Destination XL Q2 Sales Down 9 Percent

Destination XL Group(NASDAQ:DXLG) reported second quarter fiscal 2025 results on August 14, 2025, with comparable sales down 9.2% year over year and net sales of $115.5 million. Management highlighted a strategic shift toward private brands, cost discipline amid sector headwinds, and proactive tariff mitigation. The following insights detail the most significant developments and risks for long-term investors.

Private brand strategy boosts DXLG margin potential

Private brand penetration reached 56.5% of sales, up from under 50% several years ago, and management targets more than 60% in fiscal 2026 and above 65% in 2027. Private brands deliver higher initial markup (IMU) rates than national brands, supporting margin expansion even as promotions increase.

"Over the course of the next two years, we will be strategically shifting our assortment to prioritize private brands. To support this focus, we are reducing investment in underperforming national brands, which will create a realignment to drive higher profitability and enable us to leverage strategic promotions to fuel customer acquisition and sales growth. Our private brand portfolio is designed to combine a balance between trend-right fashion and core essentials while offering the agility to respond to quickly emerging trends, capitalize on overperforming categories, and address underperforming businesses. Our intent is to grow private brand sales penetration from today's 56.5% to greater than 60% in 2026, and greater than 65% in 2027, depending on customer response and brand resonance."
— Harvey Kanter, President and CEO

This accelerated shift to private brands positions the company to structurally improve merchandise margins and gain greater control over inventory and promotional levers, enhancing long-term profitability even in a challenging demand environment.

Cost discipline helps DXLG weather sector headwinds

Despite a 9.2% year-over-year decline in comparable sales and ongoing macroeconomic pressures, the company reduced selling, general, and administrative (SG&A) expenses by $6.1 million and kept inventory nearly flat at $78.9 million. Inventory is down 28.5% compared to 2019 pre-pandemic levels, reflecting tight operational control.

"Our operating expenses are down year over year. We continue to rationalize our corporate overhead to mitigate our sales challenges. Corporate headcount is down 15% since the pandemic. And our inventory balance at the end of Q2 was $78.9 million, as compared to $78.6 million last year, for a modest increase of $300,000. And in comparison, our inventory was down 28.5% as compared to 2019."
— Harvey Kanter, President and CEO

Effective cost and inventory management preserves cash flow and positions the company to capitalize on a sector recovery, while reducing the risk of margin-dilutive markdowns and promotional overhangs.

Tariff mitigation efforts support DXLG margin stability

Management estimates that U.S. apparel tariffs could increase fiscal 2025 inventory costs by just under $4 million, net of vendor concessions, with only a 20 basis point margin impact in the second quarter but greater risk in the second half. The company is pursuing retail price increases, supply chain cost savings, and material adjustments to qualify for tariff exemptions.

"At the current time, we have estimated that if currently enacted tariffs remain in effect through year-end, they could increase our inventory cost by just under $4 million in fiscal year 2025. This estimate is net of substantial cost concessions from our private brand vendors. We've also planned to take retail price increases over the remainder of fiscal 2025 and into 2026 to offset some of the tariff risk. We are also aggressively pursuing cost-saving measures across the supply chain. One such opportunity involves leveraging tariff exemptions for garments that contain a minimum of 20% American-made materials. DXL has explored this option for its Supima dress shirt program, which currently includes a 19.12% American-made fiber. Efforts are underway to modify the fabric composition to meet the exemption threshold, although the feasibility of this approach remains under evaluation."
— Harvey Kanter, President and CEO

Proactive sourcing and pricing strategies help the company manage cost volatility and support a further shift to higher-margin private brands, mitigating the impact of an unpredictable tariff environment on long-term margins.

Looking Ahead

Management did not provide quantitative sales or earnings guidance for the remainder of 2025, citing ongoing macroeconomic uncertainty and dynamic apparel demand. The company expects private brands to exceed 60% of sales in fiscal 2026 and surpass 65% in fiscal 2027, depending on customer response. All new store development is paused, and maintenance capital expenditures are typically $5 million to $10 million per year.

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This article was created using Large Language Models (LLMs) based on The Motley Fool's insights and investing approach. It has been reviewed by our AI quality control systems. Since LLMs cannot (currently) own stocks, it has no positions in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.