Destination XL Group, Inc. — Form 10-Q Summary
Reporting period: Fiscal third quarter and first nine months ended November 1, 2014; comparative periods ended November 2, 2013. The filing covers fiscal 2014, notwithstanding the request metadata’s “2013 Q3” label. Destination XL is a specialty retailer of big-and-tall men’s apparel, reporting one segment. At quarter-end it operated 361 stores, including 128 DXL locations.
Financial performance and position
| Metric | Q3 2014 | Q3 2013 | First 9 months 2014 | First 9 months 2013 |
|---|---|---|---|---|
| Sales | $93.6 million | $88.7 million | $294.1 million | $280.7 million |
| Gross margin | 43.3% | 44.2% | 44.8% | 45.9% |
| Operating loss | $(5.7) million | $(6.7) million | $(12.3) million | $(7.0) million |
| Net loss | $(6.3) million | $(4.1) million | $(13.8) million | $(4.6) million |
| Net loss per diluted share | $(0.13) | $(0.08) | $(0.28) | $(0.10) |
| EBITDA, non-GAAP | $0.3 million | $(1.8) million | $4.9 million | $6.6 million |
- Q3 sales rose 5.6%; nine-month sales rose 4.8%. Comparable sales increased 5.5% for both periods; DXL comparable sales increased 12.8% in Q3 and 12.3% year to date.
- Gross margin contraction reflected increased promotions and, for the nine-month period, first-quarter clearance markdowns. Q3 SG&A fell 2.0% to $40.2 million, while nine-month SG&A rose 3.9% to $127.0 million. Depreciation and amortization increased with DXL store growth.
- Cash used in operations was $15.4 million for the first nine months, versus $5.5 million used a year earlier. Capital expenditures were $30.8 million; reported non-GAAP free cash flow was $(46.2) million.
- Cash was $6.1 million at November 1, 2014. Current assets were $149.5 million and current liabilities $110.2 million. Inventory was $126.4 million, up from $105.6 million at fiscal year-end but down 2% by units year over year.
- Borrowings under the revolving credit facility were $38.0 million; long-term debt was $36.0 million, including a $15.0 million term loan. Total debt including revolving borrowings was approximately $73.9 million. Unused excess availability under the revolver was $75.1 million.
Changes, outlook and management commentary
- On October 29, 2014, the company increased its revolving facility commitment from $100 million to $125 million, extended maturity to October 2019, and obtained a $15 million secured term loan due October 2019. Term-loan interest is one-month LIBOR, subject to a 1% floor, plus 6.50%; specified early repayments carry fees.
- Management maintained fiscal 2014 guidance: sales of $413–$418 million; gross margin of 45.5%–46.1%; SG&A of $176.0–$177.6 million; EBITDA of $12.4–$15.6 million; and GAAP diluted loss per share of $(0.21)–$(0.27). Non-GAAP loss-per-share guidance, assuming a normalized 40% tax rate, was $(0.12)–$(0.16).
- Fiscal 2014 capital expenditure guidance was $45.7 million, partly offset by $9.3 million in tenant allowances. Management expected year-end debt of $55–$60 million and operating cash flow of $11.6 million, including tenant allowances. It stated that available cash generation and revolver capacity should meet foreseeable liquidity needs within current forecasts.
- Management attributed DXL growth to marketing and promotional efforts; those promotions increased traffic and transactions but reduced merchandise margins. It planned to open 41 DXL stores in fiscal 2014, with 12 opened in the first three weeks of November after quarter-end. “Shop online, store pick-up” was planned for fiscal 2015.
- The company was winding down its Sears Canada business, expecting completion in Q4 fiscal 2014. Its first-nine-month operating loss included $1.3 million from Sears Canada, including an approximately $0.8 million inventory-reserve and sales-allowance charge.
- After quarter-end, the company agreed to exit its San Francisco Rochester store by January 23, 2015, in exchange for a $2.5 million termination payment. The payment was to be recognized in Q4 as a reduction of cost of goods sold, including occupancy costs.
Risks, contingencies and notable items
- The company remained loss-making and recorded a full valuation allowance against net deferred tax assets; management said this remained appropriate. Deferred tax assets were $75.4 million, deferred tax liabilities $15.8 million, and the valuation allowance $59.7 million. Use of tax-loss carryforwards depends on future taxable income and may be limited by ownership changes.
- Expansion and store transitions require substantial investment and financing. Inventory increased, operating cash use worsened, and management cited seasonality, with a significant share of annual operating income traditionally generated in Q4.
- Management identified execution of the DXL strategy, customer tastes and fashion trends, and competition as key risks. Variable-rate borrowing creates interest-rate exposure; a 50-basis-point increase was estimated to add about $160,000 of annualized interest expense based on average borrowings.
- Ordinary-course legal proceedings were disclosed; management did not expect their resolution to materially affect results or financial position. No material changes to previously disclosed risk factors were reported.
Key facts for investors to verify
- Whether DXL comparable-sales growth and store productivity continue as promotional activity eases, and whether margins recover as planned.
- Progress toward fiscal 2014 sales, EBITDA, loss-per-share, capital spending and debt guidance, including the effect of the post-quarter store openings and holiday season.
- Actual operating cash flow, inventory levels, tenant allowances and borrowing availability; reconcile the approximately $73.9 million quarter-end debt with management’s $55–$60 million year-end debt forecast.
- Completion and financial impact of the Sears Canada wind-down and recognition of the $2.5 million San Francisco lease-termination payment.
- Whether the full deferred-tax valuation allowance remains necessary as earnings develop, and the potential impact of ownership changes on tax attributes.