Destination XL outlines private brand shift to 65% by 2027 amid evolving promotional strategy and tariff challenges

Earnings Call Insights: Destination XL Group, Inc. (DXLG) Q2 2025

MANAGEMENT VIEW

* Harvey S. Kanter, President and CEO, reported, "our financial results continue to be under pressure. Sales demand for apparel has been tepid all year, and we believe our Big and Tall sector customers continue to hold very tight to their wallets as we observed negative comparable sales trends across the business in the second quarter." He noted that July and August showed improving results, with comp sales for August month-to-date better than July's negative 7% and Q2's negative 9.2%.
* Kanter highlighted a strategic shift: "Over the course of the next 2 years, we will be strategically shifting our assortment to prioritize private brands...our intent is to grow private brand sales penetration from today's 56.5% to greater than 60% in 2026 and greater than 65% in 2027, depending on customer response and brand resonance."
* Kanter detailed the evolving promotional strategy: "We have started to reframe our promotional strategy around a more disciplined strategic framework that prioritizes relevance, competitiveness and a stronger perception of value."
* Kanter addressed competitive pressures, stating, "the Big and Tall space...is becoming increasingly competitive as other men's apparel retailers appear to be expanding their big and tall exposure and encroaching on our end of rack sizing."
* Kanter reported a new internal appointment: "We have recently promoted someone internally into a newly created position of Vice President of Digital Fit Technology and Business Development."
* Kanter estimated the impact of tariffs: "if currently enacted tariffs remain in effect through year-end, they could increase our inventory cost by just under $4 million in fiscal year 2025...we have also planned to take retail price increases over the remainder of fiscal 2025 and into 2026 to offset some of the tariff risk."
* Kanter described store development as "collectively, our new stores are performing below our initial expectations," and confirmed future store openings are on hold. He expressed optimism about the Nordstrom partnership: "Nordstrom will still represent a small percentage of total sales, but we are motivated by what we believe is a new and meaningful opportunity to grow."
* Peter H. Stratton, CFO, stated, "Net sales for the second quarter were $115.5 million as compared to $124.8 million in the second quarter of last year. The decrease in net sales was primarily due to a decrease in comparable sales of 9.2%, partially offset by an increase in noncomparable sales from new stores."
* Stratton highlighted, "Our EBITDA for the quarter came in at $4.6 million as compared to $6.5 million for the second quarter of last year. The decrease in earnings was primarily driven by our lower sales, partially offset by reductions in operating expenses."

OUTLOOK

* Kanter reported, "We still have half a year to go in 2025 and preparations for 2026 are well underway," while reiterating optimism for improvement if the current down cycle turns. He noted, "Our intent is to grow private brand sales penetration from today's 56.5% to greater than 60% in 2026 and greater than 65% in 2027, depending on customer response and brand resonance."
* Stratton noted, "For the full year, we still expect to spend approximately 5.9% of our sales on marketing costs."

FINANCIAL RESULTS

* Net sales were reported at $115.5 million for Q2 2025, compared to $124.8 million in Q2 2024.
* Comparable sales declined 9.2% for the second quarter, with stores down 7.1% and direct sales down 14.4%. Sequential monthly improvement was noted: May down 10.4%, June down 9.6%, July down 7%.
* Gross margin rate, inclusive of occupancy, was 45.2% compared to 48.2% last year, attributed to higher occupancy costs and increased promotional activity.
* SG&A as a percentage of sales decreased to 41.2% from 43%, with dollar expenses down $6.1 million, largely due to lower marketing spend and incentive accruals.
* Cash and short-term investments ended the quarter at $33.5 million, with no outstanding debt and $70.1 million available under the revolving credit facility.
* Inventory at the end of Q2 was $78.9 million, up $300,000 from last year, with clearance penetration at 10.2%.
* Stratton also referenced new long-term extensions for both headquarters/distribution center and the credit facility, with the latter reduced from $125 million to $100 million.

