Destination XL Group, Inc. Q3 FY2025 earnings call

• DXL and FullBeauty are merging to create a scaled category-defining retailer for inclusive apparel, with complementary missions targeting underserved consumers. - DXL's mission is to provide Big + Tall men with style options, quality, and service, while FullBeauty serves plus-size women and Big + Tall men with a focus on fit and brand experience. - The merger creates a powerful omnichannel and data-driven platform with a combined customer database of approximately 34 million households, and expects $25 million in annual run rate cost synergies by 2027. - DXL's third quarter financial results were reviewed, including net sales, margin details, SG&A expense, and EBITDA.

For DXL's third quarter of 2025, net sales were $101.9 million compared to $107.5 million in the same period last year. The decrease in net sales was primarily due to a 7.4% decrease in comparable sales, partially offset by an increase in noncomparable sales from new stores. The gross margin rate, inclusive of occupancy costs, was 42.7% compared to 45.1% in the third quarter of the previous year. SG&A expense as a percentage of sales increased to 44.7% from 44.1% in the third quarter of 2024. EBITDA for the quarter was a loss of $2 million compared to earnings of $1 million in the third quarter of the previous year. Total inventory levels were down 4.6% from the previous year, and clearance levels remained at approximately 10%. Cash and short-term investments were $27 million at the end of the quarter compared to $43 million a year ago.

• The transaction is expected to close in the first half of fiscal 2026, subject to customary closing conditions and shareholder approval. - The combination is expected to generate $25 million in run rate annual cost synergies by 2027, with a significant portion to be actioned within the first 12 months of closing. - The combined company will trade under the ticker symbol DXLG upon close.

Q: 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.

A: Sure. So Jeremy, let me start with that question. So first of all, I should just note that we will have an awful 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.

Q: 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?

A: 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 2 teams start working together and coming up with what are those operational plans that we want to be pursuing in the immediate term.

Q: Okay. Got it. Maybe this is a question more for Jim. But Jim, I wanted to understand, obviously, it's been a challenging couple of years for DXL. And wanted to understand what FBB was seeing in terms of trends, kind of sales trends over the past year and whether or not with kind of the number of brands that you have under the umbrella, if there are particular brands that are very strong and those that may be -- are any of the brands getting shed kind of post-closing?

A: No plans for that currently. All of our brands serve a purpose. If you look at -- I think there's a slide in the investor presentation, you'll see that we break our brands down into what we call the new mall brands and the classic mall brands. Our new mall brands service millennial, younger Gen X demo. And then the classic mall brands have historically serviced the sort of older Gen X and into young boomers demo. And we've leaned into the new mall, and we've seen some better results there. And then we're continuing the classic mall is sort of the mainstay of the business for many, many years. And so we've built up a networking effect within that classic mall where we have very loyal customers, big percentages of our business are done by customers who bought more than 4 times from us lifetime. We have a very strong extended plus size business within that classic mall. And we try to drive -- we'll take a new customer into classic mall in one of our brands, let's say, Woman Within. And then that relationship will try to grow with a basically a strategy of driving her -- and you'll see we operate with a universal web cart. So if you were able to load into womanwithin.com, you would see other surrounding brands. And we try to then encourage that customer to not only be a customer of Woman Within, but if she needs something nice for the weekend, she might move over to Roaman's. If she needs workwear, she'll move over to Jessica London. And so we're basically trying to build multiple brand relationships with that customer and then also multiple categories, move her into multiple categories as well. And then classically, direct-to-consumer, CRM, customer lifetime value driving, just getting more transactions and more loyalty with that customer over time. So I'm giving你 like the quick history. And then we, as a company, introduced -- bought a brand called Eloquii, and we built out a new mall presence toward that younger demographic. And so we're seeing nice performance with that new mall lean as well. And then I would just double back and say, from our standpoint, we've always prided ourselves on being high free cash flow generators. So Peter will handle the sort of specific numbers there, but we have been CapEx light and strong free cash flow driving. You'll see those numbers from us over time. And I concur with Peter's -- and you saw it in my remarks that we're pretty excited about the -- not only the synergies on the cost side to sort of deliver those, that's super important. But also, we believe the -- and would reinforce that the commercial synergies in the transaction are exciting. The capacity and capabilities that we bring to the DXL brand and vice versa, I won't go through that all again, but we're pretty excited about that. So I'll leave it there.

Q: Okay. Great. Last one, actually kind of building on that point. In terms of managing kind of 2 really separate businesses that are in the same servicing similar customer sets, DXL has been very kind of hesitant to lead with promotion and fairly disciplined now for the -- certainly since Harvey's tenure. Just want to understand in terms of thinking about how the FB portion of the organization versus DXL, I'm sure this has been something discussed, but in thinking about how to kind of to market the brands and how to position from a price point and promotion, how do you create synergy among those 2 organizations?

