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
The global impact of the COVID-19 pandemic has had and, based on the current status and uncertainty, will likely continue to have an adverse effect on our business, financial results, liquidity, supply chain and workforce until a significant portion of the U.S. population has been vaccinated.
On March 11, 2020, the World Health Organization declared the current outbreak of a novel coronavirus disease (“COVID-19”) a global pandemic. Federal, state and local agencies have mandated various restrictions including travel restrictions, restrictions on public gatherings, state of emergencies, stay-at-home orders and closure of all non-essential businesses, among others.
The COVID-19 pandemic has had, and will likely continue to have, an adverse effect on our business, financial results and liquidity until a significant portion of the U.S. population has been vaccinated and our customers begin to socialize outside the home. All of our stores were closed temporarily on March 17, 2020 and remained closed through the end of April 2020, at which point we began to open our stores on a gradual basis through June 30, 2020. During fiscal 2020, we focused on mitigating the effects of the COVID-19 pandemic and preserving our liquidity. These efforts included, among other things, (i) the furloughing of substantially all of our associates while our stores remained closed, (ii) temporarily reducing, on a tiered basis, the salaries of all members of management through August 2, 2020, (iii) suspending merit increases, (iv) implementing a restructuring program in the third quarter to reduce SG&A costs by terminating services agreements, eliminating certain professional services and reduced marketing costs, (v) eliminating approximately 101 corporate positions and a total of 1,078 store associates since March 2020, (vi) suspending compensation for non-employee directors for the second quarter of fiscal 2020 and reducing the size of the board from nine to six directors, (vii) eliminating capital expenditures and operating expenses, where possible, (viii) negotiating with vendors and landlords for extended and revised payment terms, (ix) cancelling approximately $148.0 million of on-order merchandise, at retail, (x) drawing $30.0 million under our credit facility and amending that facility to increase our borrowing base availability by delaying the step-down of our advance rates and amending the agreement to permit the Company the ability to enter into an aggregate of up to $15.0 million in promissory notes with merchandise vendors, and (xi) pursuing all opportunities that may be available to us under the Coronavirus Aid, Relief and Economic Security Act, ("CARES Act").
These actions may not be successful in mitigating the effects of this pandemic, which remains highly uncertain and difficult to predict, especially given the existence of new variants, and the actions that we take may negatively impact or delay our strategic initiatives. For example, even though our stores are open, we cannot be assured that (i) consumer demand and, therefore, sales will return to levels experienced prior to the pandemic, (ii) if sales do not return to levels prior to the pandemic, sales will be at levels sufficient to support the ongoing business, (iii) new practices or protocols could impact our business and may continue and/or increase, for example, occupancy limitations, (iv) our stores can remain open if there is a resurgence of the virus and therefore need to close again, or (v) our associates will be willing to staff our stores, as a result of health concerns. Furthermore;
and
In addition to the specific risks to our business noted above, we will also be subject to the long-term effects the COVID-19 pandemic may have on the U.S. economy as a whole. The U.S. experienced unprecedented unemployment and an economic recession during fiscal 2020 that has impacted consumer discretionary spending, and therefore consumer demand for our products. The magnitude of the impact of the COVID-19 pandemic will be determined by the length of time that the pandemic continues, and while government authorities’ measures relating to the pandemic may be relaxed as the pandemic abates, these measures may be reinstated as the pandemic continues to evolve.
Even after the COVID-19 pandemic subsides, we may continue to experience material adverse impacts to our business as a result of an economic recession that has occurred or may occur in the future due to a continued erosion in consumer sentiment or the effect of
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unemployment on our customer base. Furthermore, our customers may have or will continue to have a decrease in in discretionary consumer spending which would have an adverse impact on our store traffic and sales.
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 obligations under our existing debt agreements.
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 impact of the COVID-19 pandemic on our business, inventory levels have been reduced to align with expected decreased sales. 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 assure you 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. We cannot ensure that we could obtain refinancing or additional financing on favorable terms or at all.
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:
• grow our DXL e-commerce business;
• grow our existing customer base;
• attract and retain new customers across all channels;
• hire qualified store management and store associates;
• 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 television and radio advertising, advertising events, loyalty programs, catalogs, and digital marketing, including social media, e-commerce 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 costly and, if not successful, may negatively affect our ability to meet our sales goals and gain market share.
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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 invested in digital media to attract new customers. Growth of our overall sales is dependent on customers’ continuing to expand their online purchases in addition to in-store purchases. During fiscal 2020, because of the COVID-19 pandemic, we saw significant growth in our DXL.com business with revenues increasing 38.6% 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 customer sophistication requires that we provide additional website features and functionality 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 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. This includes the expansion of our BOPIS (buy online pick up in stores) and BOPAC (buy online pick up curbside) during fiscal 2020 to help our customers continue to shop during the pandemic. While we consider ourselves an omni-channel retailer, 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 growth of our wholesale segment may not be successful.
As part of our strategic growth plan, we launched a wholesale segment in fiscal 2018 focused on product development and distribution relationships with key retailers. We are working on developing and distributing co-branded big & tall men’s apparel lines. The success of this strategic initiative depends on a number of factors, including our ability to grow our wholesale customer base, develop a cost-effective infrastructure, and sustain adequate liquidity to meet the longer lead times associated with the wholesale business. In addition, because our wholesale customers order merchandise on a “purchase order” basis, as our wholesale business grows, any decision by any customer to decrease their order volume or cease purchasing from us could adversely affect our wholesale revenues and profitability.
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 closure if an employee is diagnosed with COVID-19 or there is a governmentally-imposed quarantine, 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.
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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 from our distribution center.
Our business may be adversely affected due to disruptions in the global supply chain.
Disruptions in the global supply chain due to COVID-19 outbreaks 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 on domestic ports has also created a similar disruption in the supply chain and may cause delays in the receipt and shipment of inventory. 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 further loss of sales and an adverse impact on our results of operations.
Our business may be adversely affected if we are unable to successfully manage our store portfolio.
We lease all of our store locations. Renewing and renegotiating these leases at acceptable lease terms is critical to the profitability of our stores. In the second quarter of fiscal 2020, we were able to negotiate short-term rent relief agreements, primarily through rent abatements and rent deferments, with the majority of our landlords due to the temporary store closures in response to the pandemic. Given the uncertainty as to the continued impact of the pandemic on store sales as well as our customers’ shift to online shopping, we are continuing to engage with our landlords to restructure certain lease arrangements. If store sales do not return to levels prior to the pandemic and we are unable to renegotiate lease agreements, certain stores may not be profitable and we may not be able to renew existing agreements. At January 30, 2021, we have 131 stores that have either a natural lease expiration or a kick-out option within the next two years. This provides us an opportunity to right-size our store portfolio over the next few years, through lease renegotiations or lease-term expirations, to ensure that we are optimizing our store profitability and omni-channel distribution.
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 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, consumer debt, interest rates and consumer confidence. Due to our seasonality, the possible adverse impact from such risks is potentially greater if any such risks occur during our fourth quarter.
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
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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 Company is working with its 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 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.
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.
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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. As a result of the impact of the COVID-19 pandemic on the Company’s business during fiscal 2020, the Company did incur significant asset impairment charges during fiscal 2020. 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 2023. In the absence of a LIBOR rate, our credit facility provides for a comparable or successor rate to be used. It is expected that the LIBOR rate will be replaced by 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 30, 2021, approximately $72.0 million of our total outstanding debt of $74.4 million was in short-term LIBOR-based contracts. 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 2020 we experienced labor shortages 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. Furthermore, if the federal minimum wage is increased to $15 per hour, we may need to increase not only the rate of our minimum wage employees, but also the wages paid to employees at wage rates that are above minimum wage. 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.
