DESTINATION XL GROUP, INC. - Quarter Report: 2016 October (Form 10-Q)

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

Quarterly Report Pursuant to Section 13 or 15(d)

of the Securities Exchange Act of 1934

For the Quarterly Period Ended October 29, 2016

Commission File Number 01-34219

DESTINATION XL GROUP, INC.

(Exact name of registrant as specified in its charter)

(781) 828-9300

(Registrant’s telephone

number, including area code)

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  ☒    No   ☐

Indicate by check mark whether the registrant has submitted electronically 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  ☒    No  ☐

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 Exchange Act).    Yes  ☐    No  ☒

The number of shares of the registrant’s common stock outstanding as of November 11, 2016 was 50,823,803.

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements.

DESTINATION XL GROUP, INC.

CONSOLIDATED BALANCE SHEETS

(In thousands, except share data)

(Unaudited)

The accompanying notes are an integral part of the consolidated financial statements.

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DESTINATION XL GROUP, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

(In thousands, except per share data)

(Unaudited)

The accompanying notes are an integral part of the consolidated financial statements.

3

DESTINATION XL GROUP, INC.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

(In thousands)

(Unaudited)

The accompanying notes are an integral part of the consolidated financial statements.

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DESTINATION XL GROUP, INC.

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY

(In thousands)

(Unaudited)

The accompanying notes are an integral part of the consolidated financial statements.

5

DESTINATION XL GROUP, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

(Unaudited)

The accompanying notes are an integral part of the consolidated financial statements.

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DESTINATION XL GROUP, INC.

Notes to Consolidated Financial Statements

1. Basis of Presentation

In the opinion of management of Destination XL Group, Inc., a Delaware corporation (formerly known as Casual Male Retail Group, Inc. and, collectively with its subsidiaries, referred to as the “Company”), the accompanying unaudited consolidated financial statements contain all adjustments necessary for a fair presentation of the interim financial statements. These financial statements do not include all disclosures associated with annual financial statements and, accordingly, should be read in conjunction with the notes to the Company’s audited consolidated financial statements for the fiscal year ended January 30, 2016 included in the Company’s Annual Report on Form 10-K, which was filed with the Securities and Exchange Commission on March 18, 2016.

The information set forth in these statements may be subject to normal year-end adjustments. The information reflects all adjustments that, in the opinion of management, are necessary to present fairly the Company’s results of operations, financial position and cash flows for the periods indicated. The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. The Company’s business historically has been seasonal in nature, and the results of the interim periods presented are not necessarily indicative of the results to be expected for the full year.

The Company’s fiscal year is a 52- or 53- week period ending on the Saturday closest to January 31. Fiscal 2016 and fiscal 2015 are 52-week periods ending January 28, 2017 and January 30, 2016, respectively.

Segment Information

The Company reports its operations as one reportable segment, Big & Tall Men’s Apparel, which consists of two principal operating segments: its retail business and its direct business. The Company considers its operating segments to be similar in terms of economic characteristics, production processes and operations, and have therefore aggregated them into a single reporting segment, consistent with its omni-channel business approach. The direct operating segment includes the operating results and assets for LivingXL^® and ShoesXL^®.

Intangibles

At October 29, 2016, the “Casual Male” trademark had a carrying value of $0.7 million and is considered a definite-lived asset. The Company is amortizing the remaining carrying value on an accelerated basis, consistent with projected cash flows through fiscal 2018, its estimated remaining useful life.

The Company’s “Rochester” trademark is considered an indefinite-lived intangible asset and has a carrying value of $1.5 million. During the first nine months ended October 29, 2016, no event or circumstance occurred which would cause a reduction in the fair value of the Company’s reporting units, requiring interim testing of the Company’s “Rochester” trademark.

Fair Value of Financial Instruments

ASC Topic 825, Financial Instruments, requires disclosure of the fair value of certain financial instruments. ASC Topic 820, “Fair Value Measurements and Disclosures,” defines fair value, establishes a framework for measuring fair value and enhances disclosures about fair value measurements.

The valuation techniques utilized are based upon observable and unobservable inputs. Observable inputs reflect market data obtained from independent sources, while unobservable inputs reflect internal market assumptions. These two types of inputs create the following fair value hierarchy:

Level 1 – Quoted prices in active markets for identical assets or liabilities.

Level 2 – Observable inputs other than Level 1 prices such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the related assets or liabilities.

Level 3 – Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of assets or liabilities.

The Company utilizes observable market inputs (quoted market prices) when measuring fair value whenever possible.

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The fair value of long-term debt is classified within Level 2 of the valuation hierarchy. At October 29, 2016, the fair value approximates the carrying amount based upon terms available to the Company for borrowings with similar arrangements and remaining maturities.

The fair value of indefinite-lived assets, which consists of the Company’s “Rochester” trademark, is measured on a non-recurring basis in connection with the Company’s annual impairment test. The fair value of the trademark is determined using a projected discounted cash flow analysis based on unobservable inputs and are classified within Level 3 of the valuation hierarchy. See Intangibles above.

The carrying amounts of cash and cash equivalents, accounts receivable, accounts payable, accrued expenses and short-term borrowings approximate fair value because of the short maturity of these instruments.

Accumulated Other Comprehensive Income (Loss) - (“AOCI”)

Other comprehensive income (loss) includes amounts related to foreign currency and pension plans and is reported in the Consolidated Statements of Comprehensive Income (Loss). Other comprehensive income and reclassifications from AOCI for the three and nine months ended October 29, 2016 and October 31, 2015, respectively, were as follows:

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Revenue Recognition

Revenue from the Company’s retail business is recorded upon purchase of merchandise by customers, net of an allowance for sales returns. Revenue from the Company’s direct business is recognized at the time a customer order is delivered, net of an allowance for sales returns. Revenue is recognized by the operating segment that fulfills a customer’s order.

