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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM
(Mark One)
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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended
OR
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
Commission File Number:
(Exact Name of Registrant as Specified in its Charter)
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(State or other jurisdiction of incorporation or organization) |
(I.R.S. Employer |
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(Address of principal executive offices) |
(Zip Code) |
Registrant’s telephone number, including area code: (
Securities registered pursuant to Section 12(b) of the Act.
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Title of each class |
Trading symbol(s) |
Name of each exchange on which registered |
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Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
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Large accelerated filer |
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☐ |
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Accelerated filer |
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Non-accelerated filer |
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Smaller reporting company |
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Emerging growth company |
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If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes
As of August 15, 2020, the registrant had
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements.
DESTINATION XL GROUP, INC.
CONSOLIDATED BALANCE SHEETS
(In thousands, except share data)
(Unaudited)
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August 1, 2020 |
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February 1, 2020 |
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(Fiscal 2020) |
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(Fiscal 2019) |
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ASSETS |
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Current assets: |
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Cash and cash equivalents |
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$ |
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$ |
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Accounts receivable |
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Inventories |
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Prepaid expenses and other current assets |
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Total current assets |
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Non-current assets: |
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Property and equipment, net of accumulated depreciation and amortization |
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Operating lease right-of-use assets |
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Intangible assets |
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Other assets |
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Total assets |
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$ |
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$ |
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LIABILITIES AND STOCKHOLDERS' EQUITY |
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Current liabilities: |
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Accounts payable |
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$ |
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$ |
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Accrued expenses and other current liabilities |
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Operating leases, current |
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Borrowings under credit facility |
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Total current liabilities |
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Long-term liabilities: |
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Long-term debt |
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Operating leases, non-current |
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Other long-term liabilities |
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Total long-term liabilities |
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Commitments and contingencies |
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Stockholders' equity: |
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Preferred stock, $ |
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— |
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— |
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Common stock, $ |
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Additional paid-in capital |
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Treasury stock at cost, |
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( |
) |
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( |
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Accumulated deficit |
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( |
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( |
) |
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Accumulated other comprehensive loss |
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( |
) |
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( |
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Total stockholders' equity |
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Total liabilities and stockholders' equity |
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$ |
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$ |
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The accompanying notes are an integral part of the consolidated financial statements.
2
DESTINATION XL GROUP, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
(Unaudited)
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For the Three Months Ended |
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For the Six Months Ended |
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August 1, 2020 |
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August 3, 2019 |
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August 1, 2020 |
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August 3, 2019 |
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(Fiscal 2020) |
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(Fiscal 2019) |
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(Fiscal 2020) |
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(Fiscal 2019) |
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Sales |
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$ |
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$ |
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$ |
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$ |
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Cost of goods sold including occupancy costs |
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Gross profit |
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Expenses: |
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Selling, general and administrative |
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CEO transition costs |
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— |
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— |
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— |
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Impairment of assets |
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— |
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— |
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— |
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Depreciation and amortization |
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Total expenses |
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Operating income (loss) |
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( |
) |
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( |
) |
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( |
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Interest expense, net |
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( |
) |
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( |
) |
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( |
) |
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( |
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Income (loss) before provision (benefit) for income taxes |
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( |
) |
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( |
) |
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( |
) |
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Provision (benefit) for income taxes |
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( |
) |
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( |
) |
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Net income (loss) |
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$ |
( |
) |
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$ |
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$ |
( |
) |
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$ |
( |
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Net income (loss) per share - basic and diluted |
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$ |
( |
) |
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$ |
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$ |
( |
) |
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$ |
( |
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Weighted-average number of common shares outstanding: |
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Basic |
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Diluted |
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The accompanying notes are an integral part of the consolidated financial statements.
3
DESTINATION XL GROUP, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(In thousands)
(Unaudited)
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For the Three Months Ended |
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For the Six Months Ended |
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||||||||||
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August 1, 2020 |
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August 3, 2019 |
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August 1, 2020 |
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August 3, 2019 |
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||||
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(Fiscal 2020) |
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(Fiscal 2019) |
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(Fiscal 2020) |
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(Fiscal 2019) |
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||||
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Net income (loss) |
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$ |
( |
) |
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$ |
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$ |
( |
) |
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$ |
( |
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Other comprehensive income before taxes: |
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Foreign currency translation |
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( |
) |
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( |
) |
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( |
) |
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( |
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Pension plans |
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Other comprehensive income before taxes |
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Tax provision related to items of other comprehensive income |
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— |
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( |
) |
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— |
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( |
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Other comprehensive income, net of tax |
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Comprehensive income (loss) |
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$ |
( |
) |
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$ |
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$ |
( |
) |
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$ |
( |
) |
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The accompanying notes are an integral part of the consolidated financial statements.
4
.
DESTINATION XL GROUP, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY
(In thousands)
(Unaudited)
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Accumulated |
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Additional |
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Other |
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Common Stock |
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Paid-in |
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Treasury Stock |
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Accumulated |
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Comprehensive |
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Shares |
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Amounts |
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Capital |
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Shares |
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Amounts |
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Deficit |
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Income (Loss) |
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Total |
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Balance at February 1, 2020 |
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$ |
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$ |
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( |
) |
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$ |
( |
) |
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$ |
( |
) |
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$ |
( |
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$ |
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Board of directors compensation |
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Stock compensation expense |
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Issuance of common stock, upon RSUs release |
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( |
) |
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— |
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Deferred stock vested |
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— |
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— |
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— |
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Accumulated other comprehensive income (loss): |
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Pension plan, net of taxes |
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Foreign currency, net of taxes |
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( |
) |
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( |
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Net loss |
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( |
) |
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( |
) |
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Balance at May 2, 2020 |
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$ |
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$ |
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( |
) |
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$ |
( |
) |
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$ |
( |
) |
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$ |
( |
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$ |
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Stock compensation expense |
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Deferred stock vested |
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— |
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— |
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— |
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Accumulated other comprehensive income (loss): |
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Pension plan, net of taxes |
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Foreign currency, net of taxes |
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( |
) |
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( |
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Net loss |
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|
|
|
|
|
|
|
|
|
( |
) |
|
|
|
|
|
|
( |
) |
|
Balance at August 1, 2020 |
|
|
|
|
|
$ |
|
|
|
$ |
|
|
|
|
( |
) |
|
$ |
( |
) |
|
$ |
( |
) |
|
$ |
( |
) |
|
$ |
|
|
The accompanying notes are an integral part of the consolidated financial statements.
5
DESTINATION XL GROUP, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY
(In thousands)
(Unaudited)
|
|
|
|
|
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|
|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additional |
|
|
|
|
|
|
|
|
|
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|
|
|
|
Other |
|
|
|
|
|
||
|
|
|
Common Stock |
|
|
Paid-in |
|
|
Treasury Stock |
|
|
Accumulated |
|
|
Comprehensive |
|
|
|
|
|
|||||||||||||
|
|
|
Shares |
|
|
Amounts |
|
|
Capital |
|
|
Shares |
|
|
Amounts |
|
|
Deficit |
|
|
Income (Loss) |
|
|
Total |
|
||||||||
|
Balance at February 2, 2019 |
|
|
|
|
|
$ |
|
|
|
$ |
|
|
|
|
( |
) |
|
$ |
( |
) |
|
$ |
( |
) |
|
$ |
( |
) |
|
$ |
|
|
|
Board of directors compensation |
|
|
|
|
|
|
— |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock compensation expense |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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|
|
|
|
|
|
|
|
|
|
|
RSUs granted for achievement of performance-based compensation, reclassified from liability to equity |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of common stock, upon RSUs release |
|
|
|
|
|
|
|
|
|
|
( |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
— |
|
|
Shares withheld for taxes related to net share settlement of RSUs |
|
|
( |
) |
|
|
— |
|
|
|
( |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
( |
) |
|
Deferred stock vested |
|
|
|
|
|
|
— |
|
|
|
— |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
— |
|
|
Change in accounting principle due to adoption of ASC 842 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated other comprehensive income (loss): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pension plan, net of taxes |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency, net of taxes |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
( |
) |
|
|
( |
) |
|
Net loss |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
( |
) |
|
|
|
|
|
|
( |
) |
|
Balance at May 4, 2019 |
|
|
|
|
|
$ |
|
|
|
$ |
|
|
|
|
( |
) |
|
$ |
( |
) |
|
$ |
( |
) |
|
$ |
( |
) |
|
$ |
|
|
|
Board of directors compensation |
|
|
|
|
|
|
— |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock compensation expense |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of common stock, upon RSUs release |
|
|
|
|
|
|
|
|
|
|
( |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
— |
|
|
Shares withheld for taxes related to net share settlement of RSUs |
|
|
( |
) |
|
|
— |
|
|
|
( |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
( |
) |
|
Cancellation of restricted stock |
|
|
( |
) |
|
|
— |
|
|
|
— |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
— |
|
|
Deferred stock vested |
|
|
|
|
|
|
— |
|
|
|
— |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
— |
|
|
Accumulated other comprehensive income (loss): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pension plan, net of taxes |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency, net of taxes |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
( |
) |
|
|
( |
) |
|
Net income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at August 3, 2019 |
|
|
|
|
|
$ |
|
|
|
$ |
|
|
|
|
( |
) |
|
$ |
( |
) |
|
$ |
( |
) |
|
$ |
( |
) |
|
$ |
|
|
The accompanying notes are an integral part of the consolidated financial statements.
6
DESTINATION XL GROUP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
|
|
|
For the Six Months Ended |
|
|||||
|
|
|
August 1, 2020 |
|
|
August 3, 2019 |
|
||
|
|
|
(Fiscal 2020) |
|
|
(Fiscal 2019) |
|
||
|
Cash flows from operating activities: |
|
|
|
|
|
|
|
|
|
Net loss |
|
$ |
( |
) |
|
$ |
( |
) |
|
Adjustments to reconcile net loss to net cash provided by (used for) operating activities: |
|
|
|
|
|
|
|
|
|
Amortization of deferred debt issuance costs |
|
|
|
|
|
|
|
|
|
Impairment of assets |
|
|
|
|
|
|
— |
|
|
Depreciation and amortization |
|
|
|
|
|
|
|
|
|
Stock compensation expense |
|
|
|
|
|
|
|
|
|
Board of directors stock compensation |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Changes in operating assets and liabilities: |
|
|
|
|
|
|
|
|
|
Accounts receivable |
|
|
|
|
|
|
|
|
|
Inventories |
|
|
|
|
|
|
( |
) |
|
Prepaid expenses and other current assets |
|
|
|
|
|
|
( |
) |
|
Other assets |
|
|
|
|
|
|
( |
) |
|
Accounts payable |
|
|
( |
) |
|
|
|
|
|
Operating leases, net |
|
|
|
|
|
|
( |
) |
|
Accrued expenses and other liabilities |
|
|
|
|
|
|
( |
) |
|
Net cash provided by (used for) operating activities |
|
|
( |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from investing activities: |
|
|
|
|
|
|
|
|
|
Additions to property and equipment, net |
|
|
( |
) |
|
|
( |
) |
|
Net cash used for investing activities |
|
|
( |
) |
|
|
( |
) |
|
|
|
|
|
|
|
|
|
|
|
Cash flows from financing activities: |
|
|
|
|
|
|
|
|
|
Net borrowings under credit facility |
|
|
|
|
|
|
|
|
|
Debt issuance costs associated with credit facility amendment |
|
|
( |
) |
|
|
— |
|
|
Tax withholdings paid related to net share settlements of RSUs |
|
|
— |
|
|
|
( |
) |
|
Net cash provided by financing activities |
|
|
|
|
|
|
|
|
|
Net increase in cash and cash equivalents |
|
|
|
|
|
|
|
|
|
Cash and cash equivalents: |
|
|
|
|
|
|
|
|
|
Beginning of period |
|
|
|
|
|
|
|
|
|
End of period |
|
$ |
|
|
|
$ |
|
|
The accompanying notes are an integral part of the consolidated financial statements.
