Destination XL Group, Inc. — Form 10-K Summary
Reporting period: Fiscal 2013, the 52 weeks ended February 1, 2014. The filing also reports fourth-quarter results. This is not a 2012 quarterly filing; fiscal 2012 ended February 2, 2013 and comprised 53 weeks.
Business context
Destination XL is a specialty retailer of big-and-tall men’s apparel, operating retail and direct channels. Its central strategy is to replace most Casual Male XL and some Rochester stores with the larger, broader-assortment DXL format. At year-end it operated 99 DXL, 198 Casual Male XL full-price, 52 Casual Male XL outlet, and 10 Rochester stores.
Financial performance and liquidity
| Metric | Fiscal 2013 | Comparable period |
|---|---|---|
| Sales | $388.0 million | $399.6 million in fiscal 2012; down 2.9% (2012 had an extra week) |
| Comparable sales | +3.0% | Fiscal 2012: +1.5% |
| Gross profit / margin | $178.4 million / 46.0% | $185.8 million / 46.5% |
| Operating income (loss) / margin | $(13.1) million / (3.4)% | $13.9 million / 3.5% |
| Net income (loss) | $(59.8) million; $(1.23) diluted EPS | $6.1 million; $0.13 diluted EPS |
| Operating cash flow | $24.9 million | $29.9 million |
| Capital expenditures / free cash flow | $54.1 million / $(29.2) million | $32.4 million / $(2.5) million |
| Cash / working capital / current ratio | $4.5 million / $50.2 million / 1.7:1 | Fiscal 2012: $8.2 million / $82.5 million / 2.6:1 |
| Debt at year-end | $25.7 million: $16.7 million equipment notes and $9.0 million credit-facility borrowings | No long-term debt or credit-facility borrowing reported at prior year-end |
Fiscal 2013 fourth-quarter sales were $108.5 million, operating loss was $6.0 million, and net loss was $55.1 million. The quarter’s tax provision was $48.8 million. The filing attributes the annual loss principally to weaker-than-expected sales and a $51.3 million non-cash charge establishing a full valuation allowance against deferred tax assets. Other items included a $1.5 million store-asset impairment and $2.3 million in executive severance costs. Excluding these items, management reported non-GAAP adjusted net loss of $6.2 million, or $0.13 per diluted share; this is a non-GAAP measure, not a substitute for GAAP results.
Gross margin declined 50 basis points: merchandise margin improved 60 basis points, but occupancy costs rose 110 basis points. SG&A increased $14.3 million to $170.7 million, reflecting higher marketing expense, severance, stock compensation, and DXL transition costs. DXL comparable sales rose 19.3%; the 48 DXL stores open more than a year posted comparable sales growth of 12.3%. Total comparable sales also reflected weakness in legacy stores and a 4.4% decline in direct business, partly due to discontinuing catalogs.
The amended credit facility provides up to $100 million of committed borrowing, matures June 26, 2018, and had $75.5 million of unused availability at year-end. Fiscal 2013 capital spending was funded partly by $17.5 million of equipment financing. Contractual commitments totaled $370.8 million, including $297.4 million of operating leases. The company reported no off-balance-sheet arrangements.
Strategy, outlook, and risks
- Management extended the DXL transition plan to fiscal 2017 after sales, customer migration, and store-opening timing fell short of initial expectations. Fiscal 2013 included 51 DXL openings and closures of 102 Casual Male XL and two Rochester stores.
- For fiscal 2014, management forecast sales of $405–$410 million, a 20–90 basis-point gross-margin improvement, and an operating margin of negative 2.0% to 2.8%. It forecast a GAAP diluted loss of $0.21–$0.27 per share and approximately $45.7 million of capital expenditures, partly offset by $9.3 million of tenant allowances.
- Fiscal 2014 plans called for about 40 DXL openings and 40 legacy-store closures. Management projected year-end debt of $50–$55 million and operating cash flow of $22.5 million, including tenant allowances, implying free cash flow of approximately negative $23.2 million.
- Management expects incremental transition costs of about $30 million from fiscal 2013 through fiscal 2017 and approximately $150 million of rollout capital expenditures, incremental SG&A, and other charges. Longer-term projections depend on successful execution and current economic assumptions; management’s stated goal is double-digit operating margins over time.
- Key risks include slower customer migration and DXL ramp-up, store lease and construction delays, consumer weakness and seasonality, competition, fashion and inventory execution, dependence on third-party sourcing and transportation, cybersecurity exposure, and the ability to fund substantial store investment and lease commitments.
- The former COO/CFO/Treasurer resigned in January 2014; John Kyees was appointed interim CFO. Management said it believed liquidity resources were sufficient for foreseeable needs under current forecasts. The auditor issued unqualified opinions on the financial statements and internal control over financial reporting.
Important facts for investors to verify
- Whether DXL stores sustain comparable-sales growth and successfully retain or convert customers from closing legacy stores.
- Whether fiscal 2014 sales, margin, loss, capital-spending, and debt forecasts were achieved, and how the transition affected cash and credit-facility availability.
- Whether deferred tax assets remain subject to a full valuation allowance, given the company’s projected losses and cumulative-loss position.
- The pace, cost, and timing of store openings and closures, including lease termination exposure and the substantial operating-lease commitments.
- Whether direct-channel growth, merchandise margins, and store productivity offset ongoing marketing and DXL rollout costs.