DESTINATION XL GROUP, INC. - Quarter Report: 2017 July (Form 10-Q)

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

FORM 10-Q

(Mark One)

For the quarterly period ended July 29, 2017

OR

Commission File Number: 01-34219

DESTINATION XL GROUP, INC.

(Exact Name of Registrant as Specified in its Charter)

Registrant’s telephone number, including area code: (781) 828-9300

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, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

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

As of August 15, 2017, the registrant had 48,655,223 shares of common stock, $0.01 par value per share, outstanding.

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.

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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.

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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 28, 2017 included in the Company’s Annual Report on Form 10-K, which was filed with the Securities and Exchange Commission on March 20, 2017.

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 2017 is a 53-week period ending on February 3, 2018 and fiscal 2016 was a 52-week period ending on January 28, 2017.

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 has 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 July 29, 2017, the “Casual Male” trademark had a carrying value of $0.4 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 six months ended July 29, 2017, 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 July 29, 2017, the fair value approximated the carrying amount based upon terms available to the Company for borrowings with similar arrangements and remaining maturities.

The fair value of 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 is classified within Level 3 of the valuation hierarchy. See Intangibles above.

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

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 six months ended July 29, 2017 and July 30, 2016, 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. Store sales are defined as sales that originate and are fulfilled directly at the store level.  E-commerce sales are defined as sales that originate online, including those initiated online at the store level.

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.

Impairment of Long-Lived Assets

The Company reviews its long-lived assets for events or changes in circumstances that might indicate the carrying amount of the assets may not be recoverable. The Company assesses the recoverability of the assets by determining whether the carrying value of such assets over their respective remaining lives can be recovered through projected undiscounted future cash flows. The amount of impairment, if any, is measured based on projected discounted future cash flows using a discount rate reflecting the Company’s average cost of funds.

In the second quarter of fiscal 2017, the Company recorded an impairment charge of $1.7 million for the write-down of property and equipment.  The impairment charge related to a store where the carrying value exceeded fair value.  The fair value of these assets, based on Level 3 inputs, was determined using estimated discounted cash flows.  The impairment charge was included in Depreciation and Amortization on the Consolidated Statement of Operations for the second quarter and first six months of fiscal 2017.  There was no material impairment of assets in the second quarter and first six months of fiscal 2016.

Recently Adopted Accounting Pronouncements

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, with early adoption permitted.  The Company adopted this pronouncement as of January 29, 2017.  The adoption of this standard did not have a material impact on the Company’s Consolidated Financial Statements.

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 adopted this standard during the first quarter of fiscal 2017. The adoption of this standard did not have a material impact on the Company’s provision for income taxes or diluted earnings per share.  The Company has elected to adopt the guidance related to the presentation of excess tax benefits in its Consolidated Statements of Cash Flows on a prospective transition method.  Since there were no excess tax benefits for the six months ended July 29, 2017 or July 30, 2016, this election did not result in a change in presentation on the Consolidated Statement of Cash Flows.  In addition, the Company has elected to continue to estimate forfeitures at each grant.

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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 expects to adopt ASU 2014-09 in the first quarter of fiscal 2018 and will not adopt early.  The Company expects it will use the modified retrospective approach as a transition method and is making progress towards completing its assessment of the effect that ASU 2014-09 will have 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. While the Company is still evaluating the impact this pronouncement will have on its Consolidated Financial Statements, the Company expects a gross-up of its Consolidated Balance Sheets as a result of recognizing lease liabilities and right of use assets.  The extent of such gross-up is under evaluation.  

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.

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.

In May 2017, the FASB issued ASU 2017-09, “Compensation—Stock Compensation (Topic 718)”which provides clarity in order to reduce both (1) diversity in practice and (2) cost and complexity when applying the guidance in Topic 718, Compensation—Stock Compensation, to a change to the terms or conditions of a share-based payment award. Under the new guidance, modification accounting is required only if the fair value, the vesting conditions, or the classification of the award (as equity or liability) changes as a result of the change in terms or conditions. 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.

No other new accounting pronouncements, issued or effective during the first six months of fiscal 2017, have had or are expected to have a significant impact on the Company’s Consolidated Financial Statements.

