DESTINATION XL GROUP, INC. - Annual Report: 2019 (Form 10-K)

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-K

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)

OF THE SECURITIES EXCHANGE ACT OF 1934

DESTINATION XL GROUP, INC.

(Exact name of registrant as specified in its charter)

(781) 828-9300

(Registrant’s telephone number, including area code)

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

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

None

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

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

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

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).    Yes  ☒    No  ☐

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

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or emerging growth company. See the definitions of "large accelerated filer," "accelerated filer," "non-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 Act).    Yes  ☐    No  ☒

As of August 3, 2018, the aggregate market value of the Common Stock held by non-affiliates of the registrant was approximately $71.2 million, based on the last reported sale price on that date. Shares of Common Stock held by each executive officer and director and by certain persons who own 10% or more of the outstanding Common Stock have been excluded on the basis that such persons may be deemed to be affiliates. This determination of affiliate status is not necessarily determinative for other purposes.

The registrant had 49,522,233 shares of Common Stock, $0.01 par value, outstanding as of March 15, 2019.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the Proxy Statement for the 2019 Annual Meeting of Stockholders are incorporated by reference into Part III.

DESTINATION XL GROUP, INC.

Index to Annual Report on Form 10-K

Year Ended February 2, 2019

2

PART I.

Certain statements contained in this Annual Report on Form 10-K (this “Annual Report”) constitute “forward-looking statements,” including forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. In some cases, forward-looking statements can be identified by the use of forward-looking terminology such as “may,” “will,” “estimate,” “intend,” “plan,” “continue,” “believe,” “expect” or “anticipate” or the negatives thereof, variations thereon or similar terminology. The forward-looking statements contained in this Annual Report are generally located under the headings “Business” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” but may be found in other locations as well, and include statements regarding the impact of strategic initiatives on our future growth and profitability; expected annualized savings from our 2018 restructuring; store counts, comparable sales growth and free cash flow expectations for fiscal 2019; and objective of achieving 10% EBITDA margin over time. These forward-looking statements generally relate to plans and objectives for future operations and are based upon management’s reasonable estimates of future results or trends. The forward-looking statements in this Annual Report should not be regarded as a representation by us or any other person that the objectives or plans of the Company will be achieved. Numerous factors could cause our actual results to differ materially from such forward-looking statements, including, without limitation, risks relating to the execution of our corporate strategy and ability to grow our market share, and those risks and uncertainties set forth below under Item 1A, Risk Factors. Readers are encouraged to review these risks and uncertainties carefully.

These forward-looking statements speak only as of the date of the document in which they are made. We disclaim any obligation or undertaking to provide any updates or revisions to any forward-looking statement to reflect any change in its expectations or any change in events, conditions or circumstances in which the forward-looking statement is based.

Item 1. Business

Destination XL Group, Inc., together with its subsidiaries (the “Company”), is the largest specialty retailer of big & tall men’s apparel with retail locations in the United States, London, England and Toronto, Canada. We operate under the trade names of Destination XL^®, DXL^®, DXL Men’s Apparel, DXL outlets, Casual Male XL^®, Casual Male XL outlets and Rochester Clothing. We currently operate 216 DXL retail stores, 15 DXL outlet stores, 66 Casual Male XL retail stores, 30 Casual Male XL outlet stores and 5 Rochester Clothing stores and a direct business at www.dxl.com. In fiscal 2018, we launched a wholesale business unit focused on product development and distribution relationships with key retailers offering both private label and co-branded men’s big & tall apparel lines. Unless the context indicates otherwise, all references to “we,” “our,” “ours,” “us” and “the Company” refer to Destination XL Group, Inc. and our consolidated subsidiaries. We refer to our fiscal years ended February 2, 2019, February 3, 2018 and January 28, 2017 as “fiscal 2018”, “fiscal 2017” and “fiscal 2016,” respectively. Fiscal 2017 was a 53-week year and fiscal 2018 and fiscal 2016 were 52-week years.

OUR INDUSTRY

The big & tall men’s apparel market includes pants with a waist size of 42” and greater, as well as tops sized 1XL and greater. Growth in this segment has historically been driven by rapidly changing market demographics. We believe that we can increase our market share by catering to the broader target market, attracting customers from various income, age and lifestyle segments and offering the widest selection of sizes and styles that fit well. An opportunity also exists for market share growth from the lower-size range of our market, that is, men with a 38” to 46” waist size, which we define as our “end-of-rack” customers. These sizes are usually at the high end of the size range for most men’s apparel retailers and, as a result, the selection is usually limited at such retailers.  

HISTORY

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

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

3

trained associates providing both personal attention and on-site tailoring. With the initial success of this store format, we then made a similar change to our e-commerce business in fiscal 2011 when we launched our DestinationXL.com website (now dxl.com).

OUR BUSINESS

We operate as an omni-channel retailer of big & tall men’s apparel.  Through our multiple brands, which include both branded apparel and private-label, we aim to provide a premium, personalized shopping experience, whether in-store or online, with a broad range of merchandise at varying price points, catering from the value-oriented customer to the luxury-oriented customer. Our objective is to appeal to all of our customers by providing a good, better, best array of product assortments in all primary lifestyles with multiple and convenient ways to shop.

Our DXL retail stores and e-commerce site, dxl.com, cater to all income demographics and offer our customers merchandise to fit a variety of lifestyles from casual to business, young to mature, in all price ranges and in all large sizes from XL and up. In addition, a complete offering of shoes in sizes 10W to 18W is available at dxl.com.  Our Casual Male XL stores primarily carry moderate-priced branded and private label casual sportswear and dresswear, while our Rochester Clothing stores carry fine quality, designer and branded menswear. We also operate Casual Male XL outlets and DXL outlets for our value-oriented customer. Through online marketplaces, we are able to extend our reach, by providing a select offering of our merchandise to new customers who may not be current DXL customers.  In addition to our retail channels, in fiscal 2018, we also launched a wholesale channel of our business, working with key retailers.  

What is so unique about our business is managing the number of sizes offered to our customers to ensure proper fit and optimizing our in-stock position throughout each season. Our best-selling pant has 49 size combinations as compared to an average retailer who may only have 15 different size combinations.  We maintain a consolidated inventory across all channels that enables us to manage our in-stock position of all sizes effectively, ultimately improving customer service. Moreover, our planning and allocation methodologies, with respect to store assortment planning, help to optimize each location’s market potential without excessive inventory levels.

BUSINESS STRATEGY

As we head into fiscal 2019, our business strategy is a continuation of the objectives that we identified at the start of fiscal 2018: customer acquisition, customer retention and customer re-activation leading to top line growth (while managing margins) and increased market share.  We are currently working on several key initiatives and strategies that we believe will drive this growth, while at the same time continually looking at opportunities where we can further improve the efficiency and productivity of our business.  

Grow top-line sales and market share. This growth will be driven by new marketing initiatives, new merchandise initiatives, store innovation and continued branding of our DXL name:

4

Improve operating efficiency and productivity.  In fiscal 2018, as part of a corporate restructuring, we eliminated 56 positions in our corporate office and also targeted other corporate overhead costs in an effort to accelerate our path to profitability.  On an annualized basis, this restructuring will save approximately $10.0 million. We have also evaluated our store portfolio and committed to a plan to close our five remaining Rochester Clothing stores in fiscal 2019 as the lease term in each store expires.  These prime real estate stores are located in high-rent, metropolitan areas.  As DXL has grown over the past 8 years, Rochester stores have struggled to remain profitable.  With the exception of London, each Rochester store is located in close proximity to one or more DXL stores.   In fiscal 2019, we will be focused on using appropriate strategies to direct these Rochester customers to DXL.

Wholesale Channel. We are excited about the recent launch of our wholesale channel and believe it will be a strong complement to our retail channel.  We will be able to leverage our existing infrastructure, including DXL design, product development and sourcing capabilities.  The wholesale business affords us the opportunity to access new customers who do not currently shop at DXL, and increase our market share of certain female shoppers, gift givers, budget/convenience shoppers, and customers who do not have the convenience of a local DXL store.

MERCHANDISE

We offer our customers a broad assortment of apparel that is appropriate to our diverse customer base. Regardless of our customers’ age, socioeconomic status, or lifestyle preference, we are able to assemble a wardrobe to fit their apparel needs. We offer such assortments in both private-label product and a wide array of brand name labels. With over 5,000 styles available, we carry tops in sizes up to 8XL and 8XLT, bottoms with waist sizes 38” to 70”, and shoes in sizes 10W to 18W.

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

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

We carry over 100 well-known national brands (“branded apparel”) as well as a number of our own private-label lines within our “good,” “better” and “best” price points.  The penetration of branded apparel in a specific DXL stores can range from 15% to 80%, depending on several factors, but on average, our DXL stores carry approximately 51% branded merchandise.  

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

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

Moderate-Priced Apparel -“Better” Merchandise

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

In addition, we carry three moderate-priced private-label lines:

Value-Priced Apparel -“Good” Merchandise

5

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

STORE CHANNEL

Destination XL Stores (“DXL”)

At February 2, 2019, we operated 216 DXL retail stores.  Our DXL store concept brings all of our brands together in one format. Within this format, we cater to our diverse customer base, with merchandise representing all price points, from our luxury brands to value-oriented brands, and all lifestyles, from business to denim.  The size of our current DXL stores averages 7,800 square feet.  In recent years, we opened smaller (5,000-6,500 square feet) DXL stores.  Because of the smaller size of these stores, they carry a smaller product offering than our other DXL stores but are representative of the “good, better, best” merchandise variety. We seek to locate our DXL stores in places that are highly visible, preferably adjacent to regional malls or other high-traffic shopping areas.

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

During fiscal 2018, we opened two new DXL stores and rebranded three of our Casual Male XL retail stores to the DXL store concept.  Based on the positive results from the rebranding, we expect to rebrand 12 Casual Male XL retail stores and 1 Casual Male XL outlet store in fiscal 2019.  In many markets, rebranding a Casual Male XL store to a DXL stores provides a viable alternative to the more costly endeavor of relocating a Casual Male XL store to new DXL real estate. In addition, the converted stores benefit from DXL advertising.

Casual Male XL Retail Stores

At February 2, 2019, we operated 66 Casual Male XL full-price retail stores, located primarily in strip centers or stand-alone locations. The majority of the merchandise carried in our Casual Male XL stores is moderate-priced basic or fashion-neutral items, such as jeans, casual slacks, t-shirts, polo shirts, dress shirts and suit separates. These stores also carry a full complement of our “better” private label collections. The average Casual Male XL retail store is approximately 3,300 square feet.

DXL Outlet /Casual Male XL Outlet Stores

At February 2, 2019, we operated 15 DXL outlet stores and 30 Casual Male XL outlet stores designed to offer a wide range of casual clothing for the big & tall customer at prices that are generally 20-25% lower than our moderate-priced merchandise. Much of the merchandise in our outlet stores is offered with the purchasing interests of the value-oriented customer in mind. In addition to private-label and branded merchandise at our “good” price tier, our outlets also carry clearance product obtained from DXL, Casual Male XL and Rochester Clothing stores, offering the outlet customer the ability to purchase branded and fashion product for a reduced price.

The average DXL outlet is approximately 5,200 square feet and the average Casual Male XL outlet store is approximately 3,000 square feet.  

6

Rochester Clothing Stores

At February 2, 2019, we operated five Rochester Clothing stores, located in major cities in the United States and one store in London, England. The Rochester Clothing stores have a wide selection of our “best” and “luxury” merchandise, which consists primarily of high-end merchandise from well-recognized brands. In addition, these stores also carry a few private-label lines that are specifically designed for our high-end customer. The average Rochester Clothing store is approximately 10,000 square feet.

During the fourth quarter of fiscal 2018, the Company made the decision to close its five Rochester Clothing stores during fiscal 2019 as our lease term in each store expires.  This was a store productivity and efficiency decision that was driven by the high occupancy costs associated with these prime locations.  The Company will continue to sell its Rochester-branded merchandise in its DXL stores and on its website.

International

In addition to our Rochester Clothing store located in London, England, we also have one franchised DXL store in the Middle East at the Symphony Mall in Kuwait City, Kuwait, which was opened in fiscal 2014 pursuant to a franchise agreement with The Standard Arabian Business & Enterprises Company (SABECO).  

In the spring of fiscal 2017, we opened two DXL stores in Toronto, Canada. These are the first DXL brand stores operated by the Company outside of the United States. We believe that Canada provides a strategic growth opportunity for our DXL brand. We believe that the international big & tall men’s apparel market is currently underserved and we will continue to consider and evaluate opportunities for international growth in the future.  

DIRECT CHANNEL

Our direct business is a critical channel for growing sales and market share. We define our direct business (which we also refer to as e-commerce) as sales that originate online, whether through our website, those initiated online at the store level, or through a third-party marketplace. We have the ability to service our customers in-person at a store, over the telephone, or online via a computer, smartphone or tablet.

With the ability to showcase all of our store inventories online, we are seeing an increase in the number of transactions that are initiated online, but are ultimately completed in store.  In addition, our stores are able to fulfill an order for an item that is out-of-stock in our warehouse.  This capability has not only resulted in incremental sales, but it has also helped us reduce clearance merchandise at the store level and manage margins.

DXL Website

We are focused on providing an outstanding guest experience wherever our customer decides to shop with us, whether in our stores or online.  To further support our growing direct business, in the third quarter of fiscal 2018, we launched our updated website.  Our new website enhances our digital presence and provides our customers with improved functionality with fewer clicks and faster speed. More importantly, our updated website allows us to showcase our merchandise by showing a complete outfit in addition to showing the traditional individual product pages.  We believe that this approach allows us to emulate the in-store experience.  We want to provide our online customers with the tools necessary to construct a complete wardrobe.

From our website, customers can shop merchandise from value-oriented to luxury price points, and they can tailor their search using our “size profile.”  In addition, our DXL website also offers a complete line of men’s footwear in extended sizes.  Although our DXL stores carry a limited selection of footwear, we are able to offer a full assortment of sizes and styles through our website.  The shoe assortment is a reflection of our apparel, with a broad selection from moderate to luxury and from casual to formal. We currently have a selection of more than 600 styles of shoes, ranging in sizes from 10W to 18W, including designer brands such as Cole Haan®, Allen Edmonds®, Timberland®, Calvin Klein®, Lacoste®, Donald J. Pliner and Bruno Magli®.

In the fourth quarter of fiscal 2018, we purchased the domain name “dxl.com” for $1.2 million, including fees, and it now serves as the landing page for our e-commerce business. Acquiring this domain name, which mirrors our stores’ signage, was a significant acquisition for our brand and we believe it will increase traffic to our site.

Online Sales at Store Level

Our omni-channel approach encourages our store associates to use our website to help fulfill our in-store customers’ clothing needs. If a wider selection of a lifestyle, color or size of an item is not available in our store, then our store associates can order the item for our

7

customer online through our direct channel and have it shipped to the store or directly to the customer. Our customers also have the ability to order online and pick-up in store on the same day.

Online Marketplaces

Broadening our reach through online, third-party marketplaces continues to be a growth initiative for our direct business. A large portion of our assortment is available on Amazon, with Amazon Prime shipping.  Online marketplaces provide us an opportunity to grow our customer base and introduce new customers to our brand.

WHOLESALE CHANNEL

As part of our strategic growth plan, in fiscal 2018, we launched a wholesale channel that we believe will be a strong complement to our retail channel, focused on product development and distribution relationships with key retailers. We intend to develop and distribute both private label and co-branded big & tall men’s apparel lines. We believe that this model will allow us to leverage our existing infrastructure, including DXL technical and fashion design, product development and sourcing capabilities and provide us an opportunity to access new customers who do not currently shop at DXL.     

MERCHANDISE PLANNING AND ALLOCATION  

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

Our core merchandise makes up approximately 38% of our merchandise assortment. Our planning and allocation team estimates quantity and demand several months in advance to optimize gross margin and minimize end-of-season merchandise for all seasonal merchandise. We develop customized assortment strategies by store that accentuate lifestyle preferences for each particular store.

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

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

STORE OPERATIONS  

We believe that our store associates are the key to creating the highest quality experience for our customers. Beginning with the advent of our initial testing of DXL stores, we committed to change the culture in our stores from an operationally-driven organization to a sales-driven, customer-centric organization. Our overall goal was to assist our associates in becoming less task-oriented and more focused on serving the customer. We want our associates to help our customer meet his apparel needs through building his wardrobe, not just selling our customer a single item. In order to accomplish this, we invested in educating our associates.  Our associates are trained to be clothing experts, capable of accommodating our customer’s style and fit needs with ready-to-wear clothing. Our associates are well versed in not only the product selection carried in their specific store, but also the product selection carried online.  With a point-of-sale system that can access items online for the customer who is physically in the store, our associates are able to fulfill all of their customers’ needs. Our stores also offer on-site tailoring in order to assist customers in receiving a perfect fit. In addition to product knowledge, our training approach includes behavioral training as well.  A key component to the success of this program is finding the right caliber of store associates. Our multi-unit, field management team receives extensive training on recruiting associates who are the correct fit for our stores. Our new DXL store management team hires are enrolled in “The DXL Experience Training Program,” with time spent in one of our two Regional Training Centers. The culture has been created over the last eight years to promote from our internal associates, starting at the Assistant Store Manager level up to, and including, the Vice President of Store Operations and Guest Engagement level. Our Regional Vice Presidents give us touch-points in the field in addition

8

to the Regional Sales Managers and the store management to ensure consistency in executing our standards and all programs and processes we deem important to our success.

