DESTINATION XL GROUP, INC. 10-Q

Item 1. Financial Statements. DESTINATION XL GROUP, INC. CONSOLIDATED BALANCE SHEETS (In thousands, except share data) (Unaudited) October 29, 2022 January 29, 2022 (Fiscal 2022) (Fiscal 2021) ASSETS Current assets: Cash and cash equivalents $ 23,485 $ 15,506 Accounts receivable 1,016 2,110 Inventories 106,816 81,764 Prepaid expenses and other current assets 8,507 6,615 Total current assets 139,824 105,995 Non-current assets: Property and equipment, net of accumulated depreciation and amortization 39,617 44,442 Operating lease right-of-use assets 125,903 127,812 Deferred income taxes, net of valuation allowance 33,480 — Intangible assets 1,150 1,150 Other assets 563 559 Total assets $ 340,537 $ 279,958 LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable $ 26,564 $ 25,165 Accrued expenses and other current liabilities 34,236 35,102 Operating leases, current 36,711 35,191 Total current liabilities 97,511 95,458 Long-term liabilities: Operating leases, non-current 110,997 120,414 Other long-term liabilities 4,585 5,867 Total long-term liabilities 115,582 126,281 Commitments and contingencies Stockholders' equity: Preferred stock, $ 0.01 par value, 1,000,000 shares authorized, none issued — — Common stock, $ 0.01 par value, 125,000,000 shares authorized, 78,057,366 and 77,025,419 shares issued at October 29, 2022 and January 29, 2022, respectively 781 770 Additional paid-in capital 320,457 319,511 Treasury stock at cost, 15,625,172 shares and 12,755,873 shares at October 29, 2022 and January 29, 2022, respectively ( 105,386 ) ( 92,658 ) Accumulated deficit ( 83,076 ) ( 163,879 ) Accumulated other comprehensive loss ( 5,332 ) ( 5,525 ) Total stockholders' equity 127,444 58,219 Total liabilities and stockholders' equity $ 340,537 $ 279,958 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) For the Three Months Ended For the Nine Months Ended October 29, 2022 October 30, 2021 October 29, 2022 October 30, 2021 (Fiscal 2022) (Fiscal 2021) (Fiscal 2022) (Fiscal 2021) Sales $ 129,671 $ 121,486 $ 401,960 $ 371,570 Cost of goods sold including occupancy costs 64,856 60,529 197,960 188,178 Gross profit 64,815 60,957 204,000 183,392 Expenses: Selling, general and administrative 48,383 41,962 144,441 120,856 Impairment (gain) of assets - ( 1,086 ) ( 398 ) ( 2,103 ) Depreciation and amortization 3,769 4,142 11,748 13,031 Total expenses 52,152 45,018 155,791 131,784 Operating income 12,663 15,939 48,209 51,608 Interest expense, net ( 107 ) ( 2,189 ) ( 350 ) ( 4,256 ) Income before provision (benefit) for income taxes 12,556 13,750 47,859 47,352 Provision (benefit) for income taxes 2,083 94 ( 32,944 ) 548 Net income $ 10,473 $ 13,656 $ 80,803 $ 46,804 Net income per share - basic $ 0.17 $ 0.21 $ 1.28 $ 0.74 Net income per share - diluted $ 0.16 $ 0.20 $ 1.20 $ 0.69 Weighted-average number of common shares outstanding: Basic 62,016 63,699 62,928 63,126 Diluted 66,229 68,644 67,106 67,378 The accompanying notes are an integral part of the consolidated financial statements. 3 DESTINATION XL GROUP, INC. CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (In thousands) (Unaudited) For the Three Months Ended For the Nine Months Ended October 29, 2022 October 30, 2021 October 29, 2022 October 30, 2021 (Fiscal 2022) (Fiscal 2021) (Fiscal 2022) (Fiscal 2021) Net income $ 10,473 $ 13,656 $ 80,803 $ 46,804 Other comprehensive income before taxes: Foreign currency translation ( 3 ) 2 ( 10 ) ( 40 ) Pension plans 68 77 203 233 Other comprehensive income before taxes 65 79 193 193 Tax provision related to items of other comprehensive income — — — — Other comprehensive income, net of tax 65 79 193 193 Comprehensive income $ 10,538 $ 13,735 $ 80,996 $ 46,997 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) Accumulated Additional Other Common Stock Paid-in Treasury Stock Accumulated Comprehensive Shares Amounts Capital Shares Amounts Deficit Loss Total Balance at January 29, 2022 77,025 $ 770 $ 319,511 ( 12,755 ) $ ( 92,658 ) $ ( 163,879 ) $ ( 5,525 ) $ 58,219 Board of directors compensation 29 — 125 125 Stock compensation expense 366 366 Restricted stock units (RSUs) granted for achievement of performance-based compensation, reclassified from liability to equity 1,138 1,138 Issuance of common stock, upon RSUs release 313 3 ( 3 ) — Shares withheld for taxes related to net share settlement ( 85 ) ( 1 ) ( 414 ) ( 415 ) Exercise of stock options 41 1 22 23 Repurchase of common stock ( 946 ) ( 4,847 ) ( 4,847 ) Accumulated other comprehensive income (loss): Pension plan, net of taxes 67 67 Foreign currency, net of taxes ( 4 ) ( 4 ) Net income 13,388 13,388 Balance at April 30, 2022 77,323 $ 773 $ 320,745 ( 13,702 ) $ ( 97,505 ) $ ( 150,491 ) $ ( 5,462 ) $ 68,060 Board of directors compensation 25 1 125 126 Stock compensation expense 386 386 Issuance of common stock, upon RSUs release 5 — — — Shares withheld for taxes related to net share settlement — — ( 6 ) ( 6 ) Exercise of stock options 7 — 3 3 Repurchase of common stock ( 1,923 ) ( 7,881 ) ( 7,881 ) Accumulated other comprehensive income (loss): Pension plan, net of taxes 68 68 Foreign currency, net of taxes ( 3 ) ( 3 ) Net income 56,942 56,942 Balance at July 30, 2022 77,360 $ 774 $ 321,253 ( 15,625 ) $ ( 105,386 ) $ ( 93,549 ) $ ( 5,397 ) $ 117,695 Board of directors compensation 31 — 124 124 Stock compensation expense 301 301 Issuance of common stock, upon RSUs release 266 3 ( 3 ) — Exercise of stock options 705 7 203 210 Shares withheld for taxes related to net share settlement ( 305 ) ( 3 ) ( 1,421 ) ( 1,424 ) Accumulated other comprehensive income: — Pension plan, net of taxes 68 68 Foreign currency, net of taxes ( 3 ) ( 3 ) Net income 10,473 10,473 Balance at October 29, 2022 78,057 $ 781 $ 320,457 ( 15,625 ) $ ( 105,386 ) $ ( 83,076 ) $ ( 5,332 ) $ 127,444 The accompanying notes are an integral part of the consolidated financial statements. 5 DESTINATION XL GROUP, INC. CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY (DEFICIT) (In thousands) (Unaudited) Accumulated Additional Other Common Stock Paid-in Treasury Stock Accumulated Comprehensive Shares Amounts Capital Shares Amounts Deficit Loss Total Balance at January 30, 2021 64,656 $ 647 $ 314,747 ( 12,755 ) $ ( 92,658 ) $ ( 220,592 ) $ ( 6,221 ) $ ( 4,077 ) Issuance of common stock through private direct offering, net of offering costs 11,111 111 4,264 4,375 Board of directors compensation 137 1 108 109 Stock compensation expense 327 327 Issuance of common stock, upon RSUs release 308 3 ( 3 ) — Accumulated other comprehensive income (loss): Pension plan, net of taxes 78 78 Foreign currency, net of taxes ( 25 ) ( 25 ) Net income 8,697 8,697 Balance at May 1, 2021 76,212 $ 762 $ 319,443 ( 12,755 ) $ ( 92,658 ) $ ( 211,895 ) $ ( 6,168 ) $ 9,484 Board of directors compensation 70 1 109 110 Stock compensation expense 316 316 Exercise of stock options 7 — 4 4 Accumulated other comprehensive income (loss): Pension plan, net of taxes 78 78 Foreign currency, net of taxes ( 17 ) ( 17 ) Net income 24,451 24,451 Balance at July 31, 2021 76,289 $ 763 $ 319,872 ( 12,755 ) $ ( 92,658 ) $ ( 187,444 ) $ ( 6,107 ) $ 34,426 Board of directors compensation 15 — 77 77 Stock compensation expense 295 295 Issuance of common stock, upon PSUs release 240 3 ( 3 ) — Exercise of stock options 423 4 342 346 Shares withheld for taxes related to net share settlements ( 190 ) ( 2 ) ( 1,144 ) ( 1,146 ) Accumulated other comprehensive income (loss): — Pension plan, net of taxes 77 77 Foreign currency, net of taxes 2 2 Net income 13,656 13,656 Balance at October 30, 2021 76,777 $ 768 $ 319,439 ( 12,755 ) $ ( 92,658 ) $ ( 173,788 ) $ ( 6,028 ) $ 47,733 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 Nine Months Ended October 29, 2022 October 30, 2021 (Fiscal 2022) (Fiscal 2021) Cash flows from operating activities: Net income $ 80,803 $ 46,804 Adjustments to reconcile net income to net cash provided by operating activities: Amortization and write-off of deferred debt issuance costs 57 1,161 Impairment (gain) of assets ( 398 ) ( 2,103 ) Depreciation and amortization 11,748 13,031 Deferred taxes, net of valuation allowance ( 33,480 ) — Stock compensation expense 1,053 938 Board of directors stock compensation 375 296 Changes in operating assets and liabilities: Accounts receivable 1,094 4,812 Inventories ( 25,052 ) 2,744 Prepaid expenses and other current assets ( 1,892 ) ( 3,237 ) Other assets ( 61 ) 360 Accounts payable 1,399 2,674 Operating leases, net ( 5,590 ) ( 12,275 ) Accrued expenses and other liabilities 113 8,945 Net cash provided by operating activities 30,169 64,150 Cash flows from investing activities: Additions to property and equipment, net ( 7,853 ) ( 2,802 ) Net cash used for investing activities ( 7,853 ) ( 2,802 ) Cash flows from financing activities: Repurchase of common stock ( 12,728 ) — Proceeds from issuance of common stock from private direct offering, net of offering costs — 4,375 Repayment of FILO loan — ( 32,500 ) Proceeds from new FILO loan — 17,500 Net repayments under credit facility — ( 59,733 ) Debt extinguishment costs — ( 1,111 ) Debt issuance costs — ( 1,143 ) Tax withholdings paid related to net share settlements ( 1,845 ) ( 1,146 ) Proceeds from the exercise of stock options 236 350 Net cash used for financing activities ( 14,337 ) ( 73,408 ) Net increase (decrease) in cash and cash equivalents 7,979 ( 12,060 ) Cash and cash equivalents: Beginning of period 15,506 18,997 End of period $ 23,485 $ 6,937 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 January 29, 2022 included in the Company’s Annual Report on Form 10-K, which was filed with the Securities and Exchange Commission on March 17, 2022. 