Destination XL (DXLG) - 2020 Q2 - Quarterly Report

PART I. FINANCIAL INFORMATION Item 1. Financial Statements The company presents unaudited consolidated financial statements reflecting the material impact of adopting the new lease accounting standard Consolidated Balance Sheet Highlights (in thousands) | Account | August 3, 2019 | February 2, 2019 | | :--- | :--- | :--- | | Total Assets | $423,724 | $226,076 | | Total Current Assets | $132,688 | $127,660 | | Operating lease right-of-use assets | $200,480 | $— | | Total Liabilities | $361,305 | $167,436 | | Total Current Liabilities | $145,251 | $107,931 | | Operating leases, non-current | $197,388 | $— | | Total Stockholders' Equity | $62,419 | $58,640 | Consolidated Statement of Operations Highlights (in thousands) | Metric | Six Months Ended Aug 3, 2019 | Six Months Ended Aug 4, 2018 | | :--- | :--- | :--- | | Sales | $236,218 | $235,537 | | Gross Profit | $103,982 | $107,213 | | Operating Loss | $(1,357) | $(2,448) | | Net Loss | $(3,043) | $(4,295) | | Net Loss Per Share | $(0.06) | $(0.09) | Consolidated Statement of Cash Flows Highlights (in thousands) | Cash Flow Activity | Six Months Ended Aug 3, 2019 | Six Months Ended Aug 4, 2018 | | :--- | :--- | :--- | | Net cash provided by operating activities | $918 | $6,793 | | Net cash used for investing activities | $(7,597) | $(7,365) | | Net cash provided by financing activities | $7,304 | $1,426 | | Net increase in cash | $625 | $854 | - The company adopted the new lease accounting standard ASC 842 on February 3, 2019, resulting in the recognition of $214.1 million in right-of-use assets and $254.5 million in lease liabilities[28] Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Management discusses financial results, noting flat comparable sales and lower margins due to promotions and a new wholesale business Results of Operations Q2 sales rose slightly due to a new wholesale segment, but gross margin declined from increased promotional activity Q2 2019 vs Q2 2018 Sales Reconciliation (in millions) | Description | Amount | | :--- | :--- | | Sales for fiscal 2018 | $122.2 | | Less: Sales from closed/converted stores | $(1.8) | | Change in comparable sales | $— | | Change in wholesale revenue | $2.7 | | Non-comparable sales & Other | $0.1 | | Sales for fiscal 2019 | $123.2 | - The Q2 2019 gross margin rate decreased by 200 basis points to 44.3% from 46.3% in Q2 2018, caused by lower merchandise margins from promotions and the new wholesale segment[66] - Inventory increased by $7.5 million YoY to $110.4 million, attributed to accelerated receipts due to tariffs, wholesale segment needs, and replacement for lost cargo[63][69] - For the first six months of fiscal 2019, direct sales (e-commerce) grew to 21.3% of total retail sales, up from 20.5% in the prior year[66] Liquidity and Capital Resources Operating cash flow decreased significantly, leading to negative free cash flow driven by working capital changes and lower earnings - Free cash flow for the first six months of fiscal 2019 was negative $(6.7) million, a decrease of $6.1 million from the prior year period, driven by lower Adjusted EBITDA and working capital changes[72] - At August 3, 2019, the company had $44.5 million in unused excess availability under its credit facility[73] - Capital expenditures for the first six months of fiscal 2019 were $7.6 million, primarily for store projects and rebranding[75] Total Debt Outstanding as of August 3, 2019 (in thousands) | Debt Component | Gross Debt | Less: Issuance Costs | Net Debt | | :--- | :--- | :--- | :--- | | Credit facility | $49,770 | $(319) | $49,451 | | FILO Loan | $15,000 | $(215) | $14,785 | | Total debt | $64,770 | $(534) | $64,236 | Non-GAAP Financial Measures The company reports non-GAAP metrics like Adjusted EBITDA and free cash flow to supplement its GAAP results Adjusted EBITDA Reconciliation (in millions) | Metric | Q2 2019 | Q2 2018 | Six Months 2019 | Six Months 2018 | | :--- | :--- | :--- | :--- | :--- | | Net Income (Loss) (GAAP) | $0.0 | $(1.2) | $(3.0) | $(4.3) | | Adjustments (Interest, Tax, D&A, etc.) | $7.1 | $9.9 | $14.9 | $18.2 | | Adjusted EBITDA (non-GAAP) | $7.1 | $8.7 | $11.9 | $14.0 | Adjusted Net Income (Loss) per Diluted Share (non-GAAP) | Period | 2019 | 2018 | | :--- | :--- | :--- | | Second Quarter | $0.00 | $0.01 | | Six Months | $(0.04) | $(0.04) | Free Cash Flow Reconciliation (in millions) | Metric | Six Months Ended Aug 3, 2019 | Six Months Ended Aug 4, 2018 | | :--- | :--- | :--- | | Cash flow from operating activities (GAAP) | $0.9 | $6.8 | | Capital expenditures | $(7.6) | $(7.4) | | Free Cash Flow (non-GAAP) | $(6.7) | $(0.6) | Item 3. Quantitative and Qualitative Disclosures About Market Risk The company's primary market risk stems from interest rate fluctuations on its variable-rate debt - The company is exposed to interest rate risk through its variable-rate debt; a hypothetical 50 basis point increase in rates would increase annual interest expense by approximately $357,000[80] - Foreign currency risk from operations in the UK and Canada is considered immaterial due to the low volume of sales from these locations[81] Item 4. Controls and Procedures Management concluded that disclosure controls and procedures were effective, noting new controls for the lease accounting standard - Based on an evaluation, the CEO and CFO concluded that the company's disclosure controls and procedures were effective as of August 3, 2019[82] - New internal controls were implemented to manage the adoption of the new lease accounting guidance (ASC 842), with no other material changes to internal control over financial reporting[84] PART II. OTHER INFORMATION Item 1. Legal Proceedings Ongoing legal proceedings are not expected to have a material adverse impact on the company's financial results - The company states that ongoing legal proceedings from the ordinary course of business are not expected to have a material adverse impact on its financial position or future results[86] Item 1A. Risk Factors No material changes to risk factors were reported since the company's latest Annual Report on Form 10-K - No material changes to risk factors were reported since the company's Fiscal 2018 Annual Report[87] Other Items (2, 3, 4, 5, 6) The company reports no unregistered equity sales or defaults and lists the exhibits filed with this report - The company reported "None" for Item 2 (Unregistered Sales of Equity Securities), Item 3 (Defaults Upon Senior Securities), and Item 5 (Other Information)[88][89] - Item 6 lists the exhibits filed with the 10-Q, including a credit facility amendment, incentive plans, and required CEO/CFO certifications[90][91]