Stock-based Compensation

All share-based payments, including grants of employee stock options and restricted stock, are recognized as an expense in the Consolidated Statements of Operations based on their fair values and vesting periods. The fair value of stock options is determined using the Black-Scholes valuation model and requires the input of subjective assumptions. These assumptions include estimating the length of time employees will retain their vested stock options before exercising them (the “expected term”), the estimated volatility of the Company’s common stock price over the expected term and the number of options that will ultimately not complete their vesting requirements (“forfeitures”). The Company reviews its valuation assumptions at each grant date and, as a result, is likely to change its valuation assumptions used to value employee stock-based awards granted in future periods. The values derived from using the Black-Scholes model are recognized as an expense over the vesting period, net of estimated forfeitures. The estimation of stock-based awards that will ultimately vest requires significant judgment. Actual results and future changes in estimates may differ from the Company’s current estimates.

Recently Issued Accounting Pronouncements

In May 2014, the FASB issued ASU 2014-09, “Revenue from Contracts with Customers,” which supersedes the revenue recognition requirements in ASC 605, “Revenue Recognition,” as well as various other sections of the ASC, such as, but not limited to, ASC 340-20, “Other Assets and Deferred Costs - Capitalized Advertising Costs”. The core principle of ASU 2014-09 is that an entity should recognize revenue in a way that depicts the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. ASU 2014-09 will be effective for fiscal years, and interim periods within those years, beginning after December 15, 2017, and is to be applied either retrospectively to each prior reporting period presented or with the cumulative effect recognized at the date of initial adoption as an adjustment to the opening balance of retained earnings (or other appropriate components of equity or net assets on the balance sheet). Early adoption is permitted after December 15, 2016. The Company is currently evaluating the impact of the adoption of ASU No. 2014-09 on its Consolidated Financial Statements.

In July 2015, the FASB issued ASU 2015-11, "Inventory (Topic 330): Simplifying the Measurement of Inventory," which applies to inventory that is measured using first-in, first-out ("FIFO") or average cost. Under the updated guidance, an entity should measure inventory that is within scope at the lower of cost and net realizable value, which is the estimated selling price in the ordinary course of business, less reasonably predictable costs of completion, disposal and transportation. This ASU is effective for annual and interim periods beginning after December 15, 2016, and should be applied prospectively with early adoption permitted at the beginning of an interim or annual reporting period. The Company does not expect the adoption of this pronouncement to have a material impact on its Consolidated Financial Statements.

In February 2016, the FASB issued ASU 2016-02, “Leases (Topic 842),” which will require an entity to recognize lease assets and lease liabilities on its balance sheet and will increase disclosure requirements on its leasing arrangements.  The ASU is effective for annual periods beginning after December 15, 2018, and interim periods therein.  Early adoption is permitted. In the financial statements in which the ASU is first applied, leases shall be measured and recognized at the beginning of the earliest comparative period presented with an adjustment to equity. The Company is currently evaluating the impact this pronouncement will have on its Consolidated Financial Statements.  

In March 2016, the FASB issued ASU 2016-04, “Liabilities—Extinguishments of Liabilities: Recognition of Breakage for Certain Prepaid Stored-Value Products,” which amends exempting gift cards and other prepaid stored-value products from the guidance on extinguishing financial liabilities. Rather, they will be subject to breakage accounting consistent with the new revenue guidance in Topic 606. However, the exemption only applies to breakage liabilities that are not subject to unclaimed property laws or that are attached to segregated bank accounts (e.g., consumer debit cards).  The ASU is effective for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years. Early adoption is permitted. The Company does not expect the adoption of this pronouncement to have a material impact on its Consolidated Financial Statements.

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In March 2016, the FASB issued ASU 2016-09, “Compensation - Stock Compensation (Topic 718) - Improvements to Employee Share-Based Payment Accounting,” which simplifies several aspects of the accounting for share-based payment transactions, including the income tax consequences, classification of awards, and classification on the statement of cash flows. The standard is effective for fiscal years beginning after December 15, 2016, including interim periods within those fiscal years. The Company does not expect that the adoption of this pronouncement will have a material impact on its Consolidated Financial Statements.

In August 2016, the FASB issued ASU 2016-15, “Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments,” which reduces the existing diversity in practice in how certain cash receipts and cash payments are presented and classified in the statement of cash flows under Topic 230.  The ASU is effective for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years.  The Company does not expect the adoption of this pronouncement to have a material impact on its Consolidated Financial Statements.

In October 2016, the FASB issued ASU 2016-16, “Income Taxes(Topic 740): Intra-Entity Transfer of Assets Other Than Inventory,” which reduces the existing diversity in practice in how income tax consequences of an intra-entity transfer of an asset other than inventory should be recognized. The amendments in ASU 2016-16 require an entity to recognize such income tax consequences when the intra-entity transfer occurs rather than waiting until such time as the asset has been sold to an outside party.  The ASU is effective for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years.  The Company does not expect the adoption of this pronouncement to have a material impact on its Consolidated Financial Statements.

No other new accounting pronouncements, issued or effective during the first nine months of fiscal 2016, have had or are expected to have a significant impact on the Company’s Consolidated Financial Statements.

2. Debt

Credit Agreement with Bank of America, N.A.

On October 30, 2014, the Company amended its credit facility with Bank of America, N.A, effective October 29, 2014, by executing the Second Amendment to the Sixth Amended and Restated Loan and Security Agreement (as amended, the “Credit Facility”).

The Credit Facility provides for maximum committed borrowings of $125 million. The Credit Facility includes, pursuant to an accordion feature, the ability to increase the Credit Facility by an additional $50 million upon the request of the Company and the agreement of the lender(s) participating in the increase. The Credit Facility includes a sublimit of $20 million for commercial and standby letters of credit and a sublimit of up to $15 million for swingline loans. The Company’s ability to borrow under the Credit Facility is determined using an availability formula based on eligible assets. The maturity date of the Credit Facility is October 29, 2019. The Company’s obligations under the Credit Facility are secured by a lien on substantially all of its assets, excluding (i) a first priority lien held by the lenders of the Term Loan Facility on certain equipment of the Company described below and (ii) intellectual property.

