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 our marketing efforts and raising brand awareness, store development, website replatform and future alliances and collaborations; expected marketing costs, gross margin rates and expected capital expenditures in 2024; expected store openings and store conversions for the remainder of fiscal 2024 and fiscal 2025; expected long-term plans for new stores; the expected completion and impact of our rollout of our improved eCommerce platform; and our expectations regarding liquidity needs for the next 12 months.These forward-looking statements generally relate to plans and objectives for future operations and are based upon management’s reasonable estimates of future results or trends. The forward-looking statements in this Quarterly Report should not be regarded as a representation by us or any other person that our objectives or plans will be achieved. The following discussion of our financial condition and results of operations should be read in conjunction with the unaudited Consolidated Financial Statements and notes to those statements included elsewhere in this Quarterly Report and our audited Consolidated Financial Statements for the year ended February 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. The Company encourages readers to refer to its filings with the SEC that set forth certain risks and uncertainties that may have an impact on future results and direction of our Company, including risks related to changes in consumer spending in response to economic factors; the impact of inflation with rising costs and high interest rates; the impact of ongoing worldwide conflicts, including 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 as 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 August 3, 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 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 18 result, certain transactions that begin online 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 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 For the six months ended August 3, 2024 July 29, 2023 August 3, 2024 July 29, 2023 (in millions, except percentage of sales and per share data) Sales $ 124.8 $ 140.0 $ 240.3 $ 265.5 Net income $ 2.4 $ 11.6 $ 6.2 $ 18.6 Adjusted EBITDA (Non-GAAP basis) $ 6.5 $ 22.9 $ 14.7 $ 35.6 Gross margin, as a percentage of sales 48.2 % 50.3 % 48.2 % 49.5 % SG&A expenses, as a percentage of sales 43.0 % 33.9 % 42.1 % 36.1 % Adjusted EBITDA margin (Non-GAAP basis) 5.2 % 16.4 % 6.1 % 13.4 % Per diluted share: Net income $ 0.04 $ 0.18 $ 0.10 $ 0.28 Our second quarter results reflect a challenging men's apparel market that was punctuated by a lack of foot traffic to our stores and lower conversion rates in our direct business. Customers gravitated towards promotions and lower price point goods, which signals a consumer who is carefully choosing where and how he spends his money. This was evident with the double-digit decrease we saw in store traffic and the lower conversion rates in our direct business, both of which were the primary contributors to our comparable sales decrease for the second quarter of 10.9%. Comparable sales for our stores were down 10.0% and our direct business was down 12.8%. Despite a disappointing sales performance, we maintained a flat merchandise margin, with meaningfully less inventory, and a strong balance sheet. Our occupancy costs and selling, general and administrative (SG&A) expenses for the second quarter of fiscal 2024 were in line with our expectations and included an increase in marketing costs, specifically related to our brand awareness campaign that launched mid-May. While we continued to diligently manage our operating expenses, given the pressure on sales, some of our cost structure was negatively deleveraged by the sales shortfall. As of August 3, 2024, we had cash and investments of $63.2 million as compared to $62.8 million at July 29, 2023 with no debt outstanding and unused excess availability of $69.9 million. We continued to maintain our strong financial position, successfully managing our liquidity and our inventory levels, which were down 10.2% to last year's second quarter. Progress on Our Long-Range Plan and Future Growth Strategy We have made substantial progress on our long-term strategic growth initiatives and continue to 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. However, given the current environment and the concern that this continued pressure on sales will continue, our near-term priority is to focus on our balance sheet, achieving profitable sales, and generating free cash flow. For this reason, we have made the difficult decision to pivot from the next wave of our planned brand campaign in the Fall, in favor of other advertising spend that we believe will stimulate traffic in the short term. We have also decided to slow our store roll out to lower our capital expenditure burden. It is important to emphasize, we remain very enthusiastic about the brand campaign and store development, and we are not abandoning our growth ambitions. We will stay focused on executing our fundamentals and controlling what we can control as we cycle through the current environment. Marketing & Brand Building : We launched our new brand advertising campaign on May 13 th to build awareness of our brand. The campaign ran in a three-matched-market test in Boston, Detroit, and St. Louis and the results were positive in all three markets, with increased traffic, sessions, and customer acquisition. Our initial plan was to run a second similar campaign in the second half of the year, however, given current market conditions, we believe pivoting the brand marketing dollars back into our traditional marketing channels will be more productive. 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 19 + 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 six months of fiscal 2024, we opened two new stores and subsequent to the end of the quarter, on August 17th, we opened our third store, with five more expected later this year. We are evaluating our current rollout schedule and will likely reduce the number of expected stores, opening in fiscal 2025, from 15 to 10. New Website Platform : We are transitioning to a new and improved eCommerce platform. The platform addresses friction online and will drive a richer and simpler consumer experience, as well as drive measurably greater speed and agility. We completed our first phase of this project in the first quarter, our second phase is expected to be released by the end of September, and the last phase is on schedule to be completed in January 2025. 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 : Last quarter we announced our alliance with Nordstrom to launch DXL's Big & Tall assortment on their digital marketplace platform. Our merchandise offering launched on the marketplace on May 28 th . To date, we have been pleased with the results and we are currently looking to expand our current product offering. We believe this collaboration will allow us to bring the DXL experience beyond our four walls and directly to the Nordstrom customer, thereby further extending DXL’s relationship with the female consumer. 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 and six months ended August 3, 2024 and July 29, 2023: For the Three Months Ended For the Six Months Ended (in thousands) August 3, 2024 July 29, 2023 August 3, 2024 July 29, 2023 Store sales $ 87,845 70.4% $ 97,445 69.6% $ 168,693 70.2 % $ 184,742 69.6 % Direct sales 36,975 29.6% 42,598 30.4% 71,616 29.8 % 80,743 30.4 % Total sales $ 124,820 $ 140,043 $ 240,309 $ 265,485 Total sales for the second quarter of fiscal 2024 were $124.8 million, as compared to $140.0 million in the second quarter of fiscal 2023. The decrease in total sales was primarily attributable to a decrease in comparable sales for the second quarter of 10.9%. The remainder of the decrease was due to a $1.9 million decrease due to the shift in calendar weeks due to the 53rd week in fiscal 2023 which was partially offset by an increase in non-comparable sales of $1.7 million. The comparable sales decrease of 10.9% consisted of comparable sales from our stores down 10.0% and our direct business down 12.8%. Similar to our first quarter results, the decrease in comparable sales during the second quarter of fiscal 2024 was principally driven by a decrease in traffic in our stores and decreased conversion in our direct business. For the first six months of fiscal 2024, total sales of $240.3 million decreased 9.5% as compared to $265.5 million for the first six months of fiscal 2023. The decrease was primarily driven by a decrease in comparable sales of 11.1%, with stores down 10.7% and our direct business down 12.0%. This decrease in comparable sales was slightly offset by an increase in non-comparable sales of $3.4 million and a $1.0 million shift in calendar weeks due to the 53rd week in fiscal 2023. Gross Margin Rate For the second quarter of fiscal 2024, our gross margin rate, inclusive of occupancy costs, was 48.2% as compared to a gross margin rate of 50.3% for the second quarter of fiscal 2023. Our gross margin rate decreased by 210-basis points, which was driven by an increase in occupancy costs, as a percentage of sales, primarily due to the deleveraging of sales and increased rents as a result of lease extensions. Our merchandise margin, which was flat to the second quarter of fiscal 2023, was achieved despite an increase in markdowns associated with selected price matching for some of our national brands, as well as markdowns on seasonal merchandise to ensure inventory levels remain healthy as we head into the fall season. These increases were offset by favorable shipping costs and a reduction in loyalty expense. For the first six months of fiscal 2024, our gross margin rate, inclusive of occupancy costs, was 48.2% as compared to a gross margin rate of 49.5% for the first six months of fiscal 2023. The decrease of 130-basis points was due to an increase of 190-basis points in occupancy costs due to the deleveraging of sales and increased rents. This increased cost was partially offset by an increase in merchandise margin of 60-basis points, driven by favorable shipping costs and a reduction in loyalty expense and marketplace commissions. 20 For 2024, we expect gross margin rates to be approximately 60 to 110-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 second quarter of fiscal 2024 were 43.0% as compared to 33.9% for the second quarter of fiscal 2023. For the first six months of fiscal 2024, SG&A expenses, as a percentage of sales, were 42.1% as compared to 36.1% for the first six months of fiscal 2023. On a dollar basis, SG&A expenses increased by $6.2 million and $5.5 million for the second quarter and first six months of fiscal 2024 as compared to the second quarter and first six months of fiscal 2023. The increase was principally due to an increase in marketing costs, which included our brand campaign that launched in the second quarter, of $3.9 million and $4.3 million for the second quarter and first six months of fiscal 2024, as compared to the respective prior year periods. The remainder of the increase was due to an increase in operating costs to support our long-range growth initiatives and increased healthcare costs. Marketing costs were 8.8% of sales for the second quarter of fiscal 2024 as compared to 5.0% of sales for the second quarter of fiscal 2023. For the first six months of fiscal 2024, marketing costs were 7.6% as compared to 5.3% for the first six months of fiscal 2023. For fiscal 2024, marketing costs are expected to be approximately 7.0% 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 24.2% of sales in the first six months of fiscal 2024 as compared to 20.3% of sales in the first six months of fiscal 2023. Corporate Support Costs, which include the distribution center and corporate overhead costs, represented 17.9% of sales in the first six months of fiscal 2024 as compared to 15.8% of sales in the first six months of fiscal 2023. Depreciation and Amortization Depreciation and amortization for the second quarter of fiscal 2024 decreased to $3.4 million as compared to $3.5 million for the second quarter of fiscal 2023. For the first six months of fiscal 2024 depreciation and amortization was $6.7 million as compared to $6.9 million for the first six months 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 in fiscal 2024 as we have started to open new store locations and are investing in certain other infrastructure and technology projects. Loss from Termination of Retirement Plan Results for the second quarter and first six months of fiscal 2023 included a charge of $4.2 million related to a partial settlement of our pension obligation. The termination and final settlement of the remaining pension obligation was completed in the fourth quarter of fiscal 2023. Interest Income, Net Net interest income for the second quarter of fiscal 2024 was $0.6 million, as compared to $0.5 million for the second quarter of fiscal 2023. Net interest income for the first six months of fiscal 2024 was $1.1 million, as compared to $0.8 million for the first six months of fiscal 2023. Interest income was earned from investments in U.S. government-backed investments and money market accounts. Interest costs for all periods were immaterial because we had no outstanding debt and no borrowings under our credit facility. Income Taxes Our 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 second quarter of fiscal 2024 and fiscal 2023, our effective tax rate was 35.2% and 26.4%, respectively, and for the first six months of fiscal 2024 and fiscal 2023, our effective tax rate was 32.3% and 26.5%, 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 second quarter and first six months of fiscal 2023. Net Income For the second quarter of fiscal 2024, we recorded net income of $2.4 million, or $0.04 per diluted share, as compared to net income of $11.6 million, or $0.18 per diluted share, for the second quarter of fiscal 2023. For the first six months of fiscal 2024, net income was $6.2 million, or $0.10 per diluted share, as compared to $18.6 million, or $0.28 per diluted share, for the first six months of fiscal 2023. The decrease in earnings was driven primarily by a decrease in sales and to a lesser extent an increase in marketing costs associated with our brand campaign. 21 Results for the second quarter and first six months of fiscal 2023 included a charge of $4.2 million related to the partial settlement of the pension plan . Inventory As of August 3, 2024, our inventory decreased by approximately $8.9 million to $78.6 million, as compared to $87.5 million at July 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 August 3, 2024, our clearance inventory was 10.4% of our total inventory, as compared to 9.3% at July 29, 2023. Our inventory position is very strong and our clearance levels, while slightly above our benchmark of 10%, are in line with expectations given our 10% decrease in total inventory. 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 August 3, 2024, we had no outstanding debt, including no borrowings under our credit facility during the first six 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. For the first six months of fiscal 2024, cash flow from operations was $16.0 million as compared to $26.2 million for the first six months of fiscal 2023. Free cash flow, a non-GAAP measure, was $3.2 million for the first six months of fiscal 2024 as compared to $21.6 million for the first six months of fiscal 2023. The decrease in free cash flow was primarily due to a decrease in operating income, driven by our sales decrease, and increases in capital expenditures of $4.4 million for store development and $3.7 million for other capital projects. Cash flow used for investing activities was $21.9 million for the first six months of fiscal 2024 as compared to $48.1 million for the first six months of fiscal 2023. This decrease of $26.2 million was primarily due to a decrease in net purchases of short-term investments, 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. The stock repurchase program was completed in the first quarter of fiscal 2024, with the repurchase of 52,802 shares at a total cost, including fees, of $211,182. 22 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 August 3, 2024 and no borrowings during the first six months of fiscal 2024. At August 3, 2024, outstanding standby letters of credit were $4.2 million and outstanding documentary letters of credit were $0.9 million. The average unused excess availability during the first six months of fiscal 2024 was approximately $73.4 million and the unused excess availability at August 3, 2024 was $69.9 million. Capital Expenditures The following table sets forth the open stores and related square footage at August 3, 2024 and July 29, 2023, respectively: August 3, 2024 July 29, 2023 Store Concept Number of Stores Square Footage Number of Stores Square Footage (square footage in thousands) DXL Retail 233 1,729 219 1,666 DXL Outlets 15 76 16 80 Casual Male XL Retail 17 55 27 88 Casual Male Outlets 19 57 19 57 Total Stores 284 1,917 281 1,891 During the first six months of fiscal 2024, we opened two new DXL stores, located in Coon Rapids, Minnesota and Thousand Oaks, California, completed a DXL remodel and closed one of our DXL stores. During the second half of fiscal 2024, we expect to open six additional DXL stores, convert five Casual Male stores to the DXL store format and remodel four more of our existing DXL stores. We expect our capital expenditures to range from $22.0 million to $25.0 million, net of tenant incentives, in fiscal 2024. Over the next 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. In an effort to better manage our capital expenditures, we expect to open 10 stores in 2025 which is down from our previous estimate of 15 new stores in 2025. 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, free cash flow before capital expenditures for store development, 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, net income per diluted share 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) : 23 Free Cash Flow. We define free cash flow as cash flow from operating activities less capital expenditures. We define free cash flow before capital expenditures for store development as cash flow from operations activities less all capital expenditures except capital expenditures for store development. Capital expenditures for store development includes capital expenditures for new stores, conversions of Casual Male XL stores to DXL and remodels. Capital expenditures related to store relocations and maintenance are not included in store development. 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 development. We expect to fund our ongoing capital expenditures with cash flow from operations. The following table reconciles free cash flow: For the six months ended (in millions) August 3, 2024 July 29, 2023 Cash flow from operating activities (GAAP basis) $ 16.0 $ 26.2 Capital expenditures, excluding store development (7.6 ) (3.9 ) Free Cash Flow before capital expenditures for store development (non-GAAP basis) $ 8.4 $ 22.4 Capital expenditures for store development (5.2 ) (0.8 ) Free Cash Flow (non-GAAP basis) $ 3.2 $ 21.6 Adjusted EBITDA and Adjusted EBITDA Margin . Adjusted EBITDA is calculated as earnings before interest, taxes, depreciation and amortization and adding back impairment (gain) of assets, if any, and loss on termination of retirement plans. 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 For the six months ended August 3, 2024 July 29, 2023 August 3, 2024 July 29, 2023 (in millions) Net income (GAAP basis) $ 2.4 $ 11.6 $ 6.2 $ 18.6 Add back: Loss on termination of retirement plans — 4.2 — 4.2 Provision for income taxes 1.3 4.2 3.0 6.7 Interest income, net (0.6 ) (0.5 ) (1.1 ) (0.8 ) Depreciation and amortization 3.4 3.5 6.7 6.9 Adjusted EBITDA (non-GAAP basis) $ 6.5 $ 22.9 $ 14.7 $ 35.6 Sales $ 124.8 $ 140.0 $ 240.3 $ 265.5 Adjusted EBITDA margin (non-GAAP), as a percentage of sales 5.2 % 16.4 % 6.1 % 13.4 %