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 expectations with respect to sales trends, including expected sales growth in the fourth quarter of 2022, expected marketing costs in 2022, gross margin rate, improved inventory levels and our management of inventory levels, our ability to realize our deferred tax assets, increased freight costs, increases in certain raw materials cost, our long-term outlook, expected capital expenditures in 2022, our ability to attract new customers, and our plans with respect to our store portfolio, including anticipated closures, re-brandings, and new and relocated stores. 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 January 29, 2022, included in our Annual Report on Form 10-K for the year ended January 29, 2022, as filed with the Securities and Exchange Commission on March 17, 2022 (our “Fiscal 2021 Annual Report”).
Numerous factors could cause our actual results to differ materially from such forward-looking statements. This discussion sets forth certain risks and uncertainties that may have an impact on future results and direction of our Company, including, without limitation, risks related to labor shortages, increased labor costs, changes in consumer spending in response to the economy, the ongoing effects of the COVID-19 pandemic, the economic impact of the war in Ukraine, our ability to navigate supply chain uncertainties, our ability to maintain appropriate inventory levels, our ability to successfully execute on our corporate strategy, our ability to predict customer tastes and fashion trends, our ability to grow market share, and the other risks and uncertainties set forth in the “Risk Factors” section in Part I, Item 1A of our Fiscal 2021 Annual Report.
All subsequent written and oral forward-looking statements attributable to us or to persons acting on our behalf are expressly qualified in their entirety by the foregoing. These forward-looking statements speak only as of the date of the document in which they are made. We disclaim any obligation or undertaking to provide any updates or revisions to any forward-looking statement to reflect any change in our expectations or any change in events, conditions or circumstances in which the forward-looking statement is based.
BUSINESS SUMMARY
Destination XL Group, Inc., together with our consolidated subsidiaries (the “Company”), is the largest specialty retailer of big and tall men’s clothing with retail and direct operations in the United States. We operate under the trade names of Destination XL®, DXL®, DXL Outlets, Casual Male XL® and Casual Male XL Outlets. At October 29, 2022, we operated 218 Destination XL stores, 16 DXL outlet stores, 30 Casual Male XL retail stores, 19 Casual Male XL outlet stores and a digital business, including an e-commerce site at dxl.com and a mobile site, m.destinationXL.com, mobile app and third-party marketplaces.
Unless the context indicates otherwise, all references to “we,” “our,” “us” and “the Company” refer to Destination XL Group, Inc. and our consolidated subsidiaries. We refer to our fiscal years, which end on January 28, 2023, January 29, 2022 and January 30, 2021 as “fiscal 2022,” “fiscal 2021” and “fiscal 2020,” respectively. All three fiscal years are 52-week periods.
SEGMENT REPORTING
We currently have two principal operating segments: our stores and direct business. We consider our stores and direct business segments to be similar in terms of economic characteristics, production processes and operations, and have therefore aggregated them into one reportable segment, retail segment, consistent with our omni-channel business approach. Our wholesale segment was a third operating segment. In the first quarter of fiscal 2022, we ended the relationship with our primary wholesale customer. Due to the immateriality of the wholesale segment’s revenues, profits and assets, its operating results have been aggregated with the retail segment for all periods.
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
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result, we continue to see more transactions that begin online but are ultimately completed at the store level. Similarly, if a customer visits a store and the item is out of stock, the associate can order the item through our website. A customer also has the ability to order online and pick-up in a store and at curbside. We define store sales as sales that originate and are fulfilled directly at the store level. Digital commerce sales, which we also refer to as direct sales, are defined as sales that originate online, whether through our website, at the store level or through a third-party marketplace.
Stores that have been open for at least 13 months are included in comparable sales. Stores that have been remodeled or re-located during the period are also included in our determination of comparable stores sales. Stores that have been expanded by more than 25% are considered non-comparable for the first 13 months. If a store becomes a clearance center, it is also removed from the calculation of comparable sales. The method of calculating comparable sales varies across the retail industry and, as a result, our calculation of comparable sales is not necessarily comparable to similarly titled measures reported by other retailers.
