After engineering an 'extraordinary' turnaround, Destination XL is on the hunt for market share - The Entrepreneurial Way with A.I.


Wednesday, April 6, 2022

After engineering an 'extraordinary' turnaround, Destination XL is on the hunt for market share


When Harvey Kanter joined Destination XL in early 2019, he had plenty on his plate as the big-and-tall apparel specialist's new chief. 

The company had posted net losses for every year since 2012, including years when its sales were growing. Apparel retail as an industry was struggling with constant discounting wars and transitions to new ways of shopping. 

Roughly a year into his tenure, instead of digging into a turnaround strategy the company ran into a pandemic that put even more pressure on Destination XL's finances. By the end of 2020, the company's stock had been de-listed from the Nasdaq stock exchange, with investors leaving it for just another all-but-bankrupt apparel retailer. 

Then, over the course of the next year, Destination XL undid a decade of struggles. A surge in sales, and with it the first positive annual net income since 2012, allowed the company to erase the debt that kept it alive through years of losses and the worst of the pandemic.

Now it is eyeing the market share of other big-and-tall players. 

"It was an extraordinary turnaround," said Michael Baker, managing director and senior research analyst with D.A. Davidson, who pointed to Kanter as one of the primary drivers. "It took them a while to reposition the company, and the results — you saw them pay off. The profitability they were able to generate, I think it's a great turnaround story."

Suiting back up

Even with supply chain challenges, 2021 was a boom year for many in apparel. Shoppers started shopping again, and they refreshed wardrobes as weddings were rescheduled and offices reopened. 

That followed an incredibly challenging year for the industry. Men's dress clothes, including suits, dropped by some 40% during the early pandemic, NPD's Maria Rugolo told Retail Dive last year, while men's apparel overall fell 18% in 2020. 

But as travel, events and office work picked up, so did the market. According to Euromonitor data shared with Retail Dive, the market size for men's apparel including suits, trousers, shirts and jackets topped $52 billion last year and grew by nearly 29% from the horrendous year of 2020.

Tailored clothing fell to just 7% of Destination XL's assortment at one point in 2020. That has rebounded since. In Q3 last year, tailored clothing was more than 18% of Destination XL's business, and it remained above 15% in Q4, as the occasions that drive dress apparel increased. 

To some degree, Destination XL reflects the wider apparel world. "We absolutely think about the fact that there were tailwinds, whether it's pent-up demand, whether it's buying revenge, whether it's some level of … 'OK, we're moving past the worst of this,'" Kanter told Retail Dive in an interview. 

But the company did more than rebound from 2020. For 2021, it posted record sales, which increased over its pre-pandemic levels. That in turn put the company on firmer financial footing. Its financial health score, as measured by analysis firm RapidRatings, skyrocketed over the course of last year, moving Destination XL from among the highest risk companies (in terms of default) to among those with the very lowest risk. Even among 2021 comebacks, Destination XL's stood out for sheer magnitude of improvement.  

Shored up financially, Destination XL can pursue growth even more aggressively. Looking ahead, Kanter — who just signed a three-year extension and prior to joining Destination XL had run Blue Nile and Moosejaw as CEO — thinks the company can grow faster than the overall apparel market. It can only do that by taking business from its competitors. 

'Nobody has the offering they have'

Destination XL serves a segment of the market long neglected by retail and brands. Even among sellers of larger-sized men's clothing, some didn't aggressively, or often even adequately, market their assortment. 

Destination XL's very existence and footprint give it a competitive advantage, and the company is trying to expand that advantage with a deeper understanding of fit and marketing. 

"The reality is that there's a lot of people that are in this space, and it's kind of a night job for them. It's like a part-time side job," Kanter said. "All we do is what we do."

All told, management sees its total addressable market as roughly $10 billion in size, and its sales of over half a billion dollars in 2021 gives Destination XL a 5% share of the market. And in the coming years, Kanter thinks the company can grow its sales at one or two percentage points higher than other apparel retailers. 