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 2022 and fiscal 2021 are 52-week periods ending on January 28, 2023 and January 29, 2022, respectively. Segment Information The Company has two principal operating segments: its stores and its direct business. The Company considers its stores and direct operating segments to be similar in terms of economic characteristics, production processes and operations, and has therefore aggregated them into one reportable segment, retail segment, consistent with its omni-channel business approach. The Company’s wholesale business was a third operating segment. In the first quarter of fiscal 2022, the Company ended its relationship with its primary wholesale customer. Due to the immateriality of the wholesale segment’s revenues, profits and assets, its operating results are aggregated with the retail segment for all periods presented. 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 carrying amounts of cash and cash equivalents, accounts receivable, accounts payable and accrued expenses approximate fair value because of the short maturity of these instruments. 8 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 nine months ended October 29, 2022 and October 30, 2021, respectively, were as follows: October 29, 2022 October 30, 2021 For the three months ended: (in thousands) Pension Plans Foreign Currency Total Pension Plans Foreign Currency Total Balance at beginning of the quarter $ ( 5,331 ) $ ( 66 ) $ ( 5,397 ) $ ( 6,068 ) $ ( 39 ) $ ( 6,107 ) Other comprehensive income (loss) before reclassifications, net of taxes 77 ( 3 ) 74 90 2 92 Amounts reclassified from accumulated other comprehensive income, net of taxes (1) ( 9 ) — ( 9 ) ( 13 ) — ( 13 ) Other comprehensive income (loss) for the period 68 ( 3 ) 65 77 2 79 Balance at end of quarter $ ( 5,263 ) $ ( 69 ) $ ( 5,332 ) $ ( 5,991 ) $ ( 37 ) $ ( 6,028 ) October 29, 2022 October 30, 2021 For the nine months ended: (in thousands) Pension Plans Foreign Currency Total Pension Plans Foreign Currency Total Balance at beginning of fiscal year $ ( 5,466 ) $ ( 59 ) $ ( 5,525 ) $ ( 6,224 ) $ 3 $ ( 6,221 ) Other comprehensive income (loss) before reclassifications, net of taxes 232 ( 10 ) 222 270 ( 40 ) 230 Amounts reclassified from accumulated other comprehensive income, net of taxes (1) ( 29 ) — ( 29 ) ( 37 ) — ( 37 ) Other comprehensive income (loss) for the period 203 ( 10 ) 193 233 ( 40 ) 193 Balance at end of quarter $ ( 5,263 ) $ ( 69 ) $ ( 5,332 ) $ ( 5,991 ) $ ( 37 ) $ ( 6,028 ) (1) Includes the amortization of the unrecognized loss on pension plans, which was charged to “Selling, General and Administrative” Expense on the Consolidated Statements of Operations for all periods presented. The Company recognized income of $ 9,000 and $ 13,000 for the three months ended October 29, 2022 and October 30, 2021 , respectively, and income of $ 29,000 and $ 37,000 for the first nine months ended October 29, 2022 and October 30, 2021 , respectively, as a result of a change in amortization from average remaining future service to average remaining lifetime. There was no related tax effect for the three and nine months ended October 29, 2022 and October 30, 2021. 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 9 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 nine months of fiscal 2022 and fiscal 2021. October 29, 2022 October 30, 2021 Expected volatility 87.9 %- 123.7 % 97.4 % - 104.9 % Risk-free interest rate 2.52 %- 4.41 % 0.31 % - 0.60 % Expected term 2.0 - 3.5 yrs. 3.0 - 4.0 yrs. Dividend rate — — Weighted average fair value of options granted $ 3.46 $ 0.47 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 and the related stock compensation expense was fully expensed by the end of fiscal 2021. 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’s judgment regarding the identification of impairment indicators is based on operational performance at the store level. Factors considered by the Company that could result in an impairment triggering event include significant changes in the use of assets, a current period operating or cash flow loss, underperformance of a store relative to historical or expected operating results, and an accumulation of costs significantly in excess of the amount originally expected for the construction of the long-lived store assets. 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 model for undiscounted future cash flows includes assumptions, at the individual store level, with respect to expectations for future sales and gross margin rates as well as an estimate for occupancy costs used to estimate the fair value of the respective store’s operating lease right-of-use asset. 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. There were no impairments or non-cash gains recognized in the third quarter of fiscal 2022. For the third quarter of fiscal 2021, the Company recognized a non-cash gain of $ 1.2 million, and for the first nine months of fiscal 2022 and fiscal 2021, the Company recognized non-cash gains of $ 0.6 million and $ 2.3 million, respectively. These non-cash gains related to the Company’s decision to close certain retail stores, which resulted in a revaluation of the existing lease liabilities. The portion of the gains that related to previously recorded impairment charges against the operating lease right-of-use asset were included as an offset to previously recorded asset impairment charges. Accordingly, for the third quarter of fiscal 2021, $ 1.1 million was included as an offset to asset impairment charges. For the first nine months of fiscal 2022 and fiscal 2021, $ 0.4 million and $ 2.1 million, respectively, were included as an offset to asset impairment charges. The remaining gains for the third quarter of fiscal 2021 and the first nine months of fiscal 2022 and fiscal 2021 were included as a reduction of store occupancy costs. Leases The Company adopted ASU 2016-02, “ Leases (Topic 842) ” in fiscal 2019. 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 (“ROU”) 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 October 29, 2022 , the Company had no short-term leases. The Company’s store leases typically contain options that permit renewals for additional periods of up to five years each. In general, for store leases with an initial term of 10 years or more, the options to extend are not considered reasonably certain at lease commencement. For stores leases with an initial term of 5 years, the Company evaluates each lease independently and, when the Company considers it reasonably certain that it will exercise an option to extend, the associated payment of that option will be included in the measurement of the right-of-use asset and lease liability. Renewal options are not included in the lease term for automobile and equipment leases because they are not considered reasonably certain of being exercised at lease commencement. Renewal options were not considered 10 for the Company’s corporate headquarters and distribution center lease, which was entered into in 2006 and was for an initial 20 -year term . At the end of the initial term, the Company will have the opportunity to extend this lease for six additional successive periods of five years . 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 Issued Accounting Pronouncements -Not Yet Adopted In September 2022, the FASB issued Accounting Standards Update ("ASU") 2022 - 04, Liabilities – Supplier Finance Programs, which is intended to enhance the transparency surrounding the use of supplier finance programs in connection with the purchase of goods and services. The guidance requires companies that use supplier finance programs to make annual disclosures about the program’s key terms, the balance sheet presentation of related amounts, the confirmed amount outstanding at the end of the period and associated rollforward information. The new standard does not affect the recognition, measurement, or financial statement presentation of supplier finance program obligations. ASU 2022-04 is effective as of the Company's first quarter of fiscal 2023, with the exception of the rollforward information, which is effective for fiscal 2024. The Company does not plan to elect early adoption of this update and does not expect this pronouncement to materially affect its Consolidated Financial Statements. No other new accounting pronouncements, issued or effective during the first nine months of fiscal 2022, 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. ̶ Revenue from the Company’s wholesale operations was recognized at the time the wholesale customer took physical receipt of the merchandise, net of any identified discounts in accordance with each individual order. For the first nine months of fiscal 2022 and fiscal 2021, 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 $ 2.1 million and $ 3.3 million at October 29, 2022 and January 29, 2022, respectively. Unredeemed Loyalty Coupons. The Company offers a free loyalty program to its customers for which points accumulate based on the purchase of merchandise. Approximately 90 % of the Company’s customers participate in the loyalty program. Under ASC 606, Revenue from Contracts with Customers , these loyalty points provide the customer with a material right and a distinct performance obligation with revenue deferred and recognized when the points are expected to redeem or expire. The cycle of earning and redeeming loyalty points is generally under one year in duration. The loyalty accrual, net of breakage, was $ 1.3 million and $ 1.3 million at October 29, 2022 and January 29, 2022, respectively. 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. 11 Disaggregation of Revenue As noted above under Segment Information in Note 1, the Company’s business consists of one reportable segment, its retail segment. Substantially all of the Company’s revenue is generated from its stores and direct businesses. The operating results from the wholesale segment, which were immaterial, have been aggregated with this reportable segment, but the revenues are separately reported below. Accordingly, the Company has determined that the following sales channels depict the nature, amount, timing, and uncertainty of how revenue and cash flows are affected by economic factors: For the Three Months Ended For the Nine Months Ended (in thousands) October 29, 2022 October 30, 2021 October 29, 2022 October 30, 2021 Store sales $ 91,770 70.8 % $ 84,762 70.3 % $ 280,973 70.0 % $ 258,685 70.5 % Direct sales 37,901 29.2 % 35,837 29.7 % 120,588 30.0 % 108,043 29.5 % Retail segment $ 129,671 $ 120,599 $ 401,561 $ 366,728 Wholesale segment — 887 399 4,842 Total sales $ 129,671 $ 121,486 $ 401,960 $ 371,570 3. Debt Credit Agreement with Citizens Bank, N.A. On October 28, 2021, the Company entered into a credit facility with Citizens Bank, N.A. (the "Credit Facility”). The Credit Facility is a $ 125.0 million secured, asset-based credit facility with a maturity date of October 28, 2026 . The maximum committed borrowing of $ 125.0 million includes a sublimit of $ 20.0 million for commercial and standby letter of credits and a sublimit of up to $ 15.0 million for swing line loans. The Company’s ability to borrow under the Credit Facility is determined using an availability formula based on eligible assets . Borrowings made pursuant to the Credit Facility will be made pursuant to either a Base Rate loan or LIBOR Rate loan, at the Company's option. Base Rate loans will bear interest at a rate equal to (i) the greater of: (a) the Prime Rate, (b) the Federal Funds effective rate plus 0.50 % per annum and (c) the daily LIBOR rate plus 1.00 % per annum, plus (ii) a varying percentage, based on the Company’s average excess availability, of either 0.25 % or 0.50 %. LIBOR Rate loans, which may be either for 1 month or 3 months, will bear interest at (i) the LIBOR rate, or the Benchmark Rate as defined in the credit agreement plus (ii) a varying percentage based on the Company’s average excess availability, of either 1.25 % or 1.50 %. Any swingline loan will bear interest at a rate equal to the rate of a Base Rate loan, plus a varying percentage based on the Company’s average excess availability, of either 0.25 % or 0.50 %. The Company will be subject to an unused line fee of 0.25 %. The Company’s obligations under the Credit Facility are secured by a lien on substantially all of its assets. If the Company’s availability under the Credit Facility at any time is less than the greater of (i) 10 % of the Revolving Loan Cap (the lesser of the aggregate revolving commitments or the borrowing base) and (ii) $ 7.5 million, then the Company is required to maintain a minimum consolidated fixed charge coverage ratio of 1.0 :1.0 until such time as availability has exceeded the greater of (1) 10 % of the Revolving Loan Cap and (2) $ 7.5 million for 30 consecutive days. At October 29, 2022 , the Company had no borrowings outstanding under the Credit Facility and unused availability was $ 90.2 million. The Company had no borrowings during the first nine months of fiscal 2022, resulting in an average unused excess availability of approximately $ 82.0 million. Outstanding standby letters of credit were $ 3.8 million and outstanding documentary letters were $ 1.0 million at October 29, 2022. At October 29, 2022, the Company’s prime-based interest rate was 6.50 % . Borrowings and repayments for the first nine months ended October 30, 2021 were as follows: For the nine months ended (in thousands) October 30, 2021 Borrowings $ 40,297 Repayments ( 100,030 ) Net borrowings (repayments) $ ( 59,733 ) 12 Long-Term Debt The Company had no outstanding long-term debt during the first nine months of fiscal 2022. During the first quarter of fiscal 2021, the Company refinanced its then existing $ 15.0 million FILO (first-in, last-out) loan and entered into a new $ 17.5 million FILO loan, which was subsequently repaid in full in September 2021. The Company paid interest and fees totaling $ 0.3 million and $ 3.1 million for the nine months ended October 29, 2022 and October 30, 2021, respectively. Included in the $ 3.1 million of interest and fees paid in fiscal 2021 was a prepayment fee of $ 1.1 million associated with the prepayment of the Company $ 17.5 million FILO loan. In connection with the execution of the Credit Facility and prepayment of the FILO loan, in the third quarter of fiscal 2021, the Company also wrote-off a total of $ 0.8 million in unamortized debt issuance costs. 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 5 years to 10 years , with options that usually permit renewal for additional five-year periods. The initial term of the lease for the corporate headquarter was for 20 years, with the opportunity to extend for six additional consecutive periods of five years , beginning in fiscal 2026 . The Company also leases certain equipment and other assets under operating leases, typically with initial terms of 3 to 5 years . The Company is generally obligated for the cost of property taxes, insurance and common area maintenance fees relating to its leases, which are considered variable lease costs and are expensed as incurred. 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 opted not to elect this practical expedient and instead accounted for these rent concessions as lease modifications in accordance with ASC 842. As of October 29, 2022, the Company’s operating leases liabilities represent the present value of the remaining future minimum lease payments updated based on concessions and lease modifications. Lease costs related to store locations are included in cost of goods sold including occupancy costs on the Consolidated Statements of Operations, and expenses and lease costs related to the corporate headquarters and equipment leases are included in selling, general and administrative expenses on the Consolidated Statements of Operations. The following table is a summary of the Company’s components of net lease cost for the three and nine months ended October 29, 2022 and October 30, 2021: For the three months ended For the nine months ended October 29, 2022 October 30, 2021 October 29, 2022 October 30, 2021 (in thousands) Operating lease cost $ 11,365 $ 11,064 $ 33,123 $ 32,698 Variable lease costs (1) 3,261 3,284 9,534 10,473 Total lease costs $ 14,626 $ 14,348 $ 42,657 $ 43,171 (1) Variable lease costs include the cost of property taxes, insurance and common area maintenance fees related to its leases. Supplemental cash flow and balance sheet information related to leases for the first nine months ended October 29, 2022 and October 30, 2021 was as follows: (dollars in thousands) For the nine months ended Cash paid for amounts included in the measurement of lease liabilities: October 29, 2022 October 30, 2021 Operating cash flows for operating leases (1) $ 42,001 $ 43,846 Non-cash operating activities: Right-of-use assets obtained in exchange for operating lease liabilities $ 20,667 $ 6,099 Weighted average remaining lease term 4.3 yrs. 4.1 yrs. Weighted average discount rate 6.45 % 6.95 % 13 (1) The cash paid for the first nine months of fiscal 2022 and fiscal 2021 included prepaid rent of $ 4.1 million and $ 3.8 million, respectively. 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 October 29, 2022: (in thousands) 2022 (remaining) $ 8,322 2023 48,113 2024 40,063 2025 31,745 2026 19,266 Thereafter 21,241 Total minimum lease payments $ 168,750 Less: amount of lease payments representing interest 21,042 Present value of future minimum lease payments $ 147,708 Less: current obligations under leases 36,711 Long-term lease obligations $ 110,997 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 . The LTIPs are granted annually and each LTIP covers a three-year performance period. Each participant in the LTIP 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, 50 % of each participant’s Target Cash Value is subject to time-based vesting and 50 % is subject to performance-based vesting. Awards for any achievement of performance targets are not granted until the performance targets are achieved and then are subject to additional vesting through August 31 following the end of the applicable performance period. 2019-2021 LTIP The performance targets for the Company’s 2019-2021 LTIP were approved by the Compensation Committee of the Board of Directors (the "Compensation Committee”) on August 7, 2019 and covered a three-year period performance period, which ended on January 29, 2022. The time-vested portion of the 2019-2021 LTIP vests in four annual installments, with the remaining installment vesting on April 1, 2023. In the first quarter of fiscal 2022, on March 21, 2022, the Compensation Committee approved a 141.9 % payout of its performance targets for the 2019-2021 LTIP. On that date, the Company granted awards totaling $ 2.7 million, in a combination of 50 % cash and 50 % restricted stock units (RSUs), which vested, net of any forfeitures, on August 31, 2022. In connection with the grant of 269,162 RSUs, the Company reclassified $ 1.1 million of its liability accrual from “Accrued expenses and other current liabilities” to “Additional paid-in capital” in the first quarter of fiscal 2022. See the Consolidated Statement of Changes in Stockholders’ Equity. Active LTIPs At October 29, 2022 , the Company had three active LTIPs: the 2020-2022 LTIP, the 2021-2023 LTIP and the 2022-2024 LTIP. The time-based awards under the 2020-2022 LTIP were granted in a combination of 50 % stock options and 50 % cash; the 2021-2023 LTIP time-based awards were granted in a combination of 25 % stock options and 75 % cash; and the 2022-2024 LTIP time-based awards were granted in a combination of 50 % RSUs and 50 % cash. Performance targets for the 2020-2022 LTIP, 2021-2023 LTIP and 2022-2024 LTIP were established and approved by the Compensation Committee on June 11, 2020, March 8, 2021 and April 9, 2022, respectively. The performance period for each LTIP is three years . Awards for any achievement of performance targets will not be granted until the performance targets are achieved and then will be subject to additional vesting through August 31, 2023, August 31, 2024 and August 31, 2025, respectively. The time-based awards under the 2020-2022 LTIP, 2021-2023 LTIP and 2022-2024 LTIP vest in four equal installments through April 1, 2024, April 1, 2025 and April 1, 2026, respectively. Assuming that the Company achieves the performance targets at target levels and all time-based awards vest, the compensation expense associated with the 2020-2022 LTIP, 2021-2023 LTIP and 2022-2024 LTIP is estimated to be approximately $ 3.7 million, $ 4.1 million and $ 4.7 million, respectively. Approximately half of the compensation expense for each LTIP relates to the time-based awards, which are being expensed straight-line over 46 months, 49 months and 48 months, respectively. 14 At October 29, 2022 , the Company had accrued $ 2.1 million under the 2020-2022 LTIP, $ 1.4 million under the 2021-2023 LTIP and $ 0.6 million under the 2022-2024 LTIP for the performance awards. 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 5,725,538 shares of common stock. A grant of a stock option award or stock appreciation right will reduce the outstanding reserve on a one-for-one basis, meaning one share for every share granted. A grant of a full-value award, including, but not limited to, restricted stock, restricted stock units and deferred stock, will reduce the outstanding reserve by a fixed ratio of 1.9 shares for every share granted. The Company’s shareholders approved amendments to increase the share reserve by 2,800,000 shares on August 8, 2019, an additional 1,740,000 shares on August 12, 2020 and an additional 4,855,000 on August 5, 2021. At October 29, 2022, the Company had 3,975,145 shares available under the 2016 Plan. In accordance with the terms of the 2016 Plan, any shares outstanding under the previous 2006 Incentive Compensation Plan (the “2006 Plan”) at August 4, 2016 that subsequently terminate, expire or are cancelled for any reason without having been exercised or paid are added back and become available for issuance under the 2016 Plan, with stock options being added back on a one-for-one basis and full-value awards being added back on a 1 to 1.9 basis. At October 29, 2022 , 263,341 stock options remained outstanding under the 2006 Plan. 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. Except with respect to 5 % of the shares available for awards under the 2016 Plan, no award will become exercisable unless such award has been outstanding for a minimum period of one year from its date of grant. The following tables summarize the share activity and stock option activity for the first nine months of fiscal 2022: RSUs (1) Deferred shares (2) Performance Share Units (3) Fully-Vested Shares (4) Total number of shares Weighted- average grant-date fair value Shares Outstanding non-vested shares at beginning of year 515,291 435,568 240,000 — 1,190,859 $ 1.57 Shares granted 563,691 — — 27,386 591,077 $ 5.09 Shares vested and/or issued ( 584,359 ) — — ( 27,386 ) ( 611,745 ) $ 3.52 Shares forfeited ( 23,617 ) ( 23,617 ) $ 3.89 Outstanding non-vested shares at end of quarter 471,006 435,568 240,000 — 1,146,574 $ 2.30 (1) During the first nine months of fiscal 2022, the Company granted RSUs for the achievement of performance metrics under the 2019-2021 LTIP that were subject to additional vesting through August 31, 2022 and time-based RSUs under its 2022-2024 LTIP. See Note 5, Long-Term Incentive Plans . As a result of net share settlements, of the 584,359 RSUs that vested, only 419,542 shares of common stock were issued. (2) The outstanding deferred shares will be issued upon the director’s separation from service. (3) Represents the remaining performance stock units (“PSUs”) granted to Mr. Kanter in February 2019. The 240,000 PSUs will vest when the trailing 90-day volume-weighted average closing stock price (“VWAP”) is $ 8.00 . The PSUs will expire on April 1, 2023 if the $ 8.00 VWAP is not achieved by that date. (4) Represents compensation, with a fair value of $ 121,485 , to certain directors, who are required to receive shares, in lieu of cash, in order to satisfy their minimum equity ownership under the Non-Employee Director Plan. Voluntary shares received, in lieu of cash, are reported below under Non-Employee Director Compensation Plan . Number of shares Weighted- average exercise price per option Weighted- average remaining contractual term Aggregate intrinsic value Stock Options Outstanding options at beginning of year 4,621,550 $ 0.90 8.2 years $ 16,066,914 Options granted 15,747 $ 5.41 — 1,262 Options exercised (1) ( 752,938 ) $ 0.71 3,636,343 Options expired and canceled ( 177,454 ) $ 1.18 — 804,868 Outstanding options at end of quarter 3,706,905 $ 0.95 7.4 years $ 21,505,348 Options exercisable at end of quarter 1,242,201 $ 1.56 6.3 years $ 6,447,396 15 (1) As a result of net share settlements, of the 752,938 shares underlying stock options that were exercised during the first nine months of fiscal 2022, only 527,712 shares of common stock were issued. For the first nine months of fiscal 2022, the Company granted stock options to purchase an aggregate of 15,747 shares of common stock, 563,691 restricted stock units and 27,386 fully-vested shares. For the first nine months of fiscal 2021, the Company granted stock options to purchase an aggregate of 1,518,154 shares of common stock and 8,054 restricted stock units. Non-Employee Director Compensation Plan The Company granted 57,307 shares of common stock, with a fair value of approximately $ 254,218 , to certain of its non-employee directors as compensation in lieu of cash in the first nine months of fiscal 2022. These shares are in addition to any shares that may be granted under the 2016 Plan related to the requirement to receive equity if a director has not yet satisfied his or her minimum equity ownership requirement under the Non-Employee Director Compensation Plan. Stock Compensation Expense The Company recognized total stock-based compensation expense of $ 1.1 million and $ 0.9 million for the first nine months of fiscal 2022 and fiscal 2021, respectively. The total compensation cost related to time-vested stock options and RSU awards not yet recognized as of October 29, 2022 was approximately $ 2.2 million, net of estimated forfeitures, which will be expensed over a weighted average remaining life of 32 months. 7. Equity and 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 nine months ended October 29, 2022 October 30, 2021 October 29, 2022 October 30, 2021 (in thousands ) Common stock outstanding: Basic weighted average common shares outstanding 62,016 63,699 62,928 63,126 Common stock equivalents – stock options, restricted stock units and deferred stock 4,213 4,945 4,178 4,252 Diluted weighted average common shares outstanding 66,229 68,644 67,106 67,378 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 the unearned compensation associated with stock options, restricted stock units, or deferred stock had an anti-dilutive effect. For the three months ended For the nine months ended October 29, 2022 October 30, 2021 October 29, 2022 October 30, 2021 (in thousands, except exercise prices) Stock options 31 — 256 386 Restricted stock units 55 — 65 — Range of exercise prices of such options $ 4.48 -$ 6.59 — $ 4.48 - $ 6.59 $ 4.19 - $ 5.50 The above options, which were outstanding at October 29, 2022 , expire from May 28, 2023 to October 26, 2032 . Excluded from the computation of basic and diluted earnings per share were 240,000 shares for the third quarter and first nine months of fiscal 2022 and 480,000 shares for the third quarter and first nine months of fiscal 2021 of unvested performance stock units. These performance-based awards are included in the computation of basic and diluted earnings per share if, and when, the respective performance targets are achieved. In addition, 435,568 shares of deferred stock at October 29, 2022 and at October 30, 2021 were excluded from basic earnings per share. Outstanding shares of deferred stock are not considered issued and outstanding until the vesting date of the deferral period. 8. Stock Repurchase Program On March 15, 2022, the Company’s Board of Directors approved a stock repurchase program. Under the stock repurchase program, the Company may repurchase up to $ 15.0 million of its common stock through open market and privately negotiated transactions. 16 The timing and the amount of any repurchases of common stock will be determined based on the Company’s evaluation of market conditions and other factors. The stock repurchase program commenced in the first quarter of fiscal 2022 and will expire on March 15, 2023 , but may be suspended, terminated or modified at any time for any reason. The Company expects to finance the repurchases from operating funds and/or periodic borrowings on its credit facility. There were no stock repurchases in the third quarter of fiscal 2022. For the first nine months of fiscal 2022, the Company repurchased 2.9 million shares at an aggregate cost of $ 12.7 million, including fees, from available cash on hand. Shares of repurchased common stock are held as treasury stock. 9. Income Taxes Since the end of fiscal 2013, the Company has maintained a full valuation allowance against its deferred tax assets. During the second quarter of fiscal 2022, the Company determined that it was more likely than not that it would be able to realize the benefit of substantially all of its deferred tax assets in the United States. In reaching this determination, the Company considered the cumulative three years of profitability, its expectations regarding the generation of future taxable income as well as the overall improvement in the Company's business and its current market position. As a result, in the second quarter of fiscal 2022, the Company recognized a discrete tax benefit related to the release of approximately $ 35.5 million in valuation allowance against its deferred tax assets in the United States that are expected to be realized in future years. At October 29, 2022, the Company continued to provide a valuation allowance of $ 2.4 million primarily against certain state and foreign net operating losses ("NOLs"). For the third quarter of fiscal 2022, the Company recorded an income tax provision of $ 2.1 million, which included a $ 2.0 million discrete tax expense to adjust the release of the valuation allowance to reflect an increase in the Company's third quarter earnings and full-year earnings forecast. For the first nine months of fiscal 2022, the Company recorded an income tax benefit of $ 32.9 million, which included a discrete tax benefit of $ 33.5 million for the release of the valuation allowance discussed above. For the third quarter and first nine months of fiscal 2021, the Company recorded an income tax provision of $ 94,000 and $ 548,000 , respectively, primarily related to income tax in states where NOL usage was statutorily limited. The Company made tax payments of $ 0.3 million and $ 0.1 million for the first nine months of fiscal 2022 and fiscal 2021, respectively. For federal income tax purposes, at the end of fiscal 2021, the Company had net operating loss carryforwards of approximately $ 100.7 million, which will expire from fiscal 2028 through fiscal 2037 , and net operating loss carryforwards of $ 43.1 million that are not subject to expiration. For state purposes, at the end of fiscal 2021, the Company had $ 90.0 million of net operating losses that are available to offset future taxable income, the majority of which will expire from fiscal 2028 through fiscal 2041 . 17 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 expectations with respect to sales trends, including expected sales growth in the fourth quarter of 2022, expected marketing costs in 2022, gross margin rate, improved inventory levels and our management of inventory levels, our ability to realize our deferred tax assets, increased freight costs, increases in certain raw materials cost, our long-term outlook, expected capital expenditures in 2022, our ability to attract new customers, and our plans with respect to our store portfolio, including anticipated closures, re-brandings, and new and relocated stores. 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 January 29, 2022, included in our Annual Report on Form 10-K for the year ended January 29, 2022, as filed with the Securities and Exchange Commission on March 17, 2022 (our “Fiscal 2021 Annual Report”). Numerous factors could cause our actual results to differ materially from such forward-looking statements. This discussion sets forth certain risks and uncertainties that may have an impact on future results and direction of our Company, including, without limitation, risks related to labor shortages, increased labor costs, changes in consumer spending in response to the economy, the ongoing effects of the COVID-19 pandemic, the economic impact of the war in Ukraine, our ability to navigate supply chain uncertainties, our ability to maintain appropriate inventory levels, our ability to successfully execute on our corporate strategy, our ability to predict customer tastes and fashion trends, our ability to grow market share, and the other risks and uncertainties set forth in the “Risk Factors” section in Part I, Item 1A of our Fiscal 2021 Annual Report. 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 and direct operations in the United States. We operate under the trade names of Destination XL ® , DXL ® , DXL Outlets, Casual Male XL ® and Casual Male XL Outlets. At October 29, 2022, we operated 218 Destination XL stores, 16 DXL outlet stores, 30 Casual Male XL retail stores, 19 Casual Male XL outlet stores and a digital business, including an e-commerce site at dxl.com and a mobile site, m.destinationXL.com, mobile app and third-party marketplaces. 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 28, 2023, January 29, 2022 and January 30, 2021 as “fiscal 2022,” “fiscal 2021” and “fiscal 2020,” respectively. All three fiscal years are 52-week periods. SEGMENT REPORTING We currently have two principal operating segments: our stores and direct 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. Our wholesale segment was a third operating segment. In the first quarter of fiscal 2022, we ended the relationship with our primary wholesale customer. Due to the immateriality of the wholesale segment’s revenues, profits and assets, its operating results have been aggregated with the retail segment for all periods. COMPARABLE SALES Our customer’s shopping experience continues to evolve across multiple channels and we are continually adapting to meet the guest’s needs. The majority of our stores have the capability of fulfilling online orders if merchandise is not available in the warehouse. As a 18 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 at curbside. We define store sales as sales that originate and are fulfilled directly at the store level. Digital 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. Stores that have been open for at least 13 months are included in comparable sales. Stores that have been remodeled or re-located during the period are also included in our determination of comparable stores sales. Stores that have been expanded by more than 25% are considered non-comparable for the first 13 months. If a store becomes a clearance center, it is also removed from the calculation of comparable sales. The method of calculating comparable sales varies across the retail industry and, as a result, our calculation of comparable sales is not necessarily comparable to similarly titled measures reported by other retailers. RESULTS OF OPERATIONS Executive Summary For the three months ended For the nine months ended October 29, 2022 October 30, 2021 October 29, 2022 October 30, 2021 (in millions, except percentage of sales and per share data) Sales $ 129.7 $ 121.5 $ 402.0 $ 371.6 Net income $ 10.5 $ 13.7 $ 80.8 $ 46.8 Adjusted EBITDA (Non-GAAP basis) $ 16.4 $ 19.0 $ 59.6 $ 62.5 Gross Margin. as a percentage of sales 50.0 % 50.2 % 50.8 % 49.4 % SG&A expenses, as a percentage of sales 37.3 % 34.5 % 35.9 % 32.5 % Per diluted share: Net income $ 0.16 $ 0.20 $ 1.20 $ 0.69 We are pleased to report continued earnings and sales growth this quarter, with results exceeding our internal expectations, especially up against a very strong third quarter last year. Comparable sales increased 8.7% for the quarter, with strong performance from our stores, which were up 10.1% for the third quarter, with all regions reporting sales growth over last year. This growth was primarily driven by higher dollars per transactions and conversion. The increase in dollars per transactions was attributable to our reduced reliance on promotions and a shift in merchandise mix to higher-price items, such as tailored clothing. Our direct business had a comparable sales increase of 5.5% for the third quarter, driven primarily by our web, app and marketplaces. Our gross margin rate for the third quarter continued to benefit from the low promotions and clearance enabling us to partially offset the increase in freight and raw material costs that we continue to experience. In line with our expectations, our selling, general and administrative expenses (SG&A) increased by 280 basis points during the third quarter, with our marketing costs representing approximately 140 basis points of this increase. The remainder of the increase in SG&A was primarily due to increased payroll costs to support sales growth and higher accruals for performance-based incentive plans. As a result, net income for the third quarter was $10.5 million, or $0.16 per diluted share, as compared to net income for the third quarter of fiscal 2021 of $13.7 million, or $0.20 per diluted share. At October 29, 2022, we had no debt outstanding and we did not borrow from our credit facility during the first nine months. Our unused excess availability at October 29, 2022 was $90.2 million. At the end of the third quarter, we are in a strong inventory position and have been able to replenish those categories that were depleted last year. As a result, our inventory level at the end of the third quarter was intentionally up 29.8% from last year, but was down 11.1%, when compared to the end of the third quarter in fiscal 2019 inventory, or pre-pandemic levels. In addition, we have improved our inventory turn by over 30% from the third quarter of fiscal 2019. As we previously disclosed, the Company's Board of Directors approved a $15.0 million stock repurchase program in March 2022 and, during the first nine months of fiscal 2022, we utilized our free cash flow to repurchase 2.9 million shares of our common stock, at an aggregate cost of $12.7 million, including fees. There were no repurchases of stock during the third quarter of fiscal 2022. Our results year-to-date have outperformed our expectations and we believe that we are well-positioned as we head into the fourth quarter. While we remain optimistic, we are cognizant of the potential impact that inflation and other macro-economic factors may have on fourth quarter consumer spending. We expect to grow our comparable sales in the fourth quarter by single digits. 19 Financial Summary Sales The following table presents sales by segment for the three and nine months ended October 29, 2022 and October 30, 2021: For the Three Months Ended For the Nine Months Ended (in thousands) October 29, 2022 October 30, 2021 October 29, 2022 October 30, 2021 Store sales $ 91,770 70.8 % $ 84,762 70.3 % $ 280,973 70.0 % $ 258,685 70.5 % Direct sales 37,901 29.2 % 35,837 29.7 % 120,588 30.0 % 108,043 29.5 % Retail segment $ 129,671 $ 120,599 $ 401,561 $ 366,728 Wholesale segment — 887 399 4,842 Total sales $ 129,671 $ 121,486 $ 401,960 $ 371,570 Total sales for the third quarter of fiscal 2022 were $129.7 million, as compared to $121.5 million in the third quarter of fiscal 2021. Comparable sales for the third quarter were up 8.7% with comparable sales from our stores up 10.1% and our direct business up 5.5%. Store sales for the third quarter exceeded our plan, driven primarily by increases in dollars per transaction and conversion. The increase in dollars per transaction was attributable to a combination of factors, including less markdowns as a result of fewer promotions and deeper penetration in high-ticket categories such as tailored clothing. All regions outperformed the prior year third quarter, with the southeast region showing the strongest sales increase. The growth in our direct business of 5.5% was driven primarily by our web and app with continued growth from online marketplaces. Stores accelerated and outpaced the direct business in total during the third quarter, as consumers continued to return to stores at an increasing level. Compared to the third quarter of fiscal 2019, the last normalized selling year, our comparable sales for the third quarter of fiscal 2022 were up 33.7%. We believe the comparison to fiscal 2019 is relevant when evaluating our sales performance given the impact of the pandemic on the past two years. As compared to the third quarter of fiscal 2021, for the third quarter of fiscal 2022 comparable sales were up 7.4% in August, up 8.5% in September and up 10.3% in October. We are aware of the potential macro-economic impact on consumer spending in the fourth quarter. As a result, while we remain optimistic, we are conservatively forecasting comparable sales growth for the fourth quarter of fiscal 2022 to be single digits. For the first nine months of fiscal 2022, total sales increased 8.2% to $402.0 million, as compared to $371.6 million for the first nine months of fiscal 2021. Comparable sales for the first nine months of fiscal 2022, as compared to fiscal 2021, increased 10.9%, with comparable sales from our stores up 10.7% and our direct business up 11.5%. As we previously disclosed, during the first quarter of fiscal 2022, we ended our relationship with our primary wholesale customer. As a result, our wholesale revenues for the first nine months of fiscal 2022 were $0.4 million as compared to $4.8 million for the first nine months of fiscal 2021. Gross Margin Rate For the third quarter of fiscal 2022, our gross margin rate, inclusive of occupancy costs, was 50.0% as compared to a gross margin rate of 50.2% for third quarter of fiscal 2021. Our gross margin rate decreased by 20-basis points, with a decrease in merchandise margin of 70-basis points, partially offset by a 50-basis point improvement in occupancy costs due to the increased leverage from sales. The decrease in merchandise margin of 70-basis points was due to increased costs for raw materials, increased shipping costs per package, driven by higher fuel costs and surcharges, and a higher penetration of our marketplace business, which has commission costs. Those increases were partially offset by lower promotional markdowns. We continue to optimize our pricing and promotional cadence to mitigate cost increases and preserve our margin rates. For the first nine months of fiscal 2022, our gross margin rate, inclusive of occupancy costs, was 50.8%, as compared to a gross margin rate of 49.4% for the first nine months of fiscal 2021. The increase of 140-basis points was due to an improvement of 110-basis points in occupancy costs, due to the increased leverage from sales, and an increase in merchandise margins of 30-basis points, due primarily to lower promotional markdowns partially offset by an increase in freight and shipping costs. Selling, General and Administrative Expenses As a percentage of sales, SG&A (selling, general and administrative) expenses for the third quarter of fiscal 2022 were 37.3% as compared to 34.5% for the third quarter of fiscal 2021. The SG&A rate for third quarter of fiscal 2021 was abnormally low due to the surge in sales from pent-up demand and stimulus money while at the same time experiencing a shortage in store staffing. However, 20 our SG&A rate as a percentage of sales is favorable when compared against 39.5% in the third quarter of fiscal 2019, which was our last normalized third quarter, pre-pandemic. On a dollar basis, SG&A expenses increased by $6.4 million as compared to the third quarter of fiscal 2021. The increase was primarily due to an increase in marketing costs to drive customer acquisition and engagement, payroll costs to support sales growth, including merit adjustments and filling open positions, and an increase in performance-based incentive accruals. Our marketing costs for the third quarter of fiscal 2022 represented 5.9% of sales as compared to 4.5% in the third quarter of fiscal 2021. For fiscal 2022, we are expecting marketing costs to be approximately 6.2% of sales. For the first nine months of fiscal 2022, SG&A expenses were 35.9% of sales as compared to 32.5% of sales for the first nine months of fiscal 2021. Similar to the third quarter, the prior year rate was abnormally low. When compared against the first nine months of fiscal 2019 when the rate was 39.1% of sales, the savings that we have been able to realize in our SG&A costs is evident. As compared to the first nine months of fiscal 2021, SG&A costs increased $23.6 million, or 19.5%, as a result of increased marketing costs, payroll costs to support sales growth, annual merit adjustments, filling open positions and an increase in performance-based incentive accruals. Marketing costs represented 5.5% of sales for the first nine months of fiscal 2022 as compared to 3.7% for the first nine months of fiscal 2021. Management views SG&A expenses through two primary cost centers: Customer Facing Costs and Corporate Support Costs. Customer Facing Costs, which include store payroll, marketing and other store and direct operating costs, represented 20.4% of sales in the first nine months of fiscal 2022 as compared to 18.1% of sales in the first nine months of fiscal 2021. Corporate Support Costs, which include the distribution center and corporate overhead costs, represented 15.5% of sales in the first nine months of fiscal 2022 compared to 14.4% of sales in the first nine months of fiscal 2021. Impairment (Gain) of Assets There were no impairments or non-cash gains recognized in the third quarter of fiscal 2022. During the third quarter of fiscal 2021, we recorded non-cash gains of $1.2 million, and for the first nine months of fiscal 2022 and fiscal 2021, we recorded non-cash gains of $0.6 million and $2.3 million, respectively. These non-cash gains related to the reduction of our operating lease liability in connection with our decision to close certain retail stores, which resulted in a revaluation of the lease liability. The portion of the gains that related to previously recorded impairment charges against the operating lease right-of-use asset were included as an offset to previously recorded asset impairment charges. Accordingly, $1.1 million for the third quarter of fiscal 2021, and $0.4 million and $2.1 million for the first nine months of fiscal 2022 and fiscal 2021, respectively, were included in the Impairment (Gain) of Assets line of the Consolidated Statement of Operations. The remaining gains were recorded as a reduction to occupancy costs in each period. Depreciation and Amortization Depreciation and amortization for the third quarter of fiscal 2022 decreased to $3.8 million as compared to $4.1 million for the third quarter of fiscal 2021. For the first nine months of fiscal 2022, depreciation and amortization decreased to $11.7 million as compared to $13.0 million for the first nine months of fiscal 2021. The decrease was due to a lower depreciable cost base, especially from our store assets, due to our limited capital spending since fiscal 2020. Interest Expense, Net Interest expense for third quarter of fiscal 2022 was $0.1 million, as compared to $2.2 million for the third quarter of fiscal 2021. For the first nine months of fiscal 2022, interest expense was $0.4 million as compared to $4.3 million for the first nine months of fiscal 2021. The Company had no outstanding debt and no borrowings under its credit facility during the third quarter and first nine months of fiscal 2022 resulting in a decrease in interest expense as compared to the third quarter and first nine months of fiscal 2021. Interest expense for the third quarter and first nine months of fiscal 2021 included a prepayment penalty of $1.1 million associated with the Company's early prepayment of its long-term debt. Income Taxes Since the end of fiscal 2013, we have maintained a full valuation allowance against our deferred tax assets. During the second quarter of fiscal 2022, we determined that it was more likely than not that we would be able to realize the benefit of substantially all of our deferred tax assets in the United States. In reaching this determination, we considered the cumulative three years of profitability, our expectations regarding the generation of future taxable income as well as the overall improvement in the Company's business and its current market position. As a result, in the second quarter of fiscal 2022, we recognized a tax benefit related to the release of approximately $35.5 million in valuation allowance against our deferred tax assets in the United States. At October 29, 2022, we continued to provide a valuation allowance of $2.4 million, primarily against certain state and foreign net operating losses ("NOLs"). For the third quarter of fiscal 2022, we recorded an income tax provision of $2.1 million, which included a $2.0 million discrete tax expense to adjust the release of the valuation allowance to reflect an increase in third quarter earnings and full-year earnings forecast. 21 For the first nine months of fiscal 2022, we recorded an income tax benefit of $32.9 million, which included a discrete tax benefit of $33.5 million for the release of the valuation allowance. For the third quarter and first nine months of fiscal 2021, we recorded an income tax provision of $94,000 and $548,000, respectively, primarily related to income tax in states where NOL usage was statutorily limited. Net Income For the third quarter of fiscal 2022, we recorded net income of $10.5 million, or $0.16 per diluted share, as compared to net income of $13.7 million, or $0.20 per diluted share, for the third quarter of fiscal 2021. The decrease in earnings from the prior year third quarter was primarily due to the planned investment in marketing, an increase in payroll to support the increased sales volume and an increase in tax provision as a result of the reversal of the valuation allowance. As mentioned previously, our operating cost structure in fiscal 2021 was insufficient to support our 2022 sales growth objectives and was unsustainable over the long-term. For the first nine months of fiscal 2022, we have recorded net income of $80.8 million, or $1.20 per diluted share, as compared to net income of $46.8 million, or $0.69 per diluted share, for the first nine months of fiscal 2021. Results for the first nine months of fiscal 2022 include a non-cash tax benefit of $33.5 million, or $0.50 per diluted share, related to the release of substantially all of the Company's valuation allowance against its deferred tax assets. Inventory As of October 29, 2022, our inventory increased approximately $24.5 million to $106.8 million, as compared to $82.3 million at October 30, 2021. We are in a stronger inventory position at October 29, 2022 than at the end of the third quarter last year. This increase was purposeful in order to replenish several categories that were depleted last year. While our inventory has increased over last year's third quarter, inventory is down 11.1% and inventory turnover is up over 30% from the third quarter of fiscal 2019, or pre-pandemic levels. Managing our inventory remains a primary focus for us given the potential impact that inflation may have on consumer spending. As we head into the fourth quarter of fiscal 2022, we believe that we are in a strong inventory position. At October 29, 2022, our clearance inventory was 6.7% of our total inventory, as compared to 8.9% at October 30, 2021 and 10.0% at November 2, 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. At October 29, 2022, we had no outstanding debt, including no borrowings under our credit facility during the first nine months of fiscal 2022. We believe our cash on hand, availability under our credit facility, and ongoing cash generated from our operations will be sufficient to fund our working capital requirements, our stock repurchase program and capital expenditures for the next 12 months. We believe that cash flows from operating activities and cash on hand will also be sufficient to satisfy our capital requirements in the longer-term, however, to the extent future capital requirements exceed cash on hand plus cash flows from operating activities, we anticipate that working capital will be financed by our credit facility, as discussed below. For the first nine months of fiscal 2022, cash flow from operations decreased to $30.2 million as compared to $64.2 million for the first nine months of fiscal 2021. Free cash flow, a non-GAAP measure, decreased to $22.3 million for the first nine months of fiscal 2022 as compared to $61.3 million for the first nine months of fiscal 2021. The decrease in free cash flow was due to our purposeful replenishment of inventory in several categories that were depleted last year, the payout of incentive-based awards, and an increase in capital expenditures. Cash flow used from financing activities for the first nine months of fiscal 2022 improved by $59.1 million as compared to the first nine months of fiscal 2021, primarily due to the repayment in the prior year of amounts outstanding under our credit facility and the early repayment of our long-term debt. This was partially offset by the stock offering in February 2021 and the repurchase of our common stock, as discussed below, in the first nine months of fiscal 2022. Stock Repurchase Program In March 2022, the Company’s Board of Directors approved a stock repurchase program. Under the stock repurchase program, the Company may repurchase up to $15.0 million of its common stock through open market and privately negotiated transactions. For 22 the first nine months of fiscal 2022, the Company repurchased 2.9 million shares at an aggregate cost, including fees, of $12.7 million from available cash on hand. There were no stock repurchases in the third quarter of fiscal 2022. Shares of repurchased common stock are held as treasury stock. The stock repurchase program will expire in March 2023. Credit Facility On October 28, 2021, we entered into a $125.0 million revolving credit agreement with a five-year term, which replaced our prior credit facility that was due to expire in May 2023 (the "Credit 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 Credit Facility will be made pursuant to either a Base Rate loan or LIBOR Rate loan, at the Company's option. Base Rate loans bear interest, at a rate equal to (i) the greater of: (a) the Prime Rate, (b) the Federal Funds effective rate plus 0.50% per annum and (c) the daily LIBOR rate plus 1.00% per annum, plus (ii) a varying percentage, based on the Company’s average excess availability, of either 0.25% or 0.50%. LIBOR Rate loans, which may be either for 1 month or 3 months, bear interest at (i) the LIBOR rate, or the Benchmark Rate as defined in the credit agreement plus (ii) a varying percentage based on the Company’s average excess availability, of either 1.25% or 1.50%. We had no outstanding borrowings under our Credit Facility at October 29, 2022 and no borrowings during the first nine months of fiscal 2022. At October 29, 2022, outstanding standby letters of credit were $3.8 million and outstanding documentary letters of credit were $1.0 million. The average unused excess availability during the first nine months of fiscal 2022 was approximately $82.0 million and the unused excess availability at October 29, 2022 was $90.2 million. Capital Expenditures The following table sets forth the open stores and related square footage at October 29, 2022 and October 30, 2021, respectively: October 29, 2022 October 30, 2021 Store Concept Number of Stores Square Footage Number of Stores Square Footage (square footage in thousands) DXL Retail 218 1,664 220 1,678 DXL Outlets 16 80 16 80 Casual Male XL Retail 30 100 38 126 Casual Male Outlets 19 57 20 60 Total Stores 283 1,901 294 1,944 Our capital expenditures in fiscal 2021 and fiscal 2020 were very limited due to the pandemic. For fiscal 2022, we expect our capital expenditures will be approximately $10.0-$12.0 million as we make investments in technology related to our marketing and merchandising initiatives. We are also actively pursuing opportunities to relocate or convert our remaining Casual Male XL stores to DXL stores which may require some capital investment in fiscal 2022. During the first nine months of fiscal 2022, we closed 5 Casual Male XL retail stores and 2 DXL retail stores. We are also reviewing white space opportunities in markets where our store footprint is underpenetrated and relocation opportunities where we have an existing Casual Male XL store. We believe that our store portfolio is a vital asset to our business strategy and we expect to continue to invest in stores over the next several years as we further strengthen the store portfolio. Over the next three to five years, based on our preliminary store development plan, we believe that we could potentially open up to 50 new and relocated stores. CRITICAL ACCOUNTING POLICIES AND ESTIMATES There have been no material changes to the critical accounting policies and estimates disclosed in our Fiscal 2021 Annual Report. 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 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 income 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 23 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) : 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 nine months ended (in millions) October 29, 2022 October 30, 2021 Cash flow from operating activities (GAAP basis) $ 30.2 $ 64.2 Capital expenditures (7.9 ) (2.8 ) Free Cash Flow (non-GAAP basis) $ 22.3 $ 61.3 Adjusted EBITDA . Adjusted EBITDA is calculated as earnings before interest, taxes, depreciation and amortization and is before any impairment of assets, if any. We believe that adjusted EBITDA is useful to investors in evaluating our performance and is a key metric to measure profitability and economic productivity. The following table reconciles adjusted EBITDA from net income: For the three months ended For the nine months ended October 29, 2022 October 30, 2021 October 29, 2022 October 30, 2021 (in millions) Net income (GAAP basis) $ 10.5 $ 13.7 $ 80.8 $ 46.8 Add back: Impairment (gain) of assets — (1.1 ) (0.4 ) (2.1 ) Provision (benefit) for income taxes 2.1 0.1 (32.9 ) 0.5 Interest expense 0.1 2.2 0.4 4.3 Depreciation and amortization 3.8 4.1 11.7 13.0 Adjusted EBITDA (non-GAAP basis) $ 16.4 $ 19.0 $ 59.6 $ 62.5