Destination XL Group, Inc. — Form 10-Q Summary
Reporting period: Third quarter and first nine months of fiscal 2018, with the quarter ended November 3, 2018. The filing’s stated period differs from the request metadata (“2017 Q3”); this summary reflects the filing.
Business context and period
Destination XL is a specialty retailer of big-and-tall men’s apparel, operating stores and direct/e-commerce channels in the U.S., Canada and London. It reports one segment. At quarter-end it operated 333 stores, versus 344 a year earlier. Fiscal 2018 is a 52-week year; fiscal 2017 had 53 weeks.
Financial performance and liquidity
| Metric | Q3 FY2018 | Q3 FY2017 | Nine months FY2018 | Nine months FY2017 |
|---|---|---|---|---|
| Sales | $107.1m | $103.7m | $342.6m | $332.5m |
| Gross margin, including occupancy | 44.0% | 43.2% | 45.0% | 44.9% |
| Operating loss | $(1.2)m | $(4.8)m | $(3.7)m | $(12.9)m |
| Net loss | $(2.0)m | $(5.7)m | $(6.3)m | $(15.5)m |
| Net loss per diluted share | $(0.04) | $(0.12) | $(0.13) | $(0.32) |
| Adjusted EBITDA (non-GAAP) | $6.6m | $2.8m | $20.7m | $12.1m |
Quarterly comparable sales increased 3.4%; nine-month comparable sales increased 3.0%. Direct sales were 20.4% of nine-month sales, up from 20.1%. Q3 SG&A declined $1.5m year over year, mainly from lower payroll costs; nine-month SG&A fell $3.6m, with payroll and marketing savings partly offset by higher e-commerce and technology costs. Q3 gross margin improved largely through lower occupancy costs relative to sales; merchandise margin was slightly lower.
Operating cash flow was $(1.3)m for the first nine months, versus $5.2m a year earlier. Capital expenditures were $9.8m versus $18.4m; free cash flow, a non-GAAP measure, was $(11.1)m versus $(13.2)m. Cash at quarter-end was $6.4m. Inventory was $116.4m, up from $103.3m at fiscal year-end but down $3.5m year over year.
Gross debt was $72.7m, or $72.0m net of debt issuance costs, compared with $81.4m total debt at the prior-year third-quarter end. The revolving facility had $57.7m outstanding and $45.4m of unused excess availability; the $15.0m FILO loan was also outstanding. The amended credit facility matures May 24, 2023. Management cited variable-rate exposure; a 50-basis-point rate increase was estimated to raise annual interest expense by about $0.36m.
Changes, outlook and management commentary
- Management attributed sales growth to improving store traffic, conversion and transaction size, plus direct-channel growth. It launched an updated website during the quarter.
- A May 2018 restructuring eliminated 56 positions, about 15% of corporate staff. Charges totaled approximately $1.9m; management expected $5.6m of FY2018 savings and $10.3m annualized savings.
- CEO succession remained unsettled: the initial search ended in October and a new search began in November. If no successor was appointed by December 31, 2018, the outgoing CEO was to serve as acting CEO from January 1, 2019, for at least four months, at $200,000 per month subject to an $800,000 minimum.
- Revised FY2018 guidance: sales of $470m–$474m; comparable-sales growth of 2.5%–3.5%; gross margin of about 44.9%; GAAP net loss of $9.8m–$12.8m, or $0.20–$0.26 per diluted share; adjusted EBITDA of $24m–$27m; operating cash flow of $22.5m–$26.5m; and free cash flow of $10m–$14m. Capital expenditures were estimated at $12.5m, including tenant allowances. Management expected free cash flow to support debt reduction.
- The company maintained a full valuation allowance against net deferred tax assets; it did not expect a fiscal 2018 income-tax benefit. It reported $52.5m of deferred tax assets and a $48.5m valuation allowance.
- Adoption of the new lease standard in fiscal 2019 was expected to materially increase reported assets and liabilities, but management did not expect a material effect on earnings or liquidity. Management said no material changes had occurred to previously disclosed risk factors; ordinary-course legal matters were not expected to have a material adverse effect.
Important facts for investors to verify
- Whether comparable-sales momentum, store productivity and direct-channel growth persist through the holiday season.
- Actual delivery of the revised FY2018 sales, margin, adjusted EBITDA and cash-flow guidance, including the effects of inventory timing and seasonality.
- Restructuring savings realized versus the $5.6m FY2018 and $10.3m annualized estimates, and associated cash costs.
- Debt, borrowing availability, variable interest costs and covenant headroom under the asset-based credit facility.
- CEO succession timing and the resulting transition costs and compensation obligations.
- The balance-sheet impact of lease-standard adoption and the recoverability of deferred tax assets subject to the valuation allowance.