DESTINATION XL GROUP, INC. 10-Q

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 long-range strategic plan and the expected impact of our strategic initiatives on future growth, including with respect to raising brand awareness, store development, website replatform and future alliances and collaborations; expected marketing costs, gross margin rates and expected capital expenditures in 2024; and expected changes in our store portfolio and long-term plans for new or 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 February 3, 2024, included in our Annual Report on Form 10-K for the year ended February 3, 2024, as filed with the Securities and Exchange Commission on March 21, 2024 (our “Fiscal 2023 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 changes in consumer spending in response to economic factors; the impact of inflation with rising costs and high interest rates; the Israel-Hamas conflict and the ongoing Russian invasion of Ukraine on the global economy; potential labor shortages; and the Company’s ability to execute on its marketing, digital, store and collaboration strategies, ability to grow its market share, predict customer tastes and fashion trends, forecast sales growth trends and compete successfully in the United States men’s big and tall apparel market, and the other risks and uncertainties set forth in the “Risk Factors” section in Part I, Item 1A of our Fiscal 2023 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 May 4, 2024, we operated 233 Destination XL stores, 15 DXL outlet stores, 17 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 February 1, 2025, February 3, 2024 and January 28, 2023 as "fiscal 2024", “fiscal 2023,” and “fiscal 2022” respectively. Fiscal 2024 is a 52-week period, fiscal 2023 was a 53-week period and fiscal 2022 a was a 52-week period. 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. 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 result, certain 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 18 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 relocated 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 is temporarily closed for more than 7 days, it is removed from the calculation of comparable sales until it reopens and upon its anniversary is once again removed from the calculation until the reopen date. 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. EXECUTIVE SUMMARY For the three months ended May 4, 2024 April 29, 2023 (in millions, except percentage of sales and per share data) Sales $ 115.5 $ 125.4 Net income $ 3.8 $ 7.0 Adjusted EBITDA (Non-GAAP basis) $ 8.2 $ 12.6 Gross margin. as a percentage of sales 48.2 % 48.6 % SG&A expenses, as a percentage of sales 41.1 % 38.5 % Adjusted EBITDA margin (Non-GAAP basis) 7.1 % 10.1 % Per diluted share: Net income $ 0.06 $ 0.11 Our sales for the first quarter of fiscal 2024 were below our expectations. We believe that many of our customers are still feeling the economic impacts of high inflation and have chosen to moderate their discretionary spending on apparel. This behavior resulted in lower than expected traffic levels to our stores and lower conversion rates in our direct business, both of which were the primary contributors to our comparable sales decrease of 11.3% in the first quarter. Comparable sales for our stores were down 11.4% and our direct business was down 11.0%. Despite these economic impacts on our top line, we are still maintaining our low promotional stance and proactively managing our inventory levels and receipts. This enabled us to end the quarter in a strong margin position, with our merchandise margin improvement nearly mitigating the deleveraging of occupancy costs. This gross margin performance, coupled with our lower SG&A expenses, enabled us to end the first quarter of fiscal 2024 with net income of $0.06 per diluted share and an adjusted EBITDA margin (a non-GAAP measure) of 7.1%. We continued to maintain our strong financial position, successfully managing our liquidity and our inventory levels, which are down 9.0% to last year's first quarter. Our inventory turn has improved by almost 30% from fiscal 2019 and our clearance inventory remains below our 10% benchmark. As of May 4, 2024, we had cash and investments of $53.2 million as compared to $46.0 million at April 29, 2023 with no debt outstanding and unused excess availability of $79.2 million. With cash on hand, no outstanding debt and full availability under our credit facility, we are continuing to pursue our strategic initiatives this year to grow our business. Progress on Our Long-Range Plan and Future Growth Strategy We continue to make progress on our long-term strategic growth initiatives and believe that these initiatives will lead to greater brand awareness, enabling us to take a greater share of the addressable market, and grow our top line: Marketing & Brand Building : Working with our newly retained creative and media agencies, we have developed a campaign that we believe will drive an emotional connection to the DXL brand and drive brand awareness. Subsequent to the end of the first quarter of fiscal 2024, on May 13th, we launched our new multichannel marketing campaign in three test markets. This is our first advertising campaign since 2017. Media includes broadcast television, connected TV, streaming video, audio, paid digital channels, and out-of-home, as well as all-owned marketing. We are prepared to invest cautiously in this initiative, with total marketing costs increasing to approximately 7.0%-7.5% of sales in fiscal 2024. If we experience favorable results, we plan to fund our marketing and brand building initiative at greater levels over time. Store Development : While we have stores in every major metropolitan market across the United States, there are geographic voids in certain markets where big + tall consumers are not being served by a DXL store. Our consumer research has indicated that 44% of big + tall men self-reported they do not shop with us because a store is not near them, while 35% self-reported that they do not shop with us because a store location is not convenient. During the first quarter of fiscal 2024, we opened our first of eight stores that we plan to open in fiscal 2024, with 15 new stores per year planned in fiscal 2025 through 2027. 19 New Website Platform : We are transitioning our website from our legacy infrastructure to a new, modern commerce platform, with various features and functionality launching in a phased approach with the first phase launching the last week of May 2024. A second phase is scheduled to launch in late summer with the final phase occurring after the holiday season. We believe this upgrade will provide immediate performance improvements and customer experience benefits by eliminating friction points, optimizing search capability, and enhancing speed and response times. We expect this new platform, engineered by a leading eCommerce technology provider, will position us to respond faster and more effectively to make changes in the future. Alliances & Collaborations : Collaborating with other retailers allows us to overcome the challenge of reaching consumers who may never be exposed to the DXL brand through our organic channels. On April 29th, we announced our latest collaboration with Nordstrom which will allow us to bring the DXL experience beyond our four walls and directly to the Nordstrom customer. We are very excited to be launching DXL on Nordstrom's digital marketplace platform. We are currently in discovery mode for collaborative offers with several other brands and we are optimistic that some of these brands could play a role in our assortment, similar to the collaboration with UNTUCKIT. RESULTS OF OPERATIONS Sales The following table presents sales by segment for the three months ended May 4, 2024 and April 29, 2023: For the Three Months Ended (in thousands) May 4, 2024 April 29, 2023 Store sales $ 80,848 70.0% $ 87,297 69.6% Direct sales 34,641 30.0% 38,145 30.4% Total sales $ 115,489 $ 125,442 Total sales for the first quarter of fiscal 2024 were $115.5 million, as compared to $125.4 million in the first quarter of fiscal 2023. Comparable sales for the first quarter decreased 11.3% with comparable sales from our stores down 11.4% and our direct business down 11.0%. The decrease in comparable store sales was slightly offset by an increase in non-comparable sales of $1.8 million and a $3.0 million shift in calendar weeks due to the 53rd week in fiscal 2023. The decrease in comparable sales during the first quarter was primarily driven by a decrease in traffic in our stores. While traffic was down, our three new stores that opened in fiscal 2023 in Queens, New York, Cincinnati, Ohio, and Pasadena, California all drove strong dollars per transaction and new-to-file rates that were approximately three times the chain average during the first quarter of 2024. The eleven Casual Male stores that were converted to DXL in fiscal 2023 also performed stronger than the chain average, with comparable sales approximately flat. The decrease in our direct business was primarily driven by a decrease in conversion rates. Gross Margin Rate For the first quarter of fiscal 2024, our gross margin rate, inclusive of occupancy costs, was 48.2% as compared to a gross margin rate of 48.6% for the first quarter of fiscal 2023. Our gross margin rate decreased by 40-basis points, with an increase of 175-basis points in occupancy costs primarily due to the deleveraging of sales and increased rents as a result of lease extensions, which was partially offset by an increase in merchandise margin of 135-basis points. The improvement in merchandise margin of 135-basis points was due to a shift in merchandise mix, favorable shipping costs and a reduction in loyalty expense and marketplace commissions. For 2024, we expect gross margin rates to be approximately 30- to 50-basis points lower than fiscal 2023 and reflect some occupancy deleveraging due to lower sales expectations. Selling, General and Administrative Expenses As a percentage of sales, SG&A (selling, general and administrative) expenses for the first quarter of fiscal 2024 were 41.1% as compared to 38.5% for the first quarter of fiscal 2023. On a dollar basis, SG&A expenses decreased by $0.8 million for the first quarter of fiscal 2024 as compared to the first quarter of fiscal 2023. The decrease was primarily due to a decrease in store payroll and performance-based incentive accruals, partially offset by an increase in advertising costs and operating costs to support our long-range growth initiatives. Marketing costs were 6.3% of sales for the first quarter of fiscal 2024 as compared to 5.5% of sales for the first quarter of fiscal 2023. For fiscal 2024, marketing costs are expected to be approximately 7.0%-7.5% of sales. 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 23.0% of sales in the first quarter of fiscal 2024 as compared to 21.1% of sales in the first quarter of fiscal 2023. Corporate Support Costs, 20 which include the distribution center and corporate overhead costs, represented 18.1% of sales in the first quarter of fiscal 2024 as compared to 17.4% of sales in the first quarter of fiscal 2023. Depreciation and Amortization Depreciation and amortization for the first quarter of fiscal 2024 decreased to $3.3 million as compared to $3.5 million for the first quarter of fiscal 2023. The decrease was due to a lower depreciable cost base, especially from our store assets, due to our limited capital spending since fiscal 2020. Our capital expenditures have increased as we have started to open new store locations and are investing in certain other infrastructure and technology projects. Interest Income, Net Net interest income for the first quarter of fiscal 2024 was $0.6 million, as compared to $0.3 million for the first quarter of fiscal 2023. Interest income was earned from investments in U.S. government-backed investments and money market accounts. Interest costs for both periods were immaterial because we had no outstanding debt and no borrowings under our credit facility during either period. Income Taxes Our tax provision for income taxes for interim periods is determined using an estimate of our annual effective tax rate, adjusted for discrete items, if any. Each quarter, we update our estimate of the annual effective tax rate and make a year-to-date adjustment to the provision. For the first quarter of fiscal 2024 and fiscal 2023, our effective tax rate was 30.4% and 26.6%, respectively. The increase in the effective tax rate was primarily due to permanent book to tax differences combined with a lower pretax income as compared to the first quarter of fiscal 2023. Net Income For the first quarter of fiscal 2024, we recorded net income of $3.8 million, or $0.06 per diluted share, as compared to net income of $7.0 million, or $0.11 per diluted share, for the first quarter of fiscal 2023. The decrease in earnings was driven by the decrease in sales, which was partially offset by improvement in merchandise margin and lower selling, general and administrative expenses. Inventory As of May 4, 2024, our inventory decreased by approximately $9.0 million to $91.2 million, as compared to $100.3 million at April 29, 2023. We continue to take proactive measures to manage our inventory and adjust our receipt plan given the ongoing macroeconomic factors affecting consumer spending. At May 4, 2024, our clearance inventory was 9.7% of our total inventory, as compared to 7.8% at April 29, 2023 and still below our historical benchmark of approximately 10.0%. Our inventory turnover rate has improved by almost 30% from fiscal 2019. SEASONALITY Historically, and consistent with the retail industry, we have experienced seasonal fluctuations as it relates to our operating income, net income, and free cash flow. Traditionally, a significant portion of our operating income, net income, and free cash flow is generated in the second and fourth quarters. Our inventory is typically at peak levels by the end of the third quarter, which represents a significant use of cash, which is then relieved in the fourth quarter as we sell-down our inventory through the holiday shopping season. LIQUIDITY AND CAPITAL RESOURCES Our primary sources of liquidity are our cash and cash equivalents, short-term investments, cash generated from operations and availability under our credit facility, which is discussed below. At May 4, 2024, we had no outstanding debt, including no borrowings under our credit facility during the first three months of fiscal 2024. Cash that is in excess of our forecasted needs may be invested in money market accounts and U.S. government-backed securities. We believe that our cash and cash equivalent balances, short-term investments, cash generated from operations, and borrowings available to us under our credit facility will be adequate to meet our liquidity needs and capital expenditure requirements for at least the next 12 months. However, we remain cautious regarding the effect that the current macroeconomic conditions may have on consumer spending, including inflation, high interest costs, and other geopolitical conflicts around the world. We also believe that cash flows from operating activities and cash on hand will be sufficient to satisfy our current capital requirements. In the longer term, 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. 21 For the first three months of fiscal 2024, cash flow from operations was $(1.1) million as compared to $(4.2) million for the first three months of fiscal 2023. Free cash flow, a non-GAAP measure, was $(7.0) million for the first three months of fiscal 2024 as compared to $(5.9) million for the first three months of fiscal 2023. The decrease in free cash flow was primarily due to an increase in capital expenditures primarily related to the store openings as well as due to a decrease in operating income. Cash flow used for investing activities decreased by $7.7 million for the first three months of fiscal 2024 as compared to the first three months of fiscal 2023, primarily due to a net decrease in short-term investment activity, partially offset by an increase in capital expenditures. Stock Repurchase Program In March 2023, the Company’s Board of Directors approved a stock repurchase program, which was subsequently amended in November 2023. Under the stock repurchase program, as amended, the Company was authorized to repurchase up to $25.0 million of its common stock through open market and privately negotiated transactions. During the first quarter of fiscal 2024, we repurchased 52,802 shares at a total cost, including fees, of $211,182, completing the stock repurchase program. Credit Facility The Company has a $125.0 million revolving credit agreement with Citizens Bank, N.A., with a maturity date of October 28, 2026 (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 under the Credit Facility bear interest at either a Base Rate loan or Daily Simple SOFR rate, 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 Simple SOFR rate plus 1.00% per annum (provided the Base Rate shall never be less than the Floor (as defined in the Credit Facility)), plus (ii) a varying percentage, based on the Company’s average excess availability, of either 0.25% or 0.50% (the “Applicable Margin”). Daily Simple SOFR loans will bear interest at a rate equal to (i) the Daily Simple SOFR rate plus an adjustment of 0.10% (provided the Daily Simple SOFR rate shall never be less than the Floor), plus (ii) the Applicable Margin. Any swingline loan will continue to bear interest at a rate equal to the Base Rate plus the Applicable Margin. We are subject to an unused line fee of 0.25%. We had no outstanding borrowings under the Credit Facility at May 4, 2024 and no borrowings during the first three months of fiscal 2024. At May 4, 2024, outstanding standby letters of credit were $4.3 million and outstanding documentary letters of credit were $1.5 million. The average unused excess availability during the first three months of fiscal 2024 was approximately $71.8 million and the unused excess availability at May 4, 2024 was $79.2 million. Capital Expenditures The following table sets forth the open stores and related square footage at May 4, 2024 and April 29, 2023, respectively: May 4, 2024 April 29, 2023 Store Concept Number of Stores Square Footage Number of Stores Square Footage (square footage in thousands) DXL Retail 233 1,732 218 1,663 DXL Outlets 15 76 16 80 Casual Male XL Retail 17 55 28 92 Casual Male Outlets 19 57 19 57 Total Stores 284 1,920 281 1,892 During the first quarter of fiscal 2024, we opened a new DXL store in Coon Rapids, Minnesota. Subsequent to the end of the first quarter, we opened our second store in Thousand Oaks, California and expect to open six additional DXL stores by end of fiscal 2024. During fiscal 2024, we also plan to convert five Casual Male stores to the DXL store format and remodel five of our existing DXL stores. We expect our capital expenditures to range from $22.0 million to $25.0 million in fiscal 2024. Over the next three to five years, we believe we could potentially open approximately 50 net new DXL stores across the country, which could average 6,000 square feet or 300,000 sq. ft. in total, a 15% increase over our current square footage. 22 CRITICAL ACCOUNTING POLICIES AND ESTIMATES There have been no material changes to the critical accounting policies and estimates disclosed in our Fiscal 2023 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, adjusted EBITDA and adjusted EBITDA margin 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 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. Management believes this metric is important to investors because it demonstrates the Company's ability to strengthen liquidity while supporting its capital projects and new store growth. We expect to fund our ongoing capital expenditures with cash flow from operations. The following table reconciles free cash flow: For the three months ended (in millions) May 4, 2024 April 29, 2023 Cash flow from operating activities (GAAP basis) $ (1.1 ) $ (4.2 ) Capital expenditures (5.9 ) (1.7 ) Free Cash Flow (non-GAAP basis) $ (7.0 ) $ (5.9 ) Adjusted EBITDA and Adjusted EBITDA Margin . Adjusted EBITDA is calculated as earnings before interest, taxes, depreciation and amortization and is before impairment (gain) of assets, if any. Adjusted EBITDA margin is calculated as Adjusted EBITDA divided by Sales. We believe that providing adjusted EBITDA and adjusted EBITDA margin is useful to investors in evaluating our performance and are key metrics to measure profitability and economic productivity. The following table reconciles adjusted EBITDA from net income and calculates adjusted EBITDA margin: For the three months ended May 4, 2024 April 29, 2023 (in millions) Net income (GAAP basis) $ 3.8 $ 7.0 Add back: Provision for income taxes 1.7 2.5 Interest income, net (0.6 ) (0.3 ) Depreciation and amortization 3.3 3.5 Adjusted EBITDA (non-GAAP basis) $ 8.2 $ 12.6 Sales $ 115.5 $ 125.4 Adjusted EBITDA margin (non-GAAP), as a percentage of sales 7.1 % 10.1 %