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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 July 29, 2017, the Company had outstanding borrowings under the Credit Facility of $53.7 million, before unamortized debt issuance costs of $0.3 million. Outstanding standby letters of credit were $3.3 million and outstanding documentary letters of credit were $0.1 million. Unused excess availability at July 29, 2017 was $43.7 million. Average monthly borrowings outstanding under the Credit Facility during the first six months of fiscal 2017 were $58.6 million, resulting in an average unused excess availability of approximately $46.0 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 July 29, 2017, the Company’s prime-based interest rate was 4.75%. At July 29, 2017, the Company had approximately $47.0 million of its outstanding borrowings in LIBOR-based contracts with an interest rate of 2.69%. The LIBOR-based contracts expired on August 1, 2017. 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.

The fair value of the amount outstanding under the Credit Facility at July 29, 2017 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

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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 through 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.

3. Long-Term Incentive Plans

The following is a summary of the Company’s long-term incentive plans.  Beginning on August 4, 2016, all equity awards granted under long-term incentive plans are issued from the Company’s stockholder-approved 2016 Incentive Compensation Plan.  All prior awards were issued from the Company’s 2006 Incentive Compensation Plan, which expired on July 31, 2016.  See Note 4, Stock-Based Compensation.

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, was a supplemental performance-based incentive plan that was only effective if there was 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.  The performance targets under the 2013-2016 LTIP were not achieved at the end of fiscal 2016 and accordingly, the Wrap-Around Plan became effective.

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

The Wrap-Around Plan also provided for an opportunity to receive additional shares of restricted stock if the performance targets were achieved and the Company’s closing stock price was $6.75 or higher on the day earnings for fiscal 2016 were publicly released, which was March 20, 2017.  The stock did not achieve a minimum of $6.75, therefore, no additional award was earned.

Based on the operating results for fiscal 2016, the Company achieved 50.6% of its EBITDA target.  The minimum threshold for the Sales target was not achieved.  Accordingly, subsequent to year-end, in the first quarter of fiscal 2017, the Compensation Committee of the Board of Directors approved awards totaling $2.3 million, with a grant date of March 20, 2017.  On that date, the Company granted shares of restricted stock, with a fair value of approximately $1.0 million and cash awards totaling approximately $1.3 million.  All awards vested on July 28, 2017.  

On March 20, 2017, in conjunction with the grant of restricted stock awards, the Company reclassified $0.9 million of the liability accrual from “Accrued Expenses and Other Current Liabilities” to “Additional Paid-In Capital.” See the Consolidated Statement of Changes in Stockholders’ Equity.

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New 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, as amended February 1, 2017 (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.  

For the 2016-2017 Performance Period, the Compensation Committee established two performance targets under the 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.  

For the 2017-2018 Performance Period, the Compensation Committee established two performance targets under the LTIP (the “2017-2018 LTIP”), each weighted 50%.  The first target is Total Company Comparable Sales and will be measured based on a two-year stack, which is the sum of the Total Company Comparable Sales for fiscal 2017 and fiscal 2018.  The second target is a Modified ROIC, which is defined as Operating Income divided by Invested Capital (Total Debt plus Stockholders’ Equity).

All awards granted under both the 2016-2017 LTIP and 2017-2018 LTIP were 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 and 2017-2018 LTIP is estimated to be approximately $4.0 million and $4.2 million, respectively.  Approximately half of the compensation expense for each plan 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 second quarter of fiscal 2017, the Company had accrued approximately $0.3 million and $0.1 million in compensation expense related to the potential payout of performance awards under the 2016-2017 LTIP and 2017-2018 LTIP, respectively.

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 initial share reserve under the 2016 Plan, including the rollover of 525,538 available shares under our 2006 Plan was 5,725,538 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 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 to 1.9 basis. At July 29, 2017, the Company had 6,479,451 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 unless such award has been outstanding for a minimum period of one year from its date of grant.

