer who loves our brand. You can see that in our Net Promoter Score, which is consistently in the mid-70s and while some of the most endeared brands in retail. We also have a customer with a big, long purchase cycle. And in times of financial difficulty or stress that cycle gets longer. We operate in a cyclical business and we can't control when those cycles start and finish. But our operating discipline and foundational regimen will provide leverage to EBITDA margins when sales momentum returns.

Our company is positioned as a moderate to upper moderate retailer, bringing to market a unique fit, unique assortment and experience and while our competitors predominantly compete on price and promotion, that is not our sweet spot. We must stay competitive in price, but it is not our calling card and what we are trying to do right now is bridge the gap between cycles. There are reasons for us to be optimistic. Interest rates are going to start coming down in September. We are going to have a new administration in Washington come January. And there have been recent reports that US consumer and the labor market are both looking resilient.

So we do have great enthusiasm for what's to come, but we must acknowledge the financial challenges we see today. The harsh reality is we are now guiding 2024 to a sales range of $470 million to $490 million with an EBITDA margin rate of approximately 6%. Our focus is on our balance sheet and delivering positive free cash flow for the year, all the while trying to restore a level of momentum back in sales. To achieve these results, we're going to redeploy our brand campaign dollars into other areas that we believe will shore up second half traffic challenges and we are cutting back on our capital spending.

Put another way, we want to fish when the fish are [biting], and this just isn't happening in the current environment. So we will bite our time. We will protect our brand and we will be ready when we see the beginning of a new upward cycle and our customer returning to shop.

I'm now going to ask Peter to run through the second quarter finances before I come back and have some closing thoughts.

Peter?

Thank you, Harvey, and good morning, everyone.

Net sales for the second quarter were $124.8 million as compared to $140 million in the second quarter of last year. This amounts to a 10.9% decrease on both the total sales and comparable sales basis. We believe this result is directly tied to the ongoing macroeconomic challenges that big and tall customers are facing, which are causing them to stretch their time between shopping.

Our revised sales outlook for the year of $470 million to $490 million represents approximately a negative 10% to negative 6% comp. We do not know when the current downward economic cycle that we are in will reverse, but our performance has been tracking steadily through the first six months of the year, with two-year comp stacks in the negative 10% to negative 12% range. Our sales range is built on an expectation that we will not see a material change in trend between now and year end, and we'll maintain that double-digit negative two-year stack. But comps are expected to improve in the second half of the year as we start to lap the severe negative comp declines we saw starting last year in Q3. So on a structural basis, the comps should improve in the second half, assuming our two-year stack remains [comp].

Next, I'll speak about margins. First, merchandise margin. I am pleased with the fact that our merchandise margin for the second quarter was flat to last year. We achieved this despite the increase in promotional activity around us as Harvey discussed. We were able to offset these increased markdowns with reductions in shipping costs, loyalty program expenses, and marketplace commissions.

In terms of gross margin, inclusive of occupancy costs, our gross margin was 48.2% for the second quarter as compared to 50.3% in the second quarter of last year. The 210-basis-point decrease was entirely attributable to an increase in store occupancy rates as a percentage of our net sales. This deleveraging was primarily due to the $15-million lower sales base. A lesser factor was an increase in occupancy costs on a dollar basis and store lease renewals and lease extensions at increased rates.

At this point, the majority of the pandemic [era] rent abatements and deferment, we negotiated have expired and reverted back to higher market rates. For the full year, we expect our gross margin erosion to be in the range of 60 to 110 basis points due primarily to the occupancy deleverage I spoke about. I believe our inventory position is a key strength of our balance sheet in terms of the freshness of our assortment, our improved turnover rates, and our healthy clearance levels. Inventory management continues to be a critical element of providing the best big and tall shopping experience available.

Moving to selling, general, and administrative expenses. Our SG&A expense as a percentage of sales increased to 43% as compared to 33.9% in the second quarter of last year. On a dollar basis, SG&A expenses increased by $6.2 million, $3.9 million of this increase was related to marketing costs, the majority of which was for the brand campaign. The payback period for the campaign will extend into the future, but the expenses incurred now. The balance of the SG&A increase was related to other operating expenses to support our long-range growth initiatives and an increase in health care benefit costs.

