UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
(Mark One)
☒
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended October 31, 2020
OR
☐
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
Commission File Number: 01-34219
DESTINATION XL GROUP, INC.
(Exact Name of Registrant as Specified in its Charter)
Delaware
04-2623104
(State or other jurisdiction of
incorporation or organization)
(I.R.S. EmployerIdentification No.)
555 Turnpike Street
Canton, MA
02021
(Address of principal executive offices)
(Zip Code)
Registrant’s telephone number, including area code: (781) 828-9300
Securities registered pursuant to Section 12(b) of the Act.
Title of each class
Trading symbol(s)
Name of each exchange on which registered
Common Stock, $0.01 par value
DXLG
NASDAQ Stock Market LLC
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer
Accelerated filer
Non-accelerated filer
Smaller reporting company
Emerging growth company
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒
As of November 13, 2020, the registrant had 51,880,030 shares of common stock, $0.01 par value per share, outstanding.
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements.
CONSOLIDATED BALANCE SHEETS
(In thousands, except share data)
(Unaudited)
October 31, 2020
February 1, 2020
(Fiscal 2020)
(Fiscal 2019)
ASSETS
Current assets:
Cash and cash equivalents
$
21,417
4,338
Accounts receivable
5,222
6,219
Inventories
94,898
102,420
Prepaid expenses and other current assets
5,535
10,883
Total current assets
127,072
123,860
Non-current assets:
Property and equipment, net of accumulated depreciation and amortization
60,617
78,279
Operating lease right-of-use assets
147,540
186,413
Intangible assets
1,150
Other assets
540
1,215
Total assets
336,919
390,917
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable
28,580
31,763
Accrued expenses and other current liabilities
22,837
18,123
Operating leases, current
45,616
41,176
Borrowings under credit facility
68,019
39,301
Total current liabilities
165,052
130,363
Long-term liabilities:
Long-term debt
14,855
14,813
Operating leases, non-current
150,906
182,051
Other long-term liabilities
5,049
5,267
Total long-term liabilities
170,810
202,131
Commitments and contingencies
Stockholders' equity:
Preferred stock, $0.01 par value, 1,000,000 shares authorized, none issued
—
Common stock, $0.01 par value, 100,000,000 shares authorized, 64,323,455 and 63,297,598 shares issued at October 31, 2020 and February 1, 2020, respectively
643
633
Additional paid-in capital
314,316
312,933
Treasury stock at cost, 12,755,873 shares at October 31, 2020 and February 1, 2020
(92,658
)
Accumulated deficit
(215,516
(156,054
Accumulated other comprehensive loss
(5,728
(6,431
Total stockholders' equity
1,057
58,423
Total liabilities and stockholders' equity
The accompanying notes are an integral part of the consolidated financial statements.
2
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
For the Three Months Ended
For the Nine Months Ended
November 2, 2019
Sales
85,171
106,581
218,840
342,799
Cost of goods sold including occupancy costs
54,099
62,776
153,057
195,012
Gross profit
31,072
43,805
65,783
147,787
Expenses:
Selling, general and administrative
32,820
42,108
90,727
134,197
CEO transition costs
702
Impairment of assets
(1,135
15,200
Exit costs associated with London operations
1,737
Depreciation and amortization
5,302
6,329
16,374
18,877
Total expenses
36,987
50,174
122,301
155,513
Operating loss
(5,915
(6,369
(56,518
(7,726
Interest expense, net
(1,080
(870
(2,873
(2,585
Loss before provision (benefit) for income taxes
(6,995
(7,239
(59,391
(10,311
Provision (benefit) for income taxes
27
(49
71
(78
Net loss
(7,022
(7,190
(59,462
(10,233
Net loss per share - basic and diluted
(0.14
(1.16
(0.21
Weighted-average number of common shares outstanding:
Basic
51,545
50,089
51,127
49,853
Diluted
3
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(In thousands)
Other comprehensive income before taxes:
Recognition of accumulated foreign currency translation adjustment
792
Foreign currency translation
(39
(81
Pension plans
247
196
742
588
Other comprehensive income before taxes
990
703
1,299
Tax provision related to items of other comprehensive income
(70
(151
Other comprehensive income, net of tax
920
1,148
Comprehensive loss
(6,775
(6,270
(58,759
(9,085
4
.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY
Accumulated
Additional
Other
Common Stock
Paid-in
Treasury Stock
Comprehensive
Shares
Amounts
Capital
Deficit
Income (Loss)
Total
Balance at February 1, 2020
63,297
(12,755
Board of directors compensation
93
1
148
149
Stock compensation expense
452
Issuance of common stock, upon RSUs release
437
(4
Deferred stock vested
6
Accumulated other comprehensive income (loss):
Pension plan, net of taxes
242
Foreign currency, net of taxes
(34
(41,726
Balance at May 2, 2020
63,833
638
313,529
(197,780
(6,223
17,506
345
8
253
(5
(10,714
Balance at August 1, 2020
63,841
313,874
(208,494
(5,975
7,385
252
117
120
326
131
(1
100
Accumulated other comprehensive income:
Balance at October 31, 2020
64,324
5
Balance at February 2, 2019
62,242
622
310,393
(153,534
(6,183
58,640
36
142
414
RSUs granted for achievement of performance-based compensation, reclassified from liability to equity
304
374
Shares withheld for taxes related to net share settlement of RSUs
(192
Change in accounting principle due to adoption of ASC 842
5,276
150
(24
(3,081
Balance at May 4, 2019
62,576
626
311,057
(151,339
(6,057
61,629
45
514
67
(3
(6
Cancellation of restricted stock
(20
(40
Net income
38
Balance at August 3, 2019
62,668
627
311,706
(151,301
(5,955
62,419
55
494
348
(30
(46
145
(17
Balance at November 2, 2019
63,044
630
312,293
(158,491
(5,035
56,739
CONSOLIDATED STATEMENTS OF CASH FLOWS
Cash flows from operating activities:
Adjustments to reconcile net loss to net cash used for operating activities:
Amortization of deferred debt issuance costs
108
104
1,123
1,422
Board of directors stock compensation
269
426
Changes in operating assets and liabilities:
997
544
7,522
(13,374
5,348
(100
675
(352
(3,183
(7,380
Operating leases, net
763
(2,992
Accrued expenses and other liabilities
5,631
(2,138
Net cash used for operating activities
(8,635
(14,404
Cash flows from investing activities:
Additions to property and equipment, net
(2,938
(10,973
Net cash used for investing activities
Cash flows from financing activities:
Net borrowings under credit facility
28,677
26,215
Debt issuance costs associated with credit facility amendment
(25
Tax withholdings paid related to net share settlements of RSUs
(244
Net cash provided by financing activities
28,652
25,971
Net increase in cash and cash equivalents
17,079
594
Cash and cash equivalents:
Beginning of period
4,868
End of period
5,462
7
Notes to Consolidated Financial Statements
1. Basis of Presentation
In the opinion of management of Destination XL Group, Inc., a Delaware corporation (collectively with its subsidiaries, referred to as the “Company”), the accompanying unaudited Consolidated Financial Statements contain all adjustments necessary for a fair presentation of the interim financial statements. These financial statements do not include all disclosures associated with annual financial statements and, accordingly, should be read in conjunction with the notes to the Company’s audited Consolidated Financial Statements for the fiscal year ended February 1, 2020 included in the Company’s Annual Report on Form 10-K, which was filed with the Securities and Exchange Commission on March 19, 2020.
The information set forth in these statements may be subject to normal year-end adjustments. The information reflects all adjustments that, in the opinion of management, are necessary to present fairly the Company’s results of operations, financial position and cash flows for the periods indicated. The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. The Company’s business historically has been seasonal in nature, and the results of the interim periods presented are not necessarily indicative of the results to be expected for the full year.
The Company’s fiscal year is a 52- or 53- week period ending on the Saturday closest to January 31. Fiscal 2020 and fiscal 2019 are 52-week periods ending on January 30, 2021 and February 1, 2020, respectively.
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 are open, they are operating with reduced operating hours and it has been and may continue to be necessary to close and re-open stores in response to any ongoing COVID concerns.
In response to the uncertainty that exists relating to the COVID-19 pandemic, the Company has taken significant precautionary measures to reduce expenses, preserve liquidity, and mitigate the adverse impact of the pandemic to the Company. The majority of the Company’s workforce was furloughed in March 2020. As store locations were reopened, employees were gradually brought back, however, due to the reduced store traffic and sales, the Company’s field organization has been reduced by 1,078 associates, or 54%, since March 2020. For the safety of its employees, employees at the Company’s headquarters will continue to work from home, where possible, until at least July 2021. For store personnel and roles that require employees to be on-site, such as its distribution center, the Company is providing protective equipment, practicing social distancing and has increased sanitizing standards. The management team (director-level and above) took a temporary salary reduction ranging from 10%-20% during the period April 5, 2020 through August 2, 2020 and the Company’s non-employee directors suspended their second quarter fiscal 2020 compensation.
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 3, Debt, for a discussion of the amendment. During the second quarter of 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. See Note 4, 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.
