Destination XL Group, Inc. — Form 10-Q Summary
Period and business: The filing covers the quarter ended August 4, 2018 and the first six months of fiscal 2018; comparisons are to the periods ended July 29, 2017. This differs from the request metadata’s “2017 Q2.” Destination XL sells big-and-tall men’s apparel through retail stores and direct channels. At quarter-end it operated 334 stores and reported one segment.
Financial performance
| Metric | Quarter | First six months |
|---|---|---|
| Sales | $122.2 million, up 0.9% | $235.5 million, up 3.0% |
| Comparable sales | Up 3.3% | Up 2.7% (calculated from disclosed comparable-sales dollars) |
| Gross margin | 46.3%, versus 46.1% | 45.5%, versus 45.7% |
| Operating loss | $0.2 million, versus $2.9 million | $2.4 million, versus $8.1 million |
| Net loss | $1.2 million, or $0.02 per share, versus $3.7 million, or $0.08 per share | $4.3 million, or $0.09 per share, versus $9.8 million, or $0.20 per share |
| Adjusted EBITDA (non-GAAP) | $8.8 million, versus $6.7 million | $13.9 million, versus $9.3 million |
| Operating cash flow | Not separately stated | $6.8 million, versus $14.3 million |
Second-quarter SG&A fell $1.3 million, chiefly from lower payroll and marketing costs, partly offset by higher e-commerce and technology costs. Six-month gross margin declined 0.2 percentage points, as lower merchandise margins (primarily higher shipping costs) more than offset improved occupancy-cost leverage.
Balance sheet, debt and liquidity
- At August 4, cash was $6.2 million; inventory was $102.9 million, down 8.4% year over year. Total assets were $234.2 million and stockholders’ equity was $67.2 million.
- Gross debt was $61.8 million, with $61.2 million reported net of debt issuance costs. This included $46.8 million borrowed on the revolver and a $15.0 million FILO loan. Revolver availability was $41.3 million.
- Operating cash flow of $6.8 million less $7.4 million of capital expenditures produced negative free cash flow of $0.6 million for the first six months. Cash increased $0.9 million to $6.2 million.
- The May 2018 credit agreement extended maturity to May 2023 and reduced revolving borrowing rates by 25 basis points. Management estimated annualized interest savings of approximately $0.7 million. The facility is secured by substantially all company assets; availability depends on eligible assets and covenant terms.
Changes, outlook and risks
- Management attributed improved results to comparable-sales growth, store productivity, direct-channel growth and lower SG&A. Direct sales were 20.5% of six-month sales, versus 20.0% a year earlier.
- A May restructuring eliminated 56 corporate positions. The company recorded $1.6 million of charges in the quarter and expected total charges of $1.8 million, including approximately $1.5 million in cash expenditures. Expected savings were $5.6 million in fiscal 2018 and $10.3 million annualized. The company also expected $4.2 million of CEO transition costs before fiscal year-end.
- Fiscal 2018 guidance was reaffirmed: sales of $462–472 million; comparable-sales growth of approximately 1%–3%; gross margin of approximately 44.5%; GAAP net loss of $13.2–18.2 million ($0.27–$0.37 per diluted share); adjusted net loss of $0.11–$0.18 per diluted share; and adjusted EBITDA of $20–25 million.
- Management forecast operating cash flow of $20.5–26.5 million and free cash flow of $9.1–15.1 million, including tenant allowances and restructuring and transition costs. Planned capital expenditures were approximately $11.4 million. Guidance assumes lower sales from one fewer fiscal week and a net store-count decline versus fiscal 2017.
- The business is seasonal, with a significant share of operating and net income traditionally generated in the holiday fourth quarter. Management said existing operating cash flow and credit availability should meet foreseeable liquidity needs, subject to its forecasts.
- The company expected lease accounting adoption in fiscal 2019 to materially increase reported assets and liabilities. It maintained a full valuation allowance against net deferred tax assets; realization of substantial tax-loss carryforwards depends on future taxable income. Management reported no material changes to previously disclosed risk factors and did not expect ordinary-course legal proceedings to materially affect results or financial position.
Key facts for investors to verify
- Whether comparable-sales momentum, direct-channel growth and store productivity persist, particularly through the holiday season.
- Whether restructuring savings materialize and whether CEO transition costs remain within the disclosed estimate.
- Actual cash generation, capital spending, debt levels and revolver availability relative to guidance and facility requirements.
- The effects of shipping costs, inventory clearance levels and store closures on margins and sales.
- The eventual balance-sheet impact of lease-standard adoption and the support for the deferred-tax valuation allowance and forecast assumptions.