Business context and reporting period
Destination XL Group, Inc. is a specialty retailer of big-and-tall men’s clothing, operating stores and digital channels under DXL and Casual Male XL brands. This is the Form 10-Q for the fiscal third quarter ended October 29, 2022, and the first nine months of fiscal 2022; the filing’s period differs from the “2021 Q3” request metadata. The company reported one retail segment. It ended its relationship with its primary wholesale customer in Q1 FY2022. At quarter-end, it operated 283 stores.
Financial performance and position
| Metric | Q3 FY2022 | Q3 FY2021 | Nine months FY2022 | Nine months FY2021 |
|---|---|---|---|---|
| Sales | $129.7 million | $121.5 million | $402.0 million | $371.6 million |
| Gross margin | 50.0% | 50.2% | 50.8% | 49.4% |
| Operating income | $12.7 million | $15.9 million | $48.2 million | $51.6 million |
| Net income | $10.5 million | $13.7 million | $80.8 million | $46.8 million |
| Diluted EPS | $0.16 | $0.20 | $1.20 | $0.69 |
| Adjusted EBITDA (non-GAAP) | $16.4 million | $19.0 million | $59.6 million | $62.5 million |
- Q3 comparable sales rose 8.7%: stores +10.1% and direct +5.5%. Nine-month comparable sales increased 10.9%. Q3 total sales growth was approximately 6.7%; nine-month sales growth was 8.2%.
- Q3 SG&A was $48.4 million, or 37.3% of sales, versus $42.0 million and 34.5% a year earlier. Higher marketing, payroll and performance-incentive costs contributed. Q3 gross margin declined 0.2 percentage points as higher freight, raw-material and marketplace commission costs partly offset lower promotions.
- Nine-month net income included a $33.5 million non-cash tax benefit from releasing most of the U.S. deferred-tax-asset valuation allowance. The reported earnings increase therefore does not reflect operating growth alone.
- Operating cash flow was $30.2 million versus $64.2 million; capital expenditures were $7.9 million versus $2.8 million. Free cash flow, a non-GAAP measure, was $22.3 million versus $61.3 million. Inventory investment was a key use of cash.
- Cash was $23.5 million at October 29, 2022, up from $15.5 million at fiscal year-end. Inventory was $106.8 million, up 29.8% from the prior-year quarter; management said it was 11.1% below Q3 FY2019 levels and inventory turns were over 30% higher than then.
- No long-term debt or credit-facility borrowings were outstanding. The $125 million asset-based facility had $90.2 million of unused availability, subject to its borrowing-base terms; letters of credit totaled $4.8 million. Operating lease liabilities totaled $147.7 million, including current and long-term portions.
- Stockholders’ equity was $127.4 million at quarter-end. The company repurchased 2.9 million shares for $12.7 million in the first nine months under a $15 million program; there were no Q3 repurchases.
Changes, outlook, risks and notable items
- Management said Q3 results exceeded internal expectations, supported by store growth, higher transaction values and conversion, fewer promotions, and sales of higher-priced merchandise. Comparable sales were up 33.7% against Q3 FY2019.
- Management expected single-digit comparable-sales growth in Q4 FY2022, while cautioning that inflation and other macroeconomic conditions could affect consumer spending. Fiscal 2022 marketing expense was expected to be about 6.2% of sales; capital expenditures were expected to be approximately $10–$12 million.
- The company described its inventory position as strong, with clearance inventory at 6.7% of total inventory versus 8.9% a year earlier. It cited inflation, labor shortages and higher labor costs, consumer-spending changes, supply-chain uncertainty, freight and raw-material costs, fashion-trend execution, and the ongoing effects of COVID-19 and the war in Ukraine as risks.
- During the first nine months, the company closed five Casual Male XL stores and two DXL stores. It was evaluating conversions, relocations and new-store opportunities, and said a preliminary three-to-five-year plan could include up to 50 new or relocated stores.
- Management believed cash, credit availability and operating cash flow would fund working capital, repurchases and capital expenditures for at least the next 12 months. This outlook is subject to operating results, inventory needs and credit-facility availability.
- Ordinary-course legal proceedings were not expected by management to have a material adverse effect. The company reported no material changes to previously disclosed risk factors and stated that disclosure controls were effective.
Important facts for investors to verify
- Whether Q4 comparable-sales growth met management’s single-digit expectation and how consumer demand, promotions and margins evolved.
- Whether the $33.5 million valuation-allowance release and deferred tax assets are realizable as forecast, and the effect on future tax expense.
- Whether inventory growth converts to sales without markdowns, and whether freight, raw-material and labor costs continue to pressure margins.
- Actual operating cash flow, capital spending and free cash flow compared with management’s outlook, including funding of the remaining repurchase authorization.
- Credit-facility availability and covenant headroom, alongside substantial lease obligations and planned store investment.
- The business impact of ending the primary wholesale relationship and execution of store closures, conversions, relocations and potential new openings.