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 starting to see 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.
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Failure to comply with laws, rules and regulations could negatively affect our business operations and financial performance.
Our business is subject to federal, state, local and international laws, 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, the Affordable Care Act 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. In addition, as a result of operating in Canada, we must comply with their laws and regulations which may differ substantially from, and may conflict with, corresponding U.S. laws and regulations. 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
Trading of our common stock on the OTCQX market may be volatile and sporadic, which could depress the market price of our common stock and make it difficult for our stockholders to sell their shares.
In December 2020 we voluntarily delisted our common stock from The Nasdaq Stock Market to the OTCQX tier of the OTC Markets. Our common stock is currently quoted under the symbol “DXLG.” Trading in stock quoted on the OTCQX may be thin and characterized by wide fluctuations in trading prices, due to many factors that may have little to do with our operations or business prospects. This volatility could depress the market price of our common stock for reasons unrelated to our operating performance. Accordingly, stockholders may have difficulty reselling any of their shares. Our common stock will continue to trade on OTCQX so long as we meet their standards for continued qualifications, including having at least two brokers who choose to make a market for our common stock, however, there can be no assurances regarding any such trading.
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, since January 4, 2021, the last reported sale price of our common stock on the OTCQX has ranged from a low of $0.26 to a high of $0.80 on January 29, 2021. Factors that could cause fluctuations in the market price of our common stock include the following:
• overall changes in the economy and general market volatility;
• news announcements regarding our quarterly or annual results of operations;
• quarterly comparable sales;
• acquisitions;
• competitive developments;
• governmental regulation (such as increased wage and paid benefits laws);
• litigation affecting us; or
• 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
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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.
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Item 1B. Unresolved Staff Comments
None.
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 30, 2021, we operated 226 Destination XL retail stores, 17 Destination XL outlet stores, 46 Casual Male XL retail stores and 22 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 30, 2021.
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 30, 2021
Alabama 2 1
Arizona 6 —
Arkansas — 1
Colorado 3 1
Connecticut 3 1
Delaware 2 —
Georgia 4 2
Idaho 1 —
Indiana 6 3
Kansas 2 —
Kentucky 3 —
Louisiana 3 1
Maine 2 —
Maryland 6 3
Massachusetts 5 2
Minnesota 2 2
Mississippi — 2
Missouri 5 2
Montana 1 —
Nebraska 2 —
Nevada 3 —
New Hampshire 3 —
New Jersey 8 5
New Mexico 1 —
North Carolina 4 4
North Dakota — 1
Oklahoma 2 —
Pennsylvania 11 6
Rhode Island 1 —
South Carolina 4 —
South Dakota 1 —
Tennessee 7 1
Utah 2 —
Vermont 1 —
Virginia 6 2
Washington 5 —
West Virginia — 1
Wisconsin 5 —
International
Toronto, Canada 2 —
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.
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Item 4. Mine Safety Disclosure
Not applicable.
PART II.
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
Market Information
Our common stock previously traded on the Nasdaq Global Select Market (“Nasdaq”) under the symbol “DXLG”. Effective December 22, 2020, we voluntarily delisted our common stock from Nasdaq and began trading our common stock on the OTCQX Marketplace of the OTC Markets Group ("OTCQX") under the symbol “DXLG”.
Holders
As of March 15, 2021, based upon data provided by the transfer agent for our common stock, there were approximately 83 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 2020.
Item 6. Selected Financial Data
Note Applicable.
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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 our financial outlook for fiscal 2021 with respect to sales, comparable sales, adjusted EBITDA and free cash flows, statements regarding our ability to withstand the impact of the COVID-19 pandemic on our business, our efforts to restructure and reduce costs and right size our lease structure, expected annualized savings from restructuring actions taken in fiscal 2020, expected additional borrowing capacity under our new FILO loan, and our expected liquidity for the next 12 months. 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.
Impact of COVID-19 Pandemic on Our Business
The COVID-19 pandemic has negatively affected the global economy, disrupted global supply chains, and created significant disruption of the financial and retail markets, including a disruption in consumer demand for men’s clothing and accessories. While the pandemic has had, and will likely continue to have, a significant adverse effect on our business, financial condition, and results of operations, we moved early and decisively throughout fiscal 2020 to preserve our financial flexibility and position ourselves to withstand the short-term impact of the pandemic.
We closed all of our retail stores on March 17, 2020 and, beginning at the end of April 2020 and continuing into the second quarter of fiscal 2020, we started to gradually reopen stores. As of the end of June, all stores had been reopened but have been operating at reduced hours. Since the reopening, some stores have had to close for periods of time. Our direct business continues to play a vital role as we are seeing our customer’s shopping preference shift to online. Given the increased demand in our direct business, we have been very fortunate that our distribution center was able to operate without any business disruption during fiscal 2020.
The unrelenting impact of COVID-19 on the apparel industry continues to be a challenge. At DXL, we experienced a shift among our customers away from event-driven shopping and into need-based shopping. Our customers spent less time this year at large social gathering events such as parties, graduations, and sporting events which negatively impacted demand for apparel. We saw improvements in many of our core and basic categories which have been driven by this change in lifestyle of staying close to home. We expect this trend to continue for the early part of fiscal 2021, and we expect our customers’ shopping behaviors to significantly change when vaccines are widely distributed and our customer is in a need to replenish his wardrobe over time.
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 and, more recently due to the COVID-19 pandemic, pick-up at curbside. We define store sales as sales
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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. The Company has not carved-out prior year sales for periods where the stores were temporarily closed in fiscal 2020 due to the pandemic. 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.
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 adjusted net loss, adjusted net loss per diluted share, free cash flow, EBITDA and adjusted EBITDA. 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 2020 to fiscal 2019 and fiscal 2018. 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 similar measures used by other companies and should not be considered superior to or as a substitute for net loss, net 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.
EXECUTIVE OVERVIEW
(in millions, except for per share data)
Adjusted net loss (1) (36.7 ) (3.2 ) (3.5 )
Exit costs associated with London operations — 1.7 —
CEO transition costs — 0.7 2.4
Corporate restructuring — — 1.9
Diluted loss per share:
Adjusted net loss $ (0.72 ) $ (0.06 ) $ (0.07 )
Cash flow from operating activities $ (1.2 ) $ 15.8 $ 15.7
Free cash flow $ (5.5 ) $ 2.4 $ 2.8
The COVID-19 pandemic had an adverse impact on our revenues and, in turn our earnings in fiscal 2020. In response, we took decisive steps early in fiscal 2020 to pivot our business model and position ourselves for recovery, and emerge with significantly more operating leverage as we head into fiscal 2021. While fiscal 2020 was a challenging year for us, we navigated those challenges and maintained our solvency through one of the most difficult years in the history of our Company.
Managing our liquidity to help us weather the impact of the pandemic was our primary objective, which we believe we successfully accomplished. In those initial few weeks in March 2020, we took several immediate and proactive steps, including: drawing down $30.0 million from our credit facility, furloughing the majority of our organization, cancelling inventory orders, eliminating capital spending except where necessary, instituting a temporary reduction in pay for management (director-level and above) until the start of the third quarter, suspending the directors second quarter compensation, working with landlords on rent deferments and abatements during those temporary closures, negotiating extended payment terms with our suppliers and vendors, and amending our credit facility
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to provide additional borrowing capacity. As our stores began to open, we continued to focus on liquidity. We took several cost-reduction measures to realign our cost structure with our current sales trends. These steps have been difficult and included reducing our field organization by approximately 54% and our corporate workforce by 29%. In November 2020, we also terminated certain service agreements and eliminated certain professional services, much of the benefit of which will not be realized until fiscal 2021. As a result of these efforts, we not only preserved liquidity, but we also have substantially reduced our operating cost structure.
From a liquidity perspective, at January 30, 2021, our total debt, net of cash, increased only $5.6 million to the prior year despite the significant loss in revenues. We decreased inventory levels by $17.4 million, or 17%, and our year-end inventory is current with clearance inventory down $1.4 million from February 1, 2020. In addition, we were able to work with our landlord community to renegotiate much of our lease portfolio given current sales trends, which benefited our cash flows in fiscal 2020 by approximately $10.0 million and will benefit fiscal 2021 as well. We also restructured 91 individual store leases in fiscal 2020 which we expect to deliver over $13.5 million in savings over the life of the leases, including approximately $5.2 million in fiscal 2021. As discussed below, subsequent to the end of fiscal 2020, we also raised $5 million, before offering costs, from the sale of 11.1 million shares of common stock through a registered direct offering and also entered into a new first-in, last out term loan “FILO” loan which replaced our existing FILO loan, both of which added further flexibility to our liquidity as we head into 2021.
While our stores were adversely affected by the pandemic, with comparable store sales down 47.1% to last year, our digital growth was a bright spot for us this year. We had started transforming our digital presence in fiscal 2019 in order to grow our digital business, and in response to the pandemic we accelerated those efforts during fiscal 2020 as our customers migrated to online shopping. Our e-commerce site, DXL.com, was instrumental to our business, enabling us to continue to serve our customers. As our customers increasingly migrated to online shopping, our DXL.com site and distribution center were able to successfully meet the increased demand. Sales from our DXL.com site increased 38.6% over the prior year. This is an exciting opportunity for us and we are hoping we are able to build on this growth into fiscal 2021.
The loss of revenues in fiscal 2020, resulted in a net loss for fiscal 2020 of $(1.26) per diluted share as compared to a net loss of $(0.16) per diluted share in fiscal 2019. On a non-GAAP basis, adjusted net loss was $(0.72) per diluted share in fiscal 2020 as compared to $(0.06) per diluted share in fiscal 2019.
The loss in store sales from the temporary store closures and reduced demand for in-person shopping resulted in our having to take significant impairment charges against our long-lived assets, especially in the first quarter of fiscal 2020. Our results for fiscal 2020 include a total impairment charge of $14.8 million, or $0.29 per diluted share, primarily related to the write-down of our operating lease right-of-use assets and, to a lesser extent, store assets. This compares to a total impairment charge of $0.9 million, or $0.02 per diluted share, in fiscal 2019.
Subsequent Events
Registered Direct Offering of Common Stock
On February 5, 2021, we sold, pursuant to a definitive stock purchase agreement in a registered direct offering, an aggregate of 11,111,111 shares of our common stock, for a gross purchase price of $5.0 million, before payment of offering costs. We intend to use the net proceeds from the offering for working capital and other general corporate purpose.
New FILO Loan
On March 16, 2021, we refinanced our existing $15.0 million first-in, last-out term loan under our credit agreement with Bank of America and entered into a new, $17.5 million senior secured first-in, last-out term loan facility (the “new FILO Loan”). Pursuant to the Fourth Amendment to its Seventh Amended and Restated Credit Facility with Bank of America, N.A. (as amended, the “Credit Facility”), PathLight Capital Fund II LP was added as the FILO lender to the Credit Facility. Proceeds from the new FILO Loan were used to repay in full the Company’s existing FILO loan with the balance of the proceeds to be used for working capital.
The borrowing base for the new FILO Loan is determined based on a percentage of eligible inventory, receivables and intellectual property. We expect the new FILO Loan to provide us additional borrowing capacity of approximately $5.0 to $10.0 million. Interest rates under the new FILO Loan will be higher than the existing FILO loan by approximately 250 to 300 basis points. See “Liquidity and Capital Resources” for a more detailed description of the new FILO Loan.
Financial Outlook
Our plans for fiscal 2021 include expected sales of approximately $385.0 million to $402.0 million, adjusted EBITDA of approximately $11.0 to $18.0 million and positive free cash flow, which we expect to use to pay-down debt. Our financial projections assume that vaccines against the COVID-19 virus are widely available and administered by the end of Spring 2021. We believe that demand for apparel will gradually improve in fiscal 2021 as our customers begin to return to pre-COVID-19 activities. We expect a 10.8% to 14.8% decline in comparable sales from fiscal 2019 levels, with comparable store sales down 23.8% to 27.8% and our direct
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business up 26.9% to 30.7% to fiscal 2019. We expect to achieve these results through continued penetration of our direct business and a modest recovery in store traffic during the course of the year.
RESULTS OF OPERATIONS
Our fiscal year is a 52- or 53-week period ending on the Saturday closest to January 31. Fiscal 2020, fiscal 2019 and fiscal 2018 were all 52-week periods.
Below is a discussion of our results of operations for fiscal 2020 as compared to fiscal 2019.
Our Annual Report on Form 10-K for the year ended February 1, 2020 (fiscal 2019) includes a discussion and analysis of our financial condition and results of operations comparing fiscal 2019 to fiscal 2018 in Item 7 of Part II, “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”
SALES
Fiscal year
Less prior year sales for stores that have closed (12.5 )
Decrease in comparable sales (145.5 )
Increase in wholesale revenues 4.1
Other, net (1.2 )
For fiscal 2020, total sales decreased 32.7% to $318.9 million from $474.0 million in fiscal 2019. Comparable sales for the full year decreased 32.6%, primarily due to a comparable sales decrease in stores of 47.1%, partially offset by an increase in our direct business of 14.9%. All of our stores were temporarily closed on March 17, 2020 and, at the end of April 2020, we started to gradually reopen them. By the end of June 2020, all stores had reopened, but with reduced operating hours. Stores sales gradually improved through the remainder of fiscal 2020, but comparable store sales were still below fiscal 2019 levels with the fourth quarter comparable store sales down 37.3%. Until vaccines are widely administered and customers gain some comfort that enables them to begin socializing, we expect to continue to see similar sales trends for at least the early part of fiscal 2021.
The increase in our direct business was driven by our DXL.com e-commerce site, which had a sales increase of 38.6% and was partially offset by a 50.4% decrease in universe sales, which are online sales that are initiated at the store level. The decrease in our universe sales is directly attributable to store closures and the decrease in store traffic once the stores reopened. The strong growth in our direct business was a direct outcome of the digital strategies we implemented and the customers’ shift in shopping preferences in response to COVID-19.
Wholesale revenues for fiscal 2020 increased $4.1 million to $16.6 million. The increase is primarily due to the sale of masks during the second quarter of fiscal 2020.
GROSS MARGIN
Gross margin rate for fiscal 2020 was 32.9% compared to 43.1% in fiscal 2019. The decrease of 10.2% was due to a decrease in merchandise margin of 5.6% and a decrease of 4.6% due to the deleveraging of occupancy costs. On a dollar basis, occupancy costs decreased $8.3 million, or 11.8% largely due to our efforts to restructure our lease agreements due to the impact of the pandemic on our retail stores, as well as due to closed stores.
The decrease in merchandise margin reflects the increased promotional posture we took in response to COVID-19, especially during the second quarter, where we were highly promotional in our effort to drive sales and reduce inventories. For the second half of fiscal 2020, we focused on more targeted promotions with a greater gross margin impact, which improved our merchandise margins in the third and fourth quarter. Because of the growth in our direct channel and free shipping promotions during fiscal 2020, our shipping costs increased over the prior year.
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While our gross margin was negatively impacted by the deleveraging of occupancy costs against the lower sales base, we worked throughout fiscal 2020 with our landlord community to restructure our existing lease agreements. In the first half of fiscal 2020, we negotiated $10.0 million of favorable rent abatements and deferments with our landlords for the months that our stores were temporarily closed. In addition, to date, we have also restructured 91 individual store leases which will deliver over $13.5 million in savings over the life of the leases, including $5.2 million of savings projected in fiscal 2021.
By its nature, gross margin rates for wholesale are lower than gross margin rates for the Company’s retail segment. During fiscal 2020, margins in our wholesale business improved, primarily driven by our sales of masks in the second quarter of fiscal 2020.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
SG&A expenses for fiscal 2020 decreased $51.6 million, or 28.6%, to $129.1 million as compared to $180.7 million in fiscal 2019. SG&A expenses as a percentage of sales for fiscal 2020 were 40.5% as compared to 38.1% for fiscal 2019.
The decrease in SG&A expenses for the year was due to the decrease in variable-based costs such as store payroll, supplies, travel and other supporting expenses, a decrease in advertising costs, corporate payroll, professional services and director compensation. Performance-based incentives and insurance costs increased over the prior year. Included in SG&A costs for fiscal 2020 is an earned tax credit of approximately $1.3 million that the Company realized as part of the CARES Act.
We took several steps throughout fiscal 2020 to reduce our operating costs, including the furlough of both our store associates and certain corporate associates while our stores were closed, a reduction in marketing costs, a temporary salary reduction of 10-20% for management levels director and above, and the suspension of non-employee director compensation for the second quarter. We also implemented several cost savings initiatives to realign our operating costs with expected sales levels, which resulted in the termination of certain service agreements and professional services, a reduction in our field organization by approximately 54% and in our corporate workforce by 29%. With the reduced sales levels and store traffic, our stores are operating at minimal staffing levels and reduced operating hours.
The expected annualized savings from the action taken in November 2020 are expected to result in annualized savings of $9.7 million, the majority of which will be realized in fiscal 2021. These savings will be in addition to the previous cost-saving measures we took during the first three quarters of fiscal 2020.
SG&A expenses are managed 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 20.2% of sales in fiscal 2020 compared to 22.6% of sales in fiscal 2019. Corporate Support Costs, which include the distribution center and corporate overhead costs, represented 20.3% of sales in fiscal 2020 compared to 15.5% of sales in fiscal 2019 and reflects the impact of the deleveraging of sales.
IMPAIRMENT OF ASSETS
We regularly review assets for impairment indicators at the individual store level, as this represents the lowest level of identifiable cash flows. Store assets include property and equipment as well as operating lease right-of-use assets. When indicators of impairment are present, a recoverability analysis is performed.
As a result of the impact of the COVID-19 pandemic on store operations, we have taken significant impairment charges in fiscal 2020, primarily related to our right-of-use assets. Our determination of impairment was based on multiple probability-weighted scenarios as to the recoverability of each individual store assuming that consumer retail spending would remain curtailed for a period of time.
In addition, the asset impairment charges for fiscal 2020 were partially offset by non-cash gains related to the Company’s decision to close certain retail stores, which resulted in a revaluation of the existing lease liabilities. To the extent that such gain related to previously recorded impairment charges for operating right-of-use assets, the gain was included as an offset to impairment charges, with the remainder of the gain included as a reduction in store occupancy costs. For fiscal 2020, the Company recognized a non-cash gain of $3.1 million, of which $2.6 million was included as an offset to the asset impairment charges.
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.
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DEPRECIATION AND AMORTIZATION
Depreciation and amortization expense was $21.5 million in fiscal 2020 compared to $24.6 million for fiscal 2019. With the majority of our new store growth complete, our depreciation expense has been decreasing over the past few years.
INTEREST EXPENSE, NET
Net interest expense for fiscal 2020 was $3.9 million as compared to $3.3 million for fiscal 2019. The increase in interest expense is due to an increase in average borrowings and an increase in the effective borrowing rates. As a result of our amendment to our credit facility in April 2020, interest rates under our Credit Facility, which includes our FILO loan, increased by approximately 150 basis points. In addition, as discussed above, on March 20, 2020, we drew approximately $30.0 million against our revolving credit facility, which increased our average borrowings. This action was taken to provide the Company with flexibility to manage its cash flow due to the uncertainty of the pandemic.
See “Liquidity and Capital Resources” below for more discussion regarding our credit facility and term loan as well as our future liquidity needs.
INCOME TAXES
Realization of our deferred tax assets, which relate principally to federal net operating loss carryforwards, of which approximately $158.2 million will expire from fiscal 2022 through fiscal 2037, is dependent on generating sufficient taxable income in the near term. 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. While we expect to return to profitability, generate taxable income and ultimately emerge from a three-year cumulative loss, based on our results for fiscal 2020 and our forecast for fiscal 2021, we believe that a full valuation allowance remains appropriate at this time.
Due to current period losses, our current tax provision for fiscal 2020 and fiscal 2019 was primarily due to current state margin tax, based on gross receipts less certain deductions. See Note F of the Notes to the Consolidated Financial Statements.
NET LOSS
Net loss for fiscal 2020 was $(64.5) million, or $(1.26) per diluted share, as compared to $(7.8) million, or $(0.16) per diluted share, in fiscal 2019.
Included in our results for fiscal 2020 were asset impairment charges of $14.8 million, or $0.29 per diluted share. Included in our results for fiscal 2019 were charges of $1.7 million, or $0.03 per diluted share, for the exit costs associated with our London operations, $0.7 million, or $0.01 per diluted share, in CEO transition costs and $0.9 million, or $0.02 per diluted share in impairment charges.
On a non-GAAP basis, before asset impairments, exit costs associated with our London operations, CEO transition costs and assuming a normalized tax rate of 26% for both years, adjusted net loss per share for fiscal 2020 was $(0.72) per diluted share, compared to $(0.06) per diluted share for fiscal 2019. See “Non-GAAP Reconciliation” below.
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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. Generally, the majority of our operating income is generated in the fourth quarter as a result of the impact of the holiday selling season. A comparison of quarterly sales, gross profit, and net loss per share for the past two fiscal years is presented in Note O of the Notes to the Consolidated Financial Statements.
(in millions, except percentages) Fiscal 2020 Fiscal 2019 Fiscal 2018
EFFECTS OF INFLATION
Although our operations are influenced by general economic trends, we do not believe that inflation has had a material effect on the results of our operations in the last three fiscal years.
LIQUIDITY AND CAPITAL RESOURCES
Our primary sources of liquidity are cash generated from operations and availability under our credit facility with Bank of America, N.A., which was most recently amended in April 2020 (“Credit Facility”). Although our cash flow from operations has been significantly impacted by the lost revenue as of result of the COVID-19 pandemic, we believe that we have taken sufficient steps to manage our available cash flow for the foreseeable future. During fiscal 2020, we amended our Credit Facility to increase our borrowing base, negotiated extended payment terms with vendors, restructured lease agreements, cancelled inventory purchase orders, reduced operating costs and reduced capital spending. Subsequent to year end, in February 2021, we raised $5 million, before offering costs, through the sale of 11.1 million shares in a direct registered offering, the proceeds of which will be used for working capital in fiscal 2021. Also in March 2021, the Company entered into a new $17.5 million FILO loan to replace the Company’s existing $15.0 million FILO loan. Based on our current projections, we believe our cash on hand, including the proceeds from the equity offering, availability under our amended Credit Facility, the new FILO loan, and cash generated from operations will be sufficient to cover our working capital requirements and limited capital expenditures for the next 12 months. However, the extent to which the COVID-19 pandemic will continue to impact our business in fiscal 2021 will depend on the swiftness and effectiveness of the vaccine roll-out and our customers returning to pre-COVID activities, which are uncertain and cannot be predicted at this time.
Managing our business, while preserving our liquidity was our primarily objective in fiscal 2020. Our total debt, net of cash, at the end of fiscal 2020 was $55.4 million, as compared to $49.8 million in fiscal 2019. Our ability to borrow under the credit facility is largely dependent on our inventory levels, which we have intentionally reduced to realign with current expectations of sales. Accordingly, the decrease in the unused excess availability under our credit facility at year-end is due to the $17.4 million decrease in inventory and the $14.7 million increase in cash on hand.
The following table sets forth financial data regarding our liquidity position at the end of the past two fiscal years:
Cash flow from operating activities $ (1.2 ) $ 15.8
Capital expenditures (4.2 ) (13.4 )
Free Cash Flow $ (5.5 ) $ 2.4
Cash on hand, at year end $ 19.0 $ 4.3
Total debt, net of unamortized debt issuance costs $ 74.4 $ 54.1
Unused excess availability under Credit Facility $ 11.5 $ 48.5
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The following is a summary of our total debt outstanding at January 30, 2021, with the associated unamortized debt issuance costs:
Credit Facility
Our Credit Facility provides for a maximum committed borrowing of $125.0 million, which, pursuant to an accordion feature, may be increased to $175.0 million upon our request and the agreement of the lender(s) participating in the increase (the “Revolving Facility”). The Credit Facility includes a sublimit of $20.0 million for commercial and standby letters of credit and a sublimit of up to $15.0 million for swingline loans. Borrowings made pursuant to the Revolving Facility under the Credit Facility bear interest, calculated under either the Federal Funds rate or the LIBOR rate, at a rate equal to the following: (a) the Federal Funds rate plus a varying percentage based on the Company’s excess availability, of either 1.75% or 2.00%, or (b) the LIBOR rate (the Company being able to select interest periods of 1 week, 1 month, 2 months, 3 months or 6 months) plus a varying percentage based on the Company’s excess availability, of either 2.75% or 3.00%. The current maturity date is May 24, 2023. The Credit Facility was amended in March 2021, subsequent to fiscal 2020, to accommodate the new FILO loan agreement and the repayment of the existing FILO loan.
Our Credit Facility is described in more detail in Note D to the Notes to the Consolidated Financial Statements.
We had outstanding borrowings of $59.7 million under the Revolving Facility at January 30, 2021. Outstanding standby letters of credit were $2.8 million and outstanding documentary letters of credit were $0.1 million. The average monthly borrowing outstanding under the Revolving Facility during fiscal 2020 was approximately $67.6 million, resulting in an average unused excess availability of approximately $17.9 million. Unused excess availability at January 30, 2021 was $11.5 million. Our obligations under the Credit Facility are secured by a lien on substantially all of our assets.
FILO Loan
The Credit Facility also includes a FILO loan for $15.0 million. The total borrowing capacity under the FILO loan is based on a borrowing base, generally defined as a specified percentage of the value of eligible assets, including certain trade names, that amortizes over time, plus a specified percentage of the value of eligible inventory that amortizes over time. During the first quarter of fiscal 2020, we entered into an amendment that extended these advance rates to December 2020 before they began to step down.
As a result of extending the advance rates under the FILO loan, the applicable margin rates for borrowings were increased by approximately 150 basis points. Accordingly, current borrowings made under the FILO loan bear interest, calculated under either the Federal Funds rate or the LIBOR rate, at a rate equal to the following: (a) the Federal Funds rate plus a varying percentage based on the Company’s excess availability, of either 3.75% or 4.00% or (b) the LIBOR rate (the Company being able to select interest periods of 1 week, 1 month, 2 months, 3 months or 6 months) plus a varying percentage based on the Company’s excess availability, of either 4.75% or 5.00%. At January 30, 2021, the outstanding balance of $15.0 million was in a 1-week LIBOR-based contract with an interest rate of 6.00%. As discussed above, under “Subsequent Events”, on March 16, 2021 the FILO was repaid in full in connection with the Company’s new FILO loan.
INVENTORY
At January 30, 2021, total inventories decreased to $85.0 million from $102.4 million at February 1, 2020. The $17.4 million decrease in inventory is the result of our managing inventory very conservatively, slowing replenishment and reducing receipts to align with the reduced sales volumes as a result of the pandemic. We have narrowed our assortment of merchandise in our efforts to maintain a healthy inventory and manage clearance levels. At January 30, 2021, our clearance inventory decreased by $1.4 million, or 13.6% from the prior year, and represented 10.4% of our inventory as compared to 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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CONTRACTUAL OBLIGATIONS
The following table summarizes our contractual obligations at January 30, 2021, and the effect such obligations are expected to have on our liquidity and cash flows in future periods:
Payments due by period
(in millions)
Long-term debt obligations (2) 15.0 — 15.0 — —
Interest on long-term debt obligations (3) 3.0 0.9 2.1 — —
Merchandise purchase obligations (4) 30.0 10.0 20.0 — —
CAPITAL EXPENDITURES
The following table sets forth the open stores and related square footage at January 30, 2021 and February 1, 2020 respectively:
Store Concept Number of Stores Square Footage Number of Stores Square Footage
(square footage in thousands)
In response to the pandemic, we did not rebrand any of our Casual Male XL stores or open any new DXL locations during fiscal 2020. In total, we closed 12 stores during the year. Below is a summary of those store closings from February 1, 2020 to January 30, 2021:
Closed retail stores (2 ) — (4 ) (6 ) (12 )
Our capital expenditures for fiscal 2020 were $4.2 million, as compared to $13.4 million in fiscal 2019. Early in fiscal 2020, we eliminated all non-essential capital projects for fiscal 2020 in our efforts to preserve liquidity. The capital expenditures for fiscal 2020 primarily related to management information projects to support our distribution center and marketing, including our CRM platform.
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In fiscal 2019, in addition to our management information projects, we also rebranded 14 Casual Male XL stores to DXL stores and opened two DXL retail stores. During fiscal 2021, we do not plan to open any new stores or rebrand any of our Casual Male XL stores. As mentioned above, during fiscal 2020, we have been proactively working with our landlord community to renegotiate our existing leases given the impact of the COVID-19 pandemic on our retail store sales. We have 131 stores that have leases with either a natural lease expiration or a kick-out option within the next two years. This provides us an opportunity to right-size our store portfolio, through ongoing lease renegotiations or lease-term expirations, to ensure that we are optimizing our store profitability and omni-channel distribution.
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 2020 to fiscal 2019 and fiscal 2018, 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 loss, net loss per diluted share or cash flows from operating activities in accordance with GAAP.
Adjusted Net Loss and Adjusted Net Loss Per Diluted Share
Adjusted net loss reflects an adjustment assuming a normal tax rate of 26% and the add-back of asset impairment charges, exit costs associated with London operations, CEO transition costs and corporate restructuring. We have fully reserved against our deferred tax assets and, therefore, net loss is not reflective of earnings assuming a “normal” tax position. Adjusted net loss provides investors with a useful indication of the financial performance of the business, on a comparative basis, assuming a normalized tax rate of 26%.
The following table is a reconciliation of net loss and net loss per diluted share (on a GAAP basis) to adjusted net loss and adjusted net loss per diluted share (on a non-GAAP basis) (certain amounts may not foot due to rounding):
Add back:
Exit costs associated with London operations — — 1,737 $ 0.03 — —
Corporate restructuring charge — — — — 1,904 $ 0.04
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 (certain amounts may not foot due to rounding):
Projected
Cash flow from operating activities (GAAP) $ (1.2 ) $ 15.8 $ 15.7 $ >4.3
Free cash flow (non-GAAP) $ (5.5 ) $ 2.4 $ 2.8 $ >0.0
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EBITDA and Adjusted EBITDA
EBITDA and Adjusted EBITDA 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.
The Company is unable to reconcile the adjusted EBITDA guidance for fiscal 2021 to net loss, because certain information necessary for the reconciliation is not available without unreasonable efforts. Such information is difficult to predict and/or is dependent on future events that are outside of our control. In particular, we are unable to reasonably predict potential asset impairments, because of the ongoing impact of the COVID-19 pandemic on our retail stores.
The following table is a reconciliation of net loss on a GAAP basis to EBITDA and Adjusted EBITDA, on a non-GAAP basis, for each fiscal year. (Certain amounts in the following table do not foot due to rounding):
Net loss, on a GAAP basis $ (64.5 ) $ (7.8 ) $ (13.5 )
Add back:
Provision (benefit) for income taxes 0.1 0.1 (0.1 )
Add back:
Exit costs associated with London operations $ — $ 1.7 $ —
CEO transition costs — 0.7 2.4
Corporate restructuring charge — — 1.9
Adjusted EBITDA (non-GAAP) $ (24.2 ) $ 23.5 $ 27.4
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 2020, we had three active LTIPs: the 2018-2020 LTIP, the 2019-2021 LTIP and the 2020-2022 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 granted pursuant 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 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 2018-2020 LTIP were not achieved, therefore, there were no awards earned in fiscal 2020. With respect to the performance-based component of the 2019-2021 LTIP and the 2020-2022 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 2020, we have accrued approximately $0.2 million for performance under the 2020-2022 LTIP. There is no accrual at the end of fiscal 2020 for the 2019-2021 LTIP.
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Impairment of Long-Lived Assets
We evaluate property, plant 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. We evaluate these assets for impairment at a store level for all our retail locations and 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 were based on multiple probability-weighted scenarios and assumed that consumer retail spending would remain substantially curtailed for a period of time.
For fiscal 2020, fiscal 2019 and fiscal 2018, we recorded asset impairment charges of $14.8 million, $0.9 million and $4.6 million, respectively.
Leases
In accordance with ASU 2016-02, “Leases (Topic 842)” our 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.
Interest Rates
We utilize cash from operations and from the Revolving Facility of our Credit Facility to fund our working capital needs. Our Credit Facility is not used for trading or speculative purposes. As part of our Credit Facility, we also have an outstanding $15.0 million FILO loan. In addition, we have available letters of credit as sources of financing for our working capital requirements. Borrowings under the Credit Facility, which expires May 24, 2023, bear interest at variable rates based on Bank of America’s prime rate or LIBOR.
At January 30, 2021, we had outstanding borrowings under the Revolving Facility of approximately $59.7 million, of which approximately $57.0 million were in LIBOR-based contracts with an interest rate of approximately 4.00%. The remainder was prime-based borrowings, with a rate of 5.25%. At January 30, 2021, the $15.0 million outstanding borrowings under the FILO loan were in a LIBOR-based contract with an interest rate of 6.00%.
Based upon a sensitivity analysis as of January 30, 2021, assuming average outstanding borrowings during fiscal 2020 of $67.6 million under our Credit Facility and $15.0 million outstanding under our FILO loan, a 50 basis point increase in interest rates would have increased interest expense by approximately $0.4 million on an annualized basis.
Foreign Currency
Our two DXL stores located in Toronto, Canada conduct business in Canadian dollars. As of January 30, 2021, sales from these stores were immaterial to consolidated sales. As such, we believe that movement in foreign currency exchange rates will 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
Report of Independent Registered Public Accounting Firm 36
Consolidated Financial Statements:
Consolidated Balance Sheets at January 30, 2021 and February 1, 2020 38
Notes to Consolidated Financial Statements 43
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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 30, 2021 and February 1, 2020, 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 30, 2021, 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 30, 2021 and February 1, 2020, and the results of its operations and its cash flows for each of the years in the three-year period ended January 30, 2021, in conformity with U.S. generally accepted accounting principles.
Change in Accounting Principle
As discussed in Note A to the consolidated financial statements, the Company has changed its method of accounting for leases as of February 3, 2019 due to the adoption of Accounting Standards Update 2016-02, Leases (Topic 842) and Accounting Standards Update 2018-11, Leases (Topic 842): Targeted Improvements.
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 Public Company Accounting Oversight Board (United States) (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. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits, we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion.
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 for events or changes in circumstances that might indicate the carrying amount of the assets may not be recoverable. As of January 30, 2021, the Company had property and equipment and operating lease right-of-use assets of $56.6 million and $134.3 million, respectively. The Company assesses the recoverability of the assets at an individual store level by determining whether the carrying value of such assets over their respective remaining lives can be recovered through projected undiscounted future cash flows. 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. The Company recorded an impairment charge of $14.8 million for the
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year ended January 30, 2021. The impairment charge included approximately $4.1 million for the write-down of certain property and equipment and $10.7 million for the write-down of certain operating lease right-of-use assets, related to stores where the carrying value exceeded fair value.
We identified the evaluation of the recoverability of long-lived store assets, including property and equipment and operating lease right-of-use assets, as a critical audit matter. A high degree of auditor judgment was applied in evaluating certain inputs in the undiscounted and discounted cash flow models. These cash flow models included the following internally-developed assumptions for which there was limited observable market information, and changes in the estimates for these assumptions could have a significant impact on the resulting impairment charge, where applicable:
• forecasted sales attributable to individual stores
• forecasted gross margin
The following are the primary procedures we performed to address this critical audit matter. We performed sensitivity analyses to assess the impact of reasonably possible changes to forecasted sales attributable to individual stores and forecasted gross margin for certain stores. We evaluated management’s ability to effectively forecast sales and gross profit by comparing actual results to management’s historical forecasts. We evaluated the reasonableness of forecasted sales attributable to individual stores by comparing the growth assumptions to available industry reports, historical financial data, and budgets. We compared forecasted gross margin to historical financial data and budgets.
/s/ KPMG LLP
We have served as the Company’s auditor since2013.
Boston, Massachusetts
March 19, 2021
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DESTINATION XL GROUP, INC.
CONSOLIDATED BALANCE SHEETS
January 30, 2021 and February 1, 2020
(In thousands, except share data)
ASSETS
Current assets:
Prepaid expenses and other current assets 3,689 10,883
Noncurrent assets:
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Accrued expenses and other current liabilities 24,825 18,123
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 (6,221 ) (6,431 )
Total stockholders' equity (deficit) (4,077 ) 58,423
Total liabilities and stockholders' equity (deficit) $ 306,755 $ 390,917
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 30, 2021, February 1, 2020 and February 2, 2019
(In thousands, except per share data)
Expenses:
Exit costs associated with London operations — 1,737 —
Corporate restructuring charge — — 1,904
Loss before provision (benefit) for income taxes (64,432 ) (7,691 ) (13,581 )
Provision (benefit) for income taxes 106 105 (50 )
Net loss per share - basic and diluted $ (1.26 ) $ (0.16 ) $ (0.28 )
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 30, 2021, February 1, 2020 and February 2, 2019
(In thousands)
Other comprehensive income (loss) before taxes:
Recognition of accumulated foreign currency translation adjustment $ — $ 792 $ —
Foreign currency translation (44 ) (83 ) (264 )
Other comprehensive income (loss) before taxes 210 (248 ) (658 )
Tax provision related to items of other comprehensive income (loss) — — —
Other comprehensive income (loss), net of tax 210 (248 ) (658 )
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 30, 2021, February 1, 2020 and February 2, 2019
(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 release of RSUs 627 6 (6 ) —
Deferred stock vested 10 — — —
Stock option exercise 3 — — —
Cancellation of restricted stock, net of issuances (3 ) — — —
Accumulated other comprehensive income (loss):
Unrecognized loss associated with Pension Plan (394 ) (394 )
Remeasurement and reclassification on stranded tax effect (Note A) (718 ) 718 —
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 )
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 30, 2021, February 1, 2020 and February 2, 2019
(In thousands)
Cash flows from operating activities:
Recognition of accumulated foreign currency translation adjustment — 792 —
Amortization of deferred gain on sale-leaseback — — (1,465 )
Amortization of deferred debt issuance costs 146 139 171
Write-off of deferred debt issuance costs — — 186
Board of directors stock compensation 382 569 594
Changes in operating assets and liabilities:
Prepaid expenses and other current assets 7,194 1,252 (464 )
Operating leases, net (2,440 ) (4,254 ) —
Deferred rent and lease incentives — — (3,879 )
Net cash provided by (used for) operating activities (1,228 ) 15,803 15,741
Cash flows from investing activities:
Purchase of intangible asset — — (1,150 )
Cash flows from financing activities:
Net borrowings (repayments) under credit facility 20,155 (2,690 ) (5,334 )
Proceeds from the issuance of long-term debt — — 15,000
Principal payments on long-term debt — — (12,251 )
Tax withholdings paid related to net share settlements of RSUs — (244 ) (136 )
Net cash provided by (used for) financing activities 20,130 (2,934 ) (3,274 )
Net increase (decrease) in cash and cash equivalents 14,659 (530 ) (494 )
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 30, 2021
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 30, 2021, the Company operated 226 DXL stores, 46 Casual Male XL stores, 22 Casual Male XL outlets and 17 DXL outlets located throughout the United States, including two stores in Canada and an e-commerce site at www.dxl.com. In fiscal 2018, the Company launched a wholesale segment focused on product development and distribution relationships with key retailers.
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. The COVID-19 pandemic has had an adverse effect on the Company’s operations, employees, distribution and logistics, its vendors and customers. All of the Company’s store locations were closed temporarily on March 17, 2020. The Company began reopening stores in late April and by the end of June 2020 all retail stores had been reopened. While all of the Company’s stores were open, the majority were operating with reduced operating hours and were subject to having to close and re-open to any COVID-19 concerns.
In March 2020, as a proactive measure, the Company drew $30.0 million under its revolving facility in order to increase the Company’s cash position and preserve financial flexibility. In addition, in April 2020 the Company entered into an amendment to its credit facility to, among other things, increase its borrowing base availability and permit the Company the ability to enter into promissory notes with its merchandise vendors. See Note D, Debt Obligations, for a discussion of the amendment. During fiscal 2020, the Company entered into rent concessions with the majority of its landlords, in the form of rent abatements, rent deferments and, to a lesser extent, lease term extensions as a result of store closures and the impact of COVID-19 on its store revenues. See Note E, Leases, for more discussion. Further, since early March, the Company has taken proactive steps to manage cash by substantially eliminating capital spend, negotiating deferred payment terms with vendors and, in limited cases, entering into short term notes, reducing operating expenses and cancelling purchase orders for merchandise, where possible.
The Company intends to proceed cautiously and continue to take proactive steps to manage its liquidity.
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 2020, fiscal 2019 and fiscal 2018 were each 52-week periods, which ended on January 30, 2021, February 1, 2020 and February 2, 2019, respectively.
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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 2020, fiscal 2019 and fiscal 2018, the Company did not incur any losses on its accounts receivable.
Accounts Payable
During fiscal 2020, the Company received extended payment terms with certain of its merchandise vendors, by entering into short-term notes. The short-term notes, totaling $3.5 million, have terms of less than one-year and accrue interest at an annual rate of 4.0%, with payments due monthly. At January 30, 2021, the outstanding balance of the notes was $0.4 million and is included in Accounts Payable on the Consolidated Balance Sheet.
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, accrued expenses and short-term borrowings 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.
The fair value of long-term debt is classified with Level 2 of the valuation hierarchy. At January 30, 2021, long-term debt approximated the carrying amount based upon terms available to the Company for borrowings with similar arrangements and remaining maturities. See Note D, “Debt Obligations,” for more discussion.
The fair value of the “dxl.com” domain name, an indefinite-lived intangible asset, is measured on a non-recurring basis in connection with the Company’s annual impairment test and is classified within Level 3 of the valuation hierarchy. At January 30, 2021, the fair value of the Company’s “dxl.com” domain name was determined to approximate carrying value. See Intangibles below.
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.
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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. Due to the significant impact of the COVID-19 pandemic on the Company’s business during fiscal 2020, the Company performed a qualitative review of the domain name at each reporting period in fiscal 2020, and concluded at each date that it was more likely than not that the intangible asset was not impaired and therefore no quantitative assessment was required. In the fourth quarter of fiscal 2020, the domain name was tested 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.
Advertising Costs
The Company expenses in-store advertising costs as incurred. Television advertising costs 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 30, 2021 and February 1, 2020. Advertising expense, which is included in selling, general and administrative expenses, was $11.9 million, $22.9 million and $24.4 million for fiscal 2020, 2019 and 2018, 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 30, 2021, the Company had two stores located in Toronto, Canada. Assets and liabilities for these stores are translated into U.S. dollars at the exchange rates in effect at each balance sheet date. Stockholders’ equity (deficit) is translated at applicable historical exchange rates. Income, expense and cash flow items are translated at average exchange rates during the period. Resulting translation adjustments are reported as a separate component of stockholders’ equity (deficit).
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.
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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 2020, fiscal 2019 and fiscal 2018 are as follows:
(in thousands)
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 2020, fiscal 2019 and fiscal 2018.
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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 Loss Per Share
Basic earnings per share are computed by dividing net 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 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:
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 2020 and fiscal 2019 were 720,000 shares of unvested performance stock units. 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, 435,568 shares, 295,604 shares and 204,040 shares of deferred stock for fiscal 2020, fiscal 2019 and fiscal 2018, respectively, were excluded from basic earnings per share and 30,000 shares of unvested time-based restricted shares in fiscal 2018. Unvested shares of deferred stock and unvested restricted shares are excluded until such shares vest.
Shares of unvested restricted stock are not considered outstanding for basic earnings per share purposes until vested, but are considered issued and outstanding. A share of unvested restricted stock has all of the rights of a holder of the Company’s common stock, including, but not limited to, the right to vote and the right to receive dividends, which rights are forfeited if the restricted stock is forfeited. Outstanding shares of deferred stock are not considered issued and outstanding until the vesting date of the deferral period.
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
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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 $1.4 million, $1.9 million and $2.0 million for fiscal 2020, fiscal 2019 and fiscal 2018, respectively.
The total stock-based compensation cost related to time-vested awards not yet recognized as of January 30, 2021 was approximately $2.1 million and will be expensed over a weighted average remaining life of approximately 27 months.
The total grant-date fair value of awards vested was $1.5 million, $3.0 million and $2.0 million for fiscal 2020, 2019 and 2018, 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 - 4.5
Dividend rate - - -
Weighted average fair value of options granted $ 0.32 - $ 1.06
Weighted average fair value of non-vested shares granted - $ 1.73 $ 2.13
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 asset impairment charges of $14.8 million, $0.9 million and $4.6 million in fiscal 2020, fiscal 2019 and fiscal 2018, 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 assesses the recoverability of the assets by determining whether the carrying value of such assets over their respective remaining lives can be recovered through projected undiscounted future cash flows. The model for undiscounted future cash flows includes assumptions, at the individual store level, with respect to expectations for future sales and gross margin rates as well as an estimate for occupancy costs used to estimate the fair value of the respective store’s operating lease right-of-use asset. The amount of impairment, if any, is measured based on projected discounted future cash flows using a discount rate reflecting the Company’s average cost of funds.
As a result of the significant impact of the COVID-19 pandemic on the Company’s business during fiscal 2020 and the continued uncertainty, the Company reassessed the recoverability of the carrying value for its long-lived assets throughout fiscal 2020. Due to uncertainty around the duration and extent of the pandemic’s impact on future cash flows, the Company’s projections were based on multiple probability-weighted scenarios and assumed that consumer retail spending would remain substantially curtailed for a period of time. 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 the Company’s decision to close certain retail stores, which resulted in a revaluation of the existing lease liabilities. To the extent that such gains related to previously recorded impairment charges against the operating lease right-of-use asset, the gain was included as an offset to asset impairment charges with the remainder of the gain included as a reduction in store occupancy costs. For fiscal 2020, the Company recognized a
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non-cash gain of $3.1 million, of which $2.6 million has been included as an offset to the operating lease right-of-use asset impairment charge.
In addition to the write-down of store assets, the asset impairment charge for fiscal 2019 included $0.7 million for the write-down of operating lease right-of-use assets, and the impairment charge for fiscal 2018 included the write-off of the Company’s “Rochester” trademark of $1.5 million.
Leases
The Company adopted ASU 2016-02, “Leases (Topic 842)” and ASU 2018-11, “Leases (Topic 842): Targeted Improvements” as of February 3, 2019 during the first quarter of 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 30, 2021, 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 Adopted Accounting Pronouncements
In June 2016, the Financial Accounting Standards Board (“FASB”) issued ASU No. 2016-13, “Financial Instruments — Credit Losses (Topic 326) — Measurement of Credit Losses on Financial Instruments.” This guidance amends several aspects of the measurement of credit losses on financial instruments, including trade receivables. Topic 326 replaces the existing incurred credit loss model with an impairment model (known as the current expected credit loss ("CECL") model), which is based on expected losses rather than incurred losses. The amendments are effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019. The Company adopted this standard in the first quarter of fiscal 2020 and it did not have a material impact on the Company’s Consolidated Financial Statements.
In August 2018, the FASB issued ASU 2018-13, “Fair Value Measurement (Topic 820): Disclosure Framework—Changes to the Disclosure Requirements for Fair Value Measurement.” This guidance modifies the disclosure requirements on fair value measurements in Topic 820 by removing disclosures regarding transfers between Level 1 and Level 2 of the fair value hierarchy, by modifying the measurement uncertainty disclosure, and by requiring additional disclosures for Level 3 fair value measurements, among others. The Company adopted this standard in the first quarter of fiscal 2020 with new disclosures adopted on a prospective basis. The adoption of this standard did not have a material impact on the Company’s Consolidated Financial Statements and related disclosures.
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In December 2019, the FASB issued ASU 2019-12, “Simplifying the Accounting for Income Taxes.” This standard simplifies the accounting for income taxes by removing certain exceptions to the general principles in ASC 740, Income Taxes, while also clarifying and amending existing guidance, including interim-period accounting for enacted changes in tax law. This standard is effective for fiscal years, and for interim periods within those fiscal years, beginning after December 15, 2020, with early adoption permitted. In the first quarter of fiscal 2020, the Company elected early adoption of ASU 2019-12. The provisions related to intra period tax allocation and interim recognition of enactment of tax laws are being adopted on a prospective basis. The effect of the adoption of ASU 2019-12 was not material to the Company's Consolidated Financial Statements.
Recently Issued Accounting Pronouncements
No new accounting pronouncements, issued or effective during fiscal 2020, have had or are expected to have a significant impact on the Company’s Consolidated Financial Statements.
B. REVENUE RECOGNITION
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 stores, direct and wholesale. Revenue is recognized by the operating segment that initiates a customer’s order. Store sales are defined as sales that originate and are fulfilled directly at the store level. Direct sales are defined as sales that originate online, including those initiated online at the store level, on its website or on third-party marketplaces. Wholesale sales are defined as sales made to wholesale customers pursuant to the terms of each customer’s contract with the Company. Generally, all revenues are recognized when control of the promised goods is transferred to customers, in an amount that reflects the consideration in exchange for those goods. Sales tax collected from customers and remitted to taxing authorities is excluded from revenue and is included as part of accrued expenses on the Consolidated Balance Sheets.
Unredeemed Loyalty Coupons. The Company offers a free loyalty program to its customers for which points accumulate based on the purchase of merchandise. Over 90% of the Company’s customers participate in the loyalty program. Under ASC 606, these loyalty points provide the customer with a material right and a distinct performance obligation with revenue deferred and recognized when the points are redeemed. The cycle of earning and redeeming loyalty points is generally under one year in duration. The loyalty accrual, net of breakage, was $1.0 million and $1.0 million at January 30, 2021 and February 1, 2020, respectively.
Unredeemed Gift Cards, Gift Certificates, and Credit Vouchers. Upon issuance of a gift card, gift certificate, or credit voucher, a liability is established for its cash value. The liability is relieved and net sales are recorded upon redemption by the customer. Based on historical redemption patterns, the Company can reasonably estimate the amount of gift cards, gift certificates, and credit vouchers for which redemption is remote, which is referred to as "breakage". Breakage is recognized over two years in proportion to historical redemption trends and is recorded as sales in the Consolidated Statements of Operations. The gift card liability, net of breakage, was $2.8 million and $2.7 million at January 30, 2021 and February 1, 2020, respectively.
Shipping. Shipping and handling costs are accounted for as fulfillment costs and are included in cost of sales for all periods presented. Amounts related to shipping and handling that are billed to customers are recorded in sales, and the related costs are recorded in cost of goods sold including occupancy costs, in the Consolidated Statements of Operations.
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Disaggregation of Revenue
As noted above under Segment Information in Note A, the Company’s business at January 30, 2021 consists of one reportable segment, its retail segment. Substantially all of the Company’s revenue is generated from its stores and direct businesses. The operating results from the wholesale segment have been aggregated with this reportable segment for all periods, but the revenues are separately reported below. Accordingly, the Company has determined that the following sales channels depict the nature, amount, timing, and uncertainty of how revenue and cash flows are affected by economic factors for each of the following fiscal years: