Earnings Call Transcript - DXLG Q3 2025

Operator, Operator

Thank you for joining us for Destination XL Group's Third Quarter Fiscal 2025 Earnings Conference Call. I would now like to turn the call over to John Cooney, Chief Accounting Officer. Please proceed.

John Cooney, Chief Accounting Officer

Thank you, operator, and good afternoon, everyone. As you saw earlier today, we announced a merger agreement between DXL and FullBeauty as well as our third quarter fiscal 2025 earnings results. Joining me today are Harvey Kanter, DXL's President and Chief Executive Officer; Peter Stratton, DXL's Chief Financial Officer; and Jim Fogarty, FullBeauty's Chief Executive Officer and incoming Chief Executive Officer of the combined company. Today's discussion contains certain forward-looking statements concerning the announced merger between the company and FullBeauty, including an overview of the transaction and the future opportunities and expectations that the combination of these businesses will provide. 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. During today's call, we will also discuss some non-GAAP metrics to provide investors with useful information about DXL's third quarter financial performance. Please refer to our earnings release, which was filed this afternoon and is available on our Investor Relations website at investor.dxl.com for an explanation and reconciliation of such measures. I would now like to turn the call over to DXL's CEO, Harvey Kanter. Harvey?

Harvey Kanter, CEO

Thank you, John, and good afternoon, everyone. Today marks a pivotal step in redefining inclusive apparel as DXL and FullBeauty join forces to create a retailer that sets a new standard for choice, quality, and customer experience. We are pleased to be speaking with you about the opportunities we see ahead for the combined company to accelerate growth, improve operational efficiency, and deliver long-term value for our shareholders. On our call today, Jim Fogarty and I will begin by sharing additional insights about our two companies and the compelling benefits of this combination. I will then turn it over to Peter to review DXL's financial results for the third quarter of 2025, which were announced today in a separate release. I'll now begin by walking through why we believe our business fits so well together. It starts with our complementary missions and the ways in which we target underserved consumers and the fragmented markets that provide significant growth opportunities. At DXL, we are driven by a mission of providing Big + Tall men the freedom to choose their own style. We offer the best brands through our broad and deep assortment of national and private brands, most of which are exclusive across styles that provide options for most any occasion. Our clothes are made with the highest standards of construction and quality. In our stores, our customers will find a level of service that gives them a better experience than they can get anywhere else, bar none. We are solving problems for our customers. The Big + Tall man has largely been ignored by the apparel industry. There are few brands, fewer styles, and even fewer sizing options out there at most other retailers. For the Big + Tall man, his clothes are largely chosen for him, not by what he likes, but purely by what exists. DXL fixes that. In so doing, we create significant growth opportunities for our business. And when the Big + Tall man shops at one of our stores, they are getting the brands, quality, style, and experience that they simply cannot find anywhere else. Jim will tell you more about FullBeauty's history, but they also solve this issue by building on a business that has been dedicated to serving plus-size women and Big + Tall men since 1901. Their company's journey has been marked by transformation, evolution, and purpose, adapting to new technology, platforms, and customer behaviors. FullBeauty today provides an unparalleled fit and experience with each product meticulously crafted to cater to the customers' needs. FullBeauty's broad and balanced portfolio offers thoughtfully curated assortments aligned with evolving customer preferences, fashion trends, and a wide range of end use, price points, looks, and styles. Through an unwavering focus on the brand experience and creating meaningful connections with their customers, FullBeauty has set itself apart in the market as a differentiated and reliable choice for plus-size and midsized customers. Our companies share a belief in the importance of rigorous design, sizing and manufacturing processes, and this focus has allowed both FullBeauty and DXL to distinguish themselves in the market and build strong loyalty with our respective customer bases. The merger of equals we are announcing today creates a scaled category-defining retailer for inclusive apparel. Together, we have unmatched know-how, manufacturing facilities, and proven capabilities to deliver high-quality bespoke pieces for our customers that are not merely just graded up but thoughtfully created with Big + Tall and plus-size individuals in mind from the very start. This is what has set each of us and our companies apart in the broader retail industry, and we are confident it will be foundational to our success as we enter this next phase. By building on our combined strengths, we will meet the opportunity by creating a powerful engine for innovation, combining data science, digital scale, proprietary fit technology, and differentiated store expertise. It also strengthens our financial position, providing us the profitability and flexibility to generate strong free cash flow. That financial strength, along with synergies we expect to capture will provide the resources to reinvest in our business and further reduce our leverage. Ultimately, together with FullBeauty, we will be better positioned to create value for our shareholders by serving our customers across the plus-size and Big + Tall apparel markets with more brands, more styles, and more options, whether they shop with us in our stores or online. And with that, I'll hand the mic over to Jim so he can share more about how this combination will create a scaled category-defining retailer.

James Fogarty, CEO of FullBeauty

Thank you, Harvey. This is an exciting day for both DXL and FullBeauty, and I'm pleased to be speaking with you all about this transaction. Today, we are creating a new entity that we believe is greater than the sum of its parts. Today's inclusive fashion market remains highly fragmented with few players offering comprehensive solutions for plus-size and Big + Tall customers. Together, we are building the first true scaled, profitable omnichannel platform that finally treats sizing inclusivity as a category, not a niche. This is not a merger to simply get bigger. It is a merger to become a category-defining leader and to create more value than either business could deliver on its own. Despite the underserved market opportunity, the sector has traditionally lacked coordinated offerings, leaving many customers with limited choices and inconsistent shopping experiences. This merger positions us to address these gaps by bringing together two leading companies with complementary strengths, creating a retailer that delivers greater assortment, improved fit, and a powerful omnichannel experience. For DXL shareholders, this means owning a larger, more diversified company with higher EBITDA and stronger value creation prospects than DXL on a standalone basis. The combined company will be larger, stronger, and more flexible. As a result, we will be well positioned to invest in long-term growth, joining forces as one best-in-class inclusive sizing retailer, our combined company will be one of the largest players in the inclusive sizing clothing sector by both sales and store count. For the last 12 months ending October 2025, DXL and FullBeauty generated approximately $1.2 billion in combined net sales. Assuming no pro forma adjustments, adjusted EBITDA was approximately $45 million. With the $25 million in expected annual run-rate cost synergies, adjusted EBITDA for the LTM would have been approximately $70 million. We'll talk more about synergies in a moment. Uniting FullBeauty's leading pure-play direct-to-consumer capabilities with DXL's expertise in men's Big + Tall retail will create a powerful omnichannel and data-driven platform. Together, we will have a customer database of approximately 34 million households. Our leading direct-to-consumer presence will be 73% of total sales, and our nearly 300 stores will be 27% of total sales. With more first-party data, the combined company will be better able to offer more personalized marketing, make better inventory decisions, and deliver higher customer lifetime value. We expect to deliver sustainable growth, stronger margins, and long-term shareholder value while expanding choice for customers. Our combined customer offering will be diversified across brands, gender, assortment, and channel to offer unparalleled depth and breadth in options, whether our customers shop in-store or online. FullBeauty's distinctive women's brands as well as KingSize brand will join DXL's Big + Tall specialty to create a meaningfully expanded portfolio of both private and national brands. Our combined product mix is expected to be approximately 54% women's and 46% men's, delivering day-to-day staples, activewear, intimates, accessories, and decor, spanning value to premium across lifestyles and occasions. The differentiated core capabilities that each of our companies bring to the table will enable us to accelerate growth. DXL's store infrastructure and expertise creates potential for brick-and-mortar expansion at FullBeauty. DXL's well-established relationships with national brands provide opportunities for KingSize and FullBeauty's women's brands to enhance their merchandise offerings. Meanwhile, FullBeauty brings an existing private label credit card program that can be broadened to include DXL, a universal cart website infrastructure that can increase cross-selling and sales at both DXL and FullBeauty, marketplace expertise that can be leveraged to increase DXL sales as well as a print catalog capability that can be leveraged to increase DXL sales. Further, we will be able to accelerate the work both companies are already doing to remain agile and responsive to evolving customer needs and shopping habits. Our shared focus on fit, flexibility, and ongoing customer support positions the combined company to meet new and existing customers at every stage of their weight fluctuation journey, including those using GLP-1 medications through offerings such as DXL's FiTMAP and FullBeauty's free exchange program. As we invest in enhancing and expanding our product range across the combined enterprise, we will also continue adding sizes at the lower end of our current range to offer an even broader range of options. In addition to cost synergies, I want to remind and reinforce that this combination unlocks meaningful commercial synergy upside by applying the strengths of both organizations to create a company with greater revenue potential than either business could achieve alone. FullBeauty has demonstrated an ability to drive commercial synergies across previous integrations, and we expect to apply that same playbook to drive incremental commercial growth with DXL through aforementioned universal card platform cross-selling, marketplace expansion, website conversion, private label credit card penetration, and print and digital marketing. Likewise, DXL's brick-and-mortar and national brand expertise will also drive incremental growth within FullBeauty. Let me now turn it back to Harvey to discuss the technical aspects of the transaction and certain of the financial benefits.

Harvey Kanter, CEO

Thanks, Jim. Let me start with an overview of the merger transaction. Under the terms of the agreement, FullBeauty will merge with a newly formed subsidiary of DXL with DXL remaining as a publicly traded entity. The transaction is 100% stock-for-stock with DXL shareholders owning 45% and FullBeauty shareholders owning 55% of the combined company. As part of establishing a strong financial foundation for the combined company at closing, a certain of FullBeauty's equity and debt holders will complete a committed subscription of $92 million through the sale of common stock in exchange for a combination of new equity and outstanding debt equitization. This will result in a term loan outstanding at closing of approximately $172 million with a maturity of August 2029. The combination is expected to generate $25 million in run rate annual cost synergies by 2027. We intend to begin capturing these synergies promptly after the closing of the transaction with a significant portion to be actioned within the first 12 months. We will take a scientific approach to driving efficiencies across the combined company through cost of goods sold, organizational and non-organizational expenses. With meaningfully enhanced scale, we will be able to optimize our factory base and supplier network, improve our inbound freight and logistics, and leverage improvements in outbound shipping rates. Taken together, this will allow us to streamline our factories and resources for product creation while maintaining agility to pivot sourcing operations to mitigate tariff exposure. We will also be able to consolidate our workforce and streamline corporate functions to create a leaner, more efficient organization. Finally, by unifying our business overhead across the combined organization, we will benefit from improved pricing efficiency on corporate programs, streamlined customer-facing spend categories, and reduced spending for non-organizational and contract programs. Turning now to the road map to completing the transaction and our integration plans. Looking ahead, the transaction is expected to close in the first half of fiscal 2026, subject to customary closing conditions and approval by shareholders of DXL. I'm pleased to note that the Boards of Directors of both companies have unanimously approved the merger. In addition, DXL has entered into voting support agreements with one of our largest shareholders, Fund 1 Investments and with each member of the DXL Board, under which the parties have agreed to vote all of their respective shares in favor of the transaction. These agreements represent approximately 19.4% of DXL's existing voting shares, further reinforcing our confidence in a successful closing. Upon close, the company will trade under the ticker symbol of DXLG. The combined company's headquarters will remain in Canton, Massachusetts, and the combined company expects to maintain a significant presence in New York, Indianapolis, and El Paso. The combined company will be led by a proven management team that includes members from both organizations. Upon closing, Jim will serve as our Chief Executive Officer; and Peter Stratton, current CFO of DXL, will serve as the Chief Financial Officer of the combined entity. This experienced team is highly qualified to deliver on the promise of this merger. The Board will be composed of 9 directors, 4 directors from each company and 1 independent director to be mutually agreed upon by the go-forward directors prior to closing. There are, of course, many decisions to be made throughout our integration planning. We look forward to keeping you apprised of further details as we have updates to share. And now I'd like to turn the call over to Peter for a quick update on DXL's third quarter earnings results.

