Destination XL Group, Inc. — Form 10-Q Summary
Reporting period: The filing covers the quarter ended October 28, 2017, identified as fiscal 2017 Q3, and the nine months ended that date. Fiscal 2017 is a 53-week year ending February 3, 2018. This differs from the request metadata’s “2016 Q3.” The interim financial statements are unaudited.
Business context
Destination XL is a specialty retailer of big-and-tall men’s apparel, operating retail and direct/e-commerce businesses as one reportable segment. At quarter-end it had 344 stores, including 211 DXL stores, and operated in the U.S., Canada, and London. It opened two DXL stores in Ontario during the first nine months, its first company-operated stores outside the U.S.
Financial performance and liquidity
- Third quarter: Sales were $103.7 million, up 1.8% from $101.9 million. Comparable sales declined 0.1%. Gross profit was $44.8 million and gross margin was 43.2%, down 120 basis points. Operating loss was $4.8 million; net loss was $5.7 million, or $0.12 per diluted share, versus a $4.5 million loss, or $0.09 per share, a year earlier. EBITDA, a non-GAAP measure, was $2.8 million versus $3.9 million.
- First nine months: Sales were $332.5 million, up 1.5% from $327.6 million; comparable sales declined 0.5%. Gross margin was 44.9%, down 80 basis points. Operating loss was $12.9 million and net loss was $15.5 million, or $0.32 per diluted share, compared with a $4.0 million net loss, or $0.08 per share. EBITDA was $12.1 million versus $20.8 million.
- Drivers and unusual items: Quarterly gross margin fell mainly because of heavier markdowns to clear slower-moving merchandise; merchandise margin declined 120 basis points. Nine-month SG&A increased $8.2 million, including $4.2 million of additional advertising. Nine-month depreciation and amortization included a $1.7 million store-asset impairment charge. Management attributed weaker sales to delayed cold weather and Hurricanes Irma and Harvey; it estimated the storms reduced quarterly comparable sales by about 50 basis points.
- Cash flow: Nine-month operating cash flow was $5.2 million, down from $8.1 million. Capital expenditures were $18.4 million. Free cash flow, as defined by the company, was negative $13.2 million, compared with negative $13.7 million. Cash at quarter-end was $5.8 million.
- Debt and liquidity: Net debt was $81.4 million, including $68.2 million drawn on the revolving credit facility and $13.2 million of equipment and term-loan debt. Revolver availability was $38.2 million; the facility matures October 2019. Total assets were $263.7 million and current liabilities were $129.3 million. Inventory was $119.9 million, down $8.3 million, or 6.5%, from a year earlier but up from $117.4 million at fiscal year-end.
- Equity and repurchases: Stockholders’ equity declined to $71.8 million from $88.5 million at fiscal year-end, principally alongside the nine-month net loss and share repurchases. The company repurchased 1.88 million shares for $4.7 million through October 28; $7.3 million remained under its $12 million authorization. There were no repurchases in the quarter.
Outlook and management commentary
Management lowered fiscal 2017 guidance, citing sales below expectations, including the delayed arrival of cold weather. Its revised outlook for the 53-week year was:
- Sales of $466–$470 million and comparable sales ranging from flat to up 2.0%, versus previous sales guidance of $470–$480 million and comparable sales growth of 1.0%–4.0%.
- Gross margin of approximately 45.0%–45.5%; SG&A as a percentage of sales expected to rise approximately 280–310 basis points.
- GAAP net loss of $17–$21 million, or $0.35–$0.42 per diluted share; EBITDA of $16–$20 million; adjusted net loss of $0.21–$0.25 per diluted share. These were all reduced from prior guidance.
- Capital expenditures of approximately $22 million, partly offset by about $5 million of tenant allowances. Operating cash flow was projected at $31–$35 million and free cash flow after DXL store capital expenditures at $9–$13 million.
Management expected inventory at fiscal year-end to be $12–$15 million below fiscal 2016, supporting working capital and partially reducing debt. It said colder weather early in Q4 was beginning to improve comparable-sales performance and expected markdowns to ease, supporting more normalized merchandise margins. The company also planned DXL store openings and Casual Male XL closures as part of its format transition; it expected marketing investment to support brand awareness and traffic, while acknowledging that the investment increased near-term costs.
Risks, contingencies, and other matters
- Borrowings are subject to variable interest rates. The company estimated that a 50-basis-point rate increase would raise annualized interest expense by approximately $362,000. It also reported $64 million of LIBOR-based revolver borrowings at 2.70%; those contracts expired October 31, 2017.
- The company maintained a full valuation allowance against deferred tax assets: $84.4 million of deferred tax assets, $12.6 million of deferred tax liabilities, and a $72.0 million valuation allowance. It reported $155.9 million of federal tax-loss carryforwards and $3.0 million of unrecognized tax benefits.
- Management said ordinary-course legal proceedings were not expected to materially adversely affect results or financial position. It reported no material changes to previously disclosed risk factors and no material change in internal control over financial reporting.
- The filing describes the anticipated balance-sheet impact of the forthcoming lease-accounting standard as an increase in reported lease assets and liabilities; the extent was still under evaluation.
Key facts for investors to verify
- Confirm the reporting-period discrepancy: this filing is for fiscal 2017 Q3, not fiscal 2016 Q3.
- Track whether the revised sales, margin, loss, EBITDA, and cash-flow guidance was achieved, and how weather and marketing affected demand.
- Monitor inventory reduction and markdowns for effects on sales availability, gross margin, working capital, and revolver borrowings.
- Review liquidity and borrowing-base availability, including the status and pricing of borrowings after the October 31 LIBOR-contract expiration.
- Assess returns from DXL store expansion and marketing investment, alongside store closures, capital spending, and share repurchases.