CMRG Destination XL Group, Inc. (MM)

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. 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. Numerous factors could cause our actual results to differ materially from such forward-looking statements. We encourage readers to refer to Part I, Item 1A of our Annual Report on Form 10-K for the fiscal year ended January 28, 2012, filed with the Securities and Exchange Commission on March 16, 2012, and Part II, Item 1A of this Quarterly Report which identify certain risks and uncertainties that may have an impact on our future earnings and the direction of our Company.

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

Casual Male Retail Group, Inc. together with our subsidiaries is the largest specialty retailer of big & tall men’s apparel with retail operations in the United States and London, England and direct businesses throughout the United States, and Canada. We operate under the trade names of Destination XL®, Casual Male XL®, Casual Male XL Outlets, Rochester Clothing, B&T Factory Direct™, ShoesXL® and LivingXL®. At October 27, 2012, we operated 327 Casual Male XL retail stores, 59 Casual Male XL outlet stores, 34 Destination XL (“DXL®”) stores and 12 Rochester Clothing stores. Our direct business includes several catalogs and e-commerce sites which support our brands and product extensions.

Unless the context indicates otherwise, all references to “we,” “our,” “ours,” “us” and “the Company” refer to Casual Male Retail Group, Inc. and our consolidated subsidiaries. We refer to our fiscal years which end on February 2, 2013 and January 28, 2012 as “fiscal 2012” and “fiscal 2011,” respectively. Fiscal 2012 is a 53-week period and Fiscal 2011 was a 52-week period.

When discussing sales growth, we refer to the term “comparable sales.” Comparable sales for all periods include our retail stores that have been open for at least one full fiscal year together with our e-commerce and catalog sales. Stores that have been remodeled, expanded or re-located during the period are also included in our determination of comparable sales. Our Destination XL stores are considered relocations and comparable to all the closed stores in each respective market area. We include our direct businesses as part of our calculation of comparable sales since we are a multi-channel retailer, offering our customers convenient alternatives for their shopping. 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 companies.

SEGMENT REPORTING

Through the end of fiscal 2011, we managed our business using three operating segments – B&T Factory Direct, Casual Male XL and Rochester Clothing. However, with the continued expansion of the DXL store format and our new website, www.destinationxl.com, which we launched in fiscal 2011 and which has merchandise from all three of these business formats, the business is managed using retail and direct, as opposed to the previous store formats.

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Effective the first quarter of fiscal 2012, we report our operations as one reportable segment, Big & Tall Men’s Apparel, which consists of our two principal operating segments: retail and direct. We consider our operating segments to be similar in terms of economic characteristic, production processes and operations, and have therefore aggregated them into a single reporting segment.

RESULTS OF OPERATIONS

Financial Summary

As we disclosed in the second quarter of fiscal 2012 and which is discussed in detail below, we are in the process of significantly transforming our business as we accelerate our DXL® store openings and close our existing Casual Male XL stores. Our DXL stores outperform our Casual Male XL stores and as the chain is converted, we believe that our sales growth will improve. However, during the transition, we are experiencing some erosion among our Casual Male XL stores which are located near opened DXL stores. Sales from our DXL stores represented 14% of our retail sales for the third quarter and 11% of our retail sales for the first nine months of fiscal 2012. By the end of fiscal 2012, we expect that the penetration of our DXL stores will approach almost 25% of our retail business.

To support this growth, our results for the third quarter of fiscal 2012 included costs and charges of $3.0 million, or $0.04 per diluted share, related to our DXL store growth initiative. These costs include approximately $0.2 million in pre-opening occupancy costs associated with our DXL store openings, approximately $2.3 million in selling, general and administrative (“SG&A”) expenses related to store opening, infrastructure costs and marketing and $0.5 million of additional amortization as a result of our “Casual Male” trademark becoming a definite-lived asset.

For the third quarter of fiscal 2012, we reported a loss from continuing operations of $1.6 million, or $(0.03) per diluted share, as compared to a loss from continuing operations of $1.0 million, or $(0.02) per diluted share, for the third quarter of fiscal 2011. This decrease was primarily the result of a sales shortfall. Comparable sales from our retail stores were up 2.5%, which was lower than our expectations, and comparable sales from our direct business for the third quarter was down 3.0%, principally driven by a decrease in our catalog sales. Sales from our catalogs and call center were down 33.0% for the third quarter, while sales from our websites, which account for approximately 68% of our direct business, were up 11.0%. Throughout fiscal 2012, there has been a shift in the direct business resulting from our customers responding less to traditional catalogs. In response to this new trend, we have intensified our digital marketing efforts which include emails, web searches, internet banners, and affiliate sites. Our gross margin for the third quarter of fiscal 2012 also impacted earnings slightly due to an increase of approximately 6.5% in clearance markdowns as compared to the prior year’s third quarter. While the decrease in our catalog sales has affected our direct business in the short-term, we expect our digital marketing efforts will make up for this shortfall in the long-term. In addition, as a result of decreasing our catalog circulation, we expect that our operating margins in our direct business will benefit from this shift.