Peter Stratton, CFO

Thank you, Harvey, and good afternoon, everyone. I'll just take a few minutes to run through the highlights of DXL's third quarter financial performance. Net sales for the third quarter were $101.9 million as compared to $107.5 million in the third quarter of last year. The decrease in net sales was primarily due to a decrease in comparable sales of 7.4%, partially offset by an increase in noncomparable sales from new stores. Although sales were below our expectations, the quarterly comp was an improvement from negative 9.3% in the first half of the year. We continue to see a shift towards our value-driven private brands as customers remain cautious with their discretionary spending. These private brands sell at lower average unit retails but generate higher margins. By month, our comps were negative 6.7% in August, negative 9.3% in September, and negative 5.8% in October, with October our best month year-to-date. Our gross margin rate, inclusive of occupancy costs, was 42.7% as compared to 45.1% in the third quarter of last year. Deleverage on occupancy costs contributed 210 basis points of decline and merchandise margins decreased by only 30 basis points, primarily impacted by promotional offers and tariff increases. Tariffs impacted our third quarter margins by approximately 60 basis points, and we expect the impact on our fiscal year 2025 margin to be approximately $2 million. We did see favorability in Q3 due to the shift in product mix from national brands to private brands. Our SG&A expense as a percentage of sales increased to 44.7% as compared to 44.1% in the third quarter of 2024. Our ad-to-sales ratio for Q3 was up slightly at 6% from 5.7% last year, and we have been seeing strong returns from our paid search and social channels. EBITDA for the quarter came in at a loss of $2 million as compared to earnings of $1 million for the third quarter of last year. We continue to feel very good about the overall strength of our balance sheet. Total inventory levels are down 4.6% to last year and clearance levels remain at approximately 10%, which is in line with our target and with last year. We finished the quarter with cash and short-term investments of $27 million as compared to $43 million a year ago, with no outstanding debt in either period and excess availability of $73.6 million under our revolving credit facility. The $16 million decrease in cash from a year ago can be accounted for with $13.1 million in capital spent on new store development during the past 12 months and $3.3 million in share repurchases in the fourth quarter of fiscal 2024. For the 9 months year-to-date, our free cash flow, which we define as cash flow from operating activities less capital expenditures, was a use of $20.2 million of cash as compared to a use of $7 million last year, with the decrease primarily attributable to lower earnings. Now I'll pass it back to Harvey for some concluding remarks.

Harvey Kanter, CEO

Thanks, Peter and Jim. On behalf of Jim and I, we want to take a moment to recognize our teams, both at DXL and FullBeauty for their dedication and hard work every day. Our success is built on their commitment and the efforts of our colleagues across the stores, distribution center, corporate offices, and the guest engagement centers. Everything we accomplished, including our ability to reach this milestone transaction, is possible because of them. Thank you for joining us today to learn more about this compelling transaction. I am confident that FullBeauty and DXL will reach even greater heights together than either business could have achieved on its own as a standalone. And with that, operator, we will open the floor for questions.

Operator, Operator

Our first question comes from Jeremy Hamblin of Craig-Hallum Capital Group.

Jeremy Hamblin, Analyst

Congrats on the transaction. I wanted to start by just getting a fuller picture of the expected capital structure. Post-closing, we see the $172 million term loan. But wanted to just get a sense for kind of the expectations of where total debt would be post-closing, kind of expected cash post-closing and then hear a little bit more about the expected terms within the term loan.

Peter Stratton, CFO

Sure. So Jeremy, let me start with that question. So first of all, I should just note that we will have a lot more information coming out in the proxy statement, which we're going to be working on soon, but I'll try to give you some sense of how we're thinking about it. So as you saw in the release, what's happening is it's a 100% stock-for-stock transaction. We will be welcoming new shareholders into the company who are shareholders of FullBeauty today. And to answer your question about debt, the total debt that we're expecting upon closing is the $172 million. As I said, there's going to be a lot more that will be coming soon, but that's just a quick start with how to think about it. But certainly, Harvey or Jim can add anything else to that I think appropriate.

James Fogarty, CEO of FullBeauty

I would just add that the maturity is out to August of 2029 on the term loan, and it's LIBOR plus 750.

Jeremy Hamblin, Analyst

Great. So DXL has $27 million in cash. To understand FullBeauty's balance sheet, the total debt will be $172 million after closing. Can you provide an estimate of the expected post-closing cash balance for the combined entity?

Peter Stratton, CFO

So Jeremy, again, I'm not going to get into those pro forma numbers right now. We will have a lot more information coming in the proxy statement. But as of right now, what we're announcing is we wanted to make sure that everyone was clear on the term loan that Jim just referenced. That's going to be the outstanding debt that we're expecting upon closing.