At October 29, 2016, the Company had outstanding borrowings under the Credit Facility of $62.7 million, before unamortized debt issuance costs of $0.4 million. Outstanding standby letters of credit were $2.9 million and outstanding documentary letters of credit were $0.5 million. Unused excess availability at October 29, 2016 was $52.4 million. Average monthly borrowings outstanding under the Credit Facility during the first nine months of fiscal 2016 were $51.9 million, resulting in an average unused excess availability of approximately $58.4 million. The Company’s ability to borrow under the Credit Facility is determined using an availability formula based on eligible assets, with increased advance rates based on seasonality.  Pursuant to the terms of the Credit Facility, if the Company’s excess availability under the Credit Facility fails to be equal to or greater than the greater of (i) 10% of the Loan Cap (defined in the Credit Facility as the lesser of the revolving credit commitments at such time or the borrowing base at the relevant measurement time) and (ii) $7.5 million, the Company will be required to maintain a minimum consolidated fixed charge coverage ratio of 1.0:1.0 in order to pursue certain transactions, including but not limited to, stock repurchases, payment of dividends and business acquisitions.

Borrowings made pursuant to the Credit Facility will 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% or (c) the annual ICE-LIBOR rate (“LIBOR”) for the respective interest period) plus a varying percentage, based on the Company’s borrowing base, of 0.50%-0.75% for prime-based borrowings and 1.50%-1.75% for LIBOR-based borrowings. The Company is also subject to an unused line fee of 0.25%. At October 29, 2016, the Company’s prime-based interest rate was 4.0%. At October 29, 2016, the Company had approximately $56.0 million of its outstanding borrowings in LIBOR-based contracts with an interest rate of 1.96%. The LIBOR-based contracts expired on October 31, 2016. When a LIBOR-based borrowing expires, the borrowings revert back to prime-based borrowings unless the Company enters into a new LIBOR-based borrowing arrangement.

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The fair value of the amount outstanding under the Credit Facility at October 29, 2016 approximated the carrying value.

Long-Term Debt

Components of long-term debt are as follows:

Equipment Financing Loans

Pursuant to a Master Loan and Security Agreement with Banc of America Leasing & Capital, LLC, dated July 20, 2007 and amended on September 30, 2013 (the “Master Agreement”), the Company entered into twelve equipment security notes between September 2013 and June 2014 (in aggregate, the “Notes”), whereby the Company borrowed an aggregate of $26.4 million. The Notes are for a term of 48 months and accrue interest at fixed rates ranging from 3.07% to 3.50%. Principal and interest are paid monthly, in arrears.

The Notes are secured by a security interest in all of the Company’s rights, title and interest in and to certain equipment. The Company was subject to prepayment penalties through the second anniversary of each note.  The Company is no longer subject to any prepayment penalties. The Master Agreement includes default provisions that are customary for financings of this type and are similar and no more restrictive than the Company’s existing Credit Facility.

Term Loan

On October 30, 2014, the Company entered into a term loan agreement with respect to a new $15 million senior secured term loan facility with Wells Fargo Bank, National Association as administrative and collateral agent (the “Term Loan Facility”). The effective date of the Term Loan Facility is October 29, 2014 (the “Effective Date”). The proceeds from the Term Loan Facility were used to repay borrowings under the Credit Facility.

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 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 1% of the amount prepaid prior to October 29, 2017.  There is no prepayment penalty after October 29, 2017.    

The Term Loan Facility matures on October 29, 2019. It is secured by a first priority lien on certain equipment of the Company, and a second priority lien on substantially all of the remaining assets of the Company, excluding intellectual property.

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3. Long-Term Incentive Plans

The following is a summary of the Company’s long-term incentive plans.  All equity awards previously granted under these long-term incentive plans were issued from the Company’s 2006 Incentive Compensation Plan, which expired on July 31, 2016.  As of August 4, 2016, any future grants of equity awards will be issued from the Company’s stockholder-approved 2016 Incentive Compensation Plan.  See Note 4, Stock-Based Compensation.

2013-2016 LTIP

The 2013-2016 Long-Term Incentive Plan (“2013-2016 LTIP”) was approved in the second quarter of fiscal 2013.  Pursuant to the terms of the 2013-2016 LTIP, on the date of grant, each participant was granted an unearned and unvested award equal in value to four times his/her annual salary multiplied by the applicable long-term incentive program percentage, which is 100% for the Company’s Chief Executive Officer, 70% for its senior executives and 50% for other participants in the plan, which the Company refers to as the “Projected Benefit Amount.” Each participant was granted 50% of the Projected Benefit Amount in shares of restricted stock, 25% in stock options and the remaining 25% in cash.

Of the total Projected Benefit Amount, 50% is subject to time-based vesting and 50% is subject to performance-based vesting. The time-vested portion of the award (half of the shares of restricted stock, options and cash) vests in three installments with 20% of the time-vested portion having vested at the end of fiscal 2014, 40% having vested at the end of fiscal 2015 and the remaining 40% vesting at the end of fiscal 2016.

In fiscal 2016, the Company must achieve revenue of at least $600 million and an operating margin of not less than 8.0% for participants to receive 100% vesting of the performance-based portion of the Projected Benefit Amount. If the Company does not meet the performance target at the end of fiscal 2016, but the Company is able to achieve revenue equal to or greater than $510 million at the end of fiscal 2016 and the operating margin is not less than 8.0%, then the participants will receive a pro-rata portion of the performance-based award based on minimum sales of $510 million (50% payout) and $600 million (100% payout).

Assuming the Company achieves the performance target and 100% of the Projected Benefit Amount vests, excluding estimated forfeitures, the total potential value of all awards over this four-year period, as of October 29, 2016, would be approximately $19.0 million. Approximately half of the compensation expense relates to the time-vested awards, which is being expensed over forty-four months, based on the respective vesting dates. As the performance targets were not deemed probable at October 29, 2016, no expense for the performance-based awards has been recognized through October 29, 2016.

2016 Long-Term Incentive Wrap-Around Plan

The 2016 Long-Term Incentive Wrap-Around Plan (the “Wrap-Around Plan”), which was approved in the fourth quarter of fiscal 2014, is a supplemental performance-based incentive plan that is only effective if there is no vesting of the performance-based awards under the 2013-2016 LTIP and, as a result, all performance-based awards under that plan are forfeited. Under the Wrap-Around Plan, if the target level performance metrics for fiscal 2016 are met, participants will be eligible to receive a payout equal to 80% of the dollar value of the performance-based compensation they were eligible to receive under the 2013-2016 LTIP.  If the target level performance metrics for fiscal 2016 under the Wrap-Around Plan are exceeded, the greatest payout that participants will be eligible to receive is 100% of the dollar value of the performance-based compensation they were eligible to receive under the 2013-2016 LTIP.  Any award earned will be paid 50% in cash and 50% in shares of restricted stock.

