Destination XL Group, Inc. reported total sales for the first quarter were $125.4 million, down 1.7 percent from $127.7 million in the first quarter of fiscal 2022. Comparable sales for the first quarter of fiscal 2023 increased 0.6 percent as compared to the first quarter of fiscal 2022, with comparable sales from stores up 1.5 percent and direct business down 1.6 percent. This increase in comparable sales was offset by sales from closed stores and a decrease in non-comparable sales.
Sales for the quarter started off strong with a comparable sales increase of 9.1 percent in February. However, DXL saw a 2.8 percent comparable sales decline in March and a 1.9 percent decline in April. The slowdown in sales was said to be primarily driven by decreases in traffic, both to stores and the web, but was partially offset by increased dollars per transaction and conversion. Throughout the quarter, stores performed better than the direct business, but they continued to see sales growth from online marketplaces and their mobile app.
Digital commerce sales, which DXL also refers to as direct sales, are defined as sales that originate online, whether through their website, at the store level, or through a third-party marketplace. For the first quarter of fiscal 2023, DXL’s direct sales were $38.1 million, or 30.4 percent of retail segment sales, as compared to $39.0 million, or 30.6 percent of retail segment sales in the first quarter of fiscal 2022.
“We are pleased to report our 9th consecutive quarter of positive comp sales growth. While this has been a more challenging growth quarter affected by broader macro headwinds that have impacted consumer spending, we remain focused on our vision to provide Big + Tall men the freedom to choose their own style. Our brand’s positioning campaign to the Big + Tall consumer is “Wear What You Want SM”. This campaign is driven by DXL’s competitively differentiated position in Fit, Assortment, and Experience. We remain incredibly excited and enthusiastic about our ability to be the haven for the Big + Tall customer whether he is shopping online or in-store. After all, Big + Tall is all that we do!” said Harvey Kanter, president and CEO of Destination XL Group, Inc.
“We believe the work that we have done over the past two years to transform and reposition the DXL brand has enabled us to mitigate some of the inherent risk in the broader economy. We believe that our positive comp for the quarter is outperforming the overall retail apparel market, which gives us confidence that the DXL concept is still resonating in the minds of Big + Tall consumers. On an operating level and from a consumer-facing perspective, we plan to continue driving marketing initiatives to engage the consumer more profoundly and in more personalized and more relevant ways. Conversely, from a back-end perspective, we continue to run our inventory lean as demonstrated by the quarter-end inventory, which was 11 percent below pre-pandemic levels, and turnover, which was up over 25 percent from the first quarter of 2019.
Gross margin rate, inclusive of occupancy costs, was 48.6 percent as compared to a gross margin rate of 50.0 percent for the first quarter of fiscal 2022. The gross margin rate decreased by 140 basis points, with a decrease in merchandise margin of 110 basis points and an increase of 30 basis points in occupancy costs primarily due to the deleveraging of sales. The decrease in merchandise margin of 110-basis points was due to increased costs on certain private-label merchandise, much of which DXL absorbed rather than passing on to the customer through price increases. DXL also experienced increased shipping costs related to direct-to-consumer shipments and costs related to their loyalty program with more sales tendered with loyalty certificates, as compared to the first quarter of fiscal 2022. These cost increases were partially offset by lower inbound freight costs. For the year, DXL expects gross margin rates to be approximately 100 basis points lower than fiscal 2022.
As a percentage of sales, SG&A (selling, general and administrative) expenses for the first quarter of fiscal 2023 were 38.5 percent as compared to 36.5 percent for the first quarter of fiscal 2022. On a dollar basis, SG&A expenses increased by $1.7 million as compared to the first quarter of fiscal 2022. The increase was primarily due to an increase in payroll-related costs from new positions added in the past year to support DXL’s long-range plan growth initiatives and merit increases implemented last year. DXL also saw increases in benefit costs over the first quarter of the prior year.
Management said they view SG&A expenses through two primary cost centers—Customer Facing Costs and Corporate Support Costs. Customer Facing Costs, which include store payroll, marketing and other store and direct operating costs, represented 21.1 percent of sales in the first quarter of fiscal 2023 as compared to 20.2 percent of sales in the first quarter of fiscal 2022. Corporate Support Costs, which include the distribution center and corporate overhead costs, represented 17.4 percent of sales in the first quarter of fiscal 2023 as compared to 16.3 percent of sales in the first quarter of fiscal 2022. Marketing costs for the first quarter were 5.5 percent of sales as compared to 5.3 percent of sales for the first quarter of fiscal 2022. For fiscal 2023, marketing costs are expected to be approximately 5.7 percent of sales.
Net interest income for the first quarter of fiscal 2023 was $0.3 million, as compared to interest expense of $0.1 million for the first quarter of fiscal 2022. For the first quarter of fiscal 2023, interest income was earned from investments in U.S. government-backed investments and money market accounts. Interest costs for both periods were minimal because DXL had no outstanding debt and no borrowings under its credit facility during either period.
As a result of the valuation allowance against deferred tax assets being substantially released during fiscal 2022, DXL has returned to a normal tax provision for fiscal 2023. Accordingly, for the first quarter of fiscal 2023, the effective tax rate was 26.6 percent as compared to 0.8 percent for the first quarter of fiscal 2022. The effective tax rate for the first quarter of fiscal 2022 was reduced from the statutory rate due to the utilization of fully reserved net operating loss carryforwards.
For the first quarter of fiscal 2023, net income was $7.0 million, or 11 cents per diluted share, as compared to net income for the first quarter of fiscal 2022 of $13.4 million, or 20 cents per diluted share.
On a non-GAAP basis, assuming a normalized tax rate of 26 percent and adjusting for asset impairment (gain), if any, adjusted net income for the first quarter of fiscal 2023 was $7.0 million, or 11 cents per diluted share, as compared to $9.7 million, or 14 cents per diluted share, for the first quarter of fiscal 2022. There was no asset impairment (gain) for the first quarter of fiscal 2023 and a gain of $0.4 million for the first quarter of fiscal 2022.
Adjusted EBITDA for the first quarter was $12.6 million, or 10.1 percent of sales, as compared to $17.3 million, or 13.5 percent of sales in the first quarter of fiscal 2022.
Total cash and investments were $46.0 million at quarter-end on April 29, as compared to $7.5 million at April 30, 2022, with no outstanding debt for either period. Availability under DXL’s credit facility was $93.8 million at April 29, 2023, as compared to $85.0 million at April 30, 2022.
“Lastly, it cannot go without saying how well the team has managed the business in the current environment. As noted, our inventory is in a healthy position, and we expect to continue to maintain our low promotional cadence. With cash on hand, no outstanding debt and full availability under our credit facility, we are continuing to pursue our strategic initiatives this year as we look to further grow our business,” Kanter concluded.
Looking ahead, DXL said that based on the results for the first quarter of fiscal 2023 and considering the macro-economic challenges and uncertainties regarding consumer spending seen throughout the retail industry, the company is currently trending toward the lower end of its previously-reported guidance for fiscal 2023 sales, net income and adjusted EBITDA margin, based on a 53-week year.
