Destination XL Group, Inc. — Form 10-Q Summary
Period clarification: The filing is for the quarter ended July 29, 2017 (fiscal 2017 second quarter), not 2016 Q2 as stated in the request metadata. The six-month comparison is against the six months ended July 30, 2016. 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 apparel, operating retail stores and direct/e-commerce channels as one reportable segment. At quarter-end it had 342 stores, including 206 DXL stores; the six-month period included the opening of two company-operated DXL stores in Ontario, Canada. The company notes that results are seasonal, with a significant portion of operating income typically generated in the fourth quarter.
Financial performance and liquidity
| Metric | Three months ended July 29, 2017 | Three months ended July 30, 2016 | Six months ended July 29, 2017 | Six months ended July 30, 2016 |
|---|---|---|---|---|
| Sales | $121.1 million | $117.9 million | $228.8 million | $225.8 million |
| Gross profit | $55.8 million | $54.8 million | $104.5 million | $104.6 million |
| Operating income (loss) | $(2.9) million | $1.0 million | $(8.1) million | $2.1 million |
| Net income (loss) | $(3.7) million | $0.2 million | $(9.8) million | $0.4 million |
| Diluted net income (loss) per share | $(0.08) | $0.00 | $(0.20) | $0.01 |
| EBITDA (non-GAAP) | $6.7 million | $8.5 million | $9.3 million | $16.9 million |
Gross margin, including occupancy costs, was 46.1% in the quarter versus 46.5% a year earlier, and 45.7% for the six months versus 46.3%. Quarterly comparable sales increased 0.1%; six-month comparable sales declined 0.9%. E-commerce represented 20.5% of trailing-12-month sales, up from 19.4% a year earlier.
Operating cash flow for the first six months was $14.3 million, down from $19.1 million. Capital expenditures were $13.8 million; reported free cash flow, a non-GAAP measure, was $0.6 million versus $5.3 million. Cash was $6.5 million at July 29, 2017. Net debt was $68.3 million (gross debt $68.9 million); credit-facility borrowings were $53.7 million and unused excess availability was $43.7 million. Inventory was $112.3 million, down $9.0 million, or 7.4%, from a year earlier.
Material changes versus prior comparable periods
- Quarterly sales rose 2.8%, but six-month sales increased only 1.3%; non-comparable sales from newer stores contributed to the increases. Quarterly comparable sales improved from recent declines, while six-month comparable sales remained negative.
- Despite higher sales, quarterly results shifted from a small profit to a loss; the six-month period also shifted from profit to loss. SG&A rose $2.8 million for the quarter and $7.6 million for six months, principally reflecting higher advertising costs and expenses associated with the larger DXL store base.
- Six-month EBITDA fell to $9.3 million from $16.9 million. Management cited increased marketing investment and lower earnings as contributors to reduced cash generation.
- Inventory declined year over year as the company adjusted receipt timing and weeks of supply. Management reported that merchandise margins were maintained for the six-month period, while occupancy costs increased relative to sales.
Outlook, management commentary, risks and unusual items
Management emphasized customer acquisition, brand awareness, store traffic and digital growth. It reported ongoing store-traffic weakness and a difficult apparel retail environment, but cited improved conversion, units per transaction and dollars per transaction. Planned fiscal 2017 marketing spend was increased by approximately $4.0 million to $29.0 million, approximately $10.8 million above fiscal 2016.
- Fiscal 2017 sales guidance: $470–$480 million; comparable-sales growth of 1%–4% (unchanged).
- Gross margin guidance: approximately 45.5%–46.0%. SG&A as a percentage of sales was expected to increase approximately 230–290 basis points.
- GAAP net loss guidance was revised to $(11.7)–$(16.7) million, or $(0.24)–$(0.34) per diluted share; EBITDA guidance was reduced to $20–$25 million. Adjusted net loss guidance was $(0.14)–$(0.21) per diluted share (non-GAAP).
- Operating cash flow guidance was $35–$40 million; free cash flow after DXL store capital expenditures was expected to be $13–$18 million (non-GAAP). Capital expenditures were forecast at approximately $22 million, partly offset by about $5 million of tenant allowances.
- The company expected to open 19 DXL retail stores and one DXL outlet, and close 16 Casual Male XL retail stores and three outlets during fiscal 2017. It expected inventory at fiscal year-end to be $10–$14 million below fiscal 2016.
The quarter included a $1.7 million impairment charge for property and equipment at a store, recorded in depreciation and amortization. The company repurchased approximately 1.9 million shares for $4.7 million in the first six months under a $12 million fiscal-year authorization, leaving approximately $7.3 million available. The credit facility has a $125 million commitment, matures in October 2019, and is secured by substantially all assets subject to stated exclusions. A minimum fixed-charge coverage requirement may apply if availability falls below specified thresholds and can constrain certain transactions, including repurchases.
The company maintained a full valuation allowance against deferred tax assets and said it did not expect a fiscal 2017 income-tax benefit. It disclosed $148.7 million of federal and $88.5 million of state net operating loss carryforwards, subject to potential ownership-change limitations. Management said ordinary-course legal matters were not expected to have a material adverse effect; the filing reported no material changes to previously disclosed risk factors. Key risks cited include executing strategy, growing market share, forecasting customer tastes and sales, building brand awareness, and competing successfully. Management said disclosure controls were effective and that no material change in internal control occurred during the quarter.
Important facts for investors to verify
- Whether comparable-sales trends, store traffic and customer acquisition improve enough to support the unchanged sales-growth outlook.
- Whether the higher marketing budget produces the anticipated sales and brand benefits while the company absorbs weaker earnings guidance.
- Whether forecast operating cash flow and free cash flow are achieved after store investment, debt service and share repurchases.
- Credit-facility availability, borrowing-base capacity and compliance with applicable covenants, particularly as repurchases continue.
- The effect of the store impairment, inventory reductions and new-store openings on future margins and asset values.