Jeremy Hamblin, Analyst

Okay. Got it. And then just another one kind of post-closing combined entity expectations around CapEx, given that FBB is more of a DTC business. But just on a go-forward basis and kind of assuming some of the investments that you'll be making in the business, but kind of the ongoing CapEx that you would expect for the entity?

Peter Stratton, CFO

Sure. So I'll speak to it qualitatively, I guess, is the best way to say it. I think one of the most exciting things about this transaction is the commercial synergies that both sides see. Now of course, we both have infrastructure and maintenance CapEx that needs to be maintained, whether it's maintaining distribution facilities, investments in IT and technology. But when I think about commercial synergies, there will be questions about where do we want to go with store operations. That's certainly one of the strengths that we bring to this transaction. And I think FullBeauty does not operate any stores today. So I think we will be looking at all kinds of commercial synergies and industrial logic that makes sense. That's going to become more clear, I think, as the two teams start working together and coming up with what are those operational plans that we want to be pursuing in the immediate term.

Jeremy Hamblin, Analyst

Got it. Maybe this is a question more for Jim. But Jim, I wanted to understand that it has been a challenging couple of years for DXL. I want to know what FBB has been seeing in terms of trends, specifically sales trends over the past year, and whether, given the number of brands under the umbrella, there are particular brands that are performing very well and if any of the brands are being eliminated after the closing.

James Fogarty, CEO of FullBeauty

Currently, we have no plans for that. Each of our brands serves a specific purpose. In our investor presentation, we categorize our brands into new mall brands and classic mall brands. The new mall brands cater to millennials and younger Gen X consumers, while the classic mall brands have historically appealed to older Gen X and young boomer demographics. We've focused on the new mall brands and have seen positive results there, while the classic mall brands remain a cornerstone of our business for many years. We have established a loyal customer base within the classic mall, with a significant percentage of our business coming from customers who have purchased from us more than four times. Our strong extended plus-size offerings are also part of this classic mall strategy. We aim to bring new customers into our classic mall brands, like Woman Within, and nurture that relationship further. We utilize a universal web cart, allowing customers to explore surrounding brands while shopping. For instance, a customer looking for something special for the weekend might also purchase from Roaman's, or for workwear from Jessica London. Our goal is to develop multiple brand and category relationships with our customers while enhancing customer lifetime value through direct-to-consumer strategies and increasing transaction frequency. As a company, we've also acquired a brand called Eloquii to strengthen our presence among the younger demographic in the new mall segment, which is performing well. We pride ourselves on generating high free cash flow, and while Peter will provide specific figures, we have maintained minimal capital expenditure and strong free cash flow performance. We are enthusiastic about the synergies both in terms of cost and commercial opportunities from our recent transaction, which will enhance the DXL brand and vice versa. We are truly excited about these prospects.

Jeremy Hamblin, Analyst

Great. Last one, actually building on that point. In terms of managing two really separate businesses that serve similar customer sets, DXL has been quite hesitant to lead with promotions and has been fairly disciplined about it, especially during Harvey's tenure. I want to understand how the FB portion of the organization compares to DXL. I'm sure this has been discussed, but how do you approach marketing the brands and positioning them in terms of pricing and promotions to create synergy between those two organizations?

Peter Stratton, CFO

So let me start with that one. And then, Jim, I'd love for you to comment on some of the specific questions about FB. So Jeremy, so we mentioned we're targeting $25 million of run-rate cost synergies. We're going to start capturing those we think, pretty quickly after closing. There will be a lot of actioning on that coming in the first 12 months. But I think there's going to be opportunities with cost of goods. We both have a pretty diverse manufacturing footprint around the world. There's certainly going to be organizational efficiencies and reduced overhead. But ultimately, I think what we collectively are excited about are those commercial synergies I was alluding to earlier and how can we accelerate growth through cross-selling, cross-channel capabilities, stores, DTC. I really think this is a tremendous opportunity for each company to bring their best attributes and skill sets and be able to build upon each other's distinct capabilities.