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The following tables summarize the share activity and stock option activity for the Company’s 2006 Plan and 2016 Plan, on a combined basis, for the first six months of fiscal 2017:

Valuation Assumptions

For the first six months of fiscal 2017, the Company granted 484,558 shares of restricted stock, 782,357 RSUs and 43,467 shares of deferred stock. For the first six months of fiscal 2016, the Company granted 23,323 shares of deferred stock and 427,874 RSUs. There were no grants of stock options during the first six months of fiscal 2017 and fiscal 2016.  

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.

Non-Employee Director Compensation Plan

The Company granted 18,054 shares of common stock, with a fair value of approximately $49,428, to certain of its non-employee directors as compensation in lieu of cash in the first six months of fiscal 2017.

Stock Compensation Expense

The Company recognized total stock-based compensation expense of $0.8 million for both the first six months of fiscal 2017 and fiscal 2016.   The total compensation cost related to time-vested stock options, restricted stock and RSU awards not yet recognized as of July 29, 2017 was approximately $2.8 million, net of estimated forfeitures, which will be expensed over a weighted average remaining life of 24 months.  

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5. Earnings per Share

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

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 July 29, 2017, expire from October 22, 2017 to January 18, 2027.

There were no performance-based awards outstanding at July 29, 2017. For the second quarter and first six months of fiscal 2016, 941,082 shares of unvested performance-based restricted stock and 1,181,168 performance-based stock options were excluded from the Company’s computation of basic and diluted earnings per share. All outstanding performance-based awards expired unvested in March 2017 as a result of the Company not achieving performance targets in fiscal 2016.  

Shares of unvested time-based restricted stock of 53,333 at July 29, 2017 and 374,062 shares at July 30, 2016 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 LTIP plans and equity awards.

All 53,333 shares of restricted stock outstanding at July 29, 2017 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. Stock Repurchase Plan

On March 17, 2017, the Company’s Board of Directors approved a stock repurchase plan. Under the stock repurchase plan, the Company may purchase up to $12.0 million of its common stock through open market and privately negotiated transactions during fiscal 2017.  The timing and the amount of any repurchases of common stock will be determined based on the Company’s evaluation of market conditions and other factors. The stock repurchase program commenced in the first quarter of fiscal 2017 and will expire on February 3, 2018, but may be suspended, terminated or modified at any time for any reason.  The Company expects to finance the repurchases from operating funds and/or periodic borrowings on its Credit Facility.  Any repurchased common stock will be held as treasury stock and will be recorded on a trade-date basis.

Through July 29, 2017, the Company purchased 1,878,434 shares of common stock at an average price of $2.49 per share.  Approximately $7.3 million remains available under the stock repurchase plan.

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7. Income Taxes

At July 29, 2017, the Company had total deferred tax assets of approximately $83.9 million, total deferred tax liabilities of $13.5 million and a corresponding valuation allowance of $70.6 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 2017, the Company believes that a full allowance remains appropriate at this time.

As of July 29, 2017, the Company had net operating loss carryforwards of $148.7 million for federal income tax purposes and $88.5 million for state income tax purposes that are available to offset future taxable income through fiscal year 2037. 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 $2.6 million of net operating loss for tax purposes related to the Company’s operations in Canada.

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 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 second quarter and first six months of fiscal 2017 and fiscal 2016 primarily represents 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 July 29, 2017 was $3.0 million. This amount is directly associated with a prior year tax position related to exiting the Company’s direct business in Europe. 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.

8. Related Parties

Oliver Walsh was elected as a director at the Company’s Annual Meeting of Stockholders on August 3, 2017. Subsequent to the end of the second quarter of fiscal 2017, on August 17, 2017, Mr. Walsh entered into a temporary consulting agreement with the Company, agreeing to serve as the Company’s Interim Chief Marketing Officer through the Fall and Holiday selling seasons, while the Company searches for a new Chief Marketing Officer.  Pursuant to the terms of the temporary consulting agreement, Mr. Walsh is entitled to receive compensation at a rate of $7,000 per week plus reimbursement for all business and travel expenses.  Because of the related party relationship, the temporary consulting agreement was approved by the Company’s Audit Committee.