Subsequent to the end of the third quarter, on November 2, 2020 the Company implemented an additional corporate restructuring to further align its cost structure with the potential continuation of reduced sales levels. The Company eliminated an additional 45 corporate positions, terminated certain service agreements, eliminated certain professional services and reduced its marketing costs. In aggregate, the Company’s corporate workforce has been reduced by 101 positions, or 29%, since March 2020. The Company expects that these additional steps will result in annualized savings of $9.7 million, of which $3.8 million is related to the reduction in corporate payroll. The Company expects to incur an aggregate cash charge in the fourth quarter of fiscal 2020 of approximately $0.5
million for employee severance and one-time termination benefits. The Company intends to proceed cautiously and continue to take proactive steps to manage its liquidity.
Segment Information
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 both periods.
Intangibles
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. Due to the significant impact of the COVID-19 pandemic on the Company’s business, the Company performed a qualitative review of the domain name as of May 2, 2020, August 1, 2020 and October 31, 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. During the fourth quarter of fiscal 2020, the Company will perform a similar qualitative review as part of annual impairment testing.
Accounts Payable
During the first nine months of 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 October 31, 2020, the outstanding balance of the notes was $1.3 million and is included in Accounts Payable on the Consolidated Balance Sheet.
Fair Value of Financial Instruments
ASC Topic 825, Financial Instruments, requires disclosure of the fair value of certain financial 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 assets 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 within Level 2 of the valuation hierarchy. At October 31, 2020, the fair value approximated the carrying amount based upon terms available to the Company for borrowings with similar arrangements and remaining maturities.
The fair value of the “dxl.com” domain name, an indefinite-lived 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. See Intangibles above.
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.
9
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 the three and nine months ended October 31, 2020 and November 2, 2019, respectively, were as follows:
For the three months ended:
(in thousands)
Pension
Plans
Foreign
Currency
Balance at beginning of the quarter
(5,983
(5,229
(726
Other comprehensive income (loss) before
reclassifications, net of taxes
77
10
Recognition of accumulated foreign currency translation adjustment (1)
Amounts reclassified from accumulated other
comprehensive income, net of taxes (2)
170
118
Other comprehensive income (loss) for the period
775
Balance at end of quarter
(5,736
(5,084
49
For the nine months ended:
Balance at beginning of fiscal year
(6,478
47
(5,521
(662
231
192
82
511
355
711
(1)
In connection with the Company’s closing its Rochester Clothing store in London, England and exiting its London operations, the Company recognized the accumulated foreign currency translation adjustment as an expense, which was included in “Exit costs associated with London operations” on the Consolidated Statement of Operations for the three and nine months ended November 2, 2019.
(2)
Includes the amortization of the unrecognized loss on pension plans, which was charged to “Selling, General and Administrative” Expense on the Consolidated Statements of Operations for all periods presented. The amortization of the unrecognized loss, before tax, was $170,000 and $160,000 for the three-month period ended October 31, 2020 and November 2, 2019, respectively, and $511,000 and $481,000 for the nine-month period ended October 31, 2020 and November 2, 2019, respectively. As a result of the adoption of ASU 2019-12, as discussed below, there was no tax provision for the third quarter and first nine months of fiscal 2020. The tax effect for the third quarter and first nine months of fiscal 2019 was $42,000 and $126,000, respectively.
Stock-based Compensation
All share-based payments, including grants of employee stock options and restricted stock, are recognized as an expense in the Consolidated Statements of Operations based on their fair values and vesting periods. 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”). 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 an expense over the vesting period, net of estimated forfeitures. The estimation of stock-based awards that will ultimately vest requires judgment. Actual results and future changes in estimates may differ from the Company’s current estimates.
The fair value of each stock option grant is estimated on the date of grant using the Black-Scholes option-pricing model based on the assumptions in the table below as it relates to stock options granted during the first nine months of fiscal 2020. There were no grants of stock options during the first nine months of fiscal 2019.
Expected volatility
82.3% - 87.8%
Risk-free interest rate
0.22% - 0.27%
Expected life
3.0 - 4.0 yrs.
Dividend rate
Weighted average fair value of options granted
$0.32
The Company has outstanding performance stock units (PSUs) with a market condition. The respective grant-date fair value and derived service periods assigned to the PSUs were determined using a Monte Carlo model. The valuation included assumptions with respect to the Company’s historical volatility, risk-free rate and cost of equity.
Impairment of Long-Lived Assets
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 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 the first quarter of fiscal 2020 and the continued uncertainty, the Company reassessed the recoverability of the carrying value for its long-lived assets as of May 2, 2020, assuming that its stores would gradually open throughout the second quarter of fiscal 2020 but that consumer retail spending will remain substantially curtailed for a period of time. 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. Based on the results of that assessment, the Company recorded an impairment charge of $16.3 million in the first quarter of fiscal 2020. The impairment charge included approximately $12.5 million for the write-down of certain right-of-use assets and $3.8 million for the write-down of property and equipment, related to stores where the carrying value exceeded fair value.
During the third quarter of fiscal 2020, the Company recorded a $1.2 million non-cash gain on the reduction of its operating lease liability in connection with its decision to close three retail stores, which resulted in a revaluation of the lease liability. Approximately $1.1 million of this gain related to two leases where the right-of-use assets had previously been impaired and, therefore, is included as a reduction in the impairment charge for the three and nine months ended October 31, 2020. The remaining gain of $0.1 million is included as an offset to store occupancy costs.
There was no material impairment of long-lived assets in the first nine months of fiscal 2019.
Leases
The Company adopted ASU 2016-02, “Leases (Topic 842)” in 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
11
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 October 31, 2020, 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 4 ‘‘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.
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 the first nine months of fiscal 2020, have had or are expected to have a significant impact on the Company’s Consolidated Financial Statements.
12
2. Revenue Recognition
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.
̶
Revenue from the Company’s store operations is recorded upon purchase of merchandise by customers, net of an allowance for sales returns, which is estimated based upon historical experience.
Revenue from the Company’s direct operations is recognized at the time a customer order is delivered, net of an allowance for sales returns, which is estimated based upon historical experience.
Revenue from the Company’s wholesale operations is recognized at the time the wholesale customer takes physical receipt of the merchandise, net of any identified discounts in accordance with each individual order. For the first nine months of fiscal 2020 and fiscal 2019, chargebacks were immaterial.
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 $1.9 million and $2.7 million at October 31, 2020 and February 1, 2020, respectively.
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, Revenue from Contracts with Customers, these loyalty points provide the customer with a material right and a distinct performance obligation with revenue deferred and recognized when the points are expected to redeem or expire. 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 October 31, 2020 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.
Disaggregation of Revenue
As noted above under Segment Information in Note 1, the Company’s business 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, which were immaterial, have been aggregated with this reportable segment, 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 the three months ended
For the nine months ended
Store sales
53,363
66.6
%
81,054
78.1
124,155
60.0
262,888
78.5
Direct sales
26,764
33.4
22,676
21.9
82,605
40.0
71,915
21.5
Retail segment
80,127
103,730
206,760
334,803
Wholesale segment
5,044
2,851
12,080
7,996
Total Sales
3. Debt
Credit Agreement with Bank of America, N.A.
On May 24, 2018, the Company entered into the Seventh Amended and Restated Credit Agreement, as amended, with Bank of America, N.A., as agent, providing for a secured $140.0 million credit facility. On April 15, 2020, the Company entered into a Third Amendment to the Seventh Amended and Restated Credit Facility, as amended (the “Third Amendment”). The Third Amendment,
13
among other things, (i) extended the current advance rate of 10%, under the “first-in, last out” (FILO) term facility (the “FILO loan”), from May 24, 2020 to December 31, 2020, at which time it will step-down to 7.5%; (ii) lowered the Loan Cap, as described below, and eliminated the springing financial covenant, (iii) increased the Applicable Margins under the FILO and Revolving Facility (defined below) by 150 basis points and (iv) permitted the Company to enter into promissory notes with vendors in satisfaction of outstanding payables for existing goods, in an aggregate amount not to exceed $15.0 million (as amended, the “Credit Facility”).
The Credit Facility provides maximum committed borrowings of $125.0 million in revolver loans, with the ability, pursuant to an accordion feature, to increase the Credit Facility by an additional $50.0 million upon the request of the Company and the agreement of the lender(s) participating in the increase (the “Revolving Facility”). The Revolving Facility provides for a sublimit of $20.0 million for commercial and standby letters of credit and up to $15.0 million for swingline loans. The Company’s ability to borrow under the Revolving Facility (the “Loan Cap”) is determined using an availability formula based on eligible assets. Pursuant to the Third Amendment, the excess availability under the Credit Facility cannot be less than the greater of (i) 10% of the Revolving Loan Cap (calculated without giving effect to the FILO (first-in, last-out) Push Down Reserve) or (ii) $10.0 million. The maturity date of the Credit Facility is May 24, 2023. The Company’s obligations under the Credit Facility are secured by a lien on substantially all of its assets.
To help manage its near-term liquidity in light of the uncertainty related to COVID-19 and provide financial flexibility, the Company drew $30.0 million under its secured revolving credit facility in March 2020. At October 31, 2020, the Company had outstanding borrowings under the Revolving Facility of $68.3 million, before unamortized debt issuance costs of $0.2 million. At October 31, 2020, outstanding standby letters of credit were $2.8 million and outstanding documentary letters of credit were $1.3 million. Unused excess availability was $13.5 million at October 31, 2020. Average monthly borrowings outstanding under the Revolving Facility during the first nine months of fiscal 2020 were $67.4 million, resulting in an average unused excess availability of approximately $19.5 million. The Company’s ability to borrow under the Revolving Facility was determined using an availability formula based on eligible assets, with increased advance rates based on seasonality.
Borrowings made pursuant to the Revolving 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 Company was also subject to an unused line fee of 0.25%. At October 31, 2020, the Company’s prime-based interest rate was 5.25%. At October 31, 2020, the Company had approximately $65.0 million of its outstanding borrowings in LIBOR-based contracts with an interest rate of 4.00%. The LIBOR-based contracts expired on November 2, 2020. When a LIBOR-based borrowing expires, the borrowings revert back to prime-based borrowings unless the Company enters into a new LIBOR-based borrowing arrangement.
Borrowings and repayments under the Revolving Facility for the nine months ended October 31, 2020 and November 2, 2019 were as follows:
Borrowings
60,748
117,910
Repayments
(32,071
(91,695
Net borrowings (repayments)
The fair value of the amount outstanding under the Revolving Facility at October 31, 2020 approximated the carrying value.
Long-Term Debt
Long-term debt at October 31, 2020 and February 1, 2020 is as follows:
FILO Loan
15,000
Less: unamortized debt issuance costs
(145
(187
Total long-term debt
Less: current portion of long-term debt
Long-term debt, net of current portion
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 accounts (including certain trade names) that step down over time, plus a specified percentage of the value of eligible
14
inventory that steps down over time. The Third Amendment to the Credit Facility extended these advance rates by approximately seven months before they begin to step down. The FILO loan can be repaid, in whole or in part, subject to certain payment conditions. The term loan expires on May 24, 2023, if not repaid in full prior to that date.
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, borrowings made under the FILO loan will 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 carrying percentage based on the Company’s excess availability, of either 3.75% or 4.00% until May 24, 2021 or 3.25% or 3.50% after May 24, 2021 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% until May 24, 2021, or 4.25% or 4.50% after May 24, 2021. At October 31, 2020, the outstanding balance of $15.0 million was in a 6-month LIBOR-based contract with an interest rate of 6.00%. The LIBOR-based contract expired on November 15, 2020. When a LIBOR-based contract expires, the borrowings revert back to prime-based borrowings unless the Company enters into a new LIBOR-based borrowing arrangement.
The Company paid interest and fees totaling $2.4 million and $2.7 million for the nine months ended October 31, 2020 and November 2, 2019, respectively.
4. Leases
The Company leases all of its store locations and its corporate headquarters, which also includes its distribution center, under operating leases. The store leases typically have initial terms of 5 years to 10 years, with options that usually permit renewal for additional five-year periods. The initial term of the lease for the corporate headquarter was for 20 years, with the opportunity to extend for six additional successive periods of five years, beginning in fiscal 2026. The Company also leases certain equipment and other assets under operating leases, typically with initial terms of 3 to 5 years. The Company is generally obligated for the cost of property taxes, insurance and common area maintenance fees relating to its leases, which are considered variable lease costs and are expensed as incurred.
Due to the COVID-19 pandemic and all stores having to close temporarily, the Company held rent payments for the period of April through June 2020. During the second quarter of fiscal 2020, the Company received concessions with the majority of its landlords in the form of rent deferrals, abatements and, to a lesser extent, lease extensions. For the remainder of the leases, the outstanding lease payments were paid and the leases remain in good standing. ASC 842 requires the assessment of any lease modification to determine if the modification should be treated as a separate lease and if not, modification accounting would be applied. Lease modification accounting requires the recalculation of the ROU asset, lease liability and lease expense over the respective lease term. In April 2020, the FASB issued guidance allowing entities to make a policy election to account for lease concessions related to the COVID-19 pandemic as though enforceable rights and obligations for those concessions existed. The election applies to any lessor-provided lease concession related to the impact of the COVID-19 pandemic, provided the concession does not result in a substantial increase in the rights of the lessor or in the obligations of the lessee. The Company has opted not to elect this practical expedient and instead account for these rent concessions as lease modifications in accordance with ASC 842. As of October 31, 2020, the Company’s operating leases liabilities represent the present value of the remaining future minimum lease payments updated based on concessions and lease modifications, the majority of which were recorded in the second quarter of fiscal 2020.
The following table is a summary of the Company’s components of net lease cost for the third quarter and nine months ended October 31, 2020 and November 2, 2019:
Operating lease cost
11,824
13,500
35,756
39,968
Variable lease costs(1)
3,690
4,201
10,759
12,200
Total lease costs
15,514
17,701
46,515
52,168
Variable lease costs include the cost of property taxes, insurance and common area maintenance fees related to its leases.
15
Supplemental cash flow and balance sheet information related to leases for the nine months ended October 31, 2020 and November 2, 2019 is as follows:
(dollars in thousands)
Cash paid for amounts included in the measurement of lease liabilities:
Operating cash flows for operating leases (1)
33,233
43,633
Non-cash operating activities:
Right-of-use assets obtained in exchange for operating lease liabilities
645
3,245
Net decrease in right-of-use assets due to lease modifications
associated with rent concessions and lease exits
(2,283
-
Weighted average remaining lease term
4.7 yrs.
5.5 yrs.
Weighted average discount rate
6.46%
7.12%
This decrease in cash payments for the first nine months of fiscal 2020 as compared to the prior year is primarily due to rent abatements and deferments negotiated primarily during the second quarter of fiscal 2020 for rent obligations due while stores were closed.
The table below reconciles the undiscounted cash flows for each of the first five years and total of the remaining years to the operating lease liabilities recorded on the Consolidated Balance Sheet as of October 31, 2020:
2020 (remaining)
13,026
2021
57,523
2022
49,322
2023
40,749
2024
30,517
Thereafter
37,403
Total minimum lease payments
228,540
Less: amount of lease payments representing interest
32,018
Present value of future minimum lease payments
196,522
Less: current obligations under leases
Long-term lease obligations
5. Long-Term Incentive Plans
The following is a summary of the Company’s Long-Term Incentive Plan (“LTIP”). All equity awards granted under long-term incentive plans are issued from the Company’s stockholder-approved 2016 Incentive Compensation Plan. See Note 6, Stock-Based Compensation.
At October 31, 2020, the Company has three active LTIPs: 2018-2020 LTIP, 2019-2021 LTIP and 2020-2022 LTIP. Each participant in the plan participates based on that participant’s “Target Cash Value” which is defined as the participant’s annual base salary (on the participant’s effective date) multiplied by his or her LTIP percentage. Under each LTIP, 50% of each participant’s Target Cash Value is subject to time-based vesting and 50% is subject to performance-based vesting. All time-based awards under the 2018-2020 LTIP were granted in restricted stock units (RSUs) and the time-based awards for the 2019-2021 LTIP were granted in a combination of 50% RSUs and 50% cash. For the 2020-2022 LTIP, the time-based awards were granted in a combination of 50% stock options and 50% cash.
Performance targets for the 2018-2020 LTIP, 2019-2021 LTIP and 2020-2022 LTIP were established and approved by the Compensation Committee on October 24, 2018, August 7, 2019, and June 11, 2020, respectively. The performance period for each LTIP is three years. Awards for any achievement of performance targets will not be granted until the performance targets are achieved and then will be subject to additional vesting through August 31, 2021, August 31, 2022 and August, 31, 2023, respectively. The time-based awards under the 2018-2020 LTIP, 2019-2021 LTIP and 2020-2022 LTIP vest in four equal installments through April 1, 2022, April 1, 2023 and April 1, 2024, respectively. Assuming that the Company achieves the performance targets at target levels and all time-based awards vest, the compensation expense associated with the 2018-2020 LTIP, 2019-2021 LTIP and 2020-2022 LTIP is estimated to be approximately $3.7 million, $3.8 million and $3.8 million, respectively. Approximately half of the compensation
16
expense for each LTIP relates to the time-based awards, which are being expensed straight-line over 41 months, 44 months and 46 months, respectively.
At October 31, 2020, the performance targets under each of the three LTIP were not deemed probable and, therefore, no accrual related to performance awards has been recorded.
6. Stock-Based Compensation
The Company has one active stock-based compensation plan: the 2016 Incentive Compensation Plan (the “2016 Plan”). The initial share reserve under the 2016 Plan was 5,725,538 shares of common stock. A grant of a stock option award or stock appreciation right will reduce the outstanding reserve on a one-for-one basis, meaning one share for every share granted. A grant of a full-value award, including, but not limited to, restricted stock, restricted stock units and deferred stock, will reduce the outstanding reserve by a fixed ratio of 1.9 shares for every share granted. The Company’s shareholders approved amendments to increase the share reserve by 2,800,000 shares on August 8, 2019 and by an additional 1,740,000 shares on August 12, 2020. At October 31, 2020, the Company had 2,087,111 shares available under the 2016 Plan.
In accordance with the terms of the 2016 Plan, any shares outstanding under the previous 2006 Incentive Compensation Plan (the “2006 Plan”) at August 4, 2016 that subsequently terminate, expire or are cancelled for any reason without having been exercised or paid are added back and become available for issuance under the 2016 Plan, with stock options being added back on a one-for-one basis and full-value awards being added back on a 1 to 1.9 basis. At October 31, 2020, 464,016 stock options remained outstanding under the 2006 Plan.
The 2016 Plan is administered by the Compensation Committee. The Compensation Committee is authorized to make all determinations with respect to amounts and conditions covering awards. Options are not granted at a price less than fair value on the date of the grant. Except with respect to 5% of the shares available for awards under the 2016 Plan, no award will become exercisable unless such award has been outstanding for a minimum period of one year from its date of grant.
The following tables summarize the share activity and stock option activity for the Company’s 2006 Plan, 2016 Plan and inducement awards, on a combined basis, for the first nine months of fiscal 2020:
RSUs (1)
Deferred shares (2)
Fully-vested
shares (3)
Performance Share Units (4)
Total number of shares
Weighted-average
grant-date
fair value
Outstanding non-vested shares at beginning of year
1,420,803
295,604
720,000
2,436,407
1.95
Shares granted
134,999
240,868
375,867
0.57
Shares vested/issued
(567,586
(113,900
(240,868
(922,354
1.75
Shares canceled
(17,443
2.11
Outstanding non-vested shares at end of quarter
835,774
316,703
1,872,477
1.77
During the first nine months of fiscal 2020, the vesting of RSUs was primarily related to the time-based awards under the Company’s LTIP plans, see Note 5, Long-Term Incentive Plans.
The 134,999 shares of deferred stock, with a grant date fair value of $80,621, represent compensation to certain directors in lieu of cash, in accordance with their irrevocable elections. The shares of deferred stock will vest three years from the date of grant or at separation of service, based on the irrevocable election of each director pursuant to the Company’s Fourth Amended and Restated Non-Employee Director Compensation Plan (“Non-Employee Director Compensation Plan”).
(3)
During the first nine months of fiscal 2020, the Company granted 240,868 shares of stock, with a fair value of approximately $134,995, to certain directors as compensation in lieu of cash, in accordance with their irrevocable elections. Directors are required to elect 50% of their quarterly retainer in equity. Any shares in excess of the minimum required election are issued from the Non-Employee Director Compensation Plan.
(4)
17
Monte Carlo model based on: the Company’s historical volatility of 55.9%, a term of 4.1 years, stock price on the date of grant of $2.50 per share, a risk-free rate of 2.5% and a cost of equity of 9.5%.
Number of
shares
exercise price
per option
remaining
contractual term
Aggregate
intrinsic value
(in 000's)
Stock Options
Outstanding options at beginning of year
754,833
4.84
2.3 years
Options granted (1)
3,185,542
0.55
Options expired and canceled
(264,146
4.85
Options exercised
Outstanding options at end of quarter
3,676,229
1.12
8.7 years
Options exercisable at end of quarter
490,687
4.83
2.8 years
In the second quarter of fiscal 2020, the Company granted to Mr. Kanter a stock option to purchase 450,000 shares of the Company’s common stock, at an exercise price of $0.64 per share, which will vest over 34 months. The Company also granted stock options to purchase an aggregate of 2,735,542 shares of the Company’s common stock, at an exercise price of $0.53 per share, in connection with the time-based grant of awards under its 2020-2022 LTIP, see Note 5, Long-Term Incentive Plans.
For the first nine months of fiscal 2020, the Company granted stock options to purchase an aggregate of 3,185,542 shares of common stock and 134,999 shares of deferred stock. For the first nine months of fiscal 2019, the Company granted 720,000 PSUs, 1,234,439 RSUs and 72,668 shares of deferred stock. The Company’s non-employee directors voted to suspend their compensation for the second quarter of fiscal 2020. Subsequently, such compensation resumed in the third quarter of fiscal 2020.
Non-Employee Director Compensation Plan
The Company granted 103,669 shares of common stock, with a fair value of approximately $52,921, to certain of its non-employee directors as compensation in lieu of cash in the first nine months of fiscal 2020. As mentioned above, the non-employee directors voted to suspend their second quarter compensation.
Stock Compensation Expense
The Company recognized total stock-based compensation expense of $1.1 million and $1.4 million for the first nine months of fiscal 2020 and fiscal 2019, respectively. The total compensation cost related to time-vested stock options, RSU and PSU awards not yet recognized as of October 31, 2020 was approximately $2.4 million, net of estimated forfeitures, which will be expensed over a weighted average remaining life of 30 months.
7. Earnings per Share
The following table provides a reconciliation of the number of shares outstanding for basic and diluted earnings per share:
Common stock outstanding:
Basic weighted average common shares outstanding
Common stock equivalents – stock options and restricted stock (1)
Diluted weighted average common shares outstanding
Common stock equivalents of 134 shares and 172 shares for the three and nine months ended October 31, 2020, respectively, and 324 shares and 404 shares for the three and nine months ended November 2, 2019, respectively, were excluded due to the net loss in each period.
18
The following potential common stock equivalents were excluded from the computation of diluted earnings per share in each period, 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 of the unearned compensation associated with either stock options, restricted stock units, restricted or deferred stock had an anti-dilutive effect.
(in thousands, except exercise prices)
Stock options
3,676
819
804
Restricted stock units
833
1,242
679
Restricted and deferred stock
191
114
Range of exercise prices of such options
$0.53 - $7.02
$1.85 - $7.02
$2.25 - $7.02
The above options, which were outstanding at October 31, 2020, expire from January 31, 2021 to June 11, 2030.
Excluded from the computation of basic and diluted earnings per share for both periods 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, 316,703 shares and 267,851 shares of deferred stock at October 31, 2020 and November 2, 2019, respectively, were excluded from basic earnings per share. Outstanding shares of deferred stock are not considered issued and outstanding until the vesting date of the deferral period.
8. Income Taxes
Since the end of fiscal 2014, the Company has maintained a full valuation allowance against its deferred tax assets. While the Company has projected it will return to profitability, generate taxable income and ultimately emerge from a three-year cumulative loss, the Company believes that a full valuation allowance remains appropriate at this time, based on the Company’s forecast for fiscal 2020. Realization of the Company’s deferred tax assets is dependent on generating sufficient taxable income in the near term. At October 31, 2020, the Company had total deferred tax assets of $106.2 million, total deferred tax liabilities of $44.5 million and a valuation allowance of $61.7 million.
As of October 31, 2020, for federal income tax purposes, the Company has net operating loss carryforwards of $158.2 million, which will expire from fiscal 2022 through fiscal 2036 and net operating loss carryforwards of $42.1 million that are not subject to expiration. For state income tax purposes, the Company has $118.0 million of net operating losses that are available to offset future taxable income, which will expire from fiscal 2020 through fiscal 2040. Additionally, the Company has $4.1 million of net operating loss carryforwards related to the Company’s operations in Canada, which will expire from fiscal 2025 through fiscal 2040.
The Company’s financial statements reflect the expected future tax consequences of uncertain tax positions that the Company has taken or expects to take on a tax return, based solely on the technical merits of the tax position. The liability for unrecognized tax benefits at October 31, 2020 was approximately $2.0 million and was associated with a prior tax position related to exiting the Company’s direct business in Europe during fiscal 2013. The amount of unrecognized tax benefits has been presented as a reduction in the reported amounts of the Company’s federal and state net operating losses carryforwards. No penalties or interest have been accrued on this liability because the carryforwards have not yet been utilized. The reversal of this liability would result in a tax benefit being recognized in the period in which the Company determines the liability is no longer necessary.
In March 2020, the Coronavirus Aid, Relief and Economic Security Act, ("CARES Act") was signed into law. This law includes several taxpayer favorable provisions which may impact the Company including relaxed interest expense limitations, a carryback of net operating losses, permitted accelerated depreciation on certain store build out costs and allowance for the deferral of employer FICA taxes. The CARES Act also included an Employee Retention Credit, which provided the Company with a $1.3 million refundable tax credit during the first nine months of fiscal 2020. The refundable tax credit allowed eligible employers to receive a 50% tax credit for each employee up to $10,000 in wages and other eligible expenses. This credit only impacts payroll taxes, which are recorded in pre-tax income and has no impact on the income tax provision. In addition, it provided for the accelerated payment of any refundable alternative minimum tax credit (“AMT”). Accordingly, during the first nine months of fiscal 2020, the Company received $1.1 million for its refundable AMT receivable.
The discrete tax rate method was used for calculating tax expense for the third quarter and first nine months of fiscal 2020 and fiscal 2019. The net tax provision for the third quarter and first nine months of fiscal 2020, primarily related to certain states’ margin tax. The Company’s net tax benefit for the third quarter and first nine months of fiscal 2019 was the result of the deferred tax impact of $70,000 and $151,000, respectively, in other comprehensive income (loss), which resulted in a corresponding decrease in valuation allowance. This income tax benefit was partially offset by tax expense, primarily for certain states’ margin tax.
19
9. CEO Transition Costs
Results for the first nine months of fiscal 2019, included $0.7 million related to CEO search costs, Acting CEO consulting costs, housing allowance and legal fees.