James Fogarty, CEO of FullBeauty

Yes. I want to emphasize that we take the task of achieving cost synergies very seriously, which is to be expected. As Peter mentioned, we will approach this promptly. Both organizations have dedicated significant time to identifying potential synergies in both organizational and contract details. These synergies align with what Peter described regarding our sourcing organization and shared contracts over time. The consolidation of leadership is a clear area for streamlining, and we aim to maintain a lean operation within the organization. Additionally, we will focus on optimizing outbound shipping and inbound logistics, along with managing core product costs. We will also address the usual overlaps in audit and tax functions. Regarding the integration of our organizations, we are still in the planning phase, but we recognize the strength of the KingSize brand in the Big + Tall market and the powerful presence of DXL. We have respected each other's brands for many years, with DXL being larger than KingSize to a certain extent. However, KingSize offers more moderate pricing compared to DXL. We envision a universal shopping experience that leverages both brands, driving cross-channel traffic in a direct-to-consumer model. There are many factors to consider, especially since DXL is advancing toward increased private label offerings, which aligns with our strengths, while they excel with national brands. We believe there is significant potential for collaboration between the two brands, which will enhance their value collectively. Our goal is to operate as efficiently as possible and be disciplined in capital allocation as we merge our operations.

Operator, Operator

Our next question comes from the line of Michael Baker of D.A. Davidson.

Michael Baker, Analyst

Congratulations on the transaction. I would like to follow up on Jeremy's question regarding the capital structure. I may be mistaken, but just to clarify, we are not issuing any additional stock. It remains approximately 58 million shares outstanding, correct?

Peter Stratton, CFO

Yes. No, Mike. So it is going to be a stock issuance deal. We will be issuing stock to combine the two companies. As we were talking about, Jim was mentioning FullBeauty brings a high strong cash flowing business. DXL has a strong balance sheet. There's a lot of synergies that we think we'll find, but this is essentially a stock deal.

Michael Baker, Analyst

So I guess then you got to know how much stock is going to be issued or what the amount is.

Peter Stratton, CFO

Yes. So as we mentioned in the terms, it's going to be 55% to FullBeauty and 45% to DXL will be the pro forma ownership.

Michael Baker, Analyst

Understood. Okay, I got you. And for the capital structure, is there any update on the $172 million term loan? Does FullBeauty come with any debt? I know in the past, FullBeauty had existing debt, but has that been paid down? Or is there still existing debt for FullBeauty that we need to consider?

Peter Stratton, CFO

That $172 million mentioned by Jim is the FullBeauty debt that DXL is taking on in the transaction. As noted in his prepared remarks, the owners of FullBeauty have contributed a significant portion of that debt. There is a $92 million paydown, which reduces the debt to $172 million. Additionally, the term debt is being extended to August of 2029.

Michael Baker, Analyst

Okay. That helps clear it up. Now can I ask about the trailing 12-month numbers provided of $1.2 billion and $45 million in EBITDA? We know DXLG's last 12 months numbers are about $445 million and around $6 million in trailing 12-month EBITDA. This allows us to estimate what FullBeauty would be doing over the last 12 months, which seems to be down a bit from the last figures we saw from your ICR presentation for fiscal year 2023. So, following up on a previous question, can you talk about the trends you’ve been seeing in terms of top-line growth or declines in EBITDA profitability over the last couple of years?

James Fogarty, CEO of FullBeauty

Yes. To give you a quick overview, Peter discussed the recent comparisons with DXL. Our comp performance has been similar to DXL's during the recent period. We have been focusing on our cost structure while working in an environment where moderate value customers have been impacted. We've also been diligent about aligning our marketing expenses effectively, which is reflected in our EBITDA flow-through relative to our revenue. We believe both businesses are performing significantly better than our standalone plans. The motivation for our merger is to capitalize on the synergies—both cost-related and commercial—that we have mentioned. This partnership is advantageous not only for DXL shareholders but also for our organization as we join forces and strengthen our position.

Harvey Kanter, CEO

Michael and Jeremy, thank you so much for asking your questions. Operator, it looks like there's no one else left in the queue with questions. So I would just like to thank everyone for their attendance on the call today. You know that we have a number of follow-ups. As Peter mentioned, we'll be working on the proxy and that you should see in the first quarter at some point. And we know we'll have ongoing discussions and need to follow up with all of you. So I wish you the very best of holidays if we don't talk to you live, and we look forward to catching with you in the weeks and months ahead. Have a wonderful holiday.

Operator, Operator

This concludes today's conference call. Thank you for participating. You may now disconnect.