DESTINATION XL GROUP, INC. - Annual Report: 2015 (Form 10-K)

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-K

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)

OF THE SECURITIES EXCHANGE ACT OF 1934

DESTINATION XL GROUP, INC.

(Exact name of registrant as specified in its charter)

(781) 828-9300

(Registrant’s telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act:

Securities registered pursuant to Section 12(g) of the Act:

None

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.    Yes  ¨    No  x

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.    Yes  ¨    No  x

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  x    No  ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted 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 and post such files).    Yes  x    No  ¨

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K(§229.405 of this chapter) is not contained herein, and will not be contained, to the best of the registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.    ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).    Yes  ¨    No  x

As of August 2, 2014, the aggregate market value of the Common Stock held by non-affiliates of the registrant was approximately $158.7 million, based on the last reported sale price on that date. Shares of Common Stock held by each executive officer and director and by each person who owns 10% or more of the outstanding Common Stock have been excluded on the basis that such persons may be deemed to be affiliates. This determination of affiliate status is not necessarily determinative for other purposes.

The registrant had 50,698,965 shares of Common Stock, $0.01 par value, outstanding as of March 6, 2015.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the Proxy Statement for the 2015 Annual Meeting of Stockholders are incorporated by reference into Part III.

DESTINATION XL GROUP, INC.

Index to Annual Report on Form 10-K

Year Ended January 31, 2015

2

PART I.

Certain statements contained in this Annual Report on Form 10-K constitute “forward-looking statements” within the meaning of the 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 Annual Report are generally located under the headings “Business” and “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 cash flows, operating and gross profit margins, store counts, costs, capital expenditures, borrowings, sales and earnings expectations for fiscal 2015 and beyond, the expected benefit of marketing initiatives and the anticipated pace and number of store openings in fiscal 2015. 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 Annual Report should not be regarded as a representation by us or any other person that the objectives or plans of the Company will be achieved. Numerous factors could cause our actual results to differ materially from such forward-looking statements, including, without limitation, risks relating to the execution of our corporate strategy and ability to grow our market share and those risks and uncertainties, set forth under Item 1A, Risk Factors, which begins on page 15 of this Annual Report. Readers are encouraged to review these risks and uncertainties carefully.

All subsequent written and oral forward-looking statements attributable to the Company or to persons acting on the Company’s 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 its expectations or any change in events, conditions or circumstances in which the forward-looking statement is based.

Item 1. Business

Destination XL Group, Inc., together with our subsidiaries (the “Company”), is the largest specialty retailer of big & tall men’s apparel with retail and direct operations in the United States and London, England. We operate under the trade names of Destination XL^®, DXL^®, Casual Male XL^®, Casual Male XL Outlets, DXL Outlets, Rochester Clothing, ShoesXL^® and LivingXL^®. We operate 138 Destination XL stores, 157 Casual Male XL retail stores, 48 Casual Male XL outlet stores, 2 DXL outlet stores and 8 Rochester Clothing stores. Our direct business includes our DestinationXL.com and bigandtall.com e-commerce sites which support our stores, brands and product extensions. Unless the context indicates otherwise, all references to “we,” “our,” “ours,” “us” and “the Company” refer to Destination XL Group, Inc. and our consolidated subsidiaries. We refer to our fiscal years ended January 31, 2015, February 1, 2014 and February 2, 2013 as “fiscal 2014”, “fiscal 2013” and “fiscal 2012,” respectively.

OUR INDUSTRY

We believe that the men’s big & tall apparel market, which includes pants with a waist size of 42” and greater, as well as tops sized 1XL and greater, generates approximately $3.5 billion to $4.0 billion in sales annually and represents approximately 11% of the overall men’s apparel business. Growth in this segment has been driven by rapidly changing market demographics. We estimate that our current market share is approximately 11% and believe that we have the potential to reach 17-20%. We believe that we can ultimately achieve this goal by catering to the broader target market, attracting customers from various income, age and lifestyle segments and offering the widest selection of sizes and styles that fit well. A substantial opportunity continues to exist for market share growth from the lower-size range of our market, that is, men in the 38”-46” waist size. These sizes are usually at the high end of the size range for most retailers and, as a result, the selection is usually limited at such retailers.

HISTORY

Our Company was incorporated in the State of Delaware in 1976 under the name Designs, Inc. Until fiscal 1995, we operated exclusively in Levi Strauss & Co. branded apparel mall and outlet stores. In May 2002, we acquired the Casual Male business from Casual Male Corp. at a bankruptcy court-ordered auction. At the time of the acquisition, Casual Male was the largest specialty retailer of men’s clothing in the big & tall market in the United States. As a result of the acquisition, on August 8, 2002, we changed our name to “Casual Male Retail Group, Inc.”

Through fiscal 2010, we primarily operated Casual Male XL retail stores, Casual Male XL outlet stores and Rochester Clothing stores, along with the associated websites and catalogs. We catered to all customers through these three store formats, from our value-oriented customer (Casual Male XL outlets) to our luxury-oriented customer (Rochester Clothing stores). During that year, we tested a new store concept, Destination XL (“DXL”). The DXL store concept merged all of our existing brands under one roof, offering our customers a superior shopping environment with an extensive assortment of product and an increased presence of name brands, without having to shop multiple stores. In addition to offering our customers a wide assortment, we also wanted to provide them with

3

an outstanding and unique shopping experience. We are focused on providing outstanding customer service through our DXL concept, with everything from larger fitting rooms to professional, trained associates providing both personal attention and on-site tailoring. With the success of this store format, we then made a similar change to our e-commerce business in fiscal 2011 when we launched our DestinationXL.com website which, like our DXL store, merged all of our previous websites into one consolidated site providing our customers the ability to cross-shop our brands easily.

Our DXL store format has proven to be successful for us and our customers, and, based on the positive performance and future growth opportunities of this concept, we are in the process of completely transitioning our business by opening DXL stores and exiting the majority of our Casual Male XL retail stores and many of our Rochester Clothing stores. As part of our new direction, in December 2012, we changed our NASDAQ stock ticker symbol to “DXLG” followed by a change in February 2013 of our corporate name to “Destination XL Group, Inc.” We believe the change of our corporate name to Destination XL Group, Inc. better reflects who we are today as we expand the Destination XL concept and rebrand our Company as a whole.

BUSINESS STRATEGY

Our primary business strategy over the near term is to convert the majority of our Casual Male XL and Rochester Clothing stores to our DXL store format.

In fiscal year 2013, we had accelerated our roll-out strategy by opening 51 DXL stores and closing 102 Casual Male XL retail and outlet stores and 2 Rochester Clothing stores.  However, the sales that resulted from this acceleration were below our expectations.  While our DXL stores performed well, our forecasts, especially with respect to immediate sales contribution, had not adequately taken into account the hurdles we would face trying to convert existing customers of the closed Casual Male XL stores to newly opened DXL stores. Our forecasts for fiscal 2013 were based on the results of a limited number of DXL stores and we lacked the benefit of historical data. At the end of fiscal 2013, we engaged a third-party consultant to review the reasonableness of our forecasts and projections and determined that the transition and top-line benefit would take an additional two years to accomplish and that we would benefit by keeping some of the fully-depreciated Casual Male XL stores open longer during the transition, using the additional cash flow from those stores to help fund the transition to the DXL stores.

At the end of fiscal 2013, we identified several strategic shifts that we believed were necessary to drive top-line sales, meet our forecasts and keep us on track for fiscal 2017.  Through the end of fiscal 2014, we successfully accomplished each objective and, as a result, our top-line results exceeded our expectations and we met our earnings guidance for fiscal 2014. The following is a summary of those objectives that we identified last year and successfully executed during fiscal 2014:

4

We expect to substantially complete our transition by the end of fiscal 2017 with an estimated 230 DXL stores. In addition, we expect to have 75-100 Casual Male XL retail and outlet stores and three of our high-volume Rochester Clothing stores open.

With 138 DXL stores and 2 DXL outlets open at the end of fiscal 2014, we are more than half way through our transition.  From a financial perspective, we expect incremental transition costs for the remaining 90 DXL stores, in the aggregate, of approximately $15.0 million for fiscal 2015 through fiscal 2017, primarily associated with pre-opening occupancy costs, lease terminations and additional selling, general and administrative (“SG&A”) expenses. In addition, we expect our capital expenditures associated with these DXL stores will be approximately $45.0 million. These incremental occupancy, SG&A and capital costs of approximately $60.0 million, associated with the rollout, are expected to be funded primarily from operating cash flows and borrowings under our credit facility. We continue to believe, based on our projections and current economic conditions, that this investment will significantly enhance revenues and ultimately produce double digit operating margins for the longer term.

In addition to our DXL transition, we are also investing in several initiatives to move us from a multi-channel retailer to a fully operational omni-channel retailer.  During fiscal 2014, we made significant progress on this initiative with the implementation and rollout of new software that enabled us to offer our in-store inventory to our e-commerce customer.  By increasing the visibility of our chain-wide inventory through our direct channel, we have been able to capture incremental sales while at the same time reducing the level of clearance merchandise at the store level.  In the first quarter of fiscal 2015, we are on track to launch “in store pick up” which will allow online customers to purchase online and then pick up in store.  We also upgraded our e-commerce website to accommodate the growing preference by consumers to shop on mobile devices.  Our website was optimized for smart phones in 2014 and will be further optimized for tablets in 2015.  As a result of these omni-channel initiatives, we started to see a shift in our business model in fiscal 2014.  With sales originating in one channel, but fulfillment occurring in another, it is becoming less meaningful to report our retail business separately from our direct business.  As a result, beginning in the third quarter of fiscal 2014, we no longer report comparable sales separately by channel and instead only report total Company comparable sales, including the direct business. We expect that we will continue to report separately on comparable sales for our DXL stores until the transition is substantially complete.

OUR BUSINESS

We operate as an omni-channel retailer. Through our multiple brands, which include both branded apparel and private-label, we offer a broad range of merchandise at varying price points, catering from the value-oriented customer to the luxury-oriented customer. Our objective is to appeal to all of our customers by providing a good, better, best array of product assortments in all primary lifestyles with multiple and convenient ways to shop.

Our DXL stores cater to all income demographics and offer our customers merchandise in all lifestyles from casual to business, young to mature, in all price ranges and in all large sizes from XL and up. Our Casual Male XL stores carry primarily moderately priced branded and private label casual sportswear and dresswear, while our Rochester Clothing stores carry fine quality, designer and branded menswear. We also operate Casual Male XL outlets and DXL outlets for our value-oriented consumer. In addition to our stores, we operate our Destination XL e-commerce site which is similar to our DXL store concept and offers a brand range of merchandise at each price point, including a complete offering of shoes.  

Another critical part of our business operation is managing the number of sizes offered to our customers and optimizing our in-stock position throughout each season. We maintain a consolidated inventory across all channels which enables us to manage our in-stock position of all sizes effectively, ultimately improving customer service. Moreover, our planning and allocation methodologies, with respect to store assortment planning, help to optimize each location’s market potential without excessive inventory levels.

5

MERCHANDISE

A vital component of our business strategy is to offer our customers a broad assortment of apparel that is appropriate to our diverse customer base. Regardless of our customers’ age, socioeconomic status, or lifestyle preference, we are able to assemble a wardrobe to fit our customers’ apparel needs. In addition, we offer such assortments in private-label product, balanced with an array of brand name labels. With over 5,000 styles available, we carry tops in sizes up to 8XL and 6XLT, bottoms with waist sizes 38” to 66”, and shoes in sizes 10W to 18. In addition, we added to our product assortment a smaller fit XL and XLT to appeal to our target “end-of-rack” customer.