The performance target under the Wrap-Around Plan consists of two metrics, Sales and EBITDA, with threshold (50%), target (80%) and maximum (100%) payout levels.  Each metric is weighted as 50% of the total performance target.  However, in order for there to be any payout under either metric, EBITDA for fiscal 2016 must be equal to or greater than the minimum threshold.    

The Wrap-Around Plan also provides for an opportunity to receive additional shares of restricted stock if the performance targets are achieved and the Company’s closing stock price is $6.75 or higher on the day earnings for fiscal 2016 are publicly released. If the Company’s stock price is $6.75, the payout in restricted shares will be increased by 20% and if the stock price is $7.25 or higher, the payout in restricted shares will be increased by 30%, with a pro-rata payout between $6.75 and $7.25.  The portion of the award payable in cash is not affected by the stock price. All awards granted pursuant to the Wrap-Around Plan will not vest until the last day of the second quarter of fiscal 2017.

Assuming that the Company achieves the performance target at target levels under the Wrap-Around Plan, and further assuming that the Company’s stock price is greater than $7.25, at the time the Company’s earnings are publicly released, the compensation expense associated with this Wrap-Around Plan is estimated to be approximately $8.4 million.  Through the end of the third quarter of fiscal 2016, the Company has accrued approximately $2.0 million in compensation expense related to the potential payout of performance awards under the Wrap-Around Plan.

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2016-2017 Long-Term Incentive Plan

With the 2013-2016 LTIP and Wrap-Around Plan expiring at the end of fiscal 2016, on March 15, 2016, the Compensation Committee approved the Destination XL Group, Inc. Long-Term Incentive Plan (the “new LTIP”).

Under the terms of the new LTIP, each year the Compensation Committee will establish performance targets which will cover a two-year performance period (each a “Performance Period”), thereby creating overlapping Performance Periods.  Each participant in the plan will be entitled to receive an award based on that participant’s “Target Cash Value” which is defined as the participant’s annual base salary (on the participant’s effective date) multiplied by his or her long-term incentive program percentage, which is 100% for the Company’s Chief Executive Officer, 70% for its senior executives and 25% for other participants in the plan.  Because of the overlapping two-year Performance Periods, the Target Cash Value for any award is based on one year of annual salary, as opposed to two years to avoid doubling an award payout in any given fiscal year.

For each participant, 50% of the Target Cash Value is subject to time-based vesting and 50% is subject to performance-based vesting.  The time-vested portion of the award will vest in two installments with 50% of the time-vested portion vesting on April 1 following the fiscal year end which marks the end of the applicable Performance Period and 50% vesting on April 1 the succeeding year. The performance-based vesting is subject to the achievement of the performance target(s) for the applicable Performance Period.   Any performance award granted will vest on August 31 following the end of the applicable Performance Period.  

The Compensation Committee established two performance targets for the 2016-2017 Performance Period under the new LTIP (the “2016-2017 LTIP”), each weighted 50%. The first target is EBITDA for fiscal 2017, defined as earnings before interest, taxes, depreciation and amortization, and the second target is “DXL Comparable Store Marginal Cash-Over-Cash Return”, defined as the aggregate of each comparable DXL store’s four-wall cash flow for fiscal 2017 divided by the aggregate capital investment, net of any tenant allowance, for each comparable DXL store.  

All awards granted under the 2016-2017 LTIP will be in restricted stock units (RSUs). Assuming that the Company achieves the performance target at target levels and all time-vested awards vest, the compensation expense associated with the 2016-2017 LTIP is estimated to be approximately $4.2 million.  Approximately half of the compensation expense, or $2.1 million, relates to the time-vested RSUs, which are being expensed over thirty-six months, based on the respective vesting dates. With respect to the performance-based component, RSUs will be granted at the end of the performance period if the performance targets are achieved. Through the end of the third quarter of fiscal 2016, the Company has accrued approximately $0.5 million in compensation expense related to the potential payout of performance awards under the 2016-2017 LTIP.

4. Stock-Based Compensation

Through the end of the second quarter of fiscal 2016, the Company’s 2006 Incentive Compensation Plan (as amended and restated effective as of August 1, 2013, the “2006 Plan”) was the only stockholder-approved plan. The 2006 Plan expired on July 31, 2016. In the third quarter of fiscal 2016, at the Company’s 2016 Annual Meeting of Stockholders held August 4, 2016, the Company’s stockholders approved the adoption of the 2016 Incentive Compensation Plan (the “2016 Plan”).

2016 Plan

The share reserve under the 2016 Plan is 5,200,000 shares of our common stock. A grant of a stock option award or stock appreciation right will reduce the outstanding reserve on a one-for-one basis, meaning one share for every share granted.  A grant of a full-value award, including, but not limited to, restricted stock, restricted stock units and deferred stock, will reduce the outstanding reserve by a fixed ratio of 1.9 shares for every share granted.  

In addition to the initial share reserve of 5,200,000 shares, the 525,538 shares that remained available under our 2006 Plan were added and became available for issuance under the 2016 Plan on August 4, 2016.  In accordance with the terms of the 2016 Plan, any shares outstanding under the 2006 Plan at August 4, 2016 that subsequently terminate, expire or are canceled for any reason without having been exercised or paid are added back and become available for issuance under the 2016 Plan, with options and stock appreciation rights being added back on a one-for-one basis and full-value awards being added back on a 1 to1.9 basis.  Accordingly, an additional 237,952 shares were added to share availability under the 2016 Plan during the third quarter of fiscal 2016. At October 29, 2016, the Company had 5,940,761 shares available under the 2016 Plan.  

The 2016 Plan is administered by the Compensation Committee. The Compensation Committee is authorized to make all determinations with respect to amounts and conditions covering awards.  Options are not granted at a price less than fair value on the date of the grant. Except with respect to 5% of the shares available for awards under the 2016 Plan, no award will become exercisable or otherwise forfeitable unless such award has been outstanding for a minimum period of one year from its date of grant.

