Destination XL Group, Inc. — Form 10-Q Summary
Period clarification: The filing is for the three months ended May 4, 2019 (fiscal 2019 first quarter), not 2018 Q1. Comparative results are for the three months ended May 5, 2018. Amounts below are in U.S. dollars.
Business context and reporting period
Destination XL Group is a specialty retailer of big-and-tall men’s clothing, operating stores, direct sales and a developing wholesale business. At May 4, 2019, it operated 328 stores. The company reports one retail segment; wholesale results were aggregated with retail because they were immaterial.
Financial performance and position
| Metric | Q1 fiscal 2019 | Comparable period |
|---|---|---|
| Sales | $113.0 million | $113.3 million |
| Comparable sales | Down 1.2% | Not clearly stated as a growth rate |
| Gross profit / margin | $49.4 million / 43.7% | $50.7 million / 44.7% |
| Operating loss | $2.2 million | $2.2 million |
| Net loss / diluted loss per share | $3.1 million / $0.06 | $3.1 million / $0.06 |
| Adjusted EBITDA (non-GAAP) | $4.8 million | $5.3 million |
| Cash flow from operations | $(16.5) million | $(5.8) million |
| Free cash flow (non-GAAP) | $(20.2) million | $(9.1) million |
| Capital expenditures | $3.7 million | $3.3 million |
Sales fell 0.3%. A 1.2% comparable-sales decline and $1.6 million of sales lost to store closures were partly offset by $2.4 million in wholesale revenue; prior-year wholesale revenue was $20,000. Store sales were $86.7 million and direct sales were $23.8 million. Direct sales were 21.6% of total sales, versus 21.2% a year earlier.
Merchandise margin declined 150 basis points, mainly due to increased promotions and lower-margin wholesale sales; a 40-basis-point improvement in shipping costs partly offset this. Occupancy costs as a percentage of sales improved 50 basis points. SG&A was $44.6 million, down $0.8 million, with restructuring savings partly offset by costs related to wholesale operations and the lease-accounting change. CEO transition costs were $0.7 million, versus $0.1 million.
At May 4, 2019, cash was $6.8 million, inventory $112.3 million, and total assets $437.9 million. Current assets were $134.6 million and current liabilities $149.9 million. Inventory was up 5.8% year over year; clearance inventory was 10.6% of total inventory versus 9.7%. Cash increased $1.9 million during the quarter, supported by net credit-facility borrowings of $22.3 million.
Gross debt was $79.6 million ($79.0 million net of issuance costs): $64.6 million drawn on the revolving facility and a $15.0 million FILO loan. Unused excess availability was $32.3 million; letters of credit totaled $3.4 million. The revolving facility matures May 24, 2023. Its fixed-charge coverage covenant applies if excess availability falls below the specified threshold.
Material changes and unusual items
- Cash used in operations increased by $10.7 million year over year, primarily from working-capital timing: accounts payable and accrued expenses were lower following accelerated payments for inventory and other obligations. Management also cited $3.0 million more in incentive payments.
- The company adopted ASC 842 on February 3, 2019. At adoption it recognized $214.1 million of right-of-use assets and $254.5 million of lease liabilities, with a $5.3 million credit to opening accumulated deficit. At May 4, lease assets were $209.3 million and lease liabilities totaled $248.8 million. Comparative periods were not restated. The change removes an approximately $1.5 million annual benefit from amortization of a deferred sale-leaseback gain.
- Wholesale contributed $2.4 million of sales and reduced merchandise margin; management described its rollout as deliberate and said it was building infrastructure and financial discipline.
- Management attributed weak sales and traffic to harsh winter weather and delayed warm spring weather. Seasonal merchandise sales missed expectations; promotional activity was used to drive traffic.
Outlook, risks and contingencies
Management expected comparable-sales growth in the omni-channel retail business and positive free cash flow for fiscal 2019, but provided no detailed earnings or cash-flow guidance pending the CEO’s strategic review and greater visibility into initiatives. The company’s longer-term objective is a 10% EBITDA margin. Planned fiscal 2019 actions included opening two DXL stores, rebranding 12 Casual Male XL stores and one outlet, and closing five Casual Male XL stores, one DXL store and the five remaining Rochester Clothing stores.
CEO Harvey Kanter assumed the role on April 1, 2019. Priorities cited include customer retention and acquisition, improved returns on marketing and digital investment, better store and online experiences, and cost management. The business is seasonal, with a significant portion of operating income traditionally generated in the fourth quarter. Management said existing operating cash flow and credit availability should meet foreseeable liquidity needs under current forecasts.
Risks include execution of the corporate strategy, growth of wholesale, forecasting demand and fashion trends, brand awareness and competition. Borrowings carry variable interest rates; management estimated a 50-basis-point rate increase would raise annual interest expense by about $357,000, based on stated borrowing assumptions. The company maintained a full valuation allowance against deferred tax assets and reported $2.0 million of unrecognized tax benefits. Ordinary-course legal proceedings were not expected by management to have a material adverse effect. Management reported disclosure controls were effective and no material change in risk factors from the prior annual report.
Most important facts for investors to verify
- Confirm the period: this filing covers fiscal 2019 Q1 ended May 4, 2019, despite the request metadata’s “2018 Q1.”
- Track comparable sales, traffic, seasonal-category performance, promotions and whether the stated fiscal 2019 comparable-sales and free-cash-flow expectations are achieved.
- Monitor working capital, inventory and payables, cash generation, revolving-facility availability, covenant headroom and variable-rate borrowing costs.
- Assess the effect of ASC 842 lease obligations and the end of sale-leaseback gain amortization on reported balance-sheet and operating results.
- Evaluate wholesale growth, its margin impact, and progress under the CEO’s strategic review; detailed earnings and cash-flow guidance was not provided.