Our stores are merchandised to showcase entire outfits by lifestyle, including traditional, active, denim, dress wear and contemporary. This format allows us to merchandise key items and seasonal goods in prominent displays and makes coordinating outfits easier for the customer while encouraging multi-item purchases. This lifestyle layout also allows us to manage store space more effectively in each market to target local demographics. The key item strategy is also fully integrated by lifestyle, allowing us to focus on merchandise presentation and offer our customers a compelling value proposition.

Merchandise assortments in our DXL stores are organized not only by lifestyle, but within each lifestyle, the assortments are shown in a “good”, “better”, “best” and “luxury” visual presentation, again to benefit our customers’ ease of shopping. With the “best” merchandise assortments featured most prominently in the DXL store, our customers are able to visualize current fashion trends and easily select their wardrobes within their desired price points in a convenient manner.

We carry several well-known national brands of merchandise as well as a number of our own private-label lines within our “good”, “better”, “best” and “luxury” price points.  The penetration of branded apparel in our DXL stores can range from 15% to 80%, depending on several factors, but on average, our DXL stores carry approximately 43% of branded merchandise.  

Higher-End Luxury Fashion Apparel -“Best” and “Luxury” Merchandise

Within this higher-end price range, we carry a broad selection of quality apparel from well-known branded manufacturers such as Bogosse^®, Brooks Brothers^®, Gran Sasso, John Laing, Remy, Jack & Jokers, Psycho Bunny, Derek Rose, Brioni^®, Coppley, Eton^®, Hickey Freeman^®, Jack Victor^®, Lucky, Michael Kors^®, Pantherella^®, Paul & Shark, Peter Millar, Robert Graham^®, Robert Talbot, St. Hillaire, Ted Baker^®, Tulliani, True Religion^®, Turnbull & Asser^® and David Donahue.

Moderate-Priced Apparel -“Better” Merchandise

We offer our customer an extensive selection of quality sportswear and dress clothing at moderate prices carrying such well-known brands such as: Junk Food, Rainforest, Retro Brand, Cutter & Buck, Levis, Adidas Golf, Columbia, Berne, Carhartt, Callaway^®, CK Jeans^®, CK Sport^®,  Jockey^®, Lacoste^®, Majestic, Polo Ralph Lauren^®, Tommy Bahama^®, Tommy Hilfiger^®, Tallia^® and Trafalger.

In addition, we carry several private-label lines:

Value-Priced Apparel -“Good” Merchandise

For our value-oriented customers, we carry Geoffrey Beene^®, Cubavera, Nautica^® and Nautica Jeans^®, Dockers, Lee, Perry Ellis, Wrangler, Reebok and Creekwood. In addition we carry several private label lines:

6

RETAIL CHANNEL

Destination XL stores (“DXL”)

Our DXL store concept brings all of our brands together in one format. Our target customer group is a very diverse group, and we have previously catered to them in individual groups through our various channels and brands, such as our Casual Male XL outlets for our value-oriented customers, Casual Male XL for our moderate-price customers and Rochester Clothing for our high-end customers. The size of the DXL stores, which contain almost triple the product assortments of a Casual Male XL store, currently averages 8,500 square feet, but is expected to average closer to 7,000 to 8,000 square feet as the Company opens future DXL stores. In fiscal 2014, we opened seven smaller 5,000-6,500 square foot stores in locations where the customer base is not dense enough to support our larger DXL format. Because these locations are smaller, they carry a smaller product offering than our other DXL stores but are representative of the “good, better, best” merchandise strategy. The locations of our DXL stores are also an essential aspect of our roll-out. We require locations where our stores are highly visible, potentially adjacent to regional malls or other high-traffic shopping areas.

Our legacy Casual Male XL store format, which averages 3,500 square feet, was small and crowded. With our larger DXL store format, we are able to provide our customers a spacious store with up to three times the product offering of a Casual Male XL store. The merchandise in our DXL stores is organized by lifestyle: active, traditional, modern and denim with a representation of all of our brands and price points, utilizing a “good, better, best” pricing structure. Depending on the customers in each respective market, we can adjust the appropriate mix of merchandise, with varying selections from each of our price points, to cater to each demographic market. This larger store format also provides us the footprint necessary to carry a complete offering of dress wear, including tailored and “made-to-measure” custom clothing, as well as a selection of shoes in extended sizes and a broad assortment of accessories such as belts, ties, and socks.

During fiscal 2014, we opened 39 DXL stores, bringing our store count at January 31, 2015 to 138 DXL stores. The average sales per square foot for our DXL stores increased 10.0% to $165 for fiscal 2014 as compared to $150 for fiscal 2013. Once a DXL store matures, we expect sales will be approximately $200-220 per square foot. For fiscal 2014, we had 27 DXL stores that had sales greater than $200 per square foot.  For fiscal 2015, we plan to open 40 DXL stores resulting in approximately 178 DXL stores operating at the end of fiscal 2015. By the end of fiscal 2017, we expect to have opened approximately 230 DXL stores.

Casual Male XL retail stores

At January 31, 2015, we operated 157 Casual Male XL full-price retail stores, located primarily in strip centers, power centers or stand-alone locations. The majority of the merchandise carried in our Casual Male XL stores is moderate-priced basic or fashion-neutral items, such as jeans, casual slacks, tee-shirts, polo shirts, dress shirts and suit separates. These stores also carry a full complement of our “better” private label collections. The average Casual Male XL retail store is approximately 3,500 square feet and has approximately $180 in sales per square foot annually.

Casual Male XL/DXL outlet stores

At January 31, 2015, we operated 48 Casual Male XL and 2 DXL outlet stores designed to offer a wide range of casual clothing for the big & tall customer at prices that are generally 20-25% lower than our moderate-priced merchandise. Much of the merchandise in our outlet stores is offered with the purchasing interests of the value-oriented customer in mind. In addition to private-label and branded merchandise at our “good” price tier, our outlets also carry clearance product obtained from DXL, Casual Male XL and Rochester Clothing stores, offering the outlet customer the ability to purchase branded product and fashion product for a specially reduced price. As we open our DXL stores, the mix of branded product flowing into the outlets will increase to approximately 30% as we move inventory out of our DXL stores to keep it current while enhancing the branded presence in our outlets. During fiscal 2014, two Casual Male XL outlets were replaced with two DXL outlet stores, with slightly more square footage and better locations.  The average outlet store is approximately 3,300 square feet and has approximately $195 in sales per square foot annually.

7

Rochester Clothing stores

At January 31, 2015, we operated 8 Rochester Clothing stores, located in major cities throughout the United States and one store in London, England. The Rochester Clothing stores have a wide selection of our “best” merchandise which consists primarily of high-end merchandise from well-recognized brands. In addition, the stores also carry a few private-label lines especially designed for our high-end customer. The average Rochester Clothing store is approximately 9,300 square feet and has approximately $311 in sales per square foot annually. Although some of our Rochester Clothing stores will close over the next few fiscal years as we open DXL stores in the same geographical market, by the end of fiscal 2016 we currently expect that 3 of our high-traffic Rochester Clothing stores will remain open.

DIRECT CHANNEL

Our direct business, which consists primarily of our e-commerce business, is a vital part of our growing omni-channel business approach, allowing us to service our customers whether it be in person at a store, over the telephone, online via a computer, smartphone or tablet. Our direct business bridges that gap for us by encouraging and expecting our store associates to use our website to help fulfill our customers’ clothing needs. If a wider selection of a lifestyle, color or size of an item is not available in our store, then our store associates can order the item for our customer through our direct channel and have it shipped to the store or directly to the customer.

We are starting to see more transactions that begin online but are ultimately completed in store.  This past year we enhanced our website functionality to showcase all store inventories online.  Previously, our direct customer was limited to inventory available in our centralized distribution center.  With this new technology, we can now fulfill from the store an item that is out-of-stock in our warehouse.  This capability has not only resulted in incremental sales for fiscal 2014, but it has also helped us reduce clearance merchandise at the store level and improve long-term margins.  Our clearance merchandise decreased to approximately 8.4% at January 31, 2015 as compared to 10.3% at February 1, 2014.

In fiscal 2015, we expect to continue to expand on our omni-channel initiatives by offering our customers the ability to order online and pick-up in store on the same day.  Our customer’s shopping behavior continues to evolve across multiple channels and we are working to meet his needs.  

Destination XL^® E-Commerce Site

In fiscal 2013, we combined all of our then-existing web addresses: www.casualmalexl.com, www.rochesterclothing.com, www.btdirect.com, www.livingxl.com and www.shoesxl.com and redirected our users to our new comprehensive Destination XL website. Similar to our DXL store concept, our www.destinationxl.com website allows our customers to shop across all of our brands and product extensions with ease and brings all of our customers to one website. Our customers were previously classified as a “Rochester” customer or a “Casual Male” customer.  Now, our customers are all “DXL” customers, which no longer limits our customer’s ability to access our full product assortment.

From the Destination XL homepage, customers can search across all of our brands and, similar to our stores, shop merchandise from value-oriented to luxury price points.  In addition, a customer can tailor their search using our “size profile.”  Our Destination XL website also offers a complete line of men’s footwear in extended sizes, offering our customers a full range of footwear in hard-to-find sizes.  Although our DXL stores all have a selection of footwear available, we are able to offer a full assortment of sizes and styles through our website.  The assortment is a reflection of our apparel, with a broad assortment from moderate to luxury and from casual to formal. We currently have a selection of more than 500 styles of shoes, ranging in sizes from 10W to 18M and widths up to 6E. We carry a number of designer brands including Cole Haan^®, Allen Edmonds^®, Timberland^®, Calvin Klein^®, Lacoste^®, Donald J. Pliner and Bruno Magli^®.

In addition to our Destination XL website, our customers can also access our LivingXL website directly from our homepage.  LivingXL is an online-only store that specializes in the selling of select high-quality products which help larger people maintain a more comfortable lifestyle. The types of products sold on our website benefit both men and women and include chairs, outdoor accessories, travel accessories, bed and bath and fitness equipment.

In recent years, we have seen a significant increase in the number of visitors to our websites from a mobile device. As such, in the summer of fiscal 2013, we launched a mobile optimized website, m.destinationxl.com, creating an improved experience around product browsing, checkout, access to loyalty program information, researching inventory in a local store, and finding a local store location. An improved experience was also created for international visitors. Upon entering our full site, these visitors are identified based on where they reside globally and are now able to shop in their local currency. In addition, checkout is customized based on their location, with local payment methods and a guaranteed cost including shipping and taxes. Further enhancements, including a tablet optimized site, are planned for fiscal 2015.

8

BigandTall.com

During fiscal 2014, we launched a new website: www.bigandtall.com. This website is separate from our Destination XL site, catering to a value-oriented customer and exclusively offering an assortment of promotional and clearance merchandise.

Franchised DXL Store

In April 2012, pursuant to a franchise agreement between one of our subsidiaries and The Standard Arabian Business & Enterprises Company (SABECO), we opened our first franchised Destination XL^® store in the Middle East at the Symphony Mall in Kuwait City, Kuwait.

MERCHANDISE PLANNING AND ALLOCATION

Our merchandise planning and allocation area is critical to the effective management of our inventory, store assortments, product sizes and overall gross margin profitability. The merchandise planning and allocation team has an array of planning and replenishment tools available to assist in maintaining an appropriate level of inventory, in-stock positions at the store and direct levels, and pre-season planning for product assortments for each store and the direct channels. Additionally, in-season reporting identifies opportunities and challenges in inventory performance. Over the past several years, we have made important investments in implementing best practice tools and processes.

Our core merchandise makes up over 40% of our “better” assortment and over 20% of our “best” assortment. Our planning and allocation team estimates quantity and demand several months in advance to optimize gross margin and minimize end-of-season merchandise for all seasonal merchandise. We have implemented an omni-channel approach towards our assortment planning methodology that customizes each store’s assortment to accentuate lifestyle preferences for each store.