The following tables summarize the stock option activity and share activity under the 2016 Plan for the first nine months of fiscal 2016:

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2006 Incentive Compensation Plan

The following tables summarize the stock option activity and share activity under the 2006 Plan for the first nine months of fiscal 2016:

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Valuation Assumptions

For the first nine months of fiscal 2016, the Company granted 8,522 stock options, 3,834 shares of restricted stock, 431,270 RSUs and 23,570 shares of deferred stock. For the first nine months of fiscal 2015, the Company granted 15,790 shares of deferred stock and 10,000 shares of restricted stock. There were no grants of stock options during the first nine months of fiscal 2015.  

Unless otherwise specified by the Compensation Committee, RSUs, restricted stock and deferred stock are valued using the closing price of the Company’s common stock on the day immediately preceding the date of grant.

The fair value of each option granted is estimated on the date of grant using the Black-Scholes option-pricing model.  The following assumptions were used for grants for the first nine months of fiscal 2016.  There were no grants of stock options for the first nine months of fiscal 2015:

Non-Employee Director Stock Purchase Plan

The Company granted 10,403 shares of common stock, with a fair value of approximately $51,804, to certain of its non-employee directors as compensation in lieu of cash in the first nine months of fiscal 2016.

Stock Compensation Expense

For the first nine months of fiscal 2016 and fiscal 2015, the Company recognized total stock-based compensation expense of $1.1 million and $1.6 million, respectively. The total compensation cost related to time-vested stock options, restricted stock and RSU awards not yet recognized as of October 29, 2016 is approximately $1.8 million, net of estimated forfeitures, which will be expensed over a weighted average remaining life of 21 months. At October 29, 2016, the Company had $7.0 million of unrecognized stock-based compensation expense, net of estimated forfeitures, related to its performance-based stock options and restricted stock under its 2013-2016 LTIP. As discussed above, the Company will begin recognizing compensation if, and when, achievement of the performance targets under the 2013-2016 LTIP becomes probable.

5. Earnings per Share

The following table provides a reconciliation of the number of shares outstanding for basic and diluted earnings per share:

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The following potential common stock equivalents were excluded from the computation of diluted earnings per share in each period because the exercise price of such options was greater than the average market price per share of common stock for the respective periods or because of the unearned compensation associated with either stock options, restricted stock units, restricted or deferred stock had an anti-dilutive effect.

The above options, which were outstanding at October 29, 2016, expire from October 22, 2017 to September 11, 2026.

Excluded from the Company’s computation of basic and diluted earnings per share for the third quarter and first nine months of fiscal 2016 were 893,621 shares of unvested performance-based restricted stock and 1,125,317 performance-based stock options. For the third quarter and first nine months of fiscal 2015, 933,486 shares of unvested performance-based restricted stock and 1,162,047 performance-based stock options were excluded from the Company’s computation of basic and diluted earnings per share for both periods. Performance-based awards will be included in the computation of basic and diluted earnings per share if, and when, the respective performance targets are achieved. In addition, shares of unvested time-based restricted stock of 356,227 for the third quarter and first nine months of fiscal 2016 and 729,581 shares for the third quarter and first nine months of fiscal 2015 were excluded from the computation of basic earnings per share and will continue to be excluded until such shares vest. See Note 3, Long-Term Incentive Plans, for a discussion of the Company’s 2013-2016 LTIP and the respective performance targets.

Although the shares of performance-based and time-based restricted stock issued in connection with the 2013-2016 LTIP are not considered outstanding or common stock equivalents for earnings per share purposes until certain vesting and performance thresholds are achieved, all 1,249,848 shares of restricted stock outstanding at October 29, 2016 are considered issued and outstanding. Each share of restricted stock has all of the rights of a holder of the Company’s common stock, including, but not limited to, the right to vote and the right to receive dividends, which rights are forfeited if the restricted stock is forfeited.

6. Income Taxes

At October 29, 2016, the Company had total deferred tax assets of approximately $80.0 million, total deferred tax liabilities of $15.5 million and a corresponding valuation allowance of $64.7 million.

In the fourth quarter of fiscal 2013, the Company entered into a three-year cumulative loss position and based on forecasts at that time, the Company expected the cumulative three-year loss to increase as of the end of fiscal 2014. Management determined that this represented significant negative evidence at February 1, 2014. While the Company has projected it will return to profitability, generate taxable income and ultimately emerge from a three-year cumulative loss, based on a consideration of all positive and negative evidence as of February 1, 2014, the Company established a full allowance against its net deferred tax assets. Based on the Company’s forecast for fiscal 2016, the Company believes that a full allowance remains appropriate at this time.

As of October 29, 2016, the Company had net operating loss carryforwards of $140.4 million for federal income tax purposes and $81.8 million for state income tax purposes that are available to offset future taxable income through fiscal year 2036. Additionally, the Company has alternative minimum tax credit carryforwards of $2.3 million, which are available to further reduce income taxes over an indefinite period. Additionally, the Company has $0.1 million and $2.2 million of net operating loss for tax purposes related to the Company’s operations in Hong Kong and Canada, respectively, though both are expected to expire largely unutilized. Included in the federal and state net operating loss carryforwards are stock compensation deductions of approximately $9.3 million and $4.0 million, respectively, the tax benefit from which, if realized, will be credited to additional paid-in capital.

The utilization of net operating loss carryforwards and the realization of tax benefits in future years depends predominantly upon having taxable income. Under the provisions of the Internal Revenue Code, certain substantial changes in the Company’s ownership

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may result in a limitation on the amount of net operating loss carryforwards and tax credit carryforwards which may be used in future years.

The Company’s tax provision for the first nine months of fiscal 2016 and fiscal 2015 represents an increase in our deferred tax liability for indefinite-lived intangibles as well as current state margin tax and foreign income tax.

A tax position is recognized as a benefit only if it is “more likely than not” that the tax position would be sustained in a tax examination, with a tax examination being presumed to occur. The amount recognized is the largest amount of tax benefit that is greater than 50% likely of being realized on examination. For tax positions not meeting the “more likely than not” test, no tax benefit is recorded. The charge for taxation is based on the results for the year as adjusted for items that are non-assessable or disallowed. The charge is calculated using tax rates that have been enacted or substantively enacted by the balance sheet date. Pursuant to Topic 740, “Income Taxes”, the Company will recognize the benefit from a tax position only if it is more likely than not that the position would be sustained upon audit based solely on the technical merits of the tax position. The unrecognized tax benefit at October 29, 2016 was $3.0 million. This amount is directly associated with a prior year tax position related to exiting the European direct business. The amount of unrecognized tax benefit has been presented as a reduction in the reported amounts of its federal and state net operating loss carryforwards. It is the Company’s policy to record interest and penalties on unrecognized tax benefits as income taxes; however, no penalties or interest have been accrued on this liability because the carryforwards have not yet been utilized.

