Destination XL Group, Inc. — Form 10-K Summary
Period clarification: Although the request identifies “2017 Q4,” this filing reports fiscal 2018, the 52-week year ended February 2, 2019. Fiscal 2017 was a 53-week year, which affects year-over-year sales comparisons.
Business context
Destination XL is a specialty omni-channel retailer of big-and-tall men’s apparel, operating DXL, Casual Male XL and Rochester formats, as well as its direct e-commerce business. It launched a wholesale channel in fiscal 2018. At year-end it operated 332 stores and its online business; wholesale sales were still small.
Financial performance and liquidity
| Metric | Fiscal 2018 | Fiscal 2017 |
|---|---|---|
| Sales | $473.8 million | $468.0 million |
| Comparable sales | +3.0% | +0.9% |
| Gross margin | 44.6% | 45.0% |
| Operating loss | $10.1 million | $18.0 million |
| Net loss | $13.5 million | $18.8 million |
| Adjusted EBITDA (non-GAAP) | $27.4 million | $17.1 million |
| Cash from operating activities | $15.7 million | $31.0 million |
| Free cash flow (non-GAAP) | $2.8 million | $8.4 million |
Sales rose 1.2% as reported; management attributed the change to comparable and non-comparable growth and wholesale sales, partly offset by the prior year’s extra week and sales from closed stores. Adjusted EBITDA margin improved to 5.8% from 3.7%. The gross-margin decline reflected lower merchandise margin, including a mix shift toward fashion and branded merchandise and wholesale sales, partly offset by lower occupancy costs.
At year-end, cash was $4.9 million, working capital $19.7 million and the current ratio 1.2:1. Net debt was approximately $56.7 million, versus $59.4 million a year earlier. Unused excess availability under the credit facility was $45.6 million. Operating cash flow fell primarily because the prior-year inventory reduction did not recur and the new wholesale business required additional inventory and receivables.
Material changes and unusual items
- Fiscal 2018 included $4.3 million of corporate restructuring and CEO transition costs and $4.6 million of asset impairment charges. Impairments included a $1.5 million write-off of the Rochester trademark.
- A May 2018 restructuring eliminated 56 corporate positions. Management reported approximately $6 million of fiscal 2018 savings and expects about $10 million in annualized savings.
- The company amended its credit facility, extending maturity to May 2023 and lowering certain borrowing rates; it replaced a prior term loan with a $15 million FILO loan and repaid equipment financing notes.
- The company acquired the dxl.com domain for approximately $1.2 million including fees. It also launched a new website and began wholesale sales, including an Amazon Essentials Fit by DXL arrangement.
- Cash capital expenditures were $13.0 million, down from $22.6 million. The company made no stock repurchases in fiscal 2018 and paid no cash dividends during the periods shown.
Outlook, management commentary and risks
Management expected low-single-digit comparable-sales growth in fiscal 2019 and positive free cash flow, but did not provide detailed earnings or cash-flow guidance pending a new CEO’s strategic review and further assessment of wholesale. The stated long-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 Rochester stores, five Casual Male XL stores and one DXL store.
Harvey S. Kanter was appointed CEO effective April 1, 2019, after a transition period with acting CEO David Levin. Management cited customer acquisition and retention, marketing and digital returns, customer experience, and cost management as priorities.
Principal risks include execution of the DXL and omni-channel strategy, competitive pressure and fashion or demand shifts, seasonal sales concentration, reliance on adequate liquidity and asset-based borrowing availability, wholesale customer/order risk, foreign sourcing and tariff disruption, cybersecurity threats, store lease and occupancy costs, and potential impairment of store assets. The company had a full valuation allowance against deferred tax assets. It reported no material adverse expected outcome from ordinary-course legal matters and no off-balance-sheet arrangements.
Key facts for investors to verify
- Whether comparable-sales growth and management’s fiscal 2019 free-cash-flow expectation were achieved; note fiscal 2017 had an extra week.
- Whether restructuring savings materialized and whether the company progressed toward its 10% EBITDA-margin objective.
- Wholesale economics, including margins, working-capital needs, customer concentration and repeat order volumes.
- Liquidity and borrowing-base availability, debt balances, interest costs and compliance with credit-facility conditions.
- Execution and financial effects of planned store closures, conversions and the Rochester exit, including any further impairment charges.
- The expected lease-accounting adoption effect: the filing estimated approximately $217 million of right-of-use assets and $255 million of lease liabilities.
KPMG issued unqualified opinions on the consolidated financial statements and internal control over financial reporting.