Good day, everyone, and welcome to the Destination XL Group, Inc. Second Quarter Fiscal 2025 Financial Results Conference Call. Today's call is being recorded. At this time, I would like to turn the call over to Ms. Shelly Mokas, Vice President of Financial Reporting and SEC Compliance at DXL. Please go ahead, Shelly.

Thank you, operator, and good morning, everyone. Thank you for joining us on Destination XL Group's Second Quarter Fiscal 2025 Earnings Call. On our call today are our President and Chief Executive Officer, Harvey Kanter, and our Chief Financial Officer, Peter Stratton. Today's call, we will discuss some non-GAAP metrics to provide investors with useful information about our financial performance. Please refer to our earnings release, which was filed this morning and is available on our Investor Relations website at investor.dxl.com for an explanation and reconciliation of such measures. Today's discussion also contains certain forward-looking statements concerning the company's strategic priorities, potential impact of current tariffs, and other expectations for fiscal 2025. Such forward-looking statements are subject to various risks and uncertainties that could cause actual results to differ materially from those assumptions mentioned today due to a variety of factors that affect the company. Information regarding risks and uncertainties is detailed in the company's filings with the Securities and Exchange Commission. I would now like to turn the call over to our CEO, Harvey Kanter. Harvey?

Thank you, Shelly, and good morning, everyone. I appreciate all of you joining us today to hear about our business, given the timing being just prior to the upcoming long weekend. There's been a lot going on at DXL for the past few months, and I'm hoping to provide a comprehensive update to you today. As most of you have likely already seen in our earnings release, which was published earlier this morning, 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 sale trends across the business in the second quarter. We began to see this trend over a year ago, and our average customer continues to gravitate towards lower-priced goods and select promotions, signaling a consumer who is carefully choosing where and how he spends his money. The objective for us is to try to understand these shifts and maneuver our plans and tactics in response to changing consumer behavior. I am pleased to let you know that our results in July were better than June. And in August, we've seen an uptick in business, with results month-to-date better than July. Our store traffic has begun to improve, and our comp sales results for August are coming in month-to-date with a modest improvement from July's negative 7% and from Q2 in total, which was negative 9.2%. The macro environment continues to be dynamic right now and full of uncertainty. As such, it is a challenge for us to provide clarity around this behavior and hence what we expect to deliver. Despite the difficult sales environment we posted in the second quarter, I must say we remain optimistic for our…

Thank you, Harvey, and good morning, everyone. I'll start with some additional color around our second quarter financial performance. 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 non-comparable sales from new stores. As Harvey noted, sales trends improved month over month, with comparable sales down 10.4% in May, down 9.6% in June, and down 7% in July. Overall, the second quarter decline was consistent with the first quarter as customers continued to pull back on discretionary spending and shifted towards our value-driven private brands, which sell at lower average unit retails but generate higher margins. However, the sequential improvement, which has continued into August, gives us hope that we can continue to close the gap and comp declines in the second half as we work towards getting back to positive comps and sales growth. Our gross margin rate, inclusive of occupancy costs, was 45.2% as compared to 48.2% in the second quarter of last year. The 300 basis point decrease was primarily due to a 240 basis point increase in occupancy costs from the deleveraging on lower sales and increased rents from new stores and lease extensions. Merchandise margins decreased by only 60 basis points as compared to the second quarter of last year, primarily due to a higher markdown rate from promotional offers, marketing initiatives, and increased freight from accelerating inventory receipts ahead of planned tariff increases. These negative factors were partially offset by a benefit from the shift in product mix from national brands to private brands. Tariffs had a minimal impact on our second quarter margins, approximately 20 basis points, but are…

Thanks, Peter. Before we take questions, and although likely the single most repetitive comment I make, I must once again thank the DXL team that I work with every day. Their hard work and dedication in the stores, in the distribution center, in the corporate office, and the guest engagement center provide a level of optimism for the opportunity ahead. Their passion and commitment as a team has served our underserved customer well and is our reason for being, our purpose, and why we do what we do. It is because of the great team and culture that we've created that I want to get up every morning and keep moving on this journey. Thank you for all your hard work and commitment in our pursuit of serving big and tall men and making DXL the place where they can choose their style and wear what they want. And with that, operator, we will now take questions.

Thank you. If your question has been answered and you'd like to remove yourself from the queue, our first question comes from Jeremy Hamblin with Craig Hallum Capital Group. Your line is open.

Morning, and thanks for taking the questions. I wanted to come back to the strategy of more private brands. And if you could just walk us through again, you know, where your mix is on private brands today and what you're expecting that to migrate to over the next couple of years. And then just a reminder of what the product margin difference is between the national brand average product margin versus the private brands.

Jeremy, great question. It's Harvey Kanter. Hey. Why we're doing what we're doing and then try to back into really what you've asked for. We believe that given the product quality that we can create on our private brand scenario, and I'll remind you that we are in factories that specialize in big and tall, that have unique and distinctly different characteristics than a traditional factory in terms of the laydown and the quality. So based on the quality, based on the ability to create a proprietary fit and bring it to market in a way that we have that continue to do. And then, ultimately, even with tariffs, the belief and knowledge that the value we can create in our private brands is demonstrably greater than national brands. And, obviously, a national brand has a banding that, but there are distinct differences. We believe that the customer's migration, which we are actually seeing now live, take place. It's something we want to lean into. We've already started that process. I'll remind you that it's hard to believe I've been here now in my seventh year, but way back when, our private brands were under 50%. 48, 49, something like that with 52%. Quickly becoming the penetration of that they were at 56.5%. So we've already seen a meaningful migration over the past couple of years. And as the consumers hunt for value and being more discerning about what they buy, they are looking for absolute lower price points. And in some respects, not only looking to not lose quality, but in our case, give us better quality. And we believe it's an opportunity to really lean in. And, ultimately, your last question or the last part of your question about margin is really apropos here because while we would tell you that we're in the low fifties typically on a national brand, on an IMU basis. We're probably in the upper sixties to mid-seventies on an IMU basis for private brands. So we start out with a distinctly different IMU. We don't necessarily end up at the same place because we have the wherewithal to use our private brands promotionally in a strategic way that allows us to do that and still margin out above national brands but not with that level of gap at the end, just at the beginning. And then, obviously, still a meaningful gap on merch margin and gross margin when we're done. But not as great as we have initially started with IMU. So, hopefully, I've helped you appreciate some of the no. I wouldn't even call them nuances, big strategic levers and the reason for our actions and belief that over the next couple of years, the opportunity is yet ahead to really bring that to market, not just on margin, but on quality the consumer's response.

That's helpful. There was a little bit of feedback. I wanted to just confirm. So a couple of years from now, I think what you said is today, you're at, like, 56.5% private brand, and that total's going towards, like, maybe 65% over the next couple of years.

We've articulated it is we expect that by 60. Coming from really, today, over 56. And by 2027, in the year of 2027, we're expecting to be north of 65%.

Okay. Great. And it sounds like there's well over a thousand basis point differential or benefit to margin.

Yeah. I think when all is said and done on a merch margin basis, there is something in the realm of what you just talked about. The IMU is greater initially, but then to the point I talk about strategic promotion, yeah, you end up at a merch margin more similar to what you just defined.

Got it. That's great. Okay. And then I wanted to, you know, come back to tariffs here for a second. Still obviously an important point. You know, I know it's a volatile and fluid situation. But if the impact that you're anticipating is about $4 million for fiscal 2025. At this point, do you have kind of a range of what you think it might look like for '26?

Jeremy, I think I would love to lean in and give you an answer to your question, but I don't know if you'll appreciate this. But the reality is our range in 2025 has already been from literally a million and 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 unfortunate reality of 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. So rather than try to give you a range that I think is just kind of sort of almost irrelevant, I gave you just a range just now that literally real-time has been between one and six, and we're hovering south of $4 million at this moment. But, you know, no different than literally India just executed the Russian tariff increase because of the gas going into India. You know, these various kind of movements left and right almost daily make it almost impossible to articulate with a great deal of confidence real-time yet alone twelve months from now.

Fair point. Let me shift gears then and talk about kind of capital plans. You've got obviously, you've got a couple more stores that you're opening this year. I know you're not planning to do that in '26, but wanted to see if you could provide an outline of where you think your CapEx budget might be for '26 or, you know, at the least maybe a kind of what you expect maintenance CapEx to be.

Sure. So let me take that one, Jeremy. You're right. We're putting a pause on store development, so we have two more stores to open. And, actually, I think we just opened one store, so there's one more still to go in September. And then we'll be to 18 stores really since we started building new stores after the pandemic, and we're putting a pause on that. Really to wait for the business to stabilize and keep our focus on cash flow. With your question regarding maintenance CapEx, yes, every year, there is always some level of infrastructure CapEx where we're making investments in our technology infrastructure, our distribution infrastructure, and so forth. Typically, that's running, you know, it could be anywhere from $5 to $10 million a year. I'm not gonna give you a number yet for '26. We're still kind of working on those plans, and a lot of that will be dependent on how the second half of the year comes together. But that gives you some general sense of, you know, yes, there's always some level of maintenance CapEx that we typically have, and it's usually up towards, I would say, the $10 million mark.

Right. So much for taking my questions. Appreciate it.

Thank you. Our next question comes from Bryce Butler with RockBot. Your line is open.

Hi. Thanks, everyone, for allowing the questions. My question is in regard to retail in-store retail media. With the projected spend of retail media set to be about $1 billion by 2028, and with more apparel brands leaning into retail media, I was curious to hear, does the company have a current strategy or future strategy when it comes to in-store media, retail media promotions through their in-store media.

Bryce, I think I needed you to be a little clearer on what you're referring to as store media. So maybe I can answer the question better.

Sure. I'm talking ads or messaging that pushes through the audio or appears on the screens through digital signage that's promoting brands and opportunities within the store. So for any private brand or any public brand, pushing that messaging out to your consumer base within the store giving them an opportunity to see promotions that may lead to purchases?

Yeah. We do have both in-store audio. It's mostly music, but there is in-store audio where we populate it with messages that are appropriate for our brand's positioning. Typically, it talks about things like fit and not so typically, but about brands. There are select dimensions of some of our most important brands like Polo Ralph Lauren, but there are select brands that we talk about occasionally. In addition to that, probably more relevant, and you may or may not know this, we do have digital TVs in nearly every store. And we create distinct content for those TVs in-store that play. And that shows both our customer in our clothes and some level of advertising around our brands. But what we don't do is we don't specifically promote via audio or the in-store media things like promotion. Once they're in the store. It's really about the experience that is most important to us. Our net promoter score, which, you know, I don't know how familiar you are with the brand, but the eighties in the net promoter scores are rather remarkable numbers, and it's all based on the experience. And, typically, our guests know our store manager and store team. Our team knows our guests. And so it's really about less about selling them stuff and understanding why they came in and can we help them and for lack of a better way to say it, and it may seem odd, but in some many cases, they are friends. They literally know each other and have shopped with us for a very long period of time, and they're less about a client and more about just, hey. I was in the market. Wanted to see what you had in today, and they pop in. So again, less promotional, less direct marketing once they're in the store. But certainly a level of positioning that we think reinforces the relevance of DXL in terms of fit and sizes that we carry in some of the really more important national brands that the consumer finds relevant in addition to our private brands.

Great. Thank you for that answer. I appreciate it.

You bet. Operator, it looks like that is the extent of our questions. We will regroup in about ninety days at the end of the third quarter and hopefully look forward to everyone joining us then for our updated quarterly results. And with that, I'll wish everyone a safe holiday this holiday weekend. Stay cool. And thank you for your attendance today. Have a great, great fall.

Thank you. This does conclude the program. You may now disconnect. Good day.