Destination XL Group Inc's Q2 2025: Contradictions Emerge on Private Brand Strategy, Tariff Impact, and Cost Management

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 7.4% YOY (vs $124.8M prior year)
• Gross Margin: 45.2%, compared to 48.2% in the prior year (down 300 bps)

Guidance:

• Sequential comp trends improved: May (-10.4%), June (-9.6%), July (-7%); August MTD better than July; aiming to narrow declines in H2.
• Full-year marketing spend expected at ~5.9% of sales.
• If current tariffs persist through year-end, FY25 inventory costs expected to rise by just under $4M; impact heavier in H2.
• Pricing actions: selective ticket increases and promotional architecture updates; reticketing to complete in ~8 weeks.
• Private brand mix targeted to exceed 60% in 2026 and 65%+ in 2027.
• Store development paused after one remaining Q3 opening (18 stores opened over two years) to prioritize free cash flow.

Business Commentary:

• Sales Performance and Market Conditions:
• Destination XL Group reported negative comparable sales trends across the business in Q2, with comparable store sales down 7.1% and direct down 14.4%.

• The decline was attributed to tepid demand for apparel, particularly among the Big and Tall sector customers, who continue to hold tight to their wallets.

• Tariff Impact and Strategic Pricing Adjustments:

• The company estimated that if current tariffs remain in effect until year-end, they could increase inventory costs by just under $4 million in fiscal year 2025.

• DXL is strategically implementing pricing adjustments across certain product lines and expediting the reticketing process to minimize financial impact.

• Shift Towards Private Brands:

• Private brand sales penetration is currently at 56.5% and is expected to grow to greater than 60% in 2026 and 65% in 2027.

• The shift is driven by the perception of better value, lower price points, and higher profitability compared to national brands, and is supported by strategic marketing and product development.

• ** FiTMAP Initiative and Digital Transformation:**

• Over 23,000 fit profile scans have been recorded since the FiTMAP program's inception, with plans to deploy the technology in 86 operational sites by year-end.
• This initiative is aimed at enhancing customer experience, driving operational excellence, and leveraging data insights to improve recommendations and engagement.

Sentiment Analysis:

• Management noted “financial results continue to be under pressure,” with comps down 9.2% and gross margin 45.2% vs 48.2% last year. However, sales trends improved sequentially (May to June to July), and August MTD was better than July, giving confidence to narrow declines in H2.

Q&A:

• Question from Jeremy Scott Hamblin (Craig-Hallum Capital Group): Detail the private brand mix today, the migration over the next few years, and margin differences vs national brands.
  Response: Private brands are 56.5% today; targeting >60% by fall next year and >65% in 2027. IMU: national brands low 50s vs private brands upper 60s–mid-70s; after strategic promos, private still ends with meaningfully higher merchandise margin.

• Question from Jeremy Scott Hamblin (Craig-Hallum Capital Group): What’s the expected tariff impact for FY26, given ~$4M estimated for FY25?
  Response: Too volatile to forecast; FY25 estimates have ranged $1M–$6M and are now just under $4M. Management cannot credibly bracket FY26 at this time.

• Question from Jeremy Scott Hamblin (Craig-Hallum Capital Group): Outline CapEx plans for 2026 and maintenance CapEx levels.
  Response: Store development is paused after remaining Q3 opening; maintenance/infrastructure CapEx typically $5–$12M, usually near ~$10M; specific 2026 figure TBD and dependent on H2 performance.

• Question from Bryce Butler (Rockbot): Does DXL have an in-store retail media strategy (audio/digital signage) for promotional messaging?
  Response: DXL uses in-store audio and digital screens for brand/fit storytelling and experience, not promotion pushes; focus is service and fit, reflected in very high NPS.