Business context and reporting period
Destination XL Group, Inc. is a specialty retailer of big-and-tall men’s clothing, operating stores, direct-to-consumer and wholesale businesses. At July 31, 2021, it operated 297 stores and an e-commerce business. The supplied filing is a Form 10-Q for the quarter ended July 31, 2021 (fiscal 2021 Q2), not 2020 Q2 as stated in the request metadata.
All dollar figures below are in millions unless otherwise noted. Comparisons with 2020 are heavily affected by pandemic-related store closures and reduced demand; management also compares results with 2019.
Financial performance
| Metric | Three months ended July 31, 2021 | Six months ended July 31, 2021 |
|---|---|---|
| Sales | $138.6 | $250.1 |
| Gross profit / margin | $71.6 / 51.7% | $122.4 / 49.0% |
| Operating income | $25.8 | $35.7 |
| Net income | $24.5; $0.36 diluted EPS | $33.1; $0.50 diluted EPS |
| Adjusted EBITDA (non-GAAP) | $29.8 | $43.5 |
| Operating cash flow | Not separately provided | $42.2 |
| Capital expenditures | Not separately provided | $1.7 |
| Free cash flow (non-GAAP) | Not separately provided | $40.5 |
- Q2 sales rose 81% year over year and were 12% above Q2 2019. First-half sales increased 5.9% versus the first half of 2019. Q2 comparable sales rose 21.6% versus 2019; first-half comparable sales rose 13.1%.
- Q2 sales comprised $99.0 million from stores, $38.7 million from direct sales and $0.9 million from wholesale. Direct sales were 28.1% of retail sales, versus 21.1% in Q2 2019.
- Q2 gross margin improved 740 basis points versus 2019, reflecting higher merchandise margin and lower occupancy costs. SG&A was 30.1% of sales, versus 38.5% in Q2 2019. For the first half, SG&A was 31.5% of sales.
Financial position, liquidity and debt
- At July 31, 2021, cash was $5.8 million, inventory $73.4 million and current assets $87.0 million; current liabilities were $84.6 million.
- There were no borrowings under the $125 million revolving credit facility; unused excess availability was $65.1 million, with $2.7 million of standby letters of credit outstanding.
- Gross FILO debt was $17.5 million, or $16.8 million net of debt issuance costs. Management reported total debt net of cash of $11.0 million. The new FILO loan carried an 8.50% interest rate at quarter-end and begins quarterly principal repayments of $218,750 on December 31, 2021.
- Operating lease liabilities totaled $159.2 million, including $36.9 million current and $122.3 million non-current. This is a significant fixed obligation in addition to reported debt.
- Cash declined by $13.2 million in the first half, principally reflecting net financing outflows, including $59.7 million of net revolver repayments. Operating cash flow was $42.2 million.
Material changes and unusual items
- Compared with the first half of 2020, the company moved from a $52.4 million net loss to $33.1 million net income. The prior period included a $16.3 million non-cash impairment charge; fiscal 2021 included a $1.0 million first-half impairment-line credit associated with store lease exits.
- Compared with Q2 2019, sales rose 12%, gross margin increased 740 basis points, and SG&A expense declined $5.7 million. Management attributed performance to sales recovery, fewer markdowns, lease savings and cost reductions.
- On February 5, 2021, the company issued 11.1 million shares in a registered direct offering, generating $4.4 million net proceeds. Weighted-average basic shares for Q2 increased to 63.5 million from 51.1 million a year earlier; the offering and equity awards are relevant to dilution.
- The March 2021 refinancing replaced a $15.0 million FILO loan with a $17.5 million loan, increasing borrowing capacity. The loan includes prepayment penalties during its initial two-year period.
- Inventory was $73.4 million, down $14.0 million from July 2020 and $37.0 million from July 2019. Clearance inventory was 8.9% of total inventory.
Outlook, management commentary and risks
- Management said Q2 performance exceeded expectations and reported month-over-month sales improvement. It cited a 28.5% increase in the new-to-file customer rate versus Q2 2019 and said the active customer file was nearing pre-pandemic levels.
- The company had renegotiated approximately 133 store leases, expecting more than $17.1 million in savings over the life of the leases, including $6.2 million in fiscal 2021. It reported 119 stores with a lease expiration or kick-out option within two years and no planned new store openings or Casual Male XL rebranding in fiscal 2021.
- Management expects to maintain a reduced promotional posture, while anticipating increased promotions in the holiday season. It flagged elevated freight costs and rising raw-material costs, particularly cotton, as near-term pressures.
- Management said it expects cash on hand, revolving availability and operating cash generation to cover working capital and limited capital expenditures for the next 12 months. This outlook is subject to pandemic and variant uncertainty, supply-chain disruption, customer demand, inventory availability and execution risks. No specific full-year revenue or earnings guidance is provided in the supplied text.
- The company maintained a full valuation allowance against deferred tax assets despite first-half profitability, pending a more consistent profitability record. Legal proceedings in the ordinary course were not expected by management to have a material adverse effect. Management reported disclosure controls were effective and no material change in internal control over financial reporting.
Most important facts for investors to verify
- Confirm the intended reporting period: the filing covers fiscal 2021 Q2, ended July 31, 2021, despite the request’s “2020 Q2” label.
- Assess whether the strong recovery is sustainable using comparisons with 2019, not only pandemic-affected 2020 results; monitor comparable sales, direct-channel growth and margins.
- Verify ongoing cash generation and revolver availability against seasonal working-capital needs, lease obligations and the FILO repayment and interest terms.
- Track freight, cotton and other supply-chain costs, inventory availability, promotional intensity and the execution of lease-related savings.
- Account for dilution from the 11.1 million-share offering and equity awards, and distinguish GAAP results from management’s non-GAAP adjusted measures.