Destination XL Group, Inc. Reports Fourth-Quarter and Fiscal 2016 Financial Results

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FY 2016 Net Loss Improved 73%; EBITDA Grew 36%; Company Provides 2017
Guidance and Announces $12.0 Million Stock Repurchase Program

CANTON, Mass.–(BUSINESS WIRE)–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 2016.

Highlights

  • Total sales for the quarter of $122.6 million, down slightly from
    $124.0 million in the prior-year quarter; total sales for the year of
    $450.3 million, up from $442.2 million in the prior year
  • DXL comparable store sales decreased 1.9% for the quarter, while
    growing 2.4% for the year, in a challenging retail environment
  • Total company comparable sales declined 2.4% for the quarter, while
    growing 0.6% for the year
  • Net Income for the quarter of $1.8 million improved by $3.2 million
    compared to the prior-year quarter’s net loss of $(1.4) million; net
    loss for the year narrowed to $(2.3) million from $(8.4) million in
    the prior year
  • EBITDA for the quarter increased 48.2% to $10.8 million from $7.3
    million in the prior-year quarter; EBITDA for the year increased 35.8%
    to $31.6 million from $23.3 million in the prior year
  • Board authorizes a $12.0 million stock repurchase program

Management Comments

“Despite the 2016 retail environment being one of the most challenging
in recent memory, we were very pleased to deliver strong growth in
EBITDA and free cash flow,” said President and CEO David Levin. “In
2016, we fully funded our DXL store expansion from free cash flow and
grew EBITDA nearly 36%,” Levin said.

Levin went on to note that, “We enter the new fiscal year keenly focused
on continuing to grow our customer base by leveraging our fully
developed fleet of DXL stores and elevating our digital distribution
channel. Six out of ten big and tall guys still do not know who we are
and, therefore, our top priority in 2017 is customer retention and
acquisition. We intend to fuel that objective with a marketing dollar
increase of approximately 40% this year, including reinstituting
television advertising beginning April 2nd.

“Fiscal 2016 marked a milestone year for our Company with the opening of
our 200th DXL store, which now affords us the scale and reach
to service our customers across every major market in the U.S. through
in-store and online channels. We are also thrilled to have entered the
Canadian market with our first Company-operated DXL store in the Toronto
area,” Levin commented.

Levin also highlighted that, “Under the leadership of Sahal Laher, our
new Chief Digital and Information Officer, we are accelerating our
efforts to leverage our already robust omni-channel capabilities with a
focus on building an unparalleled online experience. This will enhance
our engagement with existing shoppers, while inviting new customers to
the DXL experience. Our marketing efforts, coupled with our accelerated
digital strategies, are now unified and aligned at retaining existing
customers, while simultaneously driving new customer acquisition.”

Fourth-Quarter and
Fiscal 2016 Results

Sales

For the fourth quarter of fiscal 2016, total sales declined 1.1% to
$122.6 million from $124.0 million in the fourth quarter of fiscal 2015.
The decrease of $1.4 million in total sales was primarily driven by a
comparable sales decrease of $2.7 million, or 2.4%, which included a
comparable sales decrease of 1.9% from our DXL stores. This decrease was
partially offset by sales from new DXL stores. Sales for the fourth
quarter of fiscal 2016 were negatively impacted by the overall weakness
in the retail environment. In addition, we believe our decision to
eliminate our fall marketing campaign also had a negative impact on our
fourth quarter sales.

For fiscal 2016, total sales increased 1.8% to $450.3 million from
$442.2 million in fiscal 2015. The increase in sales of $8.1 million was
primarily due to our comparable DXL store sales growth of 2.4%, or $5.4
million. In addition, new DXL store growth was partially offset by sales
from closed Casual Male XL stores and comparable store decreases from
our other store formats. Sales per square foot for the DXL retail
stores, on a rolling 12-month basis, increased to $180 for fiscal 2016
from $177 for the prior year.

For fiscal 2017, with the majority of our store base consisting of DXL
stores, we will transition to one comparable sales figure for the
Company and will no longer provide specific information on our DXL
comparable store sales.