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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, selling, general and administrative expenses, store counts, inventory levels, capital expenditures, borrowings, interest costs, sales and earnings expectations for fiscal 2017 and beyond, the expected impact of inventory management improvements on inventory levels and working capital in fiscal 2017, the expected impact of investments in marketing on 2017 sales and longer term impact on customer acquisition and brand awareness, and the anticipated pace and number of store openings and closings in fiscal 2017 and anticipated impact of expanding into Canada or future growth. 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 28, 2017, included in our Annual Report on Form 10-K for the year ended January 28, 2017, as filed with the Securities and Exchange Commission on March 20, 2017 (our “Fiscal 2016 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 2016 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, maintain and build our brand awareness 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 July 29, 2017, we operated 206 Destination XL stores, 14 DXL outlet stores, 84 Casual Male XL retail stores, 33 Casual Male XL outlet stores and 5 Rochester Clothing stores. Our e-commerce site, DestinationXL.com, supports our stores, brands and product extensions.

Unless the context indicates otherwise, all references to “we,” “our,” “us” and “the Company” refer to Destination XL Group, Inc. and our consolidated subsidiaries. We refer to our fiscal years which end on February 3, 2018 and January 28, 2017 as “fiscal 2017” and “fiscal 2016,” respectively. Fiscal 2017 is a 53-week period and fiscal 2016 was a 52-week period.  

SEGMENT REPORTING

We report our operations as one reportable segment, Big & Tall Men’s Apparel.  We consider our retail and direct (e-commerce) 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.  

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As we disclosed at the end of fiscal 2016, with over 200 DXL stores open, we have transitioned to one comparable sales figure for the Company which includes stores and our e-commerce business.  We no longer provide comparable store sales on a discrete basis for our DXL format stores.     

In addition, 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 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 do not report comparable sales separately for our retail and e-commerce businesses.  However, as we invest in building our e-commerce platform, bringing a heightened digital focus to our Company, additional disclosure on our e-commerce growth as it relates to our current initiatives is important.  Beginning in the second quarter of fiscal 2017, we define store sales as sales that originate and are fulfilled directly at the store level.  E-commerce sales are defined as sales that originate online, including those initiated online at the store level.  This reclassification on how we define a store sale from an e-commerce sale had no effect on our previous disclosure or how we report total Company comparable sales.

RESULTS OF OPERATIONS

The following is a summary of results for the second quarter and first six months of fiscal 2017 as compared to the prior year’s second quarter and first six months, including EBITDA, which is a non-GAAP measure. Please see “Non-GAAP Financial Measures” below for a reconciliation of Net Income (Loss) to EBITDA.

Executive Summary

Although sales were below expectations for the second quarter, we did see sequential improvement from our prior two consecutive quarters.  Comparable sales for the second quarter grew 0.1%, which is an improvement from (2.4%) in the fourth quarter of fiscal 2016 and (2.1%) in the first quarter of fiscal 2017.  For the second quarter, we continued to experience a decline in store traffic and an overall weakness across the retail apparel environment.  However, despite this decrease in store traffic, we saw improvements in our sales productivity, with increases in conversion rates, units per transactions and dollars per transaction.  

We remain focused on improving brand awareness, driving traffic to our stores and growing our e-commerce business through a robust investment in both traditional and digital marketing programs. With our store base transformation complete, our focus is on building the DXL brand and driving sales to the growing men’s big & tall market through an integrated bricks and mortar and e-commerce strategy.  Through the end of the second quarter, we were ahead of our plan for new customer acquisition.  Continuing to build brand awareness is key to driving customer acquisition and long-term sales growth.  With only 4 out of 10 target customers identifying with our brand, customer acquisition is our top priority this year.  As discussed below under our Fiscal 2017 Outlook, we are planning to increase our marketing spend for fiscal 2017 by approximately $4.0 million to $29.0 million to further enhance our digital marketing initiatives and television ad spend.  We believe that this investment will benefit us in the long-term as we work to strengthen our customer base and build brand awareness.  

Despite the difficult retail apparel environment, we are pleased that our merchandise margins remained strong, only decreasing by 10 basis points during the second quarter and remaining flat to fiscal 2016 for the first six months of fiscal 2017.  As discussed below, our initiative to decrease inventory levels by improving timing of inventory receipts and in-stock positions resulted in a $9.0 million decrease in inventory levels as compared to last year’s second quarter and we achieved this with minimal impact to our merchandise margin.  

