Destination XL posted improved results in the fiscal first quarter, but there was a bit of pushback from one Wall Street analyst on the transition costs for a new chief executive officer expected later this year.
In the period ended May 5, the men’s big and tall retailer cut its losses to $3.1 million compared with $6.1 million in the same period last year. Comparable-store sales rose 2.2 percent while total sales rose 5.3 percent to $113.3 million from $107.6 million in the prior year’s first quarter. On a non-GAAP basis, earnings before interest, taxes, depreciation and amortization more than doubled to $5.1 million from $2.5 million last year.
In a conference call Wednesday morning, David Levin, president and chief executive officer of the 300-unit-plus company, said the “sales momentum” it had enjoyed in the fourth quarter of last year continued in the first quarter with increases in transactions and dollars-per-transaction. He said results in May have also continued to be strong, with gains in the mid- to high-single digits.
Even so, the company on May 16 “took an important step toward achieving acceptable EBITDA margins by reorganizing and rightsizing our corporate workforce,” Levin said. The company eliminated 56 positions, or 15 percent of its corporate workforce, a move that is expected to deliver annualized savings of approximately $10.3 million, he said.
Levin also revealed that DXL has entered into a $140 million, five-year senior secured credit facility with Bank of America NA. “The new facility not only enhances our access to capital on improved terms, but it demonstrates the confidence that our bank group has in our vision,” Levin said. “We expect to reduce our interest expense by approximately $700,000 on an annualized basis due to the improvement in terms.”
Looking ahead to this year, the company revised its earnings guidance to reflect the savings expected from the restructuring, which includes approximately $1.7 million in the second quarter for severance and other charges, and $4.2 million associated with the ceo transition costs.
This turned into a point of contention for one analyst who called the company out on the costs of the separation benefits.
As reported, Levin said in March he is planning to retire by the end of the year. Heidrick & Struggles has been retained to search for a successor and will consider candidates from within and outside the company. Levin, 66, has agreed to remain with the firm to provide support during the transition period.
Under the terms of a transition agreement dated March 20, Levin modified an earlier employment contract that called for him to remain in his position through Dec. 31, 2019. The agreement calls for Levin to continue as ceo until Dec. 31 of this year or earlier if a full-time successor is appointed. At that point, Levin will remain employed by the company to “perform reasonable transition duties or other consulting activities or projects unless his employment is terminated,” according to the agreement.
In the company’s most recent proxy, filed last year, Levin’s total compensation for 2016 was $2.1 million, which included a base salary of $811,200 as well as stock awards and other compensation.
In questioning the $4.2 million amount, Alexander Silverman, an analyst with AWM Investment, asked for clarification. Peter Stratton, chief financial officer, said the figure was determined as a result of the transition agreement filed in March as well as costs related to installing a new ceo, including the retainer paid to Heidrick & Struggles. “So, I’m not going to get into specifics about what makes up the $4.2 million, but our best estimate right now is all of these costs that we’re incurring to ensure a successful and smooth transition,” Stratton said.
Silverman responded: “That sounds to me like severance,” to which Stratton said: “Well, again, as part of David’s employment of contract, he would be entitled to certain separation benefits but that’s only one piece of the $4.2 million.”
Silverman said: “I thought David was retiring,” and added, “I find that to be somewhat egregious, just so you know.”
In other business, the company said it will work on four pillars to improve profitability this year: better managing its cost structure; improving its focus on our customer; increasing the return on investment as well as its marketing and digital initiatives, and enhancing the in-store experience.