| Summary of Significant Accounting Policies | A. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Nature of Business Destination XL Group, Inc. (collectively with its subsidiaries referred to as the “Company”) is the largest specialty retailer in the United States of big & tall men’s apparel. The Company operates under the trade names of Destination XL ® ® ® ® www.dxl.com Basis of Presentation The consolidated financial statements include the accounts of the Company and its subsidiaries. All significant intercompany accounts, transactions and profits are eliminated. The accompanying financial statements have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent liabilities as of the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from estimates. Subsequent Events All appropriate subsequent event disclosures, if any, have been made in these Notes to the Consolidated Financial Statements. 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 has 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 are aggregated with the retail segment for fiscal 2018. Fiscal Year The Company’s fiscal year is a 52-week or 53-week period ending on the Saturday closest to January 31. Fiscal 2018 and Fiscal 2016 were 52-week periods, which ended on February 2, 2019 and January 28, 2017, respectively. Fiscal 2017 was a 53-week period, which ended on February 3, 2018. Cash and Cash Equivalents Cash and cash equivalents consist of cash in banks and short-term investments, which have a maturity of ninety days or less when acquired. Included in cash equivalents are credit card and debit card receivables from banks, which generally settle within two to four business days. Accounts Receivable Accounts receivable primarily includes amounts due for tenant allowances, rebates from certain vendors and amounts due from wholesale customers. For fiscal 2018, fiscal 2017 and fiscal 2016, the Company did not incur any losses on its accounts receivable. Fair Value of Financial Instruments ASC Topic 825, Financial Instruments, ASC Topic 820, Fair Value Measurements and Disclosures The valuation techniques utilized are based upon observable and unobservable inputs. Observable inputs reflect market data obtained from independent sources, while unobservable inputs reflect internal market assumptions. These two types of inputs create the following fair value hierarchy: Level 1 – Quoted prices in active markets for identical assets or liabilities. Level 2 – Observable inputs other than Level 1 prices such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the related asset or liabilities. Level 3 – Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of assets or liabilities. The Company utilizes observable market inputs (quoted market prices) when measuring fair value whenever possible. The fair value of long-term debt is classified with Level 2 of the valuation hierarchy. At February 2, 2019, long-term debt approximated the carrying amount based upon terms available to the Company for borrowings with similar arrangements and remaining maturities. See Note D, “ Debt Obligations ” The fair value of indefinite-lived assets, which consists of the Company’s “dxl.com” domain name and its “Rochester” trademark, are measured on a non-recurring basis in connection with the Company’s annual impairment test and are classified within Level 3 of the valuation hierarchy. The fair value of the “Rochester” trademark was determined using the relief from royalty method based on unobservable inputs. At February 2, 2019, the fair value of the Company’s “dxl.com” domain name was determined to approximate carrying value, due to its recent acquisition in December 2018. See Intangibles Stores that have indicators of impairment and fail the recoverability test (based on undiscounted cash flows) are measured for impairment by comparing the fair value of the assets against their carrying value. Fair value of the assets is estimated using a projected discounted cash flow analysis and is classified within Level 3 of the valuation hierarchy. See Impairment of Long-Lived Assets Inventories All inventories are valued at the lower of cost or market, using a weighted-average cost method. Property and Equipment Property and equipment are stated at cost. Major additions and improvements are capitalized while repairs and maintenance are charged to expense as incurred. Upon retirement or other disposition, the cost and related accumulated depreciation of the assets are removed from the accounts and the resulting gain or loss, if any, is reflected in the results of operations. Depreciation is computed on the straight-line method over the assets’ estimated useful lives as follows:
Furniture and fixtures
Five to ten years
Equipment
Five to ten years
Leasehold improvements
Lesser of useful lives or related lease term
Hardware and software
Three to seven years Intangibles ASC Topic 805, “ Business Combinations, Intangibles Goodwill and Other,” Trademarks At each reporting period, management analyzes current events and circumstances to determine whether the indefinite life classification for its “Rochester” trademark continues to be valid. The Company’s “Casual Male” trademark was considered a finite-lived asset and became fully amortized in fiscal 2018. At least annually, as of the Company’s December month-end, the Company evaluates its “Rochester” trademark. The Company performs an impairment analysis and records an impairment charge for any intangible assets with a carrying value in excess of its fair value. In the fourth quarter of fiscal 2018, the “Rochester” trademark was tested for potential impairment, utilizing the relief from royalty method to determine the estimated fair value. In fiscal 2019, the Company expects to close its 5 Rochester Clothing stores and while the Company expects that the majority of its Rochester assortment will continue to be available on the Company’s website and in its DXL stores, the projected future cash flows were insufficient to support the carrying value of the “Rochester” trademark. As a result, the Company recorded an impairment charge of $1.5 million in the fourth quarter of fiscal 2018 to fully write-off the “Rochester” trademark. Domain Name On December 26, 2018, the Company purchased the rights to the domain purchase Below is a table showing the changes in the carrying value of the Company’s intangible assets from February 3, 2018 to February 2, 2019:
(in thousands)
February 3, 2018
Additions
Impairment
Amortization
February 2, 2019
"Rochester" trademark
$
1,500
$
—
$
(1,500
)
$
—
$
—
"Casual Male" trademark
292
—
—
(292
)
—
"dxl.com" domain
—
1,150
—
—
1,150
Other intangibles (1)
29
—
—
(29
)
—
Total intangible assets
$
1,821
$
1,150
$
(1,500
)
$
(321
)
$
1,150
(1)
Other intangibles consisted of customer lists and were amortized based on an estimated economic useful life of 16 years. The gross carrying amount and accumulated amortization of the customer lists and “Casual Male” trademark, subject to amortization, were $7.7 million and $7.7 million, respectively, at February 2, 2019 and $7.7 million and $7.4 million, respectively, at February 3, 2018. Amortization expense for fiscal 2018, 2017 and 2016 was $0.3 million, $0.4 million and $0.4 million, respectively. Because the Company’s finite-lived intangibles have been fully amortized as of February 2, 2019, no future amortization expense is expected. Pre-opening Costs The Company expenses all pre-opening costs for its stores as incurred. Advertising Costs The Company expenses in-store advertising costs as incurred. Television advertising costs are expensed in the period in which the advertising is first aired. Direct response advertising costs, if any, are deferred and amortized over the period of expected direct marketing revenues, which is less than one year. There were no deferred direct response costs at February 2, 2019 and February 3, 2018. Advertising expense, which is included in selling, general and administrative expenses, was $24.4 million, $29.5 million and $18.2 million for fiscal 2018, 2017 and 2016, respectively. Revenue Recognition The Company’s accounting policies with respect to revenue recognition are discussed in Note B, “ Revenue Recognition. Accumulated Other Comprehensive Income (Loss) – (“AOCI”) Other comprehensive income (loss) includes amounts related to foreign currency and pension plans and is reported in the Consolidated Statements of Comprehensive Income (Loss). Other comprehensive income (loss) and reclassifications from AOCI for fiscal 2018, fiscal 2017 and fiscal 2016 are as follows:
Fiscal 2018
Fiscal 2017
Fiscal 2016
(in thousands)
Pension Plans
Foreign Currency
Total
Pension Plans
Foreign Currency
Total
Pension Plans
Foreign Currency
Total
Balance at beginning of fiscal year
$
(5,840
)
$
(403
)
$
(6,243
)
$
(5,237
)
$
(781
)
$
(6,018
)
$
(6,113
)
$
(539
)
$
(6,652
)
Other comprehensive income (loss) before reclassifications, net of taxes
(746
)
(264
)
(1,010
)
820
393
1,213
171
(242
)
(71
)
Amounts reclassified from accumulated other comprehensive income (loss), net of taxes (1)
352
—
352
670
—
670
705
—
705
Other comprehensive income (loss) for the period
(394
)
(264
)
(658
)
1,490
393
1,883
876
(242
)
634
Remeasurement and reclassification of stranded tax effect (2)
713
5
718
—
—
—
—
—
—
Adjustment to reclassify intraperiod tax allocation to accumulated deficit (Note E)
—
—
—
(2,093
)
(15
)
(2,108
)
—
—
—
Balance at end of fiscal year
$
(5,521
)
$
(662
)
$
(6,183
)
$
(5,840
)
$
(403
)
$
(6,243
)
$
(5,237
)
$
(781
)
$
(6,018
)
(1)
Includes the amortization of the unrecognized (gain)/loss on pension plans, which was charged to Selling, General and Administrative expense on the Consolidated Statements of Operations for all periods presented. The amortization of the unrecognized loss, before tax, was $352,000, $670,000 and $705,000 for fiscal 2018, fiscal 2017 and fiscal 2016, respectively. There was no corresponding tax benefit.
(2)
Represents the reclassification to retained earnings of the tax benefit associated with comprehensive income earned, adjusted for the effects of ASU 2018-02 which allows for the reclassification to retained earnings of stranded tax effect as a result of the 2017 Tax Act. Foreign Currency Translation At February 2, 2019, the Company had one Rochester Clothing store located in London, England and two stores located in Toronto, Canada. Assets and liabilities for these stores are translated into U.S. dollars at the exchange rates in effect at each balance sheet date. Stockholders’ equity is translated at applicable historical exchange rates. Income, expense and cash flow items are translated at average exchange rates during the period. Resulting translation adjustments are reported as a separate component of stockholders’ equity. Income Taxes Deferred income taxes are provided to recognize the effect of temporary differences between tax and financial statement reporting. Such taxes are provided for using enacted tax rates expected to be in place when such temporary differences are realized. A valuation allowance is recorded to reduce deferred tax assets if it is determined that it is more likely than not that the full deferred tax asset would not be realized. If it is subsequently determined that a deferred tax asset will more likely than not be realized, a credit to earnings is recorded to reduce the allowance. ASC Topic 740, Income Taxes The Company is subject to U.S. federal income tax as well as income tax of multiple state and foreign jurisdictions. The Company has concluded all U.S. federal income tax matters for years through fiscal 2002, with remaining fiscal years subject to income tax examination by federal tax authorities. Net Loss Per Share Basic earnings per share are computed by dividing net loss by the weighted average number of shares of common stock outstanding during the respective period. Diluted earnings per share is determined by giving effect to unvested shares of restricted stock and the exercise of stock options using the treasury stock method. The following table provides a reconciliation of the number of shares outstanding for basic and diluted earnings per share:
FISCAL YEARS ENDED
February 2, 2019
February 3, 2018
January 28, 2017
(in thousands )
Common stock outstanding:
Basic weighted average common shares outstanding
49,163
48,888
49,544
Common stock equivalents – stock options, restricted stock and restricted stock units (RSUs) (1)
—
—
—
Diluted weighted average common shares outstanding
49,163
48,888
49,544
(1)
Common stock equivalents, in thousands, of 497 shares, 134 shares and 439 shares for February 2, 2019, February 3, 2018 and January 28, 2017, respectively, were excluded due to the net loss. The following potential common stock equivalents were excluded from the computation of diluted earnings per share in each year because the exercise price of such options was greater than the average market price per share of common stock for the respective periods or because the unearned compensation associated with either stock options, RSUs, restricted or deferred stock had an anti-dilutive effect.
FISCAL YEARS ENDED
February 2, 2019
February 3, 2018
January 28, 2017
(in thousands, except exercise prices)
Stock options (time-vested)
942
1,196
1,162
RSUs (time-vested)
754
732
370
Restricted and deferred stock
75
63
8
Range of exercise prices of such options
$2.25 - $7.02
$1.85-$7.52
$4.49-$7.52
Excluded from the computation of basic earnings per shares in fiscal 2018 and fiscal 2017 were 30,000 shares and 36,666 shares, respectively, of unvested time-based restricted shares, and 204,040 shares and 115,457 shares, respectively, of deferred stock until such shares vest. Although shares of restricted stock are not considered outstanding for basic earnings per share purposes until vested, any outstanding shares of restricted stock are considered issued and outstanding at February 2, 2019. Each share of restricted stock has all of the rights of a holder of the Company’s common stock, including, but not limited to, the right to vote and the right to receive dividends, which rights are forfeited if the restricted stock is forfeited. Outstanding shares of deferred stock are not considered issued and outstanding until the vesting date of the deferral period. Stock-based Compensation ASC Topic 718, Compensation – Stock Compensation The Company recognized total stock-based compensation expense, with no tax effect, of $2.0 million, $1.6 million and $1.3 million for fiscal 2018, fiscal 2017 and fiscal 2016, respectively. The total stock-based compensation cost related to time-vested awards not yet recognized as of February 2, 2019 was approximately $2.0 million and will be expensed over a weighted average remaining life of approximately 32 months. The total grant-date fair value of awards vested was $2.0 million, $1.8 million and $2.9 million for fiscal 2018, 2017 and 2016, respectively. Any excess tax benefits resulting from the exercise of stock options or the release of restricted shares are recognized as a component of income tax expense. Prior to the adoption of ASU 2016-09 in fiscal 2017, any excess tax benefits were recognized as additional paid-in capital. Valuation Assumptions for Stock Options The fair value of each option grant is estimated on the date of grant using the Black-Scholes option-pricing model with the following weighted-average assumptions used for grants in fiscal 2018, 2017 and 2016:
Fiscal years ended:
February 2, 2019
February 3, 2018
January 28, 2017
Expected volatility
48.9% - 57.1%
49.9%
39.3%-42.7%
Risk-free interest rate
2.55% -2.63%
1.44%
0.78%-1.23%
Expected life (in years)
3.0 - 4.5
3.0
2.0
Dividend rate
—
—
—
Weighted average fair value of options granted
$
1.06
$
0.65
$1.02
Expected volatilities are based on historical volatilities of the Company’s common stock; the expected life represents the weighted average period of time that options granted are expected to be outstanding giving consideration to vesting schedules and historical exercise patterns; and the risk-free rate is based on the U.S. Treasury yield curve in effect at the time of grant for periods corresponding with the expected life of the option. Impairment of Long-Lived Assets The Company reviews its long-lived assets for events or changes in circumstances that might indicate the carrying amount of the assets may not be recoverable. The Company assesses the recoverability of the assets by determining whether the carrying value of such assets over their respective remaining lives can be recovered through projected undiscounted future cash flows. The amount of impairment, if any, is measured based on projected discounted future cash flows using a discount rate reflecting the Company’s average cost of funds. For fiscal 2018, the Company recorded total impairment charges of $4.6 million, which consisted of $1.5 million for the write-off of its “Rochester” trademark and $3.1 million for the write-down of property and equipment. Impairment charges for property and equipment related to stores where the carrying value exceeded fair value. The fair value of these assets, based on Level 3 inputs, was determined using estimated discounted cash flows. In fiscal 2017 and fiscal 2016, the Company recorded impairment charges of $4.1 million and $0.4 million, respectively, for the write-down of property and equipment. Also included in the charge for fiscal 2017 was the write-off of certain costs of $1.9 million associated with technology projects that were abandoned. Recently Adopted Accounting Pronouncements In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers Topic 606 on the Company’s Consolidated Financial Statements Further disclosures related to the adoption of this standard are provided below in Note B, Revenue Recognition . In March 2016, the FASB issued ASU 2016 - 04 , “ Liabilities—Extinguishments of Liabilities: Recognition of Breakage for Certain Prepaid Stored-Value Products, ” which amends exempting gift cards and other prepaid stored-value products from the guidance on extinguishing financial liabilities. Rather, they will be subject to breakage accounting consistent with the new revenue guidance in Topic 606. However, the exemption only applies to breakage liabilities that are not subject to unclaimed property laws or that are attached to segregated bank accounts (e.g., consumer debit cards). adopted this pronouncement as of February 4, 2018. The adoption of this standard did not have a material impact on the Company’s Consolidated Financial Statements In August 2016, the FASB issued ASU 2016-15, “ Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments which reduces the existing diversity in practice in how certain cash receipts and cash payments are presented and classified in the statement of cash flows under Topic 230 adopted this pronouncement as of February 4, 2018. The adoption of this standard did not have a material impact on the Company’s Consolidated Financial Statements In October 2016, the FASB issued ASU 2016-16, “ Income Taxes (Topic 740): Intra-Entity Transfer of Assets Other Than Inventory reduces the existing diversity in practice in how income tax consequences of an intra-entity transfer of an asset other than inventory should be recognized. The amendments in ASU 2016 - 16 require an entity to recognize such income tax consequences when the intra-entity transfer occurs rather than waiting until such time as the asset has been sold to an outside party adopted this pronouncement as of February 4, 2018. The adoption of this standard did not have a material impact on the Company’s Consolidated Financial Statements In May 2017, the FASB issued ASU 2017-09 Compensation—Stock Compensation (Topic 718)” The Company adopted this pronouncement as of February 4, 2018. The adoption of this standard did not have a material impact on the Company’s Consolidated Financial Statements . In February 2018, the FASB issued ASU 2018-02, “ Income Statement – Reporting Comprehensive Income (Topic 220) Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income. The Company adopted ASU 2018 - 02 in the fourth quarter of fiscal 2018, resulting in a $0.7 million decrease to retained earnings (accumulated deficit) and an offsetting increase of $0.7 million to accumulated other comprehensive income (loss) Recently Issued Accounting Pronouncements In February 2016, the FASB issued ASU 2016-02, “ Leases (Topic 842) In July 2018, the FASB issued ASU 2018 - 11 “ Leases (Topic 842): Targeted Improvements. ” Prior to ASU 2018 - 11 , a modified retrospective transition was required for financing or operating leases existing at or entered into after the beginning of the earliest comparative period presented in the financial statements. ASU 2018 - 11 allows entities an additional transition method to the existing requirements whereby an entity could adopt the provisions of ASU 2016-02 by recognizing a cumulative-effect adjustment to the opening balance of retained earnings in the period of adoption without adjustment to the financial statements for periods prior to adoption. ASU 2016-02 is effective for interim and annual periods beginning after December 15, 2018. Early adoption is permitted. The Company will adopt the standard in the first quarter of fiscal 2019 by not restating comparative periods and recognizing a cumulative-effect adjustment to the opening balance sheet of retained earnings in accordance with ASU 2018-11. The Company has implemented its leasing software solution to enable compliance with accounting and disclosure requirements. The Company has made the necessary changes to its business processes and controls to support adoption of the new standard. The Company plans to elect the lessee non-lease component separation practical expedient, which permits the Company to not separate non-lease components from the lease components to which they relate. The Company expects to make an accounting policy election that will keep certain leases with a term of 12 months or less off the balance sheet and result in recognizing those lease payments on a straight-line basis over the lease term. As the Company’s leases do not provide an implicit rate, it plans to use its incremental borrowing rate based on information available at the date of adoption to determine the present value of future payments. Company expects to recognize leases, primarily related to its stores and corporate headquarters, on its Consolidated Balance Sheet as right-of-use assets of approximately $217 million with corresponding lease liabilities of approximately $255 million. At the effective date, the right-of-use assets will be subject to impairment under ASC 360, which will require an analysis of impairment indicators at each reporting period. The $38 million difference between the right-of-use assets and lease liabilities upon adoption of the new lease standard will be primarily attributable to the elimination of certain existing lease-related assets and liabilities as a net adjustment to the right-of-use assets. The Company has also been amortizing a deferred gain from the sale-leaseback of its corporate office over the initial 20-year lease term. The Company’s annual rent expense under the sale-leaseback has been reduced by approximately $1.5 million each year. However, as part of our adoption of ASU 2016-02, the remaining balance of the deferred gain of $10.3 million related to the sale-leaseback will be recognized as an adjustment to opening retained earnings in fiscal 2019. The Company does not expect the adoption of this new lease accounting standard to have any other material impact on results of operations or cash flows in fiscal 2019. In August 2018, the FASB issued ASU 2018-13, “ Fair Value Measurement (Topic 820): Disclosure Framework—Changes to the Disclosure Requirements for Fair Value Measurement.” No other new accounting pronouncements, issued or effective during fiscal 2018, have had or are expected to have a significant impact on the Company’s Consolidated Financial Statements. |
