Revitalizing DXL With Decisive Expansions, Enhanced E-commerce, And A Redefined Loyalty Program

Key Takeaways

• Expansion and collaboration strategies, including new store openings and Nordstrom partnership, are set to broaden customer base and boost revenue.
  
• Enhancements in digital user experience and loyalty programs are expected to improve online sales, customer retention, and average order values.
  
• Reliance on discounts and shifting spending priorities towards necessities suggest reduced margins and challenges in attracting consumers, potentially affecting long-term growth.

Catalysts

Operates as a specialty retailer of big and tall men’s clothing and shoes in the United States.

• The introduction of a brand advertising campaign leading up to Father's Day, which resulted in increased traffic, sessions, and customer acquisition in test markets, could lead to improved revenue through greater brand awareness and customer traffic.
  
• Expansion plans include opening new white space stores and relocating existing ones to more desirable locations, which can enhance store traffic and sales from new and existing customers, potentially impacting revenue positively.
  
• The collaboration with Nordstrom for distribution on their marketplace site introduces DXL to a broader customer base and could boost revenue through increased exposure and sales on a reputable platform.
  
• The ongoing replatforming of DXL’s website, aimed at improving functionality and user experience, is expected to ease customer purchase processes, potentially increasing online conversion rates and impacting online sales revenue.
  
• Enhancements to the loyalty program, aimed at increasing engagement and offering more value to customers, could lead to improved customer retention, higher average order values (AOV), and more frequent purchases, positively affecting revenue and net margins.

Assumptions

• Analysts are assuming Destination XL Group's revenue will grow by 5.8% annually over the next 3 years.
• Analysts assume that profit margins will increase from 3.1% today to 3.7% in 3 years time.
• Analysts expect earnings to reach $21.5 million (and earnings per share of $0.35) by about September 2027, up from $15.4 million today.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 10.2x on those 2027 earnings, down from 11.0x today. This future PE is lower than the current PE for the US Specialty Retail industry at 15.3x.
• Analysts expect the number of shares outstanding to decline by 3.53% per year for the next 3 years.
• To value all of this in today's dollars, we will use a discount rate of 9.16%, as per the Simply Wall St company report.

Risks

• The reliance on promotional strategies and markdowns to match competition and drive traffic could lead to reduced profit margins as it forces the company to sell at lower prices.
  
• Ongoing macroeconomic challenges and inflationary pressures are leading consumers towards lower-priced goods, potentially impacting revenue as customers trade down to cheaper options.
  
• A noted decline in consumer traffic, both in physical stores and online, indicates a fundamental challenge in attracting customers, directly affecting sales volume.
  
• Shifting consumer spending priorities away from apparel to necessities or other categories could result in prolonged lower demand for Destination XL's product range, negatively impacting revenue.
  
• The strategic pivot away from broad brand campaigns towards more immediate sales strategies might not address the underlying issue of decreased consumer spending in the apparel sector, risking the effectiveness of marketing spend and potentially delaying the anticipated growth in sales and margins.

Valuation

• The analysts have a consensus price target of $3.25 for Destination XL Group based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $4.0, and the most bearish reporting a price target of just $2.5.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2027, revenues will be $587.7 million, earnings will come to $21.5 million, and it would be trading on a PE ratio of 10.2x, assuming you use a discount rate of 9.2%.
  
• Given the current share price of $2.92, the analyst's price target of $3.25 is 10.2% higher.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.