Business Context and Reporting Period
Company: Designs, Inc. (filing as DESTINATION XL GROUP, INC. in metadata, but identified as Designs, Inc. in text)
Filing Type: Form 10-K Annual Report
Period Ended: January 31, 1998 (Fiscal Year 1997)
Business Overview: A specialty retailer of branded apparel and accessories, primarily Levi Strauss & Co. products, operating through outlet stores ("Levi's Outlet by Designs"), mall-based first-quality stores ("Designs"), and a joint venture with Levi's Only Stores, Inc. ("OLS Partnership").
Key Financial Metrics
| Metric | Fiscal 1997 | Fiscal 1996 | Change |
|---|---|---|---|
| Total Sales | $265.7 million | $289.6 million | (8.0%) |
| Gross Profit | $38.4 million | $86.2 million | (55.4%) |
| Gross Margin % | 14.4% | 29.8% | (15.4 pts) |
| Net Income (Loss) | $(29.1) million | $6.3 million | Loss vs. Profit |
| Earnings Per Share (Basic) | $(1.86) | $0.40 | N/A |
| Operating Cash Flow | $(7.0) million | $(2.1) million | Worsened |
| Working Capital | $42.1 million | $72.3 million | (41.8%) |
| Long-Term Debt | $1.0 million | $1.0 million | 0% |
| Short-Term Borrowings | $9.8 million | $1.0 million | Significant Increase |
| Inventory | $55.0 million | $80.0 million | (31.0%) |
Material Changes vs. Prior Period
- Strategic Pivot: The Company executed a major shift away from its private label "Boston Traders" concept to a strategy emphasizing national name brands. This resulted in the liquidation of private label inventory and the closure of 33 stores (17 Designs and 16 Boston Traders Outlets).
- Restructuring Charges: A pre-tax charge of $20.0 million was recorded in Q2 1997 related to the strategy shift (including $13.9 million in non-cash inventory markdowns). An additional $1.6 million charge was recorded in Q4 for workforce reduction (25% of headquarters/field management).
- Comparable Store Sales: Declined 10% in Fiscal 1997, driven by lower sales of men's Levi's jeans and tops due to limited assortment and reduced demand.
- Liquidity Position: Shifted from a net cash position of $8.3 million in 1996 to a net borrowing position of $8.4 million in 1997. Short-term borrowings increased to $9.8 million under a new $25 million credit facility.
- Inventory Reduction: Inventory decreased 31% to $55 million, primarily due to the liquidation of Boston Traders brand merchandise.
Guidance, Outlook, and Risks
- Outlook: Management anticipates decreases in comparable store sales through the first and second quarters of Fiscal 1998. The Company expects to test new name brands in the "Boston Trading Co." format throughout 1998.
- Capital Expenditures: Expected to be $2.7 million in Fiscal 1998, including $1.0 million for store remodeling. No new store openings are planned for Fiscal 1998.
- Tax Refund: The Company received a $12.9 million federal income tax refund in March/April 1998 related to Fiscal 1997 losses carried back to prior years. A portion was used to reduce credit facility borrowings.
- Year 2000 Compliance: The Company expects to spend approximately $500,000 in Fiscal 1998 to convert systems to be Year 2000 compliant, with completion anticipated by the end of calendar 1999.
- Legal Contingencies:
- Atlantic Harbor Litigation: Atlantic Harbor, Inc. sued the Company for $1 million regarding a promissory note from a 1995 acquisition. The Company filed a counterclaim alleging damages in excess of $1 million due to breach of representations. Management does not believe the outcome will be materially adverse.
- IRS Examination: The IRS proposed adjustments totaling approximately $4.9 million for tax years 1991-1995. The Company intends to protest these adjustments.
- Key Risks: Heavy reliance on Levi Strauss & Co. brand products; competition from private label retailers; maturity of outlet centers; and potential impact of Year 2000 system failures.
Investor Verification Checklist
- Debt Covenants: Verify compliance with the new BankBoston credit agreement covenants (earnings, net worth, inventory turnover, cash flow ratio), especially given the recent loss and reliance on covenant amendments.
- Inventory Valuation: Confirm the adequacy of the remaining $830,000 markdown reserve for Boston Traders brand products and the valuation of remaining inventory.
- Lease Obligations: Review the $1.8 million accrued reserve for lease terminations and the $136.6 million in future minimum rental commitments.
- Joint Venture Performance: Assess the financial contribution and stability of the OLS Partnership (70% owned), which operates 22 stores.
- IRS Dispute Resolution: Monitor the outcome of the IRS appeal regarding the $4.9 million proposed tax adjustment.
- Store Conversion Success: Track the performance of the 11 "Boston Trading Co." stores testing the new multi-brand strategy to determine if the strategic pivot will restore profitability.