Destination XL Group, Inc. — Form 10-Q Summary
Period: The filing covers the quarter ended October 29, 2016, and the nine months ended that date. The request labels the period “2015 Q3,” but the filing is for fiscal 2016 Q3; the comparable prior-year quarter ended October 31, 2015. Amounts below are in U.S. dollars; financial statement amounts are in millions unless noted.
Business context
Destination XL is a specialty retailer of big-and-tall men’s apparel, operating retail and direct-to-consumer channels as one reportable segment. At quarter-end, it operated 352 stores, including 188 DXL retail stores. Its strategy continued to shift toward the DXL concept: 22 DXL retail and three DXL outlet stores opened in the first nine months, while 17 Casual Male XL retail stores and one outlet closed.
Financial performance and liquidity
| Metric | Q3 2016 | Q3 2015 | Nine months 2016 | Nine months 2015 |
|---|---|---|---|---|
| Sales | $101.9 | $99.6 | $327.6 | $318.2 |
| Gross profit | $45.2 | $44.9 | $149.8 | $147.0 |
| Gross margin, including occupancy | 44.4% | 45.0% | 45.7% | 46.2% |
| Operating loss | $(3.6) | $(4.6) | $(1.6) | $(4.5) |
| Net loss | $(4.5) | $(5.5) | $(4.0) | $(7.0) |
| Net loss per diluted share | $(0.09) | $(0.11) | $(0.08) | $(0.14) |
| EBITDA, non-GAAP | $3.9 | $2.5 | $20.8 | $16.0 |
Q3 total comparable sales increased 0.9%; comparable sales at 158 DXL stores rose 2.3%, versus 9.2% growth in the prior-year quarter. Nine-month total comparable sales increased 1.8%, and comparable DXL store sales rose 4.2%. Management attributed sales growth to new, non-comparable stores and DXL performance, partly offset by sales lost from stores closed or converted.
Gross margin fell 60 basis points in Q3 and 50 basis points year to date, mainly from the timing of clearance markdowns; higher occupancy costs also pressured Q3 margin. SG&A declined $1.0 million in Q3 and $2.0 million year to date, primarily due to lower advertising and incentive accruals, partly offset by higher store payroll and healthcare costs. Depreciation and amortization increased with store expansion.
For the first nine months, operating cash flow was $8.1 million, compared with an outflow of $5.1 million a year earlier. Capital expenditures were $21.8 million versus $25.4 million. Non-GAAP free cash flow was negative $13.7 million, improving from negative $30.4 million; free cash flow before DXL store capital expenditures was $2.3 million, compared with negative $13.1 million.
At October 29, cash was $6.3 million and inventory was $128.2 million. The balance sheet reported $62.4 million of credit-facility borrowings and $20.9 million of long-term debt, net of issuance costs, for total debt of $83.3 million. Credit-facility unused excess availability was $52.4 million, with $2.9 million of standby and $0.5 million of documentary letters of credit outstanding. Total debt is a point-in-time balance and differs from management’s projected fiscal year-end debt.
Material changes and management commentary
- Sales rose 2.3% in Q3 and 3.0% for the first nine months versus the prior-year periods, but growth was slower than management expected. Management cited broad retail traffic weakness, economic and political uncertainty, and delayed cold weather.
- Inventory was 3.8% lower than at October 31, 2015, following changes to merchandise receipt timing and weeks of supply. Clearance merchandise remained 9.0% of inventory.
- Management said DXL stores opened in non-comparable periods were outperforming plan and return-on-investment hurdles. Rolling 12-month DXL sales per square foot reached $182, up from $174 a year earlier.
- Management described fiscal 2016 as a pivotal year: it expected DXL capital spending to be funded from free cash flow and debt to decline for the first time in four years.
Outlook, risks and contingencies
Management reduced fiscal 2016 sales and EBITDA guidance, citing the decision not to run a fourth-quarter television campaign and delayed cold weather. It expected the reduced advertising to weigh on near-term sales, partly offset by lower marketing costs. Revised guidance was:
- Sales of approximately $451 million–$457 million and total-company comparable sales growth of 1%–2%.
- Gross margin of approximately 46.0%.
- GAAP net loss per diluted share of breakeven to $(0.09); adjusted non-GAAP loss per diluted share of breakeven to $(0.05).
- EBITDA of approximately $30 million–$33 million.
- Year-end total debt of approximately $60 million–$66 million; operating cash flow of $34 million–$38 million and non-GAAP free cash flow of $4 million–$8 million.
- Capital expenditures of approximately $30 million, partly offset by $7 million–$8 million in tenant allowances; planned openings of 25 DXL retail stores and four DXL outlets.
The company historically generates a significant portion of operating income in the holiday-season fourth quarter; interim results therefore may not indicate full-year results. It maintained a full valuation allowance against deferred tax assets and said it expected no income-tax benefit for fiscal 2016. Deferred tax assets were $80.0 million, offset by a $64.7 million valuation allowance; federal and state net operating loss carryforwards were $140.4 million and $81.8 million, respectively.
Borrowings are partly variable-rate. Management estimated that a 50-basis-point rate increase would raise annualized interest expense by approximately $324,500 based on specified average borrowings. Credit-facility availability depends on eligible assets; falling below the specified availability threshold can trigger a minimum fixed-charge coverage requirement for certain transactions. The company reported ordinary-course legal matters that management did not expect to have a material adverse effect, and no material changes to previously disclosed risk factors. Disclosure controls were assessed as effective.
Important facts for investors to verify
- Confirm the intended reporting period: this filing is for fiscal 2016 Q3, not 2015 Q3.
- Track DXL comparable sales, store-level productivity, and whether new-store performance offsets sales lost from closures and conversions.
- Assess holiday-quarter sales and margin assumptions underlying revised guidance, including the effect of reduced television advertising and weather.
- Reconcile projected year-end debt with the $83.3 million reported at quarter-end, and monitor credit-facility availability and seasonal working-capital needs.
- Review execution of inventory controls and the company’s ability to fund store expansion while achieving positive full-year free cash flow.
- Monitor the full deferred-tax valuation allowance, NOL usability, and the performance conditions associated with incentive awards.