Destination XL Group, Inc. Common Stock 2027 Q2 Earnings Call

Please go ahead, Shelly. Thank you, operator, and good morning, everyone.

We appreciate you joining us on Destination XL Group's second quarter fiscal 2026 earnings call. Joining me today are Lionel Conacher, our interim Chief Executive Officer, Peter Stratton, our Chief Financial Officer, and Jimmy Olsen, our new Chief Growth Officer. During today's call, we will reference certain non-GAAP financial measures that we believe provide useful supplemental information regarding our performance. Please refer to our earnings release, which was filed this morning, and is available on our investor relations website for additional information and reconciliation of those measures. Today's discussion will also include forward-looking statements regarding the company's strategic initiatives, marketing strategies, store rationalization work, expectations for comparable sales, the impact of tariffs, update regarding the merger, and other expectations for fiscal 2026. These statements are subject to risks and uncertainties that could cause actual results to differ materially from our current expectations.

Additional information regarding those risks and uncertainties is included in the company's filings with the Securities and Exchange Commission. With that, I will turn the call over to our interim CEO, Lionel Conacher.

Lionel? Thank you, Shelly, and good morning, everyone.

I am honored to join today's call as DXL's interim Chief Executive Officer at an important time for the company. I want to begin by recognizing Harvey Kanter for his leadership and contributions to DXL over more than seven years as CEO. Harvey helped strengthen DXL's position as the leading specialty retailer in men's big and tall, and on behalf of the board of directors and the entire management team, I want to thank Harvey for his service and wish him well in retirement. Just a few words about myself. I have been involved with DXL as a director since 2018 and have served as chairman since 2020. During my time with DXL, I have developed a deep appreciation for the company, its people, and most importantly, the big and tall customer.

We have a strong brand, a loyal customer base, a clear understanding of our customers' priorities. The differentiated leadership position that we have established in this underserved market gives us a strong foundation on which to build, grounded in our commitment to serving the big and tall customer. Our priorities from here are straightforward. We are focused on increasing traffic and revenue, strengthening customer engagement, improving profitability, and advancing strategic initiatives that can support long-term growth. The second quarter earnings results we reported today are a testament to progress we are already making in these efforts. Our business continues to improve, and we see clear signs that a resumption in sales growth is imminent. Q2 sales performance was consistent with the progress we reported in the first quarter, which is a significant improvement over our prior year's results.

I am incredibly excited about the opportunities ahead for DXL, and proud to be speaking with you all about our momentum today. Before we dive into the quarter, I would like to introduce Jimmy Olsen, who has worked with DXL in a consulting role for the past 12 months and recently joined us full-time as Chief Growth Officer. Jimmy comes to DXL with a deep background in retail strategy, brand elevation, and scaling omni-channel platforms through marketing, merchandising, and product development. This newly created role of Chief Growth Officer brings together the customer-facing levers of the business, and Jimmy's perspective will be instrumental as we execute against the traffic, assortment, promotional, and store experience opportunities in front of us. Jimmy has held leadership positions at a number of blue-chip retailers, including Walmart, American Eagle, Tommy John, Todd Snyder, and The Gap.

On behalf of the DXL Board of Directors, I am thrilled to welcome Jimmy to DXL. You will hear directly from Jimmy for a deeper dive into our growth priorities and initiatives. To frame up the balance of today's marks, in just a moment, I am going to turn the call over to Peter to give you an update on our second quarter performance, sales trends, margin, and liquidity. After that, Jimmy is going to talk about our go-forward strategy and priorities before I come back to close things out. With that, I am going to ask Peter to give you an update on our financial results.

Peter? Thank you, Lionel, and good morning, everyone.

Our second quarter sales were generally in line with our expectations and remain consistent with the year-over-year improvement in trends that we saw in Q1. Net sales were $111.6 million, down 3.4% from last year, and our adjusted EBITDA was $7.7 million, or 6.9% of sales, compared with $4.7 million last year, while adjusted earnings per share was $0.05, compared with last year's $0.01 result. Comparable sales were down 3.5% for the quarter, with stores down 4.3%, and our direct business down 1.6%. Monthly comps improved sequentially from -5.7% in May to -2.8% in June and then -1.9% in July. Store traffic remains our most significant challenge, although we continue to be encouraged by strong conversion and dollars per transaction, which helped offset some of that traffic pressure.

In direct, we saw improvement in conversion driven by enhancements to the app and overall site experience, and we also benefited from solid performance in clearance product primarily through the direct channel. More broadly, the direct business generated demand through paid search, paid social, and programmatic marketing, while ongoing improvements in app performance, site experience, and speed supported better conversion. We continue to evaluate our marketing allocation carefully to strike the right balance between attracting new customers, where we have seen acquisition rate increases since the fourth quarter, in reengaging repeat and lapsed customers, where spending remains more cautious. Encouragingly, when new customers discover DXL, they continue to respond well to our assortment, fit, and value proposition. Based on customer surveys and related insights, the overall slowdown in customer traffic appears to reflect the combination of weight loss journeys, shifting spending priorities, and delayed purchasing decisions.

Importantly, we believe the underlying affinity for the DXL experience remains strong. Although we still have meaningful work ahead, we are encouraged by the improvement in the quarter and confident that our turnaround efforts are beginning to gain traction. Our merchandising efforts remain focused on sharpening value, strengthening private brands, and improving inventory flow to better align with current demand. We are leaning further into private brands, particularly Harbor Bay, as an opening price point and value driver, while continuing to improve storytelling around quality, fit, and value across channels. Our creative and messaging have become more focused on essentials, cost per wear, and trusted fit, reinforcing our position with a more value-conscious customer. We are also rebalancing the promotional calendar toward higher margin and higher inventory risk categories so that promotions can help drive demand while protecting profitability and reducing future inventory exposure.

Another topic that I'd like to touch on quickly is IEEPA tariff refunds. Towards the end of the first quarter, we submitted a claim through the U.S. Customs and Border Protection online portal, and I'm pleased to report that we received a refund of $4.6 million during the second quarter, which benefited merchandise margin and improved adjusted EBITDA versus plan. Gross margin, inclusive of occupancy costs, was 47.9%, up 270 basis points to last year, primarily driven by this refund. Excluding the tariff refund, merchandise margin would've been approximately 70 basis points worse than last year, primarily due to a higher markdown rate to move through slower moving seasonal product and increased shipping costs due to fuel surcharges. Occupancy costs were flat in dollars, but deleveraged versus last year due to lower sales.