Destination XL Group, Inc. — Form 10-Q Summary
Reporting period: Quarter and six months ended August 3, 2013 (fiscal 2013). The filing is for fiscal Q2 2013, notwithstanding the request metadata’s “2012 Q2” label. Amounts are in millions except per-share data, percentages, and store counts.
Business context and results
The company is a specialty retailer of big-and-tall men’s apparel, operating retail and direct businesses. Its fiscal 2013 strategy centers on replacing Casual Male XL and Rochester stores with the DXL concept. At quarter-end it operated 65 DXL, 257 Casual Male XL retail, 55 Casual Male XL outlet, and 11 Rochester stores.
| Metric | Q2 2013 | Q2 2012 | Six months 2013 | Six months 2012 |
|---|---|---|---|---|
| Sales | $97.6 | $100.5 | $191.2 | $196.0 |
| Gross profit | $45.5 | $46.6 | $90.0 | $92.2 |
| Gross margin, including occupancy | 46.6% | 46.4% | 47.0% | 47.1% |
| Operating income (loss) | $(2.3) | $5.3 | $(0.4) | $9.4 |
| Net income (loss) | $(1.6) | $1.2 | $(0.6) | $3.5 |
| Diluted EPS | $(0.03) | $0.03 | $(0.01) | $0.07 |
Q2 comparable sales rose 3.8% overall: retail increased 6.9%, while direct sales declined 9.8%. DXL comparable sales increased 28.8% in Q2; the 29 DXL stores open more than a year rose 16.5%. For the first six months, total comparable sales increased 1.7%, with DXL up 23.7% and direct down 7.9%. The prior-year comparison includes a 53-week fiscal year, and the filing describes a comparable-week shift.
Cash flow, balance sheet, debt, and liquidity
- Six-month operating cash flow was $5.7, down from $10.8 a year earlier. Capital expenditures were $21.1, versus $11.5; reported non-GAAP free cash flow was $(15.4), versus $(0.7).
- Cash was $5.1 at August 3, 2013, compared with $8.2 at February 2, 2013. Inventory was $107.9, versus $104.2; management attributed higher inventory partly to the branded-apparel mix in DXL stores.
- Total assets were $265.3 and stockholders’ equity was $161.7 at August 3. The balance sheet showed $12.3 of credit-facility borrowings, compared with none at fiscal year-end.
- The amended asset-secured credit facility increased committed borrowing capacity from $75 to $100, extended maturity to June 26, 2018, and reduced borrowing spreads and the unused-line fee. Unused excess availability was $78.1; letters of credit totaled $2.9.
- Management expected fiscal-year-end borrowings of $10–$15, while borrowings could reach about $40 during seasonal buying periods. The company said cash from operations and credit availability should meet foreseeable liquidity needs within current forecasts.
Changes, outlook, and management commentary
- Q2 operating results were pressured by $4.1 of additional national marketing costs and $3.1 of DXL transition costs, including pre-opening and lease-related costs and trademark amortization. Six-month transition costs were $5.5; marketing costs increased $3.9.
- Management cited improved merchandise margins—up 150 basis points in Q2—but higher occupancy, selling and administrative costs, and depreciation as the DXL rollout accelerated. Direct results were hurt by declining catalog demand; catalog sales fell 51.7% in Q2. The company planned to stop fall catalogs and use a smaller direct mailer, while shifting investment toward marketing and e-commerce.
- Fiscal 2013 guidance was reduced: sales to $395–$400 (from $415–$420), comparable-sales growth to 6–7%, and diluted loss per share to $(0.03)–$(0.05) (from breakeven to earnings of $0.03). Management forecast approximately 0.5% operating loss margin and gross margin approximately flat year over year.
- Fiscal 2013 capital expenditures were projected at $56.5, partly offset by $11.5 of tenant allowances. Management planned 55–58 DXL openings for the year, expected 100–105 Casual Male XL and Rochester closures, and targeted 215–230 DXL stores by fiscal 2015 end.
- Longer-term projections—not guarantees—called for fiscal 2016 sales above $600, operating margins above 10%, and free cash flow of $60–$70. The filing said the rollout would require about $150 of capital expenditures, incremental SG&A, and other costs over three years, funded primarily by operating cash flow and limited borrowing.
- Other notable items: stockholders approved an increase in shares available under the 2006 incentive plan, and the company established a 2013–2016 incentive plan with performance conditions tied to revenue and operating margin. No material changes to previously disclosed risk factors were reported; the company stated ordinary-course legal matters were not expected to have a material adverse impact. Retail results are seasonal, with a significant portion of income typically generated in Q4.
Important facts for investors to verify
- Whether DXL sales growth and customer traffic can offset declining legacy-store and catalog sales, and whether catalog-to-e-commerce transition improves direct performance.
- Progress against revised sales and loss-per-share guidance, including the timing and costs of store openings and closures.
- Cash generation, capital spending, tenant allowances, seasonal borrowing needs, and continued availability under the asset-secured credit facility.
- The impact of incentive-plan dilution and whether the revenue and operating-margin hurdles are achieved.