D.A. Davidson's Baker thinks Destination XL is taking a little bit of market share from everyone playing in the space, but also pointed to department stores specifically — with J.C. Penney, Dillard's, Kohl's and others offering big-and-tall products — as likely ceding market share to the retailer. "Nobody has the offering they have," Baker said. 

Kanter said of customers in the big-and-tall space, "They've gone to other retailers that are not doing this for a living, and they found that the assortments are not rich and bountiful, that they're out of stock, that the service and experience isn't great, that the fit isn't good."

The executive team sees proof it is winning over new customers in the company's "new-to-file" metrics that those customers are coming to, and staying with, Destination XL. These are customers buying from Destination XL who don't have an email already registered with the company, which historically has had most of its customers enrolled in its loyalty program. 

"On a two-year stack, we are seeing new-to-file at levels that we haven't really seen before," Kanter said. And many of those customers come back to purchase more. "That to us is rich data that would say that there's something here," Kanter said. 

Wooing a frustrated customer

The company has been working toward deeper personalization and targeted marketing to bring those customers in. Destination XL Chief Marketing Officer Ujjwal Dehoot noted "frustration" among customers as a component in the company's ability to organically drive customers to it. 

"For customers where you go to a general merchant, and you're a 5XL guy, and you have a 48 waist, you might be lucky if you find a pair of pants there," Dehoot said in an interview. "But you have to go to three different general merchants to buy an outfit."

To capitalize on that frustration, assortment is crucial, as is data.

Destination XL has partnered with national brands, including recently an exclusive relationship with Vineyard Vines, and Nautica, which Kanter said pulled out of all retail channels in the big-and-tall space except its own and Destination XL. 

The retailer also has its own labels, which account for 55% of its mix. Along with its own channels, Destination XL has a lower-priced label that sells on Amazon and Target's marketplaces.

"So we're not just buying everything that's made in big-and-tall, we are picking and choosing what we think makes sense for our customer," Kanter said.

Dehoot said the team has been doing "deep sea diving" into the company's data to explore its customers. As Dehoot explained: "What is the difference between the return rates of a customer that's a 6XL versus a 3XL? Or what is the lifetime value of a customer that we're serving that's larger versus smaller? What is the fit or return rate difference for different brands versus our own brands? Things like that we're doing a ton more exploration on and developing different theses today and for the future, to help enable more agile decision making and actionable items."

Sales are one thing, profit another. The company has made huge cuts to its operating costs, some of which may be a permanent feature to the business. While the company laid off staff in 2020, Kanter said some of those workers have been hired back as it seeks growth. At the same time, it has negotiated lower lease costs in some cases and consolidated its operating platforms. Those are lowered costs that will stay lowered.

Also helping the bottom line, the retailer has stuck with regular price. For apparel retailers generally, tightening up on promotions has been easier in a low-inventory environment that has helped protect margins even with skyrocketing freight and supply chain costs. 

 Kanter said that his retailer's customers have had a need for clothing products, as opposed to a want. 

In terms of marketing, it is not engaging customers on price, which historically it has done. "We have this perspective that we should engage consumers on really relevant reasons why they would want to shop with us," Kanter said. "So first and foremost, we engage them on our unique fit. We really do have a unique fit that is, singularly, probably the best fit of anybody in the marketplace for a big-and-tall customer."

Lower costs and rising sales made for a cash windfall. With it, Destination XL paid off all its debt, and has plans for stock buybacks for investors' benefit and as well as investments in its business, including some new stores. 

As Kanter put it to analysts in March after its record 2021 results, the company has gone from "survival mode" to playing offense. He was talking about profitability when he said that, but the company is clearly also chasing other retailers' business.

"There are many retailers who dabble in big and tall, offering a piecemeal product here and there to a traditionally underserved customer," Kanter said then. "We are changing that narrative."


Ben Unglesbee, Khareem Sudlow