Prepared remarks
Good day, everyone, and welcome to Destination XL Group Inc. Conference Call to discuss our First Quarter Fiscal 26 Financial Results. 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, Michael, and good morning, everyone. We appreciate you joining us on Destination XL Group's First Quarter Fiscal 26 Earnings Call. Joining me today are Harvey S. Kanter, our Chief Executive Officer, and Peter Stratton, our Chief Financial 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 reconciliations of those measures. Today's discussion will also include forward-looking statements regarding the company's strategic initiatives, potential impact of current and other expectations for fiscal 26. 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 CEO, Harvey S. Kanter. Harvey?
Thank you, Shelly, and good morning, everyone. As always, we appreciate your time and interest in DXL. Before I get into our quarterly results, let me start by reiterating our confidence that DXL is well positioned for growth and value creation. DXL has a solid foundation built on the strength of our brand, loyal brand relationships with our customers, and financial position. The changes we are making to our assortment, promotional strategy, and customer experience to better align with today's value-conscious big and tall consumer are beginning to bear fruit. Our inventory levels are clean and stable. Inventory turnover is strong, and clearance levels are in line with our 10% targets. Additionally, we just delivered the strongest quarterly comparable sales result in the past three years at negative 3.8%. We are clear-eyed with respect to the headwinds in our market and continue to take decisive action to navigate these challenges. We are aligning our cost structure and our revenue structure by reviewing corporate overhead and our store portfolio. We are leaving no stone unturned and working with urgency to finalize and implement these cost-saving actions over the coming months. Importantly, DXL has a fortress balance sheet with over $16 million of cash on hand, no debt, and excess availability of $70 million, giving us flexibility as we continue strengthening our business for the future. We are pleased with the traction we are already driving through our growth initiatives, which we will talk about shortly, and believe we have a solid plan in place to return DXL to profitability. And with that, let me turn to our first quarter results. I am pleased to report that our first quarter performance reflected improvement as we began fiscal 26, which was due to the company-specific initiatives we have been implementing. Comparable sales were down 1.3% in February, down 2.7% in March, and down 6.8% in April. While the shift in the eastern calendar had some effect on the comparison between March and April, we also believe softer April demand reflected broader macroeconomic pressure on consumer confidence and discretionary spending, including the current global conflict, higher fuel costs, and inflation. We also believe the growing impact of GLP-1 medications is contributing to structural change in demand within the big and tall category. For the quarter, comparable sales were down 3.8%, representing our best quarterly comp performance since the second quarter of 2023. Although we still have meaningful work ahead, we are encouraged by the improvement in the quarter and believe it may indicate that our turnaround efforts are beginning to gain traction. For the quarter, store comparable sales were down 4.6%, and our direct comparable sales were down 1.6%. Store traffic remains our most significant challenge, although we continue to be encouraged by the relative stability in conversion and dollars per transaction, which has helped offset a portion of that pressure. In direct, we saw improvement in conversion driven by enhancements to the app and the overall site experience, and we also benefitted from solid clearance performance primarily through the direct channel. More broadly, the direct business generated demand through paid search, paid social, and programmatic marketing while ongoing improvements in the app's performance, site experience, and speed supported better conversion. We continue to carefully evaluate our marketing allocation to strike the right balance between attracting new customers, which has improved since the fourth quarter, and reengaging repeat and lapsed customers where spending remains more cautious. Encouragingly, when new customers discover DXL, they continue to respond well to our assortment, proprietary fit, and value proposition. At the same time, many existing customers appeared to be shopping more on a need-than-discretionary basis. Based on customer surveys and related insight, that behavior appears to reflect a combination of weight-loss journeys, shifting spending priorities, and delayed purchasing decisions. Importantly, we believe the underlying affinity for the DXL experience remains very strong. Our merchandising efforts remain focused on sharpening value, strengthening private brands, and improving inventory flow to better align with current demand. Private brands accounted for 65.9% of first quarter sales, compared with 65% in the prior period. We are also leaning further into private brands, particularly Harbor Bay, as an opening price and value driver while continuing to improve storytelling around quality, fit, and value across every channel. Our creative and messaging have become more focused on essentials, cost per wear, and our trusted fit, reinforcing our position with a more value-conscious customer. We are also rebalancing the promotional calendar