Destination XL Group, Inc. — Form 10-Q Summary
Period discrepancy: The request metadata says 2015 Q1, but the filing is for the quarter ended April 30, 2016 (fiscal 2016 Q1), compared with the three months ended May 2, 2015.
Business context and reporting period
Destination XL Group is a specialty retailer of big-and-tall men’s apparel, operating retail stores and e-commerce channels in the United States and London. It reports one segment. At quarter-end, it operated 345 stores across DXL, Casual Male XL, outlet and Rochester concepts. The interim results are unaudited; management cautions that the business is seasonal and quarterly results may not indicate full-year results.
Financial results and liquidity
| Metric | Fiscal 2016 Q1 | Prior-year quarter |
|---|---|---|
| Sales | $107.9 million | $104.4 million |
| Gross profit | $49.8 million | $48.2 million |
| Gross margin, including occupancy | 46.1% | 46.2% |
| Operating income | $1.1 million | $0.2 million |
| Net income (loss) | $0.2 million; $0.00 per diluted share | $(0.6) million; $(0.01) per diluted share |
| EBITDA, non-GAAP | $8.4 million | $6.8 million |
| Cash from operating activities | $(5.0) million | $(8.0) million |
| Capital expenditures | $6.1 million | $9.6 million |
Sales rose 3.3%. Comparable sales increased 2.0% company-wide; comparable DXL store sales increased 5.8%. SG&A was $41.4 million, approximately flat in dollars, and declined to 38.3% of sales from 39.7%. Depreciation and amortization increased to $7.3 million from $6.5 million, reflecting DXL store growth. Net interest expense was $0.8 million, broadly unchanged.
Cash and cash equivalents were $5.9 million at April 30, 2016. Inventory was $125.8 million, versus $123.8 million a year earlier. Gross debt was $80.9 million and debt net of unamortized issuance costs was $80.0 million; this included $56.2 million gross borrowings under the revolving credit facility, $11.2 million of equipment financing and a $13.5 million term loan. The company reported $55.0 million of unused excess availability under its $125 million credit facility. Operating cash use and capital expenditures were funded in part by $13.7 million of net credit-facility borrowings.
Material changes and management commentary
- Net income improved from a prior-year loss, and EBITDA rose by $1.6 million. Company-wide comparable sales increased, led by DXL stores.
- Management said sales began strongly but weakened toward the end of March and through April; it attributed weaker spring/summer-category sales partly to delayed warm weather, especially in the Northeast and Midwest.
- Merchandise margin was flat year over year; the total gross margin rate fell 0.1 percentage point, primarily due to higher occupancy costs.
- The company began an inventory-management review, targeting tighter weeks-of-supply controls and improved receipt flows. Management expects at least $5 million of working-capital improvement in fiscal 2016 and says the changes are not expected to impair sales.
- Fiscal 2016 marketing costs are expected to decline approximately $2.6 million from fiscal 2015, with management citing improved media-buying and creative-development efficiency.
Guidance, outlook and risks
Fiscal 2016 guidance was unchanged for sales of $465–$472 million, comparable-sales growth of approximately 4.8%–5.5%, gross margin of 46.2%–46.5%, EBITDA of $31–$35 million and GAAP net loss per diluted share of $(0.09) to breakeven. Adjusted net loss per diluted share, a non-GAAP measure assuming a normalized tax rate, was projected at $(0.05) to breakeven. A full valuation allowance remains against deferred tax assets, so management does not expect to recognize an income-tax benefit for fiscal 2016.
Management revised fiscal 2016 cash-flow and debt expectations upward and downward, respectively: operating cash flow of $35–$40 million, free cash flow before DXL capital expenditures of $25.6–$30.6 million, and free cash flow after those expenditures of $5–$10 million. Capital expenditures are expected to be approximately $30 million, partly offset by $7–$8 million of tenant allowances. Year-end debt is forecast at $59–$64 million, versus $68.1 million at the end of fiscal 2015. The company planned 28 DXL retail and three DXL outlet openings, alongside anticipated closures of 26 Casual Male XL retail and three outlet stores.
Key risks include seasonal sales variability, weather-related demand, execution of the DXL rollout and inventory-management changes, and reliance on revolving-credit availability. Most borrowings under the credit facility and the term loan carry variable rates; management estimated that a 50-basis-point rate increase would add approximately $321,000 of annualized interest expense. The company disclosed ordinary-course legal matters but said their resolution was not expected to materially harm results or financial position. It reported no material change to previously disclosed risk factors and that disclosure controls were effective.
Important facts for investors to verify
- Confirm the filing period: this report covers fiscal 2016 Q1, not 2015 Q1.
- Track whether the inventory initiatives deliver the forecast working-capital benefit without causing out-of-stock issues, and whether inventory levels and clearance mix remain controlled.
- Compare actual full-year sales, margins, EBITDA, cash flow, capital spending and debt with management’s fiscal 2016 guidance.
- Monitor DXL comparable sales and store-opening economics, including planned legacy-store closures and tenant allowances.
- Assess seasonal and weather-related sales exposure, variable-rate interest costs, and the company’s dependence on its asset-based credit facility.