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 November 2, 2024, we operated 239 Destination XL stores, 15 DXL outlet stores, 12 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 and February 3, 2024 as "fiscal 2024" and “fiscal 2023,” respectively. Fiscal 2024 is a 52-week period and fiscal 2023 was a 53-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 are ultimately completed at the store level. Similarly, if a customer visits a store and the 18 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 nine months ended November 2, 2024 October 28, 2023 November 2, 2024 October 28, 2023 (in millions, except percentage of sales and per share data) Sales $ 107.5 $ 119.2 $ 347.8 $ 384.7 Net income (loss) $ (1.8 ) $ 4.0 $ 4.4 $ 22.6 Adjusted EBITDA (Non-GAAP basis) $ 1.0 $ 8.6 $ 15.7 $ 44.2 Gross margin, as a percentage of sales 45.1 % 47.5 % 47.2 % 48.8 % SG&A expenses, as a percentage of sales 44.1 % 40.2 % 42.7 % 37.4 % Adjusted EBITDA margin (Non-GAAP basis) 1.0 % 7.3 % 4.5 % 11.5 % Per diluted share: Net income (loss) $ (0.03 ) $ 0.06 $ 0.07 $ 0.35 Our third quarter performance continued to be challenged by consumer spending headwinds, which resulted in lower traffic to our stores and lower conversion online. These were the primary contributors to our comparable sales decrease for the third quarter of 11.3%. Comparable sales for our stores were down 9.9% and our direct business was down 14.7%. Our customers have been very price conscious and, when they shop, they are gravitating toward our more moderate and entry-level price points. Despite the disappointing sales performance, we have maintained our disciplined operating regimen, and we have avoided a material erosion in merchandise margin, while keeping our inventory healthy and maintaining a strong balance sheet. 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 November 2, 2024, we had cash and investments of $43.0 million as compared to $60.4 million at October 28, 2023 with no debt outstanding and unused excess availability of $78.1 million. We continued to maintain our strong financial position, successfully managing our liquidity and our inventory levels, which were down 10.7% to October 28, 2023. In September 2024, our Board of Directors approved a $15.0 million stock repurchase program and during the third quarter of fiscal 2024, we utilized $10.2 million of our excess cash on hand to repurchase 3.6 million shares of our common stock. Progress on Our Long-Range Plan and Future Growth Strategy Through the first nine months of fiscal 2024, we continued to move forward with our long-term strategic growth initiatives, and we continue to believe that these initiatives will give us the opportunity to build greater brand awareness and a greater opportunity for long-term growth. However, given the continued pressure on sales, we have paused our brand campaign for the fourth quarter of fiscal 2024 and are reducing the planned number of new store openings in fiscal 2025. While we still remain committed to our long-range plan, we believe pulling back on parts of our initiatives is prudent to ensure that we remain fiscally responsible with our investment spending and focused on near-term profitability and positive free cash flow. Marketing & Brand Building : We launched our new brand advertising campaign in the second quarter of fiscal 2024 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. However as we disclosed in the second quarter of fiscal 2024, given current market conditions, we have paused our brand campaign at this time and are instead investing our marketing dollars back into our traditional marketing channels that will be more productive, including a video campaign on various social media platforms. 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 nine months of fiscal 2024, we opened four new stores, with four more 19 expected by the end of the fiscal year. We are developing our fiscal 2025 store development schedule and are targeting 8 new store openings, down from our previous expectation of 10 new store openings. New Website Platform : We are making significant progress in our transition to a new and improved eCommerce platform, with 100% of the site traffic now on our new platform. The platform addresses friction online and will drive a richer and simpler consumer experience, as well as drive measurably greater speed and agility. During the third quarter, we completed the second phase of this project, which included catalog pages, product detail pages, and a new site search experience. The last phase, which will improve the checkout process and other user experiences, is scheduled to be completed in early 2025. 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 : In the second quarter of fiscal 2024, we launched our DXL Big & Tall merchandise assortment on Nordstrom's digital marketplace platform and we currently have 37 brands and over 1,400 styles available on the platform, with plans for an additional 500 styles during the next month. 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 our relationship with the female consumer. RESULTS OF OPERATIONS Sales The following table presents sales by segment for the three and nine months ended November 2, 2024 and October 28, 2023: For the Three Months Ended For the Nine Months Ended (in thousands) November 2, 2024 October 28, 2023 November 2, 2024 October 28, 2023 Store sales $ 76,175 70.9% $ 82,997 69.6% $ 244,868 70.4 % $ 267,739 69.6 % Direct sales 31,328 29.1% 36,191 30.4% 102,944 29.6 % 116,934 30.4 % Total sales $ 107,503 $ 119,188 $ 347,812 $ 384,673 Total sales for the third quarter of fiscal 2024 were $107.5 million, as compared to $119.2 million in the third quarter of fiscal 2023. The decrease in total sales was primarily attributable to a decrease in comparable sales for the third quarter of 11.3%, partially offset by an increase in non-comparable sales. The comparable sales decrease of 11.3% consisted of comparable sales from our stores down 9.9% and our direct business down 14.7%. This third quarter decline was consistent with the trend from the first half of fiscal 2024, with the decrease in comparable sales principally driven by a decrease in traffic in our stores and decreased conversion in our direct business. We continued to see a shift toward our private-label merchandise, as opposed to our national brands, as customers continued to be cost-conscious with their discretionary spending. For the first nine months of fiscal 2024, total sales of $347.8 million decreased 9.6% as compared to $384.7 million for the first nine months of fiscal 2023. The decrease was primarily driven by a decrease in comparable sales of 11.2%, with stores down 10.5% and our direct business down 12.8%. This decrease in comparable sales was slightly offset by an increase in non-comparable sales of $4.8 million, primarily from new stores, and a $1.4 million shift in calendar weeks due to the 53rd week in fiscal 2023. Gross Margin Rate For the third quarter of fiscal 2024, our gross margin rate, inclusive of occupancy costs, was 45.1% as compared to a gross margin rate of 47.5% for the third quarter of fiscal 2023. Our gross margin rate decreased by 240-basis points, which was driven by an increase of 220 basis points in occupancy costs, as a percentage of sales, primarily due to the deleveraging of sales and increased rents as a result of lease extensions. Merchandise margin for the third quarter decreased by 20 basis points, as compared to the third quarter of fiscal 2023, primarily due to an increase in markdown activity on seasonal merchandise as well as an increase in inbound freight. These increases were partially offset by favorable outbound shipping costs, a decrease in loyalty expense and a shift in product mix. For the first nine months of fiscal 2024, our gross margin rate, inclusive of occupancy costs, was 47.2% as compared to a gross margin rate of 48.8% for the first nine months of fiscal 2023. The decrease of 160-basis points was due to an increase of 200-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 40-basis points, driven by favorable shipping costs and a reduction in loyalty expense. For 2024, we expect gross margin rates to be approximately 130 to 180 basis points lower than fiscal 2023 primarily related to the deleveraging of occupancy on a lower sales base. 20 Selling, General and Administrative Expenses As a percentage of sales, SG&A (selling, general and administrative) expenses for the third quarter of fiscal 2024 were 44.1% as compared to 40.2% for the third quarter of fiscal 2023. For the first nine months of fiscal 2024, SG&A expenses, as a percentage of sales, were 42.7% as compared to 37.4% for the first nine months of fiscal 2023. On a dollar basis, SG&A expenses decreased by $0.6 million for the third quarter of fiscal 2024 as compared to the third quarter of fiscal 2023. The decrease was primarily due to a decrease in marketing of $1.4 million as compared to the prior year's third quarter, partially offset by increases in healthcare costs, technology costs and professional services. On a percentage of sales basis, SG&A expenses increased due to the decrease in sales for the third quarter of fiscal 2024 as compared to the third quarter of fiscal 2023. For the first nine months of fiscal 2024, SG&A expenses increased $4.9 million as compared to the first nine months of fiscal 2023. The increase was principally due to an increase in marketing costs of $2.9 million, which included our brand campaign that launched in the second quarter. The remainder of the increase was primarily due to increased healthcare costs and technology costs as compared to the first nine months of fiscal 2023. These increased costs were partially offset by a decrease in incentive accruals. Marketing costs were 5.7% of sales for the third quarter of fiscal 2024 as compared to 6.3% of sales for the third quarter of fiscal 2023. For the first nine months of fiscal 2024, marketing costs were 7.0% as compared to 5.6% for the first nine months of fiscal 2023. For fiscal 2024, marketing costs are expected to be approximately 6.8% 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 nine months of fiscal 2024 as compared to 21.0% of sales in the first nine months of fiscal 2023. Corporate Support Costs, which include the distribution center and corporate overhead costs, represented 18.5% of sales in the first nine months of fiscal 2024 as compared to 16.4% of sales in the first nine months of fiscal 2023. Depreciation and Amortization Depreciation and amortization for the third quarter of fiscal 2024 increased slightly to $3.6 million as compared to $3.4 million for the third quarter of fiscal 2023. 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. For the first nine months of fiscal 2024 depreciation and amortization was $10.2 million as compared to $10.3 million for the first nine months of fiscal 2023. Loss from Termination of Retirement Plans Results for the third quarter and first nine months of fiscal 2023 included a charge of $57,000 and $4.2 million, respectively, related to the termination of the frozen Supplemental Executive Retirement Plan ("SERP") in the third quarter of fiscal 2023 and a partial settlement of our pension obligation in the second quarter of fiscal 2023. 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 third quarter of fiscal 2024 was $0.6 million, which was flat as compared to the third quarter of fiscal 2023. Net interest income for the first nine months of fiscal 2024 was $1.7 million, as compared to $1.4 million for the first nine 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 third quarter of fiscal 2024 and fiscal 2023, our effective tax rate was 9.2% and 30.2%, respectively. For the first nine months of fiscal 2024 and fiscal 2023, our effective tax rate was 38.8% and 27.2%, 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 nine months of fiscal 2023. Net Income (Loss) For the third quarter of fiscal 2024, we recorded a net loss of $1.8 million, or $(0.03) per diluted share, as compared to net income of $4.0 million, or $0.06 per diluted share, for the third quarter of fiscal 2023. 21 For the first nine months of fiscal 2024, net income was $4.4 million, or $0.07 per diluted share, as compared to $22.6 million, or $0.35 per diluted share, for the first nine 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. Results for the third quarter and first nine months of fiscal 2023 included charges of $0.1 million and $4.2 million related to the termination of the SERP and the partial settlement of the pension plan . Inventory As of November 2, 2024, our inventory decreased by approximately $10.7 million to $89.1 million, as compared to $99.9 million at October 28, 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 November 2, 2024, our clearance inventory was 9.2% of our total inventory, as compared to 9.7% at October 28, 2023. Our inventory position is very strong and our clearance levels are in line with our benchmark of 10% even with the 10.7% decrease in total inventory. Our inventory turnover rate has improved by over 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 November 2, 2024, we had no outstanding debt, including no borrowings under our credit facility during the first nine 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 and our stock repurchase program. 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 nine months of fiscal 2024, cash flow from operations was $12.5 million as compared to $33.1 million for the first nine months of fiscal 2023. Free cash flow, before capital expenditures for store development, a non-GAAP measure, was $2.5 million for the first nine months of fiscal 2024 as compared to $26.5 million for the first nine months of fiscal 2023. Free cash flow, a non-GAAP measure, was $(7.0) million for the first nine months of fiscal 2024 as compared to $22.7 million for the first nine 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 $5.6 million for store development and $3.4 million for other capital projects. For the nine months ended (in millions) November 2, 2024 October 28, 2023 Cash flow from operating activities (GAAP basis) $ 12.5 $ 33.1 Capital expenditures, excluding store development (10.0 ) (6.6 ) Free Cash Flow before capital expenditures for store development (non-GAAP basis) $ 2.5 $ 26.5 Capital expenditures for store development (9.4 ) (3.8 ) Free Cash Flow (non-GAAP basis) $ (7.0 ) $ 22.7 Cash flow used for investing activities was $22.5 million for the first nine months of fiscal 2024 as compared to $59.1 million for the first nine months of fiscal 2023. This decrease of $36.6 million was primarily due to a decrease in net purchases of short-term investments, partially offset by an increase in capital expenditures. Cash flow used for financing was $10.4 million for the first nine months of fiscal 2024 as compared to $15.3 million for the first nine months of fiscal 2023 and primarily reflected cash used to repurchase shares of the Company's common stock pursuant to the Stock Repurchase Programs. Stock Repurchase Program 22 In the first quarter of fiscal 2024, the Company repurchased 52,802 shares at a total cost, including fees, of $211,182, completing the stock repurchase program that was approved by the Company's Board of Directors ("Board") in March 2023. On September 3, 2024, the Board approved a new stock repurchase program, pursuant to which the Company is authorized to repurchase up to $15.0 million of its common stock, including excise tax, through open market and privately negotiated transactions. During the third quarter of fiscal 2024, the Company repurchased 3.6 million shares at a total cost, including fees, of $10.2 million under this 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 November 2, 2024 and no borrowings during the first nine months of fiscal 2024. At November 2, 2024, outstanding standby letters of credit were $4.2 million and outstanding documentary letters of credit were $0.3 million. The average unused excess availability during the first nine months of fiscal 2024 was approximately $72.9 million and the unused excess availability at November 2, 2024 was $78.1 million. Capital Expenditures The following table sets forth the open stores and related square footage at November 2, 2024 and October 28, 2023, respectively: November 2, 2024 October 28, 2023 Store Concept Number of Stores Square Footage Number of Stores Square Footage (square footage in thousands) DXL Retail 239 1,753 226 1,694 DXL Outlets 15 76 16 80 Casual Male XL Retail 12 37 21 68 Casual Male Outlets 19 57 19 57 Total Stores 285 1,923 282 1,899 During the first nine months of fiscal 2024, we opened four new DXL stores, relocated one DXL store, converted four Casual Male XL stores to the DXL format, completed four DXL remodels, and closed one Casual Male XL store and one DXL store. We expect to open four additional DXL stores, convert another Casual Male store to the DXL store format and complete one additional DXL remodel before the end of fiscal 2024. We expect our capital expenditures to range from $21.0 million to $24.0 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. We are currently planning to open 8 stores in fiscal 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 23 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. 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 nine months ended (in millions) November 2, 2024 October 28, 2023 Cash flow from operating activities (GAAP basis) $ 12.5 $ 33.1 Capital expenditures, excluding store development (10.0 ) (6.6 ) Free Cash Flow before capital expenditures for store development (non-GAAP basis) $ 2.5 $ 26.5 Capital expenditures for store development (9.4 ) (3.8 ) Free Cash Flow (non-GAAP basis) $ (7.0 ) $ 22.7 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 nine months ended November 2, 2024 October 28, 2023 November 2, 2024 October 28, 2023 (in millions) Net income (loss) (GAAP basis) $ (1.8 ) $ 4.0 $ 4.4 $ 22.6 Add back: Loss on termination of retirement plans — 0.1 — 4.2 Provision (benefit) for income taxes (0.2 ) 1.7 2.8 8.4 Interest income, net (0.6 ) (0.6 ) (1.7 ) (1.4 ) Depreciation and amortization 3.6 3.4 10.2 10.3 Adjusted EBITDA (non-GAAP basis) $ 1.0 $ 8.6 $ 15.7 $ 44.2 Sales $ 107.5 $ 119.2 $ 347.8 $ 384.7 Adjusted EBITDA margin (non-GAAP), as a percentage of sales 1.0 % 7.3 % 4.5 % 11.5 %