Destination XL Group, Inc. — Form 10-Q Summary
Period: First quarter of fiscal 2018, three months ended May 5, 2018; comparable quarter ended April 29, 2017. The filing is for fiscal 2018 Q1, notwithstanding the request metadata’s “2017 Q1.” The company is a specialty retailer of big-and-tall men’s apparel, reporting one segment across retail and direct channels.
Financial results and position
| Metric | Q1 FY2018 | Q1 FY2017 / comparison |
|---|---|---|
| Sales | $113.3 million | $107.6 million; up 5.3% |
| Comparable sales | Up 2.2% | — |
| Gross profit / margin | $50.7 million / 44.7% | $48.7 million / 45.2% |
| Operating loss | $(2.2) million | $(5.2) million |
| Net loss / diluted loss per share | $(3.1) million / $(0.06) | $(6.1) million / $(0.12) |
| EBITDA, non-GAAP | $5.1 million | $2.5 million |
| Operating cash flow | $(5.8) million | $(4.6) million |
| Capital expenditures | $3.3 million | $6.9 million |
| Free cash flow, non-GAAP | $(9.1) million | $(11.5) million |
At May 5, 2018, cash was $7.0 million, inventory $106.2 million, total assets $242.1 million and stockholders’ equity $67.8 million. Total gross debt was $70.6 million (net of debt issuance costs, $70.3 million), including $59.1 million drawn on the revolving credit facility and $11.5 million on the term loan. Revolver availability was $32.7 million, with $5.1 million of outstanding letters of credit.
Changes and management commentary
- Sales rose $5.7 million, driven by comparable-sales growth and $3.2 million of non-comparable sales. Direct sales were 21.2% of quarterly sales, versus 20.6% a year earlier.
- Gross margin declined 0.5 percentage point. Merchandise margin fell 1.2 points, mainly from direct-channel promotions and higher shipping costs; occupancy leverage offset 0.7 point.
- SG&A declined $0.6 million, primarily because spring marketing ran for fewer weeks. Operating loss and net loss narrowed; EBITDA improved by $2.6 million.
- Inventory was 12.5% below the prior-year quarter, reflecting inventory productivity initiatives. Clearance inventory was 9.7% of total inventory, versus 8.2% a year earlier.
- Management said the shortened spring campaign and cold weather temporarily weighed on April sales; comparable sales increased 7.5% in the last week of the quarter after the campaign launch and improved weather. The company remains focused on customer acquisition, retention and reactivation.
Outlook, financing and other matters
- Fiscal 2018 guidance: sales of $462–$472 million and comparable-sales growth of about 1%–3%; gross margin rate of about 44.5%; GAAP net loss of $13.2–$18.2 million, or $0.27–$0.37 per diluted share.
- Management forecasts adjusted EBITDA of $20–$25 million and adjusted net loss of $0.11–$0.18 per diluted share. These are non-GAAP measures; adjusted net loss assumes a 26% tax benefit, while the company expects no GAAP income-tax benefit for the year because of its deferred-tax valuation allowance.
- Expected operating cash flow is $20.5–$26.5 million and free cash flow $9.1–$15.1 million; planned capital expenditures are about $11.4 million, partly offset by tenant allowances. Management expects positive cash flow to support debt reduction.
- After quarter-end, the company announced a restructuring affecting approximately 56 corporate positions. It expects about $1.7 million of Q2 charges, $1.3 million of cash costs, $5.6 million of FY2018 SG&A savings (including $3.2 million incremental to prior expectations), and approximately $10.3 million of annualized savings.
- A May 24, 2018 refinancing extended the credit facility maturity to May 2023 and added a $15 million FILO facility, used to repay the existing $11.5 million term loan. Management estimates annual interest-cost savings of about $0.7 million. The revolver rate was reduced by 25 basis points; FILO rates were stated to be 350–450 basis points below the former term-loan rates.
- Management expects the full-year gross margin rate to be about 50 basis points below fiscal 2017. Fiscal 2018 sales are expected to be affected by one fewer week and a net reduction of nine stores. The company noted its historically seasonal results, with significant earnings typically generated in the fourth quarter.
- The company adopted ASC 606 with no material financial-statement impact. It expects lease accounting adoption in fiscal 2019 to materially increase reported assets and liabilities. Deferred tax assets remain fully reserved; federal net operating loss carryforwards include $141.4 million expiring from 2022–2036 and $19.4 million with no expiration.
- Interest-rate exposure is variable: management estimated a 50-basis-point rate increase would add about $360,000 to annualized interest expense based on quarter-end borrowings. Ordinary-course legal proceedings were not expected to materially affect results or financial position; the filing reported no material change to previously disclosed risk factors.
Key investor verification points
- Track comparable sales, channel mix and whether the spring campaign and digital initiatives sustain sales growth.
- Verify realized merchandise margins, promotional and shipping costs, and progress toward the full-year margin outlook.
- Assess restructuring and CEO-transition charges against the projected savings and revised earnings guidance.
- Monitor cash generation, inventory, revolver availability, debt balances and the cost and terms of the May 2023 credit facility.
- Review the assumptions behind non-GAAP adjusted EBITDA, adjusted net loss and free-cash-flow guidance, including their exclusions and tax assumptions.
- Follow the lease-standard implementation and the potential effect of the deferred-tax valuation allowance and NOL limitations.