towards higher-margin and higher-inventory-risk categories so that promotions can help drive demand while protecting profitability and reducing future inventory exposure. Operationally, the team is actively managing supply chain and extended transit times that delayed certain key spring receipts. In response, our sourcing partners are working to pull forward production where possible. Vendors are booking containers earlier, and our flow and allocation strategies are being adjusted to better reflect current sales trends. At the same time, our Nordstrom marketplace business continues to build momentum, with fourth quarter demand up more than 20% versus last year, supported by stronger storytelling, improved product visibility, expanded placement in the high-traffic categories, and curated events such as the upcoming Father's Day gift guide. Overall, our merchandising organization is responding proactively to softer recent sales with a tighter, more focused approach to improve conversion, grow margin, and improve inventory productivity. A second topic that remains top of mind is tariffs. In April, U.S. Customs and Border Protection launched an online portal through which companies may submit refund requests. During the first quarter, we submitted a claim seeking a refund of approximately $4 million related to tariffs previously paid. The timing and amount of any recovery remains uncertain, and we would recognize any recovery when considered realizable. Given the current volatility surrounding trade discussions, it remains difficult to determine the full impact tariffs may have on our fiscal 26 results. However, if currently enacted rates remain in effect through fiscal 26, and no additional tariffs are imposed, we estimate that the impact of tariffs on gross margin, exclusive of any refunds realized, will be approximately 100 basis points, which is an improvement from our previous estimate of 150 basis points. As we look forward, we remain focused on a small number of strategic priorities that we believe can meaningfully strengthen the business over time. Three of the most important are FitMap, our application of AI, and our work to better understand GLP-1-related customer behavior. What connects these priorities is that each reflects a meaningful shift in how our customer shops, how he discovers product, and how we need to evolve to serve him more effectively. These are not side initiatives. They are our strategic growth levers that we believe can improve customer engagement, sharpen our competitive position, and create more durable long-term value. First, FitMap. FitMap is a strong example of that strategy in action. We have exclusive rights to our FitMap technology platform until 2030. FitMap remains one of the company's most important strategic long-term growth drivers. During the quarter, we completed a rollout of FitMap across all 188 stores to enhance the customer journey. Since launching, more than 100,000 customers have engaged with the platform and early results continue to reinforce its value. Customers who use FitMap have demonstrated stronger conversion, higher average order values, greater purchase frequency, and lower return rates, underscoring the personalized fit element it can play in driving both customer satisfaction and profitable growth. Our focus now is on continuing to build adoption of FitMap, extending the value of that fit more seamlessly across all channels and over time. The second pillar is AI. We are sharpening our focus on artificial intelligence as consumer shopping behavior continues to evolve. As AI-powered search and discovery tools become increasingly important in e-commerce, we are investing to ensure that our products and content are more visible, relevant, and accessible across these emerging environments, including conversational and agent-driven experiences that differ meaningfully from traditional keyword-based search. During the quarter, we launched new AI initiatives to improve product quality, enrich item-level attributes, and strengthen our ability to connect product pricing and inventory information across AI-enabled platforms. These efforts are designed to improve discoverability, support future commerce applications, and position DXL to compete effectively as a digital shopping partner as the journey becomes more conversational and increasingly agent-assisted. The third pillar is GLP-1, an area where we are working to be thoughtful, data-driven, and proactive. We continue to deepen our understanding of how GLP-1 usage may be influencing consumer behavior and category demand. Our in-house research indicates that a meaningful portion of our customer base is currently using GLP-1 medications, contributing to more dynamic sizing needs over time. We are responding by broadening our select assortments in smaller sizes and using customer insights to inform future merchandising, marketing, and reengagement strategies. Importantly, we view this as both a near-term challenge and, most importantly, a long-term opportunity. While some customers may pause apparel purchases during periods of rapid size change, many of our guests have indicated an intention to return once they reach a more stable size profile. By staying close to these evolving customer needs, we believe we can strengthen retention, reactivation, and lifetime value over time. Taken together, these three priorities reflect our broader effort and focus to evolve DXL in step with the way our customer is changing and to position the business for continued relevance and resilience. And with that, I will turn the call over to Peter for a review of our financial results. Peter?