A: 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.

Q: Okay. Yes. And I'd just add to it. So first, we take the job on the cost synergies quite seriously, and that wouldn't be surprising. But we -- and as Peter said, we're going to get at it promptly. And it's a whole -- and we -- the 2 organizations have spent a lot of time working through where we think those synergies are and details and organizational details but also contract details. And so it's in the same places that Peter is talking about the sourcing organization, shared contracts over time, the organizational piece, we don't -- sort of the streamlining of leadership, of course, is obvious, but then also inside the organization, just trying to be as lean as we can be. And then also outbound shipping, inbound logistics, all of those in addition to the core product costs, we're going to -- and then there's, of course, the duplication of audit and tax and all of those sort of normal things. And so we'll work that piece. In terms of the organizations together, if you think about it, we're still in the planning stages, but we have a great brand in KingSize, a Big + Tall brand. And DXL, of course, is a very powerful brand in Big + Tall. And we've sort of known and respected one another's brands for years. They're bigger than our KingSize brand by a decent click. But we are a little bit more value moderate with KingSize and they're a little bit more moderate. So we think there's a positioning there where we can envision having a universal cart with our 2 men's brands, KingSize and DXL, sort of feeding cross-channel traffic to one another in a direct-to-consumer sense. And we have all sorts of things to think through. As you know, DXL was moving towards private label, increasing private label penetration. That's where we're strong. They're strong on the national brand side. So we think there may be some really nice crossover potential that we have to work through from making -- the 2 brands will absolutely have a place together. And we've always found 1 plus 1 equaling 2.5 sort of thing and making them stronger. But we'll try to be as lean and efficient in all of that and be very -- even when we're thinking about capital and utilization of capital, be very disciplined capital allocators as we sort of work these things together.

Q: Okay. Got it. Our next question comes from the line of Michael Baker of D.A. Davidson. Okay. Congratulations on the transaction. Can I follow up on Jeremy's question about the capital structure? Again, forgive my ignorance, maybe it's in here somewhere. But -- so just to be clear, we're not issuing any more stock here. It's still the same, roughly, what, 58 million shares of stock outstanding. Is that right? So that same stock outstanding number that we're using?

A: Yes. No, Mike. So it is going to be a stock issuance deal. We will be issuing stock to combine the 2 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.

Q: So I guess then you got to -- do we know how much stock is going to be issued or what the -- how much we're...

A: 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.

Q: Understood. Okay. I got you. Okay. And then for -- again, on the capital structure, is there -- so the $172 million term loan, that's -- FullBeauty doesn't come with any debt? Because I know in the past, FullBeauty had existing debt, but has that been paid down? Or is there FullBeauty existing debt that we need to consider?

A: Right. So that $172 million that Jim was referring to, that is FullBeauty debt that is being assumed by DXL in the transaction. As Jim was mentioning in his prepared remarks, the owners at FullBeauty have equitized a significant chunk of that. There's a $92 million paydown, which brings us down to the $172 million. And the extension -- the term debt is being extended out to August of '29.

Q: Okay. Okay. That helps clear it up. Now can I ask -- so based on the trailing 12-month numbers that you provided of $1.2 billion and $45 million in EBITDA. And we know DXLG's last 12 months numbers of about $445 million and I'm missing my numbers, but about $6 million in trailing 12-month EBITDA. So we can back into what FullBeauty would be doing over the last 12 months, which, correct me if I'm wrong, but that seems to be down a little bit from the last -- I think FullBeauty, the last time we have numbers from you was from your ICR presentation for fiscal year 2023. So I guess -- again, following up on a previous question, can -- Jim, can you talk about the types of trends you've been seeing in terms of top line growth or declines in EBITDA profitability over the last couple of years?

A: Yes. So -- and that will all be part of the sort of statements, but just to give you a kind of quick frame. Peter took you through the comps of DXL of late. We've been about the same level of comp as DXL in the last period of time. So we have continued to work on our -- in the environment where the moderate value customer has been squeezed. We've continued to work hard on our cost structure, and we've continued to work hard on making sure our marketing expenses are right. And so that's all evident in the EBITDA flow-through that we have on our revenue. And we think that, again, both of these businesses are in much better versus our stand-alone plans, if you will. We -- the reason we're coming together is we see incredible ability to find and deliver on these synergies, these cost synergies as well as the commercial synergies we've been referencing. And that makes the business work really well. And so we think it's a great deal for the DXL shareholder as it is for our own organization to combine and combine forces and get stronger.