Destination XL Group, Inc. — Form 10-Q summary
Reporting period: Fiscal third quarter ended October 30, 2021, and first nine months of fiscal 2021. The filing’s stated period differs from the request metadata (“2020 Q3”). Fiscal 2020 comparisons were affected by COVID-19 store closures and are not fully comparable; management also compares results with fiscal 2019.
Business context
DXL is a specialty retailer of big-and-tall men’s clothing, operating stores, direct/e-commerce and wholesale businesses. At quarter-end it operated 294 stores and a digital business. Stores and direct operations are reported together as the retail segment; wholesale is immaterial to segment reporting.
Key financial results
| Metric | Q3 FY2021 | Q3 FY2020 | First 9 months FY2021 | First 9 months FY2020 |
|---|---|---|---|---|
| Sales | $121.5 million | $85.2 million | $371.6 million | $218.8 million |
| Gross margin | 50.2% | 36.5% | 49.4% | 30.1% |
| Operating income (loss) | $15.9 million | $(5.9) million | $51.6 million | $(56.5) million |
| Net income (loss) | $13.7 million | $(7.0) million | $46.8 million | $(59.5) million |
| Diluted EPS | $0.20 | $(0.14) | $0.69 | $(1.16) |
| Adjusted EBITDA (non-GAAP) | $19.0 million | $(1.7) million | $62.5 million | $(24.9) million |
Q3 sales increased 42.7% year over year; comparable sales rose 53.9% versus FY2020, when pandemic-related closures and demand disruption depressed results. Versus Q3 FY2019, sales rose 14.0% and comparable sales rose 22.9%. Nine-month sales were up 69.8% year over year and 8.4% versus FY2019. Q3 retail sales growth included store sales of $84.8 million and direct sales of $35.8 million; direct represented 29.7% of retail sales. Wholesale sales fell to $0.9 million from $5.0 million a year earlier, primarily due to supply-chain challenges.
Q3 gross margin improved 1,370 basis points year over year and 910 basis points versus FY2019. Management attributed improvement to lower promotional markdowns and lower occupancy costs, including lease renegotiations and sales leverage. SG&A was 34.5% of sales versus 38.5% a year earlier. Q3 interest expense was $2.2 million, including debt prepayment and issuance-cost charges.
Cash, debt and liquidity
- At October 30, 2021, cash was $6.9 million; revolving borrowings and long-term debt were both zero. Availability under the new credit facility was $74.0 million.
- Current assets were $97.8 million and current liabilities were $99.7 million. Total assets were $263.9 million; stockholders’ equity was $47.7 million, versus a $4.1 million deficit at fiscal year-end.
- Operating cash flow for the first nine months was $64.2 million, compared with cash use of $8.6 million in the prior-year period. Capital expenditures were $2.8 million; free cash flow, as defined by the company (non-GAAP), was $61.3 million.
- Cash declined $12.1 million from fiscal year-end, principally reflecting net financing outflows, including repayment of revolving borrowings and the $17.5 million FILO loan. The company also paid a $1.1 million FILO prepayment penalty and wrote off debt issuance costs.
- The October 28, 2021 asset-based credit facility with Citizens Bank is a secured $125 million facility maturing October 28, 2026. It replaced the prior facility; availability depends on eligible assets. A minimum fixed-charge coverage ratio applies if availability falls below specified thresholds.
- Operating lease liabilities totaled $149.4 million, including $37.2 million current and $112.3 million non-current. These lease obligations are significant despite no funded debt outstanding.
Changes, outlook and risks
- Management said Q3 results exceeded expectations, citing strong store and direct sales, customer acquisition, higher conversion and transaction value, improved merchandise margin, and lower occupancy costs. Comparable sales were 22.9% above FY2019; new-to-file customer acquisition was 34% higher than FY2019.
- Management gave no specific numerical sales or earnings guidance in the provided filing text. It said cash, credit availability and operating cash generation should fund working capital and capital expenditures for the next 12 months, while describing its outlook as cautious.
- Supply-chain disruption, vessel shortages, port congestion and truck-driver shortages increased freight costs; management estimated a roughly 100-basis-point gross-margin impact and expected related cost pressure, along with higher raw-material costs such as cotton, well into fiscal 2022. Securing sufficient inventory was identified as a primary focus.
- Inventory was $82.3 million, down from $94.9 million a year earlier; clearance inventory was 6.4% of total inventory. Management said it expected to secure sufficient inventory but was managing assortments conservatively.
- The company had renegotiated approximately 155 store leases since the start of FY2020, expecting more than $18.1 million of savings over lease lives, including $6.2 million in FY2021. It reported 112 stores with a lease expiration or kick-out option within two years and no planned store openings or Casual Male XL rebrands for the rest of FY2021.
- COVID-19 duration and variants, consumer demand, supply-chain conditions, labor availability, inventory adequacy, sales forecasting and execution of strategy remain risks. The company noted retail seasonality, with a significant portion of operating income traditionally generated in the holiday fourth quarter.
- Unusual items included non-cash lease-related gains from planned store closures that reduced impairment expense by $1.1 million in Q3 and $2.1 million year to date. Prior-year nine-month results included a $16.3 million impairment charge associated with the pandemic. Management maintained a full valuation allowance against deferred tax assets despite returning to profitability.
- Management reported disclosure controls were effective and said there were no material changes to internal control over financial reporting. It said ordinary-course legal proceedings were not expected to have a material adverse effect and reported no material changes to previously disclosed risk factors.
Investor verification points
- Confirm the period and comparison basis: this is the quarter ended October 30, 2021, and FY2020 comparisons are distorted by pandemic-related store disruption.
- Assess whether sales, customer acquisition and margin gains are sustainable, particularly against FY2019 and after the holiday quarter.
- Monitor freight, raw-material and labor costs, and whether inventory availability supports demand without weakening margins.
- Review credit-facility borrowing-base availability and covenants alongside cash levels, lease commitments and ongoing operating cash generation.
- Consider dilution: common shares issued rose from 64.7 million at fiscal year-end to 76.8 million at quarter-end, including 11.1 million shares sold in a February 2021 registered direct offering.
- Evaluate the quality and recurrence of reported earnings and free cash flow, including lease-related gains, debt prepayment costs and the non-GAAP adjustments.