Business context and reporting period
Destination XL Group, Inc. operates specialty retail and direct businesses focused on big-and-tall men’s apparel. The filing covers the fiscal first quarter ended May 3, 2014, compared with the three months ended May 4, 2013; this differs from the request metadata’s “2013 Q1” label. The company reports one segment. At quarter-end it operated 356 stores, including 106 DXL stores.
Financial performance and liquidity
| Metric | Q1 FY2014 | Q1 FY2013 |
|---|---|---|
| Sales | $96.8 million | $94.0 million |
| Gross profit | $43.9 million | $44.3 million |
| Gross margin | 45.4% | 47.2% |
| Operating income (loss) | $(3.1) million | $2.0 million |
| Net income (loss) | $(3.5) million; $(0.07) per share | $1.0 million; $0.02 per share |
| Net cash used in operating activities | $(13.9) million | $(5.6) million |
| Capital expenditures | $11.1 million | $8.0 million |
- Comparable sales increased 3.4% overall: retail rose 4.7%, while direct sales declined 1.6%. DXL comparable sales increased 12.8%; Casual Male XL rose 3.2%.
- SG&A was $41.6 million, up $3.4 million; depreciation and amortization rose to $5.4 million from $4.2 million. Net interest expense was $0.4 million versus $0.2 million.
- Quarter-end cash was $5.6 million. Inventory was $114.2 million, up from $105.6 million at the prior fiscal year-end.
- Credit-facility borrowings were $29.2 million; equipment-note debt was $22.6 million, for total debt of approximately $51.8 million. Unused excess availability under the $100 million facility was $67.9 million. The facility matures June 26, 2018 and has no financial covenants.
- Non-GAAP adjusted loss was $2.1 million, or $(0.04) per diluted share, assuming a normalized 40% tax benefit. This is not GAAP earnings; the company recorded only a $47,000 tax provision and maintained a full valuation allowance against U.S. deferred tax assets.
Material changes and management commentary
- Sales increased 3.0%, but gross profit fell and the company shifted from prior-year profit to a loss. Gross margin declined 180 basis points: merchandise margin fell 160 basis points, principally due to promotions and clearance, while occupancy costs increased 20 basis points.
- Management attributed weak February and March sales to severe winter weather, followed by a 6.8% comparable-sales increase in April. It said DXL comparable sales had risen by double digits for four consecutive quarters.
- The company reclassified on-site tailoring revenue and related costs from SG&A into sales and cost of goods sold, respectively; prior-year figures were reclassified for comparison.
- Operating cash use worsened year over year. Management cited working-capital timing, including trade payables, and higher capital spending for technology and DXL store construction. Non-GAAP free cash flow was negative $25.0 million for the quarter.
- Management reported $1.5 million of transition costs, including store pre-opening occupancy, SG&A and trademark amortization. Fiscal 2013’s comparable transition costs were $2.4 million.
Guidance, outlook and risks
- Fiscal 2014 sales guidance was raised to $413–$418 million from $405–$410 million. Expected gross margin was reduced to 45.5%–46.1%; SG&A guidance increased to $176.0–$177.6 million, largely reflecting payroll to support forecast sales.
- GAAP loss guidance remained $(0.21)–$(0.27) per diluted share; management also presented non-GAAP loss guidance of $(0.12)–$(0.16) per share, assuming a normalized tax benefit.
- Management expected approximately $45.7 million of capital expenditures, partly offset by $9.3 million in tenant allowances, and projected year-end debt of $50–$55 million. It stated liquidity from operations and credit availability should meet foreseeable needs within current forecasts.
- The company planned approximately 40 DXL openings in fiscal 2014, with most planned before the holiday season. Management said some planned Casual Male XL closures would be delayed and normal store hours and promotions would continue.
- Key uncertainties include execution of the DXL rollout and customer conversion, promotional pressure on merchandise margins, store-opening and closure costs, seasonal working-capital needs, and interest-rate exposure on variable-rate borrowing. The filing says risks were not materially changed from the prior annual report. Ordinary-course legal matters were not expected by management to have a material adverse effect.
Important facts for investors to verify
- Confirm the period: the filed quarter is fiscal Q1 2014, ended May 3, 2014, notwithstanding the metadata label.
- Track comparable sales and customer transition to DXL against the higher promotions and lower merchandise margins.
- Assess actual store openings, closures, capital spending, tenant allowances, cash generation and debt against management’s fiscal 2014 projections.
- Review the full valuation allowance, deferred tax asset realizability and the $3.2 million unrecognized tax benefit related to a prior-year tax position.
- Check whether the reported quarter’s negative free cash flow and increased borrowing were seasonal/timing effects or continued trends.