Destination XL Group, Inc. — Form 10-Q Summary
Period clarification: The supplied filing is for the third quarter ended October 31, 2020, and nine months ended October 31, 2020—not 2019 Q3 as stated in the request. Comparative periods ended November 2, 2019. Dollar amounts below are in millions unless stated otherwise.
Business context
Destination XL is a specialty retailer of big-and-tall men’s clothing, operating stores, direct-to-consumer and wholesale channels. At October 31, 2020, it operated 316 stores. Its fiscal year ends January 30, 2021. COVID-19 materially disrupted operations: stores closed temporarily in March and all had reopened by the end of June, but operated with reduced hours and some were periodically closed again.
Financial performance
| Metric | Q3 2020 | Q3 2019 | Nine months 2020 | Nine months 2019 |
|---|---|---|---|---|
| Sales | $85.2 | $106.6 | $218.8 | $342.8 |
| Gross profit | $31.1 | $43.8 | $65.8 | $147.8 |
| Gross margin, including occupancy | 36.5% | 41.1% | 30.1% | 43.1% |
| Operating loss | $(5.9) | $(6.4) | $(56.5) | $(7.7) |
| Net loss | $(7.0) | $(7.2) | $(59.5) | $(10.2) |
| Net loss per diluted share | $(0.14) | $(0.14) | $(1.16) | $(0.21) |
- Q3 comparable sales fell 20.5% year over year, improving from a 38.6% decline in Q2. Comparable store sales fell 31.5%; direct sales rose 18.2%, including a 28.4% increase at DXL.com.
- Q3 selling, general and administrative expense was $32.8 million, or 38.5% of sales, versus $42.1 million, or 39.5%, a year earlier. For the nine months, SG&A was $90.7 million, or 41.5% of sales, versus $134.2 million, or 39.1%.
- Nine-month results included a $15.2 million net impairment charge. The Q3 statement reflects a $1.1 million reduction in impairment expense associated with lease exits. Q3 2019 included $1.7 million of London exit costs; nine-month 2019 also included $0.7 million of CEO transition costs.
- Adjusted EBITDA, a non-GAAP measure, was $(1.7) million in Q3 2020 versus $1.7 million in Q3 2019, and $(24.9) million for the first nine months versus $13.6 million. Management defines and reconciles this measure in the filing.
Cash flow, debt and liquidity
- Nine-month operating cash flow was $(8.6) million versus $(14.4) million; capital expenditures were $2.9 million versus $11.0 million. Free cash flow, a non-GAAP measure, was $(11.6) million versus $(25.4) million.
- Cash was $21.4 million at October 31, 2020, up from $4.3 million at fiscal year-end. Cash increased by $17.1 million over the nine-month period, supported by $28.7 million of net credit-facility borrowings.
- Net debt was $61.5 million; total debt, net of issuance costs, was $82.9 million, comprising $68.0 million under the revolving facility and $14.9 million of FILO debt. Revolver availability was $13.5 million. The company reported $28.6 million of accounts payable, including $1.3 million of vendor promissory notes.
- Current assets were $127.1 million and current liabilities $165.1 million. Stockholders’ equity was only $1.1 million, down from $58.4 million at February 1, 2020. Inventory was $94.9 million, down from $120.2 million a year earlier.
- Operating lease liabilities totaled $196.5 million, including $45.6 million current. The filing reports $228.5 million in undiscounted remaining minimum lease payments.
Outlook, commentary and risks
- Management said it believed available cash, credit-facility availability and expected cash generation would cover working-capital needs and limited capital spending for the next 12 months, assuming no further significant economic shutdowns. The pandemic’s future effects were described as highly uncertain.
- After quarter-end, the company announced additional restructuring, including 45 further corporate position eliminations and reductions to service, professional-services and marketing costs. It expects $9.7 million in annualized savings and approximately $0.5 million of fourth-quarter cash severance and termination charges.
- Management cited weaker event-driven apparel demand, October sales momentum slowing, shipping-cost pressure from direct-channel growth and free-shipping promotions, and possible renewed store closures. Supply-chain disruption, vendor terms, inventory access, further impairments and the ability to manage costs and credit availability are additional risks.
- The company transferred to the Nasdaq Capital Market after failing the Global Select Market stockholders’ equity requirement. It also remained below the $1.00 minimum bid-price requirement, with a compliance deadline of December 21, 2020; a reverse stock split was an option under consideration. Delisting could reduce trading liquidity and adversely affect the share price.
- Management reported disclosure controls and procedures were effective as of October 31, 2020. Ordinary-course legal proceedings were not expected by management to have a material adverse effect.
Most important facts for investors to verify
- Confirm the reporting period: this filing covers Q3 2020, not Q3 2019.
- Track cash, revolver availability, borrowing-base terms and covenant/listing compliance, particularly given $1.1 million of stockholders’ equity and $13.5 million of reported facility availability.
- Assess whether direct-channel growth can offset persistent store weakness and whether gross margins recover as promotions, occupancy costs and shipping expenses change.
- Verify the execution and realization of announced $9.7 million annualized savings, and any related restructuring charges.
- Monitor the pandemic, store operations, vendor and supply-chain conditions, lease negotiations, and potential additional impairments or liquidity needs.