The Company is subject to U.S. federal income tax as well as income tax of multiple state and foreign jurisdictions. The Company has concluded all U.S. federal income tax matters for years through fiscal 2001, with remaining fiscal years subject to income tax examination by federal tax authorities.

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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

FORWARD-LOOKING STATEMENTS

Certain statements contained in this Quarterly Report on Form 10-Q constitute “forward-looking statements” within the meaning of the United States Private Securities Litigation Reform Act of 1995. In some cases, forward-looking statements can be identified by the use of forward-looking terminology such as “may,” “will,” “estimate,” “intend,” “plan,” “continue,” “believe,” “expect” or “anticipate” or the negatives thereof, variations thereon or similar terminology. The forward-looking statements contained in this Quarterly Report are generally located in the material set forth under the heading “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” but may be found in other locations as well, and include statements regarding cash flows, gross profit margins, marketing costs, store counts, capital expenditures, borrowings, sales and earnings expectations for fiscal 2016 and beyond, the expected impact of inventory management improvements on working capital in fiscal 2016 and the anticipated pace and number of store openings and closings in fiscal 2016. These forward-looking statements generally relate to plans and objectives for future operations and are based upon management’s reasonable estimates of future results or trends. The forward-looking statements in this Quarterly Report should not be regarded as a representation by us or any other person that our objectives or plans will be achieved. The following discussion of our financial condition and results of operations should be read in conjunction with the unaudited consolidated financial statements and notes to those statements included elsewhere in this Quarterly Report and our audited consolidated financial statements for the year ended January 30, 2016, included in our Annual Report on Form 10-K for the year ended January 30, 2016, as filed with the Securities and Exchange Commission on March 18, 2016 (our “Fiscal 2015 Annual Report”).

Numerous factors could cause our actual results to differ materially from such forward-looking statements. We encourage readers to refer to the “Risk Factors” section in Part I, Item 1A of our Fiscal 2015 Annual Report, that sets forth certain risks and uncertainties that may have an impact on future results and direction of our Company, including, without limitations, risks relating to the execution of our corporate strategy, and our ability to grow our market share, predict customer tastes and fashion trends, forecast sales growth trends and compete successfully in our market.

All subsequent written and oral forward-looking statements attributable to us or to persons acting on our behalf are expressly qualified in their entirety by the foregoing. These forward-looking statements speak only as of the date of the document in which they are made. We disclaim any obligation or undertaking to provide any updates or revisions to any forward-looking statement to reflect any change in our expectations or any change in events, conditions or circumstances in which the forward-looking statement is based.

BUSINESS SUMMARY

Destination XL Group, Inc., together with our consolidated subsidiaries (the “Company”), is the largest specialty retailer of big & 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^®, DXL Outlets, Casual Male XL^®, Casual Male XL Outlets, Rochester Clothing, ShoesXL^® and LivingXL^®. At October 29, 2016, we operated 188 Destination XL stores, 108 Casual Male XL retail stores, 12 DXL outlet stores, 39 Casual Male XL outlet stores and 5 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,” “us” and “the Company” refer to Destination XL Group, Inc. and our consolidated subsidiaries. We refer to our fiscal years which end on January 28, 2017 and January 30, 2016 as “fiscal 2016” and “fiscal 2015,” respectively. Both fiscal years are 52-week periods.

SEGMENT REPORTING

We report our operations as one reportable segment, Big & Tall Men’s Apparel.  We consider our retail and direct businesses, 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

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.  As part of our omni-channel initiatives, the majority of our retail stores have the capability of fulfilling online orders if merchandise is

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not available in the warehouse.  As a result, we continue to see more transactions that begin online but are ultimately completed at the store level.  Similarly, if a customer visits a store and the item is out of stock, the associate can order the item through our website.  A customer also has the ability to order online and pick-up in store.  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.  

RESULTS OF OPERATIONS

The following is a summary of results for the third quarter and first nine months of fiscal 2016, including EBITDA, which is a non-GAAP measure. Please see “Non-GAAP Financial Measures” below for a reconciliation of Net Loss to EBITDA.

Executive Summary

The strength of our DXL concept has continued to drive our sales growth and improvement in profitability through the third quarter of fiscal 2016.  During the quarter, our 158 comparable DXL stores had a sales increase of 2.3%, against a prior year comparable sales increase of 9.2%, contributing to our 14^th consecutive quarter of positive total Company comparable sales.  We believe that the uncertainty in the economic and political climate, that continued to impact the retail industry during the quarter, has contributed to slower than expected top-line growth for us.  Given these macroeconomic issues, as well as a delay in the arrival of cold weather and our anticipated decrease in advertising in the fourth quarter, we are revising our guidance for fiscal 2016, see “Fiscal 2016 Outlook” below.  

Although our sales for fiscal 2016 are less than expected, we continue to show year-over-year growth in sales, profitability and liquidity.  The net loss for the third quarter of fiscal 2016 was $(0.09) per diluted share as compared to a net loss of $(0.11) per diluted share for the third quarter of fiscal 2015.  We also remain focused on improving EBITDA, which increased $1.4 million for the third quarter of fiscal 2016, resulting in a year-to-date improvement of 30.1% to $20.8 million for the first nine months of fiscal 2016.  

From a liquidity perspective, our cash flow from operations improved by $13.1 million.  This improvement, with a $3.6 million decrease in capital expenditures, resulted in a $16.7 million improvement in non-GAAP free cash flow.  Fiscal 2016 is a pivotal year for our Company where capital expenditures for DXL stores will be fully funded from free cash flow and we begin to pay down our debt levels for the first time in four years. See “Non-GAAP Financial Measures” below for a reconciliation of free cash flow.