7
DESTINATION XL GROUP, INC.
Notes to Consolidated Financial Statements
(Unaudited)
1. Basis of Presentation
In the opinion of management of Destination XL Group, Inc., a Delaware corporation (collectively with its subsidiaries, referred to as the “Company”), the accompanying unaudited Consolidated Financial Statements contain all adjustments necessary for a fair presentation of the interim financial statements. These financial statements do not include all disclosures associated with annual financial statements and, accordingly, should be read in conjunction with the notes to the Company’s audited Consolidated Financial Statements for the fiscal year ended February 1, 2020 included in the Company’s Annual Report on Form 10-K, which was filed with the Securities and Exchange Commission on March 19, 2020.
The information set forth in these statements may be subject to normal year-end adjustments. The information reflects all adjustments that, in the opinion of management, are necessary to present fairly the Company’s results of operations, financial position and cash flows for the periods indicated. The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. The Company’s business historically has been seasonal in nature, and the results of the interim periods presented are not necessarily indicative of the results to be expected for the full year.
The Company’s fiscal year is a 52- or 53- week period ending on the Saturday closest to January 31. Fiscal 2020 and fiscal 2019 are 52-week periods ending on January 30, 2021 and February 1, 2020, respectively.
Impact of COVID-19 Pandemic on Business
On March 11, 2020, the World Health Organization declared the current outbreak of a novel coronavirus disease (“COVID-19”) as a global pandemic. The COVID-19 pandemic has had an adverse effect on the Company’s operations, employees, distribution and logistics, its vendors and customers. All of the Company’s store locations were closed temporarily on March 17, 2020. The Company began reopening stores in late April and by the end of June 2020 all retail stores had been reopened. While all of our stores are open, they are operating with reduced operating hours and it has been and may continue to be necessary to close and re-open stores in response to any ongoing COVID concerns.
In response to the uncertainty that exists relating to the COVID-19 pandemic, the Company has taken significant precautionary measures to reduce expenses, preserve liquidity, and mitigate the adverse impact of the pandemic to the Company. The majority of the Company’s workforce was furloughed in March 2020 and
In March 2020, as a proactive measure, the Company drew $
Segment Information
The Company has
8
Intangibles
In fiscal 2018, the Company purchased the rights to the domain name “dxl.com.” The domain name has a carrying value of $
Accounts Payable
During the first six months of fiscal 2020, the Company received extended payment terms with certain of its merchandise vendors, by entering into short-term notes. The short-term notes, totaling $
Fair Value of Financial Instruments
ASC Topic 825, Financial Instruments, requires disclosure of the fair value of certain financial instruments. ASC Topic 820, “Fair Value Measurements and Disclosures,” defines fair value, establishes a framework for measuring fair value and enhances disclosures about fair value measurements.
The valuation techniques utilized are based upon observable and unobservable inputs. Observable inputs reflect market data obtained from independent sources, while unobservable inputs reflect internal market assumptions. These two types of inputs create the following fair value hierarchy:
Level 1 – Quoted prices in active markets for identical assets or liabilities.
Level 2 – Observable inputs other than Level 1 prices such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the related assets or liabilities.
Level 3 – Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of assets or liabilities.
The Company utilizes observable market inputs (quoted market prices) when measuring fair value whenever possible.
The fair value of long-term debt is classified within Level 2 of the valuation hierarchy. At August 1, 2020, the fair value approximated the carrying amount based upon terms available to the Company for borrowings with similar arrangements and remaining maturities.
The fair value of the “dxl.com” domain name, an indefinite-lived asset, is measured on a non-recurring basis in connection with the Company’s annual impairment test and is classified within Level 3 of the valuation hierarchy. See Intangibles above.
The carrying amounts of cash and cash equivalents, accounts receivable, accounts payable, accrued expenses and short-term borrowings approximate fair value because of the short maturity of these instruments.
9
Accumulated Other Comprehensive Income (Loss) - (“AOCI”)
Other comprehensive income (loss) includes amounts related to foreign currency and pension plans and is reported in the Consolidated Statements of Comprehensive Income (Loss). Other comprehensive income (loss) and reclassifications from AOCI for the three and six months ended August 1, 2020 and August 3, 2019, respectively, were as follows:
|
|
|
August 1, 2020 |
|
|
August 3, 2019 |
|
||||||||||||||||||
|
For the three months ended: |
|
(in thousands) |
|
|||||||||||||||||||||
|
|
|
Pension Plans |
|
|
Foreign Currency |
|
|
Total |
|
|
Pension Plans |
|
|
Foreign Currency |
|
|
Total |
|
||||||
|
Balance at beginning of the quarter |
|
$ |
( |
) |
|
$ |
|
|
|
$ |
( |
) |
|
$ |
( |
) |
|
$ |
( |
) |
|
$ |
( |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other comprehensive income (loss) before reclassifications, net of taxes |
|
|
|
|
|
|
( |
) |
|
|
|
|
|
|
|
|
|
|
( |
) |
|
|
( |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amounts reclassified from accumulated other comprehensive income, net of taxes (1) |
|
|
|
|
|
|
— |
|
|
|
|
|
|
|
|
|
|
|
— |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other comprehensive income (loss) for the period |
|
|
|
|
|
|
( |
) |
|
|
|
|
|
|
|
|
|
|
( |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at end of quarter |
|
$ |
( |
) |
|
$ |
|
|
|
$ |
( |
) |
|
$ |
( |
) |
|
$ |
( |
) |
|
$ |
( |
) |
|
|
|
August 1, 2020 |
|
|
August 3, 2019 |
|
||||||||||||||||||
|
For the six months ended: |
|
(in thousands) |
|
|||||||||||||||||||||
|
|
|
Pension Plans |
|
|
Foreign Currency |
|
|
Total |
|
|
Pension Plans |
|
|
Foreign Currency |
|
|
Total |
|
||||||
|
Balance at beginning of fiscal year |
|
$ |
( |
) |
|
$ |
|
|
|
$ |
( |
) |
|
$ |
( |
) |
|
$ |
( |
) |
|
$ |
( |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other comprehensive income (loss) before reclassifications, net of taxes |
|
|
|
|
|
|
( |
) |
|
|
|
|
|
|
|
|
|
|
( |
) |
|
|
( |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amounts reclassified from accumulated other comprehensive income, net of taxes (1) |
|
|
|
|
|
|
— |
|
|
|
|
|
|
|
|
|
|
|
— |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other comprehensive income (loss) for the period |
|
|
|
|
|
|
( |
) |
|
|
|
|
|
|
|
|
|
|
( |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at end of quarter |
|
$ |
( |
) |
|
$ |
|
|
|
$ |
( |
) |
|
$ |
( |
) |
|
$ |
( |
) |
|
$ |
( |
) |
|
|
(1) |
|
10
Stock-based Compensation
All share-based payments, including grants of employee stock options and restricted stock, are recognized as an expense in the Consolidated Statements of Operations based on their fair values and vesting periods. The fair value of stock options is determined using the Black-Scholes valuation model and requires the input of subjective assumptions. These assumptions include estimating the length of time employees will retain their vested stock options before exercising them (the “expected term”), the estimated volatility of the Company’s common stock price over the expected term and the number of options that will ultimately not complete their vesting requirements (“forfeitures”). The Company reviews its valuation assumptions at each grant date and, as a result, is likely to change its valuation assumptions used to value employee stock-based awards granted in future periods. The values derived from using the Black-Scholes model are recognized as an expense over the vesting period, net of estimated forfeitures. The estimation of stock-based awards that will ultimately vest requires judgment. Actual results and future changes in estimates may differ from the Company’s current estimates.
The fair value of each stock option grant is estimated on the date of grant using the Black-Scholes option-pricing model based on the assumptions in the table below as it relates to stock options granted during the first six months of fiscal 2020. There were no grants of stock options during the first six months of fiscal 2019.
|
|
|
August 1, 2020 |
|
|
|
Expected volatility |
|
82.3% - 87.8% |
|
|
|
Risk-free interest rate |
|
0.22% - 0.27% |
|
|
|
Expected life |
|
3.0 - 4.0 yrs. |
|
|
|
Dividend rate |
|
|
— |
|
|
Weighted average fair value of options granted |
|
$ |
|
|
The Company has outstanding performance stock units (PSUs) with a market condition. The respective grant-date fair value and derived service periods assigned to the PSUs were determined using a Monte Carlo model. The valuation included assumptions with respect to the Company’s historical volatility, risk-free rate and cost of equity.
Impairment of Long-Lived Assets
The Company reviews its long-lived assets for events or changes in circumstances that might indicate the carrying amount of the assets may not be recoverable. The Company assesses the recoverability of the assets by determining whether the carrying value of such assets over their respective remaining lives can be recovered through projected undiscounted future cash flows. The amount of impairment, if any, is measured based on projected discounted future cash flows using a discount rate reflecting the Company’s average cost of funds.
As a result of the significant impact of the COVID-19 pandemic on the Company’s business during the first quarter of fiscal 2020 and the continued uncertainty, the Company reassessed the recoverability of the carrying value for its long-lived assets as of May 2, 2020, assuming that its stores would gradually open throughout the second quarter of fiscal 2020 but that consumer retail spending will remain substantially curtailed for a period of time. Due to uncertainty around the duration and extent of the pandemic’s impact on future cash flows, the Company’s projections were based on multiple probability-weighted scenarios. Based on the results of that assessment, the Company recorded an impairment charge of $
There was
Leases
The Company adopted ASU 2016-02, “Leases (Topic 842)” in the first quarter of fiscal 2019 on a modified retrospective basis and applied the new standard to all leases through a cumulative-effect adjustment to beginning accumulated deficit.
Under ASC 842, the Company determines if an arrangement contains a lease at the inception of a contract. Right-of-use assets represent the Company’s right to use an underlying asset for the lease term and lease liabilities represent the Company’s obligation to make lease payments arising from the lease. Right-of-use assets and lease liabilities are recognized at the commencement date based on the present value of the remaining future minimum lease payments, initial direct costs and any lease incentives are included in the value of those right-of use assets. As the interest rate implicit in the Company’s leases is not readily determinable, the Company utilizes its incremental borrowing rate, based on information available at the lease measurement date to determine the present value of future payments. The Company elected the lessee non-lease component separation practical expedient, which permits the Company to not separate non-lease components from the lease components to which they relate. The Company also made an accounting policy election that the recognition requirement of ASC 842 will not be applied to certain, if any, non-store leases, with a term of 12 months or less, recognizing those lease payments on a straight-line basis over the lease term. At August 1, 2020, the Company has
11
For store leases, the Company accounts for lease components and non-lease components as a single lease component. Certain store leases may require additional payments based on sales volume, as well as reimbursement for real estate taxes, common area maintenance and insurance, and are expensed as incurred as variable lease costs. Other store leases contain one periodic fixed lease payment that includes real estate taxes, common area maintenance and insurance. These fixed payments are considered part of the lease payment and included in the right-of-use assets and lease liabilities. Tenant allowances are included as an offset to the right-of-use asset and amortized as reductions to rent expense over the associated lease term.