Marketing costs as a percentage of sales increased to 8.8% for this year's second quarter as compared to 5% last year. For the full year, we expect to spend about 7% of our sales on marketing costs, up from 5.9% last year. We remain focused on executing the day-to-day business with a high level of operating discipline, which includes strict controls over expense management. EBITDA for the quarter came in at 5.2% as compared to 16.4% in the second quarter of last year. The decrease from last year was primarily due to the deleverage on lower sales as well as the brand advertising spend. For the full year, we expect an EBITDA margin rate of approximately 6%.

I'll finish up with some comments on liquidity. We continue to feel very good about the overall strength of our balance sheet, which has held up well through our business challenges. We finished the quarter with cash and short-term investments of $63.2 million as compared to $62.8 million a year ago with no outstanding debt in either period and availability of $69.9 million under our revolving credit facility. We are keeping most of our excess cash and short-term US government treasury bills, which are earning interest at over 5%.

For the six months year to date, our free cash flow, which we define as cash flow from operating activities, [less] capital expenditures was $3.2 million as compared to $21.6 million in the first six months of last year. The decrease from last year was primarily the result of our defer -- decreased operating income as well as an increase in capital expenditures related to our store openings. We are pleased to have a positive free cash flow halfway through the year. And our goal is to remain free cash flow positive in the face of our great business challenges. We plan to accomplish this through prudent capital allocation requiring minimum ROIC hurdles. We are pulling back on the pace of new stores and plan to open 10 stores next year instead of 15. We continue to believe we could open approximately 50 net new stores over the next five years.

And now I'd like to turn the call back over to Harvey for some closing comments.

So hopefully, it's now clear. DXL will stay the course and we will weather the storm. The operating regimen we have in place and the foundational extensions and [labor force], we have worked on will pay us back meaningfully as an uptick in cycle returns.

And lastly, as I wrap up before we take questions, I wanted to thank the DXL team that I work with every day. Their hard work and dedication in the stores in the distribution center, in the corporate office, and the guest engagement center provide a level of optimism for the opportunity yet ahead. The passion and commitment our team has for underserved consumers is our reason for being our purpose and why we do what we do is because of the great team and culture that we've created that I want to get up every morning and keep moving on this journey.

Thank you for all your hard work and the commitment in our pursuit of serving big and tall men and making DXL the place where they can choose their style and to wear what they want.

And operator, with that, we'll now take questions.

(Operator Instructions)

Jeremy Hamblin, Craig-Hallum Capital Group.

I wanted to start by asking about some of your recent collaborations. So getting a sense of progress on the Nordstrom collaboration in the marketplace? And also, I think you were working on your -- the rollout of UNTUCKit, I think maybe 50 of your stores here by the fall, but wanted to get a sense of progress that you're making on those particular -- those two strategic initiatives.

Yeah, Jeremy. Thanks. It's Harvey Kanter. I'll answer both of those.

On the collaboration and alliance because we feel really good about where we are. If you are on Nordstrom's app or within their email exchange, you would have probably received on Monday the very first marketing element of the collaboration with Nordstrom's. They launched on their app, within their app notification of the program and feature DXL. And that literally is the first marketing communication of the partnership, their marketplaces in early innings and their marketing of key vendors or key collaborative partners like us is very early, and we do have great expectations.

As we said, we're not at a point where we think we should communicate the size of the prize, but initially it -- for half of the assortment being online, we're very excited about it. And we are being presented at the retailer -- literally supporting their big and tall consumers because their assortment relative to what we're bringing to the mix is much, much smaller relative to what we're bringing to them. So we feel really good about where it's going and time will tell. But it's a journey we've committed to for multiple years. It's not something that's in and out kind of thing.

And relative to UNTUCKit, you are correct, we are extending the stores. We will ultimately get to 100 stores and we are in the final contractual elements of bringing on at least one, if not two more versions of UNTUCKit for spring of 2025. So I think the long and the short of that is we see other brands, recognizing the challenges, inventory SKU management, things of that nature and are coming to us and saying we'd love to extend our product brand to the big and tall consumer, but we're not sure it's within our four walls, so to speak. And we are reaping hopefully the benefits of that over the next several years where we continue to bring. An you will see we will announce probably November and maybe February, it's corner what the timing is at least one, if not two more collaborations like UNTUCKit.

And the point there I think that's important to us is we're bringing to the market much better product, more product, but we're also bringing to market a product that is very well known, UNTUCKit. It's not a secret, it is a really big, wonderful marketer and their brand and what they offer is compelling. And now we're extending that in the big and tall category. So other brands are doing the same thing. And inside our product, it does literally take fit by DXL, and that's a testament to our ability to have a proprietary fit that's relevant for their view and that -- their view is that we do it better than they could. So that's where we are.

Thanks for the questions.

Sure, just and then I wanted to follow-up and ask what do you think that you're learning from your customer? You noted in the release that you've seen some gravitation to the kind of the lower value brands. I would say if you look across apparel retail, there really has been a mixture of results. Some companies seeing quite strong results and others that have not. But in terms of the DXL customer, do you sense this is a fight over the value equation to drive better traffic, is there demand for maybe more branded product but maybe lower-end branded product? Or is there anything you feel like you need to adjust in terms of the assortment within the stores and online?

It's a great question in some perspective I want to share. We think and I would say that we at least have more than anecdotal evidence that the overall men's business is soft. And without naming names, there was one of the national retailers that reported 48 hours ago and their reference was home and women's and beauty and kids and didn't even murmur about men's. And so we believe that's more than anecdotal that they're not talking about men's because the men's business is soft and we think that -- and at some level, we know our shopping cycle of our core men's customer is less frequent than the shopping cycle of women's or kids purchases.

And so inherently, we have a customer that doesn't shop us frequently. And given the environment, whether it's gas prices, even though they're down $0.40 versus last year, they're still expensive and mortgage rates are still 6% and change. And given those variables and look -- the fact that our customer literally doesn't have a high frequency of shopping, A, we think he is just shopping less. And so whether you believe that or support that or not, that's the first line.

And then the second element of that as he is shopping less, he is being challenged by discretionary income. And so the reality is yeah, we've seen him trading down into Harbor Bay and other low-priced offerings. We've also seen other replication of data where the consumer overall appears to be trading down. And that referenced that Adobe is very purposeful because, again, it's not our data. It's not anecdotal. It's data that says the product and price points lower are penetrating greater than the products and price went higher and (inaudible) ship.

So we've seen both of those. We think that there is more than anecdotal perspective about the customers not just not shopping and then ultimately and answer your question, we don't know how long that will last, but we also recognize that it's not about value. It's about price point and how far they can stretch their dollars. So we are absolutely with purpose augmenting our assortment. And you will see an example that is [hager] which is in the core business today, champion is being extended and we have other brands we're bringing online and they're not poor brands, they are not inferior brands, they are just lower price point brands because inherently when you think about our business we've talked about this before, Ralph Lauren -- Polo Ralph Lauren, one of our most premier brands, one of the ones we're most proud of and it's not an inexpensive brand.

And so it's not about value for the brand. It's about the exact -- the point that the price point of Ralph Lauren is more than the price point of other brands. And so inherently, we're not expensive, but our price points are higher. And so we have very cognitive purpose to bring our price points down and not sure about trying to be all things to all people, but on a bell curve to have more of an offer at opening price points and flag, I would rather say it, [bury to your] entry price point of Ralph Lauren can be addressed by the augmentation of a few select brands that given entry price point.

Another example that is Carhartt. Carhartt in that category is very expensive. But there are other workwear brands you will see quickly in our mix late fall or early spring where it's that same categorical business but at a lower price point. And so ultimately will hopefully evolve to the point where we have entry price points from that customer that doesn't want to spend as much maybe on Carhartt or relative to Ralph Lauren and can access our proprietary fit or the influence of our fit and the way we interact and the experience he has and the guided ability to put outfits together that quite honestly, no one else, but DXL can do.

Great. Thanks for all the color and best best wishes.

(Operator Instructions)

Mike Baker, Davidson.

Hi. It's Keegan Cox on for Mike, right now.

I just wanted to ask a question a little bit on the brand campaign in the advertising just for the rest of the year. You talked about the national brands promoting more and then kind of shifting away from your campaign. So I was just wondering like what are you going to do in terms of your spend to drive those immediate sales results? Are you going to try to match the promotions of these national brands. Are you going to spend on more like broad media to drive awareness and traffic? What's going to drive the sales immediately?

Yeah, it's a great question. There are three components of what we're going to do at a very high level. First is just [pleasantly] our marketing spend will be increased and there's not a black and white silver bullet here. So our SCM practice is going to be augmented, which is basically words that we will pay for. Certainly, there are other elements of our -- what I would call brand advertising that can be executed to continue to build awareness, but not at the level of what I would call national broadcast TV. And so specifically, things like cable TV or streaming video. We can still do that just at a lower level. So we will continue to do that. That's number one.

Number two, relative to our loyalty program. Loyalty is one of the places where consumers have point-blank told us they see value in the program. There are no exclusions in our loyalty programs. So when you come and shop with us and you earn a loyalty point or a loyalty certificate, you can use that and when the day is done, it's a denomination. So $15 and it's a $15 discount on anything you want, whether it's (inaudible) or any other brand. And quite honestly, that's not the way our typical promotions work. We exclude our national brands or most of the discounting we do and so that's the second element where we'll -- there will be an enhanced programs within the loyalty program to offer the customer, the ability to basically have greater value.

And then last but not least to your point about national brands. We are never going to win at a pricing game. And so our attempt is to be competitive, but it will not always be to match dollar for dollar. We have to run our business in ways that are relevant and important to us. The call-out that we wanted to acknowledge is that as the consumer again, I referenced overall men's business as the consumer appears to be challenged and other brands might -- national brands that we carry it or don't carry are promoting their brand in a way that is not either typical in terms of they don't normally promote or they don't promote as deep, we're trying to navigate that.

But what we've seen is in some cases, it makes perfect sense to match dollar for dollar and we're winning. In other cases, quite honestly, we did in Father's Day matched and we didn't see a win. And so we know our customer is well priced is important and we need to be competitive. It's not our calling card and we have to figure out how to navigate that balancing kind of sort of multiple elements, right? What it is going to drive customers in, where they're going to see value, where they're going to convert and purchase, and ultimately where they're going to create revenue. If you think about the stores, we referenced it, but to be really crystal clear, stores still represent about 70% of our revenue. When a customer comes into the store, we're seeing highest levels conversions we've seen and we're running year-over-year conversion and we're on a three-year run of conversion growth. [And we're seeing DPT whole zone].

So there is an element of we just can't get him to get off the couch and come into shop because he doesn't see that as a priority. But the flipside of it is when he does come in, we're selling him product at a decent [DPT, i.e., it's] not promotional. It's not like we're upside down relative to our selling price and we're converting at a higher level. So which would imply we have the right product and the right size and the right store locations.

We just need more of that come in. And so it's all about traffic. And that's the point where I started. We're going to spend more on advertising whether it's SEM or streaming media or other things owned and unknown media to attempt to drive traffic. But at some point, you got to recognize you're throwing good money after bad and that you're just not going to lose some level of customers. And so it's a balancing act how much we spend and absolutely believe we're going to get a return out of it.

Awesome.

And then just to follow-up, you talked about the monthly cadence of comps and you exited July weaker. I was just wondering if you're still seeing that kind of trend in August or if things have picked up a little?

Yeah. No, we feel -- I'm not going tosay really good about where we are, but I want to definitely tell you we're on the cusp of being in the single-digit decline. So we've definitely seen a pickup. It's mostly in stores. We've seen our traffic in stores. I'm not going to say measurably improved but we've definitely seen it improved. And with conversion and DPT holding the same variables, we've seen a decline in the negative comp. For a lack of better word, I would say it's kind of a double negative.

But yes, the answer is we've seen our business improve and as Peter said, our expectation for fall is that we will see improvement. I'll remind you, I'm doing this from memory, I think we're against a negative [8] in Q3 and a negative [11] in Q4. And in spring, we are against in Q1 a positive comp. So as we start to see that two-year stack, our expectation is the one-year performance will improve, and that's built into our guidance.

Thank you. I'm showing no further questions at this time (multiple speakers) turn it back (multiple speakers)--

Daniel, we (multiple speakers) thank you, Daniel. We appreciate you're helping us here to our investor base and shareholders. Thank you so much for your commitment of your time this morning. We hope to obviously report a better outcome in Q3 and continue to fight the good fight.

Have a great day. Have a nice Labor Day. Safe journeys to all of you.

This concludes today's conference call. Thank you for participating. You may now disconnect.