DESTINATION XL GROUP, INC. quarterly report, Q1 FY2021

Destination XL Group, Inc. — Form 10-Q Summary

Reporting period: The filing covers the three months ended May 1, 2021 (fiscal 2021 first quarter), compared mainly with the three months ended May 2, 2020. The request metadata says “2020 Q1,” but the filing itself identifies the period as fiscal 2021 Q1.

Business context

Destination XL is a specialty retailer of big-and-tall men’s clothing, with store, direct/e-commerce and wholesale operations. At May 1, 2021, it operated 301 stores and a digital business. Stores and direct operations are reported together as the retail segment; wholesale was immaterial to segment reporting.

Financial performance and position

Metric	Fiscal 2021 Q1	Comparable period
Sales	$111.5 million	$57.2 million in fiscal 2020 Q1; $113.0 million in fiscal 2019 Q1
Gross profit / gross margin	$50.8 million / 45.6%	$13.2 million / 23.1% in fiscal 2020 Q1; 43.7% in fiscal 2019 Q1
Operating income (loss)	$9.9 million	$(41.0) million in fiscal 2020 Q1
Net income (loss)	$8.7 million; $0.14 diluted EPS	$(41.7) million; $(0.82) diluted EPS in fiscal 2020 Q1
Adjusted EBITDA, non-GAAP	$13.7 million	$(18.9) million in fiscal 2020 Q1; $4.8 million in fiscal 2019 Q1
Operating cash flow / free cash flow, non-GAAP	$7.8 million / $7.0 million	$(16.8) million / $(18.4) million in fiscal 2020 Q1

Sales rose 95% year over year, but were 1.3% below fiscal 2019 Q1. Comparable sales increased 3.7% versus fiscal 2019 Q1: direct sales grew 40.7%, while store sales declined 6.7%. Versus fiscal 2020 Q1, comparable sales increased 99.0%; management cautions that pandemic-related closures make that comparison less informative.

SG&A was $37.1 million, or 33.3% of sales, versus $32.1 million and 56.1% a year earlier; it was $7.5 million lower than fiscal 2019 Q1. Net interest expense was $1.1 million, up from $0.7 million a year earlier. Income tax expense was $28,000; the company maintains a full valuation allowance against deferred tax assets.

At May 1, 2021, cash was $5.8 million, total current assets were $105.3 million, and current liabilities were $128.9 million. Total debt, net of debt issuance costs, was $50.1 million; net of cash, management reported debt of $44.3 million. Revolver borrowings were $33.6 million, with $51.1 million of unused excess availability. Stockholders’ equity was $9.5 million, compared with a $4.1 million deficit at fiscal year-end. Operating lease liabilities totaled $168.2 million, including $38.3 million current.

Material changes and notable items

• Gross margin improved 22.5 percentage points versus fiscal 2020 Q1, reflecting fewer markdowns and improved occupancy-cost leverage, including lease savings. Versus fiscal 2019 Q1, gross margin was up 1.9 points.
• Fiscal 2020 Q1 included a $16.3 million impairment charge related to store assets and lease right-of-use assets. Fiscal 2021 Q1 included a $0.8 million non-cash gain from remeasurement of lease liabilities after decisions to close certain stores.
• Cash from operations improved by $24.6 million year over year. Investing activities used $0.8 million, principally for capital expenditures. Financing activities used $20.1 million, including $26.2 million of net revolver repayments, partly offset by a $17.5 million new FILO loan and $4.4 million net proceeds from an equity offering. Cash declined by $13.2 million during the quarter.
• The February 2021 registered direct offering issued 11.1 million shares for $5.0 million gross proceeds and $4.4 million net proceeds. Shares issued rose from 64.7 million at fiscal year-end to 76.2 million at May 1, 2021.
• The company refinanced its $15.0 million existing FILO loan with a $17.5 million loan. The new loan carried an 8.5% interest rate at May 1, 2021; quarterly principal payments begin December 31, 2021. The revolver and FILO loans mature May 24, 2023, subject to the described extension provisions.
• Inventory was $88.4 million, down $19.9 million from May 2, 2020. Clearance inventory was 10.1% of total inventory versus 11.5% a year earlier.

Management outlook, risks and contingencies

• Management said first-quarter results exceeded expectations and described sales trends as encouraging. It attributed improvement beginning mid-quarter partly to stimulus payments, vaccine rollout, easing restrictions and warmer weather.
• Management expects cash, credit availability and operating cash generation to cover working capital and limited capital expenditures for the next 12 months, while remaining cautious about the pandemic’s duration, variants and effects on consumer demand and supply chains. No specific full-year sales or earnings guidance is provided in the filing text.
• The company expects more than $16.1 million of savings over the terms of approximately 115 renegotiated store leases, including $6.0 million in fiscal 2021. It had 155 stores with a lease expiration or kick-out option within two years, planned no new stores or rebranding in fiscal 2021, and closed 10 stores during the quarter.
• Management expects near-term freight-cost pressure and noted rising costs for some raw materials, particularly cotton. Global supply-chain disruptions could delay inventory receipts in the second half of the year.
• Key risks include continuing COVID-19 effects, execution of the company’s strategy, sales and fashion-trend forecasting, competition, and the ability to grow wholesale. The company noted seasonal fluctuations, with a significant share of operating income traditionally generated in the fourth quarter.
• The company is subject to ordinary-course legal proceedings; management does not expect their resolution to materially affect results or financial position. The filing reports no material changes to previously disclosed risk factors and no material change in internal control over financial reporting.

Important facts for investors to verify

• Whether sales recovery and comparable-sales growth persist beyond pandemic-affected comparisons, especially as store sales remained below fiscal 2019 levels.
• Whether lease renegotiation savings are realized as expected, and how store closures and lease liabilities affect occupancy costs and cash needs.
• Revolver availability, borrowing-base capacity, and the cost and repayment terms of the high-rate FILO loan.
• Cash generation, inventory flow, freight and materials costs, and the company’s ability to maintain liquidity through seasonal working-capital needs.
• The sustainability of reported profitability: fiscal 2021 Q1 included a lease-related non-cash gain, and adjusted EBITDA and adjusted earnings are non-GAAP measures.
• The effect of the 11.1 million-share offering and outstanding equity awards on future diluted share count.