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Young, fashionable men boosting sales at DXL

Destination XL serves a big and tall customer—so it's only fitting that its stores are getting larger too.

As the specialty retailer shutters its Casual Male nameplate and opens bigger stores with broader offerings, DXL is targeting a customer who's taller, younger and spends more money.

"What we really saw was when a guy gets to be a significant size, where he really runs out of options, we were their only choice. But that's the tail of the spectrum of men's," CEO David Levin said. "There was a much bigger piece of that market in guys who are in between."

Since the DXL nameplate started opening its doors four years ago, the younger customer with a smaller waistline already has had a significant impact on sales. Previously accounting for only about a quarter of the company's annual sales of around $400 million, this customer now makes up about 43 percent of revenue—a number that continues to grow, Levin said.

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Part of this increase is tied to the DXL's inclusion of more designer brands. It's added about 30 names, including Michael Kors and Polo, to its apparel over the past few years, while incorporating 40 new footwear labels.

The additions come at a time when men's interest in fashion is on the upswing. According to the NPD Group, men's apparel sales growth outpaced women's in 2013, growing 5 percent to $60.8 billion.

DXL store.
Source: DXL Group
DXL store.

The retailer is also buying deeper into its categories, including those that attract a 25-year-old male.

"Even though the store's full of product, by the time he would come to what he specifically wants maybe he'd get a choice of two shirts. Now there's a whole department for him," he said.

Destination XL's decision to build larger stores goes against what others in the industry are doing. Although many retailers are shrinking their square footage as online shopping gains a larger share of customers' wallets, Levin said DXL needed bigger stores because it caters to men of all ages and salaries, whose only commonality is their physical size.

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Because it aims to outfit its customers in categories spanning activewear to suits, its 3,500-square-foot stores were "jammed" and "a mess," Levin said. Now averaging about 7,000 to 8,000 square feet, there's room for more than three times as many styles—as well as more aisle and dressing room space.

"Our stores were too small, they were not functional," he said. "You couldn't even see the product."

But its new concepts aren't one size fits all; for example, its offerings vary widely by market. Although DXL's private label products account for about 70 percent of overall sales, urban markets tend to be more heavily skewed toward designer brands. And in markets with a lower population, the retailer is experimenting with smaller store formats that average 5,000 square feet.

When the company finishes its transition in 2017 or 2018, it will have a store count of about 250 with 50 outlet locations, compared with around 500 Casual Male stores.

Despite its progress—comparable-store sales at DXL branded stores, were up nearly 13 percent in the most recent quarter, and have risen in the double digits for the past four quarters—these changes don't come easy.

In the most recent quarter, the transition contributed about $1.5 million to the company's expenses; in 2013, it cost an estimated $11.2 million. Ultimately, Levin said the initiative will cost the company hundreds of millions of dollars. But he said the turnaround will be worth the expenses when the company's sales reach $600 million two to three years down the road.

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Canaccord Genuity analyst Laura Champine has a "buy" rating on the stock with a $7 price target. Although she expects the company's new marketing campaigns to drive brand awareness, the company, which lost $3.5 million in the most recent quarter and had outstanding borrowings of $51.8 million, "faces the risk of credit availability as it incurs losses from closing Casual Male stores, opening DXL stores and funding its marketing campaign."

—By CNBC's Krystina Gustafson

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