For the first nine months of fiscal 2012, income from continuing operations was $3.8 million, or $0.08 per diluted share, as compared to $10.7 million, or $0.22 per diluted share, for the first nine months of fiscal 2011. For the first nine months of fiscal 2011 our effective tax rate was 8.8%. Following the reversal of our tax valuation allowance in the fourth quarter of fiscal 2011, our tax rate for the first nine months of fiscal 2012 returned to a normal tax rate of 40.5%. Adjusted income from continuing operations for the first nine months of fiscal 2011, assuming a normal tax rate of 40.0%, was $0.14 per dilutive share. Adjusted income from continuing operations is a Non-GAAP measure. See “Presentation of Non-GAAP measures” below for a reconciliation of this non-GAAP measure.

Based on adjusted income from continuing operations for the first nine months of fiscal 2011, the decrease in earnings of $0.06 per diluted share is primarily attributable to a relatively flat sales base in the business, other than the DXL stores, and an approximately $6.6 million, or $0.08 per diluted share, increase in costs to support our DXL roll-out. Comparable sales for the first nine months of fiscal 2012 increased 1.9% with our retail business up 2.6% while our direct business decreased 1.6%. Similar to the third quarter, our direct business for the first nine months of fiscal 2012 has been negatively impacted by the poor performance of our catalog business. As a result of increased promotional markdowns during the second quarter of fiscal 2012 as well as our clearance markdowns in the third quarter of fiscal 2012, our gross margin rate is down 80 basis points.

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The $6.6 million, or $0.08 per diluted share, increase in costs associated with our DXL initiative consists of approximately $0.7 million in pre-opening occupancy costs, $4.5 million in SG&A expenses and an increase in amortization of $1.4 million related to our “Casual Male” trademark becoming a definite-lived asset.

The net loss for the third quarter of fiscal 2012 of $1.6 million, or $(0.03) per diluted share, was flat when compared to the third quarter of fiscal 2011. Net income for the first nine months of fiscal 2012 was $1.9 million, or $0.04 per diluted share, as compared to $9.2 million, or $0.19 per diluted share, for the first nine months of fiscal 2011. Assuming a normal tax rate for the first nine months of fiscal 2011, adjusted net income was $0.11 per diluted share. Adjusted net income is a Non-GAAP measure. See “Presentation of Non-GAAP Measures” below for a reconciliation of this non-GAAP measure.

Included in the loss from discontinued operations for the first nine months of fiscal 2012 is a $1.1 million early termination fee that we incurred in connection with closing our European direct business. The operating results of the European web stores for fiscal 2011 have been reclassified to discontinued operations.

From a liquidity perspective, at October 27, 2012, we have $5.2 million in cash and cash equivalents and outstanding borrowings under our credit facility of $7.6 million. At October 27, 2012, we had $64.4 million of availability under our credit facility.

Destination XL

During the first nine months of fiscal 2012, we have opened 18 DXL® stores, for a total of 34 DXL stores. Of these stores, 31 stores are considered “comparable stores” and had a combined comparable sales increase of 13.8% for the third quarter of fiscal 2012 and 15.5% for the first nine months of fiscal 2012 when compared to the third quarter and first nine months of fiscal 2011, respectively. For some of these stores that have not reached their one year anniversary, sales are compared to the respective predecessor sales in each market. For the third quarter and first nine months of fiscal 2012, the DXL stores generated approximately 14% and 11% of our retail store sales and contributed 1.9% to comparable sales in the third quarter, and 1.7% to comparable sales for the first nine months.

For fiscal 2012, we are planning to open a total of 32 DXL stores resulting in approximately 48 DXL stores operating at the end of the year, with at least one store located in most major metropolitan cities across the United States. Our DXL stores offer more than 2,000 styles (versus 600 in our traditional stores), more private label brands and more name brands. The DXL format offers a much greater selection of higher ticket price clothing than ever before, along with our “made-to-measure” custom tailoring service that provides an even broader variety of options. As we continue to open DXL stores, which offer our customer a far superior shopping experience compared to our existing Casual Male stores, our Casual Male stores that are in proximity to an existing DXL store are experiencing increasing negative sales trends when compared to the remainder of the chain of Casual Male stores.

As we announced during the second quarter of fiscal 2012, based on the strong performance of our DXL stores and their potential impact to the remainder of the chain and the negative sales trends of Casual Male stores in proximity to DXL stores, we have accelerated our DXL rollout to take advantage of the significant benefits that the transition to

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DXL offers. Average dollars per transaction at our DXL stores are currently 35.9% higher than the average Casual Male XL purchase. Originally, we had expected that the rollout would occur over a 5-year period, as existing store leases expired. However, given the opportunity for greater growth among our DXL stores, we are accelerating our rollout over the next three years. We expect to open 50-60 DXL stores across the country over each of the next three years with approximately 225 to 250 DXL stores open by the end of fiscal 2015. By the end of fiscal 2012, the DXL stores are expected to be approaching approximately 25% of our store sales, and nearing 50% by the end of fiscal 2013, on an annualized basis in our retail channel. Sales per square foot in an average DXL store is expected to reach approximately $230 in 2016 as we gain market share from our DXL roll-out. This compares to sales per square foot for our total chain of $178 for fiscal 2011.

Similar to our DXL stores, we see significant opportunities with our Destination XL website, which combines all of our existing e-commerce sites into one enhanced website, with state-of-the-art features and best ecommerce practices. Through our Destination XL website, we try to emulate the store experience. We recognize the importance of “name recognition” in growing an effective DXL business, both in retail stores and direct.

As we previously disclosed, as a result of our strategic decision to accelerate our DXL store rollout, we expect to incur incremental costs of approximately $15.0 to $20.0 million over the next three years, primarily associated with lease terminations and asset impairments as a result of early store closures, as well as additional SG&A expenses of approximately $2.5 to $3.0 million per year to support the accelerated rollout. The rollout is expected to be substantially completed by the end of fiscal 2015. Our projections, which are based on current economic conditions, suggest that this investment will significantly enhance revenues and produce double digit operating margins for the longer term. Our financial modeling, based upon the performance of the DXL stores to date, indicates that at the end of the three-year accelerated investment period in the DXL concept, our sales in fiscal 2016 should exceed $600 million with operating margins in of at least 10%. The capital expenditures and incremental SG&A and other charges of approximately $150 million over the next three years, associated with the accelerated rollout, are expected to be fully funded from operating cash flows.

DXL brand awareness is one of our primary objectives and therefore we are taking a more aggressive approach with respect to marketing. In the first quarter of fiscal 2012, we retained a professional advertising agency to develop a Destination XL brand strategy and a campaign for a more effective and comprehensive approach to expanding our market share, through the development of effective outreach programs and targeted marketing initiatives using local media as well as digital marketing. During the third quarter of fiscal 2012, we began testing a new marketing campaign in five selected markets. This test consisted of varying combinations of television, radio and digital advertising in each of our selected markets. Combined, we have seen improvements in unit sales, store traffic, web traffic and new customers. In addition, we have also seen improvement in sales among our 40”-46” waist sizes. While the analysis will not be completed until the fourth quarter of fiscal 2012, based on the preliminary results, we expect to have a nationwide rollout in the spring 2013. To support this initiative, we have increased our marketing budget for fiscal 2013 to a range of 6-6.5% of sales, up from our previous plan of 5%.

Fiscal 2012 Outlook

We are revising our earnings guidance for fiscal 2012 based on our third quarter sales shortfall and the negative impact of Hurricane Sandy on our Northeast business. For fiscal 2012, our revised earnings guidance is based on:

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For fiscal 2011, our earnings were $0.89 per diluted share. However, on a non-GAAP basis, before our discontinued operations, trademark impairment, valuation allowance and an adjustment for a normal tax rate of approximately 40.0%, adjusted income from continuing operations, on a diluted basis, was $0.22 per diluted share for fiscal 2011, compared to our revised forecasted earnings of $0.17-$0.20 per diluted share for fiscal 2012. See “Presentation of Non-GAAP Measures” for a reconciliation of this non-GAAP measure.

From a liquidity perspective, we expect cash flow from operating activities of $38.0 million (down from our previous guidance of $40.0 million), resulting in free cash flow (as defined below under “Presentation of Non-GAAP Measures”) of approximately $3.0 million (down from our previous guidance of $5.0 million). We expect our cash balances to increase to approximately $13.0 million by the end of fiscal 2012 (down from our previous guidance of $15.0 million). Our capital expenditures for fiscal 2012 are still expected to be approximately $35.0 million. These expenditures will be spent primarily on our planned opening of 32 DXL stores. As we open new DXL stores, we will be closing existing stores in each respective market area. For fiscal 2012, we currently expect to close 69 existing Casual Male stores.

