Destination XL Group, Inc. — Form 10-K Summary
Period clarification: The supplied filing is for fiscal 2019, the 52 weeks ended February 1, 2020, filed March 19, 2020. It is not a filing for “2018 Q4”; the filing separately reports fourth-quarter results.
Business context
Destination XL is a specialty retailer of big-and-tall men’s apparel and footwear, operating DXL and Casual Male XL stores, an e-commerce business, and a developing wholesale channel. At year-end it operated 323 stores, including 228 DXL retail stores, and two stores in Canada. Direct sales were 23.1% of retail-segment sales. The company closed all five Rochester Clothing stores during fiscal 2019.
Financial performance and liquidity
| Metric | Fiscal 2019 | Fiscal 2018 |
|---|---|---|
| Sales | $474.0 million | $473.8 million |
| Comparable sales change | +0.1% | +3.0% |
| Gross profit | $204.2 million | $211.3 million |
| Gross margin | 43.1% | 44.6% |
| SG&A | $180.7 million | $183.9 million |
| Operating loss | $4.4 million | $10.1 million |
| Net loss | $7.8 million; $0.16 per diluted share | $13.5 million; $0.28 per diluted share |
| Cash from operating activities | $15.8 million | $15.7 million |
| Free cash flow (non-GAAP) | $2.4 million | $2.8 million |
| Adjusted EBITDA (non-GAAP) | $23.5 million | $27.4 million |
- Fourth-quarter sales were $131.2 million, versus $131.2 million a year earlier; net income was $2.4 million, versus a $7.2 million net loss.
- Fiscal 2019 wholesale revenue rose to $12.5 million from $2.8 million. Direct revenue increased to $106.6 million from $101.7 million; store revenue declined to $354.9 million from $369.2 million.
- Gross margin fell 150 basis points, mainly from increased clearance and promotional activity, a greater branded-product mix, wholesale growth and a $0.9 million aged-inventory write-off. Lower occupancy costs partly offset the decline.
- Cash was $4.3 million at year-end; inventory was $102.4 million, down $4.4 million. Net debt was $54.1 million, down from $56.7 million. Credit-facility excess availability was $48.5 million, up from $45.6 million.
- Debt comprised $39.6 million drawn on the revolving facility and a $15.0 million FILO loan. The facility matures May 24, 2023, is secured by substantially all assets, and includes a minimum fixed-charge coverage covenant triggered by low availability.
- Adoption of lease accounting added $186.4 million of operating lease right-of-use assets and $223.2 million of lease liabilities to the year-end balance sheet. Undiscounted future minimum lease payments were $269.0 million.
Changes, outlook, risks and unusual items
- Sales were essentially flat year over year. Wholesale growth and slightly positive comparable sales offset lower store sales, Rochester closures and reduced other revenue. The company said store traffic remained challenging.
- Management cited encouraging first-year comparable sales increases above 20% at rebranded Casual Male XL stores and plans to continue selected conversions to DXL. The CEO, Harvey Kanter, joined in April 2019; priorities include customer acquisition and retention, data-driven marketing, digital capabilities and profitability.
- Fiscal 2019 included $1.7 million of London exit costs, $0.7 million of CEO-transition costs and $0.9 million of impairment charges. Fiscal 2018 included $1.9 million of restructuring costs, $2.4 million of CEO-transition costs and $4.6 million of impairments. These items are excluded from certain company-reported non-GAAP measures.
- The company provided no specific fiscal 2020 sales, earnings or cash-flow guidance because of COVID-19. It temporarily closed retail stores on March 17, 2020, initially through at least March 28; the online business remained operational. Management described expense and capital-spending reductions, inventory-receipt cancellations and liquidity preservation measures.
- Key risks include the duration and economic impact of COVID-19, store and distribution-center disruption, weak traffic and competition, sourcing and supply-chain interruptions, liquidity and borrowing-base constraints, and variable interest rates. About $48.0 million of debt was LIBOR-based; the filing noted uncertainty over LIBOR’s replacement.
- At filing, the stock’s closing bid had been below $1 since February 24, 2020, creating a stated risk of Nasdaq listing deficiency if not cured by April 3, 2020. The company also reported a full valuation allowance against deferred tax assets and no material pending legal proceeding identified in the supplied text.
- KPMG issued unqualified opinions on the financial statements and internal control over financial reporting.
Important facts for investors to verify
- Whether COVID-19 store closures extended beyond the initial announced period, and the resulting effects on sales, cash flow, inventory and credit-facility availability.
- Subsequent filings and results showing whether the company restored positive operating performance and improved gross margins, store traffic and comparable sales.
- Compliance with credit-facility covenants and the borrowing base, debt balances, and the effect of interest-rate benchmark changes.
- Progress and profitability of the wholesale channel, and whether store rebranding and direct-channel growth deliver the returns management expects.
- Nasdaq listing status and any actions taken regarding the sub-$1 share price.