Our merchandising data warehouse provides the merchandising team with standardized reporting for monitoring assortment performance by product category and by store, identifying in-stock positions by size and generally monitoring overall inventory levels relative to selling. At season end, we analyze the overall performance of product categories, overall assortments and specific styles by store to focus on the opportunities and challenges for the next season’s planning cycle.

During the season, we utilize a markdown optimization tool to monitor the selling performance of our fashion assortments and compare against the planned selling curves. When actual selling performance significantly drops below planned selling curves, we make in-season pricing adjustments so that we maintain planned levels of residual fashion product at season’s end.

Utilizing a set of specific universal reporting tools, we are able to fulfill the daily, weekly and monthly roles and responsibilities of the merchandise planning and allocation team. These reporting tools provide focused and actionable views of the business to optimize the overall assortment by category and by store. We believe that by having all members of the merchandise planning and allocation team follow a standardized set of processes with the use of standardized reporting tools, our inventory performance will be optimized.

STORE OPERATIONS

We believe that our store associates are the key to creating the highest quality experience for our customer. Over the past five years, we have worked to change the culture of our stores from essentially an operationally-driven organization to a sales-driven, customer-centric organization. Our overall goal is to help our associates become less task oriented and more focused on serving the customer. We want our associates to help our customer meet his apparel needs through building his wardrobe, not just selling our customer a single item. In order to do this, we have invested in educating our associates. Our associates have been trained to be tailored clothing experts, capable of accommodating our customer’s style and fit needs with ready-to-wear and made-to-measure custom clothing. Our training approach provides product knowledge as well as behavioral training.  We are educating our associates on how to interact and strengthen the relationship with each customer. A key component to the success of this program is having the right caliber of store associates. In order to accomplish this, we use two national workforce solution companies to assist us. Once hired, our new DXL store management team is enrolled in a world-class training program with time spent in one of our two regional training centers.  Store Managers are enrolled in a four week training program and Assistant Managers are enrolled in a three week training program. Our Regional Sales Managers, Store Managers and Assistant Managers are brought on board by one of two Directors of Regional Training, both with significant experience in providing excellent customer service.

9

Each new store management team will spend time in a DXL store practicing hands-on learning. In turn, this will allow each new store management team to be able to apply the skills learned during training in successfully managing their respective stores. Each new manager will then be put through a Certification Process. They will be certified in their specific store location by their Regional Sales Manager as well as the Area Vice President or Vice President of Sales. Certification ensures that each new management team is fully prepared to manage a DXL store successfully. In an effort to continue developing and enhancing our business, we are working to optimize one of our greatest opportunities, which is our Tailored Clothing category. We have added a Director of Field Training along with an Advanced Training program centered on Tailored Clothing, to directly impact this opportunity going forward.

We are able to gauge the effectiveness of our training through measuring sales productivity at each level of the field organization, including individual sales associates. We believe these educational programs, together with monitoring sales metrics to help identify opportunities for further training, will improve sales productivity and strengthen our customer’s brand loyalty.

Each DXL, Casual Male XL and Rochester Clothing store is staffed with a store manager, assistants and associates. The store manager is responsible for achieving certain sales and operational targets. Our DXL, Casual Male XL and Rochester Clothing stores have an incentive-based commission plan for managers and selling staff to encourage associates to focus on our customer’s wardrobing needs and sales productivity.

Our field organization is overseen by our Chief Sales Officer (Senior Vice President of Store Sales & Operations) and is comprised of approximately 20 Regional Sales Managers, who provide management development and guidance to individual store managers. Our organization is divided among two geographical zones. Each zone is run by a Vice President of Sales and consists of two Area Vice Presidents, ten Regional Sales Managers and six Area Managers. Each Regional Sales Manager is responsible for hiring and developing store managers at the stores assigned to that Regional Sales Manager’s area and for the overall operations and profitability of those stores. Regional Sales Managers report to one of our four Area Vice Presidents, who report directly to one of our two Vice Presidents of Sales.  The Vice President of Sales for each retail zone reports directly to our Chief Sales Officer (Senior Vice President of Store Sales & Operations).  Our Outlet division is overseen by our Vice President of Outlets, who, in turn, has four Outlet Area Managers overseeing the outlet stores, dividing the country by central, east, south and west. The Vice President of Outlets reports to the Chief Sales Officer.

The Chief Sales Officer (Senior Vice President of Store Sales & Operations), the Vice President of Store Operations & Training and the two Vice Presidents of Sales coordinate all sales and operations initiatives and activities along with the support of the Director of Field Training, the Director of Training & Operations, and the Director of Operations & Communications.

MARKETING AND ADVERTISING

In fiscal 2014, we made significant advancements in Destination XL’s brand awareness and increased sales during the campaign time-periods. We were able to grow the aided awareness from 24% in the spring of 2014 to 33% by the end of our 2014 fall campaign. In those markets where we have a DXL store, our aided awareness is 40%. This rivals the awareness of Casual Male even with its decades of history. As we built the awareness, we were also able to grow DXL comparable sales during the campaign. We saw strong double-digit comparable sales increases during both of our advertising campaigns.  Our advertising campaigns increased our store traffic and we were able to convert that increase in traffic to top-line sales, resulting in a 13.3% increase in total transactions for the year.  

Our e-commerce business continues to perform well. We are driving more customers to the site. In the fourth quarter of fiscal 2014, we saw a 21% increase in traffic. Additionally, we saw that our share of online traffic for big and tall websites exclusively increased to 50% from 40% a year ago. Improvements to our website functionality coupled with increased spending in paid search, affiliate marketing, and banner advertising have had the greatest impact on the positive online performance.

After experiencing several years of declining comparable customer count, in fiscal 2014, we changed the course of that trend. In October 2014, we began to compare positively against our 12-month customer count, and the positive gap between this year and last year’s count has continued to widen. With a good balance of store openings and closings, higher customer acquisition rates, improved customer retention, and higher conversion rates of Casual Male customers to DXL, we expect our customer count to continue to increase in fiscal 2015.

According to our review of trends, the DXL concept is acquiring more customers at a substantially higher rate than the Casual Male XL stores and is also retaining customers at a much higher rate. Comparing DXL’s customer count to Casual Male’s customer count further demonstrates how consumers are gravitating to the new DXL store concept. The average DXL store has 88% more customers than the average Casual Male XL store. On a comparable store basis, DXL customer counts increased by 10% in fiscal 2014, whereas Casual Male decreased by 1%. Additionally, in fiscal 2014, DXL stores retained 32% more customers than Casual Male XL stores. Our ability to grow DXL customers and retain them has been the key to achieving the positive sales growth and comparable customer count for those stores.

10

In addition to growing the active customer base within DXL, we are also growing the “end of rack” customer which is a 38-46” waist man, a demographic we increasingly rely upon for our growth. Three years ago, this customer was one-third of our bottoms business, and in the fourth quarter of fiscal 2014, this customer now represents 45% of our bottoms business. This is the highest penetration that we have had with this target group, which further illustrates our ability to target and subsequently acquire a customer who is representative of a larger segment of the marketplace.

Converting customers from Casual Male XL to DXL has been and continues to be a critical initiative for us. For stores opened between fiscal 2010 and fiscal 2013, we have converted 44% of Casual Male XL’s existing customers to new DXL customers. This figure is up from 36% at the start of fiscal 2013. For those stores that opened in fiscal 2014, we are converting customers at a rate that is 15% higher than for those stores opened in the previous year. Additionally, of those customers who convert at the outset, more than 40% of them shop again within 4 months of their first DXL experience.

In fiscal 2015, as we close more of our Casual Male XL stores, we will continue our efforts to increase awareness of DXL and convert Casual Male XL customers to our DXL stores. Our focus will continue to be on transitioning our best Casual Male XL customers first, followed by the other very active, high sales contributing tiers of customers. We have amplified the communication of DXL in Casual Male XL stores through more explicit and explanatory signage, greater storefront communication and improved associate advocacy. Before the closure of every Casual Male XL store, we have begun an aggressive direct mail campaign to provide an incentive for Casual Male XL consumers to shop the new DXL store.

Our marketing strategy will continue to be focused on converting and retaining our Casual Male XL customers to DXL, increasing customer acquisition, and driving web traffic and sales. We will continue to communicate Destination XL and its value to consumers through a broad media approach that is similar to the one we deployed in fiscal 2014. We will use a similar media strategy with a creative concept that has tested among focus groups to be superior to the ad which first aired in fiscal 2014. Additionally, we will increase our spending in e-commerce marketing as we continue to see a positive omni-channel return on our e-commerce investments.

Our marketing spend for fiscal 2015 is expected to be lower than fiscal 2014. We plan to reduce the marketing spend by $2.0 million to $24.0 million, or 5.5% of sales, for fiscal 2015 as compared to $26.0 million, or 6.3% of sales, for fiscal 2014. We anticipate that the marketing spend will continue to be reduced in fiscal 2016. By gaining improved efficiencies in media buying and creative development, we believe this reduction will not have an adverse effect on our sales, awareness, or customer acquisition goals.

GLOBAL SOURCING

We have strong experience in sourcing internationally, particularly in Asia, where we manufacture a significant percentage of our private-label merchandise. We have established relationships with some of the leading and specialized agents and factories. Our sourcing network consists of over 50 factories in 6 countries. Currently, approximately 40% of all our product needs are sourced directly.

Our global sourcing strategy is a balanced approach considering quality, cost and lead time, depending on the requirements of the program. We believe our current sourcing structure is sufficient to meet our operating requirements and provide capacity for growth. The growth and effectiveness of our global direct sourcing program is a key component to our continued merchandise margin improvement.

In an effort to minimize foreign currency risk, all payments to our direct sourced vendors and buying agents are made in U.S. dollars through the use of letters of credit or payment on account.

DISTRIBUTION

All of our distribution operations are centralized at our headquarters located in Canton, Massachusetts. However, if merchandise is available at the store level but not available at the distribution center, our stores are capable of completing the order and shipping it directly to a customer.

We believe that having one centralized distribution facility minimizes the delivered cost of merchandise and maximizes the in-stock position of our stores. We believe that the centralized distribution system enables our stores to maximize selling space by reducing necessary levels of back-room stock carried in each store. In addition, the distribution center provides order fulfillment services for our e-commerce business.

11

Since 2003, we have utilized United Parcel Services (“UPS”) for all of our store shipments as well as our domestic customer deliveries. This association with UPS has improved our distribution capabilities while also reducing our shipping costs by utilizing zone skipping. By utilizing UPS, we are able to track all deliveries from the warehouse to our individual stores, including the status of in-transit shipments. In addition, we are able to provide our Direct-to-Consumer customers with Authorized Return Service and Web labels, making returns more convenient for them. We also have the ability, through UPS, to use the United States Postal Service-SurePost.  SurePost normally take 1-2 days longer for delivery but provides cost savings when shipping direct to a customer’s residence.  Our current contract with UPS is through January 2020.

We utilize the Manhattan Associates’ PKMS warehousing application for our distribution center systems, which has streamlined our distribution processes significantly, enhanced our in-transit times, and reduced our distribution costs substantially. Automated packing for single piece orders and barcode scanning technologies were added for Direct-to-Consumer, improving productivity and lowering packing costs. Various software and material handling improvements were made with our store replenishment systems on our retail sorter that enable us to pick size-specific product, by store, efficiently, allowing for quicker and more accurate replenishment to our retail stores. Scanning technologies were added to our sortation systems that improved the accuracy for product selection that is being sent to the various retail stores and Direct-to-Consumer. Supply chain technology was added to provide better visibility for imports, providing more accurate shipping information for buyers and allowing the distribution center to plan accurate staffing models for arriving freight, resulting in reduced costs and improved receipt efficiency. In addition, we have improved our active shelving and reserve racking to enhance our space utilization in our distribution center, while continuing to improve efficiencies through the implementation of engineered productivity standards.

In-bound calls and order fulfillment for our direct businesses are also currently handled at our Canton facility.