Gross Margin

For the fourth quarter of fiscal 2016, gross margin, inclusive of
occupancy costs, was 44.9%, compared with gross margin of 45.8% for the
fourth quarter of fiscal 2015. The decrease of 90 basis points was the
result of a 40-basis-point decrease in merchandise margin and a
50-basis-point increase in occupancy costs as a percentage of total
sales. The decrease in merchandise margin was primarily due to an
increase in promotional strategies over the peak December selling weeks.
The increase in occupancy costs was due to occupancy expense increasing
at a greater rate than sales. On a dollar basis, occupancy costs for the
fourth quarter increased approximately 2.8% over the prior-year’s fourth
quarter.

For the fiscal year, gross margin, inclusive of occupancy costs, was
45.5% as compared to 46.1% for fiscal 2015. The decrease of 60 basis
points was due to a decrease of 40 basis points in merchandise margin
and a 20-basis-point increase in occupancy costs as a percentage of
sales. The decrease in our merchandise margin was mainly due to higher
markdown activity associated with increased promotional activities. The
increase in occupancy costs was due to occupancy expense increasing at a
greater rate than sales.

Selling, General & Administrative

SG&A expenses for the fourth quarter of fiscal 2016 were 36.1% of sales,
compared with 40.0% in the fourth quarter of fiscal 2015. On a dollar
basis, SG&A expense declined $5.3 million from the same quarter of the
prior year, primarily due to decreases in advertising costs and
incentive accruals, which were partially offset by increased store
payroll and healthcare costs.

For fiscal 2016, SG&A expenses were 38.5% of sales, as compared to 40.8%
in fiscal 2015. SG&A expenses for fiscal 2016 decreased $7.3 million, or
4.0%, to $173.3 million as compared to $180.6 million in fiscal 2015.
The decrease was primarily due to a decrease in advertising expense of
approximately $5.4 million as well as a reduction in incentive accruals,
including stock compensation, of approximately $5.4 million. These
decreases were partially offset by increases in store payroll of $1.1
million, associated with the higher sales base, healthcare costs of
approximately $1.4 million and other corporate and supporting costs of
$1.0 million.

Net Income (Loss)

Net Income for the fourth quarter of fiscal 2016 was $1.8 million, or
$0.04 per diluted share, compared with a net loss of $(1.4) million, or
$(0.03) per diluted share, for the fourth quarter of fiscal 2015. On a
non-GAAP basis, assuming a normalized tax rate of 40%, adjusted net
income for the fourth quarter of fiscal 2016 was $0.02 per diluted share
compared with a net loss of $(0.02) per diluted share in fiscal 2015.

The net loss for fiscal 2016 was $(2.3) million, or $(0.05) per diluted
share, compared with a net loss of $(8.4) million, or $(0.17) per
diluted share, in fiscal 2015. On a non-GAAP basis, assuming a normal
tax rate of 40%, the adjusted net loss was $(0.03) per diluted shares as
compared to $(0.10) per diluted share for fiscal 2015.

EBITDA

Earnings before interest, taxes, depreciation and amortization (EBITDA),
a non-GAAP measure, for the fourth quarter of fiscal 2016 were $10.8
million, compared with $7.3 million for the fourth quarter of fiscal
2015. The improvement was driven by a decrease in SG&A expenses.

EBITDA for fiscal 2016 was $31.6 million, compared with $23.3 million
for the fiscal 2015. The improvement was driven by an increase in sales
and a decrease in SG&A expenses.

Cash Flow

Cash Flow provided by operations for fiscal 2016 was $35.0 million,
compared with cash flow of $18.4 million in fiscal 2015. Capital
expenditures for fiscal 2016 were $29.2 million and consisted of $19.6
million for new DXL stores and $9.6 million for infrastructure projects.
Capital expenditures for fiscal 2015 of $33.4 million consisted of $20.1
million for new DXL stores and $13.3 million for infrastructure
projects. Free cash flow, a non-GAAP measure, improved $20.8 million
year over year, from $(15.0) million in 2015 to $5.8 million in 2016.

   
For the fiscal year ended
(in millions) January 28, 2017     January 30, 2016
Cash flow from operating activities (GAAP basis) $ 35.0 $ 18.4
Capital expenditures, infrastructure projects   (9.6 )   (13.3 )
Free Cash Flow, before DXL capital expenditures (non-GAAP basis) $ 25.4 $ 5.1
Capital expenditures for DXL stores   (19.6 )   (20.1 )
Free Cash Flow (non-GAAP basis) $ 5.8 $ (15.0 )
 

The Company believes it is important to distinguish between capital
expenditures for DXL stores, which is a discretionary investment, and
capital expenditures for infrastructure projects. Capital expenditures
on all new DXL stores are subject to demanding ROIC (“Return on Invested
Capital”) hurdles, and the achievement of these hurdles has been a
significant contributor to the Company’s continued improvement in
EBITDA. Management believes free cash flow before DXL capital
expenditures is an important metric, because it demonstrates DXL’s
ability to strengthen liquidity while also contributing to the funding
of DXL store growth.

