Item 1A. Risk Factors
The following risk factors are the important factors of which we are aware that could cause actual results, performance or achievements to differ materially from those expressed in any of our forward-looking statements. We operate in a continually changing business environment and new risk factors emerge from time to time. Other unknown or unpredictable factors also could have material adverse effects on our future results, performance or achievements. We cannot assure you that our projected results or events will be achieved or will occur.
Risks Related to Our Company and Our Industry
We may not be successful in executing our strategy and growing our market share.
For us to be successful in the future and maintain growth, we must be able to continue increasing our share of the big & tall men’s apparel market. Our growth is dependent on our ability to continue to build upon our DXL brand, maintain our existing customers and continue to attract new customers. Our failure to execute our strategy successfully could prevent us from growing our market share, which could have a material adverse effect on our results of operations, cash flows and financial position, including if we were unable to:
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grow our DXL e-commerce business;
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develop an effective modern marketing program to build store and digital awareness as well as increase store and online traffic, attract customers across all channels, and grow sales;
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predict and respond to fashion trends, while offering our customers a broad selection of merchandise in an extended selection of sizes;
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grow our existing customer base;
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attract and retain new customers across all channels;
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hire qualified store management and store associates;
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continue to grow and then sustain the number of transactions, units-per-transaction and share of wallet; and
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operate at appropriate operating margins.
Our marketing programs and efforts to drive traffic and convert that traffic into an increased loyal customer base are critical to achieving market share growth within the big & tall men’s apparel market and may not be successful.
Our ability to increase our share of the big & tall men’s apparel market is largely dependent on effectively marketing our merchandise to all of our target customers in several diverse market segments so that they will become loyal shoppers who spend a greater portion of their wallets on our product offerings. In order to grow our market share, we depend on the success of our marketing and advertising in a variety of ways, including streaming media advertising, advertising events, loyalty programs, direct mail, and digital marketing, including social media and customer prospecting. Our business is directly impacted by the success of these efforts and those of our vendors. Future marketing efforts by us, our vendors or our other licensors, may be more costly than prior years and, if not successful, may negatively affect our ability to meet our sales goals and gain market share.
Our direct business is a significant component of our growth strategy, and the failure to develop our e-commerce and internet infrastructure could disrupt our business and negatively impact our sales.
We continue to have increasing levels of sales made through online shopping and via mobile devices. We have made significant investments in capital spending and labor to develop these channels and increased investments in digital marketing to attract new customers. The growth of our overall sales is dependent on customers’ continuing to expand their online purchases in addition to in-store purchases. Over the past two fiscal years, we have seen significant growth in our direct business, with revenue for fiscal 2021 increasing 45.3% from fiscal 2019. While it is our objective to continue to grow this business, there can be no assurance that this growth will continue or be sustainable.
Our success in growing our direct business will depend in part upon our development of an increasingly sophisticated e-commerce experience and infrastructure. Increasing sophistication requires that we provide additional website features, functionality and messaging in order to be competitive in the marketplace and maintain market share. We continually update our website features, but we cannot predict future trends and required functionality or our adoption rate for customer preferences. In addition, we are vulnerable to additional risks and uncertainties associated with e-commerce sales, including security breaches, cyber-attacks, consumer privacy concerns, changes in state tax regimes and government regulation of internet activities. Our failure to respond to
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these risks and uncertainties successfully could reduce our direct sales, increase our costs and diminish our growth prospects, which could negatively affect our operating results.
If we are unable to develop and implement our omni-channel initiatives successfully, our market share and financial results could be adversely affected.
Our customer’s shopping behavior continues to evolve across multiple channels and we are working to meet his needs, with the real time store inventory visibility, our mobile app, the expansion of our BOPIS (buy online pick up in stores) and BOPAC (buy online pick up curbside) to help our customers continue to shop during the pandemic. We consider ourselves a customer centric omni-channel retailer, and we continue to make ongoing investments in our information technology systems to support evolving omni-channel capabilities.
Omni-channel retailing is rapidly evolving and our success depends on our ability to anticipate and implement innovations in sales and marketing technology and logistics in order to appeal to existing and potential customers who increasingly rely on multiple channels to meet their shopping needs. In addition, our competitors are also investing in omni-channel initiatives, some of which may be more successful than our initiatives.
If the investment in our omni-channel initiatives is not successful, our systems are unable to support such initiatives, or if our competitors are more successful, our financial results and our market penetration may be adversely affected.
The loss of, or disruption in, our centralized distribution center could negatively impact our business and operations.
The majority of our merchandise for our stores and e-commerce operations is received into our centralized distribution center in Canton, Massachusetts, where it is then processed, sorted and shipped to our stores or directly to our customers. We depend in large part on the orderly operation of this receiving and distribution process, which depends, in turn, on adherence to shipping schedules and effective management of the distribution center. Although we believe that our receiving and distribution process is efficient and well-positioned to support our strategic plans, events beyond our control, such as disruptions in operations due to fire or other catastrophic events, employee matters or shipping problems, or disruptions in our distribution center, including potential restrictions due to the pandemic, could result in delays in the delivery of merchandise to our stores or directly to our customers. The COVID-19 pandemic has also resulted in labor shortages, which may affect our ability to process and ship inventory in a timely manner.
With all of our management information systems centralized in our corporate headquarters, any disruption or destruction of our system infrastructure could materially affect our business. This type of disaster is mitigated by our offsite storage and disaster recovery plans, but we would still incur business interruption that may impact our business a significant period of time.
Although we maintain business interruption and property insurance, we cannot be sure that our insurance will be sufficient, or that insurance proceeds will be timely paid to us, in the event our distribution center is shut down for any reason or if we incur higher costs and longer lead times in connection with a disruption relating to our distribution center.
The global impact of the COVID-19 pandemic and its variants have had and, based on the current status and uncertainty, may continue to have an adverse effect on our business, financial results, liquidity, supply chain and workforce.
Since 2020, the COVID-19 pandemic and its variants have caused global uncertainty and disruption and has had a material impact on our business, predominately in fiscal 2020 and early 2021. While we saw significant recovery in our business during fiscal 2021, continued risk and uncertainty remain particularly related to the potential for new variants, current and future actions that may be taken by federal, state and local agencies to mitigate any resurgences, the disruption and recovery of the global supply chain, the long-term economic impact, inflationary pressures, and the continuing labor shortages.
Further, we also recognize that our business benefited from a certain level of pent-up demand and fiscal stimulus policy during fiscal 2021, which may have a negative impact our financial results in fiscal 2022 if we are not able to successfully manage the potential shifts in consumer spending.
Even after the COVID-19 pandemic subsides, our business may be negatively impacted, specifically as it relates to the changes in consumer spending behaviors, the labor market, the global supply chain and inflation, resulting from the pandemic.
Our business may be adversely affected due to disruptions in the global supply chain.
Disruptions in the global supply chain in foreign ports and shortages of vessels and shipping containers may impact our ability to import inventory in a timely manner. The impact of COVID-19 and labor shortages on domestic ports has also created a similar disruption in the supply chain and may continue to cause delays in the receipt and shipment of inventory. In addition, the recent
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invasion by Russia of Ukraine may cause additional tariffs, sanctions, import/export restrictions and future actions that may have a negative impact on the supply chain and may limit the availability of certain raw materials and associated cost. Furthermore, in the event that commercial transportation is curtailed or substantially delayed, we may not be able to maintain adequate inventory levels of important merchandise on a consistent basis, which would negatively impact our sales and potentially erode the confidence of our customer base, leading to loss of sales and an adverse impact on our results of operations. Further, we may also incur incremental freight costs which could negatively harm our gross margin rates.
Our business may be adversely affected if we are unable to manage our store portfolio successfully.
We lease all of our store locations. Renewing and renegotiating these leases at acceptable lease terms is critical to the profitability of our stores. Since the start of the pandemic in March 2020, we have worked closely with our landlords to renegotiate and restructure the majority of our lease portfolio. While sales from the majority of our stores returned to pre-pandemic levels in fiscal 2021, given the ongoing variants, supply chain issues and labor shortages, certain stores may not be profitable and we may not be able to renew existing agreements. We will continue to evaluate our store portfolio to optimize store profitability and omni-channel distribution. As part of that evaluation, we may choose not to renew certain lease locations. We are actively reviewing opportunities to relocate or convert Casual Male XL stores to DXL and we are reviewing white space opportunities in markets where our store footprint is underpenetrated. We expect to continue to invest in stores over the next several years as we further strengthen the store portfolio, but if we are unable to find locations or obtain favorable lease terms, we may not be able to grow or maintain our current store base.
We are dependent on third parties for the manufacture of the merchandise we sell.
We do not own or operate any manufacturing facilities and are therefore entirely dependent on third parties to manufacture the merchandise we sell. Without adequate supplies of merchandise to sell to our customers in the merchandise styles and fashions demanded by our particular customer base, sales would decrease materially and our business would suffer. We are dependent on these third parties’ ability to fulfill our merchandise orders and meet our delivery terms. In the event that manufacturers are unable or unwilling to ship products to us in a timely manner or continue to manufacture products for us, we would have to rely on other current manufacturing sources or identify and qualify new manufacturers. We might not be able to identify or qualify such manufacturers for existing or new products in a timely manner and such manufacturers might not allocate sufficient capacity to us in order to meet our requirements. Our inability to secure adequate and timely supplies of private-label merchandise would negatively impact proper inventory levels, sales and gross margin rates, and ultimately our results of operations.
In addition, even if our current manufacturers continue to manufacture our products, they may not maintain adequate controls with respect to product specifications and quality and may not continue to produce products that are consistent with our standards. If we were forced to rely on manufacturers who produce products of inferior quality, then our brand and customer satisfaction would likely suffer which would negatively impact our business. These manufacturers may also increase the cost to us of the products we purchase from them. The Company publishes a Code of Conduct, which is a part of every agreement requiring compliance by the manufacturing facilities.
The United States Treasury Department has placed sanctions on China’s Xinjiang Production and Construction Corporation ("XPCC") for serious human rights abuses against ethnic minorities in China’s Xinjiang Uyghur Autonomous Region ("XUAR"). In addition, in January 2021, the US Customs Border Protection (“CBP”) issued a Withhold Release Order on Products Made in Xinjiang region of China released. In response to the problems in Xinjiang, we developed a Compliance Certificate of Traceability for our cotton vendors. Although we prohibit our vendors from doing business with XPCC, we could be subject to penalties, fines or sanctions and our brand could be harmed if any of the vendors from which we purchase product is found to have done business, directly or indirectly, with XPCC.
We work with a third-party audit vendor to ensure a responsible and ethical supply chain. We are and will continue to pursue our corporate responsibilities and create a positive effect on human rights as well as the environment. If, despite third-party audits, the manufacturing facilities engage in workplace or human rights violations and we are unable to identify or correct it, it may negatively affect our business and harm our brand.
Our business may be negatively impacted and we may be liable if third parties misappropriate proprietary information of our customers and breach our security systems.
