Destination XL Group, Inc. — Form 10-Q Summary
Period: The filing covers the quarter ended October 31, 2015, and the first nine months of fiscal 2015. Although the request metadata says 2014 Q3, the filing itself identifies the period as fiscal 2015 Q3. Amounts below are in U.S. dollars; financial statement figures are in millions unless noted.
Business context and reporting period
Destination XL is a specialty retailer of big-and-tall men’s apparel, reporting one segment. Its retail and direct operations include DXL, Casual Male XL, outlet, Rochester Clothing, and e-commerce businesses. At quarter-end it operated 354 stores, including 163 DXL retail stores and 9 DXL outlets. The company was expanding DXL while closing or converting legacy stores. Retail results are seasonal, with a significant portion of operating income typically generated in the holiday-season fourth quarter.
Key financial metrics
| Metric | Q3 FY2015 | Q3 FY2014 | First nine months FY2015 | First nine months FY2014 |
|---|---|---|---|---|
| Sales | $99.6 | $93.6 | $318.2 | $294.5 |
| Gross profit | $44.9 | $40.6 | $147.0 | $132.7 |
| Gross margin, including occupancy | 45.0% | 43.3% | 46.2% | 45.1% |
| Operating loss | $(4.6) | $(5.5) | $(4.5) | $(11.0) |
| Net loss | $(5.5) | $(6.3) | $(7.0) | $(13.8) |
| Basic and diluted loss per share | $(0.11) | $(0.13) | $(0.14) | $(0.28) |
Q3 sales increased about 6.4% year over year; nine-month sales increased about 8.1%. DXL comparable sales rose 9.2% in Q3 and 10.0% for the first nine months. Non-GAAP EBITDA from continuing operations was $2.5 million in Q3 and $16.0 million year to date, versus $0.5 million and $6.1 million, respectively, in the prior-year periods. Adjusted net loss per diluted share, a non-GAAP measure assuming a normalized 40% tax rate, was $0.07 in Q3 and $0.08 year to date.
For the first nine months, cash used in operating activities was $5.1 million, compared with $15.4 million used in the prior-year period. Capital expenditures were $25.4 million, down from $30.8 million; reported free cash flow, a non-GAAP measure, was negative $30.4 million versus negative $46.2 million.
At October 31, 2015, cash was $5.6 million and inventory was $133.3 million. Gross debt was $84.9 million, or $83.9 million net of unamortized debt issuance costs; debt included $56.4 million drawn under the revolving credit facility. The company reported $62.8 million of unused excess availability and $2.5 million of outstanding standby letters of credit. Total stockholders’ equity was $88.2 million. Working-capital needs, particularly inventory, and store investment are key uses of liquidity.
Material changes versus the prior comparable period
- Q3 gross margin improved 170 basis points, reflecting 120 basis points of better merchandise margin and 50 basis points of lower occupancy costs as a percentage of sales. Year-to-date gross margin improved 110 basis points.
- Q3 operating and net losses narrowed; the year-to-date net loss also improved. The prior-year comparisons include discontinued Sears Canada operations: a $1.3 million loss for the first nine months of FY2014, including approximately $0.8 million of inventory-reserve and sales-allowance charges. No discontinued-operation loss was reported in FY2015.
- Year-to-date SG&A increased $4.4 million and depreciation and amortization increased $3.4 million, largely associated with DXL store growth. Interest expense rose to $2.3 million from $1.4 million.
- Cash used in operations and capital expenditures both declined year over year, improving reported free cash flow. Revolver borrowings on the balance sheet increased to $55.9 million from $18.8 million at January 31, 2015.
- Inventory was $133.3 million, up from $126.4 million a year earlier; management attributed the increase partly to greater store square footage and a higher mix of higher-cost branded apparel. Clearance merchandise was 9.0% of inventory, unchanged from the prior-year quarter.
Outlook, management commentary, and risks
- Management narrowed FY2015 sales guidance to $438–$440 million and EBITDA guidance to $21–$22 million. Expected gross margin remained 45.9%; expected operating margin was negative 1.7% to negative 1.2%. Forecast GAAP net loss was $0.20–$0.23 per diluted share; adjusted net loss was $0.12–$0.14 per diluted share.
- Management cited unseasonably warm October weather and slower-than-expected demand for cold-weather categories entering Q4. Results depend in part on seasonal sales, and management maintained a cautious outlook.
- FY2015 capital expenditures were forecast at $36–$39 million, partly offset by $6–$7 million of tenant allowances. Management expected year-end debt of $72–$76 million and operating cash flow of $16.5–$17.5 million, including tenant allowances; forecast free cash flow was negative $18.5–$22.5 million.
- The company expected to open another three DXL retail stores during FY2015 and said its market study supported approximately 400 potential DXL locations. Management projected 30–40 DXL openings annually through at least FY2020 and planned to explore international growth through franchise and license arrangements.
- A full valuation allowance remained against deferred tax assets; management expected no income-tax benefit in FY2015. Deferred tax assets were $78.2 million, with a $62.8 million valuation allowance. The company reported $128.7 million of federal and $73.5 million of state net operating loss carryforwards.
- Liquidity depends on operating cash flow and asset-based credit availability. The $125 million revolving facility matures in 2019, is secured by substantially all assets other than specified exclusions, and has availability tied to eligible assets. A minimum fixed-charge coverage ratio may apply if excess availability falls below specified thresholds. A 50-basis-point rise in interest rates was estimated to increase annual interest expense by about $274,000.
- Management said existing cash generation and credit availability should meet foreseeable liquidity needs under current forecasts. Legal proceedings arise in the ordinary course; management did not expect them to materially affect results or financial position. The filing reported no material changes to previously disclosed risk factors.
Important facts for investors to verify
- Whether DXL comparable-sales momentum and improved merchandise margins persisted after the quarter, particularly amid warm-weather-related weakness in seasonal categories.
- Whether FY2015 sales, EBITDA, loss-per-share, capital-spending, cash-flow, and year-end debt guidance was achieved; these are management forecasts, not reported results.
- Inventory levels, clearance mix, and the cash required to support the planned store rollout, including the timing and amount of tenant allowances.
- Revolver borrowing-base availability, covenant thresholds, interest costs, and the company’s capacity to finance expansion while operating at a loss.
- Whether performance targets for incentive awards become probable, and whether deferred tax assets and loss carryforwards can ultimately be realized.