Destination XL Group, Inc. — Form 10-Q Summary
Period clarification: Request metadata identifies 2015 Q2, but the supplied filing is for the quarter ended July 30, 2016, the second quarter of fiscal 2016. Comparisons below use the quarter ended August 1, 2015, and the corresponding six-month periods.
Business context and reporting period
Destination XL is a specialty retailer of big-and-tall men’s apparel, operating retail stores and direct/e-commerce channels. It reports one segment. At July 30, 2016, it operated 348 stores: 176 DXL retail, 11 DXL outlet, 117 Casual Male XL retail, 39 Casual Male XL outlet and 5 Rochester Clothing locations. The interim results are unaudited; the company notes that its business is seasonal and that interim results may not indicate full-year performance.
Financial performance and position
| Metric | Three months ended July 30, 2016 | Three months ended August 1, 2015 | Six months ended July 30, 2016 | Six months ended August 1, 2015 |
|---|---|---|---|---|
| Sales | $117.9 million | $114.1 million | $225.8 million | $218.6 million |
| Gross profit | $54.8 million | $53.9 million | $104.6 million | $102.1 million |
| Operating income (loss) | $1.0 million | $(0.2) million | $2.1 million | $0.1 million |
| Net income (loss) | $0.2 million | $(1.0) million | $0.4 million | $(1.6) million |
| Diluted earnings (loss) per share | $0.00 | $(0.02) | $0.01 | $(0.03) |
| EBITDA, non-GAAP | $8.5 million | $6.8 million | $16.9 million | $13.5 million |
- Gross margin, including occupancy costs, was 46.5% in Q2 versus 47.2% a year earlier, and 46.3% for the six months versus 46.7%. Management attributed the decline mainly to clearance-markdown timing.
- SG&A was $46.3 million in Q2 and $87.7 million for six months, below prior-year amounts of $47.1 million and $88.6 million. Depreciation and amortization rose to $7.5 million for Q2 and $14.9 million for six months, reflecting DXL store growth. Net interest expense was $0.8 million and $1.6 million, respectively.
- Operating cash flow for six months was $19.1 million, compared with $6.7 million a year earlier. Capital expenditures were $13.8 million versus $17.0 million. Company-defined free cash flow was $5.3 million, compared with $(10.3) million; free cash flow before DXL store capital expenditures was $15.0 million versus $0.9 million. These are non-GAAP measures.
- At July 30, cash was $5.8 million, inventory $121.3 million and current assets $142.8 million. Current liabilities were $116.6 million. Inventory was down $2.3 million, or 1.8%, from August 1, 2015.
- Total debt was $64.4 million gross and $63.6 million net of issuance costs: $41.6 million drawn on the credit facility, $9.6 million in equipment financing and $13.3 million under the term loan. Credit-facility excess availability was $66.0 million. The facility has a $125 million commitment and matures in 2019.
- Stockholders’ equity was $90.3 million. Deferred tax assets of $81.5 million were substantially offset by a $62.9 million valuation allowance; management continued to consider a full valuation allowance appropriate.
Material changes versus the prior comparable period
- Quarterly sales increased $3.7 million; six-month sales increased $7.2 million. Total comparable sales rose 2.4% in Q2 and 2.2% for six months. Comparable DXL-store sales increased 4.6% in Q2 and 5.2% for six months.
- Q2 net results improved from a loss to modest income; six-month results improved from a $1.6 million loss to $0.4 million income. EBITDA increased $1.7 million for Q2 and $3.4 million for six months.
- Management reported a $12.5 million improvement in operating cash flow and a $15.6 million improvement in free cash flow for the six-month period, supported by improved results, inventory changes and lower capital spending.
- During the first half, the company opened 10 DXL retail stores and 2 DXL outlets, while closing or replacing legacy Casual Male XL locations. Inventory initiatives reduced inventory versus the prior-year quarter; clearance merchandise was 7.7% of inventory versus 7.2%.
Outlook, management commentary, risks and contingencies
- Management lowered fiscal 2016 sales guidance to approximately $457–$463 million and comparable-sales growth to 2%–4%, from prior guidance of $465–$472 million and 4.8%–5.5%. It cited weaker-than-expected growth amid uncertainty affecting consumer spending and retail traffic.
- Other fiscal 2016 guidance was unchanged: EBITDA of $31–$35 million; GAAP net loss per diluted share of $(0.09) to breakeven; adjusted non-GAAP loss per share of $(0.05) to breakeven; and gross margin at the low end of 46.2%–46.5%.
- Management forecast year-end total debt of $59–$64 million, operating cash flow of $35–$40 million, free cash flow before DXL store capital expenditures of $25.6–$30.6 million, and free cash flow after those expenditures of $5–$10 million. Planned capital expenditures were approximately $30 million, partly offset by $7–$8 million of tenant allowances. The company planned 28 DXL retail and 3 DXL outlet openings, alongside closures of 26 Casual Male XL retail and 3 outlet stores.
- The company was reviewing procurement, inventory receipts and distribution-center processes to reduce weeks of supply and improve working capital. It said it did not expect the changes to harm sales through out-of-stocks. Management also said existing operating cash generation and credit availability should meet foreseeable liquidity needs under current forecasts.
- Risks include consumer demand and store traffic, execution of the DXL transition and store rollout, fashion and sales forecasting, competition, seasonal fourth-quarter dependence, and variable-rate borrowing exposure. A 50-basis-point rate increase was estimated to raise annual interest expense by approximately $320,000.
- The credit facility is secured by substantially all assets, subject to stated exclusions; the term loan and equipment financing are also secured. The credit facility has availability-based borrowing limits and certain transaction restrictions if excess availability falls below specified thresholds.
- The company reported ordinary-course legal proceedings and claims, which management did not expect to materially affect results or financial position. It reported no material changes to previously disclosed risk factors, no defaults on senior securities, and effective disclosure controls as of quarter-end.
Most important facts for investors to verify
- Confirm the intended reporting period: the filing supplied is fiscal 2016 Q2, not 2015 Q2.
- Track comparable sales, store productivity and whether the revised sales outlook is achieved, particularly given macroeconomic weakness and the lower guidance.
- Assess whether inventory reductions and expense controls support the forecast margins and cash flow without increasing out-of-stock risk.
- Monitor debt, credit-facility availability, interest costs and delivery of the forecast year-end debt reduction.
- Review the assumptions behind non-GAAP EBITDA, adjusted earnings and free-cash-flow guidance, and the continued need for a full deferred-tax valuation allowance.
- Evaluate execution, costs and returns from planned DXL openings and legacy-store closures, as well as seasonal performance in the fourth quarter.