Destination XL Group, Inc. — Form 10-Q Summary
Reporting period: First quarter of fiscal 2015, the three months ended May 2, 2015; comparable period ended May 3, 2014. The filing’s fiscal-year labels differ from the request’s “2014 Q1.” Amounts below are in U.S. dollars.
Business context
Destination XL is a specialty retailer of big-and-tall men’s apparel, operating retail and direct channels as one reportable segment. At quarter-end it operated 357 stores, including 149 DXL retail stores and 4 DXL outlets. The company continued shifting its store base toward the DXL concept and expanding its omni-channel capabilities.
Financial performance
| Metric | Q1 FY2015 | Q1 FY2014 |
|---|---|---|
| Sales | $104.4 million | $96.7 million |
| Gross profit / gross margin | $48.2 million / 46.2% | $43.9 million / 45.5% |
| Operating income (loss) | $0.2 million | $(2.9) million |
| Net loss | $(0.6) million; $(0.01) per diluted share | $(3.5) million; $(0.07) per diluted share |
| EBITDA from continuing operations (non-GAAP) | $6.8 million | $2.5 million |
| Net cash used in operating activities | $(8.0) million | $(13.9) million |
| Capital expenditures | $9.6 million | $11.1 million |
| Free cash flow (non-GAAP) | $(17.5) million | $(25.0) million |
Sales rose 8.0%. Comparable sales increased 5.5% overall; DXL retail comparable sales increased 8.7%, while transactions were up 6.6%. Gross margin improved 70 basis points, mainly from lower occupancy costs as a percentage of sales, including a favorable change in lease-exit accruals. Merchandise margins were approximately flat. SG&A was nearly unchanged at $41.5 million, but declined as a share of sales to 39.7% from 42.9%. Depreciation and amortization increased to $6.5 million from $5.4 million, and net interest expense rose to $0.8 million from $0.4 million.
Liquidity, debt and balance sheet
At May 2, 2015, cash was $6.6 million, inventory $123.8 million, current assets $146.5 million and current liabilities $108.9 million. Credit-facility borrowings were $40.7 million gross ($40.1 million net of issuance costs); unused excess availability was $68.3 million. Gross total debt was $73.0 million, or $71.8 million net of issuance costs. Long-term debt carrying value was $31.7 million, including equipment financing and a term loan. The credit facility has a $125 million commitment and matures in 2019; it is secured by substantially all assets, subject to disclosed exclusions and lien priorities.
Operating cash use improved year over year, but cash flow remained negative after investment in stores and technology. Inventory increased to $123.8 million from $114.2 million a year earlier; clearance goods were 8.2% of inventory, down 9.0% year over year. The company reported a full valuation allowance against deferred tax assets and does not expect to recognize an income-tax benefit in fiscal 2015.
Outlook, commentary and risks
- Fiscal 2015 sales guidance remained $438–$443 million; expected comparable-sales growth was approximately 5.6%. Gross margin guidance was 45.9%.
- Management narrowed expected net loss to $(0.20)–$(0.23) per diluted share and adjusted net loss to $(0.12)–$(0.14) per share. Adjusted results assume a normalized 40% tax benefit; this is a non-GAAP measure.
- Expected EBITDA from continuing operations was $21–$23 million; SG&A approximately $180.5 million; depreciation and amortization $28.5 million; and net interest costs approximately $3.8 million.
- Planned fiscal 2015 capital expenditures were $36–$39 million, partly offset by $6–$7 million of tenant allowances. Management projected operating cash flow of $16.5–$17.5 million, including tenant allowances, and free cash flow of $(18.5)–$(22.5) million. Year-end total debt was projected at $72–$76 million.
- The company opened 11 DXL stores and 2 DXL outlets during the quarter, with store replacements and closures also occurring. It expected to open 21 additional DXL stores and 6 outlets during the balance of fiscal 2015. Management cited delayed spring weather but reported continued strength in DXL metrics and an improved inventory position.
- Management identified execution of the DXL strategy, customer tastes and fashion trends, and competition as risks. A 50-basis-point increase in interest rates was estimated to increase annual interest expense by approximately $260,000. Foreign-currency exposure was considered immaterial. Ordinary-course legal proceedings were not expected to materially affect results or financial position; the filing reported no material change in previously disclosed risk factors.
Important facts for investors to verify
- Whether DXL comparable-sales growth and transaction gains continue as store expansion progresses.
- Whether fiscal 2015 sales, earnings, margin, capital-spending and cash-flow guidance is achieved, particularly given seasonal fourth-quarter concentration.
- Inventory growth, clearance levels, and the cash and borrowing needs associated with planned store openings and early merchandise receipts.
- Credit-facility availability, borrowing-base terms, interest-rate exposure, and projected year-end debt.
- The assumptions behind non-GAAP adjusted loss and EBITDA, and the continued appropriateness of the full deferred-tax valuation allowance.