Business context and reporting period
Destination XL Group, Inc. (formerly Casual Male Retail Group, Inc.) filed this unaudited Form 10-Q for the first quarter of fiscal 2013, the three months ended May 4, 2013. Comparative results are for the three months ended April 28, 2012. Fiscal 2013 is a 52-week year; fiscal 2012 was a 53-week year. The company operates a big-and-tall men’s apparel retail and direct business, reported as one segment.
At quarter-end, the company operated 401 stores: 54 DXL, 280 Casual Male XL retail, 55 Casual Male XL outlet, and 12 Rochester Clothing. Management is transitioning the store base toward DXL.
Financial performance and liquidity
Unless otherwise noted, amounts are in millions of dollars. Per-share amounts are dollars.
| Metric | Q1 FY2013 | Q1 FY2012 |
|---|---|---|
| Sales | $93.6 | $95.5 |
| Gross profit / gross margin | $44.5 / 47.5% | $45.6 / 47.7% |
| Operating income | $2.0 | $4.2 |
| Net income | $1.0 | $2.3 |
| Diluted earnings per share | $0.02 | $0.05 |
| Cash from operating activities | $(5.6) | $1.1 |
| Capital expenditures | $8.0 | $5.6 |
| Free cash flow, company-defined non-GAAP | $(13.6) | $(4.5) |
- Sales declined 2.0%. Total comparable sales fell 0.5%: retail comps rose 0.8%, while direct comps declined 6.0%. DXL comparable stores increased 17.7%; Casual Male XL and Rochester stores declined 3.2%.
- Gross margin fell 20 basis points as occupancy costs increased 70 basis points, partly offset by a 50-basis-point improvement in merchandise margins. SG&A rose $0.6 million, and depreciation and amortization rose $0.5 million.
- Cash and cash equivalents were $6.1 million at May 4, 2013, versus $8.2 million at fiscal year-end. Inventory was $112.4 million, up from $104.2 million at year-end and approximately flat year over year.
- Credit-facility borrowings were $11.6 million, compared with none at fiscal year-end. Unused excess availability was $61.2 million; the facility is secured by company assets and has no financial covenants. The $75 million facility matures November 10, 2014.
- Total assets were $257.3 million and stockholders’ equity was $162.4 million at May 4, 2013. The filing reports $48.2 million of deferred tax assets, with a $3.6 million valuation allowance, and federal and state net operating loss carryforwards.
Material changes versus the prior comparable period
- Net income declined to $1.0 million from $2.3 million; operating income declined to $2.0 million from $4.2 million.
- Sales were affected by weak February and March trading amid cool weather; comparable sales were down 3.9% through March, then rose 7.4% in April as weather improved.
- DXL growth contrasted with legacy-store and catalog weakness. E-commerce sales rose 5.1%, while catalog sales fell 60%; catalog circulation was reduced as the company shifted marketing emphasis toward digital and e-commerce.
- Operating cash flow decreased to $(5.6) million from $1.1 million, driven in part by working-capital movements, including inventory and accrued expenses. Capital expenditures increased to $8.0 million, largely for DXL openings and construction.
Outlook, management commentary, risks and unusual items
- Management maintained fiscal 2013 guidance: sales of $415–$420 million; gross margin approximately within 20 basis points of fiscal 2012; and earnings from breakeven to $0.03 per diluted share. Operating margin was expected to be breakeven to 0.5%.
- The company planned to open 57–64 DXL stores and close 110–119 Casual Male XL and Rochester stores in fiscal 2013, with a further 60 DXL openings planned for fiscal 2014. Management expected the rollout to be substantially complete by fiscal 2015.
- Fiscal 2013 capital expenditures were projected at approximately $54 million, partly offset by $9 million in tenant allowances. Management expected fiscal year-end borrowings of $10–$15 million, with seasonal borrowing potentially reaching about $40 million. It said existing operating cash generation and facility availability should meet foreseeable liquidity needs under current forecasts.
- The DXL transition incurred $2.4 million of first-quarter costs, including pre-opening occupancy, payroll, training, marketing and trademark amortization. Management estimated $8–$11 million of transition costs over three years and approximately $6 million in annual additional SG&A to support the rollout.
- Management’s longer-term projections—not current-period results or guaranteed outcomes—called for fiscal 2016 sales above $600 million, operating margins above 10%, and free cash flow of $60–$70 million. Execution, customer response, store-opening costs, sales trends and the ability to fund investment are key uncertainties.
- Other risks discussed include retail seasonality, weather sensitivity, the decline in catalog sales, variable interest rates, and foreign-currency exposure. The company said foreign operations were immaterial to consolidated sales. Ordinary-course legal matters were not expected by management to materially affect results or financial position. No material changes to previously disclosed risk factors were reported.
- The company was discussing a possible credit-facility extension to 2018, an increase in borrowing capacity to $100 million and lower facility costs; the filing does not say that these changes had been agreed.
Important facts for investors to verify
- Whether DXL’s strong comparable-store performance continues and translates into consolidated sales and earnings growth.
- Whether the planned store openings, closures, capital spending and transition costs remain within management’s estimates.
- Whether catalog declines are offset by e-commerce and other direct-channel growth.
- How working-capital needs and seasonal borrowing affect year-end liquidity, facility availability and interest expense.
- Whether the company achieves its fiscal 2013 guidance and longer-term projections; those projections are forward-looking and subject to risks.