Destination XL Group, Inc. — Form 10-Q Summary
Reporting period: The filing is for the three months ended April 29, 2017 (fiscal 2017 Q1), not 2016 Q1 as stated in the request metadata. Amounts below are U.S. dollars; financial statement amounts are generally in millions unless noted.
Business context and reporting period
Destination XL is a specialty retailer of big-and-tall men’s apparel, operating retail and direct businesses as one reportable segment. At quarter-end it operated 344 stores, including 202 DXL stores, and had e-commerce operations. Fiscal 2017 is a 53-week year; the comparable quarter ended April 30, 2016.
Financial performance and liquidity
| Metric | Fiscal 2017 Q1 | Fiscal 2016 Q1 / comparison |
|---|---|---|
| Sales | $107.6 | $107.9; down $0.3, or about 0.2% |
| Comparable sales | Down 2.1% | April comparable sales rose 6.4% |
| Gross profit / margin | $48.7 / 45.2% | $49.8 / 46.1% |
| SG&A | $46.2; 42.9% of sales | $41.4; 38.3% of sales |
| Operating income (loss) | $(5.2) | $1.1 |
| Net income (loss) | $(6.1), or $(0.12) per diluted share | $0.2, or $0.00 per diluted share |
| EBITDA, non-GAAP | $2.5 | $8.4 |
| Cash flow from operations | $(4.6) | $(5.0) |
| Capital expenditures / free cash flow, non-GAAP | $6.9 / $(11.5) | $6.1 / $(11.1) |
Merchandise margin improved about 10 basis points, but gross margin fell 90 basis points, reflecting sales deleverage and higher occupancy costs, including pre-opening rent for new stores. SG&A rose $4.8 million, primarily because advertising expense increased $3.5 million.
At April 29, cash was $7.9 million, inventory $121.4 million, current assets $146.0 million and current liabilities $128.8 million. Total debt was $79.4 million gross and $78.8 million net of debt issuance costs, including $62.4 million gross borrowings under the revolving credit facility. Revolver availability was $45.7 million, with $3.4 million of letters of credit outstanding. The facility matures October 29, 2019; it is asset-secured and borrowing capacity depends on eligible assets.
Operating cash use improved by $0.4 million year over year. Free cash flow worsened by $0.4 million, as capital expenditures increased $0.8 million. Inventory was $121.4 million, down 3.8% from April 30, 2016; average inventory per built-out square foot declined 7.9% year over year.
Material changes versus the prior comparable period
- Sales were nearly flat, but comparable sales declined 2.1%; management reported challenging February and March followed by stronger traffic after the spring advertising campaign began April 2.
- The company moved from $0.2 million of net income to a $6.1 million net loss. Management attributed more than half of the earnings decline to higher advertising expense.
- Gross margin decreased from 46.1% to 45.2%; SG&A increased from 38.3% to 42.9% of sales.
- Eleven stores opened in the quarter, compared with five in the prior-year quarter, including the company’s first two company-operated DXL stores in Canada. Store portfolio changes included openings and replacement closures.
- Inventory was lower year over year, while revolver borrowings increased from $44.1 million at fiscal 2016 year-end to $62.1 million net at quarter-end.
- The company repurchased 669,347 shares for approximately $1.8 million during the quarter.
Outlook, management commentary, risks and unusual items
Management’s fiscal 2017 outlook, based on a 53-week year, includes sales of $470–$480 million; comparable-sales growth of approximately 1%–4%; gross margin of approximately 46%; a GAAP net loss of $5.7–$11.7 million; and EBITDA of $24–$30 million. Expected operating cash flow is $37–$42 million, capital expenditures approximately $22 million (partly offset by about $5 million in tenant allowances), and free cash flow $15–$20 million. Management expects to use free cash flow to reduce debt and make opportunistic share repurchases.
The company plans to increase fiscal 2017 marketing spending by approximately $6.8 million to $25 million, open 19 DXL retail stores and one DXL outlet, and close 16 Casual Male XL retail stores and three outlets. It expects year-end inventory to be $8–$12 million below fiscal 2016 levels. These are forward-looking estimates, not guarantees.
The board authorized up to $12 million of fiscal 2017 repurchases; approximately $10.2 million remained under the plan at quarter-end. Repurchases may be suspended or changed, and credit-facility restrictions may apply if excess availability falls below specified thresholds. The company reported a full valuation allowance against deferred tax assets; it had $83.5 million of deferred tax assets, $14.4 million of deferred tax liabilities and a $69.3 million valuation allowance. It reported $146.9 million of federal and $87.6 million of state net operating loss carryforwards, subject to potential ownership-change limitations.
Management cited risks including retail traffic and demand, execution of strategy, changing customer tastes and fashion trends, sales forecasting and competition. Results are seasonal, with a significant portion of operating income traditionally generated in the fourth quarter. The company disclosed variable-rate debt exposure: a 50-basis-point interest-rate increase was estimated to add approximately $350,000 in annualized interest expense. Ordinary-course legal matters were not expected by management to materially affect results or financial position. Management stated disclosure controls were effective and reported no material change in internal control over financial reporting.
Most important facts for investors to verify
- Confirm the reporting period: this filing covers fiscal 2017 Q1 ended April 29, 2017, despite the request metadata’s “2016 Q1.”
- Track whether April’s 6.4% comparable-sales increase continued and whether full-year sales and comparable-sales guidance was achieved.
- Assess whether the higher advertising investment improves traffic and sales enough to offset increased SG&A and store occupancy costs.
- Monitor revolver usage, borrowing-base availability, debt repayment, and the company’s ability to deliver forecast positive free cash flow.
- Verify planned store openings and closures, inventory reduction, and the costs and performance of the Canadian expansion.
- Review progress toward profitability and the assumptions supporting the deferred-tax-asset valuation allowance and share-repurchase program.