Each new member of the store management team spends time in a DXL store, working with certified training managers to solidify his or her training before being released to the respective “home” store.  This allows the new store management team members to apply the skills learned during “The DXL Experience Training Program” so they in turn will have the tools to manage their respective stores successfully. We are able to gauge the effectiveness of our training through measuring sales productivity at each level of the field organization, including individual sales associates. We believe these educational programs, together with monitoring sales metrics to help identify opportunities for further training, will improve sales productivity and strengthen our customer’s brand loyalty.

Each DXL, Casual Male XL and Rochester Clothing store is staffed with a store manager, assistant managers and associates. The store manager is responsible for achieving certain sales and operational targets. Our stores have an incentive-based commission plan for managers and selling staff to encourage associates to focus on our customer’s wardrobing needs and sales productivity.  Our field organization strives to promote from within - a culture that has been building for eight years, with approximately 90% of the field organization’s multi-unit managers having managed one of our retail stores.

Our field organization is overseen by our Senior Vice President of Store Sales and Operations, Vice President of Store Operations and Guest Engagement, Regional Vice Presidents and Regional Sales Managers, who provide management development and guidance to individual store managers. Each Regional Sales Manager is responsible for hiring and developing store managers at the stores assigned to that Regional Sales Manager’s market, and for the overall operations and profitability of those stores.

MARKETING AND ADVERTISING

We believe that our marketing initiatives are key to driving our top-line growth by driving traffic to our stores and website. Our focus is on increasing the awareness of our DXL brand, so shoppers will think of us when they decide to purchase big & tall men’s apparel or accessories.

In fiscal 2018, our marketing expenses were $24.4 million, which was a decrease from $29.5 million in fiscal 2017.  The 2018 “Built XL” marketing campaign was broad-reaching and included two media campaigns: a Spring campaign and a Fall/Holiday campaign that each ran for six weeks.  The campaign emphasized fit, expertise, clothing brands, in-store experience, and one-stop shopping.  Our objective was to highlight our key differentiators and to make an emotional connection with our core consumer. In addition to the media campaign, we also increased the circulation of our direct mail campaign and strengthened offers under our loyalty program. During the holiday season, we tested, with positive results, a holiday catalog to a select group of our top customers, which highlighted current fashion and product offerings.

During fiscal 2018, we completed a six-month customer segmentation study where we surveyed over 4,000 target customers to help us further understand their shopping habits, style choices, preferred brands and other retailers they shop.  Because of this study, we have segmented our target customers into six distinct categories, with the largest segment being our “Fit & Style” customer.  This customer is not only interested in fit, but also in style.  This “Fit & Style” customer represents approximately 28% of the big & tall market according to our analysis, and we believe that he represents approximately 55% of the buying power.  Based on the results of this study, in fiscal 2019, we plan to pivot our marketing to a more targeted, personalized, data-driven model where we can create personalization and ultimately engage differently with customers in each of these six distinct categories. As such, we expect to redirect some of our broad-reach marketing costs to direct marketing initiatives, such as catalogs, digital advertising and loyalty incentives.  In addition, during fiscal 2019, we will also be implementing a new CRM system to support our customer segmentation marketing.

GLOBAL SOURCING

We have strong experience in sourcing internationally. We manufacture a significant percentage of our private-label merchandise primarily in Southeast Asian countries consisting of Vietnam, Bangladesh, Cambodia and India. While we do source some merchandise from China, we are diversifying our global penetration outside of China and starting to move into additional countries with duty-free opportunities in Jordan and Mexico. We have strong-established relationships with many of the leading factories and mills on the globe. Our sourcing network consists of over 28 factories in 6 countries. Currently, approximately 50% of all our product needs are sourced directly.

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

9

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

DISTRIBUTION

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

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

Since 2003, we have utilized United Parcel Services (“UPS”) for all of our store shipments as well as our domestic customer deliveries. By utilizing UPS, we are able to track all deliveries from the warehouse to our individual stores, including the status of in-transit shipments. In addition, we are able to provide our direct customers with Authorized Return Service and Web labels, making returns more convenient for them.  Our current contract with UPS is set to expire on January 5, 2020.    

In order to service our International customers, we have contracted with a global e-commerce company for payment and shipment services.  Through this service, international customers view and pay for products in their local currency.  Our vendor then ships directly to our customer, which we believe helps avoid potential fraud and currency exchange rate risks.

Our warehousing application for our distribution center systems streamlines our distribution processes, enhances our in-transit times, and reduces our distribution costs substantially. We continually work to make improvements and upgrades to our software, such as automated packing for single-piece orders, barcode scanning technologies and scanning technologies for our sortation systems, in order to improve productivity and to lower packing costs.

Our supply chain technology provides visibility for imports and domestic deliveries giving our buyers accurate shipping information and allowing the distribution center to plan staffing for arriving freight, resulting in reduced costs and improved receipt efficiency.

In-bound calls for our direct business are currently handled at our Canton facility and are primarily fulfilled by our distribution center.  If an order cannot be fulfilled by our distribution center, the order is completed at the store level.  

MANAGEMENT INFORMATION SYSTEMS

The infrastructure of our management information systems is a priority to us. We believe that the investments we have made in this regard have improved our overall efficiency and, most importantly have enabled us to manage our inventory more effectively.

Our management information systems consist of a full range of retail merchandising and financial systems, which include merchandise planning and reporting, distribution center processing, inventory allocation, sales reporting, and financial processing and reporting. We believe that our current infrastructure provides us the ability and capacity to process transactions more efficiently and provides our management team with comprehensive tools with which to manage our business.

Using a retail business intelligence solution, we are able to integrate data from several sources and provide enterprise-wide analytics reporting. Over the past few years, we have developed a custom Assortment Suite application that leverages business intelligence and predictive analytics to provide high impact insights into core merchandising tasks. In an effort to improve our inventory management, we have created a standardized set of “best practices” for both our merchandise planning and allocation groups.

Our direct and retail channels maintain a shared inventory system and we operate a single system platform for DXL, Casual Male XL and Rochester Clothing to deliver improved efficiencies.

In fiscal 2019, we will be continuing to upgrade our order management systems, which will improve our warehouse management and logistics capabilities for enhanced inventory visibility and order fulfillment, and we will be implementing a new CRM platform.  We continually work to improve our web environment and the security of our systems. Our mobile and tablet optimized sites capitalize on the growing use of mobile devices to look up store information, review product offerings, and complete purchases. In addition, our current website is fully integrated with a global e-commerce company to accommodate international customers by providing multi-currency pricing, payment processing, and international shipping.

10

COMPETITION

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

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

SEASONALITY

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

TRADEMARKS/TRADEMARK LICENSE AGREEMENTS

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

EMPLOYEES

As of February 2, 2019, we had approximately 2,543 employees. We hire additional temporary employees during the peak Fall and Holiday seasons. None of our employees is represented by any collective bargaining agreement.

AVAILABLE INFORMATION

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

11

Item 1A. Risk Factors

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

Risks Related to Our Company and Our Industry

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

Through the end of fiscal 2018, we have opened 231 DXL retail and outlet stores in the United States and Canada while closing many of our Casual Male XL and Rochester Clothing stores.  The pace of our store openings has slowed over the past two fiscal years with an increased focus on growing our direct business, developing a wholesale business and improving the overall efficiency and profitability of the Company.  For us to be successful in the future and maintain growth, we must be able to continue increasing our share of the big & tall men’s apparel market. Our growth is dependent on our ability to continue to build upon our DXL brand, maintain and convert our existing Casual Male XL and Rochester Clothing customers to DXL, and to continue to attract new customers. Our failure to execute successfully our strategy could prevent us from growing our market share, which could have a material adverse effect on our results of operations, cash flows and financial position, including if we were unable to:  

Our marketing programs and efforts in maintaining and building our brand awareness, driving traffic and converting that traffic into an increased loyal customer base are critical to achieving market share growth within the big & tall men’s apparel market and may not be successful.

Our ability to increase our share of the big & tall men’s apparel market is largely dependent on building and maintaining favorable brand recognition for our DXL stores and digital channels and effectively marketing our merchandise to all of our target customers in several diverse market segments so that they will become loyal shoppers who spend a greater portion of their wallet on our product offerings. In order to grow our brand recognition and our market share, we depend on the successful development of our brand through marketing and advertising in a variety of ways, including television and radio advertising, advertising events, loyalty programs, catalogs, digital marketing, including social media, e-commerce and customer prospecting. Our business is directly impacted by the success of these efforts and those of our vendors. Future marketing efforts by us, our vendors or our other licensors, may be costly and, if not successful, may negatively affect our ability to meet our sales goals and gain market share.