Non-GAAP Measures

EBITDA, adjusted net (income) loss and adjusted net income (loss) per
share, free cash flow and free cash flow before DXL capital expenditures
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 January 28, 2017, the Company had cash and cash equivalents of $5.6
million. Total debt at January 28, 2017 was $63.1 million. Total debt
consisted of $44.1 million outstanding under the Company’s credit
facility, net of unamortized debt issuance costs, and approximately
$19.0 million outstanding under its term loan and equipment financing
notes, net of unamortized debt issuance costs. At January 28, 2017, the
Company had $57.1 million of excess availability under its credit
facility.

Inventory was $117.4 million at January 28, 2017 compared with $125.0
million at January 30, 2016. The decrease in inventory compared with
last year’s fourth quarter is due to inventory initiatives to improve
timing of receipts and weeks of supply on hand.

Retail Store Information

For fiscal 2016, the Company opened 30 new DXL stores, which included 4
outlets:

                       
Year End 2014 Year End 2015 Year End 2016 Year End 2017E

# 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 138   1,179 166   1,369   192   1,542   211   1,660
DXL outlets 2 12 9 45 13 66 14 72
CMXL retail 157 557 125 443 97 340 81 281
CMXL outlets 48 153 40 126 36 113 33 104
Rochester Clothing 8   74 5   51   5   51 5   51
Total 353 1,975   345 2,034 343 2,112 344 2,168
 

Fiscal 2017 Outlook

Given the shifting patterns of retail distribution and consumer
purchasing behavior, we are taking a measured approach to fiscal 2017 in
which we will slow new store growth and invest in marketing and our
digital channel of distribution. As a result, we expect to open only 19
DXL retail stores and 1 DXL outlet store in fiscal 2017, while closing
16 Casual Male XL retail stores and 3 Casual Male XL outlet stores.

We believe that investment in our marketing initiatives is necessary to
drive brand awareness, store traffic and our digital presence. As a
result, we expect to increase our marketing spend for fiscal 2017 by
approximately 40% or $6.8 million to $25.0 million. We plan also to
invest in our digital distribution channel in order to transform the way
that our consumers engage with us. While we expect this increase in
spending to be in the best interest of the Company on a long-term basis,
this investment will impact our earnings in the short-term.

We will continue to improve free cash flow and inventory optimization in
order to maintain our strong liquidity position. As discussed below,
with 225 DXL stores expected to be in place by the end of fiscal 2017,
improved free cash flow, better inventory management and excess
liquidity under our credit facility, the Company’s Board of Directors
has authorized the repurchase of up to $12.0 million of the Company’s
outstanding common stock.

Our fiscal 2017 outlook, based on a 53-week year, is as follows:

  • Sales are expected to range from $470.0 million to $480.0 million,
    with a total Company comparable sales increase of approximately 1.0%
    to 4.0%.
  • Gross margin rate of approximately 46.0%, an increase of 50 basis
    points from fiscal 2016.
  • Net loss, on a GAAP basis, of $(5.7) to $(11.7) million, or $(0.11) to
    $(0.23) per diluted share.
  • EBITDA of $24.0 to $30.0 million. *
  • Adjusted net loss, on a non-GAAP basis, of $(0.06) to $(0.14) per
    diluted share, assuming a normal tax rate of 40%. *
  • Capital expenditures of approximately $22.0 million, $8.3 million of
    which will be for infrastructure projects and $13.7 million of which
    will be for new DXL stores (before tenant allowances of approximately
    $5.0 million).
  • Cash flow from operating activities of $37.0 million to $42.0 million,
    resulting in free cash flow after capital expenditures for new DXL
    stores of $15.0 to $20.0 million. *

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

Stock Repurchase Program

The Company’s Board of Directors has authorized the Company to
repurchase up to $12.0 million of its common stock through open market
and privately negotiated transactions.