MANAGEMENT INFORMATION SYSTEMS

The infrastructure of our management information systems has consistently been a priority to us. The investments that we have made in this regard have substantially improved our overall efficiency and most importantly have enabled us to better manage our inventory.

Our management information systems consist of a full range of retail merchandising and financial systems which include merchandise planning and reporting, distribution center processing, inventory allocation, sales reporting, and financial processing and reporting. Our business operates primarily on an IBM AS/400 platform, with the e-commerce/direct-to-consumer business on the Oracle and Intel/Microsoft environments. We believe that our current infrastructure provides us the ability and capacity to process transactions more efficiently and provides our management team with comprehensive tools with which to manage our business.

Our suite of merchandising systems consists of the JDA Portfolio Solutions, specifically the MMS Merchandise Management System and the Arthur Merchandise Planning and Advanced Allocation systems. In addition, we also utilize JDA’s E3 Advanced Replenishment system to optimize fill back from vendors and adjustments from seasonal profiles which we believe has improved sales opportunities and control over our basic merchandise inventory. For our distribution operations, we use Manhattan Associates’ PKMS distribution system. These systems have enabled us to improve sales, better manage inventory levels and streamline operations.

The business is supported by a POS business application provided by Epicor. The POS applications capture daily transaction information by item, color and size. Communication between our corporate headquarters and all of our stores is facilitated on a daily basis through the use of an electronic mail system. The POS system includes a multitude of features including CRM tools that enable us to track customer buying habits and provides us with the ability to target customers with specific offers and promotions. During fiscal 2013, we upgraded our DXL stores to a state-of-the-art POS hardware platform supplied by Hewlett-Packard. In fiscal 2015, we are planning to implement the latest store system solution from Epicor Software in our DXL locations to further support our business.

Our websites have all been standardized on Oracle’s state-of-the-art hosted platform. We also implemented the e-SPS Product Life Cycle Management system from NGC to support the growth of our direct sourcing initiatives. To support the marketing area, we implemented the PlanSystem3 environment from Quad-Systems to manage marketing assets, schedule promotions and monitor activities.

Our merchandising management systems are updated daily with all store transactions and provide daily sales, inventory, pricing and merchandise information and management reports to assist us in operating our retail business. Our merchandising system applications also facilitate the placement and tracking of purchase orders and utilize EDI technology. We evaluate this information, together with weekly reports on merchandise statistics, prior to making decisions regarding reorders of fast-selling items and the allocation of merchandise.

12

Using Epicor’s QuantiSense, a business intelligence and data warehousing application, we are able to provide our management team with the ability to integrate data from several sources into reports that are useful and easily obtained. With its customized reporting capabilities, we have visibility down to the lowest level: style, SKU and store. Over the past few years, we have developed customized reporting that has been extremely beneficial to our business. With the use of this software, we now have store grading applications and size scaling to the store level. In an effort to further improve our inventory management, we have created a standardized set of “best practices” for both our merchandise allocation and planning groups.

Our direct business and retail business maintain a shared inventory system and we operate a single system platform for DXL, Casual Male and Rochester Clothing which delivers excellent efficiencies and makes our full product assortment available to all of our business formats.

We are continually improving our web environment. In fiscal 2013, we introduced a mobile optimized site to capitalize on the growing use of mobile devices to look up store information, review product offerings, and complete purchases. In addition, the current web site is fully integrated with global ecommerce company, Borderfree, to accommodate international customers by providing multi-currency pricing, payment processing, and international shipping. Functionality was also implemented to support an online custom shirt program and an in-store application to support both a custom suit and custom shirt program.

Since fiscal 2013, we have been using the BrainShark communication and training platform for our stores. This platform continues to provide efficiencies in delivering information, training, and task management to all our locations. During fiscal 2014, we rolled out an eBay/VendorNet solution enabling us to access our entire DXL store inventory for customer fulfillment, making us truly omni-channel. The solution is fully integrated with UPS to facilitate the store shipments to customers. As a result, we are seeing more transactions that begin online but are ultimately completed at the store level.  

In addition, we deployed improvements to optimize our assortment planning and assortment execution capabilities. We also implemented a new web site, www.bigandtall.com, offering promotional and clearance product to appeal to our more value-oriented customers. Other significant technology upgrades in fiscal 2014 included a new web customer preferred shipping functionality with improved shipping service options and the Oracle Endeca Guided Search module to improve search engine optimization and the customer experience on the web.

During fiscal 2015, we plan to implement a new in-store customer ordering capability to better service our customers’ needs that are not fully satisfied by in-store inventory. New functionality and infrastructure will be implemented to enable our customers to buy online and pickup in store. In fiscal 2015, we will also implement a tablet optimized site to further capitalize on the continued growth of mobile e-commerce. Other planned fiscal 2015 initiatives include more accurate store customer traffic counters and an upgrade of our core financial applications.

COMPETITION

Our business faces competition from a variety of sources, including department stores such as Macy’s and Dillard’s, mass merchandisers, other specialty stores and discount and off-price retailers, as well as other retailers that sell big & tall merchandise. While we have successfully competed on the basis of merchandise selection, comfort and fit, customer service and desirable store locations, there can be no assurances that other retailers will not adopt purchasing and marketing concepts similar to ours. Discount retailers with significant buying power, such as Wal-Mart and J.C. Penney, represent a source of competition for us. The direct business has several competitors, including the King Size catalog and website.

The United States men’s big & tall apparel market is highly competitive with many national and regional department stores, specialty apparel retailers, single market operators and discount stores offering a broad range of apparel products similar to ours. Besides retail competitors, we consider any casual apparel manufacturer operating in outlet malls throughout the United States to be a competitor in the casual apparel market. We believe that we are the only national operator of apparel stores focused on the men’s big & tall market.

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.

13

TRADEMARKS/TRADEMARK LICENSE AGREEMENTS

We own several service marks and trademarks relating to our businesses, including, among others, “Destination XL^®”, “DXL^®”, “Big on Being Better™”, “Casual Male^®”, “Casual Male XL^®”, “Rochester Big & Tall^®”, “Harbor Bay^®”, “Oak Hill Established 1972^®”, “Oak Hill^®”, “Flex-Zone^®”, “Comfort Zone^®”, “Synrgy™”, “Twenty-Eight Degrees™”, “Society of One^®” and “True Nation^®”. We also hold a U.S. patent for an extendable collar system, which is marketed as “Neck-Relaxer^®” and a U.S. copyright for a no iron hang tag.

EMPLOYEES

As of January 31, 2015, we employed approximately 2,435 associates. We hire additional temporary employees during the peak fall and Holiday seasons. None of our employees is represented by any collective bargaining agreement.

AVAILABLE INFORMATION

Our corporate website is www.destinationxl.com.   Our investor relations site is http://investor.destinationxl.com. We make available, free of charge, through our website our Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and all amendments to such reports filed or furnished pursuant to Section 13(a) of the Securities Exchange Act of 1934, as amended, as soon as reasonably practicable after we have electronically filed such material with, or furnished such materials to, the Securities and Exchange Commission. The SEC maintains an internet site that contains reports, proxy and information statements, and other information for issuers that file electronically with the SEC at http://www.sec.gov.

14

Item 1A. Risk Factors

The following discussion identifies certain important factors that could affect our financial position, our actual results of operations and our actions and could cause our financial position, results of operations and our actions to differ materially from any forward-looking statements made by or on behalf of our Company. Other factors, which are not identified herein, could also have such an effect.

The following risk factors are all of the important factors of which we are aware that could cause actual results, performance or achievements to differ materially from those expressed in any of our forward-looking statements. We operate in a continually changing business environment and new risk factors emerge from time to time. Other unknown or unpredictable factors also could have material adverse effects on our future results, performance or achievements. We cannot assure you that our projected results or events will be achieved or will occur.

Risks Related to Our Company and Our Industry

We may not be successful in executing our DXL strategy and growing our market share.

We are currently implementing our strategic plan to open 230 DXL stores by the end of fiscal 2017 while simultaneously closing a significant number of our Casual Male XL retail stores and Rochester Clothing stores. However, for us to be successful in the future and maintain growth, we must be able to continue increasing our market share within the big & tall industry. Our growth and market share are dependent on our ability to successfully execute the roll-out of our DXL store concept, convert our existing Casual Male and Rochester customers into DXL customers and continue to attract new customers. Our inability to execute successfully the following factors, among others, could prevent us from growing our market share and DXL brand, which could have a material adverse effect on our results of operations, cash flows and financial position:

Our marketing programs and success in maintaining and building our brand awareness, driving traffic and converting that traffic into an increased loyal customer base are critical to achieving successful market share growth within the big & tall industry.

Our success in increasing our market share in the big & tall apparel business is largely dependent on building and maintaining favorable brand recognition for our DXL concept and effectively marketing our merchandise to all of our target customers in several diverse market segments so that they will become loyal shoppers who spend a greater portion of their wallet on our product offerings. In order to grow our brand recognition and our market share, we depend on the successful development of our brand through several means including television and radio advertising, advertising events, direct mail marketing, e-commerce and customer prospecting. Our business is directly impacted by the success of these efforts and those of our vendors. Future advertising efforts by us, our vendors or our other licensors, may be costly and may not result in increased market share or revenues.

15

Our business is seasonal and is affected by general economic conditions.

Like most other retail businesses, our business is seasonal. Historically, a significant portion of our operating income has been generated during our fourth quarter (November-January). In addition, similar to other retail businesses, our operations may be negatively affected by local, regional or national economic conditions, such as levels of disposable consumer income, consumer debt, interest rates and consumer confidence.

Our business may be adversely affected by economic and political issues abroad.

Economic and civil unrest in areas of the world where we source merchandise for our global sourcing program, as well as shipping and docking issues, could adversely impact the availability and cost of such merchandise. Disruptions in the global transportation network, such as political instability, the financial instability of our suppliers, merchandise quality issues, trade restrictions, labor and port strikes, tariffs, currency exchange rates, transport capacity and costs, inflation and other factors relating to foreign trade are beyond our control. In the event of disruptions or delays in deliveries due to economic or political conditions in foreign countries, such disruptions or delays could adversely affect our results of operations unless and until alternative supply arrangements could be made. These and other issues affecting our suppliers could adversely affect our business and financial performance.

The loss of, or disruption in, our centralized distribution center could negatively impact our business and operations.

All merchandise for our stores and e-commerce operations is received into our centralized distribution center in Canton, Massachusetts, where the inventory is then processed, sorted and shipped to our stores or directly to our customers. We depend in large part on the orderly operation of this receiving and distribution process, which depends, in turn, on adherence to shipping schedules and effective management of the distribution center. Although we believe that our receiving and distribution process is efficient and well-positioned to support our strategic plans, events beyond our control, such as disruptions in operations due to fire or other catastrophic events, employee matters or shipping problems, could result in delays in the delivery of merchandise to our stores or directly to our customers.

With all of our management information systems centralized in our corporate headquarters, any disruption or destruction of our system infrastructure would materially affect our business. This type of disaster is mitigated by our offsite storage and disaster recovery plans, but we would still incur business interruption which could impact our business for several weeks.

Although we maintain business interruption and property insurance, we cannot be sure that our insurance will be sufficient, or that insurance proceeds will be timely paid to us, in the event our distribution center is shut down for any reason or if we incur higher costs and longer lead times in connection with a disruption from our distribution center.

If we are unable to successfully develop and implement our omni-channel initiatives, our market share and financial results could be adversely affected.

One of our strategic initiatives has been to move from being a multi-channel retailer to an omni-channel retailer. Our customer’s shopping behavior continues to evolve across multiple channels and we are working to meet his needs. Our goal is to provide a seamless customer experience whether he shops at a store, on-line, or from a smartphone or other device. During fiscal 2014, with the implementation of new software, our inventory at the store level is now visible on our website and available for both web and in-store orders. We expect to continue to make similar ongoing investments in our information technology systems to support our evolving omni-channel capabilities.  

