A big bet on a bigger format

Casual Male accelerated the rollout of its DestinationXL format.

The company announced the major strategic shift in conjunction with second quarter financial results that fell shy of analysts’ estimates as gross margins declined and retail operations mustered a 2% increase in same store sales.

Going forward, Casual Male plans to gradually close its namesake Casual Male XL stores and accelerate the opening of its DestinationXL (DXL) stores. One big difference between the two concepts is the traditional Casual Male stores average around 3,500 square feet while the DXL stores average about 10,000 square feet.

“The DXL concept is more attractive to a wider customer audience due to the expansive private label and name-brand apparel selection, a broader range of sizes for the end-of-rack customer, and an appealing shopping environment,” said Casual Male Retail Group president and CEO David Levin.

In addition to the improved store experience, the company has upped the style quotient by including products from brands such as Lacoste, Michael Kors, DKNY Jeans, Lucky Brand Jeans and Robert Graham.

“Average dollars per transaction at DXL stores is currently 41% higher than the average Casual Male XL purchase, which provides us an opportunity to capture greater wallet share and improve operating margins. We look forward to capitalizing on this exciting opportunity,” Levin said.

The DXL stores are intended to serve as a one-stop offering everything from value-priced basics to top designer names in styles ranging from casual wear to activewear to suits and ties. The assortment is geared toward the extra large customer by offering tall sizes and waist sizes 40 inches and up. It is a sizable addressable market as the company cites Centers for Disease Control and U.S. Census Bureau statistics indicating approximately half of U.S. adult men have a waist size of 40 inches or greater.

The company ended last year with 16 DXL stores, has opened 13 more so far this year, recently launched DesitnationXL.com and expects to end 2012 with 51 DXL units. By the end of 2015, plans call for completion of a rollout involving between 225 to 250 DXL stores. That compares to 420 traditional Casual Male XL stores at the end of last year and a projection of 350 units by the end of this year.

“To support the transition to DXL, we are undergoing a paradigm shift in our approach to improve awareness of DXL and fully capitalize on the concept,” Levin said. “Of course, the accelerated investment in DXL will affect our bottom line and cash flow during this three year transition, but our projections, which are based on current economic conditions, suggest that this investment is expected to enhance revenues significantly and produce double digit operating margins for the longer term.”

If all goes as planned – certainly no guarantee in the retail industry – the company expects that sales in 2016 should exceed $600 million with operating margins in excess of 10%. Plans also call for the three year, $150 million DXL rollout to be funded entirely from operating cash flows.

As for the remainder of this year, Casual Male expects is looking for consumer spending to remain sluggish and anticipates sales erosion at Casual Male XL stores due to DXL stores. Accordingly, the company expects same store sales to increase between 3% and 4% and total sales to range between $405.5 million to $410 million.