Destination XL Group, Inc. (NASDAQ:DXLG)
Q1 2016 Earnings Conference Call
May 20, 2016 09:00 AM ET
Jeff Unger - IR
David Levin - President and CEO
Peter Stratton - SVP and CFO
Greg Pendy - Sidoti & Company, LLC
Good day and welcome to the Destination XL Group’s First Quarter 2016 Earnings Call. Today’s conference is being recorded.
At this time, I’d like to turn the conference over to Mr. Jeff Unger, Investor Relations. Please go ahead.
Good morning and thank you, Tracy. And everybody right now in a listen-only mode. Thank you for joining us today on Destination XL Group’s first quarter fiscal 2016 call. On our call today is David Levin, our President and CEO, as well as Peter Stratton, our Senior Vice President and Chief Financial Officer.
During today’ call we will discuss some non-GAAP metrics to provide investors with useful information about our financial performance. Please refer to our earnings release which was filed this morning and is available on our Investor Relations website at investor.destinationxl.com for an explanation and reconciliation of such measures. We have also posted a brief flight deck in the events section on our Investor Relations website that summarizes and reconciles several of our key metrics for the quarter.
Today’s discussion also contains certain forward-looking statements concerning the company’s operations, performance and financial condition including sales, profitability, EBITDA, gross margin, capital expenditures, earnings per share, free cash flow, store openings and closings and the company’s ability to execute on the strategic plan and the effectiveness of the Destination XL concept.
Such forward-looking statements are subject to various risks and uncertainties that could cause actual results to differ materially from those assumptions mentioned today due to a variety of factors that affect the company. Information regarding risks and uncertainties is detailed in the company’s filings with the Securities and exchange commission.
Now I’d like to turn the call over to our President and CEO, David Levin.
Thank you, Jeff and good morning, everyone. First quarter results demonstrate the continued strength of the DXL concept. We drove solid growth in sales and profitability even as cooler weather persisted in specific geographies. We produced strong comps in February and through the first half of March, but we did see some slowing at the end of the quarter. Typically, late March and April are the times when our customers begin shopping for warmer weather close. However the weather remained cooling down particularly in the Northeast and Midwest as a result sales from our spring summer category such as shorts and active wear were below expectations for the first quarter. However we saw consistent strong store sales results throughout the quarter in one climate regions such as Southern California, Arizona and Florida.
I should also point out that our fashion business performed very well in the first quarter, where we slowed a bit was with the core merchandise guy. This is the guy who only comes in once or twice a year, he isn’t going to come in until there is a clear shift in the season and he changes from as winter wardrobe to a summer wardrobe. For a lot of our customers, that seasonal transition hasn’t happened yet. The change in seasons is especially important for DXL because a new season drives traffic and traffic drives transaction.
The weather notwithstanding, we had a solid Q1 performance. DXL retail stores delivered a comp sales increase of 5.8% on top of an 8.7% comp a year ago. Overall, first quarter sales increased 3.3% from a year ago. We delivered EBITDA for the quarter of $8.4 million, up $1.6 million from the first quarter a year ago. All three of our DXL platforms, the larger and smaller footprint DXL stores and our DXL outlet stores contributed to our performance.
As I said last quarter, we’ve delivered consistent performance across the platforms. Our strategy is essentially working as we expected. That reliability enabled us to deliver increased sales, cash flow and profitability even against the cool weather headwinds. It’s clear our results would have been even stronger but for the effects of the weather. In line with our plan, during the quarter we opened up five DXL stores and we remain on track to open approximately 31 DXL stores this year with about two-thirds of those in our smaller format or outlet platform.
None of this would be achievable without a successful marketing campaign and we certainly have that. Our marketing campaign for the spring season kicked off with the NFL draft on April 28th and will run through Father’s Day in June. We continue to realize efficiencies in our marketing spend, which has allowed us to reduce advertising and promotion gradually, both in real dollars and as a percentage of sales. This in turn enables us to increase profitability. In dollar terms, we reduced marketing expenditures by $350,000 to 2.6% of sales in the first quarter compared with 3% of sales a year ago.
For fiscal 2016, our goal for marketing expense is 4.5% of sales, an improvement of 80 basis points from 5.3% of sales in 2015, approximately $2.6 million in savings. We mentioned on our Q4 call that marketing has driven better awareness with the big & tall customer. The conversion rate of customers migrating from casual male to DXL climbed by 6.9 percentage points year-over-year. As a result, total transactions at comparable DXL stores rose 3.4% from the first quarter of 2015, while units per transaction rose 3.5%.
The average dollars of customer spends per transaction increased 2.3% year-over-year as well. And sales per square foot grew increasing 6.5% year-over-year to $179 per foot. As we increased sales at DXL stores, we also continue to make gains with the End of Rack customer. The smaller waste and higher spending shoppers accounted for 43.2% of our bottoms' business in the first quarter, up from 42.3% during the first quarter last year. This customer segment continues to be an area of opportunity for us and we expect it to grow as a share of revenue is general awareness of our brand increases.
In closing, we remain upbeat in our outlook for 2016 driven by our steady DXL operating performance and the continued success of our efforts to reach the big & tall customers. We are confident in our merchandise assortments and overall strategy. We expect sales growth to improve in the second quarter with the arrival of a consistent normal weather pattern, which will drive traffic to both our stores and website. And we’re excited about the long-term prospects for Destination XL and we look forward to producing additional strong results when we speak with you again next quarter.
And on that note, I’ll turn it over to Peter to review our financial performance.
Thank you, David and good morning, everyone. Although we were a little lighter in sales than we would have liked this quarter, this was a good steady quarter for us overall. Before I go into the financial results for the quarter, I want to let you know about an internal project we launched at the beginning of the year.
We initiated a review of our inventory procurement and inventory management procedures in our distribution center. This review process has led to several changes we are implementing to streamline operations at our warehouse; changes include tighter controls over the number of merchandise weeks of supply on hand, and improvements in inventory receipt flow and procurement.
Going forward, we plan to manage the flow of product into the distribution facility in smaller increments, which will increase inventory turnover, free up working capital and improve free cash flow. This will not impact the amount of inventory we have in our DXL stores, only at the warehouse.
We also believe these changes will not jeopardize any sales from out of stock positions in either our stores or our ecommerce business. Moreover, we expect to utilize the additional cash generated in 2016, begin to reduce our debt load. As you’ll see in our guidance, we have raised our expectations for free cash flow in fiscal 2016 by $5 million at both the high and low ends of the range, while reducing our debt guidance by the same amount.
So now let’s turn to the financial highlights for the quarter. During the first quarter we reported a total comparable sales increase of 2%, which was on top of a 5.5% increase in the prior year quarter. We had 144 DXL stores open for at least 13 months, which delivered a comparable sales increase of 5.8% on top of 8.7% in Q1 of 2015.
The February accomplished quite strong, while March and April sales showed the effect of lingering cooler weather. The number of DXL transactions increased 3.4% from the first quarter of the prior year, up into drive our account sales growth.
In the first quarter gross margin including occupancy cost was 46.1% versus 46.2% in the same quarter of fiscal 2015. Merchandize margin was consistent with last year, but the decrease in gross margin rate was a result of a 10 basis point increase in occupancy cost as a percentage of the total sales. Our SG&A cost for the first quarter were 38.3% of sales, compared with 39.7% in the comparable quarter of 2015. We continue to expect SG&A as a percentage of sales to decline during the next several years, as we further leverage our existing cost over a glowing DXL sales base.
Marketing expense was 2.6% of sales in the quarter versus 3% a year ago. EBITDA was $8.4 million, up from $6.8 million in the comparable quarter in 2015. Our net income on a non-GAAP basis assuming a normalized tax rate of 40% was $163,000, essentially breakeven on a per share basis, up from a net loss of $308,000 or minus a minus $0.01 per share in Q1 of fiscal 2015.
Now let’s turn to cash flow and the balance sheet, capital expenditures for the first three months of 2016 were $6.1 million down from $9.6 million in the first quarter of 2015. The lower CapEx was due in large part to fewer openings compared with the first quarter of 2015. We opened five DXL stores during the quarter versus 13 last year.
As of April 30th, we had a total of 170 DXL retail stores in 10 DXL outlets open across the country. Inventory at the end of the first quarter was up $800,000 or 0.6% [ph] from year end 2015. The slightly higher inventory corresponds with the increase in overall selling square footage. Clearance inventory levels were 8.7% of our total inventory for the first quarter of 2016 compared with 8.2% of inventory for the same quarter in 2015.
Total debt at quarter end was $79.9 million, which includes borrowings under the revolving credit facility of $55.7 million with excess availability of $55 million.
Finally, let’s turn to our 2016 guidance. For the 2016 fiscal year we continue to expect total sales in the range of $465 million to $472 million, total company comparable sales increase in the range of approximately 4.8% to 5.5%, gross profit margin of approximately 46.2% to 46.5%, EBITDA in the range of $31 million to $35 million, and adjusted net loss of $0.05 per diluted share to break even assuming a normal tax benefit of approximately 40%.
Capital expenditures of approximately $30 million, with approximately $20.6 million invested in new DXL stores. As a result of the inventory management project I discussed earlier, we now expect borrowings at the end of fiscal 2016 to be in the range of $59 million to $64 million which is a decrease of $5 million at both ends of the range. And free cash flow before DXL capital expenditures of approximately $25.6 million to $30.6 million, resulting in total free cash flow in the range of $5 million to $10 million. This is also an increase in free cash flow of $5 million at both ends of the range.
Finally in 2016, we continue to expect to open approximately 31 DXL stores and close approximately 26 casual male retail stores and 3 casual male outlet stores. In closing, we remain positive in our outlook for the remainder of 2016. We are confident in our assortments, merchandising and strategy and we continue to expect sales and EBITDA for the year to be in line with our original expectations.
Our confidence comes from three important sources. First, our store performance was very strong in those parts of the country that are warm year around. Second, our fashion business is doing very well and slower sales can be primarily attributed to core warm weather items. And third, as we listen to what our peer in the apparel space are saying we know we are not alone in calling out on seasonable weather. Our customer is a need based buyer who shops more when the weather changes. We are making solid progress in all areas of the business and we look forward to driving new achievements through the remainder of the year.
And with that operator we will open the call for questions.
Thank you. [Operator Instructions] And we’ll take our first question from Greg Pendy with Sidoti.
Good morning, guys. I guess my first question just within the DXL stores was the kind of -- did you see softness mainly just weather or was there anything kind of within the composition? I mean how are the new DXL stores performing given the fact that I think you mentioned earlier there is going to be some high volume casual male conversions?
No, I mean we didn’t see anything different than what we would normally expect. I mean what we are really seeing though, which makes us confident is as we look at the different categories of our business if you look at our clothing business, which is really talking about sport coat suits, dress shirts and ties, those categories are up double-digit. And then when we look at it by region out there, there is a significant spread of business between wherever we are having warm weather and cooler weather.
So all indications for us are that it’s a timing issue with the weather. But the fact that our clothing business is so strong is a good signal for us since customers coming there, that customer is not as concerned about the weather, he is need based, he has to go to a wedding or whatever function and he is spending as he historically has done in the past.
Okay. And if I could just get one more follow-up I guess inventory looks relatively clean given the fact that the weather, how are you guys prepare it you think going forward into the season as the weather kind of picks up?
We’re in a very good inventory position right now. Again, we didn’t have a hangover of seasonal product like a lot of other retailers did going into Q1. So our margins are healthy; we’re ready to go with our inventory. And again just the fashion product is selling through at a good clip, because that’s really important, because that’s our liability. Our core product which we carry year around that we can maneuver up and down on a regular flow basis, so there is no liability there. So our inventory is in very good shape, all our deliveries have been on time this year.
Okay, thank you.
[Operator Instructions] And it appears there are no further questions at this time. Mr. Levin I’d like to turn the conference back to you for any additional or closing remarks.
Thank you all for joining us today and as a reminder, I invite you to visit one of our DXL stores and to experience what we’ve build into the Destination concept. And if you like to visit any of our stores please let us know we’ll be happy to give you a tour. We also are presenting at the B. Reilly conference at 8.30 A.M. Pacific Time on May 25th in Los Angeles and at the Oppenheimer conference in Boston on June 21st. And we look forward to speaking with you the next quarter and thank you very much for joining us.
This does conclude today’s conference. We thank you for your participation. You may now disconnect.
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