Margins And Traffic Will Limit Sales But Ecommerce Will Rise

Key Takeaways

• Reliance on brick-and-mortar stores and exposure to discount-driven competitors threatens margin stability and limits the effectiveness of digital and private label initiatives.
  
• Evolving consumer health trends and increased adoption of weight-loss solutions could shrink the core customer base, challenging long-term growth prospects.
  
• Ongoing demand and traffic challenges, reliance on physical stores, and pressured margins threaten long-term profitability, with digital efforts lagging behind rising online competition.

Catalysts

Operates as a specialty retailer of big and tall men’s clothing and footwear in the United States.

• While Destination XL Group is continuing to benefit from the expansion of its addressable market due to rising obesity rates and the growing preference for casual, comfort-driven apparel, persistent macroeconomic pressures are causing the company's core customers to delay or reduce discretionary spending on big and tall apparel, which may limit revenue recovery in the near term.
  
• Although the ongoing enhancement of DXL's e-commerce platform, including AI-driven personalization and expanded digital initiatives, is poised to deepen customer engagement and drive higher online conversion rates, the company remains heavily reliant on brick-and-mortar stores, exposing it to declining physical traffic and structurally limiting margin expansion as fixed occupancy costs remain elevated during sales downturns.
  
• While shifting the merchandise mix towards higher margin private label brands has helped offset some promotional markdown pressure, persistent competitive pressures from fast fashion and value-oriented mass retailers threaten DXL's ability to maintain price realization and could erode gross margin over time.
  
• Despite investments in innovative sizing solutions like FitNap and an expanded omnichannel strategy, growing competition from both mass-market inclusive sizing lines and digital-first specialty brands may compress DXL's market share gains, limiting long-term revenue growth and threatening the sustainability of earnings improvement efforts.
  
• Even as longer-term demographic trends drive inclusivity and a larger potential customer base for big and tall apparel, increasing health consciousness and the adoption of weight-loss drugs such as GLP-1s could gradually reduce the core plus-size male population, potentially shrinking DXL's total addressable market and impacting long-term revenue and earnings power.

Destination XL Group Future Earnings and Revenue Growth

Assumptions

• This narrative explores a more pessimistic perspective on Destination XL Group compared to the consensus, based on a Fair Value that aligns with the bearish cohort of analysts.
• The bearish analysts are assuming Destination XL Group's revenue will grow by 3.8% annually over the next 3 years.
• The bearish analysts assume that profit margins will increase from -0.6% today to 0.7% in 3 years time.
• The bearish analysts expect earnings to reach $3.7 million (and earnings per share of $0.08) by about July 2028, up from $-2.7 million today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the price target of the more bearish analyst cohort, the company would need to trade at a PE ratio of 20.7x on those 2028 earnings, up from -22.7x today. This future PE is greater than the current PE for the US Specialty Retail industry at 17.4x.
• Analysts expect the number of shares outstanding to decline by 7.0% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 11.6%, as per the Simply Wall St company report.

Destination XL Group Future Earnings Per Share Growth

Risks

• Persistent declines in comparable sales and store traffic, with first quarter comp sales down 9.4% and continued negative trends into May, suggest ongoing demand challenges that could negatively impact both revenue and earnings growth over the longer term.
  
• Heavy reliance on brick-and-mortar stores is intensifying leverage concerns, as lower in-store traffic and higher fixed occupancy costs from new stores and lease extensions cause gross margin erosion and increased SG&A as a percentage of sales, hurting net margins.
  
• Increased markdowns and promotional activity aimed at driving traffic and value perception are pressuring merchandise margins and could diminish brand pricing power over time, leading to sustained weakness in gross margin and earnings quality.
  
• Expansion into new store markets is encountering low brand awareness and underperforming traffic, raising the risk of underutilized assets and potential impairment, which would constrain cash flow and compress return on invested capital.
  
• While digital and loyalty initiatives are underway, the company's slower transition from store-based to robust omni-channel and e-commerce performance-especially against rising online competition-poses a risk to achieving necessary digital sales growth to offset physical store headwinds and support future revenue expansion.

Valuation

• The assumed bearish price target for Destination XL Group is $1.3, which represents the lowest price target estimate amongst analysts. This valuation is based on what can be assumed as the expectations of Destination XL Group's future earnings growth, profit margins and other risk factors from analysts on the more bearish end of the spectrum.
• However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $2.0, and the most bearish reporting a price target of just $1.3.
• In order for you to agree with the bearish analysts, you'd need to believe that by 2028, revenues will be $511.2 million, earnings will come to $3.7 million, and it would be trading on a PE ratio of 20.7x, assuming you use a discount rate of 11.6%.
• Given the current share price of $1.13, the bearish analyst price target of $1.3 is 13.1% higher.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.