DXL Q2 2026 Earnings: Tariff Refund Lifts Profit Despite Lower Sales

DXL (NASDAQ: DXLG) reported fiscal Q2 2026 sales of $111.6 million for the quarter ended August 1, down 3.4% from $115.5 million, while diluted EPS improved to $0.04 from $0.00. Net income reached $2.0 million versus a $0.3 million loss, but the improvement depended heavily on a $4.6 million tariff refund that also lifted gross margin and adjusted EBITDA.

Core Earnings Results

Comparable sales declined 3.5% as lower traffic continued to pressure both stores and digital channels. The monthly trend improved during the quarter, however, with comparable sales down 5.7% in May, 2.8% in June, and 1.9% in July as Father’s Day and other promotions partly offset weak traffic.

Profitability improved on a reported basis. Gross margin expanded by 270 basis points, and lower incentive-based compensation also helped earnings, although transaction-related expenses increased and sales remained below the prior-year level.

Adjusted EPS and adjusted EBITDA are non-GAAP measures. Adjusted EPS assumes a normalized 26% tax rate and adds back transaction-related costs, while adjusted EBITDA also includes the quarter’s tariff refund.

Business and Channel Performance

Store comparable sales fell 4.3%, compared with a 1.6% decline in the direct business. Traffic was the main source of weakness, particularly in stores, while improved conversion and dollars per transaction provided a partial offset.

Direct sales were $30.9 million, down from $31.8 million, but increased to 27.8% of total sales from 27.5%. DXL attributed the comparatively better direct-channel performance to paid search, paid social, and program marketing, along with clearance and promotional sales on its website.

The company is also expanding tools intended to improve customer conversion and retention. FiTMAP was available in 188 stores and had been used by more than 150,000 customers. DXL said users of the fit platform have shown higher conversion, average order values, and purchase frequency, as well as lower return rates, though it did not provide the size of those improvements.

Profitability, Cash Flow, and the Balance Sheet

The gross margin increase reflected a 340-basis-point improvement in merchandise margin, partly offset by 70 basis points of occupancy deleverage. The tariff refund contributed 410 basis points, while higher fuel-related shipping costs and additional clearance markdowns worked in the opposite direction.

SG&A declined by $1.8 million to $45.7 million and edged down to 41.0% of sales from 41.1%. Lower incentive compensation, including expense reversals for forfeited awards, and favorable healthcare costs drove the dollar reduction. Transaction-related costs, primarily connected with the proposed FullBeauty merger, increased to $1.8 million from $0.1 million.

Cash-flow figures were provided for the first six months rather than the quarter alone. Six-month operating cash flow was negative $2.8 million, compared with negative $2.1 million a year earlier. Free cash flow improved to negative $8.7 million from negative $14.2 million because capital expenditures for store development declined by $6.2 million.

Cash and investments totaled $20.1 million at August 1, 2026, down from $33.5 million a year earlier, mainly due to approximately $13.9 million of capital spending over the preceding 12 months. DXL had no outstanding debt and reported $61.7 million of credit-facility availability. Inventory declined to $75.5 million from $78.9 million, while clearance inventory fell to 9.8% of total inventory from 10.2%.

Tariff Refund Drove the Reported Earnings Improvement

The $4.6 million tariff refund was larger than DXL’s $2.0 million reported net income on a pre-tax basis and was included in adjusted EBITDA. This makes it important to separate the refund from the quarter’s underlying operating trend.

Mechanically excluding the 410-basis-point refund benefit, gross margin would have been approximately 43.8%, compared with 45.2% a year earlier. Similarly, subtracting the refund from reported adjusted EBITDA produces approximately $3.1 million, below the prior-year figure of $4.7 million. These are simple calculations rather than company-reported adjusted measures, but they show that weaker sales, shipping costs, markdowns, and occupancy deleverage remained meaningful pressures beneath the reported improvement.

DXL Board Turns Against the FullBeauty Merger

DXL’s board determined that the proposed FullBeauty merger and related share issuance were no longer advisable or in the best interests of DXL stockholders. The board urged stockholders to vote against the issuance proposal, but the company did not state that the merger had been terminated.

The board cited FullBeauty’s declining operating results and cash flow, increased indebtedness, potential negative equity value, and the dilution DXL stockholders would face under the current terms. The process also had a direct earnings effect, with Q2 transaction-related expenses rising by $1.7 million year over year.

Fiscal 2026 Guidance and Cost Estimates

DXL lowered and narrowed its fiscal 2026 capital expenditure range to $8.0 million-$10.0 million, net of tenant incentives, from $9.0 million-$12.0 million. The company also provided estimates for marketing spending and the potential gross-margin effect of currently enacted tariffs.

The tariff estimate assumes currently enacted rates remain in place throughout fiscal 2026 and no additional tariffs are imposed.

Risks Investors Need to Watch

• Persistent traffic weakness: Comparable sales remained negative in every month of the quarter, and lower traffic continued to affect both stores and digital operations.
• Reported earnings relied on a tariff refund: The $4.6 million refund materially changed gross margin, net income, and adjusted EBITDA, while DXL still expects currently enacted tariffs to create approximately 100 basis points of fiscal 2026 gross-margin pressure, excluding refunds.
• Promotional and shipping costs: Clearance activity supported digital demand but increased markdown pressure, while fuel surcharges raised shipping costs.
• Negative cash generation: First-half operating cash flow and free cash flow remained negative, while cash and investments declined year over year despite the absence of debt.
• Changing customer demand: DXL believes GLP-1 and similar weight-loss medications are contributing to changing size requirements and temporary pauses in apparel purchases for some customers.

Summary

DXL’s fiscal Q2 2026 results combined improving monthly comparable-sales trends with continued traffic weakness and lower total sales. Reported profitability increased, but the tariff refund accounted for much of the improvement, making underlying margins, traffic, and cash generation central indicators for the remainder of the year. Investors also need to follow the FullBeauty merger process, the impact of tariffs, and DXL’s response to changing customer sizing needs.