The recent launch of our wholesale segment may not be successful.  

As part of our strategic growth plan, in the fourth quarter of fiscal 2018, we announced the launch of a wholesale segment focused on product development and distribution relationships with key retailers. We intend to develop and distribute both private label and co-branded big & tall men’s apparel lines. The success of this strategic initiative depends on a number of factors, including our ability to grow our wholesale customer base, develop a cost-effective infrastructure, and sustain adequate liquidity to meet the longer lead times associated with the wholesale business.  In addition, because our wholesale customers order merchandise on a “purchase order” basis, as our wholesale business grows, any decision by one of our customers to decrease their order volume or cease purchasing from us could adversely affect our revenues and profitability.  

12

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

Our customer’s shopping behavior continues to evolve across multiple channels and we are working to meet his needs.  While we consider ourselves an omni-channel retailer, we continue to make ongoing investments in our information technology systems to support evolving omni-channel capabilities.  

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

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

Our direct business is a significant component of our growth strategy, and the failure to develop our e-commerce and internet infrastructure could disrupt our business and negatively impact our sales.

We continue to have increasing levels of sales made through online shopping and via mobile devices.  We have made significant investments in capital spending and labor to develop these channels and invested in digital media to attract new customers. Growth of our overall sales is dependent on customers’ continuing to expand their online purchases in addition to in-store purchases. We cannot accurately predict the rate at which online purchases will expand.  

Our success in growing our direct business will depend in part upon our development of an increasingly sophisticated e-commerce experience and infrastructure. Increasing customer sophistication requires that we provide additional website features and functionality, in order to be competitive in the marketplace and maintain market share. We continually update our website features, but we cannot predict future trends and required functionality or our adoption rate for customer preferences.  In addition, we are vulnerable to additional risks and uncertainties associated with e-commerce sales, including security breaches, cyber-attacks, consumer privacy concerns, changes in state tax regimes and government regulation of internet activities. Our failure to respond to these risks and uncertainties successfully could reduce our direct sales, increase our costs and diminish our growth prospects, which could negatively affect our operating results.

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

Our business is seasonal. Historically, a significant portion of our operating income has been generated during our fourth quarter (November-January). If, for any reason, we miscalculate the demand for our products during our fourth quarter, our sales in that quarter could decline, resulting in higher labor costs as a percentage of sales, lower margins and excess inventory, which could cause our annual operating results to suffer. In addition, our operations may be negatively affected by local, regional or national economic conditions, such as levels of disposable consumer income, consumer debt, interest rates and consumer confidence. Due to our seasonality, the possible adverse impact from such risks is potentially greater if any such risks occur during our fourth quarter.  

Our ability to operate and expand our business and to respond to changing business and economic conditions will depend on the availability of adequate capital.

The operation of our business, the rate of our expansion and our ability to respond to changing business and economic conditions depend on the availability of adequate capital, which in turn depends on cash flow generated by our business and, if necessary, the availability of equity or debt capital. We will also need sufficient cash flow to meet our obligations under our existing debt agreements.

The amount that we are able to borrow and have outstanding under our credit facility at any given time is determined using an availability formula based on eligible assets. As a result, our ability to borrow is subject to certain risks and uncertainties, such as advance rates and the amount and quality of inventory, which could reduce the funds available to us under our credit facility.

We cannot assure you that our cash flow from operations or cash available under our credit facility will be sufficient to meet our needs. If we are unable to generate sufficient cash flows from operations in the future, we may have to obtain additional financing. If we incur additional indebtedness, that indebtedness may contain significant financial and other covenants that may significantly restrict our operations. We cannot ensure that we could obtain refinancing or additional financing on favorable terms or at all.

13

Our business may be adversely affected by economic and political issues abroad and changes in U.S. economic policies.

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

While current tariffs have not had a material impact on our business, any further enactment of any new legislation in the U.S. that would impact current international trade regulations, exports or imports or tax policy with respect to foreign activities, or executive action affecting international trade agreements, including the uncertainty concerning the trading status of certain countries and/or retaliatory duties, taxes, quotas or other trade sanctions, could increase the cost of merchandise purchased from suppliers in such countries and could adversely affect our business and financial performance.

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

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

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

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

Our business may be adversely affected by the failure to identify suitable store locations and acceptable lease terms.  

We currently lease all of our store locations. Identifying and securing suitable store locations at acceptable lease terms is critical to our store base and positioning.  We generally have been able to negotiate acceptable lease rates and extensions, as needed.  However, we cannot be certain that desirable locations at acceptable lease rates and preferred lease terms will continue to be available.  Once we decide on a prospective new store or new market and find a suitable location, any delays in opening new stores could impact our financial results. In addition, if we need to pay higher occupancy costs in the future to secure ideal locations, the increased cost may adversely impact our financial performance and liquidity. Recent trends toward increased landlord consolidation could also negatively affect our ability to obtain and retain locations.  

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

The United States big & tall men’s apparel market is highly competitive with many national and regional department stores, mass merchandisers, specialty apparel retailers, discount stores and online retailers offering a broad range of apparel products similar to the products that we sell. Besides retail competitors, we consider any manufacturer of big & tall men’s merchandise operating in outlet malls throughout the United States to be a competitor. It is also possible that another competitor, either a mass merchant or a men’s specialty store or specialty apparel catalog, could gain market share in big & tall men’s apparel due to more favorable pricing, locations, brand and fashion assortment and size availability. Many of our competitors and potential competitors may have substantially greater financial, manufacturing and marketing resources than we do.

The presence in the marketplace of various fashion trends and the limited availability of shelf space also can affect competition. We may not be able to compete successfully with our competitors in the future and could lose brand recognition and market share. A significant loss of market share would adversely affect our revenues and results of operations.

In addition, we maintain exclusivity arrangements with several of the brands that we carry.  If we were to lose any of these exclusivity arrangements or brands altogether, our revenues may be adversely affected.

14

If our long-lived assets become impaired, we may need to record significant non-cash impairment charges.

Periodically, we review our long-lived assets for impairment whenever economic events or changes in circumstances indicate that the carrying value of an asset may not be recoverable. Specifically, if an individual store location is unable to generate sufficient future cash flows, we may be required to record a partial or full impairment of that store’s assets.  In addition, significant negative industry or general economic trends, disruptions to our business and unexpected significant changes or planned changes in our use of the assets (such as store relocations or closures) may also result in impairment charges. Any such impairment charges, if significant, could adversely affect our financial position and results of operations.

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

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

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

A significant portion of our merchandise is imported directly from other countries, and U.S. domestic suppliers who source their goods from other countries supply most of our remaining merchandise. While current tariffs have not had a material impact on our business, if the U.S. Government imposes any further tariffs or other restrictions on foreign imports, we may need to increase our prices, which could adversely affect our revenues and merchandise margins.

Furthermore, in the event that commercial transportation is curtailed or substantially delayed, we may not be able to maintain adequate inventory levels of important merchandise on a consistent basis, which would negatively impact our sales and potentially erode the confidence of our customer base, leading to further loss of sales and an adverse impact on our results of operations.

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

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

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

Our future success is dependent on the personal efforts, performance and abilities of our key management, which includes our executive officers as well as several significant members of our senior management. The loss of any of our senior management may result in a loss of organizational focus, poor operating execution, an inability to identify and execute strategic initiatives, an impairment in our ability to identify new store locations, and an inability to consummate possible acquisitions. The competition is intense for the type of highly skilled individuals with relevant industry experience that we require and we may not be able to continue to attract and retain new employees of the caliber needed to achieve our objectives.

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

We may be harmed by security risks we face in connection with our electronic processing and transmission of confidential customer information. During fiscal 2018, approximately 86% of our sales were settled through credit and debit card transactions. While our Board of Directors has a Cybersecurity and Data Privacy Committee to oversee the monitoring and management of cyber risk and data privacy for our Company, and we have not had any security breaches to date, any breach could expose us to risks of loss, litigation and liability and could adversely affect our operations as well as cause our shoppers to stop shopping with us as a result of their lack of confidence in the security of their personally identifiable information, which could have a negative impact on our sales and

15

profitability. Like many retailers, we have seen an increase in cyberattack attempts, predominantly through phishing and social engineering scams, and in particular, ransomware. While none of these attempts has been successful, there can be no assurance that our continued security measures will be effective or sufficient in the future.  If third parties are able to penetrate our network security or otherwise misappropriate the personal information or credit card information of our customers or if third parties gain unauthorized and improper access to such information, we could be subject to liability. These liabilities could include claims for unauthorized purchases with credit card information, impersonation or other similar fraud claims, or claims for other misuses of personal information, including unauthorized marketing purposes, and could ultimately result in litigation. Liability for misappropriation of this information could be significant.

