Destination XL Group, Inc. — Form 10-Q Summary
Period clarification: Although the request metadata says 2019 Q2, this filing reports the three and six months ended August 1, 2020 (fiscal 2020 Q2), compared with periods ended August 3, 2019. Amounts below are in U.S. dollars; financial statement amounts are in millions unless noted.
Business context and reporting period
Destination XL is a specialty retailer of big-and-tall men’s clothing, operating stores, direct sales and wholesale. At August 1, 2020, it operated 317 stores. Stores and direct sales are reported together as the retail segment. COVID-19 drove temporary store closures beginning March 17; all locations had reopened by the end of June, but with reduced hours and some subsequent closures.
Financial performance and position
- Q2 sales: $76.4 million, down 38.0% from $123.2 million. Retail sales were $71.4 million; wholesale sales were $5.0 million, including $4.1 million of protective-mask sales.
- Sales mix: Direct sales rose to $33.0 million, or 46.1% of retail sales, from $25.4 million, or 21.1%, a year earlier. DXL.com sales increased 69% year over year. Store sales fell to $38.5 million from $95.1 million.
- Q2 profitability: Gross profit was $21.5 million and gross margin, including occupancy costs, was 28.1%, versus 44.3%. SG&A was $25.8 million (33.7% of sales), versus $47.5 million (38.5%). Operating loss was $9.6 million; net loss was $10.7 million, or $0.21 per diluted share, compared with net income of $0.04 million.
- First-half results: Sales were $133.7 million, down 43.4%; gross margin was 26.0%, versus 44.0%. Net loss was $52.4 million, or $1.03 per diluted share, compared with a $3.0 million loss. The 2020 loss included a $16.3 million first-quarter impairment charge.
- Cash flow: First-half operating cash flow was negative $9.0 million, versus positive $0.9 million. Capital expenditures were $2.1 million, down from $7.6 million; company-defined free cash flow was negative $11.1 million, versus negative $6.7 million.
- Liquidity and debt: Cash was $20.4 million at August 1, versus $4.3 million at fiscal year-end. Gross debt was $81.8 million ($81.4 million net of issuance costs); cash-adjusted net debt was $61.0 million. Revolver borrowings were $66.8 million and unused excess availability was $12.4 million. The company reported current assets of $120.3 million and current liabilities of $151.6 million.
- Other balance-sheet items: Inventory was $87.4 million, down from $110.4 million a year earlier. Stockholders’ equity declined to $7.4 million from $58.4 million at fiscal year-end. Operating lease liabilities totaled $210.9 million.
Material changes and management commentary
- Management attributed the steep sales decline to store closures and reduced consumer spending. Store sales began to improve as locations reopened, but weakened in some areas as COVID-19 cases resurged. Comparable-sales data was omitted because closures and reduced hours made it uninformative.
- Management reported Q2 merchandise-margin improvement after Father’s Day, including a 1,260-basis-point improvement in July versus May. For the first half, margin pressure reflected promotions, lower sales leverage on occupancy costs and approximately $0.7 million of additional inventory reserves.
- The company cancelled approximately $148 million of merchandise orders at retail, reduced capital spending, cut costs and negotiated vendor payment terms and landlord concessions. Lease modifications reduced fiscal 2020 rent payments by approximately $10 million; all store leases were reported current and in good standing at quarter-end.
- Management said it was “cautiously optimistic” about the second half and pursuing a “digital first” strategy. It expected fall inventory buys below fiscal 2019 levels, with inventory increasing in Q3 for the fall season.
Outlook, risks and unusual items
- Management believed available cash, borrowing capacity and expected cash generation would cover working-capital needs and limited capital expenditures for the next 12 months, assuming no further significant economic shutdowns. It could not reasonably estimate the pandemic’s full-year impact and provided no specific revenue or earnings forecast in the supplied filing text.
- The April credit-facility amendment extended certain borrowing-base advance rates, eliminated a springing financial covenant and increased applicable margins by 150 basis points. The facility matures May 24, 2023; excess availability must meet a minimum threshold under the amended terms. Management identified liquidity and borrowing availability as priorities.
- COVID-19 risks include renewed store closures, weak discretionary spending, operating-cost pressure, supply and inventory disruption, further asset impairments and possible effects on credit-facility compliance. The company recorded a $16.3 million impairment in Q1, primarily involving lease right-of-use assets and property and equipment; it recorded no material Q2 impairment.
- The company received Nasdaq notice that its share price did not meet the $1 minimum bid requirement. The compliance deadline was extended to December 21, 2020. Shareholders subsequently approved a discretionary reverse stock split of between 1-for-2 and 1-for-5; regaining compliance was not assured.
- The CARES Act provided a $1.2 million refundable employee-retention credit and the company received $1.1 million of refundable AMT credits in Q2. A full valuation allowance remained against deferred tax assets.
- Management disclosed workforce furloughs and layoffs, including 34 corporate employees in May and 430 store associates in July. Management and named executive officers took temporary salary reductions; non-employee directors suspended Q2 compensation.
Important facts for investors to verify
- Subsequent sales trends, store operating status and the effect of renewed COVID-related restrictions.
- Actual borrowing availability and compliance with the amended credit-facility requirements, particularly given the reported $12.4 million excess availability.
- Whether operating cash flow improves enough to support working capital, rent and debt obligations without further financing or concessions.
- Inventory levels, cancelled orders, promotional activity and whether the reported margin improvement continued.
- Any further impairments, lease concessions or effects on the company’s ability to continue operations and maintain Nasdaq listing compliance.
- How reported GAAP losses compare with management’s non-GAAP adjusted EBITDA and adjusted net-loss measures, which exclude specified items and use a normalized tax assumption.