Destination XL Group (DXLG) Q4 2007 earnings summary

Executive summary

• FY2006 sales rose 10.9% to $467.5M, including $6.7M from a 53rd week; comparable sales increased 9.0% on a 52-week comparison.

• Operating income grew 44.7% to $25.4M, or 5.4% of sales, supported by stronger comparable sales and merchandise margins.

• Reported net income of $42.6M included a $30.5M income tax benefit from a deferred tax valuation allowance reversal.

Financial highlights

• Revenue was $467.5M vs. $421.4M; gross profit, net of occupancy costs, was $212.6M vs. $182.2M.

• Gross margin was 45.5%, up from 43.3% YoY; merchandise margin improved 120 bps and occupancy costs improved 100 bps.

• SG&A rose $19.0M, or 12.5%, to $170.9M; SG&A was 36.6% of sales vs. 36.1%.

• Net income was $42.6M vs. $10.8M; diluted EPS was $0.98 vs. $0.30, with FY2006 results including the substantial tax benefit.

• Cash from operations was $12.1M vs. $16.8M; inventory increased to $114.5M from $91.5M, mainly to support Rochester and direct-business growth.

Outlook and guidance

• FY2007 expectations: continued sales and market-share growth, maintained or slightly higher gross margins, slower SG&A growth, and healthy operating-margin and cash-flow improvement.

• FY2007 capital expenditures were budgeted at $19.0M, including $9.0M for systems and distribution sortation and $7.8M for store projects.

• Planned FY2007 openings: 3 Casual Male XL retail stores, 5 outlets, 3 Rochester stores and 3 Jared M. shops; 12 Casual Male XL stores were expected to close as leases expired.

• Management continued to target a 10% operating margin; achieving it depended on sales, merchandising execution, gross-margin gains, expense discipline, competition and macroeconomic trends.