Destination XL Group, Inc. — FY2015 Form 10-K
Reporting period: Fiscal year ended January 30, 2016 (52 weeks). The filing is an FY2015 annual report, not a report for 2014 Q4. Destination XL is a specialty retailer of big-and-tall men’s apparel, operating stores and e-commerce as a single reporting segment.
Business context and strategy
- The company was transitioning its legacy Casual Male XL and Rochester store base to the larger Destination XL (DXL) format. At year-end it operated 166 DXL retail stores, 9 DXL outlets, 125 Casual Male XL retail stores, 40 Casual Male XL outlets and 5 Rochester stores.
- Management identified about 400 potential U.S. locations for DXL, and planned to open 30–40 DXL stores annually through at least FY2020. FY2015 openings included 29 DXL retail stores and 7 DXL outlets.
- DXL comparable sales increased 9.7% for FY2015, following 13.7% growth in FY2014. Store sales per square foot rose to $177 from $165. Management highlighted customer conversion, the “end-of-rack” segment, and integrated online/store fulfillment as growth drivers.
Financial performance and liquidity
| Metric | FY2015 | FY2014 |
|---|---|---|
| Sales | $442.2 million | $414.0 million |
| Comparable sales growth | 4.8% | 6.4% |
| Gross profit | $203.8 million | $190.0 million |
| Gross margin | 46.1% | 45.9% |
| SG&A | $180.6 million | $174.8 million |
| Operating loss | $(5.1) million | $(8.8) million |
| Net loss | $(8.4) million; $(0.17) per diluted share | $(12.3) million; $(0.25) per diluted share |
| EBITDA from continuing operations (non-GAAP) | $23.3 million | $15.2 million |
| Cash from operating activities | $18.4 million | $13.8 million |
| Capital expenditures | $33.4 million | $40.9 million |
| Free cash flow (non-GAAP) | $(15.0) million | $(27.1) million |
Sales increased 6.8%, supported by 4.8% comparable growth and new DXL stores, partly offset by sales lost from store closures. Merchandise margin improved 40 basis points year over year; management cited stronger initial margins, fewer markdowns and less promotion. SG&A declined as a share of sales to 40.8% from 42.2%, while depreciation and amortization increased to $28.4 million as the store conversion expanded. Net interest expense rose to $3.1 million from $2.1 million.
- Year-end liquidity: Cash was $5.2 million; working capital was $28.1 million, down from $42.8 million; current ratio was 1.2:1, versus 1.5:1.
- Debt: Total debt, net of issuance costs, was $68.1 million, up from $52.3 million. This comprised $42.4 million drawn on the revolving credit facility, $12.9 million of equipment notes and $13.8 million of term-loan principal. Revolver excess availability was $66.0 million.
- Investment needs: FY2015 capital spending exceeded operating cash flow, producing negative free cash flow while the company funded store expansion. Inventory increased $9.8 million to $125.0 million; clearance inventory fell to 8.1% of total inventory from 8.4%.
Outlook, risks and notable items
- FY2016 guidance: Sales of $465–$472 million; comparable-sales growth of approximately 4.8%–5.5%; gross margin of 46.2%–46.5%; and EBITDA of $31–$35 million. GAAP earnings guidance was breakeven to a loss of $0.09 per diluted share; adjusted non-GAAP guidance was breakeven to a loss of $0.05 per diluted share.
- Management planned 28 DXL retail and 3 DXL outlet openings, alongside about 26 Casual Male XL retail and 3 outlet closures. Capital expenditures were projected at about $30 million, partly offset by $7–$8 million of tenant allowances. FY2016 ending debt was forecast at $64–$69 million; free cash flow after DXL capital expenditures was forecast at breakeven to $5 million.
- The company maintained a full valuation allowance against deferred tax assets and expected no FY2016 tax benefit. It reported federal net operating loss carryforwards of $141.2 million, but realization depends on generating taxable income.
- Material execution risks include store-opening economics and lease terms, conversion and retention of legacy customers, competition and fashion/inventory risk, continued losses and capital demands, and dependence on third-party suppliers and a centralized distribution center. The company also cited cybersecurity, regulatory, economic and international sourcing risks.
- Contractual obligations included $322.8 million of operating lease payments. The company also disclosed approximately $70.2 million of open merchandise purchase orders, about 95% of which it estimated may be non-cancelable. The filing states there were no off-balance-sheet arrangements and that ordinary-course legal matters were not expected to materially affect results or financial position.
- FY2014 results included a $2.5 million payment for exiting a San Francisco lease, which benefited gross margin by about 60 basis points. FY2013 included a $51.3 million non-cash charge establishing a full deferred-tax valuation allowance. The Sears Canada direct business was exited in FY2014; it had no FY2015 operating results.
- KPMG issued unqualified opinions on the financial statements and internal control over financial reporting; management also concluded disclosure controls were effective.
Investor verification priorities
- Check subsequent results against FY2016 sales, comparable-sales, margin, EBITDA and earnings guidance, and assess whether growth is producing sustainable GAAP profitability.
- Track store-level returns, customer conversion and retention, and whether the planned DXL rollout can be funded without undue borrowing or liquidity pressure.
- Reconcile cash generation with expansion spending, debt balances, revolver availability, inventory growth and the large lease and purchase commitments.
- Review the basis for the full deferred-tax valuation allowance and the conditions needed to use tax-loss carryforwards.
- Assess the comparability and limitations of management’s non-GAAP EBITDA and free-cash-flow measures against GAAP results.