We may be harmed by security risks we face in connection with our electronic processing and transmission of confidential customer information. The majority of our retail sales are settled through credit and debit card transactions. While our Board of Directors has a Cybersecurity and Data Privacy Committee to oversee the monitoring and management of cyber risk and data privacy for our Company, and we have not had any security breaches to date, any breach could expose us to risks of loss, litigation, and liability and could adversely affect our operations as well as cause our shoppers to stop shopping with us as a result of their lack of confidence in the security of their personally identifiable information, which could have a negative impact on our sales and profitability. We attempt
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to limit exposures to security breaches and sensitive customer data through the use of “tokens” in connection with both in-store and online credit card transactions, which eliminates the storage of credit card numbers. Like many retailers, we have seen an increase in cyberattack attempts, predominantly through phishing and social engineering scams, and in particular, ransomware. While none of these attempts has been successful, there can be no assurance that our continued security measures will be effective or sufficient in the future. If third parties are able to penetrate our network security or otherwise misappropriate the personal information or credit card information of our customers or if third parties gain unauthorized and improper access to such information, we could be subject to liability. These liabilities could include claims for unauthorized purchases with credit card information, impersonation or other similar fraud claims, or claims for other misuses of personal information, including unauthorized marketing purposes, and could ultimately result in litigation. Liability for misappropriation of this information could be significant.
Further, if a third party were to use this proprietary customer information in order to compete with us, it could have a material adverse impact on our business and could result in litigation.
Our business is highly competitive, and competitive factors may reduce our revenues and profit margins.
The United States big & tall men’s apparel market is highly competitive with many national and regional department stores, mass merchandisers, specialty apparel retailers, discount stores and online retailers offering a broad range of apparel products similar to the products that we sell. Besides retail competitors, we consider any manufacturer of big & tall men’s merchandise operating in outlet malls throughout the United States to be a competitor. It is also possible that another competitor, either a mass merchant or a men’s specialty store or specialty apparel catalog, could gain market share in big & tall men’s apparel due to more favorable pricing, locations, brand and fashion assortment and size availability. Many of our competitors and potential competitors may have substantially greater financial, manufacturing and marketing resources than we do.
The presence in the marketplace of various fashion trends and the limited availability of shelf space also can affect competition. We may not be able to compete successfully with our competitors in the future and could lose market share. A significant loss of market share would adversely affect our revenues and results of operations.
In addition, we maintain exclusivity arrangements with several of the brands that we carry. If we were to lose any of these exclusivity arrangements or brands altogether, our revenues may be adversely affected.
Our ability to operate and expand our business and to respond to changing business and economic conditions will depend on the availability of adequate capital.
The operation of our business, the rate of our expansion and our ability to respond to changing business and economic conditions, depend on the availability of adequate capital, which in turn depends on cash flow generated by our business and, if necessary, the availability of equity or debt capital. We will also need sufficient cash flow to meet our future obligations under our existing credit facility.
The amount that we are able to borrow and have outstanding under our credit facility at any given time is determined using an availability formula based on eligible assets. As a result, our ability to borrow is subject to certain risks and uncertainties, such as advance rates and the amount and quality of inventory, which could reduce the funds available to us under our credit facility. In addition, because of the disruptions in the supply chain, inventory levels may be lower than expected. This directly impacts our borrowing base and there can be no assurance that we can effectively manage the balance of maintaining inventory and sufficient availability, especially during peak selling periods.
We cannot makes assurances that our cash flow from operations or cash available under our credit facility will be sufficient to meet our needs. If we are unable to generate sufficient cash flows from operations in the future, we may have to obtain additional financing. If we incur additional indebtedness, that indebtedness may contain significant financial and other covenants that may significantly restrict our operations and we cannot ensure we would be able to obtain refinancing or that such additional financing would be on favorable terms.
Our business is seasonal and is affected by general economic conditions.
Our business is seasonal. Historically, a significant portion of our operating income has been generated during our fourth quarter (November-January). If, for any reason, we miscalculate the demand for our products during our fourth quarter, our sales in that quarter could decline, resulting in higher labor costs as a percentage of sales, lower margins and excess inventory, which could cause our annual operating results to suffer. In addition, our operations may be negatively affected by local, regional or national economic conditions, such as levels of disposable consumer income, inflation, consumer debt, interest rates, consumer confidence and other
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macro issues. Due to our seasonality, the possible adverse impact from such risks is potentially greater if any such risks occurs during our fourth quarter.
We may be unable to achieve our environmental, social and governance goals.
We are committed to corporate social responsibility and sustainability and we recognize the importance of environmental, social and governance ("ESG") issues. During fiscal 2021, we formed the Corporate Social Responsibility Committee, comprising a cross-discipline of corporate management and engaged with a third-party firm to assist us in the development of the Company's ESG policies and initiatives.
Achievement of our initiatives is subject to risks and uncertainties and we may fail to achieve our objectives. We may also incur additional costs and require additional resources to monitor, report, and comply with such ESG practices and regulations. We may also face pressure from our stockholders, customers and employees to make accelerated and material advancements in these ESG matters.
In addition, an increasing number of our stakeholders are considering sustainability factors when making related decisions regarding employment, brand loyalty and investment. Failure to establish effective policies, procedures and metrics may negatively affect our reputation, and it may be more difficult for us to compete effectively, all of which would have an adverse effect on our business, operating results, and financial condition.
We may be unable to predict fashion trends and customer preferences successfully.
Customer tastes and fashion trends are volatile and tend to change rapidly. Our success depends in large part upon our ability to predict effectively and respond to changing fashion tastes and consumer demands and to translate market trends to appropriate saleable product offerings. If we are unable to predict or respond to changing styles or trends successfully and misjudge the market for products or any new product lines, our sales will be impacted and we may be faced with a substantial amount of unsold inventory or missed opportunities. In response, we may be forced to rely on additional markdowns or promotional sales to dispose of excess, slow-moving inventory, which would decrease our revenues and margins. In addition, the failure to satisfy consumer demand, specifically in our DXL stores and from our website, could have serious longer-term consequences, such as an adverse impact on our brand value and the loss of market share to our competitors.
The loss of any of our key trademarks or licenses could adversely affect demand for our products.
We own and use a number of trademarks and operate under several trademark license agreements. We believe that certain of these trademarks have significant value and are instrumental in our ability to create and sustain demand for and to market our products. We cannot be certain that these trademarks and licensing agreements will remain in effect and enforceable or that any license agreements, upon expiration, can be renewed on acceptable terms or at all. In addition, any future disputes concerning these trademarks and licenses may cause us to incur significant litigation costs or force us to suspend use of the disputed trademarks.
General Risks That May Affect Our Business
If our long-lived assets become impaired, we may need to record significant non-cash impairment charges.
Periodically, we review our long-lived assets for impairment whenever economic events or changes in circumstances indicate that the carrying value of an asset may not be recoverable. Specifically, if an individual store location is unable to generate sufficient future cash flows, we may be required to record a partial or full impairment of that store’s right-of-use assets and its property and equipment. In addition, significant negative industry or general economic trends, disruptions to our business and unexpected significant changes or planned changes in our use of the assets (such as store relocations or closures) may also result in impairment charges. Due to the uncertainty that remains regarding the duration of the pandemic and its impact on our store locations, we may need to take additional impairment charges. Any such impairment charges, if significant, could adversely affect our financial position and results of operations.
Changes to LIBOR may negatively impact us.
The London interbank offered rate (“LIBOR”) is the basic rate of interest used in lending between banks on the London interbank market and is widely used as a reference for setting the interest rate on loans globally. Our current credit facility provides us an option to convert some of our prime-based borrowings into short-term LIBOR contracts.
Regulators in the United Kingdom that oversee LIBOR have stated that they cannot guarantee LIBOR's availability beyond the end of 2021 and expects that reliance on LIBOR will be phased out through June 2023. In the absence of a LIBOR rate, our credit facility
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with Citizens Bank, N.A. provides for a successor rate, based on the Secured Overnight Financing Rate. As such, while we do not expect that we will have to renegotiate our credit facility, we do not know whether it could result in increased interest costs. In the absence of a favorable LIBOR or successor rate, our borrowings bear interest based on the Federal Funds rate. At January 29, 2022, there were no outstanding borrowings under our credit facility, however, we cannot provide assurance that future interest rate charges will not have a material negative impact on our business, financial position, or operating results.
Our success depends significantly on our key personnel and our ability to attract and retain additional personnel.
Our future success is dependent on the personal efforts, performance and abilities of our key management, which includes our executive officers as well as members of our senior management. The loss of any of our senior management may result in a loss of organizational focus, poor operating execution, an inability to identify and execute strategic initiatives, an impairment in our ability to identify new store locations, and an inability to consummate possible acquisitions. The competition is intense for the type of highly skilled individuals with relevant industry experience that we require and we may not be able to continue to attract and retain new employees of the caliber needed to achieve our objectives.
Labor shortages or increases in labor costs due to new regulations could harm our business.
Due to the COVID-19 pandemic, during fiscal 2021 we continued to experience labor shortages primarily in our distribution facility and in our stores. If such labor shortages continue, especially during peak-selling periods, it may negatively impact our ability to process inventory in a timely manner and effectively staff our stores. Because of the tight labor market, during fiscal 2021, we increased our starting hourly rate to attract candidates. If we are unable to pass on these higher costs through price increases or reduced workforce hours, our margins and profitability may be adversely impacted which could have a material adverse effect on our business, results of operations or financial condition.
We expect that the costs associated with ocean, rail and road transportation will continue to be higher than pre-pandemic levels and may increase further in fiscal 2022 as a result of continuing supply chain challenges and a tight labor market.
Fluctuations in the price, availability and quality of raw materials and finished goods could increase costs.
Due to the COVID-19 pandemic and the ban of Xinjiang cotton, we are seeing cost increases in labor and across raw materials. We have secured raw materials in key item programs to reduce the impact on our gross margin. Fluctuations in the price, availability and quality of fabrics or other raw materials used in the manufacturing of our merchandise could have a material adverse effect on our gross margin or on our ability to meet our customers’ demands. The prices for fabrics depend on demand and market prices for the raw materials used to produce them. To the extent that we cannot offset these cost increases with other cost reductions or efficiencies, such higher costs will need to be passed on to our customers. Such increased costs could lead to reduced customer demand, which could have a material adverse effect on our results of operations and cash flow.
Failure to comply with laws, rules and regulations could negatively affect our business operations and financial performance.
Our business is subject to federal, state, and increasing local rules and regulations, such as state and local wage and hour laws, the U.S. Foreign Corrupt Practices Act, the Employee Retirement Income Security Act (“ERISA”), securities laws, import and export laws (including customs regulations), privacy and information security regulations, unclaimed property laws, and many others. The effect of some of these laws and regulations may be to increase the cost of doing business and may have a material impact on our earnings. In addition, the complexity of the regulatory environment in which we operate and the related cost of compliance are both increasing due to legal and regulatory requirements and increased enforcement. We may also be subject to investigations or audits by governmental authorities and regulatory agencies, which can occur in the ordinary course of business or which can result from increased scrutiny from a particular agency towards an industry, country or practice. If we fail to comply with laws, rules and regulations or the manner in which they are interpreted or applied, we may be subject to government enforcement action, class action litigation or other litigation, damage to our reputation, civil and criminal liability, damages, fines and penalties, and increased cost of regulatory compliance, any of which could adversely affect our results of operations and financial performance.
