Destination XL’s Strategic Merger and Earnings Insights

Destination XL ((DXLG)) has held its Q3 earnings call. Read on for the main highlights of the call.

The recent earnings call for Destination XL (DXL) was marked by a mix of optimism and challenges. The announcement of a strategic merger with FullBeauty was a highlight, promising significant synergies and enhanced financial strength. However, the company faced hurdles in the quarter, with declines in sales, gross margin, and EBITDA. The merger is seen as a positive step towards addressing these challenges and capitalizing on growth opportunities.

Merger Announcement with FullBeauty

DXL and FullBeauty have announced a merger agreement, creating a scaled category-defining retailer for inclusive apparel. This merger is anticipated to generate $25 million in run rate annual cost synergies by 2027, positioning the combined entity as a formidable player in the market.

Combined Company Financial Strength

The merger promises to create a larger, stronger, and more flexible company with approximately $1.2 billion in combined net sales and an expected adjusted EBITDA of $70 million, including synergies. This financial strength is expected to enhance the company’s competitive edge.

Focus on Innovation and Customer Experience

The merger will leverage data science, digital scale, and proprietary fit technology to deliver high-quality products and an enhanced customer experience. This focus on innovation is aimed at driving growth and customer satisfaction.

Strong Free Cash Flow and Balance Sheet

FullBeauty is recognized as a high cash flow generator, while DXL maintains a robust balance sheet with no outstanding debt and $27 million in cash and short-term investments. This financial stability is crucial for future growth and investment.

Decrease in Net Sales

DXL reported net sales of $101.9 million for the third quarter, a decrease from $107.5 million in the same quarter last year, with a comparable sales decline of 7.4%. This decline highlights the challenges faced in the current market environment.

Decline in Gross Margin

The gross margin rate fell to 42.7% from 45.1% in the prior year, primarily due to deleverage on occupancy costs and promotional offers. This decrease underscores the need for strategic adjustments to improve profitability.

EBITDA Loss

DXL reported an EBITDA loss of $2 million for the quarter, compared to earnings of $1 million in the same period last year. This loss reflects the financial pressures the company is currently facing.

Tariff Impact

Tariffs impacted third quarter margins by approximately 60 basis points, with an expected impact of $2 million on fiscal year 2025 margins. This external factor adds to the financial challenges for DXL.

Forward-Looking Guidance

In the earnings call, significant guidance was provided regarding the merger with FullBeauty. The combined entity is expected to generate approximately $1.2 billion in net sales and adjusted EBITDA of around $70 million, considering $25 million in expected annual run-rate cost synergies. The merger will result in a 100% stock-for-stock transaction, with DXL shareholders owning 45% and FullBeauty shareholders owning 55% of the combined company. The transaction aims to enhance operational efficiencies and expand market presence, specifically in the inclusive apparel sector, ultimately providing long-term value for shareholders.

In summary, the earnings call for Destination XL highlighted both the challenges and opportunities facing the company. While declines in sales, gross margin, and EBITDA were concerning, the strategic merger with FullBeauty offers a promising path forward. The merger is expected to enhance financial strength, drive innovation, and improve customer experience, positioning the company for future growth and success.