Destination XL Group, Inc. — Form 10-K Summary
Reporting period: The supplied filing is the annual report for fiscal 2012, a 53-week year ended February 2, 2013, with comparisons to fiscal 2011. Although the request metadata says “2011 Q4,” the filing covers fiscal 2012; fourth-quarter figures are noted separately below.
Business context
The company, formerly Casual Male Retail Group, is a specialty retailer of big-and-tall men’s apparel, operating retail and direct channels. Its strategic priority is accelerating the rollout of Destination XL (DXL) stores and transitioning away from most Casual Male XL retail stores. At year-end, it operated 412 stores: 48 DXL, 297 Casual Male XL retail, 55 outlets and 12 Rochester Clothing stores.
Financial performance and liquidity
| Metric | Fiscal 2012 | Fiscal 2011 |
|---|---|---|
| Sales | $399.6 million | $395.9 million |
| Gross profit / margin | $185.8 million / 46.5% | $183.2 million / 46.3% |
| Operating income (loss) | $13.9 million | $(4.5) million |
| Income from continuing operations | $8.1 million | $44.8 million |
| Net income / diluted EPS | $6.1 million / $0.13 | $42.7 million / $0.89 |
| Cash from operations | $29.9 million | $23.4 million |
| Capital expenditures / free cash flow* | $32.4 million / $(2.5) million | $18.0 million / $5.4 million |
Comparable sales rose 1.5% on a comparable 53-week basis: retail increased 2.0% and direct declined 1.0%. DXL comparable-store sales rose 15.6%; e-commerce sales increased 11.2%, while catalog sales fell 31.1%. The DXL stores represented 28% of total business in fiscal 2012.
At year-end, cash was $8.2 million, working capital was $70.9 million and the current ratio was 2.1:1. There were no borrowings under the $75 million revolving credit facility and $71.0 million of unused availability. Inventory was $104.2 million, essentially flat in dollars year over year and down 4% in units. Stockholders’ equity was $161.2 million.
Fiscal 2012 fourth quarter: Sales were $114.9 million, operating income was $7.0 million, net income was $4.2 million and diluted EPS was $0.09. Fourth-quarter results are seasonally important to the business.
*Free cash flow is a company-defined non-GAAP measure, calculated as operating cash flow less capital expenditures and, if applicable, discretionary store asset acquisitions.
Material changes versus the prior year
- Sales increased 1.0% as reported; fiscal 2012 included an additional week, and the 53rd week contributed $5.1 million in sales.
- Operating income improved from a loss to $13.9 million, as fiscal 2011 included a $23.1 million non-cash Casual Male trademark impairment.
- Reported net income fell sharply from fiscal 2011, which included a $42.5 million tax benefit from reversing most of the deferred-tax valuation allowance. On management’s adjusted, normalized-tax comparison, fiscal 2011 continuing-operations diluted EPS was $0.22 versus $0.17 in fiscal 2012.
- Capital expenditures rose to $32.4 million, principally for DXL openings; free cash flow consequently turned negative despite higher operating cash flow.
- The company closed its European direct business in fiscal 2012, recording a $1.1 million early-termination fee. Its results are presented as discontinued operations.
Outlook, management commentary and risks
For fiscal 2013, management projected sales of $415–$420 million, gross margin within 20 basis points of fiscal 2012, operating margin of break-even to 0.5%, and diluted EPS of break-even to $0.03. It planned 57–64 DXL openings and 110–119 Casual Male XL and Rochester store closures. Capital expenditures were expected to be about $54 million, partly offset by approximately $9 million of tenant allowances; projected free cash flow was approximately $(22) million and year-end borrowings $10–$15 million.
Management’s longer-term targets included operating margins of about 4% in fiscal 2014 and 8% in fiscal 2015, followed by fiscal 2016 sales above $600 million, margins above 10% and free cash flow of $60–$70 million. These are projections, not reported results. Management cited approximately $150 million in capital expenditures, incremental SG&A and other charges over the three-year rollout period, funded primarily from operating cash flow and limited credit-facility borrowings. It also expected fiscal 2013 marketing spending to rise to $28.1 million from $18.5 million.
Key risks include execution of the accelerated store conversion and customer acquisition plan; DXL performance and brand-awareness results not meeting expectations; store closures, lease and transition costs; retail competition and changing consumer demand; reliance on third-party manufacturers and international sourcing; and disruption to the centralized distribution center or information systems. The company reported $252.1 million of future operating lease commitments, $49.0 million of merchandise purchase obligations and $63.6 million of open purchase orders, approximately 95% of which it estimated may be non-cancelable. Its pension plan was underfunded by $4.3 million. Management said ordinary-course legal matters were not expected to materially affect results or financial position. The auditor issued unqualified opinions on the financial statements and internal control over financial reporting; management also concluded disclosure controls were effective.
Important facts for investors to verify
- Whether DXL stores sustain comparable-sales and productivity gains as the rollout expands; fiscal 2012 DXL sales per square foot were $147, versus $179 in fiscal 2011, and management’s long-term estimate was about $230.
- Whether planned openings, closures, tenant allowances and transition spending align with the fiscal 2013 capital, earnings and borrowing forecasts.
- Whether weaker catalog sales are offset by e-commerce and digital marketing, and whether the planned national campaign delivers results beyond the limited market tests described.
- Whether cash generation and credit availability remain sufficient given negative projected free cash flow, operating leases, purchase commitments and the accelerated investment plan.
- How the deferred-tax assets and tax-loss carryforwards are realized; fiscal 2011 reported earnings benefited materially from a one-time valuation-allowance reversal.
- Whether store closures or changing forecasts trigger additional trademark or long-lived-asset impairment charges.