Our net loss for the second quarter of fiscal 2017 was $(3.7) million, or $(0.08) per diluted share, as compared to net income of $0.2 million, or $0.00 per diluted share, for the second quarter of fiscal 2016.  Included in net loss for the second quarter of fiscal 2017 was an impairment charge of approximately $1.7 million, or $0.04 per diluted share, for the write-down of certain store assets and an increase of approximately $1.1 million, or $0.02 per diluted share, in advertising costs.  

From a liquidity perspective, our cash flow from operations decreased by $4.8 million to $14.3 million. Free cash flow for the first six months of fiscal 2017 decreased by approximately $4.7 million, as compared to the first six months of fiscal 2016, partly due to an

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increase in marketing costs of $4.6 million.  For the year, we expect to generate positive free cash flow of $13.0 to $18.0 million, which we plan to use to reduce our outstanding debt while also making opportunistic repurchases of our common stock, pursuant to our stock repurchase program discussed below.  See “Non-GAAP Financial Measures” below for a reconciliation of free cash flow.

In the first six months of fiscal 2017, we opened a total of 15 stores as compared to 12 stores during the same period in fiscal 2016.We also opened two DXL retail stores in Ontario, Canada.  These two stores, which are included in the 15 opened during the first six months, mark our first Company-operated DXL stores located outside of the United States.  We believe that Canada provides a strategic growth opportunity for our DXL brand.  

Stock Repurchase Program

As discussed more fully below under “Liquidity and Capital Resources,” in March 2017 our Board of Directors approved a stock repurchase plan, pursuant to which we may purchase up to $12.0 million of our outstanding common stock during fiscal 2017.  During the first six months of fiscal 2017, we repurchased approximately 1.9 million shares at a total cost of approximately $4.7 million.  

Inventory Management Review

In fiscal 2016, we began our inventory optimization project in an effort to improve inventory receipt flow and procurement, tightening controls over the number of weeks of supply and refining our in-stock positions by sku level.  We expect these changes to result in a more optimized inventory structure and expect our inventory at the end of fiscal 2017 to be $10.0 to $14.0 million less than fiscal 2016.  This reduction in inventory is expected to improve our working capital position in fiscal 2017. At the end of the second quarter of fiscal 2017, we were ahead of plan having reduced inventory levels by $9.0 million, or a decrease of 7.4%, as compared to the end of the second quarter last year.  We do not believe these changes have jeopardized sales from out-of-stock positions in either our retail stores or in our direct business.  

Fiscal 2017 Outlook

Our primary objectives in fiscal 2017 are to grow our customer base, through a revitalized marketing program and digital enhancements, and to maintain a strong liquidity position by continuing to improve cash flow.  We have reinvested in our marketing initiatives to help drive brand awareness, store traffic and our digital presence.  We are increasing marketing expense for fiscal 2017 to approximately $29.0 million, an increase of approximately $4.0 million from previous guidance and an increase of approximately $10.8 million from last year. While we expect this will benefit sales in the second half of fiscal 2017, we strongly believe that this investment in marketing and customer acquisition is important for our long-term growth.  Accordingly, we are updating our guidance as it relates to gross margin, SG&A, EBITDA, earnings and liquidity for fiscal 2017.  We continue to expect to open 19 DXL retail stores and 1 DXL outlet store in fiscal 2017, while closing 16 Casual Male XL retail stores and 3 Casual Male XL outlet stores, the majority of which are in connection with the opening of the DXL retail and outlet stores in the same geographic markets. All DXL store growth for the year will be funded by cash from operations.  

For fiscal 2017, our outlook, based on a 53-week year, is as follows:

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Financial Summary

Sales

Total sales for the second quarter of fiscal 2017 increased 2.8% to $121.1 million from $117.9 million from the second quarter of fiscal 2016.  The increase of $3.3 million in total sales was due to non-comparable sales of $9.4 million and a comparable sales increase of $0.2 million, or 0.1%, partially offset by a decrease in sales from closed stores.  

For the first six months of fiscal 2017, sales increased $3.0 million, or 1.3%, as compared to the first six months of fiscal 2017.  The increase in sales was primarily due to non-comparable sales of $17.2 million, partially offset by sales from closed stores and a decrease of 0.9%, or $2.0 million, in comparable store sales.  

Our end-of-rack customer grew to 46.1% of our bottoms business from 44.6% in the second quarter of fiscal 2016.  Our end-of-rack customer, with a waist size of 46 inches or less, shops 52% more often than our customer with a waist size of 48 inches or more and, on an annual basis, spends twice as much.  

As discussed above, with our transformation of our store base complete, we are focused on growing our e-commerce business through an integrated strategy. We are implementing several initiatives to enhance our digital presence and provide our customers with improved functionality and increased touchpoints across all of our e-commerce platforms with the objective of growing and retaining our customer base.  On a trailing twelve-month basis, e-commerce sales as a percentage of net sales were 20.5% at the end of the second quarter of fiscal 2017 as compared to 19.4% at the end of the second quarter of the prior year.

Gross Profit Margin

For the second quarter of fiscal 2017, our gross margin rate, inclusive of occupancy costs, was 46.1% as compared to a gross margin rate of 46.5% for the second quarter of fiscal 2016. Our merchandise margins decreased 10 basis points over the second quarter of last year and occupancy costs increased 30 basis points.  The decrease in merchandise margin was primarily related to an increase in promotional markdowns related to our inventory productivity initiatives as compared to the prior year’s second quarter.  The increase of 30 basis points in occupancy costs is due partly to the timing of store openings during the first six months and also to the deleveraging of occupancy costs to sales.

For the first six months of fiscal 2017, our gross margin rate, inclusive of occupancy costs, was 45.7% as compared to a gross margin rate of 46.3% for the first six months of fiscal 2016.  The decrease of 70 basis points was due to a 70 basis point increase in occupancy costs, primarily due to the timing of earlier store openings during the first six months of fiscal 2017 as compared to fiscal 2016.  On a dollar basis, occupancy costs for the first six months of fiscal 2017 increased approximately 5.6% over the prior year’s first six months, primarily as a result of an increase of 3.3% in total square footage.

Merchandise margins for the first six months of fiscal 2017 were flat with the prior year.  As discussed above, our inventory initiatives have resulted in a 7.4% decrease in inventory levels from a year ago, however, we have been able to successfully maintain a consistent merchandise margin.  

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Selling, General and Administrative Expenses

As a percentage of sales, SG&A expenses for the second quarter of fiscal 2017 were 40.5% as compared to 39.3% for the second quarter of fiscal 2016. For the first six months of fiscal 2017 SG&A expenses as a percentage of sales were 41.6% as compared to 38.8% for the first six months of fiscal 2016.  On a dollar basis, SG&A increased by $2.8 million and $7.6 million for the second quarter and first six months of fiscal 2017, respectively.  The increase in the second quarter and first six months was principally due to an increase of $1.1 million and $4.6 million, respectively, in advertising expense. As discussed above, we are increasing our investment in our marketing initiatives to help drive brand awareness, store traffic and our digital presence. The remainder of the increase was due to increases in store payroll and other supporting costs associated with a greater DXL store base.    

Depreciation and Amortization

Depreciation and amortization for the second quarter of fiscal 2017 increased $2.1 million to $9.6 million as compared to $7.5 million for the second quarter of fiscal 2016.  The increase primarily relates to an impairment charge of $1.7 million taken in the second quarter of fiscal 2017 to write-down certain store assets.  The remainder of the increase was due to the continued store growth associated with our DXL retail and outlet stores.

For the first six months of fiscal 2017, depreciation and amortization was $17.4 million as compared to $14.9 million for the first six months of fiscal 2016.  The increase of $2.5 million includes the $1.7 million impairment charge taken in the second quarter of fiscal 2017.

Interest Expense, Net

Net interest expense for the second quarter and first six months of fiscal 2017 of $0.8 million and $1.6 million, respectively, was relatively flat as compared to the comparable periods of the prior year.  As a result of our inventory initiatives undertaken to improve liquidity, we expect interest costs for fiscal 2017 will be similar to fiscal 2016 levels.  

Income Taxes

At July 29, 2017, we had total deferred tax assets of $83.9 million, total deferred tax liabilities of $13.5 million and a corresponding valuation allowance of $70.6 million. The deferred tax assets included approximately $56.8 million of net operating loss carryforwards and approximately $4.9 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 2017, we believe that a full valuation allowance continues to remain appropriate at this time.

Our tax provisions for the second quarter and first six months of fiscal 2017 and fiscal 2016 primarily represent current state margin tax and foreign income tax.

Net Income (Loss)

Results for the second quarter and first six months of fiscal 2017 include an impairment charge of $1.7 million, or $0.04 per diluted share, associated with write-down of store assets.

For the second quarter of fiscal 2017, we had a net loss of $(3.7) million, or $(0.08) per diluted share, compared with net income of $0.2 million, or $0.00 per diluted share, for the second quarter of fiscal 2016. For the first six months of fiscal 2017, we have a net loss of $(9.8) million, or $(0.20) per diluted share, compared with net income of $0.4 million, or $0.01 per diluted share.  

On a non-GAAP basis, assuming a normalized tax rate for both periods, adjusted net loss per share for the second quarter and first six months of fiscal 2017 was $(0.05) per diluted share and $(0.12) per diluted shares, respectively, as compared to adjusted net income of $0.00 per diluted share and $0.01 per diluted share for the second quarter and first six months of fiscal 2016.  

Inventory

At July 29, 2017, total inventory was $112.3 million compared to $117.4 million at January 28, 2017 and $121.3 million at July 30, 2016. The 7.4% decrease of $9.0 million from July 30, 3016 was due to inventory initiatives implemented in fiscal 2016 to improve timing of receipts and reduce weeks of supply on hand. At July 29, 2017, our clearance inventory represented 7.5% of our total inventory, as compared to 7.7% at July 30, 2016.  

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.

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LIQUIDITY AND CAPITAL RESOURCES

Our primary sources of liquidity are cash generated from operations and availability under our credit facility with Bank of America, N.A., which was most recently amended in October 2014 (“Credit Facility”). Our current cash needs are primarily for working capital (essentially inventory requirements), capital expenditures, growth initiatives, and, as discussed further below, our stock repurchase program, which was announced in March 2017.

As discussed below, our capital expenditures for fiscal 2017 are expected to be approximately $22.0 million, primarily related to the planned opening of approximately 19 new DXL retail and 1 outlet stores and information technology projects. However, we expect to receive approximately $5.0 million in tenant allowances to offset these capital expenditures. We expect to fund this store growth and stock repurchase program in fiscal 2017 primarily through cash flow from operations, with periodic borrowings from our Credit Facility. 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 2017, we expect cash flow from operating activities of $35.0 million to $40.0 million (including tenant allowances), and positive free cash flow of $13.0 to $18.0 million that will be used to reduce outstanding debt and purchase shares of the Company’s common stock as part of its stock repurchase program.  

For the first six months of fiscal 2017, free cash flow decreased by $4.7 million to $0.6 million from $5.3 million for the first six months of fiscal 2016. This decrease in free cash flow was due to a decrease in earnings, primarily due to the $4.6 million increase in marketing expense as compared to the prior year.

The following is a summary of our total debt outstanding at July 29, 2017 with the associated unamortized debt issuance costs:  

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 $53.7 million under the Credit Facility at July 29, 2017. At July 29, 2017, outstanding standby letters of credit were $3.3 million and outstanding documentary letters of credit were $0.1 million.  The average monthly borrowing outstanding under the Credit Facility during the first six months ended July 29, 2017 was approximately $58.6 million, resulting in an average unused excess availability of approximately $46.0 million. Unused excess availability at July 29, 2017 was $43.7 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.

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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 through 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.

Capital Expenditures

The following table sets forth the open stores and related square footage at July 29, 2017 and July 30, 2016, respectively:

Below is a summary of store openings and closings from January 28, 2017 to July 29, 2017: