Destination XL Group, Inc.: Form 10-Q for the period ended Oct 28, 2023

FORWARD-LOOKING STATEMENTS

Certain statements contained in this Quarterly Report on Form 10-Q constitute “forward-looking statements” within the meaning of the United States Private Securities Litigation Reform Act of 1995. In some cases, forward-looking statements can be identified by the use of forward-looking terminology such as “may,” “will,” “estimate,” “intend,” “plan,” “continue,” “believe,” “expect” or “anticipate” or the negatives thereof, variations thereon or similar terminology. The forward-looking statements contained in this Quarterly Report are generally located in the material set forth under the heading “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” but may be found in other locations as well, and include statements regarding our long-range strategic growth plan and our ability to achieve accelerated growth in the future; the expected impact of our strategic initiatives, including with respect to raising brand awareness, store development, website replatform and future alliances and collaborations; expected marketing costs, gross margin rates and expected capital expenditures in 2023; expected timing of stock repurchases under our board-approved stock repurchase program; and expected changes in our store portfolio and long-term plans for new or relocated stores. These forward-looking statements generally relate to plans and objectives for future operations and are based upon management’s reasonable estimates of future results or trends. The forward-looking statements in this Quarterly Report should not be regarded as a representation by us or any other person that our objectives or plans will be achieved. The following discussion of our financial condition and results of operations should be read in conjunction with the unaudited Consolidated Financial Statements and notes to those statements included elsewhere in this Quarterly Report and our audited Consolidated Financial Statements for the year ended January 28, 2023, included in our Annual Report on Form 10-K for the year ended January 28, 2023, as filed with the Securities and Exchange Commission on March 16, 2023 (our “Fiscal 2022 Annual Report”).

Numerous factors could cause our actual results to differ materially from such forward-looking statements. This discussion sets forth certain risks and uncertainties that may have an impact on future results and direction of our Company, including, without limitation, risks related to inflationary pressures, changes in consumer spending in response to economic factors, increased labor costs and potential labor shortages, the continuing economic impact of the Russian invasion of Ukraine and the war in the Middle East, our ability to manage appropriate inventory levels, our ability to successfully execute on our strategic initiatives, our ability to predict customer tastes and fashion trends, our ability to grow market share, our ability to forecast sales growth trends and compete in the market, and the other risks and uncertainties set forth in the “Risk Factors” section in Part I, Item 1A of our Fiscal 2022 Annual Report.

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

BUSINESS SUMMARY

Destination XL Group, Inc., together with our consolidated subsidiaries (the “Company”), is the largest specialty retailer of big and tall men’s clothing with retail and direct operations in the United States. We operate under the trade names of Destination XL®, DXL®, DXL Outlets, Casual Male XL® and Casual Male XL Outlets. At October 28, 2023, we operated 226 Destination XL stores, 16 DXL outlet stores, 21 Casual Male XL retail stores, 19 Casual Male XL outlet stores and a digital business, including an e-commerce site at dxl.com and a mobile site, m.destinationXL.com, mobile app and third-party marketplaces.

Unless the context indicates otherwise, all references to “we,” “our,” “us” and “the Company” refer to Destination XL Group, Inc. and our consolidated subsidiaries. We refer to our fiscal years, which end on February 3, 2024, January 28, 2023 and January 29, 2022 as "fiscal 2023", “fiscal 2022,” and “fiscal 2021” respectively. Fiscal 2023 is a 53-week period and fiscal 2022 and fiscal 2021 were 52-week periods.

SEGMENT REPORTING

We currently have two principal operating segments: our stores and direct business. We consider our stores and direct business 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 our omni-channel business approach.

COMPARABLE SALES

Our customer’s shopping experience continues to evolve across multiple channels, and we are continually adapting to meet the guest’s 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 and at curbside. We define store sales as sales that originate and are fulfilled directly at the store level. Digital 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.

Stores that have been open for at least 13 months are included in comparable sales. Stores that have been remodeled or relocated during the period are also included in our determination of comparable stores sales. Stores that have been expanded by more than 25% are considered non-comparable for the first 13 months. If a store is temporarily closed for more than 7 days, it is removed from the calculation of comparable sales until it reopens and upon its anniversary is once again removed from the calculation until the reopen date. 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.

EXECUTIVE SUMMARY

(in millions, except percentage of sales and per share data)

Our comparable sales for the third quarter decreased 6.7% with comparable sales from our stores down 8.1% and our direct business down 3.2%. The decrease was primarily driven by a slowdown in traffic. Despite this pressure on our top line results, we maintained a solid gross margin, managed our operating expenses, and generated net income of $0.06 per diluted share and an adjusted EBITDA margin (a non-GAAP measure) of 7.3%. Further, we continued to strengthen our financial position, successfully managing our inventory levels, which are down 6.5% to last year, and we generated $22.7 million in free cash flow year to date.

Net income for the third quarter of fiscal 2023 was $4.0 million, or $0.06 per diluted share, as compared to net income of $10.5 million, or $0.16 per diluted share, for the third quarter of fiscal 2022.

For the first nine months of fiscal 2023, net income was $22.6 million, or $0.35 per diluted share, as compared to net income of $80.8 million, or $1.20 per diluted share, for the first nine months of fiscal 2022. Net income for the first nine months of fiscal 2022 included the release of substantially all of the valuation allowance against our deferred tax assets. Assuming a normalized tax rate and adjusting for the loss from retirement plan terminations and asset impairments (gains), if any, adjusted net income for the first nine months of fiscal 2023, was $25.8 million, or $0.40 per diluted share, as compared to net income of $34.6 million, or $0.52 per diluted share, for the first nine months of fiscal 2022.

As of October 28, 2023, we had cash and investments of $60.4 million as compared to $23.5 million at October 29, 2022. As of October 28, 2023, we had no debt outstanding, unused excess availability of $87.6 million, and no borrowings during the first nine months. With cash on hand, no outstanding debt and full availability under our credit facility, we are continuing to pursue our strategic initiatives this year to grow our business.

Through the nine months ended October 28, 2023, we repurchased 3.1 million shares at a total cost, including fees, of $14.9 million. Subsequent to the end of the third quarter of fiscal 2023, effective November 17, 2023 the Board of Directors amended the stock repurchase program to increase the number of shares authorized to be repurchased from $15.0 million to $25.0 million.

In May 2023, we also made the decision to terminate our frozen, noncontributory pension plan and the frozen supplemental executive retirement plan ("SERP"). Given the current high interest rates, we saw this as an opportunistic use of excess cash to eliminate these variable liabilities. In connection with that decision, during the second quarter, we completed a partial settlement of our pension obligations through the purchase of nonparticipating annuities. Our results for the nine months ended October 28, 2023 include a loss of $4.2 million, representing a pro-rata portion of the unrealized loss in Accumulated Other Comprehensive Loss. We expect to complete the final settlement of the terminated pension plan by the end of fiscal 2023. In the third quarter, we completed the termination of the SERP plan, recognizing a loss for the three and nine months ended October 28, 2023 of $0.1 million.

Our Future Growth Strategy

Last quarter, we shared our long-term strategic plan to meaningfully accelerate the growth trajectory of the Company. We are actively working on these initiatives and continue to believe there is a substantial opportunity to take a greater share of market and grow our top line. Despite this more challenging quarter, we remain relentlessly disciplined and committed to our strategy and initiatives.

Our Company is in a fundamentally different position today than it was pre-pandemic. We have achieved a heightened level of operational excellence, recapitalized our balance sheet to provide a greater level of financial flexibility, made investments in our technical capabilities, and upgraded our leadership team. Since we repositioned DXL in fiscal 2019, we have grown comparable sales by more than 25% and more than doubled our adjusted EBITDA margin rate. This trajectory supports our strong belief in the longer-term opportunity for DXL in the men’s big & tall apparel category. As we look beyond fiscal 2023, we are excited about our long-term growth plan. Our goal is to accelerate the trajectory of the Company meaningfully over the next three to five years, by focusing on four specific growth initiatives: store development, website replatform, brand building and alliances/collaborations.

Store Development: As we have stated before, we believe there are at least 50 net new store opportunities. New store development addresses another factor critical to our growth. While we have stores in every major metro market across the United States, there are voids in certain markets where big + tall consumers are not being serviced by a DXL. In our most recent research across 2,500 big + tall men, both customers and non-customers, 49% self-reported that they do not shop with us because a store is not near them, while 37% self-reported that they do not shop with us because a store location is not convenient. This quarter, we opened our first new DXL store since 2018 in Queens, NY. We expect to open two more new stores before year-end and plan to open another 10 new stores in fiscal 2024 and 15 to 20 new stores in fiscal 2025. We have also converted seven Casual Male stores to DXL this year and expect to convert three more by the end of 2023.

Website Replatform: We are upgrading our website from legacy infrastructure to a modern commerce platform, with features and functionality launching throughout 2024. We believe this modernization will offer immediate performance improvements and customer experience benefits, while positioning us to deliver a greater pace of change in the future.

Marketing and Brand-Building: We believe one of our greatest opportunities is to address our overall brand awareness levels. Over the past few years, we have transformed our brand position and differentiated ourselves in terms of experience, fit, and assortment. However, many of our target consumers simply do not know DXL. We now have the financial flexibility, informed consumer research, and the right messaging to invest in building our brand. For the past several years, our advertising-to-sales ratio has been between 5.0% to 6.0%. Our plan is to increase our advertising-to-sales ratio over the next few years. We expect to invest more in brand building and top-of-funnel marketing to grow our customer file. We have begun a search for a creative agency to develop, build and execute a campaign that will drive an emotional connection to the brand and drive brand awareness. We are targeting a campaign launch for late Spring 2024 and we are prepared to conservatively spend another 1.0% to 2.0% of sales to initially fund that initiative and, with results, fund our marketing and brand building initiatives at greater levels over time.

Alliances/Collaborations: We strongly believe that our "fit authority" is one of our biggest assets and that we can develop successful collaborations with other brands, who are interested in finding a cost-effective way to expand their offering to include big + tall men's apparel. During the third quarter, we launched UNTUCKit, Fit by DXL in partnership with UNTUCKit which is being sold exclusively by DXL. In addition, we also added Hugo Boss and Faherty to our list of national brands this quarter, each with a level of merchandise exclusivity that cannot be found elsewhere. All three programs have exceeded our initial expectations and we will look for door expansions in all three for fiscal 2024. We believe these examples are only the beginning, and we are working in real-time on additional retail brand alliances. Lastly, we also launched our new fit technology and size mapping in twelve of our stores.

RESULTS OF OPERATIONS

Sales

The following table presents sales by segment for the three and nine months ended October 28, 2023 and October 29, 2022:

(in thousands)

Total sales for the third quarter of fiscal 2023 were $119.2 million, as compared to $129.7 million in the third quarter of fiscal 2022. Comparable sales for the third quarter decreased 6.7% with comparable sales from our stores down 8.1% and our direct business down 3.2%. The remainder of the decrease was due to sales from closed stores and a decrease in non-comparable sales.

Comparable sales in August decreased 6.5%, slightly improved in September to a decrease of 5.4%, but in October comparable sales decreased to 8.3%. Through the third quarter, we saw a further slowdown in store traffic as consumer spending continues to be negatively impacted by the economy and inflationary pressures. Store traffic was down 5.9% while dollars per transaction and conversion combined were down approximately 2.0%, with dollars per transaction down more than conversion. Sales were particularly softer in categories that outperformed last year due to a resurgence of back-to-work and social events. The decrease of 3.2% in the direct business was primarily due to a decrease in marketplace sales. The DXL website, which was down 1.5%, performed better as a result of improvements in email marketing and growth from our mobile app.

Sales for the first nine months of fiscal 2023 were $384.7 million as compared to $402.0 million for the first nine months of fiscal 2022. Comparable sales for the first nine months of fiscal 2023 decreased 2.5%, with comparable sales from our stores down 2.7% and direct down 2.0%.

Gross Margin Rate

For the third quarter of fiscal 2023, our gross margin rate, inclusive of occupancy costs, was 47.5% as compared to a gross margin rate of 50.0% for the third quarter of fiscal 2022.

Our gross margin rate decreased by 250-basis points, with a decrease in merchandise margin of 110-basis points and an increase of 140-basis points in occupancy costs primarily due to the deleveraging of sales and increased rents as a result of lease extensions. The decrease in merchandise margin of 110-basis points was due to continued cost pressures on certain private-label merchandise, much of which we continued to absorb rather than passing on to the customer through price increases. We also experienced increased shipping costs related to direct-to-consumer shipments and costs related to our loyalty program with more sales tendered with loyalty certificates, as compared to the third quarter of fiscal 2022. These cost increases were partially offset by lower inbound freight costs.

For the first nine months of fiscal 2023, our gross margin rate, inclusive of occupancy costs, was 48.8% as compared to a gross margin rate of 50.8% for the first nine months of fiscal 2022. The decrease of 200-basis points was due to a decrease in merchandise margins of 120-basis points and an 80-basis point increase in occupancy costs. Similar to the third quarter merchandise margin, the decrease was due to cost pressures on certain private-label merchandise, increased direct-to-consumer shipping costs and costs related to our loyalty program. The 80-basis point increase in occupancy costs was due to a combination of the deleveraging of sales and increased rents as a result of lease extensions.

For fiscal 2023, we expect gross margin rates to be approximately 180-basis points lower than fiscal 2022, of which approximately half of this decrease being attributable to the expected deleveraging of occupancy costs on the lower sales base.

Selling, General and Administrative Expenses

As a percentage of sales, SG&A (selling, general and administrative) expenses for the third quarter of fiscal 2023 were 40.2% as compared to 37.3% for the third quarter of fiscal 2022. For the first nine months of fiscal 2023, SG&A expenses, as a percentage of sales, were 37.4% as compared to 35.9% for the first nine months of fiscal 2022.

On a dollar basis, SG&A expenses decreased by $0.4 million and $0.8 million for the third quarter and first nine months of fiscal 2023, respectively as compared to the third quarter and first nine months of fiscal 2022. The decreases were primarily due to a decrease in performance-based incentive accruals, partially offset by an increase in payroll-related costs from new positions added in the past year to support our long-range growth initiatives.

Management views SG&A expenses through two primary cost centers: Customer Facing Costs and Corporate Support Costs. Customer Facing Costs, which include store payroll, marketing and other store and direct operating costs, represented 21.0% of sales in the first nine months of fiscal 2023 as compared to 20.4% of sales in the first nine months of fiscal 2022. Corporate Support Costs, which include the distribution center and corporate overhead costs, represented 16.4% of sales in the first nine months of fiscal 2023 as compared to 15.5% of sales in the first nine months of fiscal 2022. Marketing costs for the first nine months of fiscal 2023 were 5.6% of sales as compared to 5.5% of sales for the first nine months of fiscal 2022. For fiscal 2023, marketing costs are expected to be approximately 5.7% of sales.

Impairment (Gain) of Assets

There were no impairments or non-cash gains recognized in the first nine months of fiscal 2023. For the nine months ended October 29, 2022, we recognized a non-cash gain of $0.6 million. The non-cash gain related to the decision to close certain retail stores, which resulted in a revaluation of the existing lease liabilities. The portion of the gain that related to previously recorded impairment charges against the operating lease right-of-use asset was included as an offset to previously recorded asset impairment charges. Accordingly, for the nine months ended October 29, 2022, $0.4 million was included in the Impairment (Gain) of Assets line of the Consolidated Statement of Operations for the first nine months of fiscal 2022. The remaining gain was recorded as a reduction to occupancy costs.

Depreciation and Amortization

Depreciation and amortization for the third quarter of fiscal 2023 decreased to $3.4 million as compared to $3.8 million for the third quarter of fiscal 2022. For the first nine months of fiscal 2023, depreciation and amortization decreased to $10.3 million as compared to $11.7 million for the first nine months of fiscal 2022. The decrease was due to a lower depreciable cost base, especially from our store assets, due to our limited capital spending since fiscal 2020.

Loss from Termination of Retirement Plans

During the second quarter of fiscal 2023, we identified an opportunity to eliminate a variable liability by taking advantage of the current high-interest rate environment and terminating the frozen pension plan and SERP.

In the second quarter of fiscal 2023, we completed a partial settlement of the pension obligation through the purchase of nonparticipating annuities. We made a cash contribution to the plan during the first nine months of fiscal 2023 of $1.7 million. The remaining pension liability as of October 28, 2023, was approximately $0.1 million. For the nine months ended October 28, 2023, we recognized a charge of $4.2 million, representing a pro-rata portion of the unrealized loss that is part of accumulated other comprehensive loss on the balance sheet. We expect to settle the remaining obligation and recognize the remaining unrealized loss from the terminated pension plan by the end of fiscal 2023.

In the third quarter of fiscal 2023, we completed the termination of the SERP through the purchase of a nonparticipating annuity. We made a cash contribution to the SERP during the first nine months of fiscal 2023 of $0.4 million and recognized a loss on the termination of $0.1 million, which is included in the Consolidated Statement of Operations for the three and nine months ended October 28, 2023.

