DESTINATION XL GROUP, INC. annual report, FY2017

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

Reporting period: Fiscal 2017, the 53 weeks ended February 3, 2018. The request identifies “2016 Q4,” but the supplied filing is the annual report for fiscal 2017; it includes unaudited fourth-quarter data. Fiscal 2016 was a 52-week year. Destination XL is a specialty retailer of big-and-tall men’s apparel, operating stores and e-commerce under the DXL and related brands.

Financial results and liquidity

  • Sales: $468.0 million, up 3.9% from $450.3 million. The increase included $6.9 million from the extra fiscal week; comparable sales rose 0.9% for the year and 4.3% in the fourth quarter.
  • Profitability: Gross margin was 45.0%, down from 45.5%. Operating loss was $18.0 million versus operating income of $1.0 million; net loss was $18.8 million, or $0.39 per diluted share, versus a $2.3 million loss, or $0.05 per share.
  • Costs and unusual charges: SG&A rose 11.5% to $193.2 million, including an $11.3 million increase in advertising. Impairment charges were $4.1 million, including $2.2 million for store assets and $1.9 million for abandoned technology projects. The 53rd week contributed approximately $1.6 million of operating income.
  • Cash flow: Operating cash flow was $31.0 million, down from $35.0 million. Capital expenditures were $22.6 million; company-defined free cash flow was $8.4 million, compared with $5.8 million.
  • Debt and liquidity: Total debt, net of issuance costs, was $59.4 million, down $3.7 million. Cash was $5.4 million, working capital $11.9 million, and the current ratio 1.1:1. Unused excess availability under the asset-based credit facility was $37.5 million, down from $57.0 million. The facility matures October 2019; a $11.75 million term loan matures in 2019.
  • Balance sheet: Inventory fell $14.1 million to $103.3 million; stockholders’ equity declined to $70.0 million from $88.5 million. Operating lease commitments totaled $343.0 million.
  • Channel and footprint: Direct business represented 21.0% of annual sales, versus 19.9% in fiscal 2016, and 23.1% in the fourth quarter. The company ended the year with 342 stores.

Changes versus fiscal 2016

Sales increased, helped by the extra week and store additions, but earnings fell sharply. Management attributed the deterioration primarily to higher marketing expense and impairment charges, alongside a 50-basis-point gross-margin decline. Comparable sales improved to 0.9% from 0.6%, after weakness in the first three quarters and a stronger fourth quarter. Inventory reduction supported cash generation and reduced inventory by 12% year over year, while also contributing to higher promotional markdowns.

Outlook, commentary, and risks

  • Fiscal 2018 outlook: Sales of $462–$472 million; comparable-sales growth of approximately 1%–3%; gross margin around 45%; GAAP net loss of $8.3–$14.3 million, or $0.17–$0.29 per diluted share; and EBITDA of $18–$24 million. Management expects operating cash flow of $20.5–$26.5 million and free cash flow of $9.1–$15.1 million.
  • Forecast sales reflect one fewer week and an expected net reduction of nine stores, estimated to reduce sales by approximately $5.3 million. Planned capital expenditures are approximately $11.4 million, partly offset by $1.1 million in tenant allowances. Marketing expense is expected to decline to $24.0 million from $29.5 million.
  • Management’s strategy emphasizes customer acquisition and retention, store productivity, e-commerce growth, personalized marketing, and selective store remodeling and closures. Management cautioned that the fiscal 2018 outlook excludes any additional costs associated with the CEO transition.
  • CEO David Levin announced plans to retire by the end of 2018; the board began a successor search. A transition agreement provides for continued employment and transition duties through December 2019, subject to its terms.
  • The 2017 Tax Act resulted in a $2.1 million income tax benefit from a refundable AMT credit. The company maintains a full valuation allowance against deferred tax assets and expects no income tax benefit in fiscal 2018.
  • Key risks include weak store traffic and execution of the DXL strategy, retail competition and changing fashion demand, reliance on third-party suppliers and a centralized distribution center, cybersecurity exposure, lease and borrowing-base constraints, and seasonal dependence on fourth-quarter sales. The company reported no material adverse effect expected from ordinary-course legal proceedings.

Important facts for investors to verify

  • Whether comparable-sales momentum and customer traffic continued after the fourth-quarter improvement, and how much full-year growth depended on the extra week and new stores.
  • Whether fiscal 2018 sales, margin, loss, EBITDA, and cash-flow guidance was achieved, including the impact of CEO-transition costs.
  • Whether inventory reductions can be sustained without increased markdowns or reduced product availability, and whether the lower inventory base further constrains credit-facility availability.
  • Current borrowing availability, debt repayment and refinancing plans ahead of the 2019 facility and term-loan maturities, and compliance with credit-agreement covenants.
  • Progress in e-commerce growth, store productivity, planned store conversions and closures, and the effectiveness of the reduced marketing program.
  • Lease obligations and the expected balance-sheet impact of adopting the new lease-accounting standard. The filing states adoption was expected to materially increase reported lease assets and liabilities.
  • The CEO succession outcome and related transition payments. The filing reports unqualified audit opinions on the financial statements and internal control over financial reporting.