Omni-channel retailing is rapidly evolving and our success depends on our ability to anticipate and implement innovations in sales and marketing technology and logistics in order to appeal to existing and potential customers who increasingly rely on multiple channels to meet their shopping needs.  In addition, our competitors are also investing in omni-channel initiatives, some of which may be more successful than our initiatives.

If the implementation of our omni-channel initiatives is not successful, our systems are unable to support such initiatives, or if our competitors are more successful, our financial results and our market penetration may be adversely affected.

16

We are dependent on third parties for the manufacture of the merchandise we sell.

We do not own or operate any manufacturing facilities and are therefore entirely dependent on third parties for the manufacture of the merchandise we sell. Without adequate supplies of merchandise to sell to our customers in the merchandise styles and fashions demanded by our particular customer base, sales would decrease materially and our business would suffer. We are dependent on these third parties’ ability to fulfill our merchandise orders and meet our delivery terms. In the event that manufacturers are unable or unwilling to ship products to us in a timely manner or continue to manufacture products for us, we would have to rely on other current manufacturing sources or identify and qualify new manufacturers. We might not be able to identify or qualify such manufacturers for existing or new products in a timely manner and such manufacturers might not allocate sufficient capacity to us in order to meet our requirements. Our inability to secure adequate and timely supplies of private label merchandise would negatively impact proper inventory levels, sales and gross margin rates, and ultimately our results of operations.

In addition, even if our current manufacturers continue to manufacture our products, they may not maintain adequate controls with respect to product specifications and quality and may not continue to produce products that are consistent with our standards. If we are forced to rely on manufacturers who produce products of inferior quality, then our brand recognition and customer satisfaction would likely suffer. These manufacturers may also increase the cost to us of the products we purchase from them.

A significant portion of our merchandise is imported directly from other countries, and U.S. domestic suppliers who source their goods from other countries supply most of our remaining merchandise. In the event that commercial transportation is curtailed or substantially delayed, we may not be able to maintain adequate inventory levels of important merchandise on a consistent basis, which would negatively impact our sales and potentially erode the confidence of our customer base, leading to further loss of sales and an adverse impact on our results of operations.

Fluctuations in the price, availability and quality of raw materials and finished goods could increase costs.

Fluctuations in the price, availability and quality of fabrics or other raw materials used in the manufacturing of our merchandise could have a material adverse effect on our gross margin or on our ability to meet our customers’ demands. The prices for fabrics depend on demand and market prices for the raw materials used to produce them. To the extent that we cannot offset these cost increases with other cost reductions or efficiencies, such higher costs will need to be passed on to our customers. Such increased costs could lead to reduced customer demand, which could have a material adverse effect on our results of operations and cash flow.

Our success depends significantly on our key personnel and our ability to attract and retain additional personnel.

Our future success is dependent on the personal efforts, performance and abilities of our key management which includes our executive officer as well as several significant members of our senior management. For example, the loss of the services of David Levin, our President and Chief Executive Officer, who is an integral part of our daily operations and is the primary decision maker in all our important operating matters, could significantly impact our business until an adequate replacement or replacements can be identified and put in place. The loss of any of our senior management may result in a loss of organizational focus, poor operating execution, an inability to identify and execute strategic initiatives, an impairment in our ability to identify new store locations, and an inability to consummate possible acquisitions.

The competition is intense for the type of highly skilled individuals with relevant industry experience that we require and we may not be able to attract and retain new employees of the caliber needed to achieve our objectives.

Our business may be negatively impacted and we may be liable if third parties misappropriate proprietary information of our customers and breach our security systems.

We may be harmed by security risks we face in connection with our electronic processing and transmission of confidential customer information. During fiscal 2014, approximately 90% of our sales were settled through credit and debit card transactions. Any security breach could expose us to risks of loss, litigation and liability and could adversely affect our operations as well as cause our shoppers to stop shopping with us as a result of their lack of confidence in the security of their personally identifiable information, which could have a negative impact on our sales and profitability. A number of retailers have experienced actual security breaches where credit and debit card information may have been stolen, including a number of highly publicized incidents with well-known retailers in late 2013. If third parties are able to penetrate our network security or otherwise misappropriate the personal information or credit card information of our customers or if third parties gain unauthorized and improper access to such information, we could be subject to liability. These liabilities could include claims for unauthorized purchases with credit card information, impersonation or other similar fraud claims, claims for other misuses of personal information, including unauthorized marketing purposes, and could ultimately result in litigation. Liability for misappropriation of this information could be significant.

17

Further, if a third party were to use this proprietary customer information in order to compete with us, it could have a material adverse impact on our business and could result in litigation.

We have been Payment Card Industry (“PCI”) compliant since 2007, which we believe is important in ensuring that our security systems are protected, but there is always a risk that protected systems can be compromised. During fiscal 2014, significant investments were made to further secure our Company’s credit and debit processing environments. These included the implementation of a new store network specific firewall solution, a new malware prevention product, and a software white listing technology for additional malware protection.  

Our business is highly competitive, and competitive factors may reduce our revenues and profit margins.

The United States men’s big & tall apparel market is highly competitive with many national and regional department stores, mass merchandisers, specialty apparel retailers and discount stores offering a broad range of apparel products similar to the products that we sell. Besides retail competitors, we consider any manufacturer of big & tall merchandise operating in outlet malls throughout the United States to be a competitor. It is also possible that another competitor, either a mass merchant or a men’s specialty store or specialty apparel catalog, could gain market share in men’s big & tall apparel due to more favorable pricing, locations, brand and fashion assortment and size availability. Many of our competitors and potential competitors may have substantially greater financial, manufacturing and marketing resources than we do. The presence in the marketplace of various fashion trends and the limited availability of shelf space also can affect competition. We may not be able to compete successfully with our competitors in the future and could lose brand recognition and market share. A significant loss of market share would adversely affect our revenues and results of operations.

We may be unable to predict fashion trends and customer preferences successfully.

Customer tastes and fashion trends are volatile and tend to change rapidly. Our success depends in large part upon our ability to predict effectively and respond to changing fashion tastes and consumer demands and to translate market trends to appropriate saleable product offerings. If we are unable to predict or respond to changing styles or trends successfully and misjudge the market for products or any new product lines, our sales will be impacted and we may be faced with a substantial amount of unsold inventory or missed opportunities. In response, we may be forced to rely on additional markdowns or promotional sales to dispose of excess, slow-moving inventory, which would decrease our revenues and margins. In addition, the failure to satisfy consumer demand, specifically in our DXL stores and website, could have serious longer-term consequences, such as an adverse impact on our brand value and the loss of market share to our competitors.

The loss of any of our key trademarks or licenses could adversely affect demand for our products.

We own and use a number of trademarks and operate under several trademark license agreements. We believe that certain of these trademarks have significant value and are instrumental in our ability to create and sustain demand for and to market our products. We cannot be certain that these trademarks and licensing agreements will remain in effect and enforceable or that any license agreements, upon expiration, can be renewed on acceptable terms or at all. In addition, any future disputes concerning these trademarks and licenses may cause us to incur significant litigation costs or force us to suspend use of the disputed trademarks.

The re-occurrence of any disruption to the capital and credit markets could adversely affect our results of operations, cash flows and financial condition, or those of our customers and vendors.

The re-occurrence of any disruption to the capital and credit markets could adversely impact our results of operations, cash flows and financial condition, or those of our customers and vendors. Disruptions in the capital and credit markets as a result of uncertainty, changing or increased regulation, reduced alternatives or failures of significant financial institutions could adversely affect our access to liquidity. Such disruptions may also adversely impact the capital needs of our customers and vendors, which, in turn, could adversely affect our results of operations, cash flows and financial condition.

Acts of terrorism or a catastrophic event could negatively impact our operating results and financial condition.

Unforeseen events, including war, terrorism and other international conflicts, public health issues, and natural disasters such as earthquakes, hurricanes or other adverse weather and climate conditions, whether occurring in the U.S. or abroad, could disrupt our operations, or the operations of our vendors and other suppliers, or result in political or economic instability.

The continued threat of terrorism and heightened security measures in response to an act of terrorism may disrupt commerce and undermine consumer confidence which could negatively impact our sales by causing consumer spending to decline. Furthermore, an act of terrorism or war, or the threat thereof, could negatively impact our business by interfering with our ability to obtain merchandise from vendors or substitute suppliers at similar costs in a timely manner.

18

Failure to comply with laws, rules and regulations could negatively affect our business operations and financial performance.

Our business is subject to federal, state, local and international laws, rules and regulations, such as state and local wage and hour laws, the U.S. Foreign Corrupt Practices Act, the False Claims Act, the Employee Retirement Income Security Act (“ERISA”), securities laws, import and export laws (including customs regulations), privacy and information security regulations, unclaimed property laws, the Affordable Care Act and many others. The effect of some of these laws and regulations may be to increase the cost of doing business and may have a material impact on our earnings. In addition, the complexity of the regulatory environment in which we operate and the related cost of compliance are both increasing due to legal and regulatory requirements and increased enforcement. In addition, as a result of operating in the U.K., we must comply with that country’s laws and regulations, which may differ substantially from, and may conflict with, corresponding U.S. laws and regulations. We may also be subject to investigations or audits by governmental authorities and regulatory agencies, which can occur in the ordinary course of business or which can result from increased scrutiny from a particular agency towards an industry, country or practice. If we fail to comply with laws, rules and regulations or the manner in which they are interpreted or applied, we may be subject to government enforcement action, class action litigation or other litigation, damage to our reputation, civil and criminal liability, damages, fines and penalties, and increased cost of regulatory compliance, any of which could adversely affect our results of operations and financial performance.

Risks Related to Our Corporate Structure and Stock

Our stock price has been and may continue to be extremely volatile due to many factors.

The market price of our common stock has fluctuated in the past and may increase or decrease rapidly in the future depending on news announcements and changes in general market conditions. Since January 1, 2003, the closing price of our common stock has ranged from a low of $0.26 per share (March 3, 2009) to a high of $14.95 per share (October 26, 2006). The following factors, among others, may cause significant fluctuations in our stock price:

Rights of our stockholders may be negatively affected if we issue any of the shares of preferred stock which our Board of Directors has authorized for issuance.

We have available for issuance up to 1,000,000 shares of preferred stock, par value $0.01 per share. Our Board of Directors is authorized to issue any or all of these shares of preferred stock, in one or more series, without any further action on the part of stockholders. The rights of our stockholders may be negatively affected if we issue a series of preferred stock in the future that has preference over our common stock with respect to the payment of dividends or distribution upon our liquidation, dissolution or winding up.

In addition, the issuance of preferred stock by our Board of Directors pursuant to our certificate of incorporation, as amended, could have the effect of making it more difficult for a third party to acquire, or of discouraging a third party from acquiring, a majority of the outstanding voting stock of our Company.

19

State laws and our certificate of incorporation, as amended, may inhibit potential acquisition bids that could be beneficial to our stockholders.

We are subject to certain provisions of Delaware law, which could also delay or make more difficult a merger, tender offer or proxy contest involving us. In particular, Section 203 of the Delaware General Corporation Law prohibits a Delaware corporation from engaging in certain business combinations with any interested stockholder for a period of three years unless specific conditions are met. In addition, certain provisions of Delaware law could have the effect of delaying, deferring or preventing a change in control of us, including, without limitation, discouraging a proxy contest or making more difficult the acquisition of a substantial block of our common stock. The provisions could also limit the price that investors might be willing to pay in the future for shares of our common stock.

In addition, our certificate of incorporation, as amended, contains provisions that restrict any person or entity from attempting to transfer our stock, without prior permission from the Board of Directors, to the extent that such transfer would (i) create or result in an individual or entity becoming a five-percent shareholder of our stock, or (ii) increase the stock ownership percentage of any existing five-percent shareholder. These provisions provide that any transfer that violates such provisions shall be null and void and would require the purported transferee to, upon demand by us, transfer the shares that exceed the five percent limit to an agent designated by us for the purpose of conducting a sale of such excess shares. These provisions would make the acquisition of our Company more expensive to the acquirer and could significantly delay, discourage, or prevent third parties from acquiring our Company without the approval of our Board of Directors.

20

Item 1B. Unresolved Staff Comments

None.

Item 2. Properties

Our corporate offices and retail distribution center are located at 555 Turnpike Street in Canton, Massachusetts. The property consists of a 755,992 gross square foot building located on approximately 27.3 acres. We owned the property until January 30, 2006, at which time we entered into a sale-leaseback transaction with Spirit Finance Corporation, a third-party real estate investment trust (“Spirit”), whereby we entered into a twenty-year lease agreement with a wholly-owned subsidiary of Spirit for an initial annual rent payment of $4.6 million, with periodic increases every fifth anniversary of the lease. In fiscal 2006, we realized a gain of approximately $29.3 million on the sale of this property, which was deferred and is being amortized over the initial 20 years of the related lease agreement. Accordingly, our annual current rent expense of $5.1 million is offset by $1.5 million related to the amortization of this deferred gain.

As of January 31, 2015, we operated 138 Destination XL stores, 157 Casual Male XL retail stores, 50 Casual Male XL/DXL outlet stores and 8 Rochester Clothing stores. All of these stores are leased by us directly from owners of several different types of centers, including life-style centers, shopping centers, free standing buildings, outlet centers and downtown locations. The store leases are generally 5 to 10 years in length and contain renewal options extending their terms by between 5 and 10 years. Following this discussion is a listing by state of all store locations open at January 31, 2015.

Sites for store expansion are selected on the basis of several factors intended to maximize the exposure of each store to our target customers. These factors include the demographic profile of the area in which the site is located, the types of stores and other retailers in the area, the location of the store within the center and the attractiveness of the store layout. We also utilize financial models to project the profitability of each location using assumptions such as the center’s sales per square foot averages, estimated occupancy costs and return on investment requirements. We believe that our selection of locations enables our stores to attract customers from the general shopping traffic and to generate our own customers from surrounding areas.

See also “Management’s Discussion and Analysis of Financial Condition and Results of Operation—Liquidity and Capital Resources—Capital Expenditures.”

21

Store count by state at January 31, 2015

22

Item 3. Legal Proceedings

From time to time, we are subject to various legal proceedings and claims that arise in the ordinary course of business. Management believes that the resolution of these matters will not have a material adverse impact on our future results of operations or financial position.

Item 4. Mine Safety Disclosures

Not applicable.

23

PART II.

Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

Market Information

Our common stock is listed for trading on the NASDAQ Global Select Market under the symbol “DXLG”.

The following table sets forth, for the periods indicated, the high and low per share sales prices for the common stock, as reported on Nasdaq.

Holders

As of March 6, 2015, based upon data provided by independent shareholder communication services and the transfer agent for our common stock, there were approximately 116 holders of record of our common stock. The number of holders does not include individuals or entities who beneficially own shares but whose shares are held of record by a broker or clearing agent, but does include each such broker or clearing agency as one record holder.

Dividends

We have not paid and do not anticipate paying cash dividends on our common stock. In addition, financial covenants in our loan agreement may restrict dividend payments. For a description of these financial covenants see Note C to the Notes to the Consolidated Financial Statements.

Issuer Purchases of Equity Securities

None.

24

Stock Performance Graph

The following Performance Graph compares our cumulative stockholder return with a broad market index (Standard & Poor’s 500) and one published industry index (Dow Jones U.S. Apparel Retailers) for each of the most recent five years ended January 31. The cumulative stockholder return for shares of our common stock (“DXLG”) and each of the indices is calculated assuming that $100 was invested on January 31, 2010. We paid no cash dividends during the periods shown. The performance of the indices is shown on a total return (dividends reinvested) basis. The graph lines merely connect January 31 of each year and do not reflect fluctuations between those dates. In addition, we have included a chart of the annual percentage return of our common stock, the S&P 500 and the Dow Jones U.S. Apparel Retailers.

Annual Return Percentage

Indexed Returns

The performance graph above shall not be deemed “filed” for purposes of Section 18 of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), or otherwise subject to the liability of that section. This graph will not be deemed incorporated by reference into any filing under the Securities Act of 1933, as amended, or the Exchange Act, whether made before or after the date hereof, regardless of any general incorporation language in such filing.

25

Item 6. Selected Financial Data

The following tables set forth selected consolidated financial data of our Company as of and for each of the years in the five-year period ended January 31, 2015 and should be read in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our accompanying Consolidated Financial Statements and Notes thereto.

We derived the selected financial data presented below for the periods or dates indicated from our consolidated financial statements. Our consolidated financial statements as of and for the years ended January 31, 2015 and February 1, 2014 were audited by KPMG LLP, an independent registered public accounting firm. Our consolidated financial statements as of and for the years ended February 2, 2013, January 28, 2012 and January 29, 2011 were audited by Ernst & Young LLP, an independent registered public accounting firm. Our consolidated financial statements as of and for the years ended January 31, 2015, February 1, 2014 and February 2, 2013 are included herein.

For a discussion of certain factors that materially affect the comparability of the selected consolidated financial data or cause the data reflected herein not to be indicative of our future results of operations or financial condition, see Item 1A, “Risk Factors” and Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”

26

27

28

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations

FORWARD LOOKING STATEMENTS

As noted above, this Annual Report on Form 10-K, including, without limitation, this Item 7, contains “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. Actual results or developments could differ materially from those projected in such statements as a result of numerous factors, including, without limitation those risks and uncertainties set forth in Item 1A, Risk Factors which you are encouraged to read. The following discussion and analysis of our financial condition and results of operations should be read in light of those risks and uncertainties and in conjunction with our accompanying Consolidated Financial Statements and Notes thereto.

Certain figures discussed below may not add due to rounding.

General Economic Conditions

While we saw positive improvements during fiscal 2014 with both customer traffic and conversion, resulting in greater sales than a year ago, our performance remains subject to macroeconomic conditions and their impact on levels of consumer spending. The challenging state of the economy continues to influence the level of consumer spending for discretionary items, which directly impacts our business, as it is highly dependent on consumer demand. Some of the factors negatively impacting discretionary consumer spending include general economic conditions, increased taxation, high consumer debt, reductions in net worth based on severe market declines, severe weather conditions, healthcare costs, market fluctuations and volatile consumer confidence. In addition, any significant volatility in financial markets, as has been experienced in the past, could also negatively impact the levels of future discretionary consumer spending. See “Item 1A, Risk Factors” for a complete discussion of these risks.

Segment Reporting

We report our operations as one reportable segment, Big & Tall Men’s Apparel.  We consider our retail and direct business, especially in our growing omni-channel environment, to be similar in terms of economic characteristics, production processes and operations, and have therefore aggregated them into a single reporting segment.

Comparable Sales Definition

For fiscal 2014, total comparable sales include our retail stores that have been open for at least 13 months and our direct business.  Stores that have been remodeled or re-located during the period are also included in our determination of comparable 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.  

Our customer’s shopping experience continues to evolve across multiple channels and we are continually changing to meet his needs.  During fiscal 2014, as part of our omni-channel initiatives, more than 300 of our retail stores now have the capability of fulfilling online orders if merchandise is not available in the warehouse.  As a result, we are seeing 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.  Because this omni-channel approach to retailing is changing the boundaries of where a sale originates and where a sale is ultimately settled, we no longer report comparable sales separately for our retail and direct businesses.  We anticipate that we will continue to provide specific information on our DXL comparable store sales in the near-term, but as we near completion of our roll-out we expect to transition to one comparable sales figure for the Company.  

Through the end of fiscal 2013, the majority of our DXL stores were considered relocations and comparable to all the closed Casual Male XL and Rochester Clothing stores in each respective market area.  Due to the small number of DXL stores opened for more than a year, we believed that this was a useful comparison as to how a DXL store was performing in a market when compared to its predecessor store(s).  However, with 48 DXL stores opened more than a year at the beginning of fiscal 2014, we believed that a traditional DXL comparable figure would have more meaning going forward. Therefore, beginning in fiscal 2014, only DXL stores that have been open at least 13 months are included in comparable store sales.  

Reclassifications

As discussed more fully below, under “Discontinued Operations,” during the fourth quarter of fiscal 2014, we ended our business relationship with Sears Canada and, as a result, have reclassified results of operations for this business to discontinued operations for all periods presented.

29

For fiscal 2014, we began reporting alterations revenue in top-line sales with the associated tailor wages in cost of goods sold.  As alterations and tailors become a more significant part of our business model, we believe the revenue and cost should be shown within gross margin rather than encompassed in selling, general and administrative expenses (“SG&A”). We have reclassified the results for fiscal 2013 and fiscal 2012 to reflect this presentation on a comparative basis.

Non-GAAP Measures

We monitor certain non-GAAP financial measures on a regular basis in order to track the progress of our business. These measures include adjusted income (loss) from continuing operations, adjusted income (loss) from continuing operations per diluted share, adjusted net income (loss), adjusted net income (loss) per diluted share, free cash flow and EBITDA from continuing operations (earnings before interest, taxes, depreciation and amortization and discontinued operations).  We believe these measures provide helpful information with respect to the Company’s operating performance and cash flows.  We believe that the inclusion of these non-GAAP measures is important to assist investors in comparing fiscal 2014 to fiscal 2013 and fiscal 2012, on a comparable basis.  However, these measures may not be comparable to similar measures used by other companies and should not be considered superior to or as a substitute for operating income (loss), income (loss) from continuing operations, net income (loss) per diluted share or cash flows from operating activities in accordance with GAAP.  See “Non-GAAP Reconciliations” below for the definition of these non-GAAP measures and reconciliations to comparable GAAP measures.

EXECUTIVE OVERVIEW

2014 Financial Summary

At the end of fiscal 2013, we identified specific initiatives and improvements associated with our DXL store roll-out that we believed would improve our performance. Throughout fiscal 2014, we successfully implemented all of them and saw positive top-line growth as a result.  Specifically:

30

We believe that all of these initiatives had a positive impact on driving top line growth in fiscal 2014.  Comparable sales for fiscal 2014 increased 6.4%, with our 93 comparable DXL stores having a comparable sales increase of 13.7%.  This figure is on top of a 12.3% DXL comparable sales increase in fiscal 2013.  We are especially pleased with how well our DXL stores performed during the fourth quarter of fiscal 2014, with a comparable sales increase of 16.4% as compared to the fourth quarter of fiscal 2013.  We believe these results were largely due to our shift in marketing strategy.  For fiscal 2014, we started our fall marketing campaign three weeks later than last year so that the ads coincided with our peak holiday selling weeks. After the holiday selling season, we ran a bounce-back January promotion, which resulted in strong post-holiday comparable sales while helping to clear year-end merchandise.

For fiscal 2014, we reported a net loss of $12.3 million, or $(0.25) per diluted share, as compared to a net loss of $59.8 million, or $(1.23) per diluted share, in fiscal 2013. Of significance, our growth in EBITDA from continuing operations more than doubled to $15.2 million from $7.3 million in fiscal 2013. Included in our results are one-time costs that we are incurring as part of our DXL transition, such as pre-opening rent and payroll, lease exit costs and training. Once the roll-out is complete these costs will significantly diminish.  For fiscal 2014, these DXL transition costs were $7.8 million, consisting of $2.8 million in pre-opening and lease exit costs, $4.0 million in SG&A costs and $1.0 million in trademark amortization, as compared to DXL transition costs of $11.2 million for fiscal 2013. In addition to these transition costs are our marketing costs of $26.0 million and $27.1 million for fiscal 2014 and fiscal 2013, respectively, which are also expected to decrease further once the roll-out is complete.

The comparability of our operating results year-to-year is primarily affected by our income tax provision (benefit), as a result of our valuation allowance established in fiscal 2013 against our deferred tax assets.  Adjusting for a normal tax rate of 40.0% for fiscal 2014 and excluding the charges for valuation allowance, executive severance and asset impairment in fiscal 2013, on a non-GAAP basis, the adjusted net loss for fiscal 2014 was $7.7 million, or $(0.16) per diluted share as compared to an adjusted net loss of $6.2 million, or $(0.13) per diluted share in fiscal 2013. Included in the adjusted net loss for fiscal 2014 is a loss from discontinued operations of $(0.02) per share, as compared to income from discontinued operations of $0.01 per share in fiscal 2013.  On a non-GAAP basis, our adjusted loss per share from continuing operations, was $(0.13) per share, as compared to $(0.14) in fiscal 2013.  

The following table is a summary EBITDA from continuing operations and diluted earnings per share on a GAAP and non-GAAP basis for each fiscal year (Certain amounts in the following table do not foot due to rounding):

Fiscal 2015 Outlook

We anticipate our store growth for fiscal 2015 will be very similar to fiscal 2014, with plans to open 40 new DXL stores and close approximately 37 Casual Male XL stores and 3 Rochester Clothing stores.  Fiscal 2015 will be another important year in our plan to transform our store base to DXL. A complete discussion of this business strategy and our long-term projections is discussed above as well as under “Item 1. Business – Business Strategy.”

31

For fiscal 2015, sales are expected to range from $438.0 million to $443.0 million. We expect our gross margin rate to be 45.9%, which is flat when compared to fiscal 2014.  This rate is based on merchandise margins improving approximately 30 basis points, offset by occupancy costs increasing 30 basis points from fiscal 2014.   SG&A costs are planned to increase to approximately $181.5 million, primarily related to an increase in operating costs associated with a greater number of DXL stores, including pre-opening costs and payroll (both store and support). However, as a percentage of sales, SG&A expenses are expected to decrease by approximately 80 to 130 basis points.

For fiscal 2015, we expect that EBITDA will be $19.0-$23.0 million.  However, with the growth of the DXL stores, store depreciation will continue to increase to approximately $28.5 million, resulting in an operating margin of (1.2%)-(2.2%).  Interest costs are expected to be approximately $3.8 million. As a result, our earnings for fiscal 2015 will be a loss of approximately $(0.20)-$(0.27) per diluted share. We expect to continue providing a full valuation allowance against our deferred tax assets, therefore, we will not recognize any income tax benefit in fiscal 2015. For comparative purposes, assuming a normal tax benefit of approximately 40%, our loss for fiscal 2015, on a non-GAAP basis, would be approximately $(0.12)-$(0.16) per diluted share. This non-GAAP net loss was calculated by taking the 2015 forecasted net loss of $(0.20)-$(0.27) and multiplying each by 40% to calculate an estimated income tax benefit of $0.08-$0.11 per diluted share, resulting in an adjusted non-GAAP net loss of $(0.12)-$(0.16) per diluted share.

We expect to spend approximately $38.0-$41.0 million in capital expenditures in fiscal 2015, which will be partially offset by approximately $5.0-$6.0 million in tenant allowances, primarily related to opening our DXL stores. We expect to fund our capital expenditures primarily from our operating cash flow and our credit facility. At the end of fiscal 2015, we expect to have total debt of approximately $72.0-$76.0 million, consisting of $13.8 million outstanding from a term loan, $12.9 million outstanding from equipment financing notes with the balance from our credit facility. From a liquidity perspective, we expect cash flow from operating activities of $18.5 million to $19.5 million (including tenant allowances), resulting in free cash flow (as defined below under “Presentation of Non-GAAP Measures”) of approximately $(18.5)-$(22.5) million.

Non-GAAP Reconciliations

Adjusted Income (Loss) From Continuing Operations and Adjusted Net Income (Loss) Per Diluted Share-

The following table is a reconciliation of income (loss) from continuing operations and net loss (both on a GAAP-basis) to adjusted income (loss) from continuing operations and adjusted net income (loss) (both on a non-GAAP basis) for fiscal 2014 and fiscal 2013.  There were no non-GAAP adjustments to fiscal 2012 (Certain amounts do not foot due to rounding):

32

Free Cash Flow

We calculate free cash flows as cash flow provided by operating activities less capital expenditures and discretionary store asset acquisitions, if applicable:

EBITDA FROM CONTINUING OPERATIONS

The following table is a reconciliation of net income (loss) on a GAAP basis to EBITDA from continuing operations, on a non-GAAP basis, for each fiscal year. (Certain amounts in the following table do not foot due to rounding):

RESULTS OF OPERATIONS

Our fiscal year is a 52- or 53-week period ending on the Saturday closest to January 31. Fiscal 2014 and fiscal 2013 were 52- week periods while fiscal 2012 was a 53-week period.

SALES

Sales for fiscal 2014 increased 7.1% to $414.0 million as compared to $386.5 million for fiscal 2013. The increase of $27.5 million was primarily due to a comparable sales increase of 6.4%, or $20.8 million. Increases in our non-comparable sales, primarily from our DXL stores that have been opened less than 13 months, of $20.8 million and other net revenue of $0.5 million were partially offset by $14.6 million in sales from our closed Casual Male XL and Rochester Clothing stores.  The year-over-year comparable sales increase of 6.4% was driven by a comparable sales increase from our 93 comparable DXL stores of 13.7%.  Our DXL stores have had seven consecutive quarters of double-digit comparable sales increases.  

Our sales growth in fiscal 2014 was driven by a combination of factors.  Of significance, the number of customer transactions for our 93 comparable DXL stores was up 13.3% over the prior year.  This is a strong indicator that we are converting our increases in store traffic to top-line sales.  We also saw a significant increase in sales per square foot from our DXL stores, which went from $150 in fiscal 2013 to $165 in fiscal 2014.  Another key metric for us has been the percentage of “end of rack” customers that shop at our DXL stores. For fiscal 2014, those customers, with waist sizes 46” or less, represented 43% of our bottoms business.  

Our decision to keep our Casual Male XL stores open until well after a DXL store opens has also had a positive impact to sales.  By remaining open, our Casual Male XL stores have been able to market and direct our customer to the new DXL store.  While the majority of the sales growth in fiscal 2014 came from our DXL stores, our Casual Male XL stores also contributed to our comparable sales increase.

33

During fiscal 2014, we also moved our fall marketing campaign three weeks later than fiscal 2013.  This helped us to better align our advertising with the key selling weeks of the holiday season.  

For the 52 weeks of fiscal 2013, total sales decreased 2.8% to $386.5 million, as compared to $397.6 million for the 53 weeks of fiscal 2012.  This decrease of $11.1 million in total sales was due primarily to a decrease in sales for closed stores of $16.2 million related to lease terminations or sales unassociated with a DXL store.  In addition, for comparison purposes for fiscal 2013, fiscal 2012 had an additional 53^rd week of sales of approximately $5.5 million.  This decrease was partly offset by an increase in comparable sales of 2.9%, or $10.8 million, as compared to fiscal 2012.  This increase consisted of an increase in our retail business of 4.7%, or $14.3 million, offset by a decrease in our direct business of 5.0%, or $3.5 million. The increase in our retail business of $14.3 million was driven by our DXL stores which had a comparable store sales increase of 19.3%, or $15.3 million, as compared to fiscal 2012. Our remaining retail stores had a comparable sales decrease of $1.0 million, or (0.4%). At February 1, 2014, 48 of our DXL stores were open for more than one year and those stores had a comparable sales increase of 12.3%. The decrease in the direct business was primarily driven by a decrease in our catalog sales of $5.1 million for fiscal 2013 as compared to fiscal 2012. During the second quarter of fiscal 2013, we eliminated our catalogs completely replacing them with more cost-effective direct mail pieces. Catalog sales accounted for approximately 4.8% of our direct business in fiscal 2013 as compared to 11.6% in fiscal 2012. During the second half of fiscal 2013, sales from our e-commerce business improved 6.8% as compared to the second half of fiscal 2012.

For fiscal 2015, we are forecasting sales to be $438.0 million to $443.0 million, with a comparable sales increase of approximately 5.6%.

GROSS MARGIN

Gross margin rate for fiscal 2014 was 45.9% as compared to 45.6% for fiscal 2013 and 46.2% for fiscal 2012. The increase of 30 basis points for fiscal 2014 as compared to fiscal 2013 was driven by a decrease of 130 basis points in occupancy costs partially offset by a decrease in merchandise margins of 100 basis points.  The 130 basis point improvement in occupancy costs as a percentage of sales is primarily due to an early lease termination payment of $2.5 million, or 60 basis points, that we received in the fourth quarter of fiscal 2014 as part of our agreement to exit our San Francisco store prior to the end of the lease.  Occupancy costs also included DXL transition costs related to preopening rent and landlord terminations of $2.8 million in fiscal 2014 and $4.3 million in fiscal 2013. The decrease in our merchandise margin of 100 basis points is mainly due to higher markdown activity associated with our marketing initiatives and promotional activities.

The decrease of 60 basis points for fiscal 2013 as compared to fiscal 2012 was due to an increase in occupancy costs of 110 basis points partially offset by improvement in merchandise margin of 50 basis points.  The improvement in merchandise margin was due to an increase in initial markup and a reduced markdown rate over the prior year. On a dollar basis, occupancy costs for fiscal 2013 increased 4.2% as compared to the prior year, due to the timing of DXL store openings and the associated pre-opening costs as well as the timing of Casual Male XL store closings and lease exit costs.

For fiscal 2015, we are expecting that our occupancy costs, on a dollar-basis, will increase approximately $5.3 - $5.9 million over fiscal 2014.  Approximately half of the increase is the anticipated result of adding approximately 40 DXL stores to our store count in fiscal 2015.  The remaining anticipated increase is due to the $2.5 million lease termination payment we received in fiscal 2014, that resulted in lower occupancy costs for that year.  As a percentage of sales, occupancy costs will be approximately 30 basis points higher than fiscal 2014. We are expecting that our merchandise margins will improve by approximately 30 basis points. Accordingly, for fiscal 2015, we are expecting that gross margin will be 45.9% of sales and will be flat as compared to fiscal 2014.  

SELLING, GENERAL AND ADMINISTRATIVE EXPENSES

SG&A expenses as a percentage of sales for fiscal 2014, 2013 and 2012 were 42.2%, 43.7%, and 38.8%, respectively.

On a dollar basis, SG&A expenses for fiscal 2014 increased $5.7 million, or 3.4%, to $174.8 million as compared to SG&A expenses of $169.1 million in fiscal 2013. The increase in SG&A expenses of $5.7 million is principally due to a greater number of DXL stores open in fiscal 2014 as compared to fiscal 2013 and to a lesser extent, is due to increased store payroll to support the return to standard hours in our Casual Male XL stores.  Also contributing to the increase was an increase in incentive accruals and stock compensation expense partially offset by a decrease in marketing costs as compared to fiscal 2013. SG&A expenses for fiscal 2014 include approximately $4.0 million of DXL transition costs for increased payroll-related costs, such as pre-opening payroll, training and store operations as compared to $5.3 million for such transition costs in fiscal 2013.

34

SG&A expenses for fiscal 2013 increased $14.7 million, or 9.5%, to $169.1 million as compared to $154.4 million in fiscal 2012.  The increase of $14.7 million was principally due to increased marketing costs associated with our national marketing program, an accrual for executive severance–related costs of approximately $2.3 million and increased stock compensation of $1.1 million primarily related to our long-term incentive plan. These costs were partially offset by one less week of expenses of approximately $2.7 million in fiscal 2013 as compared to fiscal 2012, which was a 53-week year.

For fiscal 2015, we are expecting that our SG&A expenses will be approximately $181.5 million as we continue to grow our DXL concept. The approximate $6.7 million increase is primarily related to an increase in store payroll, payroll-related costs and other costs to support our growing DXL stores.  The planned increase for fiscal 2015 is anticipated to be partially offset by a decrease of $2.0 million in marketing costs.  Overall, we expect to limit our SG&A growth rates, except where necessary to support our growth activities or where there are unanticipated costs that are necessary to support our overall activities.

DEPRECIATION AND AMORTIZATION

Depreciation and amortization expense was $24.0 million for fiscal 2014, $20.8 million for fiscal 2013 and $15.5 million for fiscal 2012. The year-over-year increases in depreciation and amortization expense for both fiscal 2014 and fiscal 2013 are primarily related to the opening of 90 DXL stores since the end of fiscal 2012.   Included in depreciation and amortization is the amortization on our “Casual Male” trademark of $1.0 million, $1.6 million and $2.0 million for fiscal 2014, fiscal 2013 and fiscal 2012, respectively. Depreciation and amortization for fiscal 2015 is expected to be approximately $28.5 million.

INTEREST EXPENSE, NET

Net interest expense for fiscal 2014 was $2.1 million as compared to $1.0 million for fiscal 2013 and $0.6 million for fiscal 2012. Our interest costs have increased year-over-year primarily due to the increased capital costs associated with our DXL store openings.  We have funded a portion of our store growth with equipment financing, a new term loan and borrowings under our credit facility.  

Through the end of fiscal 2014, we have funded approximately $26.4 million of our capital expenditures through equipment financing loans.  In addition, during the third quarter of fiscal 2014, we entered into a $15.0 million 5-year term loan and also amended and extended our credit facility.  The proceeds from the term loan were used to reduce the outstanding borrowings under our credit facility.  See “Liquidity and Capital Resources” below for more discussion regarding our credit facility, equipment financings and term loan as well as our future liquidity needs.

For fiscal 2015, we expect our net interest costs to increase to approximately $3.8 million as a result of expected borrowings under our credit facility and our long-term debt.

INCOME TAXES

Pursuant to accounting rules, realization of our deferred tax assets, which relate principally to federal net operating loss carryforwards expiring from 2022 through 2034, is dependent on generating sufficient taxable income in the near term.

At the end of fiscal 2013, we entered a three-year cumulative loss and based on all positive and negative evidence at February 1, 2014, we recorded a charge of $51.3 million to establish a full valuation allowance against our net deferred tax assets.  Based on our results for fiscal 2014 and our earnings guidance for fiscal 2015, we believe that a full valuation allowance remains appropriate at this time.  

Our tax provision for fiscal 2014 represents an increase in our deferred tax liability for indefinite-lived intangibles as well as current state margin tax and foreign income tax.    

DISCONTINUED OPERATIONS

In the second quarter of fiscal 2014, we announced our intent to exit our direct business with Sears Canada. We ceased taking new orders and completed the run-off of operations through a final settlement with Sears during the fourth quarter of fiscal 2014. The loss for fiscal 2014 includes a charge, recorded in the second quarter of fiscal 2014, of approximately $0.8 million related primarily to inventory reserves and sales allowances as a result of our decision to exit the business. The operating results for the Sears Canada business have been reclassified to discontinued operations for all periods presented.  

Fiscal 2012 also includes the discontinued operations of our European direct business which we exited in the second quarter of fiscal 2012.  See Note J to the Notes to the Consolidated Financial Statements for additional disclosure regarding these discontinued operations.

35

NET INCOME (LOSS)

The net loss for fiscal 2014 was $(12.3) million, or $(0.25) per diluted share, as compared to $(59.8) million, or $(1.23) per diluted share, for fiscal 2013 and net income of $6.1 million, or $0.13 per diluted share, in fiscal 2012. (Certain amounts in the following table do not foot due to rounding)

SEASONALITY

A comparison of sales in each quarter of the past three fiscal years is presented below. The amounts shown are not necessarily indicative of actual trends, because such amounts also reflect the addition of new stores and the remodeling and closing of other stores during these periods. Consistent with the retail apparel industry, our business is seasonal. Generally, the majority of our operating income is generated in the fourth quarter as a result of the impact of the holiday selling season. A comparison of quarterly sales, gross profit, and net income per share for the past two fiscal years is presented in Note K of the Notes to the Consolidated Financial Statements.

LIQUIDITY AND CAPITAL RESOURCES

Our primary sources of liquidity are cash generated from operations and availability under our credit facility, which was most recently amended in October 2014, with Bank of America, N.A. (“Credit Facility”) and our term loan. Our current cash needs are primarily for working capital (essentially inventory requirements), capital expenditures and growth initiatives. As discussed below, our capital expenditures for fiscal 2015 are expected to be $38.0-$41.0 million, primarily related to the planned opening of approximately 40 new DXL stores and information technology projects. However, we expect to receive approximately $5.0-$6.0 million in tenant allowances to offset these capital expenditures. We expect to fund our store growth in fiscal 2015 primarily through earnings and borrowings from our Credit Facility. For fiscal 2015, we expect that our total debt at the end of fiscal 2015 will be approximately $72.0-$76.0 million.

36

We currently believe that our existing cash generated by operations together with our Credit Facility will be sufficient within current forecasts for us to meet our foreseeable liquidity requirements. As discussed below, during the third quarter of fiscal 2014, we entered into a $15.0 million 5-year term loan facility and also amended our current Credit Facility, increasing our maximum borrowing levels by $25.0 million.  The primary purpose for amending our Credit Facility and entering into this 5-year term loan was to increase our current availability and provide additional borrowing capacity as we continue to complete our DXL store roll-out.  The proceeds from the term loan were used to reduce borrowings under our Credit Facility.  As a result, while the composition of our debt has changed, our total debt levels at the end of fiscal 2014 were in line with our fiscal 2014 guidance.  

For fiscal 2014, free cash flow, which we define as cash flow from operating activities, less capital expenditures and discretionary store asset acquisitions, if any, improved by $2.1 million to $(27.1) million from $(29.2) million for fiscal 2013. This increase in free cash flow was due to a decrease in capital expenditures of $13.2 million related to an overall decrease in the square footage of new DXL stores. This decrease in capital expenditures was partially offset by a decrease of $11.1 million in cash flow from operations, primarily due to the timing of accounts payable associated with the earlier receipt of spring merchandise.

The following table sets forth financial data regarding our liquidity position at the end of the past three fiscal years:

Credit Facility

During the third quarter of fiscal 2014, we amended our Credit Facility with Bank of America, N.A., by executing the Second Amendment to the Sixth Amended and Restated Loan and Security Agreement. The Credit Facility provides for a maximum committed borrowing of $125 million (an increase from our prior credit facility of $100 million), which, pursuant to an accordion feature, may be increased to $175 million upon our request and the agreement of the lender(s) participating in the increase. The Credit Facility continues to include 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. The maturity date of the Credit Facility is October 29, 2019. Our Credit Facility is described in more detail in Note C to the Notes to the Consolidated Financial Statements.

Borrowings made pursuant to the Credit Facility bear interest at a rate equal to the base rate (determined as the highest of (a) Bank of America N.A.’s prime rate, (b) the Federal Funds rate plus 0.50% and (c) the one month ICE-LIBOR rate plus a varying percentage, based on our borrowing base, of 0.50%-0.75% for prime-based borrowings and 1.50%-1.75% for LIBOR-based borrowings.

We had outstanding borrowings of $19.4 million under the Credit Facility at January 31, 2015. Outstanding standby letters of credit were $0.9 million and outstanding documentary letters of credit were $2.2 million. The average monthly borrowing outstanding under the Credit Facility during fiscal 2014 was approximately $31.7 million, resulting in an average unused excess availability of approximately $66.7 million. Unused excess availability at January 31, 2015 was $77.9 million. Our obligations under the Credit Facility are secured by a lien on substantially all of our assets, excluding (i) a first priority lien held by the lenders of the Term Loan Facility described below on certain equipment of the Company and (ii) intellectual property.  

Equipment Financing Loans

Through the end of fiscal 2014, we have entered into twelve Equipment Security Notes (the “Notes”), whereby we borrowed an aggregate of $26.4 million. The Notes were issued pursuant to a Master Loan and Security Agreement with Banc of America Leasing & Capital, LLC, dated July 20, 2007 and most recently amended September 30, 2013. The Notes are secured by a security interest in all of our rights, title and interest in and to certain equipment. The Notes are for 48 months and accrue interest at fixed rates ranging from 3.07% to 3.50%. Principal and interest, in arrears, are payable monthly. We are subject to a prepayment penalty equal to 1% of the prepaid principal of the Notes until the first anniversary, 0.5% of the prepaid principal from the first anniversary until the second anniversary and no prepayment penalty thereafter. At January 31, 2015, the outstanding balance of the Notes was $19.4 million.

The proceeds from the Notes were used to fund partially the capital expenditures associated with our DXL store rollout.

37

Term Loan, Due 2019

During the third quarter of fiscal 2014, we entered into a term loan agreement, with respect to a new $15.0 million senior secured term loan facility with Wells Fargo Bank, National Association as administrative and collateral agent (the “Term Loan Facility”). The proceeds from the Term Loan Facility were used to repay borrowings under the Credit Facility. At January 31, 2015, the outstanding balance of the Term Loan Facility was $14.8 million.

The Term Loan Facility bears interest at a rate per annum equal to the greater of (a) 1.00% and (b) the one month LIBOR rate, plus 6.50%.  Interest payments are payable on the first business day of each calendar month, and increase by 2% following the occurrence and during the continuance of an “event of default,” as defined in the Term Loan Facility. The Term Loan Facility provides for quarterly principal payments on the first business day of each calendar quarter, which commenced the first business day of January 2015, in an aggregate principal amount equal to $250,000, subject to adjustment, with the balance payable on the termination date. The Term Loan Facility matures on October 29, 2019.

The Term Loan Facility includes usual and customary mandatory prepayment provisions for transactions of this type that are triggered by the occurrence of certain events.  In addition, the amounts advanced under the Term Loan Facility can be optionally prepaid in whole or part. All prepayments are subject to an early termination fee in the amount of: (a) 4% of the amount prepaid if the prepayment is prior to October 29, 2015; (b) 2% of the amount prepaid if the prepayment is after October 29, 2015, but prior to the October 29, 2016; and (c) 1% of the amount prepaid if the prepayment is after October 29, 2016, but prior to October 29, 2017. There is no prepayment penalty after October 29, 2017.  

It is secured by a first priority lien on certain of our equipment, and a second priority lien on substantially all of our remaining assets, excluding intellectual property.

INVENTORY

At January 31, 2015, total inventories increased to $115.2 million from $105.6 million at February 1, 2014. While inventory levels on a dollar basis were up 9.2% for fiscal 2014 when compared to the prior year, on a unit basis inventories increased only 5.0%. This change is due to an increase in the volume of branded apparel that we carry in our DXL stores, which has a higher carrying cost than our private label merchandise, as well as the timing of spring receipts.   At January 31, 2015, our clearance inventory, on a unit basis, represented 8.4% of our total inventory, as compared to 10.3% at February 1, 2014.  

OFF-BALANCE SHEET ARRANGEMENTS

We have no off-balance sheet arrangements as defined by 303(a)(4) of Regulation S-K.

CONTRACTUAL OBLIGATIONS

The following table summarizes our contractual obligations at January 31, 2015, and the effect such obligations are expected to have on our liquidity and cash flows in future periods (Certain amounts in the following table do not foot due to rounding):

38

CAPITAL EXPENDITURES

The following table sets forth the open stores and related square footage at January 31, 2015 and February 1, 2014, respectively: