Destination Xl Group's 2025 Q2 Earnings Call: Contradictions Emerge on Tariff Strategies, CapEx, and Private Brand Mix

The above is the analysis of the conflicting points in this earnings call

Date of Call: August 27, 2025

Financials Results

• Revenue: $115.5M, down 7.5% YOY (vs $124.8M prior year)
• Gross Margin: 45.2% (inclusive of occupancy), down 300 bps YOY (48.2% prior year)

Guidance:

• Full-year 2025 marketing spend expected at ~5.9% of sales.
• Tariffs could lift FY25 inventory costs by just under $4M; impact heavier in 2H.
• Implementing price increases in 2H25 and into 2026; 8-week reticketing underway.
• Private-brand penetration targeted >60% in 2026 and >65% in 2027.
• Sequential comp improvement into August; aiming to narrow declines in 2H and work back to positive comps.
• One more store opening in September (18 over two years), then pausing new store development to prioritize free cash flow.
• Pursuing supply-chain cost savings and tariff exemptions (e.g., Supima shirts).
• Maintenance CapEx typically $5–$12M annually; 2026 plan TBD.

Business Commentary:

* Sales and Promotional Strategy: - Destination XL Group's comparable sales declined by 9.2% in Q2, with stores down 7.1% and direct down 14.4%. - The company is shifting its promotional strategy to create greater value and relevance, migrating from designer brands to private brands to enhance customer engagement and loyalty. - The decline in sales is attributed to consumer cautiousness, prompting a focus on lower-priced goods and strategic promotions.

• Inventory Management:
• Total inventory levels remained flat year-over-year, with clearance penetration at 10.2%, aligning with long-term targets.

• The company is leveraging early inventory receipts to mitigate tariff impacts and manage costs effectively, demonstrating strong inventory management amidst challenging sales conditions.

• Tariff Impact and Cost Management:

• Tariffs are estimated to increase inventory costs by $4 million in fiscal 2025, with planned price increases and cost-saving measures to offset these expenses.

• DXL is actively reviewing and adjusting pricing architectures to manage the financial impact of tariffs and strategic production shifts.

• Store Development and Strategic Focus:

• DXL opened 6 new stores in Q2, with plans for 2 more in Q3, totaling 18 new stores since the pandemic.
• Despite soft performance due to weak customer demand, the company is maintaining a focus on free cash flow generation, pausing further store development until business stabilization.

Sentiment Analysis:

• Management cited weak demand and comps down 9.2% with gross margin at 45.2% vs 48.2% last year, but noted sequential improvement: July comps -7% and August improving. They remain optimistic about closing the comp gap in 2H and highlighted private-brand mix gains and disciplined promotions.

Q&A:

• Question from Jeremy Scott Hamblin (Craig-Hallum Capital Group): Outline private-brand mix today, targets over the next few years, and margin differential vs national brands.
  Response: Private brands are 56.5% of sales, targeted to >60% in 2026 and >65% in 2027; IMU is typically upper 60s–mid-70s for private vs low 50s for national brands, yielding higher end margins even after strategic promotions.

• Question from Jeremy Scott Hamblin (Craig-Hallum Capital Group): What is the expected tariff impact for 2026 given FY25 is ~<$4M?
  Response: Too volatile to estimate 2026; FY25 impact is just under $4M with real-time ranges historically $1M–$6M, and shifting trade actions limit visibility.

• Question from Jeremy Scott Hamblin (Craig-Hallum Capital Group): CapEx plans for 2026 and store opening cadence?
  Response: After one final September opening, new stores are paused to prioritize free cash flow; maintenance CapEx typically runs $5–$12M annually (around $10M), with 2026 specifics TBD.

• Question from Bryce Butler (Rockbot): Strategy for in-store retail media (audio/signage promotions)?
  Response: DXL uses in-store audio and digital TVs focused on fit, experience, and select brand storytelling rather than pushing promotional ads; emphasizes high NPS and personalized service over in-store promotional messaging.