See Note 4 ‘‘Leases’’ for additional information.
Recently Adopted Accounting Pronouncements
In June 2016, the Financial Accounting Standards Board (“FASB”) issued ASU No. 2016-13, “Financial Instruments — Credit Losses (Topic 326) — Measurement of Credit Losses on Financial Instruments.” This guidance amends several aspects of the measurement of credit losses on financial instruments, including trade receivables. Topic 326 replaces the existing incurred credit loss model with an impairment model (known as the current expected credit loss ("CECL") model), which is based on expected losses rather than incurred losses. The amendments are effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019. The Company adopted this standard in the first quarter of fiscal 2020 and it did not have a material impact on the Company’s Consolidated Financial Statements.
In August 2018, the FASB issued ASU 2018-13, “Fair Value Measurement (Topic 820): Disclosure Framework—Changes to the Disclosure Requirements for Fair Value Measurement.” This guidance modifies the disclosure requirements on fair value measurements in Topic 820 by removing disclosures regarding transfers between Level 1 and Level 2 of the fair value hierarchy, by modifying the measurement uncertainty disclosure, and by requiring additional disclosures for Level 3 fair value measurements, among others. The Company adopted this standard in the first quarter of fiscal 2020 with new disclosures adopted on a prospective basis. The adoption of this standard did not have a material impact on the Company’s Consolidated Financial Statements and related disclosures.
In December 2019, the FASB issued ASU 2019-12, “Simplifying the Accounting for Income Taxes.” This standard simplifies the accounting for income taxes by removing certain exceptions to the general principles in ASC 740, Income Taxes, while also clarifying and amending existing guidance, including interim-period accounting for enacted changes in tax law. This standard is effective for fiscal years, and for interim periods within those fiscal years, beginning after December 15, 2020, with early adoption permitted. In the first quarter of fiscal 2020, the Company elected early adoption of ASU 2019-12. The provisions related to intra period tax allocation and interim recognition of enactment of tax laws are being adopted on a prospective basis. The effect of the adoption of ASU 2019-12 was not material to the Company's Consolidated Financial Statements.
Recently Issued Accounting Pronouncements
No new accounting pronouncements, issued or effective during the first six months of fiscal 2020, have had or are expected to have a significant impact on the Company’s Consolidated Financial Statements.
2. Revenue Recognition
The Company operates as a retailer of big and tall men’s clothing, which includes stores, direct and wholesale. Revenue is recognized by the operating segment that initiates a customer’s order. Store sales are defined as sales that originate and are fulfilled directly at the store level. Direct sales are defined as sales that originate online, including those initiated online at the store level, on its website or on third-party marketplaces. Wholesale sales are defined as sales made to wholesale customers pursuant to the terms of each customer’s contract with the Company. Generally, all revenues are recognized when control of the promised goods is transferred to customers, in an amount that reflects the consideration in exchange for those goods. Sales tax collected from customers and remitted to taxing authorities is excluded from revenue and is included as part of accrued expenses on the Consolidated Balance Sheets.
|
|
̶ |
Revenue from the Company’s store operations is recorded upon purchase of merchandise by customers, net of an allowance for sales returns, which is estimated based upon historical experience. |
|
|
̶ |
Revenue from the Company’s direct operations is recognized at the time a customer order is delivered, net of an allowance for sales returns, which is estimated based upon historical experience. |
12
|
|
̶ |
Revenue from the Company’s wholesale operations is recognized at the time the wholesale customer takes physical receipt of the merchandise, net of any identified discounts in accordance with each individual order. For the first six months of fiscal 2020 and fiscal 2019, chargebacks were immaterial. |
Unredeemed Gift Cards, Gift Certificates, and Credit Vouchers. Upon issuance of a gift card, gift certificate, or credit voucher, a liability is established for its cash value. The liability is relieved and net sales are recorded upon redemption by the customer. Based on historical redemption patterns, the Company can reasonably estimate the amount of gift cards, gift certificates, and credit vouchers for which redemption is remote, which is referred to as “breakage”. Breakage is recognized over two years in proportion to historical redemption trends and is recorded as sales in the Consolidated Statements of Operations. The gift card liability, net of breakage, was $
Unredeemed Loyalty Coupons. The Company offers a free loyalty program to its customers for which points accumulate based on the purchase of merchandise. Over
Shipping. Shipping and handling costs are accounted for as fulfillment costs and are included in cost of sales for all periods presented. Amounts related to shipping and handling that are billed to customers are recorded in sales, and the related costs are recorded in cost of goods sold, including occupancy costs, in the Consolidated Statements of Operations.
Disaggregation of Revenue
As noted above under Segment Information in Note 1, the Company’s business consists of
|
|
|
For the three months ended |
|
|
|
|
|
For the six months ended |
|
|
|
|
||||||||||||||
|
(in thousands) |
|
August 1, 2020 |
|
|
|
|
August 3, 2019 |
|
|
|
|
|
August 1, 2020 |
|
|
|
|
August 3, 2019 |
|
|
|
|
||||
|
Store sales |
|
$ |
|
|
|
|
% |
$ |
|
|
|
|
% |
|
$ |
|
|
|
|
% |
$ |
|
|
|
|
% |
|
Direct sales |
|
|
|
|
|
|
% |
|
|
|
|
|
% |
|
|
|
|
|
|
% |
|
|
|
|
|
% |
|
Retail segment |
|
$ |
|
|
|
|
|
$ |
|
|
|
|
|
|
$ |
|
|
|
|
|
$ |
|
|
|
|
|
|
Wholesale segment |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Sales |
|
$ |
|
|
|
|
|
$ |
|
|
|
|
|
|
$ |
|
|
|
|
|
$ |
|
|
|
|
|
3. Debt
Credit Agreement with Bank of America, N.A.
On May 24, 2018, the Company entered into the Seventh Amended and Restated Credit Agreement, as amended, with Bank of America, N.A., as agent, providing for a secured $
The Credit Facility provides maximum committed borrowings of $
13
To help manage its near-term liquidity in light of the uncertainty related to COVID-19 and provide financial flexibility, the Company drew $
Borrowings made pursuant to the Revolving Facility bear interest, calculated under either the Federal Funds rate or the LIBOR rate, at a rate equal to the following: (a) the Federal Funds rate plus a varying percentage based on the Company’s excess availability, of either
Borrowings and repayments under the Revolving Facility for the six months ended August 1, 2020 and August 3, 2019 were as follows:
|
|
|
For the six months ended |
|
|||||
|
(in thousands) |
|
August 1, 2020 |
|
|
August 3, 2019 |
|
||
|
Borrowings |
|
$ |
|
|
|
$ |
|
|
|
Repayments |
|
|
( |
) |
|
|
( |
) |
|
Net borrowings (repayments) |
|
$ |
|
|
|
$ |
|
|
The fair value of the amount outstanding under the Revolving Facility at August 1, 2020 approximated the carrying value.
Long-Term Debt
Long-term debt at August 1, 2020 and February 1, 2020 is as follows:
|
(in thousands) |
|
August 1, 2020 |
|
|
February 1, 2020 |
|
||
|
FILO Loan |
|
$ |
|
|
|
$ |
|
|
|
Less: unamortized debt issuance costs |
|
|
( |
) |
|
|
( |
) |
|
Total long-term debt |
|
|
|
|
|
|
|
|
|
Less: current portion of long-term debt |
|
|
— |
|
|
|
— |
|
|
Long-term debt, net of current portion |
|
$ |
|
|
|
$ |
|
|
The total borrowing capacity under the FILO loan is based on a borrowing base, generally defined as a specified percentage of the value of eligible accounts (including certain trade names) that step down over time, plus a specified percentage of the value of eligible inventory that steps down over time. The Third Amendment to the Credit Facility extended these advance rates by approximately seven months before they begin to step down. The FILO loan can be repaid, in whole or in part, subject to certain payment conditions. The term loan expires on
As a result of extending the advance rates under the FILO loan, the applicable margin rates for borrowings were increased by approximately
The Company paid interest and fees totaling $
14
4. Leases
The Company leases all of its store locations and its corporate headquarters, which also includes its distribution center, under operating leases. The store leases typically have initial terms of
Due to the COVID-19 pandemic and all stores having to close temporarily, the Company held rent payments for the period of April through June 2020. During the second quarter of fiscal 2020, the Company received concessions with the majority of its landlords in the form of rent deferrals, abatements and, to a lesser extent, lease extensions. For the remainder of the leases, the outstanding lease payments were paid and the leases remain in good standing. ASC 842 requires the assessment of any lease modification to determine if the modification should be treated as a separate lease and if not, modification accounting would be applied. Lease modification accounting requires the recalculation of the ROU asset, lease liability and lease expense over the respective lease term. In April 2020, the FASB issued guidance allowing entities to make a policy election to account for lease concessions related to the COVID-19 pandemic as though enforceable rights and obligations for those concessions existed. The election applies to any lessor-provided lease concession related to the impact of the COVID-19 pandemic, provided the concession does not result in a substantial increase in the rights of the lessor or in the obligations of the lessee. The Company has opted not to elect this practical expedient and instead account for these rent concessions as lease modifications during the second quarter of fiscal 2020 in accordance with ASC 842. As of August 1, 2020, no material amounts related to leases remain in Accounts Payable, and the Company’s operating leases liabilities represent the present value of the remaining future minimum lease payments updated based on second quarter concessions and lease modifications.
The following table is a summary of the Company’s components of net lease cost for the second quarter and first six months ended August 1, 2020 and August 3, 2019:
|
|
|
For the three months ended |
|
|
For the six months ended |
|
||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
August 1, 2020 |
|
|
August 3, 2019 |
|
|
August 1, 2020 |
|
|
August 3, 2019 |
|
||||
|
(in thousands) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating lease cost |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
Variable lease costs(1) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total lease costs |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
|
(1) |
|
|
|
Supplemental cash flow and balance sheet information related to leases for the first six months ended August 1, 2020 and August 3, 2019 is as follows:
|
|
|
|
|
|
|
|
|
|
|
(dollars in thousands) |
|
For the six months ended |
|
|||||
|
Cash paid for amounts included in the measurement of lease liabilities: |
|
August 1, 2020 |
|
|
August 3, 2019 |
|
||
|
Operating cash flows for operating leases (1) |
|
$ |
|
|
|
$ |
|
|
|
Non-cash operating activities: |
|
|
|
|
|
|
|
|
|
Right-of-use assets obtained in exchange for operating lease liabilities |
|
$ |
|
|
|
$ |
|
|
|
Net decrease in right-of-use assets due to lease modifications associated with rent concessions during the second quarter of fiscal 2020 |
|
$ |
( |
) |
|
- |
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average remaining lease term |
|
5.0 yrs. |
|
|
5.6 yrs. |
|
||
|
Weighted average discount rate |
|
|
|
|
|
|
||
|
|
(1) |
|
15
The table below reconciles the undiscounted cash flows for each of the first five years and total of the remaining years to the operating lease liabilities recorded on the Consolidated Balance Sheet as of August 1, 2020:
|
(in thousands) |
|
|
|
|
|
2020 (remaining) |
|
$ |
|
|
|
2021 |
|
|
|
|
|
2022 |
|
|
|
|
|
2023 |
|
|
|
|
|
2024 |
|
|
|
|
|
Thereafter |
|
|
|
|
|
Total minimum lease payments |
|
$ |
|
|
|
Less: amount of lease payments representing interest |
|
|
|
|
|
Present value of future minimum lease payments |
|
$ |
|
|
|
Less: current obligations under leases |
|
|
|
|
|
Long-term lease obligations |
|
$ |
|
|
5. Long-Term Incentive Plans
The following is a summary of the Company’s Long-Term Incentive Plan (“LTIP”). All equity awards granted under long-term incentive plans are issued from the Company’s stockholder-approved 2016 Incentive Compensation Plan. See Note 6, Stock-Based Compensation.
At August 1, 2020, the Company has three active LTIPs: 2018-2020 LTIP, 2019-2021 LTIP and 2020-2022 LTIP. Each participant in the plan participates based on that participant’s “Target Cash Value” which is defined as the participant’s annual base salary (on the participant’s effective date) multiplied by his or her LTIP percentage. Under each LTIP,
Performance targets for the 2018-2020 LTIP, 2019-2021 LTIP and 2020-2022 LTIP were established and approved by the Compensation Committee on October 24, 2018, August 7, 2019, and June 11, 2020, respectively.
Through the end of the second quarter of fiscal 2020, the Company has accrued $
6. Stock-Based Compensation
The Company has one active stock-based compensation plan: the 2016 Incentive Compensation Plan (the “2016 Plan”). The initial share reserve under the 2016 Plan was
16
The 2016 Plan is administered by the Compensation Committee. The Compensation Committee is authorized to make all determinations with respect to amounts and conditions covering awards. Options are not granted at a price less than fair value on the date of the grant.
The following tables summarize the share activity and stock option activity for the Company’s 2006 Plan, 2016 Plan and inducement awards, on a combined basis, for the first six months of fiscal 2020:
|
|
|
RSUs (1) |
|
|
Deferred shares (2) |
|
|
Fully-vested shares (3) |
|
|
Performance Share Units (4) |
|
|
Total number of shares |
|
|
Weighted-average grant-date fair value |
|
||||||
|
Shares |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding non-vested shares at beginning of year |
|
|
|
|
|
|
|
|
|
|
— |
|
|
|
|
|
|
|
|
|
|
$ |
|
|
|
Shares granted |
|
|
— |
|
|
|
|
|
|
|
|
|
|
|
— |
|
|
|
|
|
|
$ |
|
|
|
Shares vested/issued |
|
|
( |
) |
|
|
( |
) |
|
|
( |
) |
|
|
— |
|
|
|
( |
) |
|
$ |
|
|
|
Shares canceled |
|
|
( |
) |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
( |
) |
|
$ |
|
|
|
Outstanding non-vested shares at end of quarter |
|
|
|
|
|
|
|
|
|
|
— |
|
|
|
|
|
|
|
|
|
|
$ |
|
|
|
|
(1) |
|
|
|
(2) |
|
|
|
(3) |
|
|
|
(4) |
|
17
|
|
|
Number of shares |
|
|
Weighted-average exercise price per option |
|
|
Weighted-average remaining contractual term |
|
|
Aggregate intrinsic value (in 000's) |
|
||||
|
Stock Options |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding options at beginning of year |
|
|
|
|
|
$ |
|
|
|
|
|
|
$ |
— |
|
|
|
Options granted (1) |
|
|
|
|
|
$ |
|
|
|
|
— |
|
|
|
|
|
|
Options expired and canceled |
|
|
( |
) |
|
$ |
|
|
|
|
— |
|
|
|
— |
|
|
Options exercised |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
Outstanding options at end of quarter |
|
|
|
|
|
$ |
|
|
|
|
|
|
$ |
— |
|
|
|
Options exercisable at end of quarter |
|
|
|
|
|
$ |
|
|
|
|
|
|
$ |
— |
|
|
|
|
(1) |
|
For the first six months of fiscal 2020, the Company granted stock options to purchase an aggregate of
Non-Employee Director Compensation Plan
The Company granted
Stock Compensation Expense
The Company recognized total stock-based compensation expense of $
7. Earnings per Share
The following table provides a reconciliation of the number of shares outstanding for basic and diluted earnings per share:
|
|
|
For the three months ended |
|
|
For the six months ended |
|
||||||||||
|
|
|
August 1, 2020 |
|
|
August 3, 2019 |
|
|
August 1, 2020 |
|
|
August 3, 2019 |
|
||||
|
(in thousands) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common stock outstanding: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic weighted average common shares outstanding |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common stock equivalents – stock options and restricted stock (1) |
|
|
— |
|
|
|
|
|
|
|
— |
|
|
|
— |
|
|
Diluted weighted average common shares outstanding |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
The following potential common stock equivalents were excluded from the computation of diluted earnings per share in each period, because the exercise price of such options was greater than the average market price per share of common stock for the respective periods or because of the unearned compensation associated with either stock options, restricted stock units, restricted or deferred stock had an anti-dilutive effect.
|
|
|
For the three months ended |
|
|
For the six months ended |
|
||||||||||
|
|
|
August 1, 2020 |
|
|
August 3, 2019 |
|
|
August 1, 2020 |
|
|
August 3, 2019 |
|
||||
|
(in thousands, except exercise prices) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock options |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restricted stock units |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restricted and deferred stock |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Range of exercise prices of such options |
|
$0.53 - $7.02 |
|
|
$1.85 - $7.02 |
|
|
$0.53 - $7.02 |
|
|
$2.00 - $7.02 |
|
||||
18
The above options, which were outstanding at August 1, 2020, expire from
Excluded from the computation of basic and diluted earnings per share for both periods were
8. Income Taxes
Since the end of fiscal 2014, the Company has maintained a full valuation allowance against its deferred tax assets. While the Company has projected it will return to profitability, generate taxable income and ultimately emerge from a three-year cumulative loss, the Company believes that a full valuation allowance remains appropriate at this time, based on the Company’s forecast for fiscal 2020. Realization of the Company’s deferred tax assets is dependent on generating sufficient taxable income in the near term. At August 1, 2020, the Company had total deferred tax assets of $
As of August 1, 2020, for federal income tax purposes, the Company has net operating loss carryforwards of $
The Company’s financial statements reflect the expected future tax consequences of uncertain tax positions that the Company has taken or expects to take on a tax return, based solely on the technical merits of the tax position. The liability for unrecognized tax benefits at August 1, 2020 was approximately $
In March 2020, the Coronavirus Aid, Relief and Economic Security Act, ("CARES Act") was signed into law. This law includes several taxpayer favorable provisions which may impact the Company including relaxed interest expense limitations, a carryback of net operating losses, permitted accelerated depreciation on certain store build out costs and allowance for the deferral of employer FICA taxes. The CARES Act also included an Employee Retention Credit, which provided the Company with a $
The discrete tax rate method was used for calculating tax expense for the second quarter and first six months of fiscal 2020 and fiscal 2019. The net tax provision for the second quarter and first six months of fiscal 2020, primarily related to certain states’ margin tax. The Company’s net tax benefit for the second quarter and first six months of fiscal 2019 was the result of the deferred tax impact of $
9. CEO Transition Costs
Results for the first six months of fiscal 2019, included $
10. Nasdaq Notification of Non-Compliance
The Company’s common stock is publicly traded and listed on The Nasdaq Global Select Market (“Nasdaq”) under the symbol “DXLG.” Nasdaq has continued listing standards that the Company must maintain to avoid delisting, including, among others, a minimum bid price requirement of $
19
compliance periods through June 30, 2020. Accordingly, the Company’s 180 calendar-day grace period to regain compliance with the minimum bid price requirement was extended to
The Notice does not result in the immediate delisting of the Company’s common stock from the Nasdaq Global Select Market. The Company intends to monitor the closing bid price of the Company’s common stock to allow a reasonable period for the price to rebound from its recent decline but will continue to consider its available options to regain compliance. Subsequent to the end of the second quarter of fiscal 2020, on August 12, 2020, the Company received approval from its shareholders to effect a
20
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
FORWARD-LOOKING STATEMENTS
Certain statements contained in this Quarterly Report on Form 10-Q constitute “forward-looking statements” within the meaning of the United States Private Securities Litigation Reform Act of 1995. In some cases, forward-looking statements can be identified by the use of forward-looking terminology such as “may,” “will,” “estimate,” “intend,” “plan,” “continue,” “believe,” “expect” or “anticipate” or the negatives thereof, variations thereon or similar terminology. The forward-looking statements contained in this Quarterly Report are generally located in the material set forth under the heading “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” but may be found in other locations as well, and include statements regarding our ability to withstand the impact of the COVID-19 pandemic on our business and results in fiscal 2020 and to manage through the pandemic, our efforts to restructure and reduce costs, expected inventory levels in the second half of 2020, the impact of direct sales on results in fiscal 2020, the ability to keep some or all of our reopened stores open and operating during more normalized hours, and our expected liquidity for the next 12 months. These forward-looking statements generally relate to plans and objectives for future operations and are based upon management’s reasonable estimates of future results or trends. The forward-looking statements in this Quarterly Report should not be regarded as a representation by us or any other person that our objectives or plans will be achieved. The following discussion of our financial condition and results of operations should be read in conjunction with the unaudited Consolidated Financial Statements and notes to those statements included elsewhere in this Quarterly Report and our audited Consolidated Financial Statements for the year ended February 1, 2020, included in our Annual Report on Form 10-K for the year ended February 1, 2020, as filed with the Securities and Exchange Commission on March 19, 2020 (our “Fiscal 2019 Annual Report”).
Numerous factors could cause our actual results to differ materially from such forward-looking statements. We encourage readers to refer to our “Risk Factors” found in Part II, Item 1A of this Quarterly Report, which supplements our discussion of “Risk Factors” found in Part I, Item 1A of our Fiscal 2019 Annual Report. This discussion set forth certain risks and uncertainties that may have an impact on future results and direction of our Company, including, without limitation, risks relating to the COVID-19 pandemic, the execution of our corporate strategy, and our ability to grow our wholesale segment, predict customer tastes and fashion trends, forecast sales growth trends, maintain and build our brand awareness and compete successfully in our market.
All subsequent written and oral forward-looking statements attributable to us or to persons acting on our behalf are expressly qualified in their entirety by the foregoing. These forward-looking statements speak only as of the date of the document in which they are made. We disclaim any obligation or undertaking to provide any updates or revisions to any forward-looking statement to reflect any change in our expectations or any change in events, conditions or circumstances in which the forward-looking statement is based.
BUSINESS SUMMARY
Destination XL Group, Inc., together with our consolidated subsidiaries (the “Company”), is the largest specialty retailer of big and tall men’s clothing with retail, wholesale and direct operations in the United States and Toronto, Canada. We operate under the trade names of Destination XL®, DXL®, DXL Outlets, Casual Male XL® and Casual Male XL Outlets. At August 1, 2020, we operated 228 Destination XL stores, 17 DXL outlet stores, 49 Casual Male XL retail stores, 23 Casual Male XL outlet stores. Our e-commerce site, dxl.com, supports our stores, brands and product extensions.
Unless the context indicates otherwise, all references to “we,” “our,” “us” and “the Company” refer to Destination XL Group, Inc. and our consolidated subsidiaries. We refer to our fiscal years, which end on January 30, 2021 and February 1, 2020 as “fiscal 2020” and “fiscal 2019,” respectively. Both fiscal 2020 and fiscal 2019 are 52-week periods.
SEGMENT REPORTING
We have three principal operating segments: our stores, direct business and our wholesale business. We consider our stores and direct business segments to be similar in terms of economic characteristics, production processes and operations, and have therefore aggregated them into one reportable segment, retail segment, consistent with our omni-channel business approach. Due to the immateriality of the wholesale segment’s revenues, profits and assets, its operating results have been aggregated with the retail segment for both periods.
DIRECT SALES
Our customer’s shopping experience continues to evolve across multiple channels and we are continually adapting to meet our guests’ needs. The majority of our stores have the capability of fulfilling online orders if merchandise is not available in the warehouse. As a result, we continue to see more transactions that begin online but are ultimately completed at the store level. Similarly, if a customer visits a store and the item is out of stock, the associate can order the item through our website. A customer also has the ability to order online and pick-up in a store and, more recently due to the COVID-19 pandemic, pick-up at curbside. As we continue to invest in building our e-commerce platform, bringing a heightened digital focus to our Company, additional disclosure on our e-commerce
21
growth as it relates to our current initiatives is important. We define store sales as sales that originate and are fulfilled directly at the store level. E-commerce sales, which we also refer to as direct sales, are defined as sales that originate online, whether through our website, at the store level or through a third-party marketplace.
COMPARABLE SALES
Due to the fact that our stores were closed temporarily during much of the second quarter and first six months of fiscal 2020 and continue to operate with reduced hours due to the COVID-19 pandemic, we have not included a discussion of comparable sales for the second quarter and first six months of fiscal 2020 as we do not believe it provides a meaningful metric of our performance during the period.
RESULTS OF OPERATIONS
Impact of COVID-19 Pandemic on Our Business
On March 11, 2020, the World Health Organization declared COVID-19 as a global pandemic. The COVID-19 pandemic has negatively affected the global economy, disrupted global supply chains, and created significant disruption of the financial and retail markets, including a disruption in consumer demand for men’s clothing and accessories. While the pandemic has had, and will likely continue to have, a significant adverse effect on our business, financial condition, and results of operations, we moved early and decisively over the past several months to preserve our financial flexibility and position ourselves to withstand the short-term impact of the pandemic and its impact on the consumer. We continue to communicate consistently and transparently with our employees, suppliers, landlords and banks and believe this direct and active communication has meaningfully enhanced the level of partnership and trust to support the plans we have in place to manage through the pandemic.
We closed all of our retail stores on March 17, 2020 and, beginning at the end of April 2020 and continuing into the second quarter of fiscal 2020, we started to gradually reopen stores. As of the end of June, all stores had been reopened although all operating at reduced hours. Since the reopening, some stores have had to close for periods of time. Store sales were gradually improving in the early weeks of the second quarter, but we started to see some dips as certain key areas of the country began experiencing a resurgence of the virus. We expect that this uncertainty will continue for the remainder of fiscal 2020 and we may have to close and reopen certain store locations to protect our associates and customers, in response to state and local guidelines. Accelerating the trend that we saw in the first quarter of fiscal 2020, sales from our direct business increase by $7.6 million, and accounted for approximately 46.1% of our retail sales compared to 21.1% for last year’s second quarter and it is playing a vital role as we are seeing our customers’ shopping preferences shift to online. Given the increased demand, we have been very fortunate that our distribution center has been able to operate without any business disruption. As we previously announced, we began selling protective masks through our wholesale business in the second quarter of fiscal 2020. The sale of protective masks to wholesale accounts accounted for $4.1 million of our $5.0 million in wholesale sales.
We believe that managing and preserving our liquidity is our top priority to navigate through the pandemic. We have been proactive and decisive in managing our cash obligations. We proactively worked with our leasing partners to mitigate cash burn from short-term lease obligations while our stores were closed. Over the past two quarters, we have worked with our vendors on extended payment terms, including entering into short-term promissory terms with vendors. During the second quarter, we negotiated short term rent relief agreements, primarily through rent abatements and rent deferments, with the majority of our landlords. As a result of lease modifications, the Company has reduced rent payments by approximately $10.0 million for fiscal 2020. As of the end of the second quarter, all store leases were current and in good standing.
We have restructured our business, where possible, to reduce operating costs to align with expected sales levels. All of our store associates and approximately 60% of our corporate office had been on furlough since March 2020. As we reopened stores in the second quarter, we gradually brought many of these associates back, doing our best to extend benefits to others remaining on furlough. However, given our current sales expectations in light of the continuing impact of the pandemic on consumer spending, there were approximately 34 corporate associates in May 2020 and 430 store associates in July 2020 that were terminated and not brought back from furlough. In addition to the furlough, our corporate management team (director level and above) also took a temporary salary reduction, ranging from 10% to 20%, from April 5, 2020 until the end of the second quarter and our non-employee members of board of directors suspended their compensation for the second quarter as well. We also eliminated much of our advertising expense during the second quarter, focusing our marketing spend on digital advertising.
In the first quarter of fiscal 2020, we drew $30.0 million under our revolving credit facility to preserve our access to cash and we also amended our credit facility to improve our excess availability under our revolver. At August 1, 2020, we had $20.4 million in cash, total debt outstanding, net of debt issuance costs, of $81.4 million and remaining availability under our credit facility of $12.4 million.
22
Total debt, net of cash, for the second quarter of fiscal 2020 was $61.0 million, as compared to $58.7 million in the second quarter of fiscal 2019. At August 1, 2020, our accounts payable balance of $18.5 million, which included $2.0 million of promissory notes payable through April 2021, compared to an accounts payable balance of $36.9 million at August 3, 2019. As we previously mentioned, we cancelled approximately $148 million, at retail, in merchandise receipts for fiscal 2020, and have been focused on keeping our current inventory healthy. At August 1, 2020, our inventory was at $87.4 million, down from $110.4 million at the end of the second quarter last year. While we expect our inventory to increase in the third quarter as we prepare for the fall season, this lower level of inventory negatively impacts our availability under the credit facility. Our access to liquidity will remain our primary objective for the balance of fiscal 2020 and we do believe that we have sufficient liquidity to meet our working capital requirements over the next twelve months, given no further significant shutdowns of the economy.
As we head into the second half of fiscal 2020, we are cautiously optimistic. Prior to the COVID-19 pandemic, our key objective was to grow our direct business, and with the current pandemic, those initiatives have just been accelerated and we are working to meet the changing shopping behaviors of our customers. We are working towards becoming a “digital first” retailer, because the vast majority of consumers begin their shopping experience, whether it be online or in a store, with their digital phones. With the current disruption in the retail landscape, we also see potential opportunity to attract a new customer base to our business.
Financial Summary
The following is a summary of results for the second quarter and the first six months of fiscal 2020 as compared to the prior year, including adjusted EBITDA, which is a non-GAAP measure. Please see “Non-GAAP Financial Measures” below for a reconciliation of net loss to adjusted EBITDA.
|
|
|
For the three months ended |
|
|
For the six months ended |
|
||||||||||
|
|
|
August 1, 2020 |
|
|
August 3, 2019 |
|
|
August 1, 2020 |
|
|
August 3, 2019 |
|
||||
|
(in millions, except per share data) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) |
|
$ |
(10.7 |
) |
|
$ |
0.0 |
|
|
$ |
(52.4 |
) |
|
$ |
(3.0 |
) |
|
Adjusted EBITDA (Non-GAAP basis) |
|
$ |
(4.3 |
) |
|
$ |
7.1 |
|
|
$ |
(23.2 |
) |
|
$ |
11.9 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Per diluted share: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) |
|
$ |
(0.21 |
) |
|
$ |
0.00 |
|
|
$ |
(1.03 |
) |
|
$ |
(0.06 |
) |
|
Adjusted net income (loss) (Non-GAAP basis) |
|
$ |
(0.15 |
) |
|
$ |
0.00 |
|
|
$ |
(0.52 |
) |
|
$ |
(0.04 |
) |
Sales
|
|
|
For the three months ended |
|
|
|
|
|
For the six months ended |
|
|
|
|
||||||||||||||
|
(in thousands) |
|
August 1, 2020 |
|
|
|
|
August 3, 2019 |
|
|
|
|
|
August 1, 2020 |
|
|
|
|
August 3, 2019 |
|
|
|
|
||||
|
Store sales |
|
$ |
38,465 |
|
|
53.9 |
% |
$ |
95,119 |
|
|
78.9 |
% |
|
$ |
70,792 |
|
|
55.9 |
% |
$ |
181,834 |
|
|
78.7 |
% |
|
Direct sales |
|
|
32,959 |
|
|
46.1 |
% |
|
25,406 |
|
|
21.1 |
% |
|
|
55,841 |
|
|
44.1 |
% |
|
49,239 |
|
|
21.3 |
% |
|
Retail segment |
|
$ |
71,424 |
|
|
|
|
$ |
120,525 |
|
|
|
|
|
$ |
126,633 |
|
|
|
|
$ |
231,073 |
|
|
|
|
|
Wholesale segment |
|
|
5,018 |
|
|
|
|
|
2,720 |
|
|
|
|
|
|
7,036 |
|
|
|
|
|
5,145 |
|
|
|
|
|
Total Sales |
|
$ |
76,442 |
|
|
|
|
$ |
123,245 |
|
|
|
|
|
$ |
133,669 |
|
|
|
|
$ |
236,218 |
|
|
|
|
Total sales for the second quarter of fiscal 2020 decreased 38.0% to $76.4 million from $123.2 million in the second quarter of fiscal 2019. We were able to open our stores sooner than expected during the second quarter, and by the end of June, all locations had been reopened. However, with the resurgence of the virus in certain key areas of the country, we started to experience a slowdown in sales from stores in those impacted geographies as July progressed. We continued to see a shift to online shopping during the second quarter and expect to see a similar trend through the remainder of fiscal 2020. Sales from direct business were driven by sales from our DXL.com website, which increased 69% over the prior year second quarter. The strong growth in our direct business, is a direct outcome of the digital strategies we have implemented and the customers’ shift in shopping preferences further grow in response to COVID-19. Our wholesale business contributed $5.0 million in sales during the second quarter, as compared to $2.7 million in the prior year, driven primarily by the sale of $4.1 million in protective masks.
Total sales for the first six months of fiscal 2020 decreased 43.4% to $133.7 million from $236.2 million for the first six months of fiscal 2019. This decrease was principally due to the closing of all of our store locations on March 17, 2020 as well as the decrease in consumer spending as a direct result of the COVID-19 pandemic. With increasing unemployment and the continued uncertainty surrounding the pandemic, we expect to continue to market to our customers primarily through digital and direct means, in an effort to drive traffic to both our website and stores.
Gross Margin Rate
For the second quarter of fiscal 2020, our gross margin rate, inclusive of occupancy costs, was 28.1% as compared to a gross margin rate of 44.3% for the second quarter of fiscal 2019. The decrease of 16.2% was comprised of a decline of 5.1% from the deleveraging
23
in occupancy costs, due to the decreased sales base, and a decrease of 11.1% in merchandise margins. Although merchandise margins were down in the second quarter, they were better than expected. We remained highly promotional during the first half of the second quarter in order to reduce inventories and drive our on-line business, but began to scale back after Father’s Day. Our gross margin improved significantly post Father’s Day, where we saw a merchandise margin improvement of 1260 basis points for the month of July, as compared to May. Because of the growth in our direct channel and free shipping promotions, shipping costs for the second quarter increased over the prior year. Because of the growth in our direct channel and free shipping promotions, shipping costs for the second quarter increased over the prior year.
For the first six months of fiscal 2020, our gross margin, inclusive of occupancy costs, was 26.0% as compared to 44.0% for the first six months of fiscal 2019. The decrease of 18.1% was comprised of a decline of 8.6% from the deleveraging in occupancy costs, due to the store closures and overall reduced sales base, and a decrease of 9.5% in merchandise margins. The decrease in merchandise margins reflects the increased promotional posture we took in response to COVID-19 and an increase in our inventory reserves of approximately $0.7 million in the first quarter of fiscal 2020. We have been highly promotional since our stores closed to encourage our customers to shop online and to mitigate a build-up of seasonal inventory.
Although by its nature, margins from our wholesale business are lower than our retail business, the gross margin rate in the second quarter and first six months of fiscal 2020 for wholesale significantly improved over the prior year.
Selling, General and Administrative Expenses
As a percentage of sales, SG&A expenses for the second quarter of fiscal 2020 were 33.7% as compared to 38.5% for the second quarter of fiscal 2019. On a dollar basis, SG&A decreased by $21.7 million, or 45.7%, for the second quarter of fiscal 2020 as compared to the prior year. For the first six months of fiscal 2020, SG&A expenses were 43.3% as compared to 39.0% for the first six months of fiscal 2019. On a dollar basis, SG&A expense decreased $34.2 million or 37.1%.
We took several steps to reduce our operating costs while our stores were closed, including the furlough of both our store associates and certain corporate associates, a reduction in marketing costs, a temporary salary reduction of 10-20% for management and the suspension of non-employee director compensation for the second quarter. As we reopened stores during the second quarter, our operating costs were realigned with the expected sales levels and associates were brought back on a staggered schedule. We continue to assess and rationalize our entire SG&A cost structure. Given the changes to our business as a result of this pandemic, we are restructuring various areas to ensure that we can operate most efficiently. This included the elimination of approximately 34 corporate positions in the first quarter of fiscal 2020 and an additional 430 store associates in the second quarter. With the reduced sales levels and store traffic, our stores are operating at minimal staffing levels and we did not see an opportunity, at this time, to bring back certain positions from furlough, such as tailors and wardrobe consultants.
SG&A expenses are managed through two primary cost centers: Customer Facing Costs and Corporate Supporting Costs. Customer Facing Costs, which include store payroll, marketing, and other store operating costs, represented 20.0% of sales for the first six months of fiscal 2020 as compared to 23.3% of sales for the first six months of last year. Corporate Supporting Costs, which include the distribution center, support, and other corporate overhead costs, represented 23.3% of sales for the first six months of fiscal 2020 compared to 15.7% of sales for the first six months of last year.
Impairment of Assets
We regularly review assets for impairment indicators at the individual store level, as this represents the lowest level of identifiable cash flows. When indicators of impairment are present, a recoverability analysis is performed. Based on the indicators present in the first quarter of fiscal 2020, we completed a recoverability analysis, which included the impact of the COVID-19 pandemic on the operations of our stores and we used projections that were based on multiple probability-weighted scenarios, assuming that our stores gradually open throughout the second quarter of fiscal 2020 but that consumer retail spending will remain substantially curtailed for a period of time. As a result of that analysis, in the first quarter of fiscal 2020 we recorded an impairment charge of $16.3 million. The impairment charge included approximately $12.5 million for the write-down of certain right-of-use assets, related to leases where the carrying value exceeded fair value, and $3.8 million for the write-down of property and equipment, related to stores where the carrying value exceeded fair value. No impairment charge was recorded in the second quarter of fiscal 2020, however, as discussed above, there remains uncertainty regarding the impact of the COVID-19 pandemic on our future results of operations, which could result in additional impairments.
Depreciation and Amortization
Depreciation and amortization for the second quarter and first six months of fiscal 2020 of $5.3 million and $11.1 million, respectively, decreased from $6.2 million and $12.5 million for the second quarter and first six months of fiscal 2019.
Interest Expense, Net
Net interest expense for the second quarter and first six months of fiscal 2020 increased to $1.1 million and $1.8 million, respectively, as compared to $0.9 million and $1.7 million, respectively, for the second quarter and first six months of fiscal 2019 due to an increase in average borrowings, and an increase in the effective borrowing rates. As a result of our recent amendment to our Credit Facility in
24
April 2020, our interest rates under our Credit Facility, which includes our FILO loan, increased by approximately 150 basis points, which will increase our interest costs on a go-forward basis for the remainder of fiscal 2020. In addition, as discussed above, on March 20, 2020, we drew approximately $30.0 million against our revolving credit facility. This action was taken to provide the Company with flexibility to manage its cash flow during this uncertain time.
Income Taxes
We established a full valuation allowance against our deferred tax assets at the end of fiscal 2013. Based on our forecast for fiscal 2020, we believe that a full valuation allowance continues to remain appropriate at this time.
The discrete tax rate method was used for calculating tax expense. Due to current period losses, our current tax provision for the first six months of fiscal 2020 and fiscal 2019 was primarily due to current state margin tax, based on gross receipts less certain deductions. The total income tax benefit for the second quarter and first six months of fiscal 2019 also included a deferred tax impact of $30,000 and $81,000, respectively, in other comprehensive income (loss), which resulted in a tax benefit on the Consolidated Statement of Operations related to the corresponding decrease in valuation allowance.
Net Loss
For the second quarter of fiscal 2020, we had a net loss of $(10.7) million, or $(0.21) per diluted share, compared with net income of $0.0 million, or $0.00 per diluted share, for the second quarter of fiscal 2019. For the first six months of fiscal 2020, we had a net loss of $(52.4) million, or $(1.03) per diluted share, as compared to a net loss of $(3.0) million, or $(0.06) per diluted share.
On a non-GAAP basis, before asset impairment costs and CEO transition costs and assuming a normalized tax rate of 26% for all periods, adjusted net loss per share for the second quarter and first six months of fiscal 2020 was ($0.15) per diluted share and ($0.52) per shares, respectively, as compared to adjusted net income (loss) of $0.00 per diluted share and ($0.04) per diluted share, respectively, for the second quarter and first six months of 2019.
Inventory
Our inventory on August 1, 2020, decreased approximately $23.0 million to $87.4 million, as compared to $110.4 million at August 3, 2019. We began reacting to the pandemic with respect to inventory in early March by ultimately cancelling approximately $148 million, at retail, of open orders for fiscal 2020. With respect to the remainder of fiscal 2020, we expect to be responsive to business changes, but expect that our fall inventory buys will be below fiscal 2019 levels. Our objective is to maintain a healthy inventory, which will include narrowing our assortment while also continuing to manage clearance levels. At August 1, 2020, our clearance inventory decreased by $2.2 million and represented 11.3% of our total inventory, as compared to 10.9% at August 3, 2019.
SEASONALITY
Historically, and consistent with the retail industry, we have experienced seasonal fluctuations as it relates to our operating income and net income. Traditionally, a significant portion of our operating income and net income is generated in the fourth quarter, as a result of the “Holiday” season.
LIQUIDITY AND CAPITAL RESOURCES
Our primary sources of liquidity are cash generated from operations and availability under our credit facility with Bank of America, N.A., which was most recently amended in April 2020 (“Credit Facility”). Although our cash flows from operations has been significantly impacted by the lost revenue as of result of the COVID-19 pandemic, we believe that we have taken sufficient steps to manage our available cash flow for the foreseeable future. During the first six months of fiscal 2020, we amended our Credit Facility to increase our borrowing base, negotiated extended payment terms with vendors, cancelled inventory purchase orders, reduced operating costs and reduced capital spending. Based on our current projections, we believe our cash on hand, availability under our Credit Facility, ongoing cash generated from our direct business, wholesale business and from the our retail operations, although they are operating on reduced hours, will be sufficient to cover our working capital requirements and limited capital expenditures for the next 12 months. However, the extent to which the COVID-19 pandemic will impact our financial results will depend on future developments, which are highly uncertain and cannot be precisely predicted at this time.
For the first six months of fiscal 2020, cash flow from operations decreased by approximately $9.9 million to $(9.0) million as compared to $0.9 million for the first six months of fiscal 2019. Free cash flow, a non-GAAP measure, decreased by $4.4 million to $(11.1) million for the first six months of fiscal 2020 as compared to $(6.7) million for the first six months of fiscal 2019. The primary reason for this decrease in free cash flow was due to a decrease in earnings offset by a decrease in capital expenditures. Cash flow from financing activities increased $19.9 million to $27.2 million for the first six months of fiscal 2020 as compared $7.3 million for the first six months of fiscal 2019, due to the $30.0 million draw-down on our Credit Facility in March 2020 to provide the Company with financial flexibility during the pandemic.
25
The following is a summary of our total debt outstanding at August 1, 2020 with the associated unamortized debt issuance costs:
|
(in thousands) |
|
Gross Debt Outstanding |
|
|
Less Debt Issuance Costs |
|
|
Net Debt Outstanding |
|
|||
|
Credit facility |
|
$ |
66,803 |
|
|
$ |
(258 |
) |
|
$ |
66,545 |
|
|
FILO Loan |
|
|
15,000 |
|
|
|
(159 |
) |
|
|
14,841 |
|
|
Total debt |
|
$ |
81,803 |
|
|
$ |
(417 |
) |
|
$ |
81,386 |
|
Our Credit Facility provides for a maximum committed borrowing of $125.0 million, which, pursuant to an accordion feature, may be increased to $175.0 million upon our request and the agreement of the lender(s) participating in the increase (the “Revolving Facility”). The Credit Facility includes a sublimit of $20.0 million for commercial and standby letters of credit and a sublimit of up to $15.0 million for swingline loans. Borrowings made pursuant to the Revolving Facility under the Credit Facility bear interest, calculated under either the Federal Funds rate or the LIBOR rate, at a rate equal to the following: (a) the Federal Funds rate plus a varying percentage based on the Company’s excess availability, of either 1.75% or 2.00%, or (b) the LIBOR rate (the Company being able to select interest periods of 1 week, 1 month, 2 months, 3 months or 6 months) plus a varying percentage based on the Company’s excess availability, of either 2.75% or 3.00%. The current maturity date is May 24, 2023.
We had outstanding borrowings of $66.8 million under the Credit Facility at August 1, 2020. At August 1, 2020, outstanding standby letters of credit were $2.8 million and outstanding documentary letters of credit were $0.6 million. The average monthly borrowing outstanding under the Credit Facility during the first six months ended August 1, 2020 was approximately $69.2 million, resulting in an average unused excess availability of approximately $23.2 million. Unused excess availability at August 1, 2020 was $12.4 million.
FILO Loan
The Credit Facility also includes a FILO loan for $15.0 million. The total borrowing capacity under the FILO loan is based on a borrowing base, generally defined as a specified percentage of the value of eligible accounts, including certain trade names, that steps down over time, plus a specified percentage of the value of eligible inventory that steps down over time. During the first quarter of fiscal 2020, we entered into an amendment that extended these advance rates to December 2020 before they begin to step down.
As a result of extending the advance rates under the FILO loan, the applicable margin rates for borrowings were increased by approximately 150 basis points. Accordingly, current borrowings made under the FILO loan bear interest, calculated under either the Federal Funds rate or the LIBOR rate, at a rate equal to the following: (a) the Federal Funds rate plus a varying percentage based on the Company’s excess availability, of either 3.75% or 4.00% or (b) the LIBOR rate (the Company being able to select interest periods of 1 week, 1 month, 2 months, 3 months or 6 months) plus a varying percentage based on the Company’s excess availability, of either 4.75% or 5.00%. At August 1, 2020, the outstanding balance of $15.0 million was in a 6-month LIBOR-based contract with an interest rate of 6.00%.
Capital Expenditures
The following table sets forth the open stores and related square footage at August 1, 2020 and August 3, 2019, respectively:
|
|
|
August 1, 2020 |
|
|
August 3, 2019 |
|
||||||||||
|
Store Concept |
|
Number of Stores |
|
|
Square Footage |
|
|
Number of Stores |
|
|
Square Footage |
|
||||
|
(square footage in thousands) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
DXL Retail |
|
|
228 |
|
|
|
1,729 |
|
|
|
220 |
|
|
|
1,697 |
|
|
DXL Outlets |
|
|
17 |
|
|
|
82 |
|
|
|
16 |
|
|
|
82 |
|
|
Casual Male XL Retail |
|
|
49 |
|
|
|
160 |
|
|
|
60 |
|
|
|
200 |
|
|
Casual Male Outlets |
|
|
23 |
|
|
|
69 |
|
|
|
29 |
|
|
|
88 |
|
|
Rochester Clothing |
|
|
- |
|
|
|
- |
|
|
|
3 |
|
|
|
36 |
|
|
Total Stores |
|
|
317 |
|
|
|
2,040 |
|
|
|
328 |
|
|
|
2,103 |
|
In our efforts to preserve our liquidity, we have reduced the majority of our capital spending, unless such spending is necessary to our immediate business needs. Our capital expenditures for the first six months of fiscal 2020 were $2.1 million as compared to $7.6 million for the first six months of fiscal 2019. During the first six months of fiscal 2020, we closed five Casual Male XL outlets and one Casual Male XL retail store.
26
CRITICAL ACCOUNTING POLICIES
There have been no material changes to the critical accounting policies and estimates disclosed in our Form 10-K for the year ending February 1, 2020. See Note 1 to the Consolidated Financial Statements included in this report for information on recent accounting pronouncements and changes in accounting principles.
Non-GAAP Financial Measures
Adjusted net income (loss), adjusted net income (loss) per diluted share, free cash flow and Adjusted EBITDA are non-GAAP measures. These non-GAAP measures are not presented in accordance with GAAP and should not be considered superior to or as a substitute for net loss 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 Quarterly Report may not be comparable to similar measures used by other companies. We believe that inclusion of these non-GAAP measures helps investors gain a better understanding of our performance, especially when comparing such results to previous periods and that they are useful as an additional means for investors to evaluate our operating results, when reviewed in conjunction with our GAAP financial statements. Reconciliations of these non-GAAP measures are presented in the following tables (certain columns may not foot due to rounding):
Adjusted net income (loss) and adjusted net income (loss) per diluted share. Adjusted net income (loss) and adjusted net income (loss) per share reflect an adjustment assuming a normal tax rate of 26% and the add-back of CEO transition and impairment of assets. We have fully reserved against our deferred tax assets and, therefore, net income (loss) is not reflective of earnings assuming a “normal” tax position. Adjusted net loss provides investors with a useful indication of the financial performance of the business, on a comparative basis, assuming a normalized tax rate of 26%.
|
|
|
For the three months ended |
|
|
For the six months ended |
|
||||||||||||||||||||||||||
|
|
|
August 1, 2020 |
|
|
August 3, 2019 |
|
|
August 1, 2020 |
|
|
August 3, 2019 |
|
||||||||||||||||||||
|
|
|
$ |
|
|
Per diluted share |
|
|
$ |
|
|
Per diluted share |
|
|
$ |
|
|
Per diluted share |
|
|
$ |
|
|
Per diluted share |
|
||||||||
|
(in thousands, except per share data) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) (GAAP basis) |
|
$ |
(10,714 |
) |
|
$ |
(0.21 |
) |
|
$ |
38 |
|
|
$ |
0.00 |
|
|
$ |
(52,440 |
) |
|
$ |
(1.03 |
) |
|
$ |
(3,043 |
) |
|
$ |
(0.06 |
) |
|
Adjust: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CEO transition costs |
|
|
- |
|
|
|
|
|
|
|
- |
|
|
|
|
|
|
|
- |
|
|
|
|
|
|
|
702 |
|
|
|
|
|
|
Impairment of assets |
|
|
- |
|
|
|
|
|
|
|
- |
|
|
|
|
|
|
|
16,335 |
|
|
|
|
|
|
|
- |
|
|
|
|
|
|
Add back actual income tax provision (benefit) |
|
|
24 |
|
|
|
|
|
|
|
(8 |
) |
|
|
|
|
|
|
44 |
|
|
|
|
|
|
|
(29 |
) |
|
|
|
|
|
Add income tax (provision) benefit, assuming a normal tax rate of 26% |
|
|
2,779 |
|
|
|
|
|
|
|
(8 |
) |
|
|
|
|
|
|
9,376 |
|
|
|
|
|
|
|
616 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjusted net income (loss) (non-GAAP basis) |
|
$ |
(7,911 |
) |
|
$ |
(0.15 |
) |
|
$ |
22 |
|
|
$ |
0.00 |
|
|
$ |
(26,685 |
) |
|
$ |
(0.52 |
) |
|
$ |
(1,754 |
) |
|
$ |
(0.04 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average number of common shares |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
outstanding on a diluted basis |
|
|
|
|
|
|
51,078 |
|
|
|
|
|
|
|
50,175 |
|
|
|
|
|
|
|
50,918 |
|
|
|
|
|
|
|
49,734 |
|
Free Cash Flow. We define free cash flow as cash flow from operating activities less capital expenditures. Free cash flow excludes the mandatory and discretionary repayment of debt. Free cash flow is a metric that management uses to monitor liquidity. We expect to fund our ongoing capital expenditures with cash flow from operations.
The following table reconciles free cash flow:
|
|
|
For the six months ended |
|
|||||
|
(in millions) |
|
August 1, 2020 |
|
|
August 3, 2019 |
|
||
|
Cash flow from operating activities (GAAP basis) |
|
$ |
(9.0 |
) |
|
$ |
0.9 |
|
|
Capital expenditures, infrastructure projects |
|
|
(1.4 |
) |
|
|
(5.2 |
) |
|
Capital expenditures for DXL stores |
|
|
(0.7 |
) |
|
|
(2.4 |
) |
|
Free Cash Flow (non-GAAP basis) |
|
$ |
(11.1 |
) |
|
$ |
(6.7 |
) |
|
|
|
|
|
|
|
|
|
|
27
Adjusted EBITDA. Adjusted EBITDA is calculated as earnings before interest, taxes, depreciation and amortization and is before CEO transition costs and any impairment of assets. We believe that adjusted EBITDA is useful to investors in evaluating our performance.
|
|
|
For the three months ended |
|
|
|
|
For the six months ended |
|
|
||||||||||
|
|
|
August 1, 2020 |
|
|
August 3, 2019 |
|
|
|
|
August 1, 2020 |
|
|
August 3, 2019 |
|
|
||||
|
(in millions) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) (GAAP basis) |
|
$ |
(10.7 |
) |
|
$ |
0.0 |
|
|
|
|
$ |
(52.4 |
) |
|
$ |
(3.0 |
) |
|
|
Add back: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CEO transition costs |
|
|
- |
|
|
|
- |
|
|
|
|
|
- |
|
|
|
0.7 |
|
|
|
Impairment of assets |
|
|
- |
|
|
|
- |
|
|
|
|
|
16.3 |
|
|
|
- |
|
|
|
Provision (benefit) for income taxes |
|
|
- |
|
|
|
- |
|
|
|
|
|
0.0 |
|
|
|
- |
|
|
|
Interest expense |
|
|
1.1 |
|
|
|
0.9 |
|
|
|
|
|
1.8 |
|
|
|
1.7 |
|
|
|
Depreciation and amortization |
|
|
5.3 |
|
|
|
6.2 |
|
|
|
|
|
11.1 |
|
|
|
12.5 |
|
|
|
Adjusted EBITDA (non-GAAP basis) |
|
$ |
(4.3 |
) |
|
$ |
7.1 |
|
|
|
|
$ |
(23.2 |
) |
|
$ |
11.9 |
|
|
Item 3. Quantitative and Qualitative Disclosures about Market Risk.
In the normal course of business, our financial position and results of operations are routinely subject to a variety of risks, including market risk associated with interest rate movements on borrowings and foreign currency fluctuations. We regularly assess these risks and have established policies and business practices to protect against the adverse effects of these and other potential exposures.
Interest Rates
We utilize cash from operations and from our Revolving Facility of our Credit Facility to fund our working capital needs. Our Credit Facility is not used for trading or speculative purposes. As part of our Credit Facility, we also have an outstanding $15.0 million FILO loan. In addition, we have available letters of credit as sources of financing for our working capital requirements. Borrowings under the Credit Facility, which expires May 24, 2023, bear interest at variable rates based on Bank of America’s prime rate or LIBOR.
At August 1, 2020, we had outstanding borrowings of approximately $66.8 million, of which approximately $62.0 million were in LIBOR-based contracts with an interest rate of approximately 4.00%. The remainder was prime-based borrowings, with a rate of 5.25%. At August 1, 2020, the $15.0 million outstanding borrowings under the FILO loan were in a LIBOR-based contract with an interest rate of 6.00%.
Based upon a sensitivity analysis as of August 1, 2020, assuming average outstanding borrowing during the first six months of fiscal 2020 of $69.2 million under our Credit Facility and $15.0 million outstanding under our FILO loan, a 50 basis point increase in interest rates would have resulted in a potential increase in interest expense of approximately $421,000 on an annualized basis.
Foreign Currency
Our two DXL stores located in Ontario, Canada conduct business in Canadian dollars. Both stores were closed temporarily on March 17, 2020 due to the COVID-19 pandemic and did not reopen until June 2, 2020 and June 16, 2020. Sales from these stores were immaterial to consolidated sales. As such, we believe that movement in foreign currency exchange rates will not have a material adverse effect on our financial position or results of operations.
Item 4. Controls and Procedures.
Evaluation of Disclosure Controls and Procedures
As required by Rule 13a-15 under the Exchange Act, our management, under the supervision and with the participation of our Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) as of August 1, 2020. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is accumulated and communicated to the company’s management, including its principal executive and principal financial officers, as appropriate to allow timely decisions regarding required disclosure. Management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving their objectives and management necessarily applies its judgment in evaluating the cost-benefit relationship of possible controls and procedures. Based on this evaluation, our Chief Executive Officer and Chief Financial Officer concluded that, as of August 1, 2020, our disclosure controls and procedures were effective.
Changes in Internal Control over Financial Reporting
While the majority of our employees are working remotely during the COVID-19 pandemic, we have not experienced any changes in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the first six months ended August 1, 2020 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
28
PART II. OTHER INFORMATION
Item 1. Legal Proceedings.
We are subject to various legal proceedings and claims that arise in the ordinary course of business. Management currently believes that the resolution of these matters will not have a material adverse impact on our future results of operations or financial position.
Item 1A. Risk Factors.
Except as described below, there have been no material changes to the risk factors as previously disclosed in Part I, Item 1A of our Fiscal 2019 Annual Report.
The global impact of the COVID-19 pandemic has had and, based on the current status and uncertainty, will likely continue to have a significant adverse effect on our business, financial results, liquidity, supply chain and workforce.
On March 11, 2020, the World Health Organization declared the current outbreak of a novel coronavirus disease (“COVID-19”) a global pandemic. Federal, state and local agencies have mandated various restrictions including travel restrictions, restrictions on public gatherings, state of emergencies, stay-at-home orders and closure of all non-essential businesses, among others.
The COVID-19 pandemic has had, and will likely continue to have, a significant adverse effect on our business, financial results and liquidity. All of our stores were closed on March 17, 2020 and remained closed the end of April 2020, at which point we began to open our stores on a gradual basis through June 30, 2020. While our direct and wholesale businesses were operational, our total revenues for the first six months of fiscal 2020 decreased by approximately 43.4%. Based on the continuing uncertainty regarding the pandemic, we are unable, within reason, to estimate the impact to the remainder of fiscal 2020. As such, we are focused on mitigating the effects of the COVID-19 pandemic and preserving our liquidity. These efforts included, among other things, (i) the furloughing of substantially all of our associates while our stores remained closed, (ii) temporarily reducing, on a tiered basis, the salaries of all members of management through August 2, 2020, (iii) suspending merit increases, (iv) eliminating approximately 34 positions in May 2020 and an additional 430 store associates in July 2020, (v) suspending compensation for non-employee directors for the second quarter of fiscal 2020, (vi) eliminating capital expenditures and operating expenses, where possible, (vii) negotiating with vendors and landlords for extended payment terms, (viii) cancelling approximately $148.0 million of on-order merchandise, at retail, (ix) drawing approximately $30.0 million under our credit facility and amending that facility to increase our borrowing base availability by delaying the step-down of our advance rates and amending the agreement to permit the Company the ability to enter into an aggregate of up to $15.0 million in promissory notes with merchandise vendors, and (x) pursuing all opportunities that may be available to us under the Coronavirus Aid, Relief and Economic Security Act, ("CARES Act").
The above actions may not be successful in mitigating the effects of this pandemic, which is highly uncertain and difficult to predict, and the actions that we take may negatively impact or delay our strategic initiatives. For example, even though the majority of our stores have reopened, we cannot be assured that (i) consumer demand and, therefore, sales will return to levels experienced prior to the pandemic, (ii) new practices or protocols could impact our business and may continue and/or increase, such as, for example, occupancy limitations, (iii) our stores can remain open if there is a resurgence of the virus and therefore need to close again, or (iv) our associates will be willing to staff our stores, as a result of health concerns. Furthermore;
|
|
• |
we may not be able to effectively manage our operating costs on a lower sales base; |
|
|
• |
we may not be able to effectively manage the availability under our Credit Facility; |
|
|
• |
we cannot be assured that inventory costs will not increase or that inventory will be readily accessible from our vendors; |
and
|
|
• |
we cannot be assured that we will not have further impairments of our long-lived assets. |
In addition to the specific risks to our business noted above, we will also be subject to the long-term effects the COVID-19 pandemic may have on the U.S. economy as a whole. The U.S. is experiencing unprecedented unemployment and a possible economic recession that would likely impact consumer discretionary spending, and therefore consumer demand for our products. The magnitude of the impact of the COVID-19 pandemic will be determined by the length of time that the pandemic continues, and while government authorities’ measures relating to the pandemic may be relaxed as the pandemic abates, these measures may be reinstated as the pandemic continues to evolve. In addition to the risks noted above, the COVID-19 pandemic may also heighten other risks described in our Fiscal 2019 Annual Report, including risks to our supply chain, the health and safety of our customers and employees, and our ability to maintain compliance with the financial covenants under our Credit Facility.
We may not be able to maintain the listing of our common stock on NASDAQ.
Our common stock currently trades on The Nasdaq Global Select Market (“Nasdaq”). Nasdaq has continued listing standards that the Company must maintain to avoid delisting, including, among others, a minimum bid price requirement of $1.00 per share. On April 9, 2020, the Company received a letter from the Listing Qualifications staff of Nasdaq notifying the Company that, based upon the closing bid price of its common stock for the last 30 consecutive trading days, the Company was not in compliance with Nasdaq Listing Rule 5450(a)(1), as the minimum bid price for the Company’s common stock was less than $1.00 per share for the previous 30 consecutive trading days. At that time, the Company was granted a 180 calendar-day grace period to regain compliance with the
29
minimum bid price requirement. On April 17, 2020, the Company received a follow-up letter from the Listing Qualifications staff notifying the Company that they had determined to toll all compliance periods through June 30, 2020. Accordingly, the Company’s 180 calendar-day grace period to regain compliance with the minimum bid price requirement was extended to December 21, 2020.
The Notice does not result in the immediate delisting of the Company’s common stock from the Nasdaq Global Select Market. The Company intends to monitor the closing bid price of the Company’s common stock to allow a reasonable period for the price to rebound from its recent decline but will continue to consider its available options to regain compliance. There can be no assurance that the Company will be able to regain compliance with the minimum bid price requirement or maintain compliance with the other listing requirements.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
None.
Item 3. Defaults Upon Senior Securities.
None.
Item 4. Mine Safety Disclosures.
Not applicable.
Item 5. Other Information.
2020 Annual Incentive Plan
On June 23, 2020, the Compensation Committee established the performance metrics for the 2020 Annual Incentive Plan (“AIP”), in which our Named Executive Officers participate. Our Named Executive Officers, as reported in the 2019 Proxy Statement are Messrs. Kanter, Stratton, Molloy, Chane and Gaeta. The potential payout for each performance metric is based on full-year results for fiscal 2020. A participant’s payout under the AIP is based on earned wages, accordingly, each participant’s earned wages for fiscal 2020 reflect a reduction in normal earnings due to either: (i) furlough or (ii) temporary pay reductions, ranging from 10% to 20%. Each of our Named Executive Officers took a temporary salary reduction of 20% for the period April 5, 2020 through August 2, 2020.
For fiscal 2020, Mr. Kanter, Mr. Stratton and Mr. Molloy will participate at 100%, 55% and 50% of their respective earned wages while Messrs. Chane and Gaeta will participate at 40% of their respective earned wages.
The following performance metrics and potential payouts levels are derived from the Company’s annual operating plan and budget for fiscal 2020, as revised in March 2020 for the COVID-19 pandemic. These metrics are intended to be achievable, with an approximate 50% probability; however, given the uncertainty surrounding the COVID-19 pandemic and its impact on our financial results, there is an inherent risk that these metrics may not be attainable. Consistent with prior years, we will disclose the actual targets under the AIP once the performance period has ended.
|
|
|
|
|
|
|
Potential Payout |
|
|||||||
|
Performance Metric |
|
Weight |
|
|
Threshold (50% payout) |
|
Target (100% payout) |
|
Maximum (150% payout, except Kanter where payout is 200%) |
|
||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales |
|
|
40 |
% |
|
|
94.1 |
% |
|
100.0 |
% |
|
105.9 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjusted EBITDA |
|
|
40 |
% |
|
|
89.1 |
% |
|
100.0 |
% |
|
110.9 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Personal Goals (1) |
|
|
20 |
% |
|
- |
|
|
100.0 |
% |
|
150.0 |
% |
|
|
|
(1) |
Personal goals are part of the Company’s annual performance review. The personal goals are a combination of quantifiable and qualitative goals specific to their respective corporate function. |
30
Item 6. Exhibits.
|
4.1 |
|
|
|
|
|
|
|
10.1 |
|
|
|
|
|
|
|
10.2 |
|
Amended Employment Agreement between the Company and Ujjwal Dhoot effective as of August 2, 2020. |
|
|
|
|
|
10.3 |
|
|
|
|
|
|
|
31.1 |
|
|
|
31.2 |
|
|
|
32.1 |
|
|
|
32.2 |
|
|
|
101.INS |
|
Inline XBRL Instance Document. The instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document.
|
|
101.SCH |
|
Inline XBRL Taxonomy Extension Schema Document.
|
|
101.CAL |
|
Inline XBRL Taxonomy Extension Calculation Linkbase Document.
|
|
101.DEF |
|
Inline XBRL Taxonomy Extension Definition Linkbase Document.
|
|
101.LAB |
|
Inline XBRL Taxonomy Extension Label Linkbase Document.
|
|
101.PRE |
|
Inline XBRL Taxonomy Extension Presentation Linkbase Document.
|
|
104 |
|
Cover Page Interactive Data File – The cover page interactive data file does not appear in the interactive data file because its XBRL tags are embedded within the Inline XBRL document.
|
31
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
|
|
|
DESTINATION XL GROUP, INC. |
||
|
|
|
|
|
|
|
Date: August 27, 2020 |
|
By: |
|
/S/ John F. Cooney |
|
|
|
|
|
John F. Cooney |
|
|
|
|
|
Vice President, Managing Director, Chief Accounting Officer and Corporate Controller (Duly Authorized Officer and Chief Accounting Officer)
|
32
No information found
* THE VALUE IS THE MARKET VALUE AS OF THE LAST DAY OF THE QUARTER FOR WHICH THE 13F WAS FILED.
| FUND | NUMBER OF SHARES | VALUE ($) | PUT OR CALL |
|---|
| DIRECTORS | AGE | BIO | OTHER DIRECTOR MEMBERSHIPS |
|---|
No information found
No Customers Found
No Suppliers Found
Price
Yield
| Owner | Position | Direct Shares | Indirect Shares |
|---|