Business context and reporting period
Destination XL Group, Inc. is a specialty retailer of big-and-tall men’s apparel, operating retail and direct channels as one reportable segment. This 10-Q covers the quarter ended August 1, 2015 and the six months then ended, compared with periods ended August 2, 2014. The request metadata labels the period “2014 Q2,” but the filing itself is for fiscal 2015 Q2.
At quarter-end, the company operated 354 stores, including 153 DXL retail stores and 5 DXL outlets. It continued shifting its store portfolio toward the DXL concept. The fiscal year is a 52-week period ending January 30, 2016; the company notes that results are seasonal and the fourth quarter historically contributes a significant portion of annual operating income and net income.
Financial results and liquidity
| Metric | Three months ended Aug. 1, 2015 | Three months ended Aug. 2, 2014 | Six months ended Aug. 1, 2015 | Six months ended Aug. 2, 2014 |
|---|---|---|---|---|
| Sales | $114.1 million | $104.2 million | $218.6 million | $200.8 million |
| Gross profit | $53.9 million | $48.2 million | $102.1 million | $92.2 million |
| Gross margin, including occupancy | 47.2% | 46.3% | 46.7% | 45.9% |
| Operating income (loss) | $(0.2) million | $(2.6) million | $0.1 million | $(5.5) million |
| Net loss | $(1.0) million | $(4.0) million | $(1.6) million | $(7.6) million |
| Net loss per diluted share | $(0.02) | $(0.08) | $(0.03) | $(0.16) |
| EBITDA from continuing operations (non-GAAP) | $6.8 million | $3.1 million | $13.5 million | $5.6 million |
Quarterly sales rose 9.6%; total comparable sales increased 6.7%, and DXL-store comparable sales rose 11.9%. For the first six months, total comparable sales increased 6.1% and DXL-store comparables rose 10.4%. Management attributed growth to store traffic, higher dollars per transaction, new DXL locations, and customer growth. Quarterly gross margin improved 90 basis points, primarily from fewer markdowns and less clearance inventory. SG&A increased in dollars but declined as a share of sales.
Cash provided by operations was $6.7 million in the first six months, versus cash used of $2.7 million a year earlier. Capital expenditures were $17.0 million, resulting in non-GAAP free cash flow of $(10.3) million, compared with $(21.6) million in the prior-year period. Cash and equivalents were $5.8 million at August 1, 2015. Inventory was $123.6 million, up from $115.2 million at January 31, 2015 and $116.0 million a year earlier.
At August 1, 2015, reported current assets were $144.3 million and current liabilities were $108.5 million. Credit-facility borrowings were $34.6 million gross ($34.1 million net of issuance costs), with $73.9 million of unused excess availability. Long-term debt was $29.8 million net of issuance costs, including equipment financing and a term loan. Total debt was $65.0 million gross and $63.9 million net. The revolving facility has a $125 million commitment and matures in October 2019; it is secured by substantially all assets, subject to disclosed exclusions and lien priorities.
The company reported a full valuation allowance against net deferred tax assets; it recorded no income tax benefit from its losses. It disclosed $129.7 million of federal and $69.6 million of state net operating loss carryforwards, and a $3.0 million liability for unrecognized tax benefits associated with a prior-year tax position related to exiting its European direct business.
Material changes versus the prior comparable period
- Revenue and profitability improved: first-half sales increased 8.8%, operating results moved from a $5.5 million loss to near break-even, and net loss narrowed to $1.6 million from $7.6 million.
- First-half operating cash flow improved to $6.7 million from a $2.7 million use, while capital spending remained substantial at $17.0 million.
- DXL-store comparables remained strong; quarterly DXL comparable growth of 11.9% followed 11.3% growth in the prior-year quarter.
- Gross margin improved year over year in both the quarter and first half, with management citing reduced promotional markdowns and clearance inventory. Clearance merchandise was 7.2% of inventory, down 14.3% from the prior-year level.
- Store conversion continued: in the first six months, the company opened 15 DXL retail stores and 3 DXL outlets and closed legacy Casual Male XL locations. Total store count was 354, versus 354 a year earlier, while total square footage rose to 2.042 million from 1.893 million.
- Prior-year results included Sears Canada discontinued operations, with losses of $1.0 million for the quarter and $1.1 million for the first half, including an approximately $0.8 million charge related mainly to inventory reserves and sales allowances. Fiscal 2015 had no discontinued-operations loss.
Guidance, outlook, risks and unusual items
Management maintained fiscal 2015 guidance and said it was trending toward the higher end of its sales and EBITDA ranges:
- Sales: $438 million–$443 million; comparable sales growth forecast at approximately 5.6%.
- Gross margin: approximately 45.9%, expected to be flat year over year.
- SG&A: approximately $180.5 million; expected to decline as a percentage of sales.
- EBITDA from continuing operations: $21 million–$23 million. GAAP net loss guidance: $(0.20)–$(0.23) per diluted share; adjusted non-GAAP net loss: $(0.12)–$(0.14) per diluted share, assuming a normalized 40% tax benefit.
- Capital expenditures: $36 million–$39 million, partly offset by $6 million–$7 million of tenant allowances. Forecast operating cash flow was $16.5 million–$17.5 million, including tenant allowances; forecast non-GAAP free cash flow was negative $18.5 million–$22.5 million.
- Year-end total debt forecast: $72 million–$76 million. Management expected to fund investment primarily through operating cash flow and credit-facility borrowings.
- Management expected to open a further 15 DXL retail stores and 5 DXL outlets during the remainder of fiscal 2015. Its market study identified approximately 400 potential locations—about 340 DXL stores and 60 outlets—and it anticipated 30–40 DXL store openings annually through at least fiscal 2020.
Management cited continued DXL rollout, store payroll and occupancy costs, and higher depreciation as costs of growth. It planned fiscal 2015 advertising spending approximately 8% below fiscal 2014, with more emphasis on digital marketing. Risks identified include execution of the DXL strategy, customer taste and fashion trends, and competition in the U.S. big-and-tall apparel market. The company said it believed cash generated from operations and the credit facility would meet foreseeable liquidity needs within current forecasts, but its forecast included meaningful capital spending and additional borrowing.
Interest-rate exposure is relevant: a 50-basis-point rate increase was estimated to add approximately $257,000 of annualized interest expense based on specified average borrowings. The company said its London store’s sales were immaterial and foreign currency movements were not expected to materially affect results. It reported no material changes to previously disclosed risk factors, no material changes in internal control over financial reporting, and no legal proceedings expected by management to materially affect financial position or results. The filing also reports early adoption of accounting guidance that reclassified debt issuance costs as a deduction from debt; this did not affect reported operating results.
Most important facts an investor should verify
- Whether revenue growth, DXL comparable-sales performance, and margin improvement continue as store openings and customer acquisition progress.
- Whether the company meets its fiscal 2015 sales, EBITDA, loss-per-share, capital-spending, and year-end debt guidance, including the impact of seasonal fourth-quarter results.
- Whether operating cash flow can fund the store rollout and capital expenditures without materially increasing credit-facility borrowings; monitor unused availability and borrowing-base terms.
- Whether inventory growth, markdown levels, and clearance mix remain consistent with management’s margin expectations.
- Whether the full deferred-tax valuation allowance remains appropriate and whether tax-loss carryforwards can be used, including potential ownership-change limitations.
- Review the filing’s non-GAAP definitions and reconciliations when comparing adjusted loss, EBITDA, and free cash flow with other companies or periods.