The timing and the amount of any repurchases of common stock will be
determined based on the Company’s evaluation of market conditions and
other factors. The stock repurchase program is expected to commence in
the first quarter of fiscal 2017 and will expire on February 3, 2018.
The stock repurchase program may be suspended, terminated or modified at
any time for any reason. The Company expects to finance the repurchases
from operating funds and/or periodic borrowings on its credit facility.
Any repurchased common stock will be held as treasury stock.

Conference Call

The Company will hold a conference call to review its financial results
today, Monday, March 20, 2017 at 8:00 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) 710-4016. Please reference conference ID:
6715016. 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 financial measures, including EBITDA, adjusted net
income (loss), adjusted net income (loss) per diluted share, free cash
flow and free cash flow before DXL capital expenditures. The
presentation of these non-GAAP measures is not in accordance with GAAP,
and should not be considered superior to or as a substitute for net
income (loss), net income (loss) per diluted share or cash flows from
operating activities or any other measure of performance derived in
accordance with GAAP. In addition, all companies do not calculate
non-GAAP financial measures in the same manner and, accordingly, the
non-GAAP measures presented in this release may not be comparable to
similar measures used by other companies. The Company believes the
inclusion of these non-GAAP measures helps investors gain a better
understanding of the Company’s performance, especially when comparing
such results to previous periods, and that they are useful as an
additional means for investors to evaluate the Company’s operating
results, when reviewed in conjunction with the Company’s GAAP financial
statements. Reconciliations of these non-GAAP measures to their
comparable GAAP measures are provided in the tables below.

The Company believes that EBITDA (calculated as earnings before
interest, taxes, depreciation and amortization) is useful to investors
in evaluating its performance. With the significant capital investment
associated with the DXL transformation and, therefore, increasing levels
of depreciation and interest, management uses EBITDA as a key metric to
measure profitability and economic productivity.

The Company has fully reserved against its deferred tax assets and,
therefore, its net income (loss) is not reflective of earnings assuming
a “normal” tax position. Adjusted net income (loss) provides investors
with a useful indication of the financial performance of the business,
on a comparative basis, assuming a normalized effective tax rate of 40%.

Free cash flow and free cash flow before DXL capital expenditures are
metrics that management uses to monitor liquidity. The Company has
stated that it expects to fund its ongoing DXL capital expenditures with
cash flow from operations. Management believes this metric is important
to investors because it demonstrates the Company’s ability to strengthen
liquidity while also contributing to the funding of the DXL store
growth. Free cash flow is calculated as cash flow from operating
activities, less capital expenditures, and excludes the mandatory and
discretionary repayment of debt. Free cash flow before DXL capital
expenditures is calculated as free cash flow with DXL capital
expenditures added back.

About Destination XL Group, Inc.

Destination XL Group, Inc. is the largest omni-channel specialty
retailer of big and tall men’s apparel with store locations throughout
the United States and London, England. The retailer operates under five
brands: Destination XL®, Casual Male XL, Rochester Clothing, ShoesXL and
LivingXL. The Company also operates e-commerce sites at www.destinationxl.com
and www.bigandtall.com.
With more than 2,000 private label and name brand styles to choose from,
big and tall customers are provided with a unique blend of wardrobe
solutions not available at traditional retailers. The Company is
headquartered in Canton, Massachusetts. For more information, please
visit the Company’s investor relations website: http://investor.destinationxl.com.

Forward-Looking Statements

Certain statements and information contained in this press release
constitute forward-looking statements under the federal securities laws,
including statements regarding the Company’s expectations with respect
to cash flows, gross profit margins, store counts, capital expenditures,
debt levels, sales, EBITDA, and earnings for fiscal 2017, the Company’s
ability to strengthen liquidity in 2017, the expected impact of
inventory management improvements on working capital in fiscal 2017, the
expected impact of marketing and digital strategies on customer
acquisition and retention in fiscal 2017 and beyond, the Company’s
ability to execute on its strategic plan, the Company’s intention to
repurchase shares of its common stock from time to time under the stock
repurchase program, the intended use of any repurchased shares, and the
source of funding for purchasing shares and the effectiveness of the
Destination XL concept. The discussion of forward-looking information
requires management of the Company to make certain estimates and
assumptions regarding the Company’s strategic direction and the effect
of such plans on the Company’s financial results. The Company’s actual
results and the implementation of its plans and operations may differ
materially from forward-looking statements made by the Company. The
Company encourages readers of forward-looking information concerning the
Company to refer to its filings with the Securities and Exchange
Commission, including without limitation, its Annual Report on Form 10-K
filed on March 18, 2016, that set forth certain risks and uncertainties
that may have an impact on future results and direction of the Company,
including risks relating to the Company’s execution of its DXL strategy
and ability to grow its market share, its ability to predict customer
tastes and fashion trends, its ability to forecast sales growth trends
and its ability to compete successfully in the United States men’s big
and tall apparel market.

Forward-looking statements contained in this press release speak only
as of the date of this release. Subsequent events or circumstances
occurring after such date may render these statements incomplete or out
of date. The Company undertakes no obligation and expressly disclaims
any duty to update such statements.

 
DESTINATION XL GROUP, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
 
               
 
For the three months ended For the fiscal year ended

January 28,
2017

January 30,
2016

January 28,
2017

January 30,
2016

Sales $ 122,646 $ 124,044 $ 450,283 $ 442,221
Cost of goods sold including occupancy   67,612   67,191   245,402   238,382
Gross profit 55,034 56,853 204,881 203,839
 
Expenses:
Selling, general and administrative 44,232 49,566 173,283 180,570
Depreciation and amortization   8,258   7,833   30,621   28,359
Total expenses   52,490   57,399   203,904   208,929
 
Operating income (loss) 2,544 (546 ) 977 (5,090 )
 
Interest expense, net   (721 )   (768 )   (3,067 )   (3,058 )
 
Income (loss) before provision for income taxes 1,823 (1,314 ) (2,090 ) (8,148 )
 
Provision for income taxes   40   69   166   260
 
Net income (loss) $ 1,783 $ (1,383 ) $ (2,256 ) $ (8,408 )
 
 
Net income (loss) per share – basic and diluted $ 0.04 $ (0.03 ) $ (0.05 ) $ (0.17 )
 
 
Weighted-average number of common shares outstanding:
Basic 49,581 49,139 49,544 49,089
Diluted 50,072 49,139 49,544 49,089
 
 
DESTINATION XL GROUP, INC.
CONSOLIDATED BALANCE SHEETS
January 28, 2017 and January 30, 2016
(In thousands)
       
 
 
January 28, January 30,
2017 2016
 
ASSETS
 
Cash and cash equivalents $ 5,572 $ 5,170
Inventories 117,446 125,014
Other current assets 15,931 12,975
Property and equipment, net 124,347 124,962
Intangible assets 2,228 2,669
Other assets   3,804   3,557
Total assets $ 269,328 $ 274,347
 
LIABILITIES AND STOCKHOLDERS’ EQUITY
 
Accounts payable, accrued expenses and other liabilities $ 104,521 $ 103,147
Long-term debt 19,002 26,158
Borrowings under credit facility 44,097 41,984
Deferred gain on sale-leaseback 13,188 14,654
Stockholders’ equity   88,520   88,404
Total liabilities and stockholders’ equity $ 269,328 $ 274,347
 

CERTAIN COLUMNS IN THE FOLLOWING TABLES MAY NOT FOOT DUE TO ROUNDING

     

GAAP TO NON-GAAP RECONCILIATION OF NET INCOME (LOSS)

 
For the three months ended For the fiscal year ended
January 28, 2017     January 30, 2016 January 28, 2017   January 30, 2016
$  

Per diluted
share

$  

Per diluted
share

$  

Per diluted
share

$  

Per diluted
share

(in thousands, except per share data)

Net income (loss) (GAAP basis) $ 1,783 $ 0.04 $ (1,383 ) $ (0.03 ) $ (2,256 ) $ (0.05 ) $ (8,408 ) $ (0.17 )
 
Add back: Actual income tax provision 40 69 166 260
Income tax (provision) benefit, assuming
a normal tax rate of 40% (729 ) 526 836 3,259
                               
Adjusted net income (loss) (non-GAAP basis) $ 1,094 $ 0.02 $ (788 ) $ (0.02 ) $ (1,254 ) $ (0.03 ) $ (4,889 ) $ (0.10 )
 
Weighted average number of common shares
outstanding on a diluted basis 50,072 49,139 49,544 49,089
 

Contacts

Investors:
ICR, Inc.
Tom Filandro, 646-277-1235
Tom.Filandro@icrinc.com
or
Media:
Jason
Geller, 646-277-1218
Jason.Geller@icrinc.com

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