RESULTS OF OPERATIONS
Executive Summary
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For the three months ended |
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For the nine months ended |
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October 29, 2022 |
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October 30, 2021 |
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October 29, 2022 |
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October 30, 2021 |
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(in millions, except percentage of sales and per share data) |
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Sales |
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$ |
129.7 |
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$ |
121.5 |
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$ |
402.0 |
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$ |
371.6 |
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Net income |
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$ |
10.5 |
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$ |
13.7 |
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$ |
80.8 |
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$ |
46.8 |
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Adjusted EBITDA (Non-GAAP basis) |
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$ |
16.4 |
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$ |
19.0 |
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$ |
59.6 |
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$ |
62.5 |
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Gross Margin. as a percentage of sales |
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50.0 |
% |
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50.2 |
% |
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50.8 |
% |
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49.4 |
% |
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SG&A expenses, as a percentage of sales |
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37.3 |
% |
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34.5 |
% |
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35.9 |
% |
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32.5 |
% |
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Per diluted share: |
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Net income |
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$ |
0.16 |
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$ |
0.20 |
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$ |
1.20 |
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$ |
0.69 |
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We are pleased to report continued earnings and sales growth this quarter, with results exceeding our internal expectations, especially up against a very strong third quarter last year. Comparable sales increased 8.7% for the quarter, with strong performance from our stores, which were up 10.1% for the third quarter, with all regions reporting sales growth over last year. This growth was primarily driven by higher dollars per transactions and conversion. The increase in dollars per transactions was attributable to our reduced reliance on promotions and a shift in merchandise mix to higher-price items, such as tailored clothing. Our direct business had a comparable sales increase of 5.5% for the third quarter, driven primarily by our web, app and marketplaces. Our gross margin rate for the third quarter continued to benefit from the low promotions and clearance enabling us to partially offset the increase in freight and raw material costs that we continue to experience. In line with our expectations, our selling, general and administrative expenses (SG&A) increased by 280 basis points during the third quarter, with our marketing costs representing approximately 140 basis points of this increase. The remainder of the increase in SG&A was primarily due to increased payroll costs to support sales growth and higher accruals for performance-based incentive plans. As a result, net income for the third quarter was $10.5 million, or $0.16 per diluted share, as compared to net income for the third quarter of fiscal 2021 of $13.7 million, or $0.20 per diluted share.
At October 29, 2022, we had no debt outstanding and we did not borrow from our credit facility during the first nine months. Our unused excess availability at October 29, 2022 was $90.2 million. At the end of the third quarter, we are in a strong inventory position and have been able to replenish those categories that were depleted last year. As a result, our inventory level at the end of the third quarter was intentionally up 29.8% from last year, but was down 11.1%, when compared to the end of the third quarter in fiscal 2019 inventory, or pre-pandemic levels. In addition, we have improved our inventory turn by over 30% from the third quarter of fiscal 2019.
As we previously disclosed, the Company's Board of Directors approved a $15.0 million stock repurchase program in March 2022 and, during the first nine months of fiscal 2022, we utilized our free cash flow to repurchase 2.9 million shares of our common stock, at an aggregate cost of $12.7 million, including fees. There were no repurchases of stock during the third quarter of fiscal 2022.
Our results year-to-date have outperformed our expectations and we believe that we are well-positioned as we head into the fourth quarter. While we remain optimistic, we are cognizant of the potential impact that inflation and other macro-economic factors may have on fourth quarter consumer spending. We expect to grow our comparable sales in the fourth quarter by single digits.
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Financial Summary
Sales
The following table presents sales by segment for the three and nine months ended October 29, 2022 and October 30, 2021:
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For the Three Months Ended |
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For the Nine Months Ended |
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(in thousands) |
October 29, 2022 |
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October 30, 2021 |
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October 29, 2022 |
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October 30, 2021 |
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Store sales |
$ |
91,770 |
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70.8 |
% |
$ |
84,762 |
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70.3 |
% |
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$ |
280,973 |
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70.0 |
% |
$ |
258,685 |
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70.5 |
% |
Direct sales |
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37,901 |
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29.2 |
% |
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35,837 |
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29.7 |
% |
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120,588 |
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30.0 |
% |
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108,043 |
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29.5 |
% |
Retail segment |
$ |
129,671 |
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$ |
120,599 |
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$ |
401,561 |
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$ |
366,728 |
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Wholesale segment |
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— |
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887 |
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399 |
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4,842 |
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Total sales |
$ |
129,671 |
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$ |
121,486 |
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$ |
401,960 |
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$ |
371,570 |
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Total sales for the third quarter of fiscal 2022 were $129.7 million, as compared to $121.5 million in the third quarter of fiscal 2021. Comparable sales for the third quarter were up 8.7% with comparable sales from our stores up 10.1% and our direct business up 5.5%.
Store sales for the third quarter exceeded our plan, driven primarily by increases in dollars per transaction and conversion. The increase in dollars per transaction was attributable to a combination of factors, including less markdowns as a result of fewer promotions and deeper penetration in high-ticket categories such as tailored clothing. All regions outperformed the prior year third quarter, with the southeast region showing the strongest sales increase. The growth in our direct business of 5.5% was driven primarily by our web and app with continued growth from online marketplaces. Stores accelerated and outpaced the direct business in total during the third quarter, as consumers continued to return to stores at an increasing level.
Compared to the third quarter of fiscal 2019, the last normalized selling year, our comparable sales for the third quarter of fiscal 2022 were up 33.7%. We believe the comparison to fiscal 2019 is relevant when evaluating our sales performance given the impact of the pandemic on the past two years.
As compared to the third quarter of fiscal 2021, for the third quarter of fiscal 2022 comparable sales were up 7.4% in August, up 8.5% in September and up 10.3% in October. We are aware of the potential macro-economic impact on consumer spending in the fourth quarter. As a result, while we remain optimistic, we are conservatively forecasting comparable sales growth for the fourth quarter of fiscal 2022 to be single digits.
For the first nine months of fiscal 2022, total sales increased 8.2% to $402.0 million, as compared to $371.6 million for the first nine months of fiscal 2021. Comparable sales for the first nine months of fiscal 2022, as compared to fiscal 2021, increased 10.9%, with comparable sales from our stores up 10.7% and our direct business up 11.5%.
As we previously disclosed, during the first quarter of fiscal 2022, we ended our relationship with our primary wholesale customer. As a result, our wholesale revenues for the first nine months of fiscal 2022 were $0.4 million as compared to $4.8 million for the first nine months of fiscal 2021.
Gross Margin Rate
For the third quarter of fiscal 2022, our gross margin rate, inclusive of occupancy costs, was 50.0% as compared to a gross margin rate of 50.2% for third quarter of fiscal 2021.
Our gross margin rate decreased by 20-basis points, with a decrease in merchandise margin of 70-basis points, partially offset by a 50-basis point improvement in occupancy costs due to the increased leverage from sales. The decrease in merchandise margin of 70-basis points was due to increased costs for raw materials, increased shipping costs per package, driven by higher fuel costs and surcharges, and a higher penetration of our marketplace business, which has commission costs. Those increases were partially offset by lower promotional markdowns. We continue to optimize our pricing and promotional cadence to mitigate cost increases and preserve our margin rates.
For the first nine months of fiscal 2022, our gross margin rate, inclusive of occupancy costs, was 50.8%, as compared to a gross margin rate of 49.4% for the first nine months of fiscal 2021. The increase of 140-basis points was due to an improvement of 110-basis points in occupancy costs, due to the increased leverage from sales, and an increase in merchandise margins of 30-basis points, due primarily to lower promotional markdowns partially offset by an increase in freight and shipping costs.
Selling, General and Administrative Expenses
As a percentage of sales, SG&A (selling, general and administrative) expenses for the third quarter of fiscal 2022 were 37.3% as compared to 34.5% for the third quarter of fiscal 2021. The SG&A rate for third quarter of fiscal 2021 was abnormally low due to the surge in sales from pent-up demand and stimulus money while at the same time experiencing a shortage in store staffing. However,
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our SG&A rate as a percentage of sales is favorable when compared against 39.5% in the third quarter of fiscal 2019, which was our last normalized third quarter, pre-pandemic.
On a dollar basis, SG&A expenses increased by $6.4 million as compared to the third quarter of fiscal 2021. The increase was primarily due to an increase in marketing costs to drive customer acquisition and engagement, payroll costs to support sales growth, including merit adjustments and filling open positions, and an increase in performance-based incentive accruals. Our marketing costs for the third quarter of fiscal 2022 represented 5.9% of sales as compared to 4.5% in the third quarter of fiscal 2021. For fiscal 2022, we are expecting marketing costs to be approximately 6.2% of sales.
For the first nine months of fiscal 2022, SG&A expenses were 35.9% of sales as compared to 32.5% of sales for the first nine months of fiscal 2021. Similar to the third quarter, the prior year rate was abnormally low. When compared against the first nine months of fiscal 2019 when the rate was 39.1% of sales, the savings that we have been able to realize in our SG&A costs is evident. As compared to the first nine months of fiscal 2021, SG&A costs increased $23.6 million, or 19.5%, as a result of increased marketing costs, payroll costs to support sales growth, annual merit adjustments, filling open positions and an increase in performance-based incentive accruals. Marketing costs represented 5.5% of sales for the first nine months of fiscal 2022 as compared to 3.7% for the first nine months of fiscal 2021.
Management views SG&A expenses through two primary cost centers: Customer Facing Costs and Corporate Support Costs. Customer Facing Costs, which include store payroll, marketing and other store and direct operating costs, represented 20.4% of sales in the first nine months of fiscal 2022 as compared to 18.1% of sales in the first nine months of fiscal 2021. Corporate Support Costs, which include the distribution center and corporate overhead costs, represented 15.5% of sales in the first nine months of fiscal 2022 compared to 14.4% of sales in the first nine months of fiscal 2021.
Impairment (Gain) of Assets
There were no impairments or non-cash gains recognized in the third quarter of fiscal 2022. During the third quarter of fiscal 2021, we recorded non-cash gains of $1.2 million, and for the first nine months of fiscal 2022 and fiscal 2021, we recorded non-cash gains of $0.6 million and $2.3 million, respectively. These non-cash gains related to the reduction of our operating lease liability in connection with our decision to close certain retail stores, which resulted in a revaluation of the lease liability. The portion of the gains that related to previously recorded impairment charges against the operating lease right-of-use asset were included as an offset to previously recorded asset impairment charges. Accordingly, $1.1 million for the third quarter of fiscal 2021, and $0.4 million and $2.1 million for the first nine months of fiscal 2022 and fiscal 2021, respectively, were included in the Impairment (Gain) of Assets line of the Consolidated Statement of Operations. The remaining gains were recorded as a reduction to occupancy costs in each period.
Depreciation and Amortization
Depreciation and amortization for the third quarter of fiscal 2022 decreased to $3.8 million as compared to $4.1 million for the third quarter of fiscal 2021. For the first nine months of fiscal 2022, depreciation and amortization decreased to $11.7 million as compared to $13.0 million for the first nine months of fiscal 2021. The decrease was due to a lower depreciable cost base, especially from our store assets, due to our limited capital spending since fiscal 2020.
Interest Expense, Net
Interest expense for third quarter of fiscal 2022 was $0.1 million, as compared to $2.2 million for the third quarter of fiscal 2021. For the first nine months of fiscal 2022, interest expense was $0.4 million as compared to $4.3 million for the first nine months of fiscal 2021. The Company had no outstanding debt and no borrowings under its credit facility during the third quarter and first nine months of fiscal 2022 resulting in a decrease in interest expense as compared to the third quarter and first nine months of fiscal 2021. Interest expense for the third quarter and first nine months of fiscal 2021 included a prepayment penalty of $1.1 million associated with the Company's early prepayment of its long-term debt.
Income Taxes
Since the end of fiscal 2013, we have maintained a full valuation allowance against our deferred tax assets. During the second quarter of fiscal 2022, we determined that it was more likely than not that we would be able to realize the benefit of substantially all of our deferred tax assets in the United States. In reaching this determination, we considered the cumulative three years of profitability, our expectations regarding the generation of future taxable income as well as the overall improvement in the Company's business and its current market position. As a result, in the second quarter of fiscal 2022, we recognized a tax benefit related to the release of approximately $35.5 million in valuation allowance against our deferred tax assets in the United States. At October 29, 2022, we continued to provide a valuation allowance of $2.4 million, primarily against certain state and foreign net operating losses ("NOLs").
For the third quarter of fiscal 2022, we recorded an income tax provision of $2.1 million, which included a $2.0 million discrete tax expense to adjust the release of the valuation allowance to reflect an increase in third quarter earnings and full-year earnings forecast.
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For the first nine months of fiscal 2022, we recorded an income tax benefit of $32.9 million, which included a discrete tax benefit of $33.5 million for the release of the valuation allowance.
For the third quarter and first nine months of fiscal 2021, we recorded an income tax provision of $94,000 and $548,000, respectively, primarily related to income tax in states where NOL usage was statutorily limited.
Net Income
For the third quarter of fiscal 2022, we recorded net income of $10.5 million, or $0.16 per diluted share, as compared to net income of $13.7 million, or $0.20 per diluted share, for the third quarter of fiscal 2021. The decrease in earnings from the prior year third quarter was primarily due to the planned investment in marketing, an increase in payroll to support the increased sales volume and an increase in tax provision as a result of the reversal of the valuation allowance. As mentioned previously, our operating cost structure in fiscal 2021 was insufficient to support our 2022 sales growth objectives and was unsustainable over the long-term.
For the first nine months of fiscal 2022, we have recorded net income of $80.8 million, or $1.20 per diluted share, as compared to net income of $46.8 million, or $0.69 per diluted share, for the first nine months of fiscal 2021. Results for the first nine months of fiscal 2022 include a non-cash tax benefit of $33.5 million, or $0.50 per diluted share, related to the release of substantially all of the Company's valuation allowance against its deferred tax assets.
Inventory
As of October 29, 2022, our inventory increased approximately $24.5 million to $106.8 million, as compared to $82.3 million at October 30, 2021. We are in a stronger inventory position at October 29, 2022 than at the end of the third quarter last year. This increase was purposeful in order to replenish several categories that were depleted last year. While our inventory has increased over last year's third quarter, inventory is down 11.1% and inventory turnover is up over 30% from the third quarter of fiscal 2019, or pre-pandemic levels. Managing our inventory remains a primary focus for us given the potential impact that inflation may have on consumer spending. As we head into the fourth quarter of fiscal 2022, we believe that we are in a strong inventory position. At October 29, 2022, our clearance inventory was 6.7% of our total inventory, as compared to 8.9% at October 30, 2021 and 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. At October 29, 2022, we had no outstanding debt, including no borrowings under our credit facility during the first nine months of fiscal 2022. We believe our cash on hand, availability under our credit facility, and ongoing cash generated from our operations will be sufficient to fund our working capital requirements, our stock repurchase program and capital expenditures for the next 12 months. We believe that cash flows from operating activities and cash on hand will also be sufficient to satisfy our capital requirements in the longer-term, however, to the extent future capital requirements exceed cash on hand plus cash flows from operating activities, we anticipate that working capital will be financed by our credit facility, as discussed below.
For the first nine months of fiscal 2022, cash flow from operations decreased to $30.2 million as compared to $64.2 million for the first nine months of fiscal 2021. Free cash flow, a non-GAAP measure, decreased to $22.3 million for the first nine months of fiscal 2022 as compared to $61.3 million for the first nine months of fiscal 2021. The decrease in free cash flow was due to our purposeful replenishment of inventory in several categories that were depleted last year, the payout of incentive-based awards, and an increase in capital expenditures.
Cash flow used from financing activities for the first nine months of fiscal 2022 improved by $59.1 million as compared to the first nine months of fiscal 2021, primarily due to the repayment in the prior year of amounts outstanding under our credit facility and the early repayment of our long-term debt. This was partially offset by the stock offering in February 2021 and the repurchase of our common stock, as discussed below, in the first nine months of fiscal 2022.
Stock Repurchase Program
In March 2022, the Company’s Board of Directors approved a stock repurchase program. Under the stock repurchase program, the Company may repurchase up to $15.0 million of its common stock through open market and privately negotiated transactions. For
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the first nine months of fiscal 2022, the Company repurchased 2.9 million shares at an aggregate cost, including fees, of $12.7 million from available cash on hand. There were no stock repurchases in the third quarter of fiscal 2022. Shares of repurchased common stock are held as treasury stock. The stock repurchase program will expire in March 2023.
Credit Facility
On October 28, 2021, we entered into a $125.0 million revolving credit agreement with a five-year term, which replaced our prior credit facility that was due to expire in May 2023 (the "Credit Facility"). The Credit Facility includes a sublimit of $20.0 million for commercial and standby letters of credit and a sublimit of up to $15.0 million for swingline loans. Borrowings made pursuant to the Credit Facility will be made pursuant to either a Base Rate loan or LIBOR Rate loan, at the Company's option. Base Rate loans bear interest, at a rate equal to (i) the greater of: (a) the Prime Rate, (b) the Federal Funds effective rate plus 0.50% per annum and (c) the daily LIBOR rate plus 1.00% per annum, plus (ii) a varying percentage, based on the Company’s average excess availability, of either 0.25% or 0.50%. LIBOR Rate loans, which may be either for 1 month or 3 months, bear interest at (i) the LIBOR rate, or the Benchmark Rate as defined in the credit agreement plus (ii) a varying percentage based on the Company’s average excess availability, of either 1.25% or 1.50%.
We had no outstanding borrowings under our Credit Facility at October 29, 2022 and no borrowings during the first nine months of fiscal 2022. At October 29, 2022, outstanding standby letters of credit were $3.8 million and outstanding documentary letters of credit were $1.0 million. The average unused excess availability during the first nine months of fiscal 2022 was approximately $82.0 million and the unused excess availability at October 29, 2022 was $90.2 million.
Capital Expenditures
The following table sets forth the open stores and related square footage at October 29, 2022 and October 30, 2021, respectively:
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October 29, 2022 |
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October 30, 2021 |
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Store Concept |
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Number of Stores |
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Square Footage |
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Number of Stores |
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Square Footage |
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(square footage in thousands) |
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DXL Retail |
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218 |
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1,664 |
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220 |
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1,678 |
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DXL Outlets |
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16 |
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80 |
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16 |
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80 |
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Casual Male XL Retail |
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30 |
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100 |
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38 |
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126 |
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Casual Male Outlets |
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19 |
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57 |
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20 |
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60 |
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Total Stores |
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283 |
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1,901 |
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|
|
294 |
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|
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1,944 |
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Our capital expenditures in fiscal 2021 and fiscal 2020 were very limited due to the pandemic. For fiscal 2022, we expect our capital expenditures will be approximately $10.0-$12.0 million as we make investments in technology related to our marketing and merchandising initiatives. We are also actively pursuing opportunities to relocate or convert our remaining Casual Male XL stores to DXL stores which may require some capital investment in fiscal 2022. During the first nine months of fiscal 2022, we closed 5 Casual Male XL retail stores and 2 DXL retail stores.
We are also reviewing white space opportunities in markets where our store footprint is underpenetrated and relocation opportunities where we have an existing Casual Male XL store. We believe that our store portfolio is a vital asset to our business strategy and we expect to continue to invest in stores over the next several years as we further strengthen the store portfolio. Over the next three to five years, based on our preliminary store development plan, we believe that we could potentially open up to 50 new and relocated stores.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
There have been no material changes to the critical accounting policies and estimates disclosed in our Fiscal 2021 Annual Report. See Note 1 to the Consolidated Financial Statements included in this report for information on recent accounting pronouncements and changes in accounting principles.
Non-GAAP Financial Measures
Free cash flow 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 income 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
23
understanding of our performance, especially when comparing such results to previous periods and that they are useful as an additional means for investors to evaluate our operating results, when reviewed in conjunction with our GAAP financial statements.
Reconciliations of these non-GAAP measures are presented in the following tables (certain columns may not foot due to rounding):
Free Cash Flow. We define free cash flow as cash flow from operating activities less capital expenditures. 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:
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|
|
For the nine months ended |
(in millions) |
|
October 29, 2022 |
|
|
October 30, 2021 |
|
|
Cash flow from operating activities (GAAP basis) |
|
$ |
30.2 |
|
|
$ |
64.2 |
|
|
Capital expenditures |
|
|
(7.9 |
) |
|
|
(2.8 |
) |
|
Free Cash Flow (non-GAAP basis) |
|
$ |
22.3 |
|
|
$ |
61.3 |
|
|
Adjusted EBITDA. Adjusted EBITDA is calculated as earnings before interest, taxes, depreciation and amortization and is before any impairment of assets, if any. We believe that adjusted EBITDA is useful to investors in evaluating our performance and is a key metric to measure profitability and economic productivity. The following table reconciles adjusted EBITDA from net income:
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|
|
|
|
|
|
|
|
For the three months ended |
|
For the nine months ended |
|
|
October 29, 2022 |
|
|
October 30, 2021 |
|
|
|
October 29, 2022 |
|
|
October 30, 2021 |
|
|
(in millions) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (GAAP basis) |
|
$ |
10.5 |
|
|
$ |
13.7 |
|
|
|
$ |
80.8 |
|
|
$ |
46.8 |
|
|
Add back: |
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|
|
|
|
|
|
|
|
|
|
|
|
|
Impairment (gain) of assets |
|
|
— |
|
|
|
(1.1 |
) |
|
|
|
(0.4 |
) |
|
|
(2.1 |
) |
|
Provision (benefit) for income taxes |
|
|
2.1 |
|
|
|
0.1 |
|
|
|
|
(32.9 |
) |
|
|
0.5 |
|
|
Interest expense |
|
|
0.1 |
|
|
|
2.2 |
|
|
|
|
0.4 |
|
|
|
4.3 |
|
|
Depreciation and amortization |
|
|
3.8 |
|
|
|
4.1 |
|
|
|
|
11.7 |
|
|
|
13.0 |
|
|
Adjusted EBITDA (non-GAAP basis) |
|
$ |
16.4 |
|
|
$ |
19.0 |
|
|
|
$ |
59.6 |
|
|
$ |
62.5 |
|
|