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Edited Transcript of DXLG earnings conference call or presentation 19-May-17 1:00pm GMT

Thomson Reuters StreetEvents

Q1 2017 Destination XL Group Inc Earnings Call

CANTON May 25, 2017 (Thomson StreetEvents) -- Edited Transcript of Destination XL Group Inc earnings conference call or presentation Friday, May 19, 2017 at 1:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* David A. Levin

Destination XL Group, Inc. - CEO, President and Director

* Peter H. Stratton

Destination XL Group, Inc. - CFO, SVP and Treasurer

* Thomas A. Filandro

ICR, LLC - MD

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Conference Call Participants

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* Bernard Sosnick

Madison Global Partners, LLC, Research Division - Retail Analyst

* Christopher Walter Krueger

Lake Street Capital Markets, LLC, Research Division - Senior Research Analyst

* Eric M. Beder

Wunderlich Securities Inc., Research Division - Analyst

* Gregory R. Pendy

Sidoti & Company, LLC - Research Analyst

* Peter Rabover

* Steven Anthony Ruggiero

R.W. Pressprich & Co. Inc., Research Division - Head of Research, MD, and Security Analyst

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Presentation

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Operator [1]

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Good day, and welcome to the Destination XL Q1 2017 Earnings Call. Today's conference is being recorded.

At this time, I would like to turn the conference over to Mr. Tom Filandro, Managing Director at ICR. Please go ahead.

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Thomas A. Filandro, ICR, LLC - MD [2]

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Thank you, Christina, and good morning, everyone. Thank you for joining us today on Destination XL Group's First Quarter Fiscal 2017 Earnings Call. On our call today is David Levin, our President and Chief Executive Officer; as well as Peter Stratton, our Senior Vice President and Chief Financial Officer.

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

Today's discussion also contains certain forward-looking statements concerning the company's operations, performance and financial condition, including sales, profitability, EBITDA, gross margin, capital expenditures, earnings per share, free cash flow, store openings and closings, and the company's ability to execute on its strategic plan. Such forward-looking statements are subject to various risk 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 filing with the Securities and Exchange Commission.

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

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David A. Levin, Destination XL Group, Inc. - CEO, President and Director [3]

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Thank you, Tom, and good morning, everyone. I'm pleased to report today that DXL is off to a solid start for fiscal year 2017. For the first quarter, our comparable sales declined 2.1%, which is very much in line with how our business was trending for the fourth quarter of last year. When we reported our fourth quarter results in late March, it was clear that both February and March would be challenged from a top line perspective.

The good news is that our sales performance accelerated dramatically with a positive April comp of 6.4% compared to last year, and net sales momentum has continued into May. We're on track to deliver a positive comp for the second quarter, and we're achieving our goal of reinvigorating top line growth by extending our brand reach and driving new-to-file shoppers to the DXL men's apparel brand.

Back in March, we highlighted that our first strategic initiative to grow our customer base was supported by increasing our 2017 marketing budget by approximately 40%, which included reinstituting television advertising utilizing creative contact -- content we knew worked. We launched our spring television advertising campaign on April 2, comprising 10 weeks of airtime compared to only 6 weeks last year.

We expected to see a lift in traffic in transactions from the advertising in the month of April, but the response exceeded our expectations. And we're also pleased to see that our end of the rack penetration increased to 44.8% in the first quarter 2017 compared to 43.8% in first quarter 2016. This is a clear indication our marketing efforts are paying off.

We are now halfway through the spring campaign, which will continue through Father's Day. We're building our brand awareness, and we remain on track with our positive comp sales guidance for the full year. What we are most pleased about is our customer acquisition growth. We're adding new-to-file shoppers to our brand, which we identified as one of our key initiatives for this year.

We also remain committed to a fall television advertising campaign, which we expect to begin in October and run through the holiday season. Keep in mind, we did not run television in the fall of 2016, so our fall 2017 campaign will compare against no television last year. Building on the spring/summer momentum, we expect the campaign will drive traffic to our stores and our website and increase our brand awareness during the fall and critical holiday selling season.

We continue to believe our greatest opportunity is the fact that 6 out of 10 big and tall guys still do not know who we are, and therefore our top priority in 2017 remains to increase brand awareness, acquire new customers and retain existing customers. We are attacking this opportunity through 2 key strategic initiatives in 2017. The first I just discussed is recommitting to an aggressive advertising and marketing vision. The second is to redefine and improve our digital experience. Over time, we expect that our digital vision will transcend e-commerce and become pivotal to every customer interaction.

Under the leadership of our Chief Digital and Information Officer, Sahal Laher, we are on track to build an unparalleled digital experience for the big and tall guy. Currently, our digital experience is transactional in nature. The website is an online catalog and lacks the interactive guided selling experience that today's digitally savvy consumer demands. We are committed to bringing the same white glove services provided in our stores to our digital interactions.

Reducing friction points for the customer is a key emphasis, and we are an evolving our customer experience with that goal in mind. In this regard, we remain focused on 4 key areas. First, acquisition: Leveraging digital marketing to attract new customers to the DXL men's apparel brand. Second, retention: Driving customer loyalty through targeted engagement and building the store of one, with curated looks and experiences for our consumer. Third, fit and comfort: Delighting the customer with unique experiences that feature personalized fit and comfort as a competitive advantage. And fourth, marketplaces: Expanding the DXL men's apparel brand reach by leveraging strategic business relationships such as with Amazon.

We are on track to launch our first mobile app during the second quarter, which represents a key priority in driving customer engagement. The mobile app will provide a platform to engage with shoppers in a personalized manner while offering ease and convenience to shop our entire selection of brands and private label merchandise. In addition, our loyalty program will be integrated into this mobile platform to simplify the monitoring and redemption of rewards.

Our e-commerce sales penetration at fiscal 2016 was approximately 15% of total sales. We expect to experience solid growth in our digital channel in 2017, benefiting from Sahal's strategic action plan while leveraging our already robust omnichannel capabilities and the new mobile app.

I'd now like to shift gears and talk about our store strategy. We currently operate 218 DXL stores with a presence in every major market in the continental United States. The DXL men's apparel store build out has been a capital-intensive proposition for the past 7 years, and our 2017 plan is designed to reduce our capital associated with new store growth. We plan on leveraging the scale of our existing store base by elevating our marketing efforts and accelerating our digital engagement.

As we highlighted back in March, we entered 2017 with a slower pace of new store growth. We're on track to open approximately 20 new stores in 2017, which is down considerably from the 30 stores we opened in 2016, and we will continue to slow the place of new store growth. Into fiscal 2018, we expect to open approximately 5 new DXL stores while simultaneously accelerating our digital engagement, appropriately aligned with the evolving retail landscape. Our slower store growth plans are strategically and financially aligned with our goal of delivering strong free cash flow while continuing to expand our DXL men's apparel branch reach.

There have been no changes in our plans to close approximately 19 Casual Male store locations in 2016, resulting in square footage growth for the year of approximately 2.6%. Our DXL men's apparel stores now represent 78% of the total company store footprint and are expected to reach 80% by the end of fiscal 2017. I want to reiterate what we highlighted back in March regarding our legacy Casual Male stores. This is a healthy fleet with 121 out of the 123 Casual Male stores in operation today generating positive free cash flow.

We successfully opened our first 2 Canadian DXL men's apparel stores in the Toronto market. We opened these stores on time and with no issues. These are company-operated stores, and I'm pleased to report that both locations are performing ahead of plan and we are experiencing higher-than-expected levels of traffic and shopper conversion.

We believe the Canadian market represents a strategic growth region for our brand. Canada is our #1 export country of DXL men's apparel merchandise, and we have extensive experiencing -- experience servicing the Canadian shopper from our border stores. As we gain valuable incremental insight into the big and tall Canadian consumer, we remain focus on becoming the go-to destination for all his wardrobe needs.

Before we move on to the first quarter financial update, I want to address a research note about DXL that was recently picked up a number of media outlets. DXL was included on the list of 10 retailers considered by the offer -- author to be vulnerable to bank default within the next 12 months. I'd like to take this opportunity to state that we believe DXL's inclusion on this list inaccurately assesses our financial position and business outlook. We ended fiscal 2016 with a debt-EBITDA ratio of 2:1 and over $57 million of unused excess availability under our bank facility. Our strategic direction is clear, and we're on track with our goal of generating $15 million to $20 million of free cash flow this year.

Furthermore, we are opportunistically repurchasing shares in the open market. During the first quarter, we repurchased 670,000 shares. And we have capacity to buy more, with $10.2 million remaining in our current reproach -- repurchase authorization. We're taking a balanced approach to capital allocation, and this flexibility is allowing us to repurchase shares and pay down debt.

And with that, I'll now pass the call over to our CFO, Peter Stratton, who will review our financial performance. Peter?

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Peter H. Stratton, Destination XL Group, Inc. - CFO, SVP and Treasurer [4]

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Thank you, David, and good morning, everyone. I'd like to start off today with a brief summary of our first quarter 2017 results. For the first quarter, net sales were $107.6 million, inclusive of a total company comparable sales decline of 2.1% compared to a 2% increase in the prior year quarter. As David mentioned, our top line results were in line with our expectations for the quarter but ended strongly as our April comp accelerated to positive 6.4%, benefiting from the launch of our television advertising campaign.

Performance across the country was evenly balanced. Some of you will recall from last year that our comparable sales performance in the middle American states was approximately 600 basis points behind our performance on the coasts. We are very pleased to see that gap has closed in the first quarter of 2017, and the stores in the middle of the country are once again performing in line with the coasts.

Gross margin for the first quarter, including occupancy costs, was 45.2% compared with 46.1% for the first quarter of fiscal 2017. Our merchandise margins increased by 10 basis points, but we also experienced a 100 basis point deleveraging in occupancy costs for a net decline of 90 basis points in gross margin. Our merchandise margins benefited from lower promotional markdowns compared to last year. Occupancy expense was negatively impacted by preopening rent expense on 11 new DXL store openings this year compared to only 5 last year.

Next, I'd like to talk about SG&A costs. Obviously, our elevated investment in advertising is going to have an impact on expenses. Our SG&A expense for the first quarter was 42.9% of sales, which was better than we expected compared with 38.3% a year ago for an increase of 460 basis points. On a dollar basis, SG&A expense increased $4.8 million from Q1 2016. The increase in advertising costs of approximately $3.5 million accounted for approximately 320 of the 460 basis point increase. The balance of the increase was related to store payroll and supporting costs associated with our existing store base.

As a reminder, our plan incorporates an increase in our marketing and digital expense base by $6.8 million for the full year in fiscal 2017, and we also expect our performance incentive accruals to return to a more normal level which will contribute to a higher SG&A rate in 2017. For the full year, we expect an SG&A increase of approximately 150 to 200 basis points.

GAAP net loss for the quarter was $6.1 million or minus $0.12 per share compared with net income of $200,000 or breakeven per share a year ago. Net income on a non-GAAP basis, assuming a normalized tax rate of 40%, was $0.07 per share compared to breakeven in Q1 of fiscal 2016.

Our EBITDA for the first quarter was $2.5 million compared to $8.4 million in the prior year quarter. Again, this was primarily driven by higher planned marketing costs associated with our television advertising campaign and higher occupancy costs.

Capital expenditures for the first quarter of fiscal 2017 of $6.9 million were up 13% from $6.1 million in the first quarter of 2016. The higher CapEx was due to the opening of 11 DXL men's apparel stores, including the 2 new locations in Canada.

Inventory at the end of the first quarter was down $4.4 million or 3.5% from the first quarter of fiscal 2016. This inventory reduction is a direct result of continued inventory initiatives we've been pursuing since 2016 to improve timing of receipts and weeks of supply on hand. As a reminder, we previously identified several opportunities within our merchandise planning and allocation functions that we believe will drive an additional $8 million to $12 million of further inventory improvements in fiscal 2017, and we remain on track with that initiative.

Our inventory composition is healthy and current, with clearance merchandise representing only 8.2% of our total inventory at the end of the first quarter compared to 8.7% for the same period last year.

Total debt at quarter end was $78.8 million, which includes borrowings under the revolving credit facility of $62.1 million with excess availability of $45.7 million. This compares to $80 million of total debt a year ago. Keep in mind that our debt levels are elevated in Q1 compared to Q4 due to the seasonal build of spring merchandise.

Now let me turn to our 2017 guidance, which we are reaffirming today. Total sales of $470 million to $480 million; a total company comparable sales increase of approximately 1% to 4%; gross profit margin of approximately 46%; and adjusted net loss of $0.06 per share to $0.14 per diluted share, assuming a normalized tax benefit of approximately 40%; EBITDA in the range of $24 million to $30 million; capital expenditures of approximately $22 million before tenant allowances of $5 million, with approximately $13.7 million invested in new DXL stores; free cash flow in the range of $15 million to $20 million; and we expect to open approximately 19 DXL men's apparel retail stores and 1 DXL outlet location. We also plan to close approximately 16 Casual Male XL retail stores and 3 Casual Male outlet stores.

Now for quarterly modeling purposes, I would like to offer the following directional comments. Our elevated efforts in marketing and digital development will weigh a bit more on SG&A expenses in the second quarter than we originally expected. We expect SG&A expense to be 150 basis -- 150 to 200 basis points greater than last year, and our non-GAAP earnings per share to be a slight loss for the quarter. We again expect a loss in Q3 and a profit in Q4.

Lastly, before we open the call for questions, I'd like to update you on our capital allocation strategy, including our share buyback. The company is forecasting free cash flow of $15 million to $20 million for fiscal year 2017, and we intend to use that cash flow to both pay down debt and buy back shares. Our Board of Directors previously authorized a stock buyback program for up to $12 million in fiscal 2017. This authorization provides the company with additional flexibility to balance debt paydown with shareholder returns.

During the first quarter, we repurchased 670,000 shares of our stock for a total cost of $1.8 million, which leaves approximately $10.2 million remaining under the current authorization. Maintaining adequate excess availability under our credit facility remains our top priority, and we believe a combination of debt pay-down and stock buyback represents the best use of free cash flow in fiscal 2017.

And with that, operator, we would like open the call for questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) We'll take our first question from Eric Beder with Wunderlich.

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Eric M. Beder, Wunderlich Securities Inc., Research Division - Analyst [2]

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Could you talk a little bit -- let's see, I have a number of questions here. Could you talk a little bit about the Canadian opportunity in terms of how many doors you're seeing? And is there any difference really in what they're wanting in terms of product or pricing than we're seeing in the U.S?

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David A. Levin, Destination XL Group, Inc. - CEO, President and Director [3]

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That's a good question. So we're starting out in the Toronto market. It -- currently there's our competitor who's there who actually is in bankruptcy right now. Dimension that out to about 14 stores overall. I mean, Toronto is the fourth-largest city in North America. So I think that we could certainly have 7, 8 stores in that market over time. What's interesting is on the customer's response to our stores, very similar to the profile we have of our U.S. customers. We were a little quizzical, would they be more inclined to buy our brands because they're more familiar with it? But they really are taking to our private label product as they do in the United States, which is great for us because, obviously, we get a higher-margin dollar on our private label.

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Eric M. Beder, Wunderlich Securities Inc., Research Division - Analyst [4]

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In terms of -- just kind of switching gears, when you're looking at the e-commerce business -- I know it's going to be a nice growth driver for you -- what do you see in the difference in margins between your e-commerce versus stores in terms of that? And what do you see in kind of the return rates there to drive that business?

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Peter H. Stratton, Destination XL Group, Inc. - CFO, SVP and Treasurer [5]

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Sure. So in the e-commerce business, I think first of all, we do have a bit of a difference in mix, where the direct customer shopping on the web is more value-based, looking for deals more frequently, so we take a little more on markdowns. We take -- we obviously have to pay for the freight, but a number of our customers, they actually prefer to expedite, which they pay for. So when we're comparing direct versus stores, there's not a huge difference. It's more a difference in mix, where we sell more full price in stores and more lower -- value product on the web.

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David A. Levin, Destination XL Group, Inc. - CEO, President and Director [6]

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The important thing to note is, you mentioned returns. We're very fortunate in this environment, where returns really eat up the profits of brick-and-mortar online sales, our return rate is 8%. Which is -- to me, that's probably the lowest I've heard of. A lot of apparel is 25% to 30% returns, and that's really based on the fact that we spec out sizing for all the brands and private label. So when the customer is buying one of our sizes, there's a high degree of confidence that, that product is going to fit him. And I think long term, that's a big advantage for us.

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Eric M. Beder, Wunderlich Securities Inc., Research Division - Analyst [7]

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Great. When you look at the mobile app, do you believe that this is going to bring in new customers? Is this going to help reinforce your kind of leadership into online? How do you look at the mobile app as a competitive tool?

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David A. Levin, Destination XL Group, Inc. - CEO, President and Director [8]

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Yes. Well, our mobile app increase quarter-over-quarter is dramatic, like, I know a lot of retailers have, in response. But it's got a high rate of engagement, but conversion isn't quite where anybody wants it to be yet, but it is getting better. But our -- it's giving us the ability to talk directly, personalize to our customer. It's built on speed. Today, our average mobile page load time is several seconds, 6 to 8 seconds, and our load time once we start the app going will be less than 1 second. And we'll be able to engage him, talk to him, interact and make that a kind of more seamless relationship that he's coming from the Internet and coming back into our stores. So we're excited about the mobile app, and it's coming up shortly. And we'll see the results in -- probably on the next quarter call, we could talk specifically how it's working.

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Eric M. Beder, Wunderlich Securities Inc., Research Division - Analyst [9]

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And last question, so you ramped up the TV spend. What has it driven in terms of -- when the TV spend is there historically does it drive more branded business? Does it drive more private label business? What does -- what customer's brought in by the TV that hasn't been brought in by just what you've done before?

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David A. Levin, Destination XL Group, Inc. - CEO, President and Director [10]

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Well, as we -- our mission was always, as you noted, grow the end of the rack. And for those who aren't familiar with that, it's really the guy who's in between, being able to shop in traditional department stores and retailers, and going into a big and tall store. And 65% of big and tall guys fall between 40 and 46, and it was only 35% of our penetration. It -- TV clearly has affected -- when we started this campaign on TV, it was in the low 30s. And now as we've just announced, 44.8%. So almost half of our customers are end of the rack. But it does also drives traffic to our existing customers. It is awareness. Our awareness did go down for the first time when we did not have a TV run last fall, and now our customer count is going back up, getting very comfortable. And the best part about us keeping customer count up is there's somewhat of a cost of acquisition to get that customer, but he comes back, he's sticky, and that's what it's about. Getting him in and retaining him will allow us to amortize the cost of that marketing over time.

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Operator [11]

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Our next question comes from Chris Krueger from Lake Street Capital Markets.

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Christopher Walter Krueger, Lake Street Capital Markets, LLC, Research Division - Senior Research Analyst [12]

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Just looking at the results, I think, obviously the April same-store sale of 6.4% really stands out. And to me, that implies kind of a sequential jump of, call it, 12%, 13%, if I'm doing my math correctly, from the February-March period. And I know your new marketing campaign kicked in. Can you talk a bit about what that all entailed? Was it mostly spent on TV? Or is it more radio and other sources?

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David A. Levin, Destination XL Group, Inc. - CEO, President and Director [13]

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It was pretty much the same balance we've used historically. It's mostly TV supported by radio. Mostly sports-driven. We have some really good spots this year in some -- in playoff games, a big boost from being on the NFL draft and actually being a sponsor of the NFL draft. Our name was all over there, I got lots of feedback from a lot of people that saw that marketing campaign. But the advantage we have this spring is that we have a more intensive program with 40% more spend to really get that customer acquisition list going up again. We're very pleased with that. And it has a halo effect. So even after we stop running the spring/summer flight in Father's Day, for the next several weeks, there's a nice carryover of that marketing campaign that does impact traffic into our stores and onto our web.

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Christopher Walter Krueger, Lake Street Capital Markets, LLC, Research Division - Senior Research Analyst [14]

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Okay. Then the mobile app that you're going to launch soon. How do you make these big and tall potential customers even aware of your app?

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Peter H. Stratton, Destination XL Group, Inc. - CFO, SVP and Treasurer [15]

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I think a lot of it will be through our store associates. They're some of the best brand ambassadors we have for our brand and they're working with our customer every day. So when somebody's coming into the store, we need to make sure that we have a good plan to show him that this app is out there, what it can do for him. It's going to be more about -- more than just another tool with which to transact business. We want him to be able to -- things like update his loyalty points and see what deals we have out there. So that will be the biggest part, is through our store associates.

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Christopher Walter Krueger, Lake Street Capital Markets, LLC, Research Division - Senior Research Analyst [16]

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Okay. And you guys indicated that your CapEx for new DXL stores is going to be about $13.7 million this year. Can you remind us what that number was for last year?

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Peter H. Stratton, Destination XL Group, Inc. - CFO, SVP and Treasurer [17]

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Let me see. That number -- let me get back you on that one. It was about $20 million, but I have to double-check.

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Operator [18]

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We'll take our next question from Greg Pendy with Sidoti.

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Gregory R. Pendy, Sidoti & Company, LLC - Research Analyst [19]

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Just wanted to understand, can you just run us through, I guess, the puts and takes of the gross margin? I know there was a little bit in the press release, but were some of these stores particularly higher-cost than typical stores? I know you said the merch margin was up 10 basis points, but I believe overall, there was about 100 basis points deleverage with some store cost within there.

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Peter H. Stratton, Destination XL Group, Inc. - CFO, SVP and Treasurer [20]

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Yes, Greg. That's a very good question. I wanted to make sure we're clear about that because you're right, merchandise margin was up 10 basis points. The merch margins were very similar to last year, we didn't have a problem there. But you're correct, there was some deleveraging on the occupancy cost. And the primary driver behind that is the timing of our new store openings this year versus last year. So last year, I think we opened 5 new DXL stores in the first quarter. This year, we opened up 11 new stores. And keep in mind, we take possession of those stores, in some cases, 3 months before opening. So you've got a lot of preopening rent in the first quarter that doesn't have any top line sales to go with it. So that's really what the biggest driver was. It's not that, overall, we're seeing that leases are getting significantly more expensive. It's more the preopening rents that we had to absorb in Q1 without sales to go with it.

And just one follow-up point for Chris Krueger, on your question earlier. The CapEx was $19.6 million last year for the DXL stores.

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David A. Levin, Destination XL Group, Inc. - CEO, President and Director [21]

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And one more point to make on that. That's why we're confident we're going to have excellent cash flow in 2018 because with the store count going from 19 to 5, that's obviously going to open up a lot of CapEx for us.

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Operator [22]

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Our next question is from Bernard Sosnick.

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Bernard Sosnick, Madison Global Partners, LLC, Research Division - Retail Analyst [23]

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April had a benefit of Easter shift for most retailers, I'm assuming DXL included. Therefore, it's a little bit difficult to judge what 6.4% gain for the month meant, and it's especially important since the commentary implies a similar 6% rate of growth going into May. Could you give us a little bit of clarity with regard to the lift expected in May? And how much of that in April came from the advertising program?

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David A. Levin, Destination XL Group, Inc. - CEO, President and Director [24]

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Yes. Well, we got the lift because the advertising program did start in the month of April. And the point for us is the Easter shift for us is not that dramatic in the men's business. I think it used to be 20 years ago and even less 10 years ago. It's just not becoming a significant buying holiday, and we've seen that over the years. So with the shift, it's a couple hundred basis points at most. And that trend, post Easter, has maintained itself quite well. So we're feeling that the impact of the TV is certainly taking place for the -- it's been like 6 weeks now of a good run on our store comps. So we're feeling confident that we're going to be able to deliver positive comps going forward for the rest of the year.

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Bernard Sosnick, Madison Global Partners, LLC, Research Division - Retail Analyst [25]

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I just want to be certain that there isn't an overly optimistic expectation out there for 6% comp increase in the second quarter. Is that what you're implying? Or something less?

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Peter H. Stratton, Destination XL Group, Inc. - CFO, SVP and Treasurer [26]

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No. I would not say we're implying that. I think that, as David just mentioned, in April, we were advertising against no advertising last year. And over the course of the spring, we expect that, that comp will come down a bit. For the second quarter, I would think we're in low to mid-single digits.

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Bernard Sosnick, Madison Global Partners, LLC, Research Division - Retail Analyst [27]

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Okay. That's much better. With regard to the end of the rack shopper, you're doing very well there. But I'm wondering whether or not you're getting as much response from your Casual Male shopper as you would've expected in the DXL store. There was some difficulty in the beginning getting the transfer of the shoppers. But I'm wondering whether or not there is the kind of responsiveness from the larger-sized guy who felt comfortable shopping in an out of the way store as compared with something a lot more contemporary with DXL. So could you give us your thoughts with regard to the traditional larger-sized shopper in DXL?

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David A. Levin, Destination XL Group, Inc. - CEO, President and Director [28]

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Bernie, I think you're -- it's completely the opposite. Our big guy loves the store. In fact, he can't wait for the store to open because when he comes in, he comes in opening day, he's walking around the store, loves the selection. We're giving him everything he wanted. This is what the Casual Male customer wanted from us. He wanted more brands. He wanted more selection. He wanted bigger dressing rooms. Basically, what we gave him came from focus groups, in surveys of everything we've done over the years. So he totally embraces the store, and they're converting over much better than ever before. And that was more of a marketing issue than a resistance. They just didn't know where the hell the store was. And we're doing a much better job keeping the Casual Male store open for 3 months after the DXL store opens to continue to move that guy -- get him to move over to where the DXL store is. Sometimes, it could be 4 or 5 miles away and it takes time. But we continue to see continued comp growth being a destination strategy here. And no, I'm in the stores, we're all in the stores. The big guy loves this, loves the concept.

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Bernard Sosnick, Madison Global Partners, LLC, Research Division - Retail Analyst [29]

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One other point with regard to DXL. Could you remind me what the sales per square foot were for 2016? And what level of sales per square foot would be required from DXL to achieve your return on investment objectives?

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Peter H. Stratton, Destination XL Group, Inc. - CFO, SVP and Treasurer [30]

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So the sales per square foot in our DXL stores, it's about 100 -- last year, it was about $177. To achieve our return on investment objectives, it's a lower much -- it's a number much lower than that. We certainly think that over time, the sales per square foot should be growing up to $200, $220. But we think we're making nice progress on that. We should be in the mid-$180s this year.

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Operator [31]

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And we'll take our next question from Steven Ruggiero with R.W. Pressprich.

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Steven Anthony Ruggiero, R.W. Pressprich & Co. Inc., Research Division - Head of Research, MD, and Security Analyst [32]

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I'd just like to say before I give the questions, just as a full cap structure analyst, I'd just want to say congratulations on maneuvering through this tough retail environment. Not only with favorable trends that could appeal for your growth analyst, but you have great financial flexibility and strength. And I just wanted to note it -- note that.

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Peter H. Stratton, Destination XL Group, Inc. - CFO, SVP and Treasurer [33]

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Thank you very...

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Steven Anthony Ruggiero, R.W. Pressprich & Co. Inc., Research Division - Head of Research, MD, and Security Analyst [34]

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Sure. So TV spend. You mentioned fourth quarter '17 versus fourth quarter '16. And perhaps I missed this, but can you give me a sense of what the dollar of that cost will be?

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Peter H. Stratton, Destination XL Group, Inc. - CFO, SVP and Treasurer [35]

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Our fourth quarter '17 versus fourth quarter '16?

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Steven Anthony Ruggiero, R.W. Pressprich & Co. Inc., Research Division - Head of Research, MD, and Security Analyst [36]

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Specifically for that TV spend that didn't exist last year but does this year.

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Peter H. Stratton, Destination XL Group, Inc. - CFO, SVP and Treasurer [37]

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The amount for just Q4, I don't think we have that with us, but I can get that. I will get that to you.

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Steven Anthony Ruggiero, R.W. Pressprich & Co. Inc., Research Division - Head of Research, MD, and Security Analyst [38]

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Okay. And then your merchandise SKUs, what percentage are available through your mobile app? Now and toward the end of '17, what percentage do you expect?

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David A. Levin, Destination XL Group, Inc. - CEO, President and Director [39]

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Everything. 100%.

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Steven Anthony Ruggiero, R.W. Pressprich & Co. Inc., Research Division - Head of Research, MD, and Security Analyst [40]

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Got it. Okay. It's not always the case, but okay. And then e-commerce sales as a percentage of total sales for all of '17, you mentioned 15 point -- 15% for the latest quarter. And I just want to get a sense of where it will be a year from now.

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David A. Levin, Destination XL Group, Inc. - CEO, President and Director [41]

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Well, we don't break that out. We give updates on it, but we don't give out that number. We give out one comp number. But I will say this, it's growing at an accelerated rate, obviously, compared to our store count.

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Steven Anthony Ruggiero, R.W. Pressprich & Co. Inc., Research Division - Head of Research, MD, and Security Analyst [42]

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Okay. And last question, when your product is sold through Amazon, what's the incremental cost per unit? Or more generally, what percentage -- what's COGS as a percentage of an Amazon-directed sales as opposed to a non-Amazon-directed sale? And I know that might be a tough one to answer, but...

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Peter H. Stratton, Destination XL Group, Inc. - CFO, SVP and Treasurer [43]

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That's one we're not going to answer.

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David A. Levin, Destination XL Group, Inc. - CEO, President and Director [44]

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We can't answer that one.

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Operator [45]

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Our next question comes from Peter Rabover with Artko Capital.

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Peter Rabover, [46]

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Guys, I have a question on your -- in your investor deck, you guys have a breakdown of stores as you opened them, that -- from year 1 to year 5. And I think in year 1, you expect to generate $150,000 in cash flow per store, year 3 is about $300,000, year 5 is $400,000. And so I guess two-part question is, any updates to those numbers? And then what would be the weighted average life of a new DXLG stores to think about in context of those numbers?

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Peter H. Stratton, Destination XL Group, Inc. - CFO, SVP and Treasurer [47]

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So the answer to the first part of the question is, is it changing? The answer to that is no. it's -- I mean, it moves a little bit, but we still see that the maturation cycle of a DXL store is 4 to 5 years. And we see, we're seeing nice comp growth each year that the store matures, and it's still pretty closely sticking to that schedule that's in the investor presentation. Our payback on these stores is about 2.5 years, so we feel like we're getting a good return on investment for our new stores that we're opening. But again, we're going to continue to open stores as we need to, but we've now got enough reach that we have a DXL store in every major market in the United States. So as we think about this year, the focus is shifting more towards digital and e-commerce.

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Peter Rabover, [48]

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Okay. And then maybe on the -- with your advertising. Do you -- does that drive more of online? Or toward the brick-and-mortar sales?

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David A. Levin, Destination XL Group, Inc. - CEO, President and Director [49]

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It's definitely both. A lot of -- you get very big spikes in our web traffic when we're on prime time. Conversion at that point is fairly low because the guy's just more curious. But again, we're getting him aware of the brand, so when he is ready to shop, he knows where to go. But it drives traffic to the stores, it drives traffic online.

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Peter Rabover, [50]

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Okay. And then you have mentioned that your return rate was 8%. Do you think that, that's because the people who shop online are your, actually, brick-and-mortar buyers? Or would you say -- do you guys have that data to see the who's buying online? Or is it brand new guys? Or is it people that have shopped with you before, and they're just loyal customers that are migrating to online?

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David A. Levin, Destination XL Group, Inc. - CEO, President and Director [51]

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Yes. It's really all about fit. Fit and comfort are the driving forces of our customers because they're challenged to find things that could fit them right. Once they find something that fits them, they're going to buy multiples because they don't think they could get it again or we'll be out of the sizes. So we have a big emphasis on that whole process. So we spend months with each brand, we have a global sourcing team that's excellent at putting out the trim, getting these fits and everything to fit just right. So just for example, if we have a Tommy Bahama 3 [X] shirt, we have a Calvin Klein 3X shirt. They both will fit him, but the DNA of that fit will be the same. So Tommy Bahama would be a little bit more generous in its fit and Calvin Klein will be a little more trimmer in its fit. But either one (inaudible) our guy. That's what differentiates ourselves from everyone else. If I'm out -- I don't buy jeans online because you never know how the brand's going to vanity-size it. So I could be any of 3 sizes, which really means I want to go in the store and try it on. Our customer knows if he's going to buy a 48-inch, 32-inch inseam, it's going to fit him. And again, having that low return rate is critical to our future growth because I think it's a real problem going forward for the brick-and-mortar retailers to make money if they're going to have high return rates.

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Operator [52]

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And that concludes today's question-and-answer session.

(inaudible) concludes today's call. Thank you for your participation. You may now disconnect.