Q&A

* Jeremy Scott Hamblin, Craig-Hallum Capital Group: Asked about the private brand mix and margin difference versus national brands. Kanter responded, "our private brands were under 50%, 48%, 49%...56.5%. So we've already seen a meaningful migration over the past couple of years...we're probably in the upper 60s to mid-70s on an IMU basis for private brands."
* Hamblin: Sought clarification on the future private brand mix. Kanter confirmed, "by fall of next year, we will be over 60%...by 2027...north of 65%."
* Hamblin: Asked about tariff impact for 2026. Kanter said, "our range in 2025 has already been from literally $1 million in change to something north of $5 million, and we're now obviously telling you we're just under $4 million. The degree to which...the execution of tariffs changes daily is something that doesn't give us great confidence that I can articulate the question you asked for '26."
* Hamblin: Inquired about CapEx plans for 2026. Stratton replied, "Typically, that's running...anywhere from $5 million to $10 million, $12 million a year. I'm not going to give you a number yet for '26."
* Bryce Butler, Rockbot: Asked about in-store media strategy. Kanter explained, "We do have both in-store audio...there is in-store audio where we populate it with messages that are appropriate for our brand positioning...we do have digital TVs in nearly every store, and we create distinct content for those TVs in-store that play."

SENTIMENT ANALYSIS

* Analysts focused on the impact and timing of the private brand mix, tariff exposure, and capital expenditure, displaying a neutral to slightly negative tone, probing for clarity on margins and risk, but not expressing overt skepticism.
* Management maintained a measured and constructive tone in prepared remarks, with Kanter stating, "we remain optimistic for our business with a strong conviction for upside when the current down cycle begins to turn," but showed caution in Q&A, particularly on tariffs: "the unfortunate reality of the execution of tariffs changes daily...doesn't give us great confidence."
* Compared to the previous quarter, management's optimism for long-term initiatives persisted, but both management and analysts displayed increased caution regarding macroeconomic headwinds, tariffs, and the pace of improvement.

QUARTER-OVER-QUARTER COMPARISON

* Guidance language shifted from a focus on "return to a positive comp result in the second half" in Q1 to more cautious optimism, with management stating, "the macro environment continues to be dynamic right now and full of uncertainty."
* Strategic focus advanced from tactical promotional activity and new loyalty initiatives in Q1 to a more aggressive realignment of assortment toward private brands and a deliberate pause on store expansion in Q2.
* Analysts previously focused on marketing and traffic-driving initiatives, but the current quarter centered on the private brand shift, tariff costs, and CapEx discipline.
* Key metrics showed continued negative comp sales, though the rate of monthly decline improved sequentially in Q2.
* Management's confidence in the private brand migration and digital innovation remains, although caution increased on tariffs and store performance.

RISKS AND CONCERNS

* Management cited persistent weak apparel demand, intensifying competition in Big and Tall from traditional and DTC retailers, and tariff uncertainty as primary risks.
* Kanter disclosed, "if currently enacted tariffs remain in effect through year-end, they could increase our inventory cost by just under $4 million in fiscal year 2025."
* Pricing power and consumer price sensitivity remain major concerns, with ongoing reassessment of promotional strategy and pricing architecture.
* Store expansion risk is being mitigated by pausing new openings until business stabilizes.
* Analysts questioned tariff impact for 2026, but management did not provide a forecast due to volatility.

FINAL TAKEAWAY

Destination XL is undertaking a significant strategic transition, accelerating its private brand focus to reach over 60% penetration in 2026 and more than 65% in 2027, aiming to improve margins and customer loyalty. The company is navigating a challenging macro environment with negative comparable sales, increasing competitive pressures, and tariff-related cost risks. Management is pausing further store expansion and intensifying its digital and promotional initiatives, while maintaining operational discipline and a strong balance sheet to weather short-term pressures and position for future growth.

Read the full Earnings Call Transcript [https://seekingalpha.com/symbol/dxlg/earnings/transcripts]

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