Market Overview

Destination XL Group, Inc. Reports Fourth-Quarter and Fiscal 2017 Financial Results

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FY 2017 Fourth Quarter Comparable Sales up 4.3%; Full Year Comparable Sales Up 0.9%;
Company Announces Hiring of new CMO and Provides 2018 Guidance

CANTON, Mass., March 23, 2018 (GLOBE NEWSWIRE) -- Destination XL Group, Inc. (NASDAQ:DXLG), the largest omni-channel specialty retailer of big and tall men's apparel, today reported operating results for the fourth quarter and fiscal year 2017.

Highlights

  • Total sales for the 14-week fourth quarter of $135.5 million, up $12.9 million from $122.6 million in the prior-year 13-week fourth quarter; total sales for the 53-week year of $468.0 million, up from $450.3 million for the prior year's 52-weeks.
  • Total comparable sales increased 4.3% for the quarter and 0.9% for the year.
  • Net loss for the quarter was $(3.3) million as compared to prior-year quarter's net income of $1.8 million; net loss for the year was $(18.8) million as compared to $(2.3) million in the prior year.
  • On a non-GAAP basis, Adjusted EBITDA for the quarter was $5.0 million compared to $10.8 million in the prior-year quarter; Adjusted EBITDA for the year was $17.1 million from $31.6 million in the prior year.

Management Comments

"We ended the quarter with a very strong comp of 4.3% and we are off to a good start in fiscal 2018," said David Levin, President and Chief Executive Officer.  "However, earnings were down for the quarter, reflecting increased marketing expense.  We now have a store presence in every major market in the continental US and a direct business which increased to 21% of our total sales in fiscal 2017.  We are planning to open only three new stores in fiscal 2018.  We expect this lower CAPEX burden along with working capital improvements from inventory productivity will increase free cash flow." 

Levin continued, "We are also announcing today the appointment of Jim Davey to the position of Chief Marketing Officer.  Jim has over 25 years of experience building lifestyle brands in categories from toys to entertainment to footwear and apparel.   Most recently, Jim was VP of Global Marketing for the Timberland brand where he oversaw all wholesale, retail, and global marketing for Timberland's footwear and apparel businesses," Levin concluded.

Fourth-Quarter and Fiscal 2017 Results

The Company's 2017 fiscal year included 53 weeks compared with 52 weeks in fiscal 2016. Accordingly, year-over-year comparisons of total sales for the fourth quarter and full year are affected by an extra week of sales in fiscal 2017. However, for comparable sales, the Company is reporting on a comparable weeks basis (e.g. the 14 and 53 weeks ended February 3, 2018 compared with the 14 and 53 weeks ended February 4, 2017, respectively).

Sales

For the 14-week fourth quarter of fiscal 2017, total sales increased 10.5% to $135.5 million from $122.6 million for the 13-week fourth quarter of fiscal 2016. The increase of $12.9 million in total sales was primarily driven by sales from the 53rd week of $6.9 million and a comparable sales increase of $5.3 million, or 4.3%.   For the fourth quarter, our direct business increased to 23.1% of our total sales as compared to 22.7% for the fourth quarter of fiscal 2016.

For fiscal 2017, total sales increased 3.9% to $468.0 million from $450.3 million in fiscal 2016. The increase in sales of $17.7 million was primarily due to sales from the 53rd week of $6.9 million and an increase in non-comparable stores sales, net of closed stores, of $6.9 million.  Comparable sales, on a 53-week basis, increased $3.7 million, or 0.9% for fiscal 2017.  Our direct business increased to 21.0% of our total sales as compared to 19.9% for fiscal 2016.  

Gross Margin

For the fourth quarter of fiscal 2017, gross margin, inclusive of occupancy costs, was 45.0%, compared with gross margin of 44.9% for the fourth quarter of fiscal 2016. The increase of 10 basis points was the result of a 90 basis-point decrease in occupancy costs as a percentage of total sales partially offset by a decrease in merchandise margin of 80 basis points.  The decrease in merchandise margin was primarily due to an increase in promotional strategies over the peak December selling weeks. The improvement in occupancy costs was due to leveraging of sales due to the additional week of sales.  On a dollar basis, occupancy costs for the fourth quarter increased approximately 3.3% over the prior-year's fourth quarter.

For the fiscal year, gross margin, inclusive of occupancy costs, was 45.0% as compared to 45.5% for fiscal 2016.  The decrease of 50 basis points was due to a decrease in merchandise margin as a result of increased promotional activities primarily associated with our inventory reduction initiatives. Occupancy costs, as a percentage of sales, were flat to the prior year.  On a dollar basis, occupancy costs for the full year increased 4.0% over fiscal 2016.   

Selling, General & Administrative

SG&A expenses for the fourth quarter of fiscal 2017 were 41.3% of sales, compared with 36.1% in the fourth quarter of fiscal 2016. On a dollar basis, SG&A expense increased $11.8 million compared to the prior year fourth quarter, primarily due to a $7.1 million increase in marketing costs and approximately $2.5 million of expenses for the additional 53rd week. 

For fiscal 2017, SG&A expenses were 41.3% of sales, as compared to 38.5% in fiscal 2016.  In addition to the extra week of expenses, the primary reason for this increase was due to an increase of $11.3 million in advertising expense. In fiscal 2017, we increased our investment in our marketing initiatives to help drive brand awareness, store traffic and our digital presence. The remainder of the increase was due to increases in store payroll and other supporting costs associated with a greater DXL store base and e-commerce initiatives.

Impairment of Assets

For the fourth quarter of fiscal 2017, we recorded impairment charges of $2.4 million, which consisted of $0.5 million for the impairment of long-lived assets, related to stores where the carrying value exceeded fair value, and $1.9 million for the write-off of certain costs associated with technology projects which were abandoned in fiscal 2017, due to a shift in strategy. 

For fiscal 2017, impairment charges totaled $4.1 million, which consisted of $2.2 million for the impairment of store assets and $1.9 million for the write-off of technology projects.  For the fourth quarter and fiscal 2016, charges totaled $0.4 million, related to impairment of stores assets. 

Income Taxes

In December 2017, the U.S. Tax Cuts and Jobs Act of 2017 (the "2017 Tax Act") was enacted.  Because we have a full valuation allowance against our deferred tax assets at February 3, 2018, there was limited impact to our consolidated financial results.  However, as a result of the repeal of the corporate alternative minimum tax ("AMT"), we have reclassified our AMT credit of $2.1 million from deferred tax assets to a non-current receivable and have reversed the corresponding valuation allowance, resulting in an income tax benefit for the fourth quarter and fiscal year 2017. 

Net Income (Loss)

Net loss for the fourth quarter of fiscal 2017 was $(3.3) million, or $(0.07) per diluted share, compared to net income of $1.8 million, or $0.04 per diluted share, for the fourth quarter of fiscal 2016.  The decrease of $(0.11) per diluted share, was primarily due to an increase of $7.1 million, or $(0.15) per diluted share, in marketing and an increase of $2.0 million, or $(0.04) per diluted share for impairment charges, partially offset by income from the 53rd week of approximately $1.6 million, or $0.03 per share.   On a non-GAAP basis, before impairment charges and assuming a normalized tax rate of 26%, adjusted net loss for the fourth quarter of fiscal 2017 was $(0.05) per diluted share compared with a net income of $0.03 per diluted share in fiscal 2016.

The net loss for fiscal 2017 was $(18.8) million, or $(0.39) per diluted share, compared with a net loss of $(2.3) million, or $(0.05) per diluted share, in fiscal 2016. The decrease of $(0.34) per diluted share was primarily due to an increase of $11.3 million, or $(0.23) per diluted share, in marketing and an increase of $3.7 million, or $(0.08) per diluted share for impairment charges.  On a non-GAAP basis, before impairment charges and assuming a normal tax rate of 26%, the adjusted net loss was $(0.26) per diluted shares as compared to $(0.03) per diluted share for fiscal 2016.

Adjusted EBITDA

Earnings before interest, taxes, depreciation and amortization, adjusted for impairments (Adjusted EBITDA), a non-GAAP measure, for the fourth quarter of fiscal 2017 were $5.0 million, compared to $10.8 million for the fourth quarter of fiscal 2016.  For the year, adjusted EBITDA was $17.1 million as compared to $31.6 million for fiscal 2016. The decreases were primarily driven by the $7.1 million and $11.3 million increase in marketing costs in the fourth quarter and full year of fiscal 2017, respectively.

Cash Flow

Cash Flow provided by operations for fiscal 2017 was $31.0 million, compared to $35.0 million in fiscal 2016. Capital expenditures for fiscal 2017 were $22.6 million as compared to $29.2 million for fiscal 2016. Free cash flow, a non-GAAP measure, improved $2.6 million, from $5.8 million in 2016 to $8.4 million in 2017.

       
(in millions)   Fiscal 2017     Fiscal 2016  
Cash flow from operating activities (GAAP)   $ 31.0     $ 35.0  
Capital expenditures, infrastructure projects     (9.7 )     (9.6 )
Free Cash Flow before DXL capital expenditures (non-GAAP)     21.3       25.4  
Capital expenditures for DXL stores     (12.9 )     (19.6 )
Free Cash Flow (non-GAAP)   $ 8.4     $ 5.8  
                 

Non-GAAP Measures

EBITDA, Adjusted EBITDA, adjusted net (income) loss, adjusted net income (loss) per diluted share, free cash flow before DXL capital expenditures and free cash flow are non-GAAP financial measures. Please see "Non-GAAP Measures" below and reconciliations of these non-GAAP measures to the comparable GAAP measures that follow in the tables below.

Balance Sheet & Liquidity

At February 3, 2018, the Company had cash and cash equivalents of $5.4 million. Total debt at February 3, 2018 was $59.4 million and consisted of $47.4 million outstanding under the Company's credit facility and approximately $12.0 million outstanding under its term loan and equipment financing notes, net of unamortized debt issuance costs. At February 3, 2018, the Company had $37.5 million of excess availability under its credit facility. 

Inventory was $103.3 million at February 3, 2018 compared with $117.4 million at January 28, 2017.  The decrease in inventory compared with last year's fourth quarter was due to inventory initiatives to improve timing of receipts and weeks of supply on hand.

Retail Store Information

For fiscal 2017, the Company opened 21 new DXL stores, which included 1 outlet:

  Year End 2015   Year End 2016   Year End 2017   Year End 2018E  
  # of
Stores
  Sq Ft.
(000's)
  # of
Stores
  Sq Ft.
(000's)
  # of
Stores
  Sq Ft.
(000's)
  # of
Stores
  Sq Ft.
(000's)
 
DXL retail 166     1,369     192     1,542     212     1,665     215     1,678  
DXL outlets 9     45     13     66     14     72     15     78  
CMXL retail 125     443     97     340     78     268     69     235  
CMXL outlets 40     126     36     113     33     103     29     87  
Rochester Clothing 5     51     5     51     5     51     5     51  
Total   345     2,034     343     2,112     342     2,159     333     2,129  
                                                 

Fiscal 2018 Outlook

Our strategy for fiscal 2018 remains focused on customer acquisition, customer retention, and customer re-activation.  We intend to launch a new creative advertising campaign with two flights of television: 6 weeks in Spring, and 5 weeks in Fall.  Our marketing spend for the year is expected to be approximately $24.0 million, which is less than our fiscal 2017 spend of $29.5 million, but greater than our fiscal 2016 spend of $18.2 million.  Compared to fiscal 2017, we are projecting that our total sales for the year will be negatively impacted by one less week of sales and a net decrease in store count of nine stores, worth approximately $5.3 million in sales.  Fiscal 2017 included a 53rd week, with sales of $6.9 million and EBITDA of $1.6 million.

We expect to open only 3 new DXL stores in fiscal 2018 and plan to remodel 2 Casual Male XL stores, which will be re-branded as DXL in fiscal 2018.

For fiscal 2018, our outlook, based on a 52-week year and without consideration of additional costs that may be incurred in connection with Mr. Levin's retirement and the engagement of a successor CEO, is as follows:

  • Sales are expected to range from $462.0 million to $472.0 million, with a total company comparable sales increase of approximately 1.0% to 3.0%.
  • Gross margin rate of approximately 45.0%.
  • Net loss, on a GAAP basis, of $(8.3) to $(14.3) million, or $(0.17) to $(0.29) per diluted share. 
  • EBITDA of $18.0 to $24.0 million.*  
  • Adjusted net loss of $(0.12) to $(0.22) per diluted share.* Because we expect to continue providing a full valuation allowance against our deferred tax assets, we do not expect to recognize any income tax benefit in fiscal 2018.  Our 2018 guidance does not include any estimate for potential impairments that may occur in 2018 because at this time there are none identified.
  • Capital expenditures of approximately $11.4 million, $2.1 million of which will be for new and remodeled stores to the DXL format and $9.3 million of which will be for infrastructure projects, partially offset by approximately $1.1 million in tenant allowances. We expect to fund our capital expenditures primarily from our operating cash flow.
  • At the end of fiscal 2018, we expect cash flow from operating activities of $20.5 million to $26.5 million (including tenant allowances), resulting in positive free cash flow, before DXL capital expenditures, of approximately $11.2 million to $17.2 million.* Free cash flow will be approximately $9.1 million to $15.1 million.*

* Reconciliations of these non-GAAP measures to their comparable GAAP measures are provided in the tables below.

Conference Call

The Company will hold a conference call to review its financial results today, Friday, March 23, 2018 at 9:00 a.m. ET. To listen to the live webcast, visit the "Investor Relations" section of the Company's website. The live call also can be accessed by dialing: 888-271-8595. Please reference conference ID: 2330751. An archived version of the webcast may be accessed by visiting the "Events" section of the Company's website for up to one year.

During the conference call, the Company may discuss and answer questions concerning business and financial developments and trends. The Company's responses to questions, as well as other matters discussed during the conference call, may contain or constitute information that has not been disclosed previously.

Non-GAAP Measures

In addition to financial measures prepared in accordance with U.S. generally accepted accounting principles ("GAAP"), this press release contains non-GAAP f

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