Destination XL (DXLG) - 2021 Q2 - Quarterly Report

PART I. FINANCIAL INFORMATION Presents the company's unaudited consolidated financial statements and management's analysis for the period Item 1. Financial Statements Unaudited consolidated financial statements for Q2 fiscal 2020, covering balance sheets, operations, comprehensive income, equity, cash flows, and notes Consolidated Balance Sheets | (In thousands, except share data) (Unaudited) | August 1, 2020 (Fiscal 2020) | February 1, 2020 (Fiscal 2019) | | :-------------------------------------------- | :--------------------------- | :----------------------------- | | ASSETS | | | | Current assets: | | | | Cash and cash equivalents | $ 20,414 | $ 4,338 | | Accounts receivable | 2,574 | 6,219 | | Inventories | 87,388 | 102,420 | | Prepaid expenses and other current assets | 9,908 | 10,883 | | Total current assets | 120,284 | 123,860 | | Non-current assets: | | | | Property and equipment, net | 65,258 | 78,279 | | Operating lease right-of-use assets | 157,095 | 186,413 | | Intangible assets | 1,150 | 1,150 | | Other assets | 593 | 1,215 | | Total assets | $ 344,380 | $ 390,917 | | LIABILITIES AND STOCKHOLDERS' EQUITY | | | | Current liabilities: | | | | Accounts payable | $ 18,533 | $ 31,763 | | Accrued expenses and other current liabilities| 20,899 | 18,123 | | Operating leases, current | 45,626 | 41,176 | | Borrowings under credit facility | 66,545 | 39,301 | | Total current liabilities | 151,603 | 130,363 | | Long-term liabilities: | | | | Long-term debt | 14,841 | 14,813 | | Operating leases, non-current | 165,310 | 182,051 | | Other long-term liabilities | 5,241 | 5,267 | | Total long-term liabilities | 185,392 | 202,131 | | Stockholders' equity: | | | | Common stock | 638 | 633 | | Additional paid-in capital | 313,874 | 312,933 |\n| Treasury stock at cost | (92,658) | (92,658) |\n| Accumulated deficit | (208,494) | (156,054) |\n| Accumulated other comprehensive loss | (5,975) | (6,431) |\n| Total stockholders' equity | 7,385 | 58,423 |\n| Total liabilities and stockholders' equity | $ 344,380 | $ 390,917 | Consolidated Statements of Operations | (In thousands, except share data) (Unaudited) | For the Three Months Ended August 1, 2020 (Fiscal 2020) | For the Three Months Ended August 3, 2019 (Fiscal 2019) | For the Six Months Ended August 1, 2020 (Fiscal 2020) | For the Six Months Ended August 3, 2019 (Fiscal 2019) | | :-------------------------------------------- | :------------------------------------------------------ | :------------------------------------------------------ | :---------------------------------------------------- | :---------------------------------------------------- | | Sales | $ 76,442 | $ 123,245 | $ 133,669 | $ 236,218 |\n| Cost of goods sold including occupancy costs | 54,945 | 68,676 | 98,958 | 132,236 |\n| Gross profit | 21,497 | 54,569 | 34,711 | 103,982 |\n| Expenses: | | | | |\n| Selling, general and administrative | 25,795 | 47,478 | 57,907 | 92,089 |\n| CEO transition costs | — | — | — | 702 |\n| Impairment of assets | — | — | 16,335 | — |\n| Depreciation and amortization | 5,340 | 6,210 | 11,072 | 12,548 |\n| Total expenses | 31,135 | 53,688 | 85,314 | 105,339 |\n| Operating income (loss) | (9,638) | 881 | (50,603) | (1,357) |\n| Interest expense, net | (1,052) | (851) | (1,793) | (1,715) |\n| Income (loss) before provision (benefit) for income taxes | (10,690) | 30 | (52,396) | (3,072) |\n| Provision (benefit) for income taxes | 24 | (8) | 44 | (29) |\n| Net income (loss) | $ (10,714) | $ 38 | $ (52,440) | $ (3,043) |\n| Net income (loss) per share - basic and diluted | $ (0.21) | $ 0.00 | $ (1.03) | $ (0.06) |\n| Weighted-average number of common shares outstanding: | | | | |\n| Basic | 51,078 | 49,867 | 50,918 | 49,734 |\n| Diluted | 51,078 | 50,175 | 50,918 | 49,734 | Consolidated Statements of Comprehensive Income (Loss) | (In thousands) (Unaudited) | For the Three Months Ended August 1, 2020 (Fiscal 2020) | For the Three Months Ended August 3, 2019 (Fiscal 2019) | For the Six Months Ended August 1, 2020 (Fiscal 2020) | For the Six Months Ended August 3, 2019 (Fiscal 2019) | | :-------------------------------------------------------- | :------------------------------------------------------ | :------------------------------------------------------ | :---------------------------------------------------- | :---------------------------------------------------- | | Net income (loss) | $ (10,714) | $ 38 | $ (52,440) | $ (3,043) |\n| Other comprehensive income before taxes: | | | | |\n| Foreign currency translation | (5) | (59) | (39) | (83) |\n| Pension plans | 253 | 191 | 495 | 392 |\n| Other comprehensive income before taxes | 248 | 132 | 456 | 309 |\n| Tax provision related to items of other comprehensive income | — | (30) | — | (81) |\n| Other comprehensive income, net of tax | 248 | 102 | 456 | 228 |\n| Comprehensive income (loss) | $ (10,466) | $ 140 | $ (51,984) | $ (2,815) | Consolidated Statements of Stockholders' Equity | (in thousands) | Common Shares | Common Stock Amounts | Additional Paid-in Capital | Treasury Stock Shares | Treasury Stock Amounts | Accumulated Deficit | Accumulated Other Comprehensive Income (Loss) | Total |\n| :-------------------------------------------- | :------------ | :------------------- | :------------------------- | :-------------------- | :--------------------- | :------------------ | :-------------------------------------------- | :---- |\n| Balance at February 1, 2020 | 63,297 | $ 633 | $ 312,933 | (12,755) | $ (92,658) | $ (156,054) | $ (6,431) | $ 58,423 |\n| Board of directors compensation | 93 | 1 | 148 | | | | | 149 |\n| Stock compensation expense | | | 452 | | | | | 452 |\n| Issuance of common stock, upon RSUs release | 437 | 4 | (4) | | | | | — |\n| Deferred stock vested | 6 | — | — | | | | | — |\n| Accumulated other comprehensive income (loss):| | | | | | | | |\n| Pension plan, net of taxes | | | | | | | 242 | 242 |\n| Foreign currency, net of taxes | | | | | | | (34) | (34) |\n| Net loss | | | | | | (41,726) | | (41,726) |\n| Balance at May 2, 2020 | 63,833 | $ 638 | $ 313,529 | (12,755) | $ (92,658) | $ (197,780) | $ (6,223) | $ 17,506 |\n| Stock compensation expense | | | 345 | | | | | 345 |\n| Deferred stock vested | 8 | — | — | | | | | — |\n| Accumulated other comprehensive income (loss):| | | | | | | | |\n| Pension plan, net of taxes | | | | | | | 253 | 253 |\n| Foreign currency, net of taxes | | | | | | | (5) | (5) |\n| Net loss | | | | | | (10,714) | | (10,714) |\n| Balance at August 1, 2020 | 63,840 | $ 638 | $ 313,874 | (12,755) | $ (92,658) | $ (208,494) | $ (5,975) | $ 7,385 | Consolidated Statements of Cash Flows | (In thousands) (Unaudited) | For the Six Months Ended August 1, 2020 (Fiscal 2020) | For the Six Months Ended August 3, 2019 (Fiscal 2019) |\n| :----------------------------------------------------------- | :---------------------------------------------------- | :---------------------------------------------------- |\n| Cash flows from operating activities: | | |\n| Net loss | $ (52,440) | $ (3,043) |\n| Adjustments to reconcile net loss to net cash provided by (used for) operating activities: | | |\n| Amortization of deferred debt issuance costs | 72 | 69 |\n| Impairment of assets | 16,335 | — |\n| Depreciation and amortization | 11,072 | 12,548 |\n| Stock compensation expense | 797 | 928 |\n| Board of directors stock compensation | 149 | 284 |\n| Changes in operating assets and liabilities: | | |\n| Accounts receivable | 3,645 | 23 |\n| Inventories | 15,032 | (3,537) |\n| Prepaid expenses and other current assets | 975 | (889) |\n| Other assets | 622 | (441) |\n| Accounts payable | (13,230) | 2,511 |\n| Operating leases, net | 4,487 | (2,115) |\n| Accrued expenses and other liabilities | 3,488 | (5,420) |\n| Net cash provided by (used for) operating activities | (8,996) | 918 |\n| Cash flows from investing activities: | | |\n| Additions to property and equipment, net | (2,128) | (7,597) |\n| Net cash used for investing activities | (2,128) | (7,597) |\n| Cash flows from financing activities: | |\n| Net borrowings under credit facility | 27,225 | 7,502 |\n| Debt issuance costs associated with credit facility amendment| (25) | — |\n| Tax withholdings paid related to net share settlements of RSUs | — | (198) |\n| Net cash provided by financing activities | 27,200 | 7,304 |\n| Net increase in cash and cash equivalents | 16,076 | 625 |\n| Cash and cash equivalents: | |\n| Beginning of period | 4,338 | 4,868 |\n| End of period | $ 20,414 | $ 5,493 | Notes to Consolidated Financial Statements The notes provide essential context and detail for the consolidated financial statements, covering the basis of presentation, the significant impact of the COVID-19 pandemic on operations and liquidity, segment information, accounting for intangibles, accounts payable, fair value measurements, and accumulated other comprehensive income. They also detail revenue recognition policies, debt agreements, lease accounting, long-term incentive plans, stock-based compensation, earnings per share calculations, income tax provisions, CEO transition costs, and the company's Nasdaq listing compliance Note 1. Basis of Presentation Impact of COVID-19 Pandemic on Business - All store locations temporarily closed on March 17, 2020, with gradual reopening starting in late April and all stores reopened by end of June 2020, though operating with reduced hours[19] - Significant precautionary measures taken to reduce expenses and preserve liquidity, including furloughs, layoffs (34 employees in May, 430 store associates in July), temporary salary reductions for management (10%-20%), and suspension of non-employee director compensation[19] - Drew $30.0 million from revolving facility in March 2020, amended credit facility in April 2020 to increase borrowing base and permit promissory notes with vendors, and negotiated rent concessions with landlords[19] Segment Information - The Company operates three principal segments: stores, direct, and wholesale businesses. Stores and direct segments are aggregated into one 'retail segment' due to similar economic characteristics and omni-channel approach[20] - Wholesale segment's operating results are aggregated with the retail segment due to immateriality of its revenues, profits, and assets[20] Intangibles - The 'dxl.com' domain name, with a carrying value of $1.2 million, is considered an indefinite-lived asset[21] - Qualitative review performed as of May 2, 2020, and August 1, 2020, concluded no impairment of the intangible asset despite the COVID-19 pandemic's impact[21] Accounts Payable - Company received extended payment terms from certain merchandise vendors through short-term notes totaling $3.5 million, accruing interest at 4.0% annually[21] - Outstanding balance of these notes was $2.0 million at August 1, 2020, included in Accounts Payable[21] Fair Value of Financial Instruments - Fair value of long-term debt is classified within Level 2 of the valuation hierarchy, approximating carrying amount at August 1, 2020[22] - The 'dxl.com' domain name's fair value is measured on a non-recurring basis (Level 3) during annual impairment tests[22] - Carrying amounts of cash, receivables, payables, accrued expenses, and short-term borrowings approximate fair value due to their short maturity[22] Accumulated Other Comprehensive Income (Loss) - ("AOCI") | (in thousands) | For the three months ended: August 1, 2020 | For the three months ended: August 3, 2019 | For the six months ended: August 1, 2020 | For the six months ended: August 3, 2019 |\n| :--------------------------------------------------------------------------- | :----------------------------------------- | :----------------------------------------- | :--------------------------------------- | :--------------------------------------- |\n| Balance at beginning of the quarter | Pension Plans $ (6,236) | Pension Plans $ (5,371) | Pension Plans $ (6,478) | Pension Plans $ (5,521) |\n| | Foreign Currency $ 13 | Foreign Currency $ (686) | Foreign Currency $ 47 | Foreign Currency $ (662) |\n| | Total $ (6,223) | Total $ (6,057) | Total $ (6,431) | Total $ (6,183) |\n| Other comprehensive income (loss) before reclassifications, net of taxes | Pension Plans: 77 | Pension Plans: 27 | Pension Plans: 154 | Pension Plans: 55 |\n| | Foreign Currency: (5) | Foreign Currency: (40) | Foreign Currency: (39) | Foreign Currency: (64) |\n| | Total: 72 | Total: (13) | Total: 115 | Total: (9) |\n| Amounts reclassified from accumulated other comprehensive income, net of taxes | Pension Plans: 176 | Pension Plans: 115 | Pension Plans: 341 | Pension Plans: 237 |\n| | Foreign Currency: — | Foreign Currency: — | Foreign Currency: — | Foreign Currency: — |\n| | Total: 176 | Total: 115 | Total: 341 | Total: 237 |\n| Other comprehensive income (loss) for the period | Pension Plans: 253 | Pension Plans: 142 | Pension Plans: 495 | Pension Plans: 292 |\n| | Foreign Currency: (5) | Foreign Currency: (40) | Foreign Currency: (39) | Foreign Currency: (64) |\n| | Total: 248 | Total: 102 | Total: 456 | Total: 228 |\n| Balance at end of quarter | Pension Plans $ (5,983) | Pension Plans $ (5,229) | Pension Plans $ (5,983) | Pension Plans $ (5,229) |\n| | Foreign Currency $ 8 | Foreign Currency $ (726) | Foreign Currency $ 8 | Foreign Currency $ (726) |\n| | Total $ (5,975) | Total $ (5,955) | Total $ (5,975) | Total $ (5,955) | Note 2. Revenue Recognition Disaggregation of Revenue | (in thousands) | For the three months ended August 1, 2020 | For the three months ended August 3, 2019 | For the six months ended August 1, 2020 | For the six months ended August 3, 2019 |\n| :------------- | :---------------------------------------- | :---------------------------------------- | :-------------------------------------- | :-------------------------------------- |\n| Store sales | $ 38,465 (53.9%) | $ 95,119 (78.9%) | $ 70,792 (55.9%) | $ 181,834 (78.7%) |\n| Direct sales | 32,959 (46.1%) | 25,406 (21.1%) | 55,841 (44.1%) | 49,239 (21.3%) |\n| Retail segment | $ 71,424 | $ 120,525 | $ 126,633 | $ 231,073 |\n| Wholesale segment | 5,018 | 2,720 | 7,036 | 5,145 |\n| Total Sales | $ 76,442 | $ 123,245 | $ 133,669 | $ 236,218 | Note 3. Debt Credit Agreement with Bank of America, N.A. - Third Amendment to Credit Facility (April 15, 2020) extended FILO loan advance rate, lowered Loan Cap, increased Applicable Margins by 150 basis points, and allowed up to $15.0 million in vendor promissory notes[31] - Borrowings and Repayments under Revolving Facility (Six Months Ended): | (in thousands) | August 1, 2020 | August 3, 2019 |\n| :------------- | :------------- | :------------- |\n| Borrowings | $ 53,471 | $ 72,384 |\n| Repayments | (26,246) | (64,882) |\n| Net borrowings | $ 27,225 | $ 7,502 | - At August 1, 2020, outstanding borrowings under the Revolving Facility were $66.8 million, with $12.4 million in unused excess availability[32] Long-Term Debt - FILO loan borrowing capacity is based on eligible accounts and inventory, with advance rates extended to December 2020 before stepping down[32] - Applicable margin rates for FILO loan borrowings increased by approximately 150 basis points due to advance rate extension[32] - Long-Term Debt (in thousands): | Item | August 1, 2020 | February 1, 2020 |\n| :---------------------------------- | :------------- | :--------------- |\n| FILO Loan | $ 15,000 | $ 15,000 |\n| Less: unamortized debt issuance costs | (159) | (187) |\n| Total long-term debt | $ 14,841 | $ 14,813 | Note 4. Leases - Company leases all store locations and corporate headquarters under operating leases, typically 5-10 year initial terms for stores and 20 years for headquarters[35] - Due to COVID-19, rent payments were held from April-June 2020, leading to concessions (deferrals, abatements, extensions) with most landlords, accounted for as lease modifications[35] - Total Lease Costs (in thousands): | Item | For the three months ended August 1, 2020 | For the three months ended August 3, 2019 | For the six months ended August 1, 2020 | For the six months ended August 3, 2019 |\n| :---------------- | :---------------------------------------- | :---------------------------------------- | :-------------------------------------- | :-------------------------------------- |\n| Operating lease cost | $ 11,300 | $ 13,215 | $ 23,932 | $ 26,468 |\n| Variable lease costs | 3,266 | 3,954 | 7,069 | 7,999 |\n| Total lease costs | $ 14,566 | $ 17,169 | $ 31,001 | $ 34,467 | - Lease Liabilities Reconciliation (in thousands) as of August 1, 2020: | Year | Undiscounted Cash Flows |\n| :--------------- | :---------------------- |\n| 2020 (remaining) | $ 27,978 |\n| 2021 | 58,166 |\n| 2022 | 49,959 |\n| 2023 | 41,321 |\n| 2024 | 31,031 |\n| Thereafter | 38,509 |\n| Total minimum lease payments | $ 246,964 |\n| Less: interest | 36,028 |\n| Present value of future minimum lease payments | $ 210,936 |\n| Less: current obligations | 45,626 |\n| Long-term lease obligations | $ 165,310 | Note 5. Long-Term Incentive Plans - Company has three active LTIPs (2018-2020, 2019-2021, 2020-2022), with 50% time-based and 50% performance-based vesting[38] - Time-based awards for 2020-2022 LTIP were granted as 50% stock options and 50% cash[38] - Estimated compensation expense for each LTIP is approximately $3.7 million to $3.8 million, expensed straight-line over 41-46 months for time-based awards[38] Note 6. Stock-Based Compensation Non-Employee Director Compensation Plan - 23,148 shares of common stock, with a fair value of approximately $24,999, were granted to non-employee directors as compensation in lieu of cash in the first six months of fiscal 2020[42] - Non-employee directors suspended their compensation for the second quarter of fiscal 2020[42] Stock Compensation Expense - Total stock-based compensation expense recognized was $0.8 million for the first six months of fiscal 2020, down from $0.9 million in fiscal 2019[42] - Unrecognized compensation cost for time-vested awards was approximately $2.7 million as of August 1, 2020, to be expensed over a weighted average remaining life of 32 months[42] Note 7. Earnings per Share - Weighted-Average Common Shares Outstanding (in thousands): | Item | For the three months ended August 1, 2020 | For the three months ended August 3, 2019 | For the six months ended August 1, 2020 | For the six months ended August 3, 2019 |\n| :------------------------------------------ | :---------------------------------------- | :---------------------------------------- | :-------------------------------------- | :-------------------------------------- |\n| Basic weighted average common shares outstanding | 51,078 | 49,867 | 50,918 | 49,734 |\n| Common stock equivalents – stock options and restricted stock | — | 308 | — | — |\n| Diluted weighted average common shares outstanding | 51,078 | 50,175 | 50,918 | 49,734 | - 720,000 shares of unvested performance stock units and 327,382 shares of deferred stock (at August 1, 2020) were excluded from EPS computations due to unachieved performance targets or unvested status[45] Note 8. Income Taxes - Company maintains a full valuation allowance against its deferred tax assets ($107.4 million total deferred tax assets, $47.4 million liabilities, $60.0 million valuation allowance at August 1, 2020) due to uncertainty in generating sufficient taxable income[46] - Federal net operating loss carryforwards of $158.2 million (expiring 2022-2036) and $34.0 million (no expiration), plus state and Canadian NOLs[46] - CARES Act provided a $1.2 million refundable employee retention tax credit and accelerated $1.1 million in refundable alternative minimum tax (AMT) credit in Q2 fiscal 2020[46] Note 9. CEO Transition Costs - First six months of fiscal 2019 included $0.7 million in CEO transition costs[47] Note 10. Nasdaq Notification of Non-Compliance - Received Nasdaq non-compliance notification on April 9, 2020, for failing to meet the $1.00 minimum bid price requirement[48] - Grace period extended to December 21, 2020, due to COVID-19 tolling of compliance periods[49] - Shareholders approved a reverse stock split (1-for-2 to 1-for-5) to regain compliance, but no assurance of success[49] Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Management's analysis of financial condition and results, highlighting COVID-19 impact, liquidity, sales, and non-GAAP measures Forward-Looking Statements - This section contains forward-looking statements regarding the Company's ability to withstand the COVID-19 pandemic, manage costs, expected inventory levels, direct sales impact, store operations, and liquidity for the next 12 months[51] - Readers are encouraged to refer to 'Risk Factors' in Part II, Item 1A, which discusses risks including the COVID-19 pandemic, corporate strategy execution, and market competition[51] Business Summary - Destination XL Group, Inc. is the largest specialty retailer of big and tall men's clothing, operating retail, wholesale, and direct businesses in the US and Canada[52] - As of August 1, 2020, the Company operated 228 Destination XL stores, 17 DXL outlet stores, 49 Casual Male XL retail stores, and 23 Casual Male XL outlet stores, supported by its e-commerce site dxl.com[52] Segment Reporting - The Company has three operating segments: stores, direct business, and wholesale business. Stores and direct businesses are aggregated into a single 'retail segment' due to similar economic characteristics and an omni-channel approach[53] - The wholesale segment's operating results are aggregated with the retail segment due to its immateriality[53] Direct Sales - The Company is adapting to evolving customer shopping preferences across multiple channels, with stores capable of fulfilling online orders and customers able to order online for in-store or curbside pickup[54] - E-commerce sales (direct sales) are defined as sales originating online, including via website, in-store online, or third-party marketplaces, distinct from store sales fulfilled directly at the store level[56] Comparable Sales - Comparable sales discussion is omitted for Q2 and first six months of fiscal 2020 because temporary store closures and reduced hours due to COVID-19 make it an unmeaningful metric[57] Results of Operations Impact of COVID-19 Pandemic on Our Business - COVID-19 significantly impacted the business, leading to temporary store closures (March 17, 2020, all reopened by end of June with reduced hours) and a shift to online shopping[58] - Direct business sales increased by $7.6 million in Q2 fiscal 2020, accounting for 46.1% of retail sales (vs. 21.1% prior year), driven by digital strategies and changing customer preferences[58] - Proactive measures included restructuring to reduce operating costs (furloughs, layoffs of 34 corporate and 430 store associates, temporary salary reductions for management), negotiating rent relief ($10.0 million reduction for fiscal 2020), and managing cash flow by drawing $30.0 million from credit facility[58] Financial Summary - Financial Summary (in millions, except per share data): | Item | For the three months ended August 1, 2020 | For the three months ended August 3, 2019 | For the six months ended August 1, 2020 | For the six months ended August 3, 2019 |\n| :---------------------------------- | :---------------------------------------- | :---------------------------------------- | :-------------------------------------- | :-------------------------------------- |\n| Net income (loss) | $ (10.7) | $ 0.0 | $ (52.4) | $ (3.0) |\n| Adjusted EBITDA (Non-GAAP basis) | $ (4.3) | $ 7.1 | $ (23.2) | $ 11.9 |\n| Per diluted share: | | | | |\n| Net income (loss) | $ (0.21) | $ 0.00 | $ (1.03) | $ (0.06) |\n| Adjusted net income (loss) (Non-GAAP basis) | $ (0.15) | $ 0.00 | $ (0.52) | $ (0.04) | Sales - Total Sales (in thousands): | Sales Channel | For the three months ended August 1, 2020 | For the three months ended August 3, 2019 | For the six months ended August 1, 2020 | For the six months ended August 3, 2019 |\n| :--------------- | :---------------------------------------- | :---------------------------------------- | :-------------------------------------- | :-------------------------------------- |\n| Store sales | $ 38,465 (53.9%) | $ 95,119 (78.9%) | $ 70,792 (55.9%) | $ 181,834 (78.7%) |\n| Direct sales | 32,959 (46.1%) | 25,406 (21.1%) | 55,841 (44.1%) | 49,239 (21.3%) |\n| Retail segment | $ 71,424 | $ 120,525 | $ 126,633 | $ 231,073 |\n| Wholesale segment| 5,018 | 2,720 | 7,036 | 5,145 |\n| Total Sales | $ 76,442 | $ 123,245 | $ 133,669 | $ 236,218 | - Total sales for Q2 fiscal 2020 decreased 38.0% to $76.4 million (from $123.2 million), and for the first six months decreased 43.4% to $133.7 million (from $236.2 million), primarily due to store closures and reduced consumer spending from COVID-19[60] - Direct business sales increased 69% over prior year Q2, driven by DXL.com, and wholesale sales increased to $5.0 million (from $2.7 million) due to $4.1 million in protective mask sales[60] Gross Margin Rate - Gross margin rate for Q2 fiscal 2020 was 28.1%, a 16.2% decrease from 44.3% in Q2 fiscal 2019, due to 5.1% deleveraging in occupancy costs and 11.1% decrease in merchandise margins[61][62] - For the first six months, gross margin was 26.0%, an 18.1% decrease from 44.0% in fiscal 2019, reflecting 8.6% deleveraging in occupancy costs and 9.5% decrease in merchandise margins, plus a $0.7 million increase in inventory reserves[62] - Merchandise margins improved significantly post-Father's Day, with a 1260 basis point improvement in July compared to May, despite increased shipping costs from direct channel growth and free shipping promotions[62] Selling, General and Administrative Expenses - SG&A expenses decreased by $21.7 million (45.7%) to 33.7% of sales in Q2 fiscal 2020 (from 38.5% in Q2 fiscal 2019), and by $34.2 million (37.1%) to 43.3% of sales for the first six months (from 39.0% in fiscal 2019)[63] - Cost reduction steps included furloughs, marketing cost reductions, temporary salary cuts for management, suspension of non-employee director compensation, and elimination of 34 corporate positions and 430 store associates[63] - Customer Facing Costs were 20.0% of sales for the first six months of fiscal 2020 (vs. 23.3% prior year), while Corporate Supporting Costs were 23.3% of sales (vs. 15.7% prior year)[63] Impairment of Assets - A $16.3 million impairment charge was recorded in Q1 fiscal 2020, comprising $12.5 million for right-of-use assets and $3.8 million for property and equipment, due to the COVID-19 pandemic's impact on store operations and projected cash flows[63] - No material impairment of long-lived assets occurred in Q2 fiscal 2020 or the first six months of fiscal 2019[25][63] Depreciation and Amortization - Depreciation and amortization decreased to $5.3 million in Q2 fiscal 2020 (from $6.2 million in Q2 fiscal 2019) and to $11.1 million for the first six months (from $12.5 million in fiscal 2019)[64] Interest Expense, Net - Net interest expense increased to $1.1 million in Q2 fiscal 2020 (from $0.9 million in Q2 fiscal 2019) and to $1.8 million for the first six months (from $1.7 million in fiscal 2019)[64] - Increase was due to higher average borrowings and a 150 basis point increase in interest rates under the Credit Facility amendment in April 2020, plus a $30.0 million draw on the revolving credit facility in March 2020[64][65] Income Taxes - A full valuation allowance against deferred tax assets has been maintained since fiscal 2013, deemed appropriate for fiscal 2020 due to current period losses and state margin tax[66] - The total income tax benefit for Q2 and first six months of fiscal 2019 included a deferred tax impact of $30,000 and $81,000, respectively, in other comprehensive income (loss)[66] Net Loss - Net loss for Q2 fiscal 2020 was $(10.7) million, or $(0.21) per diluted share, compared to net income of $0.0 million, or $0.00 per diluted share, in Q2 fiscal 2019[67] - Net loss for the first six months of fiscal 2020 was $(52.4) million, or $(1.03) per diluted share, compared to $(3.0) million, or $(0.06) per diluted share, in fiscal 2019[67] - Adjusted net loss per diluted share (non-GAAP) was ($0.15) for Q2 and ($0.52) for the first six months of fiscal 2020, compared to adjusted net income (loss) of $0.00 and ($0.04) respectively, in fiscal 2019[67] Inventory - Inventory at August 1, 2020, decreased by approximately $23.0 million to $87.4 million, compared to $110.4 million at August 3, 2019[67] - The Company cancelled approximately $148 million (at retail) of open merchandise orders for fiscal 2020 and expects fall inventory buys to be below fiscal 2019 levels[67] - Clearance inventory decreased by $2.2 million and represented 11.3% of total inventory at August 1, 2020 (vs. 10.9% prior year)[67] Seasonality - Consistent with the retail industry, the Company historically experiences seasonal fluctuations, with a significant portion of operating and net income generated in the fourth quarter due to the 'Holiday' season[68] Liquidity and Capital Resources - Primary liquidity sources are cash from operations and the Credit Facility. Management believes current liquidity is sufficient for the next 12 months, assuming no further significant economic shutdowns[69] - Cash flow from operations decreased by $9.9 million to $(9.0) million for the first six months of fiscal 2020 (from $0.9 million in fiscal 2019)[69] - Cash flow from financing activities increased $19.9 million to $27.2 million for the first six months of fiscal 2020, primarily due to a $30.0 million draw on the Credit Facility in March 2020[69] - Total Debt Outstanding (in thousands) at August 1, 2020: | Item | Gross Debt Outstanding | Less Debt Issuance Costs | Net Debt Outstanding |\n| :---------------- | :--------------------- | :----------------------- | :------------------- |\n| Credit facility | $ 66,803 | $ (258) | $ 66,545 |\n| FILO Loan | 15,000 | (159) | 14,841 |\n| Total debt | $ 81,803 | $ (417) | $ 81,386 | FILO Loan - The Credit Facility includes a $15.0 million FILO loan, with borrowing capacity based on eligible accounts and inventory, whose advance rates were extended to December 2020[72] - Borrowings under the FILO loan bear interest at variable rates (Federal Funds or LIBOR) plus increased applicable margins (e.g., 6.00% LIBOR-based at August 1, 2020)[72] Capital Expenditures - Capital expenditures for the first six months of fiscal 2020 were reduced to $2.1 million (from $7.6 million in fiscal 2019) to preserve liquidity[72] - Store Count and Square Footage (in thousands) at August 1, 2020 vs. August 3, 2019: | Store Concept | August 1, 2020 (Number of Stores) | August 1, 2020 (Square Footage) | August 3, 2019 (Number of Stores) | August 3, 2019 (Square Footage) |\n| :---------------------- | :-------------------------------- | :------------------------------ | :-------------------------------- | :------------------------------ |\n| DXL Retail | 228 | 1,729 | 220 | 1,697 |\n| DXL Outlets | 17 | 82 | 16 | 82 |\n| Casual Male XL Retail | 49 | 160 | 60 | 200 |\n| Casual Male Outlets | 23 | 69 | 29 | 88 |\n| Rochester Clothing | - | - | 3 | 36 |\n| Total Stores | 317 | 2,040 | 328 | 2,103 | - During the first six months of fiscal 2020, five Casual Male XL outlets and one Casual Male XL retail store were closed[72] Critical Accounting Policies - No material changes to critical accounting policies and estimates were disclosed compared to the Form 10-K for the year ending February 1, 2020[75] Non-GAAP Financial Measures - Adjusted net income (loss), adjusted net income (loss) per diluted share, free cash flow, and Adjusted EBITDA are non-GAAP measures used by management to evaluate performance and liquidity[75] - Adjusted Net Income (Loss) (Non-GAAP Basis) (in thousands, except per share data): | Item | For the three months ended August 1, 2020 | For the three months ended August 3, 2019 | For the six months ended August 1, 2020 | For the six months ended August 3, 2019 |\n| :------------------------------------------ | :---------------------------------------- | :---------------------------------------- | :-------------------------------------- | :-------------------------------------- |\n| Net income (loss) (GAAP basis) | $ (10,714) | $ 38 | $ (52,440) | $ (3,043) |\n| Adjust: CEO transition costs | - | - | - | 702 |\n| Impairment of assets | - | - | 16,335 | - |\n| Add back actual income tax provision (benefit) | 24 | (8) | 44 | (29) |\n| Add income tax (provision) benefit, assuming a normal tax rate of 26% | 2,779 | (8) | 9,376 | 616 |\n| Adjusted net income (loss) (non-GAAP basis) | $ (7,911) | $ 22 | $ (26,685) | $ (1,754) |\n| Per diluted share: | $ (0.15) | $ 0.00 | $ (0.52) | $ (0.04) | - Free Cash Flow (Non-GAAP Basis) (in millions): | Item | For the six months ended August 1, 2020 | For the six months ended August 3, 2019 |\n| :------------------------------------------ | :-------------------------------------- | :-------------------------------------- |\n| Cash flow from operating activities (GAAP basis) | $ (9.0) | $ 0.9 |\n| Capital expenditures, infrastructure projects | (1.4) | (5.2) |\n| Capital expenditures for DXL stores | (0.7) | (2.4) |\n| Free Cash Flow (non-GAAP basis) | $ (11.1) | $ (6.7) | - Adjusted EBITDA (Non-GAAP Basis) (in millions): | Item | For the three months ended August 1, 2020 | For the three months ended August 3, 2019 | For the six months ended August 1, 2020 | For the six months ended August 3, 2019 |\n| :------------------------------------------ | :---------------------------------------- | :---------------------------------------- | :-------------------------------------- | :-------------------------------------- |\n| Net income (loss) (GAAP basis) | $ (10.7) | $ 0.0 | $ (52.4) | $ (3.0) |\n| Add back: CEO transition costs | - | - | - | 0.7 |\n| Impairment of assets | - | - | 16.3 | - |\n| Provision (benefit) for income taxes | - | - | 0.0 | - |\n| Interest expense | 1.1 | 0.9 | 1.8 | 1.7 |\n| Depreciation and amortization | 5.3 | 6.2 | 11.1 | 12.5 |\n| Adjusted EBITDA (non-GAAP basis) | $ (4.3) | $ 7.1 | $ (23.2) | $ 11.9 | Item 3. Quantitative and Qualitative Disclosures about Market Risk Discusses market risks, primarily interest rate exposure on borrowings and immaterial foreign currency fluctuations Interest Rates - Borrowings under the Credit Facility and FILO loan bear variable interest rates based on Bank of America's prime rate or LIBOR[79] - At August 1, 2020, $66.8 million outstanding borrowings under Credit Facility ($62.0 million LIBOR-based at ~4.00%, remainder prime-based at 5.25%) and $15.0 million FILO loan (LIBOR-based at 6.00%)[79] - A 50 basis point increase in interest rates would result in an approximate $421,000 increase in annualized interest expense[79] [Foreign Currency](index=28&ty