Earnings Call Transcript - DXLG Q3 2023

Operator, Operator

Good day, and thank you for standing by. Welcome to Destination XL Group Incorporated's Third Quarter 2023 Financial Results Conference Call. At this time, all participants are in a listen-only mode. After the speakers' presentation, there will be a question-and-answer session. Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, Shelly Mokas, Vice President of Financial Reporting and SEC. Please go ahead.

Shelly Mokas, Vice President of Financial Reporting and SEC

Thank you, Norma, and good morning, everyone. Thank you for joining us on Destination XL Group's third quarter fiscal 2023 earnings call. On our call today are 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 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 2023. 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?

Harvey Kanter, CEO

Thank you, Shelly, and good morning, everyone. I appreciate the opportunity to speak with you all. Today, I'll quickly review our third-quarter results and provide updates on our key initiatives. I will discuss our expectations for the fourth quarter and our evolving brand-building and growth strategies for 2024. After my remarks, I will hand it over to Peter for a more detailed discussion on our third-quarter financial performance and our outlook for the remainder of the year. My goal in this call is to share insights on our current position, strategy, investment outlook, and what this all means for 2024, including our expectations to achieve higher growth levels for DXL from 2025 to 2027. Our third-quarter results fell short of expectations, reflecting the challenges that many retailers are facing due to a tough macro environment. We believe that our customers have shifted from the discretionary spending patterns of 2021 and 2022 to more essential purchases, which means we are competing for a more constrained consumer budget amid ongoing economic obstacles. So, what are we doing in response? To be clear, we are intensely focused on controlling what we can manage, operating efficiently, and ensuring that we meet standards in areas like merchandise margins, inventory levels, payroll, and SG&A. Our primary challenge in Q3 was traffic, which remains our top priority. Despite this, we maintain that we can execute our fundamental operations effectively. We can proactively manage inventory to prevent overbuying, optimize store labor, avoid excessive promotions, implement our store development plan, redesign our e-commerce platform, and launch a new brand campaign that will enhance our market presence. We know that once consumers experience DXL, given our conversion rates, repeat business, and customer satisfaction metrics, we can gain market share over the next couple of years. Additionally, we can leverage our position as an authority on big and tall menswear through collaborations with well-known brands and distribution partnerships to expand our reach. Our primary goals for the next year are store development, revamping our website, raising brand awareness, and forming collaborations and partnerships. Despite recent challenges, I am confident about DXL's potential in a $23 billion market and am committed to offering an exceptional selection of both private and national brands tailored for our customers. Our campaign, "To Him and For Him," embodies our commitment to serving big and tall men in a way that allows them to express their individual style. I remain very enthusiastic about our mission and the opportunities ahead, and I look forward to discussing our third-quarter results. Before I dive into the specifics of those results, I would like to provide some context regarding our performance. Comparing our results this year to 2021 and 2022, it’s evident that 2023 has been more challenging. However, when looking back to 2019, since we started DXL's repositioning, we have achieved over 25% growth in comparable sales. Our adjusted EBITDA margin has more than tripled since 2021 and is more than double what it was in 2019. Fiscal 2023 is still expected to be the third most successful year in our company’s history. Importantly, we have strengthened our balance sheet, entering the fourth quarter with no debt, $60 million in cash, and over $150 million in stockholder equity, which positions us well for strategic investments. Even though we faced a decline in year-over-year sales growth, it's necessary to acknowledge our accomplishments since 2019. However, we are aware that there's still significant work ahead. The slowdown in customer traffic that began earlier this year became more pronounced in Q3, particularly in stores. We are experiencing weaker sales in certain categories, such as sport shirts and casual pants, which performed exceptionally well last year due to the resumption of back-to-school and social events. Additionally, seasonal categories like outerwear and sweaters have started slowly. While we didn't meet our sales expectations in Q3, we are actively managing our inventory to lessen risk and are re-evaluating our inventory flow as we capitalize on clearance opportunities to provide lower price points for consumers, all while avoiding excess unproductive inventory. As we progress, our inventory position has improved, with a 6.5% reduction compared to last year and nearly a 17% decrease since 2019. Our inventory turnover has increased from 1.3 times pre-pandemic to 2 times annually now. Clearance events have helped counteract declines in online sales, resulting in healthy growth and increased customer engagement. We are particularly excited about our recent collaboration with UNTUCKit, which has exceeded our expectations since its launch on October 12. Supported by a comprehensive marketing effort across both DXL and UNTUCKit channels, we are currently offering shirts exclusively online and have set up try-on capsule displays in ten physical stores. We anticipate that positive results will warrant a broader rollout in 2024. This collaboration is a significant win for DXL, and we are actively exploring further strategic partnerships with recognizable brands that align with our curated offerings without competing with our existing products. With each collaboration, we reinforce our leadership in the big and tall market, and our focus on fit by DXL is a testament to why non-specialized brands wish to partner with us. Additionally, I would like to highlight our recent launches of Faherty and Hugo Boss, exclusive to DXL in big and tall sizes. These brands have been performing well beyond our expectations, and we plan to expand their presence in our stores next year. Our marketing initiatives have also made strides this past quarter. One area worth noting is our email platform, which has gained momentum. Personalized email campaigns have improved our click-through and open rates, and continuing to use our new deployment platform will remain a priority moving forward. We are also beginning to see improved digital conversion online and are promoting our loyalty program benefits effectively to encourage consumer participation. We recognize the potential of our Big and Tall Essentials (BTE) line on Amazon's marketplace, but performance has not met expectations due to shifts in Amazon's model. In 2024, we will scale back the BTE line to focus on a few profitable products while continuing to offer our mainline product assortment. As noted earlier, I want to share our long-term perspective. We believe we can change the company's growth trajectory and that exposing our brand to new customers is critical. Our brand awareness is currently below where we would like it to be, and we believe boosting awareness will drive traffic and lead to repeat purchases. We are progressing in identifying an agency partner for our upcoming brand awareness campaign that aims to create an emotional connection with consumers. We plan to select this agency by year-end, with an aim to test our new campaign by Father’s Day 2024. Simultaneously, we are reviewing our media agency needs to boost brand awareness through various marketing channels. Regardless of the challenging business environment, we are committed to pursuing growth in our brand initiatives in fiscal 2024. We will be judicious in planning our investment levels and aim to launch our campaign in late spring 2024. I'm very excited to share that we have opened our first new DXL store since 2018 in Regal Park, Queens, New York, and we plan to open a second store in Cincinnati, Ohio, in early December, followed by another in Pasadena, California, in January. We are actively working on more real estate opportunities to open additional DXL stores in 2024, with aspirations to convert existing Casual Male stores to the DXL concept. Lastly, regarding potential impacts from new anti-obesity medications, we recognize the importance of monitoring this trend. Fluctuations in weight often lead to wardrobe changes, and while the long-term effects of these medications are still uncertain, we see them as a potential catalyst for our business. Now, I’ll turn it over to Peter for his comments on the financials.

Peter Stratton, CFO

Thank you, Harvey, and good morning, everyone. In our last earnings call in August, we mentioned that at the halfway point of the year, our year-to-date sales comp was negative 0.5%. We indicated we expected a mid-single-digit negative comp for the third quarter and a potential recovery to nearly flat in the fourth quarter. Unfortunately, that expectation has not been met. Total sales for the third quarter of 2023 declined to $119.2 million from $129.7 million in the same period last year. Our actual sales comp for the third quarter was slightly worse than anticipated at negative 6.7%. In August, we recorded a sales comp decline of 6.5%. September showed a slight improvement to negative 5.4%, but further into October, we dropped to a negative comp of 8.3%. Our direct business underperformed slightly less than the stores, with a negative comp of 3.2% for the quarter, compared to an 8.1% decline in store sales. A significant challenge over the past quarter has been the decline in foot traffic. Store visits decreased by 5.9%, and both dollars per transaction and conversion rates fell by about 2%, with a more considerable decline in DPT. In the first three weeks of November, we continued to see a mid to high single-digit negative comp. Given the volatility observed in Q3, we anticipate the fourth quarter will reflect a similar mid to high single-digit negative comp, which sets our sales outlook for the remainder of the year. Regarding gross margin, our rate, including occupancy costs, was 47.5%, down from 50% in the third quarter of the previous year. The 250 basis point drop is attributed to a 110 basis point reduction in merchandise margin and 140 basis points related to occupancy costs, the latter stemming from reduced sales and increased rents from lease extensions. Our merchandise margin rate has aligned with our expectations and has remained relatively stable despite economic challenges. We’ve kept promotions low, only experiencing a slight increase in markdowns from the clearance events mentioned by Harvey, and we’ve offset rising costs in some private label merchandise with lower inbound freight. Similar to last quarter, we are facing increased costs for fulfilling direct-to-consumer orders and expenses associated with our loyalty program, both of which met our forecasts. We now expect our gross margin rates for the year to be approximately 180 basis points lower than last year, revised from an earlier estimate of 100 basis points, primarily driven by the impact of occupancy costs in light of lower sales expectations. Despite the decline in margin rates this year, we are still satisfied with the gross margin improvement since 2019 and expect it to be about 500 basis points higher than in 2019. On to selling, general and administrative expenses, SG&A constituted 40.2% of sales in the third quarter, compared to 37.3% the previous year. In dollar terms, expenses decreased by $400,000 this quarter and are down $800,000 year-to-date. As Harvey mentioned, we are taking steps to manage controllable elements of our P&L, and we are focused on variable labor costs and discretionary spending, such as travel. At the same time, we are investing in people and technology to support DXL's growth strategy, particularly in store development and technology initiatives. Advertising expenses for the quarter rose to 6.3% of sales from 5.9% last year, primarily focused on paid search, direct mail, and e-mail management, aiming to balance return on ad spend with new customer acquisition. Our goal for full-year advertising spend remains at 5.7% of sales, with costs for the brand campaign not incurred until next year. The bottom line for the third quarter shows an adjusted EBITDA of $8.6 million or 7.3% of sales, and net income reached $4 million or $0.06 per diluted share. The third quarter typically presents challenges for profitability due to business seasonality, and we returned to more typical levels this year after two years of record results. Despite the challenges on the P&L, I am pleased with our strong balance sheet and cash flows through the first nine months of the year. We finished Q3 with a cash and investment balance exceeding $60 million, we have been debt-free for two years, and we fully utilize our credit facility. Our inventory levels have decreased, we are turning stock faster than ever, and clearance remains under our goal of 10%. Thanks to our inventory management efforts, we increased year-to-date free cash flow to $22.7 million, up from $22.3 million last year, while funding more capital projects and eliminating our legacy pension liability. Capital expenditures year-to-date amounted to $10.4 million, with $4.2 million allocated to store development and the rest to technology and infrastructure projects. For the year, we estimate our capital expenditures to be around $15.5 million to $17.5 million. Let me also touch on our share repurchase program. In the first nine months of 2023, we repurchased 3.1 million shares at a total cost of $14.9 million. The original repurchase program approved by the Board of Directors last March authorized up to $15 million in buybacks. I’m pleased to share that the program was recently amended to allow a maximum repurchase up to $25 million, set to expire on March 16, 2024. This new authorization grants the company added flexibility to allocate capital for share buybacks when we find the share price attractive, thus enhancing shareholder value. Despite the challenging macroeconomic environment, we believe our strong balance sheet affords us the flexibility to navigate ongoing economic downturns while also pursuing our long-term growth initiatives. To conclude, I’ll provide our revised guidance for the full year. The economic pressures affecting consumer spending have contributed to our third-quarter sales falling short of expectations, leading us to adjust our fourth-quarter forecast as well. For fiscal 2023, we now anticipate sales in the range of $520 million to $530 million, with our adjusted EBITDA margin between 10% and 11% on a 53-week basis. I’ll now hand it back to Harvey for closing remarks.

Harvey Kanter, CEO

Thanks, Peter. I'd like to just close with a quick summary. But first, I want to say a sincere thank you to our team here at DXL. I feel as though our corporate culture is one of our superpowers and none of this would be possible without the hard work and dedication of our people in the stores, in the distribution center, in the corporate office and in the guest engagement center. Thank you for all your hard work and commitment in pursuit of serving big and tall men everywhere. And finally, I'll offer you this closing perspective. We have authored a strategic plan. But in the current environment, the volatility of the consumer, the market, world events and the like, are quite challenging to achieving the magnitude of our goals in the timeline. But march on, we must and we will. We remain relentlessly focused on executing our fundamentals and are committed to the strategy to grow and the initiatives we have spoken of today and often of in times past. We will open productive new stores, we will get the new platform deployed, we will launch a brand campaign, and we will keep pursuing merchandise collaborations and distribution alliances, taking more drastic actions such as offering deeper discounts and more broadly promoting and funding unproductive ROAS tactics would not make sense in the long run. We are not going to jeopardize the brand position that put so much emphasis and on over the last several years. Our trademark, Wear What You Want, is grounded in fit, in assortment and experience and not in price and promotion. We can't control customer traffic, but we can control where we focus our effort and attention. We believe in the DXL brand and everything it can mean and we remain focused on the opportunity ahead as opposed to traffic struggles at this single moment in time. And with that, operator, we'll now take questions.

Operator, Operator

Thank you. Our first question comes from Michael Baker with D.A. Davidson. Your line is now open.

Michael Baker, Analyst

Okay. Great. Thanks, guys. You sort of addressed this in the prepared remarks, but I figured I'd follow up on it. Last quarter, spent a lot of time talking about a long-term investment strategy, which I think makes sense. Since then, it does seem like things have slowed. How does that impact your long-term plans, if at all I think, correct me if I'm wrong, but the advertising budget for next year is maybe a little bit more conservative than what you had talked about on the second quarter call? But just in general, what does this do to your long-term outlook, if anything?

Harvey Kanter, CEO

Yeah. Mike, it's Harvey. I'll address that at a very high level for competitive reasons. We don't want to obviously share every element. But yes, the reality is it's hard to understand where the customer is going and what the economic realities are over the next 12 months. So, we have moderated our investment view, marching forward with what we have planned because we think it is not just critical. It's a critical imperative to do so if we're going to gain share of voice and share of market. And we know that once we do that and get trial, we will win. But we are moderating that in the first half of the year to try to understand the return and the level of investment that makes sense and we'll lean in even harder hopefully, as the economic realities become a little bit better in the second half of the year. But equally so, we have learnings in place to make sure that we understand what the return will be.

Michael Baker, Analyst

Okay. That makes sense. A couple of others. One, it's interesting about the BTE pullback in Amazon. I understand it's more challenging to be profitable there. But what about demand? And what does that indicate about your ability to pursue what I understood to be more of an entry-level type of product? What does that suggest about your capability to target that customer?

Harvey Kanter, CEO

There's still a significant opportunity to reach a larger addressable market beyond the current focus on DXL. The challenge with Amazon is similar to that of Google, where paid search elements dominate, making it difficult to achieve high visibility organically without purchasing traffic. In the past, when the program was white label, they had control over it and could direct it as they pleased. Now, as we invest in achieving search results while also utilizing FBA, our costs are increasing. We need to carefully balance the lower-income consumer market with product profitability, as selling products at a loss is not viable. This situation is still evolving. We believe there are better opportunities ahead. We remain confident that, in the long run, as we solidify the DXL brand, we can tap into greater opportunities for lower-income consumers, whether through a new brand, new distribution methods, or other avenues. Our experiences with the BTE program have provided valuable insights into the differences between top-line and bottom-line performance.

Michael Baker, Analyst

Yeah. Okay. So yes, it sounds like it's something that maybe you come back to in a different way. What's more...

Harvey Kanter, CEO

Indeed.

Michael Baker, Analyst

I'm not sure if you can provide an answer to this, but I agree that there is significant attention on GLP-1 drugs. It seems logical that as waist lines change, it could potentially be beneficial for you. I'm curious if there's any evidence regarding this. Do you have any way to identify which of your customers might be using these drugs? Have you noticed anything, even though it's still early in this situation?

Harvey Kanter, CEO

Yeah. In all honesty, we have been monitoring assertively, very assertively size penetration, and we haven't seen any material shifts. But part of the reality is we look at our business in kind of three distinct ways. There's the entry level, which is the rack of 38 to 40, so to speak. There's core suite spot of our business, which is 43 to 46, and I'm talking about waist sizes. And then there's the upper end of the rack, which let's just say that 60 to 70. And in the range of our core suite spot, we've seen small movements, lower in scale, but in the core suite overall, it's about the same. And so, it's hard to really know where that's coming from. But what you might have expected is actually a greater level of move out of our middle core suite spot into sizes that are more competitive with other retailers and quite honestly, not our core suite spot, and we just haven't seen that. And so, that's a long way of saying, I think that the jury is still out. I think that the unfortunate reality is as much as I think the weight loss drug is such a positive outcome for some part of the population, it's $10,000, $12,000, $15,000 a year, and it's not accessible to everybody. And as a result of that, the question is what's the penetration? And then, if you stay on that, it's great. But if you go off it, and as we mentioned, you don't have lifestyle changes, you gain weight back. And so, those are all things that are creating cloudiness. And ultimately, I think we're going to just need years, not months or weeks to better understand this.

Michael Baker, Analyst

Yeah. Makes perfect sense. I appreciate the time. Thank you.

Operator, Operator

Thank you. One moment for our next question, please. Next question comes from the line of Jeremy Hamblin with Craig-Hallum Capital Markets Group. Your line is now open.

Jeremy Hamblin, Analyst

Thanks. I wanted to start by discussing some customer behavior. Retail traffic trends have clearly been challenging. You mentioned an increase in the usage of the loyalty program certificates. In light of what you've observed so far this November, what insights are you gaining from the rise in loyalty certificate usage? Moving forward, how do you plan to strike a balance between driving traffic to the stores and maintaining customer engagement to prevent lapses? How do you envision using that program to encourage foot traffic while avoiding excessive markdowns on products?

Harvey Kanter, CEO

Yeah. It's a great question. And there's three or four different elements there that I'll try to unpack for you. First and foremost, the reality is the loyalty program is something that's really important to us. We believe that if we can successfully communicate the value of the program, that he will or she will shop more regularly with us because they'll appreciate that. And the value of the program specifically is performing best with our best customers. It's probably not a surprise, but they understand that value. They shop more frequently. They are more engaged with their purchases. And they recognize one of the critical elements is literally, our loyalty certificates are like currency. It's like greenbacks for lack of a better way to say it. They can come in and use them like dollars, there's no exclusion, they can buy anything and any brand that we offer. Unlike a coupon, where we are using coupon selectively to manage inventory and the file, which we've spoken about before. But any time we do that, it's to our actual internal file and there are limitations and exclusions such that they can't use it on most of the national brands because we're just not discounting those brands. And as a result of that, our best customers utilizing them the most, where they understand the program and the efficacy of the program for them. And in opening kind of price points, if you will, and opening customers, bronze and silver versus gold and platinum, they don't yet understand that. So the third element, I would say, is that we spoke about in my prepared remarks that our challenge is to evolve the consumers' understanding of the program and the inherent value in being not just a member but utilizing the certificate. And unlike a discount for us, if they come in with a certificate, whether it's $15 or $30 or even $45, our average ticket is well above that. And we know that if they use the certificate, they will end up spending close to our average ticket, and we will win at a lower level of, if you will, discount, which is when the day is done, the actual $15 certificate is a discount from the product price, but it's not discounted as a pure discount, it's discounted with the ability to use it as currency. So, we still look at it as a really meaningful opportunity for us, one we continue to work really hard. It's only a year old and really hard to creating the communication and understanding of the benefits of the program. Over time, we think it will ultimately be a big win for us. But like anything else, it's new to the consumer, it's uniquely different than it was a year ago.

Jeremy Hamblin, Analyst

That’s helpful information. I wanted to discuss the store opening plan. We’re planning to open 10 locations in 2024 along with several remodels. In considering this, there are two key points. First, the capital expenditure is likely to increase significantly from the $16.5 million midpoint that you've forecasted for this year. Second, I would like to know the expected timing for the 10 new locations. Are you anticipating that about 25% of them, or two or three, will open in the first half of the year, with the remainder later on? This will help me understand the schedule better. Additionally, there are some increased infrastructure costs associated with this, such as hiring additional staff for your real estate team. I am curious about the estimated annualized cost from a selling, general and administrative perspective to support the new openings and remodels.

Peter Stratton, CFO

Sure, I'll respond to that, Jeremy. You're correct. This is something we've been discussing for over a year, and the investment required for site selectors, store planners, construction personnel, and project managers adds up. These costs have a deferred return since we incur expenses early, and it typically takes us about a year to open a store. The average cost for our stores is around $1 million, usually net of some tenant improvement allowances we aim to secure. We're definitely moving forward with this. As Harvey noted, we're currently negotiating nine leases. I'm optimistic that we'll finalize about 30% of those in the first half and 70% in the second half, with a heavier focus on the latter part of the year. I'm pleased we have nine leases in process and hope to secure one more, bringing the total to ten for the year. This is a significant part of our strategy, as we recognize the appeal customers find in the in-store experience. Our store associates are a key asset in delivering a level of engagement that big and tall customers won’t find elsewhere, and we intend to continue leveraging this strength.

Jeremy Hamblin, Analyst

Got it. Thanks. And just remind us in terms of the conversions and the remodels, the approximate cost of those when you're going from Casual Males to DXL and other conversions that you're doing? Just the range of this cost?

Peter Stratton, CFO

We have two types of conversions happening. One is converting casual male stores to DXL, with a target of completing 10 this year and an additional five to ten next year. These conversions typically cost between $200,000 and $300,000 each. The second type involves DXL remodels, which are updates to existing DXL stores. We have already completed remodels in three locations: Warwick, Rhode Island, and Troy, Michigan. The cost for remodeling is around $300,000 per store, and we currently have five remodels underway, with plans to initiate a few more next year, though we have not determined the exact number yet. We will continue to assess the return on investment from these DXL remodels.

Harvey Kanter, CEO

One thing I might add is that if you haven't been to Regal Park, you should definitely make it a point to go when you're in the city. It's quite remarkable how the social community aspect of the storefront has evolved. I know I mentioned this before, but the concept of in-home where everyone gathers around a kitchen island and the community experience allows access to our entire online assortment, whether buying in-store, picking up in-store, or having it delivered to your home, is truly unique. The integrated digital experience creates a very different storefront, and we're excited about it. We're still early in the process, but as Peter mentioned, we'll have a second location this year and several more next year. As we open new stores, they will follow this remodeled format, creating a compelling storefront that stands out from most retail locations, especially for our core customers who don’t have many options that we provide.

Jeremy Hamblin, Analyst

Got it. Thanks. And then, last one for me is, I think at the end of Q2, you had a little over 9% of your inventory was of the clearance variety. And you might have mentioned this and I missed it, but where does that percentage stand today?

Peter Stratton, CFO

That's today, we're at 9.7%.

Jeremy Hamblin, Analyst

Got it. And so that's up about 300 basis points from a year ago?

Peter Stratton, CFO

Yeah. I don't have at my fingertips what it was a year ago, but I remember the 9.7% was where we are at the end of Q3.

Harvey Kanter, CEO

Jeremy, what's a really interesting conversation to explore, maybe not on the call, but later if you'd like, is that our inventories have come down. We talked about we're 6.5% under last year's inventory levels. And our view is that clearance and primarily, I would say, units, but also dollars based on what we carry, it's really important to maintain an offer. And so, we're actually strategically and tactically trying to manage to a certain level of clearance because we believe in the box as it fits that the reality is the customer gets greater value from the clearance, and that's our opportunity to create greater value for lower income consumers as opposed to discounting product. But when our inventory in total comes down, and we're trying to make a certain level of units in the store, by default, the percentage and dollar value penetrates greater. So, as we've always said, 10% is the marker. We're trying to actually achieve closer to 10% than farther away. So, the migration from 6% to 10% had some thoughtfulness behind it. It didn't just happen.

Jeremy Hamblin, Analyst

Got it. Thanks so much for the color, and best wishes.

Peter Stratton, CFO

Thank you.

Harvey Kanter, CEO

Thanks. Happy Thanksgiving to you.

Operator, Operator

One moment for our next question, please. Our next question comes from Raphi Savitz with RYS Advisors. Your line is open.

Harvey Kanter, CEO

Hey, Raphi.

Raphi Savitz, Analyst

Hey, good morning, guys. Maybe one tactical question and then kind of a bigger picture question. On the tactical side, as you're reinvesting in the store base here, have you revisited at all how you're thinking about incentivizing your workers and your store managers to ensure success?

Harvey Kanter, CEO

Yeah. So, we have three different programs in place. We have a base compensation program. It varies by locale where the minimum wages are different. But every single store is above minimum wage in its locale and the combination of the store quarterly bonus and the actual sales associate commission ultimately creates their hourly pay. And we're, I'd say, at a high level, comfortable with where they are. They're materially greater than any historical perspective in terms of their hourly wage rates. I think if you're going to a store and actually experience interaction, you would find it remarkable, you would never know they're on commission where often enough in commissioned stores, you have a heavier push of the sales because they're trying to sell you what's on the rack. And in our case, the first question is, how can I help you today? May I take your measurements by our certified fit specialists. And it's really understanding what they came in for, what they're shopping for and helping them put together looks. And the outcome is successfully doing that, achieves an average DPT or average transaction value that is above what most other retailers have an average transaction value. And ultimately, a result of that is a higher commission and a better store bonus if we achieve our results. So, kind of a backdoor way to look at that. I think the outcome of their compensation is the effectiveness of creating the experience that we talk about so often and frequently.

Raphi Savitz, Analyst

Got it. Okay. And then as you think about the next few years at DXL, you've talked about, again, kind of inflecting growth and really driving growth in the out years. How do you think about kind of rank ordering, what will drive that growth? Is it kind of the increased customer lifetime value of existing folks? Is it the branding efforts to bring in new folks? Is it the new stores?

Harvey Kanter, CEO

That's a great question. I want to emphasize that there’s no one solution to this. Each of the elements you mentioned plays a role, but our main focus is on our market share and awareness. Our research indicates that our awareness levels are quite low—single digits unaided and low double digits aided. In comparison, other retailers, who aren't specialists like us, have higher perceived awareness, even though their product range may not match ours. Our priorities are to enhance our share of voice, increase our actual awareness, and encourage trial among new customers. Successfully achieving these will help us acquire new customers. While I can't say that it's our top priority, it is definitely a significant focus. However, we must also balance this with the costs involved in acquiring new customers versus re-engaging existing ones. That's why we emphasize trial, repeat purchases, and customer lifetime value, as reminding our current customers of our offerings is more effective in generating returns on marketing. The goal is to grow our new customer base while being practical and thoughtful about the expenses involved, as this affects our financial performance. We've acknowledged that the percentage of EBITDA margins may decrease temporarily as we work to attract more customers, and we’ve revised our expectations given the market environment and the challenges we face in driving traffic and customer engagement. It seems like 2024 may be tougher than we anticipated.

Raphi Savitz, Analyst

Got it. And on the awareness question, is there a significant significantly better awareness where you have stores in market than where you don't have stores?

Harvey Kanter, CEO

For sure. There are absolutely awareness levels that are better by geography and even more so by the population centers of the world, and within where we have really strong performance. So like we talked often about the Northeast and the Southeast, very strong markets for us, higher awareness levels. Midwest is more challenging. And so yes, the answer to your question is yes.

Raphi Savitz, Analyst

Got it. okay. Thanks, Harvey.

Harvey Kanter, CEO

Thank you. Happy Thanksgiving to you. Operator, it looks like that's the end of the questions. We can take one more and pass. If there any other questions? If not, we will wish everyone a happy and healthy Thanksgiving, quality time with your family, and look forward to coming back to you in early January with a holiday release.

Operator, Operator

This concludes today's conference call. Thank you for your participation. You may now disconnect. Everyone, have a wonderful day.