Earnings Call Transcript
DESTINATION XL GROUP, INC. (DXLG)
Earnings Call Transcript - DXLG Q1 2023
Operator, Operator
Good day and thank you for standing by. Welcome to the Destination XL Group Incorporated First Quarter 2023 Earnings Conference Call. 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 SEC. Please go ahead.
Shelly Mokas, Vice President of Financial Reporting SEC
Thank you, Norma and good morning everyone. Thank you for joining us on Destination XL Group’s first 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 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 am grateful for the opportunity to speak with you today about our first quarter results and our thoughts on how our business is developing this year. We posted a comp sales increase for the first quarter of plus 0.6%. While our overall growth has slowed from our record-breaking double-digit comparable sales increases of the past 2 years, we remain encouraged by our ability to deliver our ninth consecutive quarter of comp sales growth. On our last earnings call in March, we talked about how our comp sales expectations for the full year were to be somewhere between flat to plus 5%. But for the first half of the year, we expected to be closer to the lower end of that range. As most of you have already seen, first quarter sales results for most apparel retailers had been affected by broader macro challenges. Our slowing comp store growth was in line with what we expected and the question we have been trying to answer is what should we expect for the remainder of the year? I will come back to that shortly. But I do want to acknowledge how very proud I am of how team DXL has managed the business during a period of harsh economic realities. The first quarter news cycle has been dominated by bank failures, rising interest rates, tighter credit standards, inflation, and fears of a recession, all of which are impacting consumer spending. Retailers are fighting for a share of an ever-tightening consumer wallet. And while DXL is an exception on many levels, we are still impacted by the volatility, consumer psyche and sentiments of the economic reality. We do believe that our first quarter results have outperformed the broader retail market on a relative basis. Because we serve a consumer with limited options and given our clear differentiated positioning, we believe we have continued to take market share and therefore we remain as optimistic as ever about our growth trajectory over time. For many retailers, the first quarter has been punctuated by double-digit comparable sales decreases. We have been fortunate to avoid that outcome and posted another quarter with a comp sales increase, albeit a small increase. While the consumer climate in May is certainly more challenging than it was in February, we believe the reason we have been able to outperform many of our peers is that our differentiated positioning is structurally unique. Our brand is built on a positioning that leverages fit, assortment and experience. For a consumer that at best has limited options, and dare I say perhaps only one truly immersive option, and that is DXL. While many of you have heard this before, the three elements I have referred to are what set DXL apart from our competition. At DXL, big and tall isn’t just a rack in our store, it isn’t just a page on our website; it’s all we do. We believe that the total addressable men’s big and tall market is more than $23 billion. And while we currently hold a meaningful slice of the better and best market share, we have far greater opportunity. Going forward, we believe that over the next 2 to 3 years, we can grow top line and take market share profitably by driving unique, more personalized and more relevant communication while maintaining our shift away from discounting. The result is driving gross margins in the upper 40s and EBITDA in the low to mid double-digits, a direct comparison to our historic margin in the lower 40s and EBITDA in the low single-digits. Our results over the last 2 plus years have been solid. These results have been driven by DXL strategic and transformational structural changes. This stands in direct contrast to results in apparel retail more broadly, which were driven in many ways because of government stimulus, low interest rates and the like. We believe the strategic transformational changes we have made are increasing our share of wallet and attracting and retaining new customers who have not yet experienced the DXL difference. We consistently hear from big and tall consumers that fit and style are the most important factors in their purchase journey. We believe our proprietary fit and expertise is a strategic asset, along with a curated and mostly exclusive offer. We have dedicated teams focused solely on developing precise specifications to deliver a unique, ownable and authentic fit and an assortment that looks, feels and moves great for the big and tall consumer. Assortment refers to our thoughtfully curated offering of designer collections and our own brands, including many exclusive brands and styles that can only be found at DXL. In fact, between our own brands and exclusive arrangements with national brands, over 80% of our assortment is exclusive to DXL. This delivers a product array and quality that stands in stark contrast to our competitors’ offerings and is one of the biggest elements of the DXL difference. Lastly, is the signature experience. We call it the DXL factor, whether in store or online, DXL is a brand built solely with the big and tall man in mind. We are engaging in ways no one else can deliver. With DXL, he can satisfy all his wardrobe needs, feel valued, respected, and throughout his shopping experience, emerge looking great and feeling even better, all in one place. We exist to provide the big and tall man the freedom to choose his own style. We relentlessly strive to serve his fit and style needs. When we do this, we are a haven for him with the largest assortment of brands and sizes accompanied by unrivaled expertise that creates an experience like no other. A testament to this, an objective metric that underlies the success we have in creating this experience is our net promoter score metric, which in stores is solidly in the mid-70s. For those of you familiar with NPS scores, this is a retail industry leading metric and one which we are appropriately proud. Our vision of becoming a haven for the big and tall man is crystal clear. It is what we believe is why so many men have tried DXL for the first time over the last few years. Let me get right to the specifics and details for our first quarter performance. As I just mentioned, comp sales in the first quarter were up 0.6%. I am pleased that this is our ninth consecutive quarter of positive comp sales growth. But clearly this is not where we want to be. The quarter started out very strong, with a comp sales growth rate of 9.1% in February. We fell back to minus 2.8% in March and then finished out the quarter with a minus 1.9% in April. As I am sure many of you are wondering, where is May’s performance? Month-to-date, we are currently tracking to a low to mid single-digit comp sales decrease. In terms of the overall high-level KPIs, the comp sales slowed down in March and April were primarily traffic-related with conversion and average order values being roughly flat to last year. To provide a little more color around traffic, we literally can see different levels of performance tied to events and context happening in the world around the consumer. I referenced earlier the consumer psyche and specifically how performance is tied to moments. For example, the SVB banking crisis was just such a moment, where in the days following, we saw business immediately change. Likewise, the looming debt ceiling discussion of late, where again, we can see and feel the consumer sentiment falling off. Correlation or causation, we really cannot say, but a clear indication that consumers are affected and this just adds to the overall malaise of consumer sentiment and reduced spending, inclusive of apparel. Conversely, in our core company-owned channels, it’s worth noting that we continue to see a nice lift in AOV from increased penetration and tailored clothing. We expect that lift will continue through the second quarter, but starting in fall, we will begin to anniversary that impact. Within our marketplace, we have seen sales growth from our big and tall essentials program. But this comes at the cost of a lower price point and consequently, lower margins. The bottom line is we have experienced a discernible difference in the velocity of traffic to both the stores and the website for the first quarter. Regarding pricing and promotions, we continue to be very selective in how we utilize promotion and we have not taken any meaningful price increases. While it can be very tempting to lean on promotions to drive sales in a weaker economy, we have resisted that temptation. The work we have done around the structural positioning in the brand with the consumer is a critically important structural element supporting our transformational strategy. We continue to prioritize the greater development and building of more personalized relationships with consumers over the next 2 to 3 years. Over the past 2 years, we have worked very hard to reposition our brand around the pillars of fit, assortment, and exclusivity, inclusive of the experience in stores. Price is important to our customers, but price is not how we differentiate. We have seen some small level of erosion in the gross margin relative to last year, driven by loyalty, shipping, and product costs. I will talk more about our loyalty program in a minute, but there is a cost associated with the program that is impacting the margin. Let me now share some thoughts on Q1 performance in the context of our merchandise assortment. Our current merchandise assortment is approximately 55% our own brands and 45% national brands. Our sales penetration for the first quarter was relatively consistent with that inventory position. Tailored clothing accounted for 21% of the Q1 business compared to 18% in the first quarter of last year. This is an area where we have been improving our in-stock position as demand for event-driven shopping and continued return to office gains momentum. In sportswear, the top-selling brands in our assortment continue to see slightly higher selling velocity, including Polo Ralph Lauren, Nautica, and Reebok. In the spring 2023 season, Life is Good and original Penguin Golf officially joined DXL’s growing exclusive brand portfolio, further reinforcing us as the number one destination for desirable national designer brands in big and tall sizes. We have two more iconic brands joining our portfolio of exclusive offerings in the fall. We aren’t yet ready to reveal who those brands are, but they are household names that our customers are going to love. Next up, inventory. Inventory continued to be a key priority for us and we are in a better stock position today compared to the first quarter of 2022. We have a very strong orientation to try to turn faster and we are making great progress here. Compared to 2022, our inventory levels are up 3%, but compared to 2019, our inventory levels are down 11%. We have worked to improve our inventory turnover for years and I am happy to report that our inventory turnover is up 25% to pre-pandemic levels. Our clearance inventory at the end of Q1 2023 is 7.8% compared to 6.9% at the end of Q1 2022. We are very comfortable with clearance inventory levels in total, which are still less than our historic target of 10%. From a marketing perspective, throughout the quarter, we continue to employ a strategy of having an eye on the road and an eye on the horizon to ensure we deliver solid results while continuing to build momentum and a modern marketing organization for the future. As such, we will continue to make good progress after we rolled out our campaign, 'Wear What You Want.' The brand positioning launched in early March. As a reminder, this new approach invites our customers to finally shop like everyone else, by choosing the style of apparel that they want, that reflects who they are and fits them uniquely versus simply accepting whatever they can find that covers their body. We continue to believe we are uniquely positioned to deliver this through our brand pillars of industry-leading fit expertise, the broadest assortment of national and own brands, the highest standards of construction and quality, and the most style options. The experience we provide cannot be found anywhere else. I am happy to report that our efforts have been well received by our customers and our DXL associates alike. We have seen increased engagement in our social channels, an increase in revenue with our e-mail program, and as a result, a more unified message to customers to wear what they want, our Wear What You Want campaign. We will continue to build on the success of the launch in the coming quarter with an integrated push around the key Father’s Day period that includes all our owned and paid channels as well as introducing new videos until we stop showing via the streaming media VidEL that will target new customers. Additionally, we continue to engage customers with our DXL rewards club loyalty program since launching it in late October of last year. We are seeing particularly strong results among our Gold and Platinum tiers in both certificate redemptions and sales. In Q2, we plan to further engage customers and drive acquisition with a focus on the value the program delivers every time you shop. Further, we plan to improve awareness and customer experience with a more pronounced emphasis on our loyalty program on our site. Building brand loyalty does not come without a cost. Our program teaches new ways to engage with the brand and leads to more loyalty certificates being issued. This is an extension of our marketing efforts that allows us to stay more connected to our best customers. In Q1, we continued our efforts to build a more robust, modern marketing organization. As discussed previously, we have worked to better position DXL for the future regarding more personalized marketing at scale, building our analytic capabilities, and deepening customer engagement. In April, we launched our Customer Data Platform, or CDP, as planned and on schedule. Over time, this new capability will further improve our customer targeting with a more sophisticated approach to segmentation, through audience creation, deeper customer insights and a path to even greater relevant personalization at scale. Throughout the coming quarter, we will utilize this tool across our marketing channels to better engage our customers based on shopping behavior, insights, and predictive modeling. In addition to launching the CDP, we also brought in a new email partner to help manage our remarketing program based on individual shopping behavior. These trigger emails have historically been a significant revenue driver and we believe they will become an even greater part of our mix in the near term. The combination of better segmentation, audience identification with the CDP and a more robust remarketing program should benefit us later in the year. We have also begun foundational improvements on our analytic capabilities. Moving to the near term, an improved holistic, cloud-based architecture will enable a more robust data infrastructure that delivers complex analytics at significantly greater speeds. This will enable a democratization of data across the organization, leading to a greater unlock of customer understanding and new ways to think about our business and make better investment decisions behind marketing drivers. As I already mentioned, we saw store traffic begin to soften throughout the quarter. To combat this, we have leveraged data to better utilize our digital investment to drive both online and offline traffic and revenue. Additionally, we will bolster traffic by highlighting local store inventory to meet customer demand in any given trade area. We believe we have made significant progress in Q1 and while our work is not done, we have laid out where we are going in the coming months and the balance of the year to deliver sustained marketing improvement. I also want to touch on our real estate and store development objectives. Earlier this year, we talked about the opportunity to grow our store base. I am pleased to report we are starting to see movement on this front. We have come to terms and executed our first lease agreement for a new store in Los Angeles; we are very close to our second new store, which will be in the New York market, and we expect to sign at least one more lease for a third store that we expect to open by the end of 2023. We have also begun construction work on four of our casual male stores that are converting to DXL, and there are six additional casual male stores that we expect to begin and complete conversion to our DXL store format by the end of the year. This would bring us to 13 new doors operating under the DXL brand nameplate by the end of 2023. Additionally, we have begun to work on remodeling one of our DXL stores in the Chicago market. We are looking to begin work on remodeling at least four additional existing DXL stores before the end of 2023. Over the next 3 to 5 years, we believe we could potentially open up to 50 net new DXL stores. We intend to continue converting casual male locations and we continue to evaluate the DXL remodels for incrementality and productivity. The bottom line is we see store development leading to more customers. We are pursuing these three avenues and will adjust our tactics as we learn. It’s an incredibly exciting time for us at DXL, and I am honored and humbled to speak with you about these exciting opportunities that lie ahead of us. In summary, I am very proud of our team and what we have achieved this quarter. None of this would be possible without the hard work and dedication of all our people in the stores, in the distribution center, in the corporate office, and in the guest engagement center. I want to take a moment and just say thank you. I truly believe that all we have accomplished is because of who we are as a team. Thank you for all your hard work and your commitment in our pursuit of serving the big and tall consumer and making DXL the place where they can best satisfy that desire to wear what they want. Now, I am going to turn it over to Peter for an update on the first quarter financials and how we are thinking about guidance for the remainder of the year. Peter?
Peter Stratton, CFO
Thank you, Harvey, and good morning, everyone. Net sales for the first quarter were $125.4 million as compared to $127.7 million in the first quarter of last year. On a comparable basis, adjusting for closed stores, sales grew by 0.6%. Our stores, which make up about 70% of our total business, were up by 1.5% and our direct business, which makes up the other 30%, was down 1.6%. As Harvey noted, our sales growth slowed in March and April due to a slowdown in traffic, which we believe is consistent with the overall macro environment. Although our direct channel was down slightly overall, we continue to see sales growth in our mobile app and online marketplaces. The mobile app customer tends to be a more loyal customer who shops more frequently, so we are excited to see growth in this channel. Moving over to gross margin, our gross margin rate inclusive of occupancy costs was 48.6% as compared to 50% in the first quarter of last year. This 140 basis point decrease was a combination of 110 basis points in merchandise margin and 30 basis points in occupancy costs, primarily due to the deleveraging of sales. The decline from last year’s record high margin rate was generally in line with our expectations. We have maintained a non-promotional posture that emphasizes our superior quality, fit and experience rather than discount prices, and our margin rate in the high 40s remains significantly higher than our historical rate. However, on a year-over-year basis, merchandise margin decreased due to a combination of higher costs in three areas. First, we decided to absorb the cost increases on certain private label merchandise, especially those at an opening price point level rather than passing these on to our customers through price increases. Second, we have seen an increase in costs related to the fulfillment of our direct-to-consumer orders. And third, the success of our new loyalty program means that there are more customers redeeming loyalty certificates for a discount on their purchase. These three factors were partially offset by lower inbound freight costs on receipts from overseas. Although these elements will all persist at varying levels through the rest of the year, we expect them to moderate to the point where gross margin rates for the year should be approximately 100 basis points lower than last year, as compared to the 140 basis points we saw in Q1. Most importantly, we feel very good about our inventory position, both in terms of the total inventory balance at the end of the quarter and in relation to our turnover rates as well as our clearance levels. Inventory management is especially critical in our business with a variety of styles and sizes that we offer. I won’t repeat the numbers, which Harvey already covered, but we feel like our inventory position at the end of Q1 sets us up for future success and we have adjusted our receipt plan to reflect our sales expectations. Moving on to selling, general and administrative expenses, our SG&A as a percentage of sales increased to 38.5% as compared to 36.5% in the prior year’s first quarter. On a dollar basis, SG&A expense increased by $1.7 million, approximately split between customer-facing costs and corporate supporting costs. The increase was primarily due to payroll-related costs from new positions added in the past year to support our long-term growth initiatives, including new store development. Last year’s annual merit adjustments and the healthcare costs also contributed to the increase. Our add-to-sales ratio also increased slightly to 5.5% from 5.3% in Q1 of last year. For the year, we expect to spend about 5.7% of sales on advertising. As you might expect, we are being very judicious with expense management. But we remain committed to investing in the people and technology necessary for future growth and success. With gross margin at 48.6% and SG&A expense at 38.5%, this brings our EBITDA in at 10.1% or $12.6 million for the first quarter. Although lower than last year’s 13.5% or $17.3 million, we are pleased to be able to deliver another quarter of double-digit EBITDA performance in the current macroeconomic environment. I want to spend a moment on income taxes. This is an area where our year-over-year results require adjustment to be comparable. Last year, we had virtually no tax expense in the first quarter, as our taxable income was offset by our fully reserved net operating loss carry forwards. With the release of our valuation allowance in the second quarter of last year, we have now returned to a more normal tax rate of approximately 26%. However, we are still able to utilize our remaining net operating loss carry forwards to reduce our cash taxes, and as a result, we will pay very little in Federal or State Income Cash Tax in fiscal 2023. Moving on to liquidity, we feel very good about our cash position and the overall strength of our balance sheet. At the end of Q1, we had cash in short-term investments of $46 million as compared to $7.5 million a year ago, with no outstanding debt in either period, and availability of $93.8 million under our revolving credit facility. With the seasonality of inventory bills and payments of prior year rather than accruals, we typically have a quarter with a net cash outflow. This quarter, our free cash flow, which we define as cash flow from operating activities, less capital expenditures, used $5.9 million of cash. We are keeping most of our excess cash, or $29.2 million in short-term U.S. government treasury bills, which are earning interest at approximately 5%. In March, our Board of Directors authorized a $15 million stock repurchase program and we expect to begin to execute purchases of our common stock on the open market in the second quarter of this year. We believe this is a prudent use of our cash at our current stock price and allows us to put our free cash flow to work for our shareholders by reducing the number of shares outstanding. I’ll close with an update on our financial outlook for fiscal 2023. Based on our results for the first quarter and considering the macroeconomic challenges and uncertainties regarding consumer spending seen throughout the retail industry, we are currently trending towards the lower end of our previously reported guidance for fiscal 2023. How we get there is through a low single-digit negative comp for Q2, we are optimistic that we can be flat in Q3 and back to a low single-digit positive comp in Q4. Accordingly, for the 53-week period, we are guiding to sales of approximately $550 million and an adjusted EBITDA margin of approximately 12.5%. Our outlook assumes that the sales trends we have seen in March, April, and May will continue to persist through the second quarter, but we are expecting to see small sequential improvement from consumer-driven marketing initiatives, which come online over the months ahead. We believe these efforts will drive a return to positive comps in the second half of the year. We remain focused on executing the strategies we have spoken about today, and we’re optimistic that this will allow us to outperform the broader apparel market. I would now like to turn it back over to Harvey for some closing thoughts.
Harvey Kanter, CEO
Thanks, Peter. Before we move on to Q&A, I’d like to briefly summarize what we believe are the most critically important elements for us and hopefully you as investors as you think about investment in DXL as part of your portfolios. We posted a comp sales increase for the first quarter of plus 0.6% and remain encouraged by our ability to drive another quarter of comp growth, which is now over nine consecutive quarters. While DXL is unique on many levels, we’re still impacted by volatility, consumer psyche and sentiment of the economic reality. But we believe that our first quarter results have outperformed the broader retail market on a relative basis because we can serve by consumer by bringing to market a clearly differentiated brand driven by more personalized and more relevant communication, structurally built on a positioning that leverages fit, assortment, and experience. Therefore, we remain optimistic for our long-term ability to take market share. We believe the strength and strategic transformational changes we have made are increasing our share of wallet and attracting and retaining new customers who have not yet experienced the DXL factor. From a marketing and strategic planning perspective, we continue to employ an eye on the road and eye on the horizon in our approach to driving outcomes this year while also investing for the future. At an operating level, we continue to have a very strong operating process, structure and discipline, demonstrated by our lean inventory, which at quarter end was 11% below pre-pandemic levels and turnover which was up 25% over pre-pandemic levels in 2019. We are maintaining our shift away from discounting, driving gross margins in the upper 40s and EBITDA in the low to mid double digits. We believe we are setting ourselves up to navigate meaningful growth over the next 2 to 3 years and are prepared to weather this most recent round of volatility. We remain incredibly excited and enthusiastic about the prospects ahead in the year, especially being a market leader serving an incredibly underserved consumer. With that, operator, we will now take questions.
Operator, Operator
Thank you. And our first question comes from the line of Jeremy Hamblin with Craig-Hallum Capital Group. Your line is now open.
Jeremy Hamblin, Analyst
Thanks, and congrats on the strong results in a tough environment. I wanted to start by asking about your gross margin and making sure that I understood in terms of the roughly 140 basis points or so year-over-year decline. You noted a couple of reasons for that including the loyalty program costs, higher shipping costs, and some occupancy deleverage as well. I wanted to see if you could provide more color in terms of the splits of how those components factored into the year-over-year decline, and what you expect to have on that guidance for down 100 basis points on the year?
Peter Stratton, CFO
Sure, I’ll take that one. Jeremy, I think the biggest part of the decline in the merchandise margin, it really came in the IMU deterioration. Across the board, we saw it, but it was most impactful in wovens and knits. I think the other three pieces—the loyalty costs and the shipping costs—that we saw on the direct-to-consumer side, those were more or less offset by the savings we saw on the ocean freight and the container freight costs. So the piece that I would point to the most is, again, it’s the product costs. Keep in mind that we recognize product costs when we sell through the product. This is product that we would have taken receipts on up to 1.5 years ago when cotton prices and some other prices were a bit higher. I hope that provides you with a little more clarity on where some of the splits are coming from.
Jeremy Hamblin, Analyst
Yes, that’s definitely helpful. In terms of your same-store sales color and expectation for the year, I think you said Q2, down low single digits, flattish for Q3, and then returning to positive low single digit in Q4. Given the tough environment out there, you guys are clearly doing a lot better than most of the competition. What does it assume in terms of performance on a relative basis to where we are today? Does this factor in that we know that traffic has been the big driver here? Your conversion remains strong and your average order value is still strong as well. How does this build into that and how are you factoring in the new stores and some of these conversions which I would assume will also have a positive benefit here in the second half of the year?
Harvey Kanter, CEO
Hey, Jeremy, it's Harvey. I’ll address that from a customer-facing perspective. Then Peter might add some value in terms of some of the underlying KPIs. As you know, we are very oriented around transformation and restructuring how we engage consumers. Whether it’s the things we’ve already done, like the beginning of the Loyalty Program—which I’ll remind you won’t really anniversary until the first of November, as we did that in mid-October. We believe there’s upside in elements like that. We also believe the new trigger email program is another example, as well as the CDP. I use the words 'more personalized, more relevant marketing communication.' Ultimately, we expect to impact traffic with localized inventory advertising, where we can literally advertise based on searches and local inventory in stores, and then serve that up to consumers. On one level, that’s pretty tactical but important. On another level, at a higher strategic perspective, the concept of more personalized marketing and more relevant communication to consumers is what’s really driving the change. As more of those things come online, we are hopeful that we will see a greater level of conversion, a greater level of potential AOV, and not material change in traffic, although we are hopeful that there’s some level of movement in that regard. Unfortunately, that’s the kind of element that is unknown. Where we are overall in a business climate? Are things going to get worse, or better? We believe that at some level, we will be able to 'push water uphill' with some of our own initiatives. If they’re just neutral to where we are today, we will win. If they deteriorate, there’s the potential to fall short. If they improve, there’s the opportunity for upside. It’s a challenge. As one of our board members says, often if we could predict the future, we probably wouldn’t be doing what we’re doing. If anyone could truly predict the future at this moment in time, it would be remarkable. I hope that gives you a bit of perspective around the consumer-facing elements, which we think are meaningful.
Peter Stratton, CFO
The one piece that I will add is we did deliberately try to give you a little more direction on what we are expecting to see quarter-by-quarter. Usually, we don’t do that; we typically just stick with an assumption for the year. We felt it was important to just show how we are thinking about the year relative to other performance. We are talking low-single digits either negative or positive, which is where we have been trending for a few months. We are not looking for a herculean change in the business, but we are definitely expecting that the second half of the year will benefit from the initiatives that Harvey just laid out, and hopefully see a little bit of tailwind from an improving macro environment.
Jeremy Hamblin, Analyst
That’s great context especially on top of last year’s plus 11 comp. I wanted to also get into your customer support costs, inclusive of your DC and corporate overhead, which I think was up 110 basis points year-over-year in Q1. In terms of thinking about the environment we are in, there have been enough retailers report now that there has been a softening across the board. If you felt it was necessary, do you think there is a little wiggle room to potentially cut those costs back if you needed to? I wanted to understand your ability to possibly pull back a little on the structural cost side.
Peter Stratton, CFO
That's a really good question, and we talk about this a lot. We've been pretty transparent about what we are trying to achieve with the company in terms of growing our analytics capabilities, growing our store base. We've been upgrading our roster and bringing on great people that are going to help propel the business. On the other side of the coin, you could argue that if we really do see additional slippage in the economy, should we really want to stop doing those things and maybe save a small amount of expense? I really don’t think that we get credit for making those kinds of difficult decisions. If we come out of this and have to restart everything, we lose that opportunity. I think it’s important to be clear that we do believe this is a moment in time with the economy. We think the investments we have made with the brand and the transformation we confront will support us through this time. I don’t think we are looking at making drastic cuts because it would leave us empty and we wouldn't have the initiatives when we come out.
Harvey Kanter, CEO
Yes, Jeremy, I want to underline what Peter said, and make sure you heard the most important thing. We are trying to position ourselves for growth. It's a bit challenging navigating quarter-to-quarter right now, but our Board and management team is oriented towards growth. I’ve mentioned before that we ask ourselves why aren’t we a $1 billion company and why aren’t we something even greater? That’s not guidance, but I want to express that our actions and strategy are oriented towards growth over the next 2 to 3 years. The challenge is managing the quarter-to-quarter fluctuations.
Jeremy Hamblin, Analyst
Got it. Best wishes. Thanks for taking the questions, guys.
Harvey Kanter, CEO
Thanks so much. Have a great day.
Operator, Operator
Thank you. One moment for our next question, please. Our next question comes from the line of Michael Baker with D.A. Davidson. Your line is now open.
Harvey Kanter, CEO
Good morning, Mike.
Michael Baker, Analyst
Thanks. Hi, how are you? I wanted to ask you a couple questions. Let’s start with what you are seeing in some of the remodel efforts that you have done. What did you change here, and what are you seeing in terms of sales lift versus cost?
Harvey Kanter, CEO
So, in terms of the remodels, we have remodeled two stores. One is in Warwick, Rhode Island, and the other is in Troy, Michigan. The third store that is currently underway is in the Chicago market. In both Warwick and Troy, they have outperformed both their regional store peers and the chain in total. It’s still early for us to reach any definitive conclusions because we have only remodeled two stores. That’s why we are eager to get four more underway this year. In both cases, traffic and our net promoter score have improved in those stores. We are encouraged, but need to learn more.
Peter Stratton, CFO
The strategic intent of our remodel is to create a stronger relationship with consumers. As an example, the cash wrap in our stores, where you check out, has been redesigned. It’s now open to the world with great lighting and visibility into the store, and we've embedded two small stations within the interior for deeper engagement with customers. Those interactions help drive AOV, UPTs, and ultimately create a stickier experience for our customers. Our goal is for our customers to walk away feeling not just that they made a purchase, but that they engaged with our team members and enjoyed their experience.
Michael Baker, Analyst
A couple other questions. One, in the short term, of all the factors that have impacted comps, do you have any data to suggest that tax refunds impact your customer? I know your customers tend to be a bit higher end, but has that faded into the background?
Peter Stratton, CFO
I think to some degree, yes, that’s impacting us, but not nearly as pronounced as what I’ve heard other retailers talk about. Retailers are fighting for that tightening share of the consumer's wallet, which gets impacted by the cash coming in for discretionary purchases.
Michael Baker, Analyst
Fair enough. Looking longer term, can you frame what you think a proper top line sales number should be over the next couple of years? You mentioned EBITDA in the low to mid-teens, can you explain how to drive back to that mid-teen number?
Peter Stratton, CFO
We’ve said from day one that we want a sustained EBITDA margin exceeding 10%, and we have clearly been well beyond that. The investments we are making in marketing, real estate, and store development come at the short-term expense of margin. We expect to float in the low to mid-double digits, so about 10% to 15%. This will continue as we build out our store portfolio, digital practice, and direct-to-consumer business, making us a more powerful company.
Michael Baker, Analyst
I noticed that gross margins are lower than expected. Are you saying those assumptions have changed compared to a few months ago?
Peter Stratton, CFO
Yes. We are expecting to be around 49%. The lower IMU, loyalty, and costs have all come in slightly lower than initial expectations. Combined with lower leverage, we believe we will see approximately a 100 basis point drop.
Harvey Kanter, CEO
And Mike, I would stress that 100 basis points from 50% is in direct comparison to our lower historical margins. We face lots of variables, and the high-water mark was around 50%.
Michael Baker, Analyst
Makes sense. Thank you.
Operator, Operator
Thank you. Our next question comes from the line of Raphi Savitz with a private investor. Your line is now open.
Raphi Savitz, Private Investor
Hi Harvey. You have been at the helm for about four years. Can you take a moment to reflect on what’s gone according to plan and what hasn’t met your expectations in your time there?
Harvey Kanter, CEO
I am excited about three things. First, our recognition of our market position and building a strategy to execute against that. We serve a customer who historically has not been honored the way average individuals can shop anywhere. Second, we’ve engaged and empowered our team, creating accountability across the organization. Finally, our investments have been critical. We’ve addressed our technical debt, making the necessary changes to our systems, investing heavily in marketing and overall organization. We've increased our marketing spend from 4% to closer to 6%, reflecting our serious approach to customer engagement.
Raphi Savitz, Private Investor
What would you say are the major risks in your strategy and how are you mitigating those?
Harvey Kanter, CEO
The most significant risk is the economy. The last three years have been anything but normal, and each year presents unique challenges. Since my first seven months with the company, we've adapted as this economic climate has shifted and impacted consumer behavior.
Raphi Savitz, Private Investor
In terms of market share growth, are you expecting that from department stores that aren’t servicing your market as well, or do you think you can create a better experience and capture business from customers who aren’t currently buying?
Harvey Kanter, CEO
We believe we will take share from various sources. We have a meaningful market share, but we are not as big as we should be. There are many players who dabble in big and tall retail, but we are the only brand that is fully dedicated to servicing these customers effectively across our stores and online presence. We believe there is significant potential for growth.
Michael Baker, Analyst
Thanks, Harvey. That was enlightening.
Operator, Operator
Thank you. One moment for our next question. Our next question comes from the line of P. Johnson with Johnson inks. Your line is now open.
Unidentified Analyst, Analyst
You have a fair amount of cash on the balance sheet. You didn’t buy back shares recently, is part of the concern that the overhang from two of your biggest investors has been selling shares recently?
Peter Stratton, CFO
We plan to start executing on our stock repurchase program in Q2. When we started the quarter, our stock was priced higher, but it's now at a more attractive price point for us to buy back shares.
Unidentified Analyst, Analyst
Has AWM or Wolf given you any sense of their medium to long-term plans?
Harvey Kanter, CEO
Unfortunately, we cannot comment on that. Thank you for your understanding.
Unidentified Analyst, Analyst
You have enough cash on your balance sheet to initiate the buyback, I would say?
Harvey Kanter, CEO
Indeed, and that’s why the Board has supported that initiative. We expect to be in the market soon.
Operator, Operator
This concludes today’s conference call. Thank you for your participation. You may now disconnect. Everyone have a wonderful day.