Company Overview
Destination XL Group, Inc. (NASDAQ:DXLG) is the leading integrated-commerce specialty retailer catering to the underserved big and tall men's apparel market. With a rich history spanning over two decades, the company has established itself as the go-to destination for stylish and well-fitting clothing options for the big and tall consumer.
Founded in 2002 through the acquisition of Casual Male Corp., Destination XL Group has meticulously crafted an extensive portfolio of exclusive and recognizable brands, including DXL, Casual Male XL, and a suite of private labels such as Harbor Bay, True Nation, and Synergy. This diversified product offering caters to the varying needs and style preferences of its target demographic, allowing the company to maintain a competitive edge in the niche big and tall clothing segment.
Historical Developments
At the time of the acquisition, Destination XL assumed the assets and liabilities of Casual Male's frozen pension plan and supplemental executive retirement plan (SERP). In a significant move during the second quarter of fiscal 2023, the company's Board of Directors approved the termination of these frozen plans. The company completed a partial settlement of the pension plan through the purchase of nonparticipating annuities in the second quarter, and then settled the remaining obligation and terminated the plan in the fourth quarter. The SERP was also terminated through the purchase of a nonparticipating annuity in the third quarter of fiscal 2023.
The company's journey has not been without challenges. In fiscal 2021, Destination XL faced significant headwinds due to the COVID-19 pandemic, resulting in a net loss of $64.5 million. To mitigate the impact, the company took several actions, including negotiating rent abatements and deferrals, and implementing furloughs and salary reductions. The termination of its frozen retirement plans in fiscal 2023 resulted in a charge of $4.2 million related to the partial settlement of the pension plan and $57,000 related to the termination of the SERP.
Business Evolution and Adaptation
Despite these challenges, Destination XL has continued to evolve and adapt its business model. The company has focused on improving its online presence, including a website replatform project to enhance the customer experience. Destination XL has also worked to expand its store footprint, opening new DXL stores and converting Casual Male XL stores to the DXL format. As of the end of fiscal 2023, the company operated 239 Destination XL stores, 15 DXL outlet stores, 12 Casual Male XL retail stores, and 19 Casual Male XL outlet stores, in addition to its digital business.
Financials
Despite the challenges posed by the macroeconomic environment, Destination XL Group has remained focused on its strategic initiatives to drive long-term growth. In the first nine months of fiscal 2024, the company reported total sales of $347.8 million, a decrease of 9.6% compared to the same period in the prior year. This decline was primarily driven by a decrease in comparable sales of 11.2%, with stores down 10.5% and the direct business down 12.8%.
The company's gross margin rate for the first nine months of fiscal 2024 was 47.2%, a decrease of 160 basis points compared to the same period in fiscal 2023. This was due to a 200 basis point increase in occupancy costs, partially offset by a 40 basis point increase in merchandise margin. For the full fiscal year 2024, the company expects gross margin rates to be approximately 130 to 180 basis points lower than fiscal 2023, primarily due to the deleveraging of occupancy costs on a lower sales base.
Selling, general, and administrative (SG&A) expenses for the first nine months of fiscal 2024 increased by $4.9 million, or 3.4%, compared to the same period in the prior year. This increase was primarily driven by higher marketing costs of $2.9 million, as well as increased healthcare and technology costs, partially offset by a decrease in incentive accruals. As a percentage of sales, SG&A expenses increased to 42.7% in the first nine months of fiscal 2024, compared to 37.4% in the same period of fiscal 2023, due to the deleveraging of sales.
For the most recent fiscal year 2024, Destination XL Group reported annual revenue of $521.8 million, annual net income of $27.9 million, annual operating cash flow of $49.6 million, and annual free cash flow of $32.2 million. In the most recent quarter (Q3 2024), the company reported revenue of $107.5 million and a net loss of $1.8 million. Comparable sales decreased 11.3% in Q3 2024, consisting of a 9.9% decline in store sales and a 14.7% decline in direct sales. The decrease in sales was primarily due to lower traffic in stores and lower conversion online, as customers continued to be price conscious and gravitated towards more moderate and entry-level price points.
Liquidity
Despite the challenging macroeconomic environment, Destination XL Group has maintained a strong balance sheet, with no outstanding debt and $43 million in cash and investments as of the end of the third quarter of fiscal 2024. The company's liquidity position provides it with the necessary flexibility to navigate the current landscape and execute on its strategic initiatives.
As of November 2, 2024, the company had cash and cash equivalents of $7.1 million, with an additional $35.9 million in short-term investments, for a total of $43 million in cash and investments. Destination XL Group has a $125 million revolving credit facility with Citizens Bank, N.A. that matures on October 28, 2026. The company had no outstanding borrowings under the credit facility as of November 2, 2024, and unused availability of $78.1 million.
The company's financial ratios further demonstrate its strong liquidity position. As of the latest reporting period, Destination XL Group had a debt-to-equity ratio of 0, a current ratio of 1.57, and a quick ratio of 0.57.
Strategic Initiatives
One of the key strategic priorities for Destination XL Group is the ongoing rollout of its new e-commerce platform, which is designed to deliver a more seamless and engaging shopping experience for its customers. The company has made significant progress on this initiative, with 100% of its site traffic now directed to the new platform. The latest phase of the project, which went live in the third quarter, included the migration of catalog pages, product detail pages, and a new site search experience.
In addition to its e-commerce initiatives, Destination XL Group has also been focused on expanding its physical retail footprint to better serve its target market. During the first nine months of fiscal 2024, the company opened four new DXL stores, with four more expected to be opened by the end of the fiscal year. The company believes that there is significant opportunity for further store expansion, with plans to potentially open approximately 50 net new DXL stores over the next five years.
Another critical aspect of Destination XL Group's long-term strategy is its focus on strengthening brand awareness and customer engagement. In the second quarter of fiscal 2024, the company launched a new brand advertising campaign that was tested in three markets. While the campaign demonstrated positive results in terms of increased traffic and customer acquisition, the company has since decided to pause the national rollout of the campaign due to the current macroeconomic environment.
Instead, the company is focusing its marketing efforts on more cost-effective and targeted tactics, such as a video campaign on various social media platforms. Additionally, Destination XL Group is making progress on the development of a new loyalty program, which is expected to launch at the beginning of the next fiscal year. The company believes that these initiatives will help drive greater customer engagement and loyalty, ultimately supporting its long-term growth aspirations.
Recent Performance and Outlook
Destination XL Group's performance in the third quarter of fiscal 2024 was impacted by the continued consumer spending headwinds, with total sales declining 9.8% year-over-year to $107.5 million. Comparable sales decreased 11.3%, with stores down 9.9% and the direct business down 14.7%. The company's net loss for the quarter was $0.03 per diluted share, compared to net income of $0.06 per diluted share in the prior-year period.
Given the challenging macroeconomic environment, Destination XL Group has revised its full-year fiscal 2024 guidance. The company now expects total sales to be at the lower end of its previously provided range of approximately $470 million, with an adjusted EBITDA margin of approximately 4.5%. This revised guidance reflects the continued pressure on consumer spending and the company's proactive measures to maintain financial discipline and control costs.
Destination XL Group expects their fiscal year 2024 comparable sales to be around negative 10%. For the fourth quarter, the company is guiding to a comparable sales decline in the mid-single digits, which represents a modest improvement from the third quarter.
Business Segments
Destination XL Group operates under two principal segments: Stores and Direct.
The Stores segment consists of the company's physical retail locations, which include Destination XL (DXL) stores, DXL Outlet stores, Casual Male XL retail stores, and Casual Male XL Outlet stores. As of November 2, 2024, the company operated a total of 285 stores, with 239 DXL retail stores, 15 DXL Outlet stores, 12 Casual Male XL retail stores, and 19 Casual Male XL Outlet stores. During the first nine months of fiscal 2024, the company opened four new DXL stores, relocated one DXL store, converted four Casual Male XL stores to the DXL format, completed four DXL remodels, and closed one Casual Male XL store and one DXL store.
The Direct segment encompasses the company's e-commerce operations, including its website at dxl.com, mobile site, mobile app, and sales through third-party marketplaces. In the third quarter of fiscal 2024, direct sales accounted for 29.1% of the company's total sales, down from 30.4% in the prior-year period, as the company's store sales increased.
Conclusion
Despite the near-term headwinds, Destination XL Group remains focused on executing its long-term strategic plan. The company's commitment to providing a superior shopping experience, both in-store and online, coupled with its focus on brand building and customer engagement, positions it well to capitalize on the long-term growth opportunities in the big and tall men's apparel market.
As Destination XL Group navigates the current macroeconomic environment, its strong balance sheet, disciplined cost management, and strategic initiatives provide a solid foundation for the company to weather the storm and emerge as an even stronger player in the industry. Investors will be closely watching the company's progress in implementing its growth strategies and its ability to adapt to the evolving consumer landscape.