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

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

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

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

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

Our business depends on our ability to meet our labor needs.

Our success depends in part upon our ability to attract, motivate and retain a sufficient number of qualified employees, including store managers and sales associates, who understand and appreciate our product offerings and are able to represent our products to our customers adequately. Qualified individuals of the requisite caliber and number needed to fill these positions may be in short supply in some areas, and the turnover rate in the retail industry is high. If we are unable to hire and retain sales associates capable of consistently providing a high level of customer service, our business could be materially adversely affected. Although none of our employees is currently covered by collective bargaining agreements, our employees may elect to be represented by labor unions in the future, which could increase our labor costs. Additionally, competition for qualified employees requires us to pay higher wages to attract a sufficient number of adequate employees. An inability to recruit and retain a sufficient number of qualified individuals in the future may cause problems for our stores or outlets. Any such delays, any material increases in employee turnover rates at existing stores or outlets or any increases in labor costs could have a material adverse effect on our business, financial condition or operating results.

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

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

16

Risks Related to Our Corporate Structure and Stock

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

The market price of our common stock has fluctuated in the past and may increase or decrease rapidly in the future depending on news announcements and changes in general market conditions. The following factors, among others, may cause significant fluctuations in our stock price:

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

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

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

Our certificate of incorporation, as amended, limits transfers of our common stock and may, along with state law, inhibit potential acquisition bids that could be beneficial to our stockholders.

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

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

17

Item 1B. Unresolved Staff Comments

None.

Item 2. Properties

Our corporate offices and retail distribution center are located at 555 Turnpike Street in Canton, Massachusetts. The property consists of a 755,992 gross square foot building located on approximately 27.3 acres. We owned the property until January 30, 2006, at which time we entered into a sale-leaseback transaction with Spirit Finance Corporation, a third-party real estate investment trust (“Spirit”), whereby we entered into a twenty-year lease agreement with a wholly-owned subsidiary of Spirit for an initial annual rent payment of $4.6 million, with periodic increases every fifth anniversary of the lease. In fiscal 2006, we realized a gain of approximately $29.3 million on the sale of this property, which was deferred and, through the end of fiscal 2018, the Company was amortizing the gain over the initial 20 years of the related lease agreement. At February 2, 2019, the balance of the deferred gain was $10.3 million.  In the first quarter of fiscal 2019, the Company will be adopting Accounting Standards Update (“ASU”) 2016-02, “Leases (Topic 842).” This ASU is a comprehensive new lease accounting standard that amends various aspects of existing guidance for leases and requires additional disclosures about leasing arrangements. In accordance with the guidance under ASU 2016-02, as part of our adoption of ASU 2016-02, the remaining balance of the deferred gain of $10.3 million will be recognized as an adjustment to opening retained earnings for fiscal 2019.  

As of February 2, 2019, we operated 216 Destination XL retail stores, 15 Destination XL outlet stores, 66 Casual Male XL retail stores, 30 Casual Male XL outlet stores and 5 Rochester Clothing stores. We lease all of these stores directly from owners of several different types of centers, including life-style centers, shopping centers, freestanding buildings, outlet centers and downtown locations. The store leases are generally 5 to 10 years in length and contain renewal options extending their terms by between 5 and 10 years. Following this discussion is a listing by state of all store locations open at February 2, 2019.

Sites for new stores are selected based on several factors, including the demographic profile of the area in which the site is located, the types of stores and other retailers in the area, the location of the store within the center and the attractiveness of the store layout. We also utilize financial models to project the profitability of each location using assumptions such as the center’s sales per square foot averages, estimated occupancy costs and return on investment requirements.

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

18

Store count by state at February 2, 2019

19

Item 3. Legal Proceedings

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

Item 4. Mine Safety Disclosure

Not applicable.

20

PART II.

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

Market Information

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

Holders

As of March 15, 2019, based upon data provided by the transfer agent for our common stock, there were approximately 86 holders of record of our common stock. The number of holders does not include individuals or entities who beneficially own shares but whose shares are held of record by a broker or clearing agent.

Issuer Purchases of Equity Securities

There were no stock repurchases during fiscal 2018.

Stock Performance Graph

The following Performance Graph compares our cumulative stockholder return with a broad market index (Standard & Poor’s 500) and one published industry index (Dow Jones U.S. Apparel Retailers) for each of the most recent five years ended January 31. The cumulative stockholder return for shares of our common stock (“DXLG”) and each of the indices is calculated assuming that $100 was invested on January 31, 2014. We paid no cash dividends during the periods shown. The performance of the indices is shown on a total return (dividends reinvested) basis. The graph lines merely connect January 31 of each year and do not reflect fluctuations between those dates. In addition, we have included a chart of the annual percentage return of our common stock, the S&P 500 and the Dow Jones U.S. Apparel Retailers.

Annual Return Percentage

21

Indexed Returns

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

22

Item 6. Selected Financial Data

The following tables set forth selected consolidated financial data of our Company as of and for each of the years in the five-year period ended February 2, 2019 and should be read in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our accompanying Consolidated Financial Statements and Notes thereto.

We derived the selected financial data presented below for the periods or dates indicated from our consolidated financial statements. Our consolidated financial statements as of and for the five-year period ended February 2, 2019 were audited by KPMG LLP, an independent registered public accounting firm. Our consolidated financial statements as of and for the years ended February 2, 2019, February 3, 2018 and January 28, 2017 are included in this Annual Report.

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

23

24

25

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

FORWARD LOOKING STATEMENTS

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

Certain figures discussed below may not foot due to rounding.

Segment Reporting

The Company has historically had two principal operating segments: its stores and direct businesses.  The Company considers these two operating segments to be similar in terms of economic characteristics, production processes and operations, and have therefore aggregated them into one reportable segment, retail segment, consistent with its omni-channel business approach.  In fiscal 2018, the Company launched a wholesale segment, which the Company considers a third operating segment.  However, due to the immateriality of the wholesale segment’s revenues, profits and assets at February 2, 2019, its operating results have been aggregated with the retail segment for fiscal 2018.

Comparable Sales Definition

Fiscal 2018 was a 52-week year as compared to fiscal 2017, which had 53-weeks.  Accordingly, year-over-year comparisons of total sales for the fourth quarter and full year are affected by an extra week of sales in fiscal 2017. However, for comparable sales, the Company is reporting on a comparable weeks basis (e.g. the 13 and 52 weeks ended February 2, 2019 compared with the 13 and 52 weeks ended February 3, 2018, respectively).

Total comparable sales include our 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.  Sales from our wholesale business are not part of the Company’s comparable sales calculation.

Our customer’s shopping experience continues to evolve across multiple channels and we are continually changing to meet his needs.  The majority of our stores have the capability of fulfilling online orders if merchandise is not available in the warehouse.  As a result, we continue to see more transactions that begin online but are ultimately completed at the store level.  Similarly, if a customer visits a store and the item is out of stock, the associate can order the item through our website.  A customer also has the ability to order online and pick-up in a 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 segment.  However, as we continue to 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.  We define store sales as sales that originate and are fulfilled directly at the store level.  E-commerce sales, which we also refer to as direct sales, are defined as sales that originate online, whether through our website, at the store level or through a third-party marketplace.

Non-GAAP Measures

We monitor certain non-GAAP financial measures on a regular basis in order to track the progress of our business. These measures include adjusted net loss, adjusted net loss per diluted share, free cash flow, EBITDA and adjusted EBITDA. We believe these measures provide helpful information with respect to the Company’s operating performance and that the inclusion of these non-GAAP measures is important to assist investors in comparing our performance in fiscal 2018 to fiscal 2017 and fiscal 2016.  We also provide certain forward-looking information with respect to certain of these non-GAAP financial measures. However, these measures may not be comparable to similar measures used by other companies and should not be considered superior to or as a substitute for net loss, net loss per diluted share or cash flows from operating activities in accordance with GAAP.  See “Non-GAAP Reconciliations” below for additional information on these non-GAAP financial measures and reconciliations to comparable GAAP measures.

26

EXECUTIVE OVERVIEW

Fiscal 2018 was a pivotal year for our Company as we addressed foundational issues in the business and also launched a number of growth and development initiatives, as described below.  On April 1, 2019, we will transition to our new Chief Executive Officer and begin work on the next phase of DXL’s growth.

In an effort to accelerate our path to profitability, in May 2018, we reduced our corporate headcount by 15%, which we expect to result in an annualized cost savings of approximately $10.0 million.  In fiscal 2018, we realized cost savings of approximately $6.0 million related to payroll, travel, benefits and other non-essential project costs.  We incurred a charge of $1.9 million in severance and termination benefits in fiscal 2018 in connection with this corporate restructuring.

In May 2018, we amended our $125.0 million revolving credit facility with Bank of America to extend the facility to May 2023.  As part of the amendment, we reduced our interest rate by 25 basis points.  We also retired our $15.0 million term loan with Wells Fargo, NA and assumed a $15.0 million FILO loan under the new $140.0 million credit facility with Bank of America.  We reduced our interest rate on the $15.0 million FILO loan by 375 basis points compared to the prior $15.0 million term loan.

We completed a six-month customer segmentation study with over 4,000 customers.  The results of this study provided us additional insight to help us redefine our marketing strategy and the characteristics of each of our primary customer segments.  We plan to increase our focus on our “Fit & Style” customer, who represents a segment of our customer base who is not only focused on a good fit, but is also engaged in finding product that is stylish and trendy. Fit & Style represents our largest customer opportunity and we believe he has the greatest buying power. In the latter half of fiscal 2018, we started to tailor our marketing, with a more targeted, personalized, data-driven model specific to these different segments.  For the holiday season, we also tested, with strong results, a catalog “look-book” for a select group of our customers, and expect to expand this program in fiscal 2019.

We launched our new website in the third quarter of fiscal 2018, which is faster, more responsive and easier to navigate than our former site.  Visually, it is wardrobe-driven as opposed to product-driven, encouraging our customers to purchase entire outfits or ensembles as opposed to just individual pieces.  We also upgraded our integration between store point-of-sale and our website.  With the new technology, our store associates are able to sell in-store merchandise together with our full assortment of merchandise on our website in a single sale transaction.  In the fourth quarter of fiscal 2018, we also acquired the domain name dxl.com, which we believe will drive additional web traffic.  Growing our direct business remains one of our primary objectives.

During fiscal 2018, we rebranded three Casual Male XL stores to the DXL store concept on a test basis.  The rebranding of these stores requires substantially less capital and provides us with an opportunity to keep a store in a geographical market without the buildout costs associated with new real estate.  Based on the strong results of this test, in fiscal 2019 we plan to rebrand 12 Casual Male XL retail stores and 1 Casual Male XL outlet.

27

In the fourth quarter of fiscal 2018, we launched a new wholesale segment.  Our wholesale team is focused on product development and distribution relationships with key retailers, which will include both private-label and co-branded big & tall men’s apparel lines.  Wholesale allows us to leverage sourcing and design expertise and offer a turnkey solution to other retailers who cater to the big & tall customer. As part of this initiative, in the fourth quarter of fiscal 2018, we entered into an agreement with Amazon to provide men’s big & tall sizes for its Amazon Private Brand, Amazon Essentials, under the name “Amazon Essentials Fit by DXL.”

Many of these initiatives contributed to our financial improvement in fiscal 2018.  Comparable sales growth in fiscal 2018 was 3.0%, with positive comparable sales each of the four quarters.  This performance was consistent across the country with the Northeast and Southeast showing the largest increases over fiscal 2017.  Although our store traffic remains an issue, as it does across the industry, we saw increases in our conversions and dollars per transactions that contributed to our comparable sales growth.  Our direct business remains steady, representing 21.6% of our retail segment sales, in fiscal 2018, as compared to 21.0% in fiscal 2017 and 19.9% in fiscal 2016.  Retail segment sales exclude sales from wholesale.

Our net loss for fiscal 2018, was $(13.5) million, or $(0.28) per diluted share, compared to a net loss of $(18.8) million, or $(0.39) per diluted share, in fiscal 2017.  Results for fiscal 2018 included $4.3 million of costs associated with the CEO transition and corporate restructuring and asset impairment charges of $4.6 million. Excluding these items and assuming a normalized tax rate, the adjusted net loss for fiscal 2018 was $(3.5) million, or $(0.07) per diluted share, compared to an adjusted net loss of $(12.8) million, or $(0.26) per diluted share, in fiscal 2017.  Adjusted EBITDA for fiscal 2018, improved $10.3 million to $27.4 million from $17.1 million in fiscal 2018.

Appointment of New Chief Executive Officer

Subsequent to the end of fiscal 2018, on February 19, 2019, the Company hired Harvey S. Kanter as its next President, Chief Executive Officer and director of the Company, effective April 1, 2019.  During a short transition period from February 19, 2019 until March 31, 2019, Mr. Kanter will be an employee of the Company and will serve as an Advisor to the Acting CEO, David Levin.   See our discussion below under “CEO Transition Costs” and in Note L, CEO Search and Transition Costs, to the Company’s Consolidated Financial Statements for additional disclosure regarding the transition and related costs.

Financial Outlook

Our core business remains strong, and we expect to deliver low single-digit comparable sales growth in our omni-channel retail business and to generate free cash flow in fiscal 2019. The Company will continue to provide forward-looking commentary on business trends. As discussed above, Mr. Kanter will assume the role of President and Chief Executive Officer of the Company effective April 1, 2019. Upon joining the Company, Mr. Kanter will conduct a strategic review to assess and address the current and go-forward execution strategy for the business. The Company and Mr. Kanter continue to believe that (i) increasing our customer base, (ii) improving returns on investment in our marketing and digital initiatives, (iii) enhancing our in-store and online experience, and (iv) managing our cost structure are essential to achieving a 10% EBITDA margin over time. Additionally, as previously announced, the Company has created a new wholesale business, the impact of which on the Company’s financial results needs to be fully assessed. Given the CEO transition, the strategic review and the launch of a new wholesale business, the Company is not providing detailed earnings or cash flow guidance until we have increased visibility in the effectiveness of our initiatives.

In fiscal 2019, we plan to open 2 new DXL retail stores, rebrand 12 Casual Male XL retail stores to DXL retail stores and rebrand 1 Casual Male XL outlet to a DXL outlet store.  We also plan to close 5 Casual Male XL retail stores (two of which will be closed in connection with the opening of the two DXL stores), 1 DXL store and our 5 remaining Rochester Clothing stores.

RESULTS OF OPERATIONS

Our fiscal year is a 52- or 53-week period ending on the Saturday closest to January 31. Fiscal 2018 and fiscal 2016 were 52-week periods and fiscal 2017 was a 53-week year.

28

SALES

Sales in fiscal 2018 increased 1.2% to $473.8 million as compared to $468.0 million for fiscal 2017. The increase in sales of $5.8 million was driven by a comparable sales increase of $13.3 million, or 3.0%, non-comparable sales growth of $6.6 million and $2.4 million in net sales from our wholesale segment.  These increases were partially offset by $6.3 million of sales due to the shift in comparable weeks and the 53^rd week in fiscal 2017, sales from closed stores of $8.6 million, and a decrease in other revenue of $1.6 million.  Our direct business continued to grow, representing 21.6% of our retail segment sales in fiscal 2018 as compared to 21.0% in fiscal 2017.  

Sales for fiscal 2017 increased 3.9% to $468.0 million as compared to $450.3 million for fiscal 2016.  The increase in sales was primarily due to sales from the 53^rd week of $6.9 million, DXL non-comparable sales, net of closed stores, of $6.9 million and a comparable sales increase of $3.7 million, or 0.9%.  While store traffic was down for most of fiscal 2017, we did see increases in sales productivity with increases in average dollars per transactions, units per transaction and conversion.  Sales from our direct business as a percentage of our retail segment were 21.0% in fiscal 2017 as compared to 19.9% in fiscal 2016.

GROSS MARGIN

Gross margin rate for fiscal 2018 was 44.6% compared to 45.0% in fiscal 2017 and 45.5% in fiscal 2016.

The gross margin of 44.6% for fiscal 2018 decreased 40 basis points from fiscal 2017.  The decrease was due to an 80 basis point decrease in merchandise margin, related primarily to a sales shift toward more fashion-forward and branded merchandise and the impact of wholesale, which has lower gross margin rates than our store and direct businesses.  The decrease in merchandise margin was partially offset by a 40 basis point improvement in occupancy costs, as a percentage of sales.  On a dollar basis, occupancy costs for fiscal 2018 decreased 1.4% as compared to fiscal 2017.

The gross margin decrease of 50 basis points for fiscal 2017 as compared to fiscal 2016 was due to a 50 basis point decrease in merchandise margin, related to our inventory initiatives and increased efforts to reduce slow-moving merchandise categories, which resulted in higher promotional markdowns than the prior year.  Our inventory initiatives resulted in a 12% decrease in inventory levels from fiscal 2017 over fiscal 2016, improved inventory turnover and days on hand, while at the same time managing a strong merchandise margin.  Occupancy costs, as a percent of sales, were flat.  On a dollar basis, occupancy costs for fiscal 2017 increased approximately 4.0% over fiscal 2016, primarily because of an increase of 2.2% in total square footage and the increased percentage of DXL stores to our total store base.

By its nature, gross margin rates for wholesale are considerably lower than gross margin rates for the Company’s retail segment.  Therefore, if we achieve top-line growth in our wholesale business, we expect to experience a decline in our gross margin on a combined basis.  

SELLING, GENERAL AND ADMINISTRATIVE EXPENSES

SG&A expenses as a percentage of sales for fiscal 2018, 2017 and 2016 were 38.8%, 41.3% and 38.5%, respectively.

SG&A expenses for fiscal 2018 decreased $9.4 million, or 4.8%, to $183.9 million as compared to $193.2 million in fiscal 2017.  The decrease was primarily due to savings of approximately $6.0 million from our corporate restructuring, a decrease in marketing costs of approximately $5.1 million and one less week of expenses of approximately $2.5 million due to the 53^rd week in fiscal 2017.  These savings were partially offset by increases in our incentive accruals and IT operating costs.

29

SG&A expenses are managed through two primary cost centers: Customer Facing Costs and Corporate Support Costs. Customer Facing Costs, which include store payroll, marketing, and other store operating costs, represented 23.2% of sales in fiscal 2018 as compared to 24.7% of sales in fiscal 2017.  Corporate Support Costs, which include the distribution center and corporate overhead costs, represented 15.6% of sales in fiscal 2018 compared to 16.6% of sales in fiscal 2017.  We expect to continue to address our SG&A cost structure to improve our EBITDA margins and overall profitability.

SG&A expense for fiscal 2017 increased $19.9 million, or 11.5%, to $193.2 million as compared to $173.3 million in fiscal 2016.  The increase was principally due to an increase of $11.3 million in advertising expense. We increased our investment in our marketing initiatives in fiscal 2017 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 and e-commerce initiatives and expenses for the additional 53rd week of approximately $2.5 million.  

CORPORATE RESTRUCTURING

In May 2018, we executed a corporate restructuring to accelerate the Company's path to profitability by better aligning our expense structure with our revenues.  We eliminated 56 positions, which represented approximately 15% of our corporate work force, or 2% of our total work force.  Of the 56 positions, 36 positions were terminations and 20 positions were open positions that were not filled.  As a result, we incurred an aggregate charge of $1.9 million in fiscal 2018, for employee severance and one-time termination benefits, as well as other employee-related costs. Approximately $1.6 million of the $1.9 million was cash expenditures.

As a result of this restructuring, as noted above, we realized savings of approximately $6.0 million in SG&A expenses in fiscal 2018.  The savings primarily relate to corporate payroll, travel, benefits and non-essential project expenses, and are expected to be approximately $10.0 million on an annualized basis.

CEO TRANSITION COSTS

We announced in March 2018 that Mr. Levin planned to retire on December 31, 2018.  Pursuant to the terms of the Transition Agreement between the Company and Mr. Levin dated March 20, 2018, as amended (the “Transition Agreement”), Mr. Levin resigned as President, Chief Executive Officer and director of the Company on January 1, 2019.  In accordance with that agreement, Mr. Levin is entitled to receive his base salary, AIP bonus and LTIP compensation through December 31, 2019.  Because no successor had been hired prior to January 1, 2019, Mr. Levin assumed the role of Acting CEO pursuant to a letter agreement with the Company dated November 27, 2018.  In connection with assuming this role, Mr. Levin is receiving total compensation of $800,000 through April 1, 2019, when Mr. Kanter will become the Company’s President and Chief Executive Officer.  

In connection with the CEO transition and search costs, we incurred a total charge of approximately $2.4 million in fiscal 2018.  The $2.4 million charge related to amounts payable to Mr. Levin under his Transition Agreement, CEO search costs and the acceleration of stock-based compensation of approximately $0.5 million, related to Mr. Levin’s time-based equity awards.

We expect to incur additional charges in fiscal 2019 of approximately $0.5 million for CEO search, legal and housing allowance costs and approximately $1.2 million, assuming target, of future cash payments that Mr. Levin may be entitled to under existing performance-based compensation plans, if such targets are achieved.

IMPAIRMENT OF ASSETS

For fiscal 2018, fiscal 2017 and fiscal 2016, we recorded asset impairment charges of $4.6 million, $4.1 million and $0.4 million, respectively.  

Impairment charges for long-lived assets related to stores, where the carrying value exceed fair value, were $3.1 million, $2.2 million and $0.4 million for fiscal 2018, fiscal 2017 and fiscal 2016, respectively.  In addition, during the fourth quarter of fiscal 2018, we made the decision to close our five remaining Rochester Clothing stores during fiscal 2019.  The growth in our DXL brand has slowly eroded the sales volume and profitability in these stores, which are in predominantly high-rent, metropolitan areas.  While we will continue to sell Rochester branded merchandise in our DXL stores and website, in the fourth quarter of fiscal 2018, we determined that, without the cash flows from these five Rochester branded retail locations, the “Rochester” trademark was impaired.  As a result, in the fourth quarter of fiscal 2018, we recorded an impairment charge of $1.5 million to write-off the trademark.  

In fiscal 2017, we also wrote-off $1.9 million for certain costs associated with technology projects, which were abandoned, due to a shift in strategy.

30

DEPRECIATION AND AMORTIZATION

Depreciation and amortization expense was $28.7 million in fiscal 2018 compared to $31.1 million for fiscal 2017 and $30.2 million for fiscal 2016. With the majority of our new store growth complete, our depreciation expense began to decrease in fiscal 2018.

Included in depreciation and amortization is the amortization of our “Casual Male” trademark of $0.3 million in each of the past three fiscal years.

INTEREST EXPENSE, NET

Net interest expense for fiscal 2018 was $3.5 million as compared to $3.4 million for fiscal 2017 and $3.1 million for fiscal 2016.  Although total debt at February 2, 2019 decreased $2.7 million from February 3, 2018, and we have decreased our overall borrowing rate as a result of the amended credit facility, interest costs for fiscal 2018 increased slightly due to the increase in the prime rate.  

See “Liquidity and Capital Resources” below for more discussion regarding our credit facility, equipment financings and term loan as well as our future liquidity needs.

INCOME TAXES

Pursuant to accounting rules, realization of our deferred tax assets, which relate principally to federal net operating loss carryforwards expiring from fiscal 2022 through fiscal 2036, is dependent on generating sufficient taxable income in the near term.

At the end of fiscal 2013, we entered a three-year cumulative loss and based on all positive and negative evidence at February 1, 2014, we established a full valuation allowance against our net deferred tax assets.  While we expect to return to profitability, generate taxable income and ultimately emerge from a three-year cumulative loss, based on our results for fiscal 2018 and our forecast for fiscal 2019, we believe that a full valuation allowance remains appropriate at this time.  

In December 2017, the U.S. Tax Cuts and Jobs Act of 2017 (the “2017 Tax Act”) was enacted.  Because we have a full valuation allowance against our deferred tax assets, there was limited impact to our consolidated financial results in fiscal 2017, as a result of the 2017 Tax Act.  The 2017 Tax Act also repealed the corporate alternative minimum tax (“AMT”) and any AMT carryforward credit became refundable over a five-year period.  As a result, in fiscal 2017 we recognized an income tax benefit for our AMT carryforward credit of approximately $2.1 million, net of the applicable sequestration rate.

Our tax benefit for fiscal 2018 consisted of an income tax benefit of $0.2 million for the recognition of the remaining portion of the AMT that was previously sequestered, partially offset by current state margin tax and foreign income tax. See Note E, Income Taxes.  

NET LOSS

Net loss for fiscal 2018 was $(13.5) million, or $(0.28) per diluted share, as compared to $(18.8) million, or $(0.39) per diluted share, in fiscal 2017 and a net loss of $(2.3) million, or $(0.05) per diluted share, in fiscal 2016.

Included in our results for fiscal 2018 were charges of $1.9 million, or $0.04 per diluted share, for the corporate restructuring, $2.4 million, or $0.05 per diluted share, in CEO transition costs and $4.6 million, or $0.09 per diluted share, in asset impairment charges.  

Results for fiscal 2017, included an asset impairment charge of $4.1 million, or $0.08 per diluted share, and increased advertising costs of $11.3 million, or $0.23 per diluted share as compared to fiscal 2016.  These additional costs were partially offset by the 53^rd week, which added approximately $1.6 million in operating income in fiscal 2017.  

On a non-GAAP basis, before asset impairments, corporate restructuring and CEO transition costs and assuming a normalized tax rate of 26% for all periods, adjusted net loss per share for fiscal 2018 was $(0.07) per diluted share, compared to $(0.26) per diluted share for fiscal 2017 and $(0.03) per diluted share in fiscal 2016.  See “Non-GAAP Reconciliation” below.  

31

SEASONALITY

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

EFFECTS OF INFLATION

Although our operations are influenced by general economic trends, we do not believe that inflation has had a material effect on the results of our operations in the last three fiscal years.

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 amended and restated in May 2018. Our current cash needs are primarily for working capital (essentially inventory requirements), capital expenditures and growth initiatives. We plan to manage our working capital and expect that excess cash from operations will be directed toward our growth initiatives and debt reductions.

For fiscal 2018, cash flow from operating activities decreased by $15.3 million primarily due to prior year inventory reduction initiatives of $14.1 million, that have now annualized, and an inventory increase in the current year for our wholesale business. The addition of our wholesale business will create a temporary shift in free cash flow due to the nature of inventory lead times and wholesale account payment terms.  For fiscal 2018, our free cash flow was negatively impacted by approximately $5.0 million related to an increase in inventory and accounts receivable for our wholesale business.  These decreases were partially offset by the improved earnings and lower capital expenditures.  Capital expenditures, including the acquisition of the dxl.com domain name, decreased $9.6 million due to fewer store openings in fiscal 2018.  As a result, free cash flow decreased $(5.6) million to $2.8 million from $8.4 million for fiscal 2017. This free cash flow was used to pay down debt. In total, debt outstanding at February 2, 2019 decreased $2.7 million from February 3, 2018.  

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

The following is a summary of our total debt outstanding at February 2, 2019, with the associated unamortized debt issuance costs:

32

Credit Facility

In the second quarter of fiscal 2018, we amended and restated our credit facility with Bank of America, N.A. (our “Credit Facility”) which extended the maturity date to May 24, 2023.  The Credit Facility continues to provide for a maximum committed borrowing of $125.0 million, which, pursuant to an accordion feature, may be increased to $175.0 million upon our request and the agreement of the lender(s) participating in the increase (the “Revolving Facility”).  The Credit Facility includes a sublimit of $20.0 million for commercial and standby letters of credit and a sublimit of up to $15.0 million for swingline loans. Borrowings made pursuant to the Revolving Facility under the Credit Facility will bear interest, calculated under either the Federal Funds rate or the LIBOR rate, at a rate equal to the following: (a) the Federal Funds rate plus a varying percentage based on the Company’s excess availability, of either 0.25% or 0.50%, or (b) the LIBOR rate (the Company being able to select interest periods of 1 week, 1 month, 2 months, 3 months or 6 months) plus a varying percentage based on the Company’s excess availability, of either 1.25% or 1.50%. Our Credit Facility is described in more detail in Note D to the Notes to the Consolidated Financial Statements.

We had outstanding borrowings of $42.3 million under the Revolving Facility at February 2, 2019. Outstanding standby letters of credit were $2.9 million and outstanding documentary letters of credit were $1.5 million. The average monthly borrowing outstanding under the Revolving Facility during fiscal 2018 was approximately $54.1 million, resulting in an average unused excess availability of approximately $37.8 million. Unused excess availability at February 2, 2019 was $45.6 million. Our obligations under the Credit Facility are secured by a lien on substantially all of our assets.  

FILO Loan

The Credit Facility also includes a FILO loan for $15.0 million, the proceeds of which were used to repay our previous Term Loan Facility.  The total borrowing capacity under the FILO loan is based on a borrowing base, generally defined as a specified percentage of the value of eligible accounts, including certain trade names, that step down over time, plus a specified percentage of the value of eligible inventory that steps down over time. There can be no voluntary prepayments on the FILO loan during the first year.  After its one-year anniversary, the FILO loan can be repaid, in whole or in part, subject to certain payment conditions.

Borrowings made under the FILO loan will bear interest, calculated under either the Federal Funds rate or the LIBOR rate, at a rate equal to the following: (a) the Federal Funds rate plus a varying percentage based on the Company’s excess availability, of either 1.75% or 2.00% or (b) the LIBOR rate (the Company being able to select interest periods of 1 week, 1 month, 2 months, 3 months or 6 months) plus a varying percentage based on the Company’s excess availability, of either 2.75% or 3.00%.  At February 2, 2019, the outstanding balance of $15.0 million was in a 2-month LIBOR-based contract with an interest rate of 5.29%.

Equipment Financing Notes

We previously 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 were secured by a security interest in all of our rights, title and interest in and to certain equipment. The Notes accrued interest at fixed rates ranging from 3.07% to 3.50%. During the second quarter of fiscal 2018, the Company repaid in full the remaining balance on these Notes, without penalty.

Prior Term Loan

We previously had a senior secured term loan facility with Wells Fargo Bank, National Association as administrative and collateral agent (the “Term Loan Facility”).  The interest rate on the Term Loan Facility was equal to the greater of (a) 1.00% and (b) the one-month LIBOR rate, plus 6.50%.  The Term Loan Facility, with a maturity date of October 29, 2019 and an outstanding balance of $11.5 million, was repaid in full, without penalty, during the second quarter of fiscal 2018 in connection with the new Credit Facility.

INVENTORY

At February 2, 2019, total inventories increased to $106.8 million from $103.3 million at February 3, 2018. The $3.5 million increase in inventory was due to the acceleration of certain receipts from February to January as well as increased inventory levels for our wholesale segment. As a result of our inventory efficiency initiatives over the past three years, we have reduced our average inventory per total built-out square footage of stores to $49.30 per square foot at February 2, 2019 from $61.46 per square foot at January 30, 2016.  At February 2, 2019, our clearance inventory represented 10.3% of our inventory, as compared to 9.8% at February 3, 2018. We believe that this slight increase was due to more customers gravitating toward our new, full-price merchandise, as opposed to last year where we saw higher sell-throughs on clearance product.

33

OFF-BALANCE SHEET ARRANGEMENTS

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

CONTRACTUAL OBLIGATIONS

The following table summarizes our contractual obligations at February 2, 2019, and the effect such obligations are expected to have on our liquidity and cash flows in future periods (Certain amounts in the following table do not foot due to rounding):

CAPITAL EXPENDITURES

The following table sets forth the open stores and related square footage at February 2, 2019 and February 3, 2018 respectively:

34

Below is a summary of store openings and closings from February 3, 2018 to February 2, 2019:

Our capital expenditures for fiscal 2018 were $13.0 million, as compared to $22.6 million in fiscal 2017 and $29.2 million in fiscal 2016.  Approximately $1.0 million related to the opening of 2 DXL retail stores, 1 DXL outlet and the rebranding of 3 Casual Male XL stores to DXL retail stores.  In addition, we spent approximately $8.2 million in management information projects, which included continued enhancements for our e-commerce sites, $2.7 million in other general projects and $1.2 million for the acquisition of the “dxl.com” domain name.

For fiscal 2019, we plan to open 2 new DXL retail stores, remodel 12 Casual Male XL to DXL retail stores and 1 Casual Male XL outlet to a DXL outlet store. In addition, we expect to close 5 Casual Male XL retail stores (2 of which will be closed in connection with the opening of the two DXL stores), 1 DXL store and our 5 remaining Rochester Clothing stores.  

Non-GAAP Reconciliations

We monitor certain non-GAAP financial measures on a regular basis in order to track the progress of our business, including the measures below.  We believe these measures provide helpful information with respect to the Company’s operating performance to shareholders, investors and analysts, and that the inclusion of these non-GAAP measures is important to assist investors in comparing our performance in fiscal 2018 to fiscal 2017 and fiscal 2016, on a comparable basis.  However, these measures may not be comparable to similar measures used by other companies and should not be considered superior to or as a substitute for operating net loss, net loss per diluted share or cash flows from operating activities in accordance with GAAP.  

Adjusted Net Loss and Adjusted Net Loss Per Diluted Share

Adjusted loss from continuing operations and adjusted net loss reflect an adjustment assuming a normal tax rate of 26% and the add- back of impairment charges, CEO transition costs and corporate restructuring.  We have fully reserved against our deferred tax assets and, therefore, net loss is not reflective of earnings assuming a “normal” tax position.  Adjusted net loss provides investors with a useful indication of the financial performance of the business, on a comparative basis, assuming a normalized tax rate of 26%.

35

The following table is a reconciliation of net loss and net loss per diluted share (on a GAAP basis) to adjusted net loss and adjusted net loss per diluted share (on a non-GAAP basis) (certain amounts may not foot due to rounding):

Free Cash Flow

We calculate free cash flow as cash flow provided by operating activities less capital expenditures. Free cash flow excludes the mandatory and discretionary repayment of debt.  The following table provides a reconciliation of free cash flow:

(1)Cash flow from operating activities includes lease incentives received against our capital expenditures.

EBITDA and Adjusted EBITDA

EBITDA and Adjusted EBITDA are presented because we believe that these measures are useful to investors in evaluating our performance.  With the significant capital investment associated with the DXL transformation, which has resulted in increased levels of depreciation expense, management uses EBITDA as a key metric to measure profitability and economic productivity.

EBITDA is calculated as earnings before interest, taxes, depreciation and amortization.  Adjusted EBITDA is calculated as EBITDA before impairment charges, CEO transition costs and corporate restructuring.  

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