Business context and reporting period
Destination XL Group, Inc. operates a specialty big-and-tall men’s apparel retail and direct business. This Form 10-Q covers the quarter and nine months ended November 2, 2013 (fiscal 2013); fiscal 2012 was a 53-week year, versus 52 weeks in fiscal 2013. The request metadata says “2012 Q3,” but the filing itself is for 2013 Q3—a period label investors should verify.
The company was transitioning its store base to the DXL concept. At quarter-end it operated 74 DXL stores, 235 Casual Male XL stores, 55 outlet stores and 11 Rochester Clothing stores. Management planned 53 DXL openings in fiscal 2013 and approximately 215–230 DXL stores by the end of fiscal 2015.
Financial performance and liquidity
Amounts below are in millions, except per-share data and percentages.
| Metric | Three months ended Nov. 2, 2013 | Nine months ended Nov. 2, 2013 | Comparable prior period |
|---|---|---|---|
| Sales | $88.2 | $279.4 | $88.7; $284.8 |
| Gross profit / margin | $39.3 / 44.5% | $129.3 / 46.3% | $39.0 / 44.0%; $131.2 / 46.1% |
| Operating income (loss) | $(6.7) | $(7.0) | $(2.5); $6.9 |
| Net income (loss) | $(4.1) | $(4.6) | $(1.6); $1.9 |
| Diluted loss (income) per share | $(0.08) | $(0.10) | $(0.03); $0.04 |
Quarterly sales declined 0.6% year over year and nine-month sales declined 1.9%. Comparable sales rose 4.4% for the quarter and 2.5% for the nine months; retail comps rose 6.4% and 4.7%, while direct-business comps fell 4.5% and 6.8%. DXL comps increased 17.7% for the quarter and 21.4% for the nine months. Gross margin improved, but higher selling, general and administrative expenses and depreciation contributed to operating losses. Nine-month SG&A was $122.8 million, versus $113.1 million.
- Cash flow: Nine-month operating cash flow was $(5.5) million, versus $8.4 million in the prior period. Capital expenditures were $38.2 million, versus $21.3 million; free cash flow, as defined by the company, was $(43.7) million, versus $(12.9) million.
- Cash, working capital and debt: At November 2, cash was $5.2 million and current assets and liabilities were $148.0 million and $88.4 million, respectively. Credit-facility borrowings were $27.0 million; equipment-note debt was $13.8 million. Unused credit-facility availability was $70.7 million. The facility is secured by company assets.
- Balance-sheet changes: Compared with February 2, 2013, inventory rose to $119.6 million from $104.2 million, property and equipment to $97.8 million from $65.9 million, and total assets to $296.3 million from $245.9 million. Cash declined from $8.2 million. Total stockholders’ equity was $158.8 million, down from $161.2 million.
Material changes, outlook and risks
- Management attributed the earnings deterioration chiefly to DXL transition costs and increased national marketing. These costs totaled $5.8 million in the quarter and $15.2 million for the nine months, including transition and marketing expenses.
- Management cited the government shutdown and unusually warm weather as pressures on August and September sales. October comps increased 13.6%; DXL comps increased 30.2% that month. E-commerce comps rose 7.9% in the quarter, while catalog sales fell 73.3%. Management said the fall marketing campaign’s full impact would be assessed later.
- Fiscal 2013 guidance was approximately $395 million in sales, comparable-sales growth of approximately 5%, gross margin within 10 basis points of fiscal 2012, operating margin of approximately negative 0.8%, and a net loss of approximately $0.05 per diluted share. Management said the low end of its earnings guidance remained achievable.
- Fiscal 2013 capital expenditures were forecast at approximately $57 million, partly offset by $11.9 million of tenant allowances. Management forecast $27 million of operating cash flow including tenant allowances, negative free cash flow of approximately $30 million, year-end cash of approximately $5 million, and credit-facility borrowings of $5–$6 million. Expected year-end net debt was revised upward to $17–$18 million from the prior estimate of $10–$15 million.
- The June 2013 credit-facility amendment increased commitments from $75 million to $100 million and extended maturity to June 26, 2018; an additional $50 million accordion is subject to lender agreement. Equipment notes carry a fixed 3.1067% rate and a 48-month term.
- Management said the business is seasonal, with a significant portion of operating income typically generated in the fourth quarter. It expected the DXL rollout to require approximately $150 million of capital expenditures, incremental SG&A and other charges over three years, primarily funded by operating cash flow, equipment financing and credit-facility borrowings. The filing also identifies variable interest rates, foreign-currency exposure and ordinary-course legal proceedings; management did not expect the legal matters or currency movements to materially affect results.
Important facts for investors to verify
- Confirm the intended reporting period: the filing is for the quarter ended November 2, 2013, notwithstanding the metadata’s “2012 Q3” label.
- Track DXL comparable sales and store-opening/closure execution, particularly whether strong DXL growth offsets declining catalog sales and closed-store revenue.
- Assess whether gross-margin improvement and the sales outlook can offset elevated SG&A, transition costs and marketing expenses.
- Monitor operating cash flow, inventory, capital spending, tenant allowances, equipment financing and actual year-end borrowing needs against management’s forecasts.
- Review the assumptions behind the fiscal 2013 guidance and the execution risks of the store-conversion plan; the filing cautions that interim results may not indicate full-year performance.