10. Exits Costs Associated with London Operations
During the third quarter of fiscal 2019, the Company closed its Rochester Clothing store located in London, England. In connection with the store closure, the Company incurred a charge of approximately $1.7 million, which included a non-cash charge of $0.8 million related to the recognition of the accumulated foreign currency translation adjustment. The remainder of the charge primarily related to lease termination and inventory liquidation costs.
11. Nasdaq Notification of Non-Compliance
On October 13, 2020, the Company received notification from the Listing Qualifications staff of The Nasdaq Stock Market LLC (“Nasdaq”) that its application to transfer from the Global Select Market to the Capital Market was approved and effective October 19, 2020. This request was in response to the notice from Nasdaq received by the Company in September 2020 that the Company was not in compliance with Nasdaq Listing Rule 5450(b)(1)(A) based on information provided in the Quarterly Report on Form 10-Q for the quarter ended August 1, 2020, which reported that its stockholders’ equity was below the $10.0 million minimum required for continued listing on the Nasdaq Global Market.
In addition, as previously reported, in April 2020, the Company received a letter from the Listing Qualifications staff of Nasdaq notifying the Company that, based upon the closing bid price of its common stock for the last 30 consecutive trading days, the Company was not in compliance with Nasdaq Listing Rule 5450(a)(1), as the minimum bid price for the Company’s common stock was less than $1.00 per share for the previous 30 consecutive trading days. At that time, the Company was granted a 180 calendar-day grace period to regain compliance with the minimum bid price requirement. On April 17, 2020, the Company received a follow-up letter from the Listing Qualifications staff notifying the Company that Nasdaq had determined to toll all compliance periods through June 30, 2020. Accordingly, the Company’s 180 calendar-day grace period to regain compliance with the minimum bid price requirement was extended to December 21, 2020. Upon transfer to the Nasdaq Capital Market, the Company was afforded the remainder of this compliance period.
On August 12, 2020, the Company received approval from its shareholders to effect a reverse stock split of the Company’s issued and outstanding common stock at a ratio of not less than 1-for-2 and not more than 1-for-5. The Company intends to monitor its compliance with all of the Nasdaq listing requirements and will continue to consider its options to regain compliance. If the Company elects to pursue a reverse stock split, the ratio, timing and implementation of such reverse stock split will be determined in the sole discretion of the Company’s Board of Directors. There can be no assurance that the Company will be able to regain compliance with the minimum bid price requirement or maintain compliance with the other listing requirements.
20
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
FORWARD-LOOKING STATEMENTS
Certain statements contained in this Quarterly Report on Form 10-Q constitute “forward-looking statements” within the meaning of the United States Private Securities Litigation Reform Act of 1995. In some cases, forward-looking statements can be identified by the use of forward-looking terminology such as “may,” “will,” “estimate,” “intend,” “plan,” “continue,” “believe,” “expect” or “anticipate” or the negatives thereof, variations thereon or similar terminology. The forward-looking statements contained in this Quarterly Report are generally located in the material set forth under the heading “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” but may be found in other locations as well, and include statements regarding our ability to withstand the impact of the COVID-19 pandemic on our business and results in fiscal 2020 and to manage through the pandemic, our efforts to restructure and reduce costs and right size our lease structure, expected inventory levels for the remainder of fiscal 2020, the impact of direct sales on results in fiscal 2020, expected annualized savings from additional restructuring actions taken in November 2020, the ability to keep some or all of our reopened stores open and operating during more normalized hours, and our expected liquidity for the next 12 months. These forward-looking statements generally relate to plans and objectives for future operations and are based upon management’s reasonable estimates of future results or trends. The forward-looking statements in this Quarterly Report should not be regarded as a representation by us or any other person that our objectives or plans will be achieved. The following discussion of our financial condition and results of operations should be read in conjunction with the unaudited Consolidated Financial Statements and notes to those statements included elsewhere in this Quarterly Report and our audited Consolidated Financial Statements for the year ended February 1, 2020, included in our Annual Report on Form 10-K for the year ended February 1, 2020, as filed with the Securities and Exchange Commission on March 19, 2020 (our “Fiscal 2019 Annual Report”).
Numerous factors could cause our actual results to differ materially from such forward-looking statements. We encourage readers to refer to our “Risk Factors” found in Part II, Item 1A of this Quarterly Report, which supplements our discussion of “Risk Factors” found in Part I, Item 1A of our Fiscal 2019 Annual Report. This discussion set forth certain risks and uncertainties that may have an impact on future results and direction of our Company, including, without limitation, risks relating to the COVID-19 pandemic, and its impact on the Company’s results of operations, the execution of our corporate strategy, and our ability to grow our wholesale segment, predict customer tastes and fashion trends, forecast sales growth trends, grow market share and compete successfully in our market.
All subsequent written and oral forward-looking statements attributable to us or to persons acting on our behalf are expressly qualified in their entirety by the foregoing. These forward-looking statements speak only as of the date of the document in which they are made. We disclaim any obligation or undertaking to provide any updates or revisions to any forward-looking statement to reflect any change in our expectations or any change in events, conditions or circumstances in which the forward-looking statement is based.
BUSINESS SUMMARY
Destination XL Group, Inc., together with our consolidated subsidiaries (the “Company”), is the largest specialty retailer of big and tall men’s clothing with retail, wholesale and direct operations in the United States and Toronto, Canada. We operate under the trade names of Destination XL®, DXL®, DXL Outlets, Casual Male XL® and Casual Male XL Outlets. At October 31, 2020, we operated 227 Destination XL stores, 17 DXL outlet stores, 49 Casual Male XL retail stores, 23 Casual Male XL outlet stores. Our e-commerce site, dxl.com, supports our stores, brands and product extensions.
Unless the context indicates otherwise, all references to “we,” “our,” “us” and “the Company” refer to Destination XL Group, Inc. and our consolidated subsidiaries. We refer to our fiscal years, which end on January 30, 2021 and February 1, 2020 as “fiscal 2020” and “fiscal 2019,” respectively. Both fiscal 2020 and fiscal 2019 are 52-week periods.
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 both periods.
COMPARABLE SALES
Our customer’s shopping experience continues to evolve across multiple channels and we are continually adapting to meet the guest’s needs. The majority of our stores have the capability of fulfilling online orders if merchandise is not available in the warehouse. As a result, 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
21
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 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.
Due to the fact that our stores were closed temporarily during a significant portion of the first six months of fiscal 2020 and continued to operate with reduced hours in the third quarter of fiscal 2020, we have refrained from reporting on comparable sales in the past two quarters as we did not believe it provided a meaningful metric of our performance against fiscal 2019. However, given the continuing impact of COVID-19, specifically on our stores, we may provide certain comparable sales information as part of our discussion regarding current sales trends.
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 Company has not carved-out prior year sales for periods where the stores were closed in fiscal 2020. 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.
RESULTS OF OPERATIONS
Impact of COVID-19 Pandemic on Our Business
On March 11, 2020, the World Health Organization declared COVID-19 as a global pandemic. 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 over the past several months to preserve our financial flexibility and position ourselves to withstand the short-term impact of the pandemic and its impact on the consumer. We continue to communicate transparently with our employees, suppliers, landlords and banks and believe this direct and active communication has meaningfully enhanced the level of partnership to support the plans we have in place to manage through 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 although all 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, we have been very fortunate that our distribution center has been able to operate without any business disruption since March. The unrelenting impact of COVID-19 on the apparel industry continues to be a challenge. At DXL, we continue to see a shift among our customer base away from event-driven shopping and into need-based shopping. Our customers are spending less time this year at large social gathering events such as parties, graduations, and sporting events which is negatively impacting demand for apparel. However, we have seen improvements in many of our core and basic categories which have been driven by this change in lifestyle of staying close to home. Our customer still has a need to replenish his wardrobe over time, but we expect our business will continue to be challenged during this pandemic.
Executive Summary
Our net loss for the third quarter of fiscal 2020 was $(7.0) million as compared to a net loss of $(7.2) million for third quarter of fiscal 2019. While our sales, specifically from our retail stores, continue to be impacted by the ongoing pandemic and therefore have not returned to prior-year levels, sales did improve from the second quarter and with the actions we have taken to manage markdowns and reduce expenses our results for the third quarter of fiscal 2020 were relatively flat to last year.
During the third quarter of fiscal 2020, total comparable sales were down 20.5% to last year’s third quarter, which is an improvement from the second quarter, when comparable sales were down 38.6%. We have month-over-month improvement in our store sales from June through September in both traffic and conversion. For the third quarter, comparable store sales were down 31.5% while our direct business was up 18.2%, driven primarily by our DXL.com website which was up 28.4%. Gross margin for the third quarter also improved from the second quarter as a result of the progress we made by running more targeted promotions that garnered higher profit margins, as opposed to the second quarter where we were highly promotional in our effort to drive sales and reduce inventories.
In response to the pandemic, we have restructured our business, where possible, to reduce operating costs to align with expected sales levels. Over the past several months, we have taken several cost-reduction measures to align our cost structure with the lower sale base until this pandemic is behind us. As difficult as these steps have been, we were able to reduce our total SG&A costs for the third quarter by 100 basis points, as a percentage of sales. Subsequent to the end of the third quarter, on November 2, 2020, we announced additional steps to reduce our corporate workforce, terminate certain service agreements and eliminate certain professional services. The actions taken subsequent to the end of the third quarter, are expected to result in annualized savings of an additional $9.7 million.
22
In total, including the actions taken subsequent to the end of the third quarter, we have reduced our field organization by approximately 54% and our corporate workforce by 29% since March 2020.
We believe that managing and preserving our liquidity is our top priority to navigate through the pandemic. We have been proactive and decisive in managing our cash obligations. During the second quarter, we negotiated short-term rent relief agreements, primarily through rent abatements and rent deferments, with the majority of our landlords. As a result of lease modifications, the Company has reduced rent payments by approximately $8.5 million for fiscal 2020. As we head into the fourth quarter, we are actively engaging with our landlords regarding our forward-looking rent structure given the lower sales base.
In the first quarter of fiscal 2020, we drew $30.0 million under our revolving credit facility to preserve our access to cash and we also amended our credit facility to improve our excess availability under our revolver. At October 31, 2020, we had $21.4 million in cash, total debt outstanding, net of debt issuance costs, of $82.9 million and remaining availability under our credit facility of $13.5 million. Total debt, net of cash, for the third quarter of fiscal 2020 was $61.5 million, as compared to $77.5 million in the third quarter of fiscal 2019. At October 31, 2020, our accounts payable balance of $28.6 million, which included $1.3 million of promissory notes payable through April 2021, compared to an accounts payable balance of $27.0 million at November 2, 2019. Our inventory at October 31, 2020 was $94.9 million, down from $120.2 million at the end of the third quarter last year. At the start of this pandemic, we canceled a substantial amount of orders and are continuing to manage our inventory very conservatively by slowing replenishment and reducing fall receipts to align with the current sales trend. Our access to liquidity will remain our primary objective for the balance of fiscal 2020 and we do believe that we have sufficient liquidity to meet our working capital requirements over the next twelve months, given no further significant shutdowns of the economy.
Financial Summary
The following is a summary of results for the third quarter and the first nine months of fiscal 2020 as compared to the prior year, including adjusted EBITDA, which is a non-GAAP measure. Please see “Non-GAAP Financial Measures” below for a reconciliation of net loss to adjusted EBITDA.
(in millions, except per share data)
(7.0
(7.2
(59.5
(10.2
Adjusted EBITDA (Non-GAAP basis)
(1.7
1.7
(24.9
13.6
Per diluted share:
Adjusted net income (loss) (Non-GAAP basis)
(0.12
(0.08
(0.64
Total sales for the third quarter of fiscal 2020 decreased 20.1% to $85.2 million from $106.6 million in the third quarter of fiscal 2019. Comparable sales for the quarter were down 20.5% to last year, which is an improvement of 18.1 percentage points from the second quarter of fiscal 2020, when comparable sales were down 38.6%. The 20.5% decrease in comparable sales was primarily driven by our stores, which were down 31.5% from the prior year’s third quarter, partially offset by our direct business, which was up 18.2%. For the third quarter of fiscal 2020, our direct business represented 33.4% of our retail sales as compared to 21.9% for the third quarter of fiscal 2019.
All of our stores had reopened by the end of June, and we were seeing month-over-month improvements in both traffic and conversion through September. However, with the resurgence of the virus, fires on the west coast and distractions from the election, our sales momentum slowed in October.
23
The increase in our direct business was principally due to our DXL.com e-commerce site, which had a sales increase of 28.4%. The strong growth in our direct business was a direct outcome of the digital strategies we implemented and the customers’ further shift in shopping preferences in response to COVID-19.
Our wholesale business contributed $5.0 million in sales during the third quarter, as compared to $2.9 million in the prior year, principally due to Amazon Essentials. We saw demand for masks, which was significant for us in the second quarter, drop during the third quarter.
Total sales for the first nine months of fiscal 2020 decreased 36.2% to $218.8 million from $342.8 million for the first nine months of fiscal 2019. This decrease was principally due to the temporary closing of all of our store locations during parts of the first two quarters as well as the decrease in store traffic and consumer spending as a direct result of the COVID-19 pandemic. With continued high unemployment and the uncertainty surrounding the pandemic, we expect to continue to market to our customers primarily through digital and direct means, in an effort to drive traffic to both our website and stores.
Gross Margin Rate
For the third quarter of fiscal 2020, our gross margin rate, inclusive of occupancy costs, was 36.5% as compared to a gross margin rate of 41.1% for the third quarter of fiscal 2019. The decrease of 4.6% was due to a decrease of 2.8% in merchandise margins and a decrease of 1.8% due to the deleveraging in occupancy costs. Merchandise margins have improved from the second quarter of fiscal 2020, when merchandise margins were down 11.1%. During the third quarter, we made progress with improving our markdowns by focusing on more targeted promotions with a greater gross margin impact as opposed to the second quarter where we were highly promotional across many categories in our effort to drive sales and reduce inventories. Because of the growth in our direct channel and free shipping promotions, shipping costs continued to increase over the prior year and are expected to remain elevated in the fourth quarter
For the first nine months of fiscal 2020, our gross margin, inclusive of occupancy costs, was 30.1% as compared to 43.1% for the first nine months of fiscal 2019. The decrease of 13.0% was comprised of a decline of 6.0% from the deleveraging in occupancy costs, due to the store closures and overall reduced sales base, and a decrease of 7.0% in merchandise margins. The decrease in merchandise margins reflects the increased promotional posture we took in response to COVID-19, especially during the second quarter, and an increase in our inventory reserves of approximately $0.7 million in the first quarter of fiscal 2020. We are continuing to work with our landlord community given the lower sales base because of the continued impact of COVID-19 on store traffic.
Although margins from our wholesale business are lower than our retail business, which is expected for wholesale, the gross margin rate in the third quarter and first nine months of fiscal 2020 for wholesale significantly improved over the prior year.
Selling, General and Administrative Expenses
As a percentage of sales, SG&A expenses for the third quarter of fiscal 2020 were 38.5% as compared to 39.5% for the third quarter of fiscal 2019. On a dollar basis, SG&A decreased by $9.3 million, or 22.1%, for the third quarter of fiscal 2020 as compared to the prior year. For the first nine months of fiscal 2020, SG&A expenses were 41.5% of sales as compared to 39.1% for the first nine months of fiscal 2019. On a dollar basis, SG&A expense decreased $43.5 million or 32.4%.
We took several steps to reduce our operating costs while our stores were closed, including the furlough of both our store associates and certain corporate associates, a reduction in marketing costs, a temporary salary reduction of 10-20% for management and the suspension of non-employee director compensation for the second quarter. As we reopened stores during the second quarter, our operating costs were realigned with the expected sales levels and associates were brought back on a staggered schedule. In the third quarter, we reduced our SG&A expenses, as a percent of sales, by 100 basis points, further showing the measures we have taken to reduce our operating costs given the lower sales base. The decrease in the third quarter was primarily driven by a decrease in store and corporate payroll and cost reduction efforts throughout all areas of our business. With the reduced sales levels and store traffic, our stores are operating at minimal staffing levels and reduced operating hours.
Subsequent to the end of the third quarter, on November 2, 2020, we implemented an additional corporate restructuring, in an effort to continually realign our SG&A costs with the potential continuation of reduced sales levels as a result of the continuing COVID-19 pandemic. The restructuring included the termination of certain service agreements, the elimination of certain professional services and the elimination of an additional 45 positions in the corporate workforce. These additional actions are expected to result in annualized savings of approximately $9.7 million. This year, we have reduced our field organization by approximately 54% and our corporate workforce by 29%. The Company expects to incur an aggregate charge of approximately $0.5 million in the fourth quarter of fiscal 2020 related to employee severance and one-time termination benefits. Our ability to restructure has been critical as it creates operating leverage and allows us to better withstand a decline in revenue. We will continue to assess and rationalize our entire SG&A cost structure.
SG&A expenses are managed through two primary cost centers: Customer Facing Costs and Corporate Supporting Costs. Customer Facing Costs, which include store payroll, marketing, and other store operating costs, represented 19.8% of sales for the first nine months of fiscal 2020 as compared to 22.9% of sales for the first nine months of last year. While down 15% over last year, Corporate
24
Supporting Costs, which include the distribution center, support, and other corporate overhead costs, represented 21.7% of sales for the first nine months of fiscal 2020 compared to 16.2% of sales for the first nine months of last year.
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 lease right-of-use assets related to the Company’s adoption of ASC 842, Leases, in the first quarter of fiscal 2019. When indicators of impairment are present, a recoverability analysis is performed. Based on the indicators present in the first quarter of fiscal 2020, we completed a recoverability analysis, which included the impact of the COVID-19 pandemic on the operations of our stores and we used projections that were based on multiple probability-weighted scenarios, assuming that our stores gradually open throughout the second quarter of fiscal 2020 but that consumer retail spending will remain substantially curtailed for a period of time. As a result of that analysis, in the first quarter of fiscal 2020 we recorded an impairment charge of $16.3 million. The impairment charge included approximately $12.5 million for the write-down of certain right-of-use assets, related to leases where the carrying value exceeded fair value, and $3.8 million for the write-down of property and equipment, related to stores where the carrying value exceeded fair value.
During the third quarter of fiscal 2020, we recorded a $1.2 million non-cash gain on the reduction of our operating lease liability in connection with our decision to close three retail stores, which resulted in a revaluation of the lease liability. Approximately $1.1 million of this gain related to two leases where the right-of-use assets had previously been impaired and therefore was included as a reduction in the impairment charge for the three and nine months ended October 31, 2020. The remaining gain of $0.1 million was included as an offset to store occupancy costs.
Exit Costs Associated with London Operations
Results for the third quarter and first nine months of fiscal 2019 included a charge of $1.7 million related to the closure of our Rochester Clothing store and the exit from our London operations. The largest component of this charge was the recognition of the accumulated foreign currency translation adjustment of approximately $0.8 million. The remainder of the charge related primarily to lease termination and inventory liquidation costs.
Depreciation and Amortization
Depreciation and amortization for the third quarter and first nine months of fiscal 2020 of $5.3 million and $16.4 million, respectively, decreased from $6.3 million and $18.9 million for the third quarter and first nine months of fiscal 2019. The decrease is due to a lower depreciable cost base, especially from our store assets.
Interest Expense, Net
Net interest expense for the third quarter and first nine months of fiscal 2020 increased to $1.1 million and $2.9 million, respectively, as compared to $0.9 million and $2.6 million, respectively, for the third quarter and first nine months of fiscal 2019 due to an increase in average borrowings, and an increase in the effective borrowing rates. As a result of our recent 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, which will increase our interest costs on a go-forward basis for the remainder of fiscal 2020. In addition, as discussed above, on March 20, 2020, we drew approximately $30.0 million against our revolving credit facility. This action was taken to provide the Company with flexibility to manage its cash flow during this uncertain time.
Income Taxes
We established a full valuation allowance against our deferred tax assets at the end of fiscal 2014. Based on our forecast for fiscal 2020, we believe that a full valuation allowance continues to remain appropriate at this time.
The discrete tax rate method was used for calculating tax expense. Due to current period losses, our current tax provision for the first nine months of fiscal 2020 and fiscal 2019 was primarily due to current state margin tax, based on gross receipts less certain deductions. The total income tax benefit for the third quarter and first nine months of fiscal 2019 also included a deferred tax impact of $70,000 and $151,000, respectively, in other comprehensive income (loss), which resulted in a tax benefit on the Consolidated Statement of Operations related to the corresponding decrease in valuation allowance.
Net Loss
For the third quarter of fiscal 2020, we had a net loss of $(7.0) million, or $(0.14) per diluted share, compared with a net loss of $(7.2) million, or $(0.14) per diluted share, for the third quarter of fiscal 2019. For the first nine months of fiscal 2020, we had a net loss of $(59.5) million, or $(1.16) per diluted share, as compared to a net loss of $(10.2) million, or $(0.21) per diluted share.
25
On a non-GAAP basis, before asset impairment costs, exit costs associated with London operations, and CEO transition costs and assuming a normalized tax rate of 26% for all periods, adjusted net loss for the third quarter and first nine months of fiscal 2020 was ($0.12) per diluted share and ($0.64) per diluted share, respectively, as compared to an adjusted net loss of ($0.08) per diluted share and ($0.12) per diluted share, respectively, for the third quarter and first nine months of 2019.
Inventory
Our inventory on October 31, 2020, decreased approximately $25.3 million to $94.9 million, as compared to $120.2 million at November 2, 2019. We are managing our inventory very conservatively, slowing replenishment and reducing fall receipts to align with the current sales trend. Our objective is to maintain a healthy inventory, which will include narrowing our assortment while also continuing to manage clearance levels. At October 31, 2020, our clearance inventory decreased by $0.8 million and represented 11.8% of our total inventory, as compared to 10.0% at November 2, 2019.
SEASONALITY
Historically, and consistent with the retail industry, we have experienced seasonal fluctuations as it relates to our operating income and net income. Traditionally, a significant portion of our operating income and net income is generated in the fourth quarter, as a result of the “Holiday” season.
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 flows 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 the first nine months of fiscal 2020, we amended our Credit Facility to increase our borrowing base, negotiated extended payment terms with vendors, cancelled inventory purchase orders, reduced operating costs and reduced capital spending. Based on our current projections, we believe our cash on hand, availability under our Credit Facility, ongoing cash generated from our direct business, wholesale business and from the our retail operations, although they are operating on reduced hours, 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 impact our financial results will depend on future developments, which are highly uncertain and cannot be predicted at this time.
For the first nine months of fiscal 2020, cash flow from operations improved by approximately $5.8 million to $(8.6) million as compared to $(14.4) million for the first nine months of fiscal 2019. Free cash flow, a non-GAAP measure, improved by $13.8 million to $(11.6) million for the first nine months of fiscal 2020 as compared to $(25.4) million for the first nine months of fiscal 2019. The improvement in free cash flow was primarily due to our decrease in inventory levels and a decrease in capital expenditures as we continued to manage our liquidity during the pandemic. Cash flow from financing activities increased $2.7 million to $28.7 million for the first nine months of fiscal 2020 as compared $26.0 million for the first nine months of fiscal 2019, due to the $30.0 million draw-down on our Credit Facility in March 2020 to provide the Company with financial flexibility during the pandemic partially offset by the decrease in working capital needs.
Our accounts payable balance at the end of the third quarter of fiscal 2020 was $28.6 million as compared to $27.0 million at the end of the third quarter of fiscal 2019. Included in the October 31, 2020, balance are $1.3 million of promissory notes, payable through April 1, 2021. We continue to work with our vendors to secure extended payment terms, where possible, to better manage our working capital.
The following is a summary of our total debt outstanding at October 31, 2020 with the associated unamortized debt issuance costs:
Gross Debt Outstanding
Less Debt Issuance Costs
Net Debt Outstanding
Credit facility
68,255
(236
Total debt
83,255
(381
82,874
26
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.
We had outstanding borrowings of $68.3 million under the Credit Facility at October 31, 2020. At October 31, 2020, outstanding standby letters of credit were $2.8 million and outstanding documentary letters of credit were $1.3 million. The average monthly borrowing outstanding under the Credit Facility during the first nine months ended October 31, 2020 was approximately $67.4 million, resulting in an average unused excess availability of approximately $19.5 million. Unused excess availability at October 31, 2020 was $13.5 million.
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 accounts, including certain trade names, that steps down over time, plus a specified percentage of the value of eligible inventory that steps down over time. During the first quarter of fiscal 2020, we entered into an amendment that extended these advance rates to December 2020 before they begin 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 October 31, 2020, the outstanding balance of $15.0 million was in a 6-month LIBOR-based contract with an interest rate of 6.00%.
Capital Expenditures
The following table sets forth the open stores and related square footage at October 31, 2020 and November 2, 2019, respectively:
Store Concept
Stores
Square
Footage
(square footage in thousands)
DXL Retail
227
1,724
229
1,736
DXL Outlets
Casual Male XL Retail
160
50
164
Casual Male Outlets
69
28
84
Rochester Clothing
Total Stores
316
2,035
2,087
In our efforts to preserve our liquidity, we have reduced the majority of our capital spending, unless such spending is necessary to our immediate business needs. Our capital expenditures for the first nine months of fiscal 2020 were $2.9 million as compared to $11.0 million for the first nine months of fiscal 2019. During the first nine months of fiscal 2020, we closed one DXL retail store, five Casual Male XL outlets and one Casual Male XL retail store.
Of the 316 stores in our portfolio as of October 31, 2020, 52 stores are controlled by lease agreements that have a natural expiration or kick-out option by the end of fiscal 2021; 44 stores are controlled by lease agreements that have a natural expiration or kick-out option in fiscal 2022; and 220 stores are controlled by lease agreements that have a natural expiration or kick-out option in fiscal 2023 or later. We review store leases on a case-by-case basis and will make decisions to renew or terminate leases based on specific store performance and their overall strategic importance to the brand.
CRITICAL ACCOUNTING POLICIES
There have been no material changes to the critical accounting policies and estimates disclosed in our Form 10-K for the year ending February 1, 2020. See Note 1 to the Consolidated Financial Statements included in this report for information on recent accounting pronouncements and changes in accounting principles.
Non-GAAP Financial Measures
Adjusted net loss, adjusted net loss per diluted share, free cash flow and Adjusted EBITDA are non-GAAP measures. These non-GAAP measures are not presented in accordance with GAAP and should not be considered superior to or as a substitute for net loss or cash flows from operating activities or any other measure of performance derived in accordance with GAAP. In addition, all companies do not calculate non-GAAP financial measures in the same manner and, accordingly, the non-GAAP measures presented in this Quarterly Report may not be comparable to similar measures used by other companies. We believe that inclusion of these non-GAAP measures helps investors gain a better understanding of our performance, especially when comparing such results to previous periods and that they are useful as an additional means for investors to evaluate our operating results, when reviewed in conjunction with our GAAP financial statements. Reconciliations of these non-GAAP measures are presented in the following tables (certain columns may not foot due to rounding):
Adjusted net loss and adjusted net loss per diluted share. Adjusted net loss and adjusted net loss per share reflect an adjustment assuming a normal tax rate of 26% and the add-back of CEO transition, exits costs associated with London operations and impairment of assets. 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%.
Per diluted
share
(in thousands, except per share data)
Net loss (GAAP basis)
Adjust:
Add back actual income tax provision (benefit)
Add income tax benefit, assuming a normal tax rate of 26%
2,114
1,431
11,490
2,047
Adjusted net loss (non-GAAP basis)
(6,016
(4,071
(32,701
(5,825
Weighted average number of common shares outstanding on a diluted basis
Free Cash Flow. We define free cash flow as cash flow from operating activities less capital expenditures. Free cash flow excludes the mandatory and discretionary repayment of debt. Free cash flow is a metric that management uses to monitor liquidity. We expect to fund our ongoing capital expenditures with cash flow from operations.
The following table reconciles free cash flow:
(in millions)
Cash flow from operating activities (GAAP basis)
(8.6
(14.4
Capital expenditures, infrastructure projects
(2.0
Capital expenditures for DXL stores
(0.9
(3.8
Free Cash Flow (non-GAAP basis)
(11.6
(25.4
Adjusted EBITDA. Adjusted EBITDA is calculated as earnings before interest, taxes, depreciation and amortization and is before CEO transition costs, exit costs associated with London operations, and any impairment of assets. We believe that adjusted EBITDA is useful to investors in evaluating our performance.
Add back:
0.7
(1.1
15.2
0.1
(0.1
Interest expense
1.1
0.9
2.9
2.6
5.3
6.3
16.4
18.9
Adjusted EBITDA (non-GAAP basis)
Item 3. 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 our 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 October 31, 2020, we had outstanding borrowings of $68.3 million, of which $65.0 million were in LIBOR-based contracts with an interest rate of 4.00%. The remainder was prime-based borrowings, with a rate of 5.25%. At October 31, 2020, 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 October 31, 2020, assuming average outstanding borrowing during the first nine months of fiscal 2020 of $67.4 million under our Credit Facility and $15.0 million outstanding under our FILO loan, a 50 basis point increase in interest rates would have resulted in a potential increase in interest expense of approximately $412,000 on an annualized basis.
Foreign Currency
Our two DXL stores located in Ontario, Canada conduct business in Canadian dollars. 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.
Item 4. Controls and Procedures.
Evaluation of Disclosure Controls and Procedures
As required by Rule 13a-15 under the Exchange Act, our management, under the supervision and with the participation of our Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) as of October 31, 2020. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is accumulated and communicated to the company’s management, including its principal executive and principal financial officers, as appropriate to allow timely decisions regarding required disclosure. Management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving their objectives and management necessarily applies its judgment in evaluating the cost-benefit relationship of possible controls and procedures. Based on this evaluation, our Chief Executive Officer and Chief Financial Officer concluded that, as of October 31, 2020, our disclosure controls and procedures were effective.
Changes in Internal Control over Financial Reporting
While the majority of our employees are working remotely during the COVID-19 pandemic, we have not experienced any changes in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the three months ended October 31, 2020 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
29
PART II. OTHER INFORMATION
Item 1. Legal Proceedings.
We are subject to various legal proceedings and claims that arise in the ordinary course of business. Management currently believes that the resolution of these matters will not have a material adverse impact on our future results of operations or financial position.
Item 1A. Risk Factors.
Except as described below, there have been no material changes to the risk factors as previously disclosed in Part I, Item 1A of our Fiscal 2019 Annual Report.
The global impact of the COVID-19 pandemic has had and, based on the current status and uncertainty, will likely continue to have a significant adverse effect on our business, financial results, liquidity, supply chain and workforce.
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, a significant adverse effect on our business, financial results and liquidity. All of our stores were closed 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. While our direct and wholesale businesses were operational, our total revenues for the first nine months of fiscal 2020 decreased by approximately 36.2%. Based on the continuing uncertainty regarding the pandemic, we are unable, within reason, to estimate the impact to the remainder of fiscal 2020. As such, we are 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, (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 approximately $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").
The above actions may not be successful in mitigating the effects of this pandemic, which is highly uncertain and difficult to predict, and the actions that we take may negatively impact or delay our strategic initiatives. For example, even though our stores have reopened, 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;
•
we may not be able to effectively manage our operating costs on a lower sales base;
we may not be able to effectively manage the availability under our Credit Facility;
we may not be able to maintain or obtain favorable credit terms with our third-party vendors, making it harder to manage liquidity and receive inventory on a timely schedule;
we cannot be assured that inventory costs will not increase or that inventory will be readily accessible from our vendors;
and
we cannot be assured that we will not have further impairments of our long-lived assets.
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. is experiencing unprecedented unemployment and a possible economic recession that would likely impact 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.
In addition to the risks noted above, the COVID-19 pandemic may also heighten other risks described in our Fiscal 2019 Annual Report, including risks to our supply chain, the health and safety of our customers and employees, and our ability to maintain compliance with the financial covenants under our Credit Facility. For example, we are seeing disruption in the global supply chain
30
due to COVID-19 outbreaks in foreign ports and shortages of vessels and shipping containers that may impact our ability to import inventory in a timely manner.
It is unlikely that we will be able to maintain the listing of our common stock on NASDAQ, and as a result our common stock will begin trading over-the-counter.
On October 13, 2020, we received notification from the Listing Qualifications staff of The Nasdaq Stock Market LLC (“Nasdaq”) that our application to transfer from the Global Select Market to the Capital Market was approved and effective October 19, 2020. This request was in response to the notice from Nasdaq, received by the Company in September 2020, that the Company was not in compliance with Nasdaq Listing Rule 5450(b)(1)(A) based on information provided in the our Quarterly Report on Form 10-Q for the quarter ended August 1, 2020, which reported that our stockholders’ equity was below the $10.0 million minimum required for continued listing on the Nasdaq Global Market.
In addition, as previously reported, in April 2020, the Company received a letter from Nasdaq indicating that, based upon the closing bid price of the Company’s common stock for the last 30 consecutive business days, the Company no longer met the requirement to maintain a minimum consolidated closing bid price of $1.00 per share, as set forth in Nasdaq Listing Rule 5450(a)(1) (the “Minimum Bid Price Rule”). The Company was provided a period of 180 days to regain compliance with the Minimum Bid Price Rule, which period was tolled due to the COVID-19 pandemic and will end on December 21, 2020. Upon transfer to the Nasdaq Capital Market, the Company was afforded the remainder of this compliance period.
If the Company is unable to regain compliance with the Minimum Bid Price Rule before December 21, 2020, the Company may be eligible to seek an additional compliance period of 180 calendar days if it meets the continued listing requirement for minimum value of stockholder’s equity and all other continued listing standards for the Nasdaq Capital Market, with the exception of the Minimum Bid Price Rule, and provides written notice to Nasdaq of its intent to cure the deficiency during this second compliance period, by effecting a reverse stock split, if necessary. However, if it appears to Nasdaq that the Company will not be able to cure the deficiency, or if the Company is otherwise not eligible because it cannot meet the other requirements for continued listing, in particular the minimum value of stockholder’s equity, Nasdaq will provide notice to the Company that its common stock will be subject to delisting.
If our common stock is delisted, or we elect to voluntarily delist our common stock from Nasdaq, our common stock would be eligible for quotation on "over-the-counter" markets, which are generally considered to be a less efficient system than listing on markets such as Nasdaq or other national exchanges because of lower trading volumes, transaction delays and reduced security analyst and news media coverage. Any delisting of our common stock could adversely affect the market liquidity of our common stock and the market price of our common stock could decrease.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
None.
Item 3. Defaults Upon Senior Securities.
Item 4. Mine Safety Disclosures.
Not applicable.
Item 5. Other Information.
31
Item 6. Exhibits.
10.1
Fifth Amended and Restated Non-Employee Director Compensation Plan.
10.2
Amended Employment Agreement between the Company and Ujjwal Dhoot effective as of August 2, 2020 (included as Exhibit 10.2 to the Company’s Quarterly Report filed August 27, 2020 and incorporated herein by reference).
31.1
Certification of the Chief Executive Officer of the Company pursuant to Rule 13a-14(a) under the Securities Exchange Act of 1934.
31.2
Certification of the Chief Financial Officer of the Company pursuant to Rule 13a-14(a) under the Securities Exchange Act of 1934.
32.1
Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32.2
Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
101.INS
Inline XBRL Instance Document. The instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document.
101.SCH
Inline XBRL Taxonomy Extension Schema Document.
101.CAL
Inline XBRL Taxonomy Extension Calculation Linkbase Document.
101.DEF
Inline XBRL Taxonomy Extension Definition Linkbase Document.
101.LAB
Inline XBRL Taxonomy Extension Label Linkbase Document.
101.PRE
Inline XBRL Taxonomy Extension Presentation Linkbase Document.
Cover Page Interactive Data File – The cover page interactive data file does not appear in the interactive data file because its XBRL tags are embedded within the Inline XBRL document.
32
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
Date: November 20, 2020
By:
/S/ John F. Cooney
John F. Cooney
Vice President, Managing Director, Chief Accounting Officer and Corporate Controller (Duly Authorized Officer and Chief Accounting Officer)
33