Risks Related to Our Corporate Structure and Stock
Our stock price has been and will likely continue to be volatile and fluctuate substantially.
The market price of our common stock has been and will likely continue to fluctuate substantially as a result of many factors, some of which are beyond our control. For example, from September 8, 2021, when we relisted on the Nasdaq Global market through January
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29, 2022, the reported price of our common stock has ranged from a low of $4.20 on January 28, 2022, to a high of $8.99 on November 17, 2021. Factors that could cause fluctuations in the market price of our common stock include the following:
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the ongoing effect of the COVID pandemic and its variants on the retail industry and overall economy;
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overall changes in the economy and general market volatility, including the effects of inflation;
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news announcements regarding our quarterly or annual results of operations;
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quarterly comparable sales;
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acquisitions;
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competitive developments;
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governmental regulation (such as increased wage and paid benefits laws);
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litigation affecting us; or
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market views as to the prospects of the retail clothing industry generally.
Our certificate of incorporation, as amended, limits transfers of our common stock and may, along with state law, inhibit potential acquisition bids that could be beneficial to our stockholders.
Our certificate of incorporation, as amended, contains provisions that restrict any person or entity from attempting to purchase our stock, without prior permission from the Board of Directors, to the extent that such transfer would (i) create or result in an individual or entity becoming a five-percent stockholder of our stock, or (ii) increase the stock ownership percentage of any existing five-percent stockholder. These provisions provide that any transfer that violates such provisions shall be null and void and would require the purported transferee, upon demand by us, to transfer the shares that exceed the five percent limit to an agent designated by us for the purpose of conducting a sale of such excess shares. These provisions would make the acquisition of our Company more expensive to the acquirer and could significantly delay, discourage, or prevent third parties from acquiring our Company without the approval of our Board of Directors.
In addition, we are subject to certain provisions of Delaware law, which could also delay or make more difficult a merger, tender offer or proxy contest involving us. In particular, Section 203 of the Delaware General Corporation Law prohibits a Delaware corporation from engaging in certain business combinations with any interested stockholder for a period of three years unless specific conditions are met. In addition, certain provisions of Delaware law could have the effect of delaying, deferring or preventing a change in control of us, including, without limitation, discouraging a proxy contest or making more difficult the acquisition of a substantial block of our common stock. The provisions could also limit the price that investors might be willing to pay in the future for shares of our common stock.
Item 1B. Unresolved Staff Comments
None.
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Item 2. Properties
Our corporate offices and retail distribution center are located at 555 Turnpike Street in Canton, Massachusetts. The property consists of a 755,992 gross square foot building located on approximately 27.3 acres. We owned the property until January 30, 2006, at which time we entered into a sale-leaseback transaction, whereby we entered into a twenty-year lease agreement for an initial annual rent payment of $4.6 million, with periodic increases every fifth anniversary of the lease.
As of January 29, 2022, we operated 220 Destination XL retail stores, 16 Destination XL outlet stores, 35 Casual Male XL retail stores and 19 Casual Male XL outlet stores. We lease all of these stores directly from owners of several different types of centers, including life-style centers, shopping centers, freestanding buildings, outlet centers and downtown locations. The store leases are generally 5 to 10 years in length and contain renewal options extending their terms by between 5 and 10 years. Following this discussion is a listing by state of all store locations open at January 29, 2022.
Sites for new stores are selected based on several factors, including the demographic profile of the area in which the site is located, the types of stores and other retailers in the area, the location of the store within the center and the attractiveness of the store layout. We also utilize financial models to project the profitability of each location using assumptions such as the center’s sales per square foot averages, estimated occupancy costs and return on investment requirements.
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Store count by state at January 29, 2022
United States DXL retail andoutlet stores Casual Male XLretail and outlet stores
Alabama 2 1
Arizona 6 —
Arkansas — 1
Colorado 3 —
Connecticut 3 —
Delaware 2 —
Georgia 4 2
Idaho 1 —
Indiana 6 3
Kansas 2 —
Kentucky 3 —
Louisiana 3 1
Maine 2 —
Maryland 6 2
Massachusetts 5 2
Minnesota 2 1
Mississippi — 2
Missouri 5 2
Montana 1 —
Nebraska 2 —
Nevada 3 —
New Hampshire 3 —
New Jersey 8 5
New Mexico 1 —
North Carolina 4 2
North Dakota — 1
Oklahoma 2 —
Pennsylvania 11 6
Rhode Island 1 —
South Carolina 4 —
South Dakota 1 —
Tennessee 7 —
Utah 1 —
Vermont 1 —
Virginia 6 2
Washington 5 —
West Virginia — 1
Wisconsin 5 —
International
Toronto, Canada 1 —
Item 3. Legal Proceedings
From time to time, we are subject to various legal proceedings and claims that arise in the ordinary course of business. Management believes that the resolution of these matters will not have a material adverse impact on our future results of operations or financial position.
Item 4. Mine Safety Disclosure
Not applicable.
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PART II.
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
Market Information
Our common stock is listed for trading on the Nasdaq Global Market under the symbol “DXLG”.
Holders
As of March 15, 2022, based upon data provided by the transfer agent for our common stock, there were approximately 78 holders of record of our common stock. The number of holders does not include individuals or entities who beneficially own shares but whose shares are held of record by a broker or clearing agent.
Issuer Purchases of Equity Securities
There were no stock repurchases during fiscal 2021.
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Stock Performance Graph
The following Performance Graph compares our cumulative stockholder return with a broad market index (Standard & Poor’s 500) and one published industry index (Dow Jones U.S. Apparel Retailers) for each of the most recent five years ended January 31. The cumulative stockholder return for shares of our common stock (“DXLG”) and each of the indices is calculated assuming that $100 was invested on January 31, 2017. We paid no cash dividends during the periods shown. The performance of the indices is shown on a total return (dividends reinvested) basis. The graph lines merely connect January 31 of each year and do not reflect fluctuations between those dates. In addition, we have included a chart of the annual percentage return of our common stock, the S&P 500 and the Dow Jones U.S. Apparel Retailers.
Annual Return Percentage
Year ended
Dow Jones U.S. Apparel Retailers 9.4 % 8.4 % 10.8 % 6.2 % 8.1 %
Indexed Returns
Base Period
Company/Index
The performance graph above shall not be deemed “filed” for purposes of Section 18 of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), or otherwise subject to the liability of that section. This graph will not be deemed incorporated by reference into any filing under the Securities Act of 1933, as amended, or the Exchange Act, whether made before or after the date hereof, regardless of any general incorporation language in such filing.
Item 6.
Reserved.
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Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
FORWARD LOOKING STATEMENTS
As noted above in Part 1, this Annual Report, including, without limitation, this Item 7, contains “forward-looking statements,” including forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Actual results or developments could differ materially from those projected in such statements because of numerous factors, including, without limitation those risks and uncertainties set forth in Item 1A, Risk Factors, which you are encouraged to read. 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. Such statements include the potential impact on results in fiscal 2022 as it relates to the ongoing global supply chain disruptions, the geopolitical instability from Russia's invasion of Ukraine, the increase in freight costs, the increase in certain raw materials and labor shortages as well as overall changes in consumer spending and demand due to the continued risk of new variants and inflation. The following discussion and analysis of our financial condition and results of operations should be read in light of those risks and uncertainties and in conjunction with our accompanying Consolidated Financial Statements and Notes thereto.
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.
Certain figures discussed below may not foot due to rounding.
Segment Reporting
We have three principal operating segments: our stores, direct business and our wholesale business. We consider our stores and direct business segments to be similar in terms of economic characteristics, production processes and operations, and have therefore aggregated them into one reportable segment, retail segment, consistent with our omni-channel business approach. Due to the immateriality of the wholesale segment’s revenues, profits and assets, its operating results have been aggregated with the retail segment for all periods.
COVID-19 Impact on our Business in Fiscal 2021
The COVID-19 pandemic and its variants continued to impact our business and results of operations in fiscal 2021. While we saw significant improvement in our business from fiscal 2020, substantial uncertainty remains regarding the impact of the pandemic, including the potential impact of new variants, continued disruptions in the supply chain, labor shortages and the long-term effect on the global economy, and overall consumer demand and spending.
Comparable Sales and E-Commerce (Direct) Sales Definition
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, we continue to see more transactions that begin online but are ultimately completed at the store level. Similarly, if a customer visits a store and the item is out of stock, the associate can order the item through our website. A customer also has the ability to order online and pick-up in a store or at curbside. We define store sales as sales that originate and are fulfilled directly at the store level. E-commerce sales, which we also refer to as direct sales, are defined as sales that originate online, whether through our website, at the store level or through a third-party marketplace.
Stores that have been open for 13 months are included in comparable sales. Stores that have been remodeled or re-located during the period are also included in our determination of comparable stores sales. Stores that have been expanded by more than 25% are considered non-comparable for the first 13 months. If a store becomes a clearance center, it is also removed from the calculation of comparable sales. The method of calculating comparable sales varies across the retail industry and, as a result, our calculation of comparable sales is not necessarily comparable to similarly titled measures reported by other retailers.
The Company has not carved-out prior year sales for periods where the stores were temporarily closed in fiscal 2020 due to the pandemic. However, because the Company’s store in Canada was closed by government edict for a significant portion of fiscal 2021, we have removed it from the current calculation of comparable sales.
Non-GAAP Measures
We monitor certain non-GAAP financial measures on a regular basis in order to track the progress of our business. These measures include free cash flow, EBITDA, adjusted EBITDA and adjusted EBITDA margin. We believe these measures provide helpful information with respect to the Company’s operating performance and that the inclusion of these non-GAAP measures is important to assist investors in comparing our performance in fiscal 2021 to fiscal 2020 and fiscal 2019. We also provide certain forward-looking information with respect to certain of these non-GAAP financial measures. However, these measures may not be comparable to
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similar measures used by other companies and should not be considered superior to or as a substitute for net income (loss), net income (loss) per diluted share or cash flow from operating activities in accordance with GAAP. See “Non-GAAP Reconciliations” below for additional information on these non-GAAP financial measures and reconciliations to comparable GAAP measures.
RESULTS OF OPERATIONS
Our fiscal year is a 52- or 53-week period ending on the Saturday closest to January 31. Fiscal 2021, fiscal 2020 and fiscal 2019 were all 52-week periods.
The following review of our results for fiscal 2021 includes certain comparisons against fiscal 2019 in addition to fiscal 2020. Due to the COVID-19 pandemic and its impact on our results, particularly during fiscal 2020, we believe that the additional discussion against fiscal 2019 provides a more meaningful comparison of our business results in fiscal 2021. Our Annual Report on Form 10-K for the year ended January 30, 2021 (fiscal 2020) includes a discussion and analysis of our financial condition and results of operations comparing fiscal 2020 to fiscal 2019 in Item 7 of Part II, “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”
EXECUTIVE OVERVIEW
(in millions, except for percentage of sales and per share data)
Net income (loss) $ 56.7 $ (64.5 ) $ (7.8 )
Adjusted EBITDA (Non-GAAP) $ 76.9 $ (24.2 ) $ 23.5
As a percentage of sales:
Adjusted EBITDA margin (Non-GAAP) 15.2 % (7.6 %) 5.0 %
Per diluted share:
Liquidity:
Cash flow from operating activities $ 75.5 $ (1.2 ) $ 15.8
Free cash flow (Non-GAAP) $ 70.3 $ (5.5 ) $ 2.4
For the first time in the Company's history, we exceeded $500.0 million in sales, with growth across all retail channels during fiscal 2021. As compared to fiscal 2019, our comparable sales increased 14.2% driven by a comparable sales increase in the direct business of 44.0% and an increase in stores of 4.8%. This growth was the result of new customer acquisition, which was up 27% over fiscal 2019, as well as increases in conversion rate and dollars per transaction. We achieved this top-line growth while maintaining a low promotional posture, resulting in a 300 basis point improvement in merchandise margins as compared to fiscal 2019. As a result of this margin improvement, coupled with our restructured lease portfolio and lower operating cost base, we reported net income for fiscal 2021 of $56.7 million, or $0.83 per diluted share, and adjusted EBITDA of $76.9 million.
We ended fiscal 2021 in a substantially stronger liquidity position than a year ago. As a result of our earnings, we generated $75.5 million in cash flows from operations during fiscal 2021, resulting in $70.3 million of free cash flow, which we used to retire our long-term debt, pay off our revolver and renegotiate our credit facility on more favorable terms. At January 29, 2022, we are debt-free and have cash on hand of $15.5 million and excess availability under our credit facility of $68.9 million.
Our primary objective for fiscal 2022 is to build off the many successes we had in fiscal 2021 by continuing to drive new customer acquisition and lifetime value through greater retention and new channels of distribution. We are excited about the growth we saw this year and believe that we gained market share during this fiscal year. However, we also recognize that our business benefited this year from many macro-level tailwinds as well, including emergence from the pandemic restrictions, pent-up demand, and fiscal stimulus policy which we do not expect to deliver the same sales lift in fiscal 2022. We are also cautious of the ongoing global issues that may impact us through fiscal 2022, including the Russian invasion of Ukraine, supply chain disruptions, increased freight costs, increased cost of raw materials, labor shortages and overall changes in consumer sentiment.
As discussed more fully below under “Liquidity and Capital Resources” subsequent to the end of fiscal 2021, our Board of Directors approved a stock repurchase plan, pursuant to which we can purchase up to $15.0 million of our outstanding common stock through March 15, 2023.
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SALES
For fiscal 2021, total sales increased 58.3% to $505.0 million from $318.9 million for fiscal 2020 and increased 6.5% from $474.0 million in fiscal 2019.
As compared to fiscal 2020, comparable sales increased 68.5%, with stores up 98.1% and the direct business up 25.4%. The comparable sales increase from our stores is largely due to the fact that our stores in fiscal 2020 were closed for a period of time due to the pandemic and many operated with reduced hours after reopening. In fiscal 2021, our customers returned to in-person shopping and our stores out-performed our expectations. Despite the surge of customers returning to stores, our direct business continued to grow in fiscal 2021, primarily driven by increased sales from our dxl.com website and mobile app. We also saw continued sales growth through our third-party marketplace presence, which is attracting a new customer to DXL.
As compared to fiscal 2019, comparable sales increased 14.2%, primarily due to a comparable sales increase in the direct business of 44.0% and an increase in stores of 4.8%. The growth in our direct business is due largely to our website and the growth from our mobile app. While store traffic remained soft during fiscal 2021, we saw strong increases in conversion rates and dollars per transaction as compared to fiscal 2019. The majority of our stores improved their performance as compared to fiscal 2019, but our Southeast, Midwest and South Central stores generally outperformed the other regions of the country. We attribute this trend to the fact that some areas of the country lifted mandates earlier than others and customer comfort level regarding in-store shopping differed throughout the country.
For fiscal 2021, wholesale revenues were $5.4 million as compared to $16.6 million in fiscal 2020 and $12.5 million in fiscal 2019. While a significant portion of our wholesale revenues in fiscal 2020 were due to the sale of masks, our wholesale business was driven primarily by our relationship with Amazon. Based on several factors, including low margins, volatility in the global supply chain, increasing lead times and the shifting dynamics of the business, the Company and Amazon have agreed to end the wholesale relationship.
GROSS MARGIN
The gross margin rate for fiscal 2021, inclusive of occupancy costs, was 49.5% compared to 32.9% in or fiscal 2020 and 43.1% for fiscal 2019.
As compared to fiscal 2020, our gross margin rate improved by 1660 basis points, driven by an increase in merchandise margin of 860 basis points and an improvement in occupancy of 800 basis points due to the leveraging of sales. On a dollar basis, occupancy costs decreased $4.2 million, or 6.7% as a result of our lease renegotiations as well as closed stores.
As compared to fiscal 2019, our gross margin rate for the year improved by 640 basis points, driven by a 300 basis point improvement in merchandise margins and a 340 basis point improvement in occupancy costs. As a result of our lease renegotiations as well as closed stores, on a dollar basis, occupancy costs for fiscal 2021 decreased by $12.5 million, or 17.7%, as compared to fiscal 2019.
The improvement in merchandise margin in fiscal year 2021 was primarily driven by our low promotional strategy and low clearance levels. Partially offsetting the savings from the reduction in markdowns was the continuing increase in the cost of freight due to shortages of vessels for overseas product, port congestion, and labor shortages of truck drivers. We estimate that the supply chain disruptions negatively impacted gross margin by approximately 84 basis points and we expect that we will continue to experience cost increases related to these supply chain issues as well as due to the increase in the cost of certain raw materials, particularly cotton, well into fiscal 2022. In aggregate, we expect that gross margin for fiscal 2022 may be impacted by upwards of 200 basis points after factoring in freight, markdowns, and the increased cost of certain raw materials.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
SG&A expenses as a percentage of sales were 34.2% for fiscal 2021, as compared to 40.5% in fiscal 2020 and 38.1% in fiscal 2019.
On a dollar basis, compared to fiscal 2020, SG&A expenses increased by $43.9 million primarily driven by an increase in variable costs as a result of our sales growth, including increases in store payroll and payroll-related costs, performance incentives and advertising. However, our costs as a percentage of sales significantly improved as a result of the cost-savings initiatives implemented in fiscal 2020.
On a dollar basis, compared to fiscal 2019, SG&A expenses for fiscal 2021 decreased $7.7 million. The decrease in SG&A expenses for the year was primarily due to the cost-savings initiatives implemented in fiscal 2020 and reductions in payroll and payroll-related costs. These costs were partially offset by an increase in incentive performance-based accruals and the reinstatement of our 401(k) profit sharing contribution.
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 operating costs, represented 19.1% of sales for fiscal 2021, compared to 20.2% of sales for fiscal 2020 and 22.6% of sales for fiscal 2019. Corporate Support Costs, which include the
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distribution center and corporate overhead costs, represented 15.1% of sales, compared to 20.3% of sales for fiscal 2020 and 15.5% of sales for fiscal 2019.
IMPAIRMENT OF ASSETS
Asset impairment charges primarily represent the write-down of operating lease right-of-use assets, where the carrying value exceeds fair value, and the write-down of store property and equipment. In addition, any subsequent gains recognized in connection with a store closure related to a previously recorded operating lease right-of-use asset impairment will be included as an offset to impairment charges, with the remainder of the gain included as a reduction in store occupancy costs.
For fiscal 2021, the Company recorded a non-cash gain of $2.7 million on the reduction of its operating lease liability in connection with its decision to close certain retail stores, which resulted in a revaluation of the lease liability. Of the total non-cash gain, $2.3 million related to leases where the right-of-use assets had previously been impaired, and therefore, the gain was recorded as a reduction of the previously-recorded impairment. The remaining gain $0.4 million was recorded as a reduction to occupancy costs.
For fiscal 2020, the asset impairment charge was $14.8 million, which included $13.3 for the write-down of operating lease right-of-use assets and $4.1 million for the write-down of store assets, partially offset by a non-cash gain of $2.6 million. The asset impairment charge for fiscal 2019 was $0.9 million, which included $0.7 million for the write-down of right-of-use assets and $0.2 million for the write-down of store assets.
DEPRECIATION AND AMORTIZATION
Depreciation and amortization expense was $17.2 million, as compared to $21.5 million in fiscal 2020 and $24.6 million for fiscal 2019. Our depreciation expense has been decreasing over the past few years, due to our reduced capital expenditures.
INTEREST EXPENSE, NET
Net interest expense for fiscal 2021 was $4.4 million, as compared to $3.9 million for fiscal 2020 and $3.3 million for fiscal 2019. The interest expense for fiscal 2021 includes a prepayment penalty of $1.1 million in connection with the Company's early prepayment of its $17.5 million FILO loan as well as $0.9 million for the write-off unamortized debt issuance costs associated with both the FILO loan and our prior credit facility. These costs were partially offset by a decrease in interest expense due to reduced borrowing levels in fiscal 2021 as compared to fiscal 2020 and fiscal 2019.
INCOME TAXES
Realization of our deferred tax assets, which relate principally to federal net operating loss carryforwards, of which approximately $100.7 million will expire from fiscal 2028 through fiscal 2037, is dependent on generating sufficient taxable income. In addition, there are $43.1 million of federal net operating loss carryforwards that do not expire.
At the end of fiscal 2013, we entered a three-year cumulative loss and based on all positive and negative evidence at February 1, 2014, we established a full valuation allowance against our net deferred tax assets. Although we returned to profitability in fiscal 2021, we believe that a full valuation allowance remains appropriate at this time. Our conclusion is based on the fact that we remain in a three-year cumulative loss position, which is considered significant negative evidence. Once we transition to a three-year cumulative profit position and demonstrate more consistent and prolonged profitability, we will reevaluate the valuation allowance.
Our tax provision for fiscal 2021 was primarily due to income tax in states where NOL usage is statutorily limited. Our tax provision for fiscal 2020 was primarily due to state margin tax, based on gross receipts less certain deductions. See Note F of the Notes to the Consolidated Financial Statements.
NET INCOME (LOSS )
Net income for fiscal 2021 was $56.7 million, or $0.83 per diluted share, as compared to a net loss of $(64.5) million, or $(1.26) per diluted share, in fiscal 2020 and a net loss of $(7.8) million, or $(0.16) per diluted share, in fiscal 2019. The improvement in earnings for fiscal 2021 was due to an increase in our comparable sales as compared to both fiscal 2020 and fiscal 2019, an improvement in gross margin driven by lower markdowns and restructured lease portfolio, and a reduction in operating costs, as a percentage of sales, as a result of our cost-savings initiatives implemented in fiscal 2020. In addition, our significant net operating loss carryforwards minimized our cash tax payments.
Included in our results for fiscal 2021 was a gain of $2.3 million against previously recognized impairment charges. Results for fiscal 2020 and fiscal 2019 included asset impairment charges of $14.8 million and $0.9 million, respectively. Fiscal 2019 also included charges of $1.7 million for exit costs associated with our London operations and $0.7 million in CEO transition costs.
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SEASONALITY
A comparison of sales in each quarter of the past three fiscal years is presented below. The sales results for fiscal 2020 reflect the impact that the COVID-19 pandemic had on the Company’s business, especially in the first and second quarters when we temporarily closed all of our stores in response to the pandemic. The amounts shown are also not necessarily indicative of actual trends, because such amounts also reflect the addition of new stores and the remodeling and closing of other stores during these periods. Consistent with the retail apparel industry, our business is seasonal. (Certain columns may not foot due to rounding)
(in millions, except percentages) Fiscal 2021 Fiscal 2020 Fiscal 2019
EFFECTS OF INFLATION
During fiscal 2021, we began to be impacted by the effects of the inflationary pressures on freight, raw materials, and labor. We have taken selective price increases on our merchandise assortment to mitigate the pressure on gross margin. If such inflationary pressures increase, the effects may have an increased impact on our financial results in fiscal 2022.
LIQUIDITY AND CAPITAL RESOURCES
Our primary sources of liquidity are cash generated from operations and availability under our credit facility, which is discussed below. We took several actions during fiscal 2020 to preserve our liquidity, and in the first quarter of fiscal 2021, we further strengthened our liquidity position by completing a direct offering of our common stock, which raised $4.4 million, net of offering costs. Also in the first quarter of fiscal 2021, we refinanced our then existing $15.0 million FILO loan by entering into a new $17.5 million FILO loan, which increased our borrowing capacity. As a result of our improved earnings and free cash flow, in the third quarter of fiscal 2021, we used a portion of the excess cash flow to prepay the FILO loan, which bore an interest rate of 8.50%. At January 29, 2022, we had no outstanding debt, including no borrowings under our credit facility.
At January 29, 2022, our material contractual obligations primarily consisted of our operating lease obligations, as disclosed in Note E, Leases, to the Notes to the Consolidated Financial Statements. In addition to our lease obligations, at January 29, 2022, we were also contractually committed pursuant to a merchandise purchase obligation to meet minimum purchases of $10.0 million in each fiscal year through fiscal 2023.
We believe our cash on hand, availability under our credit facility, and ongoing cash generated from our operations will be sufficient to fund our working capital requirements, commitments, capital expenditures and, as discussed further below, our stock repurchase program which was announced in March 2022. However, we remain cautious regarding the effect that the pandemic could have on consumer sentiment and the geopolitical impact of Russia's invasion of Ukraine on our business and the global economy.
The following table sets forth financialdata regarding our liquidity position at the end of the past three fiscal years:
Cash flow from operating activities $ 75.5 $ (1.2 ) $ 15.8
Capital expenditures (5.3 ) (4.2 ) (13.4 )
Free Cash Flow (Non-GAAP) $ 70.3 $ (5.5 ) $ 2.4
Cash on hand, at year end $ 15.5 $ 19.0 $ 4.3
Total debt, net of unamortized debt issuance costs $ - $ 74.4 $ 54.1
Unused excess availability under Credit Facility $ 68.9 $ 11.5 $ 48.5
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Credit Facility
On October 28, 2021, we entered into a new $125.0 million revolving credit agreement, which replaced our prior credit facility that was due to expire in May 2023 (the "New Credit Facility"). The New Credit Facility has a five-year term and provides more favorable terms than the previous credit facility. The New Credit Facility includes a sublimit of $20.0 million for commercial and standby letters of credit and a sublimit of up to $15.0 million for swingline loans. Borrowings made pursuant to the New Credit Facility will be made pursuant to either a Base Rate loan or LIBOR Rate loan, at the Company's option. Base Rate loans will bear interest, at a rate equal to (i) the greater of: (a) the Prime Rate, (b) the Federal Funds effective rate plus 0.50% per annum and (c) the daily LIBOR rate plus 1.00% per annum, plus (ii) a varying percentage, based on the Company’s average excess availability, of either 0.25% or 0.50%. LIBOR Rate loans, which may be either for 1 month or 3 months, will bear interest at (i) the LIBOR rate, or the Benchmark Rate as defined in the credit agreement plus (ii) a varying percentage based on the Company’s average excess availability, of either 1.25% or 1.50%.
We had no outstanding borrowings under the New Credit Facility at January 29, 2022. At January 29, 2022, outstanding standby letters of credit were $2.7 million and outstanding documentary letters of credit of $1.4 million. The average monthly borrowing outstanding under the credit facilities during fiscal 2021 was approximately $16.4 million, resulting in an average unused excess availability of approximately $56.2 million. Unused excess availability at January 29, 2022 was $68.9 million. Our obligations under the New Credit Facility are secured by a lien on substantially all of our assets.
Our New Credit Facility is described in more detail in Note D to the Notes to the Consolidated Financial Statements.
FILO Loan
In March 2021, we refinanced our existing $15.0 million FILO loan (the “existing FILO loan”) and entered into a new $17.5 million FILO loan (the “new FILO loan”). The new FILO loan had higher advance rates, provided additional borrowing capacity of approximately $5.0 to $10.0 million, and carried an interest rate of 8.50%. The terms of the new FILO loan included a prepayment penalty, if any portion of the principal for the new FILO Loan was prepaid during the initial two-year period, equal to the greater of (i) the incremental interest that would have been incurred with respect to that principal repayment during the two year period and (ii) 3% of the principal prepayment, unless the prepayment occurs after March 16, 2022 in connection with the Company’s renegotiation of its Credit Agreement in which case the prepayment premium would be equal to 1% of the principal prepayment.
On September 3, 2021, we prepaid the outstanding balance of $17.5 million under the new FILO loan. In connection with the prepayment, we negotiated a reduced prepayment penalty of $1.1 million and wrote-off unamortized debt issuance costs of $0.9 million. At January 29, 2022, the Company has no outstanding long-term debt.
Stock Repurchase Program
Subsequent to the end of fiscal 2022, our Board of Directors approved a stock repurchase plan. Under the stock repurchase plan, we may purchase up to $15.0 million of our common stock through open market and privately negotiated transactions during fiscal 2022. The timing and the amount of any repurchases of common stock will be determined based on the Company’s evaluation of market conditions and other factors. The stock repurchase program is expected to commence in the first quarter of fiscal 2022 and will expire on March 15, 2023 but may be suspended, terminated or modified at any time for any reason. We expect to finance the repurchases from operating funds and/or periodic borrowings on our credit facility. Any repurchased common stock will be held as treasury stock.
INVENTORY
At January 29, 2022, total inventories decreased to $81.8 million from $85.0 million at January 30, 2021 and $102.4 million at February 1, 2020. Maintaining sufficient inventory levels, given the ongoing supply chain disruptions, remains a primary focus. We believe that we have secured sufficient inventory to support our current sales forecast. We are continuing to manage our inventory conservatively, narrowing our assortments and increasing exclusivity with our national brands. As a result, we were able to increase our inventory turnover to over 2.0 times as compared to historical turnover of approximately 1.5 times. At January 29, 2022, our clearance inventory was 6.0% of our inventory as compared to 10.4% at January 30, 2021 and 10.0% at February 1, 2020.
OFF-BALANCE SHEET ARRANGEMENTS
We have no off-balance sheet arrangements as defined by 303(a)(4) of Regulation S-K.
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CAPITAL EXPENDITURES
The following table sets forth the open stores and related square footage at January 29, 2022 and January 30, 2021 respectively:
Store Concept Number ofStores SquareFootage Number ofStores SquareFootage
(square footage in thousands)
We did not rebrand any of our Casual Male XL stores or open any new DXL locations during fiscal 2021. In total, we closed 21 stores during the year. Below is a summary of those store closings from January 30, 2021 to January 29, 2022:
Closed retail stores (6 ) (1 ) (11 ) (3 ) (21 )
Our capital expenditures for fiscal 2021 were $5.3 million, as compared to $4.2 million in fiscal 2020. The capital expenditures for fiscal 2021 primarily related to management information projects to support our distribution center, marketing, stores and website.
In response to the pandemic, capital expenditures for the past two years have been limited. For fiscal 2022, our capital expenditures are expected to be approximately $10.0-$12.0 million. In addition to technology investments related to our marketing and merchandising initiatives, we are also actively reviewing opportunities to relocate or convert Casual Male XL stores to DXL and we are reviewing white space opportunities in markets where our store footprint is underpenetrated. We believe that our store portfolio is a vital asset to our business strategy and we expect to continue to invest in stores over the next several years as we further strengthen the store portfolio. Over the next three to five years, based on our preliminary store development plan, we believe that we could potentially open up to 50 new and relocated stores.
Non-GAAP Reconciliations
We monitor certain non-GAAP financial measures on a regular basis in order to track the progress of our business, including the measures below. We believe these measures provide helpful information with respect to the Company’s operating performance to shareholders, investors and analysts, and that the inclusion of these non-GAAP measures is important to assist investors in comparing our performance in fiscal 2021 to fiscal 2020 and fiscal 2019, on a comparable basis. However, these measures may not be comparable to similar measures used by other companies and should not be considered superior to or as a substitute for operating net income (loss), net income (loss) per diluted share or cash flows from operating activities in accordance with GAAP. (Certain amounts in the following tables may not foot due to rounding.)
Free Cash Flow
We calculate free cash flow as cash flow provided by operating activities less capital expenditures. Free cash flow excludes the mandatory and discretionary repayment of debt. The following table provides a reconciliation of free cash flow:
Cash flow from operating activities (GAAP) $ 75.5 $ (1.2 ) $ 15.8
Capital expenditures (5.3 ) (4.2 ) (13.4 )
Free cash flow (non-GAAP) $ 70.3 $ (5.5 ) $ 2.4
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EBITDA, Adjusted EBITDA, EBITDA Margin and Adjusted EBITDA Margin
EBITDA, Adjusted EBITDA, EBITDA margin and adjusted EBITDA margin are presented because we believe that these measures are useful to investors in evaluating our performance. Management uses EBITDA as a key metric to measure profitability and economic productivity. EBITDA is calculated as earnings before interest, taxes, depreciation and amortization. Adjusted EBITDA is calculated as EBITDA before asset impairment charges, exit costs associated with London operations, CEO transition costs and corporate restructuring. EBITDA margin and Adjusted EBITDA margin are calculated as EBITDA and Adjusted EBITDA, respectively, divided by sales.
The following table is a reconciliation of net income (loss) on a GAAP basis to EBITDA and Adjusted EBITDA, on a non-GAAP basis, for each fiscal year:
(in millions, except percentages) Fiscal 2021 Fiscal 2020 Fiscal 2019
Net income (loss), on a GAAP basis $ 56.7 $ (64.5 ) $ (7.8 )
Add back:
Provision for income taxes 0.9 0.1 0.1
EBITDA, on a non-GAAP basis $ 79.2 $ (39.0 ) $ 20.2
Add back:
Exit costs associated with London operations $ — $ — $ 1.7
CEO transition costs — — 0.7
Impairment of assets (2.3 ) 14.8 0.9
Adjusted EBITDA, on a non-GAAP basis $ 76.9 $ (24.2 ) $ 23.5
The following table is a reconciliation of operating margin, on a GAAP basis, to EBITDA margin and Adjusted EBITDA margin, on a non-GAAP basis, for each fiscal year:
(as a percentage of sales) Fiscal 2021 Fiscal 2020 Fiscal 2019
Operating margin, on a GAAP basis 12.3 % (19.0 %) (0.9 %)
Add back:
Depreciation and amortization 3.4 % 6.7 % 5.2 %
Add back:
Exit costs associated with London operations — — 0.4 %
CEO transition costs — — 0.2 %
Impairment of assets (0.5 %) 4.7 % 0.2 %
Adjusted EBITDA margin, on a non-GAAP basis 15.2 % (7.6 %) 5.0 %
CRITICAL ACCOUNTING POLICIES; USE OF ESTIMATES
Our financial statements are based on the application of significant accounting policies, many of which require our management to make significant estimates and assumptions (see Note A to the Notes to the Consolidated Financial Statements). We believe that the following items involve some of the more critical judgments in the application of accounting policies that currently affect our financial condition and results of operations.
Long-Term Incentive Plans
Stock awards are primarily granted pursuant to our Long-Term Incentive Plans (“LTIPs”). During fiscal 2021, we had three active LTIPs: the 2019-2021 LTIP, the 2020-2022 LTIP and the 2021-2023 LTIP. See Note H to the Notes to the Consolidated Financial Statements for additional discussion of our LTIPs. Awards under each LTIP consist of 50% time-based awards and 50% performance-based awards. All time-based awards are amortized over each LTIP’s respective vesting periods.
The performance-based component of each LTIP is a dollar-denominated award. Equity awards will only be granted if such performance targets are achieved. Accordingly, each quarter the Company reviews its expected achievement against such performance targets to assess whether an accrual is necessary. The performance metrics are for three-year performance periods and
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may include metrics such as total shareholder return against peers, 3-year stacked comparable sales or Adjusted EBITDA. As such, the accruals are based on projections that may extend beyond a year and are subject to change quarter to quarter based on actual performance. All accruals are recorded as a liability. If performance targets are achieved and equity awards are granted, the related cost of those awards will be reclassified from the accrual to stock-based compensation on grant date.
The performance targets under the 2019-2021 LTIP were achieved at the end of fiscal 2021. Based on that achievement, subsequent to the end of fiscal 2021, on March 15, 2022, the Compensation Committee approved a total performance award of $2.6 million, to be awarded in a combination of 50% cash and 50% RSUs. All awards are subject to further vesting through August 31, 2022. Accordingly, at January 29, 2022, the Company has accrued $2.3 million of the $2.6 million award.
With respect to the performance-based component of the 2020-2022 LTIP and the 2021-2023 LTIP, which each approximate $1.9 million, at target, awards will be granted at the end of the respective performance period if the performance targets are achieved. Through the end of fiscal 2021, we have accrued approximately $1.5 million and $0.8 million for performance under the 2020-2022 LTIP and the 2021-2023 LTIP, respectively.
Impairment of Long-Lived Assets
We evaluate property and equipment and operating lease right-of-use assets for impairment when facts and circumstances indicate that the carrying values of such assets may not be recoverable. Our judgment regarding the identification of impairment indicators is based on operational performance at the store level. Factors considered by us that could result in an impairment triggering event include significant changes in the use of assets, a current period operating or cash flow loss, underperformance of a store relative to historical or expected operating results, and an accumulation of costs significantly in excess of the amount originally expected for the construction of the long-lived store assets. We will recognize an impairment when the undiscounted cash flow estimated to be generated by those assets is less than the assets’ carrying amount. If actual market conditions are less favorable than management’s projections, future write-offs may be necessary. The model for undiscounted future cash flows includes assumptions, at the individual store level, with respect to expectations for future sales and gross margin rates as well as an estimate for occupancy costs used to estimate the fair value of the respective store’s operating lease right-of-use asset. The amount of impairment, if any, is measured based on projected discounted future cash flows using a discount rate reflecting the Company’s average cost of funds. Due to uncertainty around the duration and extent of the pandemic’s impact on future cash flows, the Company’s projections in fiscal 2020 were based on multiple probability-weighted scenarios and assumed that consumer retail spending would remain substantially curtailed for a period of time.
In addition, any subsequent gains recognized in connection with a store closure related to a previously recorded operating lease right-of-use asset impairment will be included as an offset to impairment charges, with the remainder of the gain included as a reduction in store occupancy costs.
For fiscal 2021, we recognized a gain against previously recorded impairment charges of $2.3 million. In fiscal 2020 and fiscal 2019, we recorded net asset impairment charges of $14.8 million and $0.9 million, respectively.
Leases
In accordance with ASU 2016-02, “Leases (Topic 842)” our operating leases are reported as right-of-use assets with corresponding lease liabilities on our Consolidated Balance Sheet. As discussed above, we evaluate, at the individual store level, the right-of-use assets for impairment at least annually but also when facts and circumstances indicate that the carrying value may not be recoverable. Furthermore as the interest rate implicit in the Company’s leases is not readily determinable, the Company utilizes its incremental borrowing rate, based on information available at the lease measurement date to determine the present value of future payments. See Note A to the Notes to the Consolidated Financial Statements.
RECENT ACCOUNTING PRONOUNCEMENTS
We have reviewed accounting pronouncements and interpretations thereof that have effective dates during the periods reported and in future periods. See Note A to the Notes to the Consolidated Financial Statements included in this report for information on recent accounting pronouncements and the impact of impending standards on our future filings.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
In the normal course of business, our financial position and results of operations are routinely subject to a variety of risks, including market risk associated with interest rate movements on borrowings and foreign currency fluctuations. We regularly assess these risks and have established policies and business practices to protect against the adverse effects of these and other potential exposures.
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Interest Rates
We utilize cash from operations and from our Credit Facility to fund our working capital needs. Our Credit Facility is not used for trading or speculative purposes. In addition, under our Credit Facility we have available letters of credit as sources of financing for our working capital requirements. Borrowings under the Credit Facility, which expires October 28, 2026, bear interest at variable rates based on the prime rate or LIBOR.
At January 29, 2022, we had no outstanding borrowings under the Credit Facility and no long-term debt. Based upon a sensitivity analysis as of January 29, 2022, assuming average outstanding borrowings during fiscal 2021 of $16.4 million under our Credit Facility and an average outstanding balance for the FILO loan of approximately $10.8 million, a 50 basis point increase in interest rates would have increased interest expense by approximately $0.1 million on an annualized basis.
Foreign Currency
Our DXL store located in Toronto, Canada, which closed subsequent to the end of fiscal 2021 on February 28, 2022, conducted business in Canadian dollars. As of January 29, 2022, sales from this store were immaterial to consolidated sales. As such, we believe that movement in foreign currency exchange rates did not have a material adverse effect on our financial position or results of operations.
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Item 8. Financial Statements and Supplementary Data
Destination XL Group, Inc.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page
Consolidated Financial Statements:
Consolidated Balance Sheets at January 29, 2022 and January 30, 2021 37
Notes to Consolidated Financial Statements 42
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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Stockholders and Board of Directors
Destination XL Group, Inc.:
Opinion on the Consolidated Financial Statements
We have audited the accompanying consolidated balance sheets of Destination XL Group, Inc. and subsidiaries (the Company) as of January 29, 2022 and January 30, 2021, the related consolidated statements of operations, comprehensive income (loss), changes in stockholders’ equity (deficit), and cash flows for each of the years in the three-year period ended January 29, 2022, and the related notes (collectively, the consolidated financial statements). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company as of January 29, 2022 and January 30, 2021, and the results of its operations and its cash flows for each of the years in the three-year period ended January 29, 2022, in conformity with U.S. generally accepted accounting principles.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company’s internal control over financial reporting as of January 29, 2022, based on criteria established in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission, and our report dated March 17, 2022 expressed an unqualified opinion on the effectiveness of the Company’s internal control over financial reporting.
Basis for Opinion
These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audits provide a reasonable basis for our opinion.
Critical Audit Matter
The critical audit matter communicated below is a matter arising from the current period audit of the consolidated financial statements that was communicated or required to be communicated to the audit committee and that: (1) relates to accounts or disclosures that are material to the consolidated financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of a critical audit matter does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.
Impairment of long-lived store assets
As discussed in Note A to the consolidated financial statements, the Company reviews its long-lived assets, which include property and equipment and operating lease right-of-use assets, for events or changes in circumstances that might indicate the carrying amount of the assets may not be recoverable. The Company’s judgment regarding the identification of impairment indicators is based on operational performance at the store level. Factors considered by the Company that could result in an impairment triggering event include significant changes in the use of assets, a current period operating or cash flow loss, underperformance of a store relative to historical or expected operating results, and an accumulation of costs significantly in excess of the amount originally expected for the construction of the long-lived store assets. At January 29, 2022, the Company had property and equipment and operating lease right-of-use assets of $44.4 million and $127.8 million, respectively.
We identified the assessment of impairment triggering events related to long-lived store assets, specifically property and equipment and operating lease right-of-use assets, as a critical audit matter. A high degree of auditor judgment was required to evaluate the Company’s assessment of (1) stores with current period operating or cash flow losses, and (2) underperforming stores based on current period operating or cash flow results relative to their respective historical and expected results.
The following are the primary procedures we performed to address this critical audit matter. We evaluated the design and tested the operating effectiveness of certain internal controls related to the Company’s process of identifying and evaluating potential impairment triggering events. This included a control related to the Company’s assessment of (1) stores with current period
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operating or cash flow losses, and (2) underperforming stores relative to historical or expected operating results. For certain stores, we evaluated the Company’s analysis of potential impairment triggering events by comparing actual operating and cash flow results to historical results, expected results, and the remaining net book value of store assets. We performed sensitivity analyses to assess the impact that reasonably possible changes to future cash flows have on the Company’s evaluation of potential impairment triggering events. We also reviewed board of directors meeting minutes and available industry and analyst information to assess the Company’s identification and evaluation of potential triggering events.
/s/ KPMG LLP
We have served as the Company’s auditor since2013.
Boston, Massachusetts
March 17, 2022
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DESTINATION XL GROUP, INC.
CONSOLIDATED BALANCE SHEETS
January 29, 2022 and January 30, 2021
(In thousands, except share data)
ASSETS
Current assets:
Prepaid expenses and other current assets 6,615 3,689
Noncurrent assets:
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Accrued expenses and other current liabilities 35,102 24,825
Borrowings under credit facility — 59,521
Long-term liabilities:
Commitments and contingencies
Stockholders' equity (deficit):
Preferred stock, $0.01 par value, 1,000,000 shares authorized, none issued — —
Accumulated other comprehensive loss (5,525 ) (6,221 )
Total stockholders' equity (deficit) 58,219 (4,077 )
Total liabilities and stockholders' equity (deficit) $ 279,958 $ 306,755
The accompanying notes are an integral part of the consolidated financial statements.
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DESTINATION XL GROUP, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
For the fiscal years ended January 29, 2022, January 30, 2021 and February 1, 2020
(In thousands, except per share data)
Expenses:
Exit costs associated with London operations — — 1,737
CEO transition costs — — 743
Income (loss) before provision for income taxes 57,630 (64,432 ) (7,691 )
Net income (loss) per share - basic $ 0.89 $ (1.26 ) $ (0.16 )
Net income (loss) per share - diluted $ 0.83 $ (1.26 ) $ (0.16 )
Weighted-average number of common shares outstanding:
The accompanying notes are an integral part of the consolidated financial statements.
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DESTINATION XL GROUP, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
For the fiscal years ended January 29, 2022, January 30, 2021 and February 1, 2020
(In thousands)
Other comprehensive income (loss) before taxes:
Recognition of accumulated foreign currency translation adjustment $ — — $ 792
Foreign currency translation (62 ) (44 ) (83 )
Other comprehensive income (loss) before taxes 696 210 (248 )
Tax provision related to items of other comprehensive income (loss) — — —
Other comprehensive income (loss), net of tax 696 210 (248 )
The accompanying notes are an integral part of the consolidated financial statements.
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DESTINATION XL GROUP, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY (DEFICIT)
For the fiscal years ended January 29, 2022, January 30, 2021 and February 1, 2020
(In thousands)
Accumulated
Additional Other
Common Stock Paid-in Treasury Stock Accumulated Comprehensive
Shares Amounts Capital Shares Amounts Deficit Income (Loss) Total
Issuance of common stock, upon RSUs release 977 10 (10 ) —
Deferred stock vested 13 — — —
Cancellations of restricted stock, net of issuances (20 ) — — —
Change in accounting principle due to adoption of ASC 842 5,276 5,276
Accumulated other comprehensive income (loss):
Unrecognized loss associated with Pension Plan (957 ) (957 )
Foreign currency (83 ) (83 )
Issuance of common stock, upon RSUs release 588 6 (6 ) —
Deferred stock vested 114 1 (1 ) —
Accumulated other comprehensive income (loss):
Unrecognized gain associated with Pension Plan 254 254
Foreign currency (44 ) (44 )
Issuance of common stock, upon RSUs and PSUs release 788 8 (8 ) —
Accumulated other comprehensive income (loss):
Unrecognized gain associated with Pension Plan 758 758
Foreign currency (62 ) (62 )
The accompanying notes are an integral part of the consolidated financial statements.
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DESTINATION XL GROUP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the fiscal years ended January 29, 2022, January 30, 2021 and February 1, 2020
(In thousands)
Cash flows from operating activities:
Recognition of accumulated foreign currency translation adjustment — — 792
Amortization and write-off of deferred debt issuance costs 1,179 146 139
Board of directors stock compensation 374 382 569
Changes in operating assets and liabilities:
Prepaid expenses and other current assets (2,926 ) 7,194 1,252
Net cash provided by (used for) operating activities 75,541 (1,228 ) 15,803
Cash flows from investing activities:
Additions to property and equipment, net (5,272 ) (4,243 ) (13,399 )
Net cash used for investing activities (5,272 ) (4,243 ) (13,399 )
Cash flows from financing activities:
Proceeds from new FILO loan 17,500 — —
Repayment of FILO loans (32,500 ) — —
Net borrowings (repayments) under credit facility (59,733 ) 20,155 (2,690 )
Debt extinguishment costs (1,111 ) — —
Debt issuance costs (1,200 ) (25 ) —
Proceeds from the exercise of stock options 776 — —
Tax withholdings paid related to net share settlements (1,867 ) — (244 )
Net cash provided by (used for) financing activities (73,760 ) 20,130 (2,934 )
Net increase (decrease) in cash and cash equivalents (3,491 ) 14,659 (530 )
Cash and cash equivalents:
The accompanying notes are an integral part of the consolidated financial statements.
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DESTINATION XL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JANUARY 29, 2022
A. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Nature of Business
Destination XL Group, Inc. (collectively with its subsidiaries referred to as the “Company”) is the largest specialty retailer in the United States of big & tall men’s clothing and shoes. The Company operates under the trade names of Destination XL®, DXL®, DXL Men’s Apparel, DXL Outlets®, Casual Male XL® and Casual Male XL Outlets. At January 29, 2022, the Company operated 220 DXL stores, 35 Casual Male XL stores, 19 Casual Male XL outlets and 16 DXL outlets located throughout the United States, including a store in Canada and an e-commerce site, www.dxl.com, and a mobile app.
Basis of Presentation
The consolidated financial statements include the accounts of the Company and its subsidiaries. All significant intercompany accounts, transactions and profits are eliminated.
The accompanying financial statements have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent liabilities as of the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from estimates.
Impact of COVID-19 Pandemic on Business
On March 11, 2020, the World Health Organization declared the current outbreak of a novel coronavirus disease (“COVID-19”) as a global pandemic. Because the pandemic had a material impact on the Company's business in fiscal 2020, results for fiscal 2021 may not be comparable to the results for fiscal 2020.
While there were positive signs of recovery in fiscal 2021, the duration and continuing impact of the COVID-19 pandemic and its variants on the global economy remains uncertain and could continue to have a material impact on the Company’s results of operations, financial condition and cash flows.
Segment Reporting
The Company has three principal operating segments: its stores, direct and wholesale businesses. The Company considers its stores and direct operating segments to be similar in terms of economic characteristics, production processes and operations, and has therefore aggregated them into one reportable segment, retail segment, consistent with its omni-channel business approach. Due to the immateriality of the wholesale segment’s revenues, profits and assets, its operating results are aggregated with the retail segment for all periods.
Fiscal Year
The Company’s fiscal year is a 52-week or 53-week period ending on the Saturday closest to January 31. Fiscal 2021, fiscal 2020, and fiscal 2019 were each 52-week periods, which ended on January 29, 2022, January 30, 2021 and February 1, 2020, respectively.
Cash and Cash Equivalents
Cash and cash equivalents consist of cash in banks and short-term investments, which have a maturity of ninety days or less when acquired. Included in cash equivalents are credit card and debit card receivables from banks, which generally settle within two to four business days.
Accounts Receivable
Accounts receivable primarily includes amounts due for rebates from certain vendors and amounts due from wholesale customers. For fiscal 2021, fiscal 2020 and fiscal 2019, the Company did not incur any losses on its accounts receivable.
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Fair Value of Financial Instruments
Accounting Standards Codification (“ASC”) Topic 825, Financial Instruments, requires disclosure of the fair value of certain financial instruments. The carrying amounts of cash and cash equivalents, accounts receivable, accounts payable and accrued expenses approximate fair value because of the short maturity of these instruments.
ASC Topic 820, Fair Value Measurements and Disclosures, defines fair value, establishes a framework for measuring fair value and enhances disclosures about fair value measurements.
The valuation techniques utilized are based upon observable and unobservable inputs. Observable inputs reflect market data obtained from independent sources, while unobservable inputs reflect internal market assumptions. These two types of inputs create the following fair value hierarchy:
Level 1 – Quoted prices in active markets for identical assets or liabilities.
Level 2 – Observable inputs other than Level 1 prices such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the related asset or liabilities.
Level 3 – Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of assets or liabilities.
The Company utilizes observable market inputs (quoted market prices) when measuring fair value whenever possible.
Stores that have indicators of impairment and fail the recoverability test (based on undiscounted cash flows) are measured for impairment by comparing the fair value of the assets against their carrying value. Fair value of the assets is estimated using a projected discounted cash flow analysis and is classified within Level 3 of the valuation hierarchy. See Impairment of Long-Lived Assets below.
Inventories
All inventories are valued at the lower of cost or market, using a weighted-average cost method.
Property and Equipment
Property and equipment are stated at cost. Major additions and improvements are capitalized while repairs and maintenance are charged to expense as incurred. Upon retirement or other disposition, the cost and related accumulated depreciation of the assets are removed from the accounts and the resulting gain or loss, if any, is reflected in the results of operations. Depreciation is computed on the straight-line method over the assets’ estimated useful lives as follows:
Furniture and fixtures Five to ten years
Equipment Five to ten years
Leasehold improvements Lesser of useful lives or related lease term
Hardware and software Three to seven years
Intangibles
Domain Name
In fiscal 2018, the Company purchased the rights to the domain name “dxl.com.” The domain name has a carrying value of $1.2 million and is considered an indefinite-lived asset. At each reporting period, management analyzes current events and circumstances to determine whether the indefinite life classification continues to be valid. At least annually, during the fourth quarter or whenever events or changes in circumstances indicate the carrying value may not be fully recoverable, the intangible is assessed for impairment using a quantitative impairment model. In the fourth quarter of fiscal 2021, the domain name was assessed for potential impairment and the Company concluded that the domain name was not impaired.
Pre-opening Costs
The Company expenses all pre-opening costs for its stores as incurred.
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Advertising Costs
The Company expenses in-store advertising costs as incurred. Television advertising costs, if any, are expensed in the period in which the advertising is first aired. Direct response advertising costs, if any, are deferred and amortized over the period of expected direct marketing revenues, which is less than one year. There were no deferred direct response costs at January 29, 2022 and January 30, 2021. Advertising expense, which is included in selling, general and administrative expenses, was $24.0 million, $11.9 million and $22.9 million for fiscal 2021, 2020 and 2019, respectively.
Revenue Recognition
The Company’s accounting policies with respect to revenue recognition are discussed in Note B, “Revenue Recognition.”
Foreign Currency Translation
At January 29, 2022, the Company had one store located in Toronto, Canada. Assets and liabilities for this store were translated into U.S. dollars at the exchange rates in effect at each balance sheet date. Stockholders’ equity (deficit) was translated at applicable historical exchange rates. Income, expense and cash flow items were translated at average exchange rates during the period. Resulting translation adjustments were reported as a separate component of stockholders’ equity (deficit). The Company's store in Toronto, Canada was closed subsequent to the end of fiscal 2021.
During fiscal 2019, the Company closed its Rochester Clothing store in London, England. In connection with exiting its operations in England, the Company recognized a total charge of $1.7 million, which included the recognition of the associated accumulated foreign currency translation adjustment of $0.8 million as an expense in fiscal 2019. See “Accumulated Other Comprehensive Income (Loss) – (“AOCI”)” below. The remainder of the charge primarily related to lease termination and inventory liquidation costs.
Accumulated Other Comprehensive Income (Loss) – (“AOCI”)
Other comprehensive income (loss) includes amounts related to foreign currency and pension plans and is reported in the Consolidated Statements of Comprehensive Income (Loss). Other comprehensive income (loss) and reclassifications from AOCI for fiscal 2021, fiscal 2020 and fiscal 2019 are as follows:
(in thousands)
(1)
In connection with the Company’s closing of its Rochester Clothing store in London, England and exiting its London operations, the Company recognized the accumulated foreign currency translation adjustment as an expense and it was included in “Exit costs associated with London operations” on the Consolidated Statement of Operations for fiscal 2019.
(2)
Includes the amortization of the unrecognized (gain)/loss on pension plans, which was charged to “Selling, General and Administrative” expense on the Consolidated Statements of Operations for all periods presented. The amortization of the unrecognized loss, before tax, was $682,000 and $641,000 for fiscal 2020 and fiscal 2019, respectively. For fiscal 2021, the Company recognized income of $41,000, as a result of a change in amortization from average remaining future service to average remaining lifetime. There was no related tax effect for any period.
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Income Taxes
Deferred income taxes are provided to recognize the effect of temporary differences between tax and financial statement reporting. Such taxes are provided for using enacted tax rates expected to be in place when such temporary differences are realized. A valuation allowance is recorded to reduce deferred tax assets if it is determined that it is more likely than not that the full deferred tax asset would not be realized. If it is subsequently determined that a deferred tax asset will more likely than not be realized, a credit to earnings is recorded to reduce the allowance.
ASC Topic 740, Income Taxes (“ASC 740”) clarifies a company’s accounting for uncertain income tax positions that are recognized in its financial statements and also provides guidance on a company’s de-recognition of uncertain positions, financial statement classification, accounting for interest and penalties, accounting for interim periods, and disclosure requirements. In accordance with ASC 740, the Company will recognize the benefit from a tax position only if it is more likely than not that the position would be sustained upon audit based solely on the technical merits of the tax position. The Company’s policy is to recognize accrued interest and penalties related to unrecognized tax benefits as income tax expense in its Consolidated Statement of Operations. The Company has not accrued or paid interest or penalties in amounts that were material to its results of operations for fiscal 2021, fiscal 2020 and fiscal 2019.
The Company is subject to U.S. federal income tax as well as income tax of multiple state and foreign jurisdictions. The Company has concluded all U.S. federal income tax matters for years through fiscal 2001, with remaining fiscal years subject to income tax examination by federal tax authorities.
Net Income (Loss) Per Share
Basic earnings per share are computed by dividing net income (loss) by the weighted average number of shares of common stock outstanding during the respective period. Diluted earnings per share is determined by giving effect to unvested shares of restricted stock, deferred stock and restricted stock units (RSUs) and the exercise of stock options using the treasury stock method. The following table provides a reconciliation of the number of shares outstanding for basic and diluted earnings per share:
FISCAL YEARS ENDED
(in thousands)
Common stock outstanding:
(1)
Common stock equivalents, in thousands, of 159 shares and 408 shares for January 30, 2021 and February 1, 2020, respectively, were excluded due to the net loss.
The following potential common stock equivalents were excluded from the computation of diluted earnings per share in each year because the exercise price of such options was greater than the average market price per share of common stock for the respective periods or because the unearned compensation associated with either stock options, RSUs, restricted or deferred stock had an anti-dilutive effect.
FISCAL YEARS ENDED
(in thousands, except exercise prices)
Excluded from the computation of basic and diluted earnings per share for fiscal 2021 were 240,000 shares of unvested performance stock units. For fiscal 2020 and fiscal 2019 720,000 shares of unvested performance stock units were excluded. These performance-based awards will be included in the computation of basic and diluted earnings per share if, and when, the respective performance targets are achieved. In addition, deferred stock of 435,568 shares for fiscal 2021 and fiscal 2020 and 295,604 shares for fiscal 2019 were
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excluded from basic earnings per share. Outstanding shares of deferred stock are not considered issued and outstanding until the vesting date of the deferral period and are excluded from basic earnings per share until such shares are issued.
Stock-based Compensation
ASC Topic 718, Compensation – Stock Compensation, requires measurement of compensation cost for all stock awards at fair value on date of grant and recognition of compensation over the service period for awards expected to vest. The fair value of stock options is determined using the Black-Scholes valuation model and requires the input of subjective assumptions. These assumptions include estimating the length of time employees will retain their vested stock options before exercising them (the “expected term”), the estimated volatility of the Company’s common stock price over the expected term and the number of options that will ultimately not complete their vesting requirements (“forfeitures”). As required under the accounting rules, the Company reviews its valuation assumptions at each grant date and, as a result, is likely to change its valuation assumptions used to value employee stock-based awards granted in future periods. The values derived from using the Black-Scholes model are recognized as expense over the vesting period, net of estimated forfeitures. The estimation of stock awards that will ultimately vest requires judgment. Actual results, and future changes in estimates, may differ from the Company’s current estimates.
The Company recognized total stock-based compensation expense, with no tax effect, of $1.2 million, $1.4 million and $1.9 million for fiscal 2021, fiscal 2020 and fiscal 2019, respectively.
The total stock-based compensation cost related to time-vested awards not yet recognized as of January 29, 2022 was approximately $1.6 million and will be expensed over a weighted average remaining life of approximately 24 months.
The total grant-date fair value of awards vested was $1.7 million, $1.5 million and $3.0 million for fiscal 2021, fiscal 2020 and fiscal 2019, respectively.
Any excess tax benefits resulting from the exercise of stock options or the release of restricted shares are recognized as a component of income tax expense.
Valuation Assumptions for Stock Options
The fair value of each option grant is estimated on the date of grant using the Black-Scholes option-pricing model based on the following assumptions in the table. The fair value of each non-vested share is equal to the closing price of the Company’s stock on the date of grant. The weighted-average fair value of options granted and non-vested shares granted shown below does not include shares or deferred stock granted to directors in lieu of compensation.
Expected life (in years) 3.0 - 4.0 3.0 - 4.0 -
Dividend rate - - -
Weighted average fair value of options granted $0.47 $0.32 -
Weighted average fair value of non-vested shares granted - - $1.73
Expected volatilities are based on historical volatilities of the Company’s common stock; the expected life represents the weighted average period of time that options granted are expected to be outstanding giving consideration to vesting schedules and historical exercise patterns; and the risk-free rate is based on the U.S. Treasury yield curve in effect at the time of grant for periods corresponding with the expected life of the option.
Impairment of Long-Lived Assets
The Company recorded a gain of $2.3 million in fiscal 2021 against previously recorded impairment charges. Fiscal 2020 and fiscal 2019 included net impairment charges of $14.8 million and $0.9 million, respectively.
The Company reviews its long-lived assets for events or changes in circumstances that might indicate the carrying amount of the assets may not be recoverable. The Company’s judgment regarding the identification of impairment indicators is based on operational performance at the store level. Factors considered by the Company that could result in an impairment triggering event include significant changes in the use of assets, a current period operating or cash flow loss, underperformance of a store relative to historical or expected operating results, and an accumulation of costs significantly in excess of the amount originally expected for the construction of the long-lived store assets. The Company assesses the recoverability of the assets by determining whether the carrying value of such assets over
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their respective remaining lives can be recovered through projected undiscounted future cash flows. The model for undiscounted future cash flows includes assumptions, at the individual store level, with respect to expectations for future sales and gross margin rates as well as an estimate for occupancy costs used to estimate the fair value of the respective store’s operating lease right-of-use asset. The amount of impairment, if any, is measured based on projected discounted future cash flows using a discount rate reflecting the Company’s average cost of funds. With respect to the impairment charges taken on operating lease right-of-use assets, if the Company subsequently makes a decision to close previously impaired stores and a gain is realized as a result of the reevaluation of the existing lease liabilities, to the extent the gain related to previously recorded impairment charges against the right-of-use assets, the gain will be included as an offset to asset impairment charges with the remainder included as a reduction in store occupancy costs.
For fiscal 2021, the Company recognized a non-cash gain of $2.7 million related to the Company’s decision to close certain retail stores, with $2.3 million of the gain included as an offset to asset impairment charges and the remaining $0.4 million of the gain included as a reduction of store occupancy costs.
For fiscal 2020, the Company recorded a total asset impairment charge of $14.8 million, which included $4.1 million for the write-down of store assets and $10.7 million for the net write-down of operating lease right-of-use assets. Included in the write-down of operating lease right-of-use assets of $10.7 million was a non-cash gain of $2.6 million related to closed stores, which had previously been impaired.
The asset impairment charge for fiscal 2019 was $0.9 million, which included $0.7 million for the write-down of operating lease right-of-use assets and $0.2 million for the write-down of store assets.
Leases
The Company adopted ASU 2016-02, “Leases (Topic 842)” in fiscal 2019 on a modified retrospective basis and applied the new standard to all leases through a cumulative-effect adjustment to beginning accumulated deficit. Under ASC 842, the Company determines if an arrangement contains a lease at the inception of a contract. Right-of-use assets represent the Company’s right to use an underlying asset for the lease term and lease liabilities represent the Company’s obligation to make lease payments arising from the lease. Right-of-use assets and lease liabilities are recognized at the commencement date based on the present value of the remaining future minimum lease payments, initial direct costs and any lease incentives are included in the value of those right-of use assets. As the interest rate implicit in the Company’s leases is not readily determinable, the Company utilizes its incremental borrowing rate, based on information available at the lease measurement date to determine the present value of future payments. The Company elected the lessee non-lease component separation practical expedient, which permits the Company to not separate non-lease components from the lease components to which they relate. The Company also made an accounting policy election that the recognition requirement of ASC 842 will not be applied to certain, if any, non-store leases with a term of 12 months or less, recognizing those lease payments on a straight-line basis over the lease term. At January 29, 2022, the Company had no short-term leases.
The Company’s store leases typically contain options that permit renewals for additional periods of up to five years each. In general, for store leases with an initial term of 10 years or more, the options to extend are not considered reasonably certain at lease commencement. For stores leases with an initial term of 5 years, the Company evaluates each lease independently and, only when the Company considers it reasonably certain that it will exercise an option to extend, will the associated payment of that option be included in the measurement of the right-of-use asset and lease liability. Renewal options are not included in the lease term for automobile and equipment leases because they are not considered reasonably certain of being exercised at lease commencement. Renewal options were not considered for the Company’s corporate headquarters and distribution center lease, which was entered into in 2006 and was for an initial 20-year term. At the end of the initial term, the Company will have the opportunity to extend this lease for six additional successive periods of five years.
For store leases, the Company accounts for lease components and non-lease components as a single lease component. Certain store leases may require additional payments based on sales volume, as well as reimbursement for real estate taxes, common area maintenance and insurance, and are expensed as incurred as variable lease costs. Other store leases contain one periodic fixed lease payment that includes real estate taxes, common area maintenance and insurance. These fixed payments are considered part of the lease payment and included in the right-of-use assets and lease liabilities. Tenant allowances are included as an offset to the right-of-use asset and amortized as reductions to rent expense over the associated lease term.
See Note E ‘‘Leases’’ for additional information.
Recently Issued Accounting Pronouncements
No new accounting pronouncements, issued or effective during fiscal 2021, have had or are expected to have a significant impact on the Company’s Consolidated Financial Statements.
B. REVENUE RECOGNITION
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Revenue is recognized in accordance with ASC 606, Revenue from Contracts with Customers. The Company operates as a retailer of big and tall men’s clothing, which includes sales through stores, direct and wholesale channels. Revenue is recognized by the operating segment that initiates a customer’s order. Store sales are defined as sales that originate and are fulfilled directly at the store level. Direct sales are defined as sales that originate online, including those initiated online at the store level, on its website or on third-party marketplaces. Wholesale sales are defined as sales made to wholesale customers pursuant to the terms of each customer’s contract with the Company. Generally, all revenues are recognized when control of the promised goods is transferred to customers, in an amount that reflects the consideration in exchange for those goods. Sales tax collected from customers and remitted to taxing authorities is excluded from revenue and is included as part of accrued expenses on the Consolidated Balance Sheets.
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Revenue from the Company’s store operations is recorded upon purchase of merchandise by customers, net of an allowance for sales returns, which is estimated based upon historical experience.
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Revenue from the Company’s direct operations is recognized at the time a customer order is delivered, net of an allowance for sales returns, which is estimated based upon historical experience.
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