Interest Income/Expense, Net

Net interest income for the third quarter of fiscal 2023 was $0.6 million, as compared to net interest expense of $0.1 million for the third quarter of fiscal 2022. For the first nine months of fiscal 2023, net interest income was $1.4 million as compared to net interest expense of $0.4 million for the first nine months of fiscal 2022. For the third quarter and first nine months of fiscal 2023, interest income was earned from investments in U.S. government-backed investments and money market accounts. Interest costs for all periods were immaterial because we had no outstanding debt and no borrowings under our credit facility during any period.

Income Taxes

As a result of releasing substantially all of the valuation allowance against our deferred tax assets during fiscal 2022, we have returned to a normal tax provision for fiscal 2023. Our tax provision for income taxes for interim periods is determined using an estimate of our annual effective tax rate, adjusted for discrete items, if any. Each quarter, we update our estimate of the annual effective tax rate and make a year-to-date adjustment to the provision.

Accordingly, for the third quarter and first nine months of fiscal 2023, the Company’s effective tax rate was 30.2% and 27.2%, respectively.

For the third quarter of fiscal 2022, the effective tax rate was 16.6% and primarily reflected a $2.0 million discrete tax expense to adjust the release of valuation allowance. For the first nine months of fiscal 2022, the Company recognized an income tax benefit of $32.9 million, which included a discrete tax benefit of $33.5 million for the release of the valuation allowance discussed above.

We are able to utilize our remaining NOL carryforwards to reduce our cash federal and state income taxes. We began the year with $78.9 million in federal NOL carryforwards.

Net Income

For the third quarter of fiscal 2023, we recorded net income of $4.0 million, or $0.06 per diluted share, as compared to net income of $10.5 million, or $0.16 per diluted share, for the third quarter of fiscal 2022. Net income for the first nine months of fiscal 2023 was $22.6 million, or $0.35 per diluted share, as compared to net income of $80.8 million, or $1.20 per diluted share for the first nine months of fiscal 2022.

On a non-GAAP basis, assuming a normalized tax rate of 27% and adjusting for asset impairments (gains), if any, and for the loss on the termination of the retirement plans, adjusted net income for the third quarter of fiscal 2023 was $4.2 million, or $0.07 per diluted share, as compared to adjusted net income of $9.2 million, or $0.14 per diluted share for the third quarter of fiscal 2022. For the first nine months of fiscal 2023, adjusted net income was $25.8 million, or $0.40 per diluted share, as compared to adjusted net income of $34.6 million, or $0.52 per diluted share for the first nine months of fiscal 2022.

Inventory

As of October 28, 2023, our inventory decreased by approximately $7.0 million to $99.9 million, as compared to $106.8 million at October 29, 2022. Managing our inventory remains a primary focus for us given the impact that inflation appears to have had on consumer discretionary spending for clothing. Based on the sales trends we started to see in March 2023, we began taking proactive measures to manage our inventory and adjust our receipt plan. At October 28, 2023, our clearance inventory was 9.7% of our total inventory, as compared to 6.7% at October 29, 2022 and still below our historical benchmark of approximately 10.0%.

SEASONALITY

Historically, and consistent with the retail industry, we have experienced seasonal fluctuations as it relates to our operating income, net income, and free cash flow. Traditionally, a significant portion of our operating income, net income, and free cash flow is generated in the second and fourth quarters. Our inventory is typically at peak levels by the end of the third quarter, which represents a significant use of cash, which is then relieved in the fourth quarter as we sell-down our inventory through the holiday shopping season.

LIQUIDITY AND CAPITAL RESOURCES

Our primary sources of liquidity are our cash and cash equivalents, short-term investments, cash generated from operations and availability under our credit facility, which is discussed below. At October 28, 2023, we had no outstanding debt, including no borrowings under our credit facility during the first nine months of fiscal 2023. Cash that is in excess of our forecasted needs may be invested in money market accounts and U.S. government-backed securities.

We believe that our cash and cash equivalent balances, short-term investments, cash generated from operations, and borrowings available to us under our credit facility will be adequate to meet our liquidity needs and capital expenditure requirements for at least the next 12 months. However, we remain cautious regarding the effect that the current macroeconomic conditions, including inflation and high interest costs, may have on consumer spending as well as the continuing geopolitical impact of Russia's invasion of Ukraine and the Israel-Hamas war on our business and the global economy. We also believe that cash flows from operating activities and cash on hand will be sufficient to satisfy our capital requirements in the longer-term, however, to the extent future capital requirements exceed cash on hand plus cash flows from operating activities, we anticipate that working capital will be financed by our credit facility, as discussed below.

For the first nine months of fiscal 2023, cash flow from operations increased to $33.1 million as compared to $30.2 million for the first nine months of fiscal 2022. Free cash flow, a non-GAAP measure, increased to $22.7 million for the first nine months of fiscal 2023 as compared to $22.3 million for the first nine months of fiscal 2022. The increase in free cash flow was primarily due to a decrease in merchandise purchases as we continue to drive more productive inventory utilization, partially offset by a decrease in operating income.

Cash flow used for investing activities increased by $51.3 million for the first nine months of fiscal 2023 as compared to the first nine months of fiscal 2022, primarily due to the purchase of short-term investments, net of maturities, of $48.9 million and an increase in capital expenditures of $2.4 million.

Cash flow used for financing activities for the first nine months of fiscal 2023 increased by $1.0 million as compared to the first nine months of fiscal 2022, primarily due to an increase in shares repurchased.

Stock Repurchase Program

In March 2023, the Company’s Board of Directors approved a stock repurchase program. Under the stock repurchase program, the Company was initially authorized to repurchase up to $15.0 million of its common stock through open market and privately negotiated transactions. Subsequent to the end of the third quarter, the Board of Directors approved an amendment to the stock repurchase program to increase the amount authorized for repurchase from $15.0 million to $25.0 million, effective November 17, 2023. The timing and the amount of any repurchases of common stock will be determined based on the Company’s evaluation of market conditions and other factors. The stock repurchase program will expire on March 16, 2024, but may be suspended, terminated or modified at any time for any reason. The Company expects to finance any repurchases from cash generated from operations.

During the first nine months of fiscal 2023, we repurchased 3.1 million shares at a total cost, including fees, of $14.9 million. Shares of repurchased common stock are held as treasury stock.

Credit Facility

On October 28, 2021, we entered into a $125.0 million revolving credit agreement with Citizens Bank, N.A., with a maturity date of October 28, 2026. On April 20, 2023, the Company entered into the First Amendment to Credit Agreement which provided for the replacement of the London Interbank Offering Rate (“LIBOR”) interest rate options with the secured overnight financing rate ("SOFR") based options (as amended, the "Credit 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. Effective April 20, 2023, borrowings under the Credit Facility bear interest at either a Base Rate loan or Daily Simple SOFR rate, at the Company's option. Base Rate loans will bear interest at a rate equal to (i) the greater of: (a) the Prime Rate, (b) the Federal Funds effective rate plus 0.50% per annum and (c) the Daily Simple SOFR rate plus 1.00% per annum (provided the Base Rate shall never be less than the Floor (as defined in the Credit Facility)), plus (ii) a varying percentage, based on the Company’s average excess availability, of either 0.25% or 0.50% (the “Applicable Margin”). Daily Simple SOFR loans will bear interest at a rate equal to (i) the Daily Simple SOFR rate plus an adjustment of 0.10% (provided the Daily Simple SOFR rate shall never be less than the Floor), plus (ii) the Applicable Margin. Any swingline loan will continue to bear interest at a rate equal to the Base Rate plus the Applicable Margin. We are subject to an unused line fee of 0.25%.

We had no outstanding borrowings under the Credit Facility at October 28, 2023 and no borrowings during the first nine months of fiscal 2023. At October 28, 2023, outstanding standby letters of credit were $4.3 million and outstanding documentary letters of credit were $0.4 million. The average unused excess availability during the first nine months of fiscal 2023 was approximately $84.3 million and the unused excess availability at October 28, 2023 was $87.6 million.

Capital Expenditures

For fiscal 2023, we expect our capital expenditures to range from $15.5 million to $17.5 million, of which approximately $7.8 million is discretionary spending for new or improved stores with the remaining for non-discretionary, infrastructure improvements.

The following table sets forth the open stores and related square footage at October 28, 2023 and October 29, 2022, respectively:

(square footage in thousands)

During the third quarter of fiscal 2023, we opened a new DXL store in Queens, New York and expect to open two additional new stores with one in the Cincinnati market and one in the Los Angeles market by the end of fiscal 2023. During the first nine months, we completed the conversion of seven Casual Male stores to the DXL store format and completed the remodel of one existing DXL store. By the end of fiscal 2023, we expect to have opened a total of 3 new DXL stores and 10 Casual Male-to-DXL conversion stores and to have begun construction on at least 5 DXL remodels. Over the next three to five years, we believe we could potentially open 50 net new DXL stores across the country which could average 6,000 square feet or 300,000 sq. ft. in total, a 15% increase over our current square footage.

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

There have been no material changes to the critical accounting policies and estimates disclosed in our Fiscal 2022 Annual Report. See Note 1 to the Consolidated Financial Statements included in this report for information on recent accounting pronouncements and changes in accounting principles.

Non-GAAP Financial Measures

Free cash flow, adjusted net income, adjusted net income per diluted share, adjusted EBITDA and adjusted EBITDA margin are non-GAAP measures. These non-GAAP measures are not presented in accordance with GAAP and should not be considered superior to or as a substitute for net income or cash flows from operating activities or any other measure of performance derived in accordance with GAAP. In addition, all companies do not calculate non-GAAP financial measures in the same manner and, accordingly, the non-GAAP measures presented in this Quarterly Report may not be comparable to similar measures used by other companies. We believe that inclusion of these non-GAAP measures helps investors gain a better understanding of our performance, especially when comparing such results to previous periods and that they are useful as an additional means for investors to evaluate our operating results, when reviewed in conjunction with our GAAP financial statements.

Reconciliations of these non-GAAP measures are presented in the following tables (certain columns may not foot due to rounding):

Free Cash Flow. We define free cash flow as cash flow from operating activities less capital expenditures. Free cash flow excludes the mandatory and discretionary repayment of debt. Free cash flow is a metric that management uses to monitor liquidity. Management believes this metric is important to investors because it demonstrates the Company's ability to strengthen liquidity while supporting its capital projects and new store growth. We expect to fund our ongoing capital expenditures with cash flow from operations.

The following table reconciles free cash flow:

(in millions)

Adjusted Net Income and Adjusted Net Income Per Diluted Share: Adjusted net income and adjusted net income per diluted share is calculated by excluding any asset impairment charge (gain) and the loss from the termination of retirement plans, subtracting the actual income tax provision (benefit) and applying an effective tax rate of 27%. The Company believes that this comparability is useful in comparing the actual results period to period. Adjusted net income per diluted share is then calculated by dividing the adjusted net income by the weighted average shares outstanding for the respective period, on a diluted basis.

(in millions, except per share data)

Adjusted EBITDA and Adjusted EBITDA Margin. Adjusted EBITDA is calculated as earnings before interest, taxes, depreciation and amortization and is before any loss from the termination of retirement plans or impairment of assets. Adjusted EBITDA margin is calculated as Adjusted EBITDA divided by Sales. We believe that providing adjusted EBITDA and adjusted EBITDA margin is useful to investors in evaluating our performance and are key metrics to measure profitability and economic productivity. The following table reconciles adjusted EBITDA from net income and calculates adjusted EBITDA margin:

(in millions)

26

In the normal course of business, our financial position and results of operations are routinely subject to a variety of risks, including market risk associated with interest rate movements on borrowings. We regularly assess these risks and have established policies and business practices to protect against the adverse effects of these and other potential exposures.

There have not been any material changes to our interest rate previously disclosed in Part II, Item 7A of our Fiscal 2022 Annual Report.

Evaluation of Disclosure Controls and Procedures

As required by Rule 13a-15 under the Exchange Act, our management, under the supervision and with the participation of our Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) as of October 28, 2023. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is accumulated and communicated to the company’s management, including its principal executive and principal financial officers, as appropriate to allow timely decisions regarding required disclosure. Management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving their objectives and management necessarily applies its judgment in evaluating the cost-benefit relationship of possible controls and procedures. Based on this evaluation, our Chief Executive Officer and Chief Financial Officer concluded that, as of October 28, 2023, our disclosure controls and procedures were effective.

Changes in Internal Control over Financial Reporting

We have not experienced any changes in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the three months ended October 28, 2023 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

There have been no material changes to the risk factors as previously disclosed in Part I, Item 1A of our Fiscal 2022 Annual Report.