During the first nine months of fiscal 2016, we opened 22 DXL retail stores and 3 DXL outlet stores, while closing 17 Casual Male XL retail stores and 1 Casual Male XL outlet.  For fiscal 2016, we plan to open a total of 25 DXL retail stores and 4 DXL outlet stores.  In addition, we expect to close 29 Casual Male XL retail stores and 4 Casual Male XL outlet stores.

Inventory Management Review

At the beginning of fiscal 2016, we initiated a review of our inventory levels in our distribution center.  We also launched a review of our inventory procurement and management functions.  As a result of this review process we identified several improvements that we are implementing to streamline operations at our distribution center, including tighter controls over the number of merchandise weeks of supply and improvements in inventory receipt flow and procurement. As reflected in our “Fiscal 2016 Outlook”, we expect these changes to result in a more optimized inventory structure that will improve our working capital position in fiscal 2016.  We do not believe these changes will jeopardize sales from out-of-stock positions in either our retail stores or in our direct business.  

Fiscal 2016 Outlook

We are reducing our full year Sales and EBITDA guidance, because of our decision not to pursue a television campaign in the fourth quarter of fiscal 2016. The lack of television exposure, coupled with the delayed arrival of cold weather is leading us to a more cautious outlook for sales and EBITDA. In the fourth quarter of fiscal 2016, our marketing efforts will focus on radio, digital and social media and we will continue to evaluate the use of television in the future.  This decision is expected to have a short-term negative impact on sales in the fourth quarter of fiscal 2016, but with a reduction in marketing costs, our earnings guidance, on a GAAP basis, of breakeven to $(0.09) per share remains unchanged and we continue to expect to generate positive free cash flow in fiscal 2016:  

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Financial Summary

Sales

For the third quarter of fiscal 2016, total sales were $101.9 million as compared to $99.6 million for the third quarter of fiscal 2015. The increase of $2.3 million in total sales was primarily due to an increase in non-comparable store sales of $6.9 million, a 0.9% increase in comparable sales of $0.8 million, and an increase of $0.1 million of other revenue, partially offset by $5.5 million in lost sales from closed and converted stores.  

Our comparable sales increase for the third quarter of $0.8 million was driven by our 158 comparable DXL retail stores which increased 2.3%, or $1.1 million, against a comparable increase of 9.2% for the third quarter of fiscal 2015.  DXL comparable store growth was primarily due to a 1.8% increase in the number of transactions and an increase in dollars per transaction.  Sales per square foot for our DXL retail stores continued to grow to $182, on a rolling 12-month basis, at the end of the third quarter as compared with $174 per square foot for the rolling 12-month period at the end of the third quarter last year.  

During the third quarter of fiscal 2016, we opened our 200^th DXL store toward our target of 400 DXL stores.  As we discussed above, store traffic is down across the retail industry, which we believe is due in part to the macroeconomic issues the country is currently facing.  This has resulted in a slower than expected increase in our sales growth. However, our non-comparable DXL stores are outperforming plan and return on investment hurdles, which is also a strong indicator that our DXL brand awareness is growing and the performance of our store openings continue to get stronger.

Our end-of-rack customer grew to 44.5% of our bottoms business from 42.9% in the third quarter of fiscal 2015.  Our end-of-rack customer, with a waist size of 46 inches or less, shops 41% more often than our customer with a waist size of 48 inches or more and, on an annual basis, spends twice as much.  

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For the first nine months of fiscal 2016, total sales were $327.6 million as compared to $318.2 million for the first nine months of fiscal 2015.  The increase in sales of $9.4 million was due to a 1.8% increase in comparable sales of $5.2 million, an increase in non-comparable store sales of $23.0 million and an increase of $0.6 million in other revenue, partially offset by $19.4 million in lost sales from closed and converted stores.  Comparable sales for our 158 DXL retail stores increased 4.2%, or $6.6 million for the first nine months of fiscal 2016.

Gross Profit Margin

For the third quarter of fiscal 2016, our gross margin rate, inclusive of occupancy costs, was 44.4% as compared to a gross margin rate of 45.0% for the third quarter of fiscal 2015. The 60 basis point decrease was due to a decrease of 30 basis points in merchandise margin and an increase in occupancy costs of 30 basis points.  The 30 basis point decrease in merchandise margin was primarily due to a shift in the timing of clearance markdowns in fiscal 2015 to the fourth quarter of fiscal 2015.  The increase in occupancy costs was due to occupancy expense increasing at a greater percentage than sales.  On a dollar basis, occupancy costs for the third quarter of fiscal 2016 increased approximately 4.0% over the prior year’s third quarter, primarily as a result of an increase in total square footage.

For the first nine months of fiscal 2016, our gross margin rate, inclusive of occupancy costs, was 45.7% as compared to 46.2% for the first nine months of fiscal 2015. This 50 basis point decrease was due to a decrease in merchandise margins of 50 basis points, due to the timing of clearance merchandise discussed above.  On a dollar basis, occupancy costs for the first nine months of fiscal 2016 increased 2.9% over the prior year.

Selling, General and Administrative Expenses

As a percentage of sales, SG&A expenses for the third quarter of fiscal 2016 were 40.6% as compared to 42.6% for the third quarter of fiscal 2015. For the first nine months of fiscal 2016, SG&A expenses were 39.4% as compared to 41.2% for the first nine months of fiscal 2015. On a dollar basis, SG&A decreased by $1.0 million and $2.0 million for the third quarter and first nine months of fiscal 2016, respectively.  These decreases were primarily due to decreases in advertising expense and incentive accruals partially offset by increases in store payroll and healthcare costs.

For the third quarter and first nine months of fiscal 2016, pre-opening payroll, training and other incremental costs to support our DXL store openings were $1.0 million and $2.4 million, respectively, as compared to the $1.4 million and $3.3 million for the third quarter and first nine months of fiscal 2015, respectively.

Depreciation and Amortization

Depreciation and amortization for the third quarter of fiscal 2016 increased $0.4 million to $7.5 million as compared to $7.1 million for the third quarter of fiscal 2015.  For the first nine months of fiscal 2016, depreciation and amortization increased $1.9 million to $22.4 million, as compared to $20.5 million in the prior year period. The increase in depreciation and amortization is due to the continued store growth associated with our DXL retail and outlet stores.

Interest Expense, Net

Net interest expense for the third quarter and first nine months of fiscal 2016 of $0.8 million and $2.3 million, respectively, were relatively flat as compared the comparable periods of the prior year.  As a result of our inventory initiatives undertaken to improve liquidity, we expect interest costs for fiscal 2016 will be similar to fiscal 2015 levels.  We expect that our total debt outstanding at the end of fiscal 2016 will be $60.0 to $66.0 million, a decrease from $68.1 million at the end of fiscal 2015. See “Liquidity and Capital Resources” for more discussion regarding our current Credit Facility, long-term debt and future liquidity needs.

Income Taxes

At October 29, 2016, we had total deferred tax assets of $80.0 million, total deferred tax liabilities of $15.5 million and a corresponding valuation allowance of $64.7 million. The deferred tax assets include approximately $50.0 million of net operating loss carryforwards and approximately $5.3 million of deferred gain on our sale-leaseback and, to a lesser extent, other book/tax timing differences.

At the end of fiscal 2013, we established a full valuation allowance against our deferred tax assets.  Based on our earnings guidance for fiscal 2016, we believe that a full valuation allowance remains appropriate at this time.

Our tax provision, for the first nine months of fiscal 2016 and fiscal 2015, represents an increase in our deferred tax liability for indefinite-lived intangibles as well as current state margin tax and foreign income tax.

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Net Loss

For the third quarter of fiscal 2016, we had a net loss of $(4.5) million, or $(0.09) per diluted share, compared with a net loss of $(5.5) million, or $(0.11) per diluted share, for the third quarter of fiscal 2015. On a non-GAAP basis, assuming a normalized tax rate for both periods, adjusted net loss per share for the third quarter of fiscal 2016 was $(0.05) per diluted share as compared to $(0.07) per diluted share for the third quarter of fiscal 2015.  

For the first nine months of fiscal 2016, the net loss was $(4.0) million, or $(0.08) per diluted share, compared with a net loss of $(7.0) million, or $(0.14) per diluted share, for the first nine months of fiscal 2015.  On a non-GAAP basis, assuming a normalized tax rate for both periods, adjusted net loss per share for the first nine months of fiscal 2016 was ($0.05) per diluted share as compared to ($0.08) per diluted share for the first nine months of fiscal 2015.

Inventory

At October 29, 2016, total inventory was $128.2 million compared to $125.0 million at January 30, 2016 and $133.3 million at October 31, 2015. The 3.8% decrease of $5.1 million from October 31, 2015 is due to inventory initiatives implemented in fiscal 2016 to improve timing of receipts and reduce weeks of supply on hand. Clearance merchandise remained unchanged at 9.0% of inventory at the end of the third quarter of fiscal 2016 as compared to the end of the third quarter of fiscal 2015.

SEASONALITY

Historically, and consistent with the retail industry, we have experienced seasonal fluctuations as it relates to our operating income and net income. Traditionally, a significant portion of our operating income and net income is generated in the fourth quarter, as a result of the “Holiday” season.

LIQUIDITY AND CAPITAL RESOURCES

Our primary sources of liquidity are cash generated from operations and availability under our Credit Facility, described below. 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 2016 are expected to be $30.0 million, primarily related to the planned opening of approximately 25 DXL retail stores and 4 DXL outlet stores and information technology projects. However, we expect to receive approximately $7.0 to $8.0 million in tenant allowances to offset these capital expenditures.

We expect to fund our store growth in fiscal 2016 primarily through earnings.  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.

For fiscal 2016, we expect to generate free cash flow before DXL capital expenditures of $24.6 million to $28.6 million.  We will reinvest that cash to fund our DXL store growth in fiscal 2016. After DXL capital expenditures, we expect positive free cash flow of $4.0 to $8.0 million.  We expect that our total debt at the end of fiscal 2016 will be approximately $60.0 to $66.0 million, a decrease from $68.1 million at the end of fiscal 2015.

For the first nine months of fiscal 2016, free cash flow improved by $16.7 million to $(13.7) million from $(30.4) million for the first nine months of fiscal 2015. This improvement in free cash flow was primarily due to the improvement in operating results, lower capital expenditures and less inventory as compared to fiscal 2015. See “Non-GAAP Financial Measures” below regarding non-GAAP free cash flow.

The following is a summary of our total debt outstanding at October 29, 2016 with the associated unamortized debt issuance costs:  

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Credit Facility

Our credit facility with Bank of America, N.A., effective October 29, 2014 (our “Credit Facility”) provides for a maximum committed borrowing of $125.0 million, which, pursuant to an accordion feature, may be increased to $175.0 million upon our request and the agreement of the lender(s) participating in the increase. The Credit Facility includes a sublimit of $20.0 million for commercial and standby letters of credit and a sublimit of up to $15.0 million for swingline loans. The maturity date of the Credit Facility is October 29, 2019. Our Credit Facility is described in more detail in Note 2 of the Notes to the Consolidated Financial Statements included in this Quarterly Report.

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 annual ICE-LIBOR (“LIBOR”) rate for the respective interest period) 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 $62.7 million under the Credit Facility at October 29, 2016. At October 29, 2016, outstanding standby letters of credit were $2.9 million and outstanding documentary letters of credit were $0.5 million.  The average monthly borrowing outstanding under the Credit Facility during the first nine months ended October 29, 2016 was approximately $51.9 million, resulting in an average unused excess availability of approximately $58.4 million. Unused excess availability at October 29, 2016 was $52.4 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 on certain of our equipment described below and (ii) intellectual property.  

Equipment Financing Loans

We have entered into twelve Equipment Security Notes (the “Notes”), whereby we borrowed an aggregate of $26.4 million. The Notes, which were issued between September 2013 and June 2014, 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 on 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, are payable monthly, in arrears. The Company was subject to prepayment penalties through the second anniversary of each note.  The Company is no longer subject to any prepayment penalties.

Term Loan, Due 2019

We have a $15.0 million senior secured term loan facility with Wells Fargo Bank, National Association as administrative and collateral agent (the “Term Loan Facility”). 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, which matures on October 29, 2019, 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 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 1% of the amount prepaid if the prepayment is prior to October 29, 2017.  There is no prepayment penalty after October 29, 2017.  

The Term Loan Facility 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.

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Capital Expenditures

The following table sets forth the open stores and related square footage at October 29, 2016 and October 31, 2015, respectively: