Destination XL Group, Inc. — Form 10-Q Summary
Period clarification: The supplied filing is for the quarter ended November 2, 2019 (fiscal 2019 Q3), not 2018 Q3 as stated in the request metadata. Comparative periods ended November 3, 2018. Amounts are in U.S. dollars.
Business context and reporting period
Destination XL is a specialty retailer of big-and-tall men’s clothing, operating stores, direct-to-consumer channels and a developing wholesale business. At quarter-end it operated 326 stores. The filing reports one aggregated retail segment; wholesale results were immaterial for segment reporting.
Financial performance and liquidity
| Metric | Q3 fiscal 2019 | Q3 fiscal 2018 | Nine months fiscal 2019 | Nine months fiscal 2018 |
|---|---|---|---|---|
| Sales | $106.6 million | $107.1 million | $342.8 million | $342.6 million |
| Gross profit | $43.8 million | $47.1 million | $147.8 million | $154.3 million |
| Gross margin, including occupancy | 41.1% | 44.0% | 43.1% | 45.0% |
| Operating loss | $6.4 million | $1.2 million | $7.7 million | $3.7 million |
| Net loss | $7.2 million | $2.0 million | $10.2 million | $6.3 million |
| Net loss per diluted share | $0.14 | $0.04 | $0.21 | $0.13 |
| Adjusted EBITDA (non-GAAP) | $1.7 million | $6.6 million | $13.6 million | $20.7 million |
For the first nine months, operating cash flow was negative $14.4 million, versus negative $1.3 million a year earlier. Capital expenditures were $11.0 million and free cash flow (non-GAAP) was negative $25.4 million, compared with negative $11.1 million. Cash was $5.5 million at November 2, 2019.
At quarter-end, revolving-facility borrowings were $68.5 million and the FILO term loan was $15.0 million; net debt was $83.0 million after debt issuance costs. Unused excess availability under the revolver was $40.6 million. Operating lease liabilities totaled $233.4 million, including $41.1 million current and $192.3 million long-term. The balance sheet reported current assets of $141.2 million and current liabilities of $157.5 million.
Material changes versus the prior comparable periods
- Q3 sales declined 0.5%; comparable sales increased 0.2%. Nine-month sales were nearly flat, while comparable sales declined 1.1% after excluding closed or converted stores.
- Q3 gross margin fell 290 basis points. Management attributed the decline to promotions and clearance activity (110 basis points), aged-inventory adjustments (80 basis points), and lower-margin wholesale growth (120 basis points), partly offset by lower occupancy costs.
- Q3 net loss widened to $7.2 million from $2.0 million; nine-month net loss widened to $10.2 million from $6.3 million. Nine-month adjusted EBITDA declined to $13.6 million from $20.7 million.
- Direct sales grew mid-single digits in Q3, supported by double-digit DXL.com traffic. Wholesale sales were $2.9 million in Q3 and $8.0 million for the first nine months, up from $0.4 million and $0.4 million, respectively.
- Inventory was $120.2 million, up $3.8 million from a year earlier. The company cited higher wholesale inventory and increased presentation levels in selected store collections.
Outlook, management commentary, risks and unusual items
- Management expected fiscal 2019 comparable sales in its omni-channel retail business to be flat and free cash flow to break even. It planned to close the two remaining Rochester Clothing stores and one DXL store in Q4.
- The Q3 results included $1.7 million of London exit costs, including a $0.8 million non-cash foreign-currency translation adjustment. The company had closed its London Rochester store and was exiting London operations.
- The company adopted ASC 842 lease accounting in fiscal 2019, recording right-of-use assets and lease obligations. This materially increased reported assets and liabilities; comparative balance-sheet periods were not restated. Adoption also eliminated the future benefit of approximately $1.5 million in annual sale-leaseback gain amortization.
- Management said liquidity from operations and the credit facility was expected to meet foreseeable requirements under current forecasts. Availability depends on eligible assets and the credit agreement’s covenants. The facility matures May 24, 2023; borrowings bear variable interest rates. A 50-basis-point rate increase was estimated to increase annual interest expense by about $369,000.
- Risks highlighted include execution of the strategy, sales and fashion-trend forecasting, competition, wholesale growth and lower wholesale margins, seasonal performance, working-capital needs and interest-rate exposure. Management maintained a full valuation allowance against deferred tax assets; realization depends on generating sufficient taxable income.
- Management reported ordinary-course legal proceedings that it did not expect to have a material adverse impact. It reported no material changes to previously disclosed risk factors and concluded disclosure controls were effective.
Important facts for investors to verify
- Whether comparable-sales trends and the direct-channel growth persisted after Q3, and whether planned promotional changes improved sales without further margin erosion.
- Whether inventory levels, aged-stock reserves and clearance activity support the company’s margin and cash-flow objectives.
- Whether the fiscal 2019 break-even free-cash-flow outlook was achieved, given negative nine-month free cash flow and increased revolver borrowing.
- Revolver availability, borrowing-base capacity and covenant compliance, including the effects of variable rates and lease obligations on liquidity.
- Progress and economics of wholesale growth, planned store closures, and investments in digital, customer-data and marketing capabilities.