Thank you, Harvey, and good morning, everyone. I will begin with additional perspective on our first quarter financial performance. Net sales for the first quarter were $103.0 million compared with $106.0 million in the first quarter of last year. Comparable sales for the quarter were down 3.8%; store comps down 4.6% and direct comps down 1.6%. The decline in comparable sales was driven primarily by continued pressure on traffic, particularly in stores, partially offset by improvements in conversion and dollars per transaction. The direct business improved during the quarter supported by demand generated through paid search, paid social, and programmatic marketing, as well as enhancements to the website and app that contributed to improved conversion. For the first quarter of fiscal 26, gross margin inclusive of occupancy costs was 44.3%, compared with 45.1% in the first quarter of fiscal 25. Gross margin declined 80 basis points driven by a 100-basis-point decrease in merchandise margin, partially offset by a 20-basis-point decrease in occupancy costs. The decline in merchandise margin was primarily due to the impact of tariffs, higher shipping costs resulting from fuel surcharges, and increased markdown activity associated with clearance sales. These pressures were partially offset by a shift in product mix toward private-brand merchandise and favorable loyalty costs. Occupancy improved primarily due to a landlord payment associated with an early lease termination, partially offset by higher rents resulting from lease extensions. Selling, general, and administrative expenses were 45.0% of sales compared with 44.9% in the first quarter of fiscal 25. On a dollar basis, SG&A decreased by $900 thousand versus the prior year primarily due to lower supporting payroll costs and incentive-based compensation, partially offset by higher marketing expense. Marketing costs were 6.5% of sales in the quarter compared with 6.1% last year. And for fiscal 26, we currently expect marketing costs to be approximately 5.8% of sales. Net loss for the quarter was $5.9 million, or $0.11 per diluted share, compared with a net loss of $1.9 million, or $0.04 per diluted share in the first quarter of fiscal 25. On a non-GAAP basis, adjusted net loss was $0.06 per diluted share compared with an adjusted net loss of $0.04 per diluted share last year. Adjusted EBITDA for the first quarter was a loss of $700 thousand compared with positive $200 thousand in the prior year period. We also incurred $1.2 million of merger-related transaction costs in the quarter, primarily related to professional service fees associated with the pending merger. I will close with a few comments on liquidity and capital allocation. As of May 2, 2026, we had cash and investments of $200 thousand compared with $29.1 million a year ago, with no outstanding debt in either period. Availability under our credit facility was $70 million compared with $77.1 million last year, and continues to be driven primarily by available inventory. Inventory at quarter end was $81.4 million, down $4.1 million from a year ago, and we continue to take proactive steps to manage inventory and adjust receipt plans in light of the ongoing macroeconomic factors affecting consumer spending. Free cash flow for the first three months was a use of $12.7 million compared with a use of $18.8 million in the prior year period. For fiscal 26, we continue to expect capital expenditures to range from $8 million to $12 million net of tenant incentives, with spending focused on select store projects, maintenance of our existing fleet and distribution center, and technology-related initiatives that support our business priorities. With that, I will turn the call back to Harvey for some closing remarks. Harvey?
Thank you, Peter. Before we open the floor to Q&A, there are a few additional topics we would like to cover. First, I would like to address CEO succession planning. On a personal note, it is difficult to believe that I have now served as CEO of DXL for more than seven years. What began as a three-year commitment evolved because of the significant opportunity I believe exists in serving the big and tall consumer. I have been constantly inspired by the passion our team and leadership have for that mission, and the strong culture that has been built across DXL. While the path over the years has included both progress and volatility, our belief in the underserved addressable market and in DXL's long-term opportunity remains unchanged. It still drives me today and will continue to do so through the very end of my journey here. In terms of timing, as previously disclosed in our 8-K filing last month, my employment contract is expiring, and I informed the board of my intention to retire effective 08/11/2026. The board and I have been discussing my retirement and succession planning for a while. This is something our board takes very seriously, and the board will ensure we have the right leadership in place to lead DXL beyond August 11. In the meantime, I am committed to leading the company as we continue to make a meaningful difference in our customers' lives, return the business to growth, and create long-term shareholder value. Next, turning to our pending merger with FullBeauty. This morning, we announced that as part of ongoing fiduciary duties, our board has conducted a comprehensive reevaluation of the merger and believes that the existing terms of the merger agreement are not in the best interest of DXL stockholders. We are engaging with FullBeauty in very constructive discussions to determine the best path forward. With that said, we are not commenting further on the merger today. The purpose of today's call is to discuss our operational and financial performance for the first quarter. We would appreciate you keeping your questions focused on these topics. And finally, I will close by saying that our team remains one of DXL's greatest assets. I continue to be energized by the commitment, professionalism, and passion of our associates across the organization as we continue to work to serve the underserved big and tall guests. None of our progress would be possible without the dedication of our teams in our stores, in our distribution center, corporate office, and guest engagement center. Their efforts together with the culture we have built continue to move this business forward. I want to thank every member of the DXL team for their hard work and commitment to serving our customer and strengthening DXL's position as the place where men can find the fit, style, and confidence they are looking for and wear what they want. And with that, Operator, we will now take questions.
Questions and answers
Thank you. If you would like to ask a question, please press 1-1. If your question has been answered and you would like to remove yourself from the queue, press 1-1 again. Our first question comes from Will Forsberg with Craig-Hallum. Your line is open.
Hey, thanks for taking my questions. I just wanted to start with comp trends. I am curious if you can give us a sense for how comps have progressed to your quarter-to-date, what you have seen in terms of traffic versus basket, and then how you are thinking about an inflection in comps in the back half of the year?
Sure. I will take that one. As we mentioned, we were really happy with our comp in the first quarter. Since the end of the first quarter, we have just closed May, and comps were roughly in the -5% to -6% range. I think what we started to see in April is that our customer is sensitive to some of the issues that are going on more globally, most notably gasoline prices. We know that our customer has the resilience and we have the flexibility to be able to work through short-term bumps like that. Even at -5% to -6%, that is still an improvement from where we had been the last couple of years, so we are happy with that. We do expect that trends will continue in the second half of the year, notwithstanding other macro events in the world. But we are optimistic for the second half of the year.
All right. Thank you. And then just wondering if you can provide any more color on the puts and takes of the decline in merchandise margin. I guess, how much of that 100 basis points came from tariffs and fuel surcharges versus promotion? And then how do you expect that to play out for the balance of the year?
Yeah, so tariffs we had mentioned that tariffs are likely going to account for about 100 basis points of exposure this year versus last year. We have submitted for refunds through the portal. The amount that we have submitted for is approximately $4 million, so that will offset some of the exposure that we are going to see this year due to tariffs. Overall, I think promotions have been relatively consistent with where we expected. We have some events planned for Father's Day where we are very excited about what we think we are going to be able to do in terms of generating demand as we head into the summer. But overall, we are relatively optimistic that we are going to be able to hold our margins and are encouraged about the developments on tariffs insofar as we have seen them in the first half of the year.
Okay, that is helpful. And then just last one for me. It seems like FitMap is gaining some strong traction. I think engagement is up another 60-plus percent sequentially. I am just curious if you are able to kind of give us a sense of the difference in order values and conversion rates from those using FitMap versus the rest of the customer base?
I cannot tell you the exact number, but I would say we are about 100 basis points, maybe higher, in conversion. Customers are definitely seeing greater conversion across the 188 stores than the 105 that do not have FitMap. The basket is up double digits; without telling you the exact number, I would say it is meaningfully up in double digits. That is not like 80%–90%, but it is not just 10%; it is meaningfully up. Across literally every metric that we can measure — frequency, AUR, AOV (average order value), customer lifetime value, repeat rate — the customer that is getting size via FitMap is materially higher in performance than the customer not getting it. What we interestingly measure is they are coming back and shopping with us more if they get FitMap, such that the percentage of customers that we want to have scanned is literally one of our greatest focuses when a customer comes in the store. They now have the ability to shop at home on the app in terms of using FitMap, and we have now mapped nearly 30 different brands. Once they are actually mapped and scanned, they can figure out which size they are in across over 30 brands, and the result of that is our return rate is actually down for online purchases made via the app once they have been scanned. So ultimately, why we are so optimistic about what this represents is basically what I have just walked you through. Appreciate it. Thank you.
Well, with that, I want to thank you all for participating and listening to our earlier comments. We appreciate your support. We look forward to getting back engaged with you at the end of Q2. You have a great day, and a happy, healthy, and warm summer. Thank you for your participation. You may now disconnect.