Presentation of Non-GAAP Measures

The presentation of non-GAAP “Adjusted Income from Continuing Operations,” “Adjusted Net Income,” “Adjusted Earnings Per Diluted Share from Continuing Operations” and “Adjusted Earnings Per Diluted Share” are not measures determined by generally accepted accounting principles (“GAAP”) and should not be considered superior to or as a substitute for income from continuing operations, net income or earnings per diluted share in accordance with GAAP. We believe that these non-GAAP measures are useful as additional means for investors to evaluate our operating results, when reviewed in conjunction with our GAAP financial statements. We believe the inclusion of these non-GAAP measures enhances an investor’s understanding of the comparability between different periods in different years. The following table reconciles income from continuing operations, net income and earning per diluted share, on a GAAP basis, for the third quarter and first nine months of fiscal 2011 to adjusted income from continuing operations, adjusted net income and adjusted earnings per diluted share, on a non-GAAP basis:

Reconciliation of income from continuing operations, GAAP to Non-GAAP

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Reconciliation net income GAAP to Non-GAAP

The presentation of non-GAAP free cash flow is not a measure determined by 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, “free cash flows” presented in this report may not be comparable to similar measures used by other companies. We calculate free cash flows as cash flow from operating activities, less capital expenditures and discretionary store asset acquisitions. We believe that inclusion of this non-GAAP measure helps investors gain a better understanding of our cash flow performance, especially when comparing such results to previous periods. The following table reconciles our non-GAAP free cash flow measure:

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The negative free cash flow of $(12.9) million for the first nine months of fiscal 2012 is largely the result of the seasonal increase in inventory of $11.9 million. Inventory levels at the end of fiscal 2012 are expected to be lower than last year’s level by approximately $2-3 million.

In the above discussion under “Fiscal 2012 Outlook”, we present “Adjusted Income from Continuing Operations, per diluted share” for fiscal 2011 of $0.22 per diluted share. This is not a measure determined by GAAP and should not be considered superior to or as a substitute for net income or earnings per diluted share in accordance with GAAP. We believe that this non-GAAP measure is useful as an additional means for investors to evaluate our operating results, when reviewed in conjunction with our GAAP financial statements. We believe that the inclusion of this non-GAAP measure enhances an investor’s understanding of the comparability between different periods in different years. The following table is a reconciliation of earnings per diluted share on a GAAP-basis to adjusted income from continuing operations, per diluted share, on a non-GAAP basis for fiscal 2011:

Sales

For the third quarter of fiscal 2012, total sales were $88.7 million as compared to $89.0 million for the third quarter of fiscal 2011. Comparable sales for the third quarter increased 1.5% when compared to the same period of the prior year. On a comparable basis, sales from our retail business increased 2.5% while our U.S. direct business decreased 3.0%. The increase in the retail business of 2.5% was primarily driven by our DXL stores which had a 13.8% comparable store increase over the prior year.

Overall, sales for the third quarter of fiscal 2012 continued to be sluggish, partially driven by the 3.0% decrease in our direct business. Our direct business consists of two primary channels: our catalogs and our websites. For the third quarter of fiscal 2012, sales from our catalogs were down 33.0% but sales from our websites were up 11%. Our customers have been migrating away from our traditional catalogs and towards our websites. In response to this new trend, we have intensified our digital marketing efforts which include emails, web searches, internet banners, and affiliate sites. While our long-term plan has been to eliminate these legacy brand catalogs gradually as our customers convert to digital mediums, we have been reducing our current circulation and page counts on existing catalogs and increasing our spending in digital. For the third quarter of fiscal 2012, circulation was down 30% and impressions (total of circulation and page counts) were down 50% compared to the third quarter of fiscal 2011. In the long-term, through our digital marketing efforts, we expect that sales from our more profitable e-commerce business, which accounts for 68% of our direct business, will more than replace the current shortfall in sales from our legacy brand catalogs.

At quarter-end, there are 73 Casual Male XL stores that are in close proximity to an existing DXL store location. These stores are continuing to experience sales erosion of approximately 4.0% as compared to the remainder of our Casual Male XL stores which are up 1.0% over the prior year. This erosion is expected to continue as the store growth in DXL stores increases. As we discussed above, we believe that our accelerated DXL rollout plan, together with our DXL marketing campaign, will eliminate this erosion and benefit our top line growth.

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For the first nine months of fiscal 2012, total sales of $284.8 million were flat when compared to sales for the first nine months of fiscal 2011. Comparable sales for the first nine months increased 1.9% when compared to the same period of the prior year. On a comparable basis, sales from our retail business increased 2.6% while our U.S. direct business decreased 1.6%. Similar to the third quarter, catalog sales are down 25.0% for the first nine months of fiscal 2012 while sales from our website are up 10.0%.

Gross Profit Margin

For the third quarter of fiscal 2012, our gross margin rate, inclusive of occupancy costs, was 44.0% as compared to a gross margin rate of 45.0% for the third quarter of fiscal 2011. The decrease of 100 basis points for the third quarter of fiscal 2012 was the result of a decrease of 40 basis points in merchandise margins plus an increase of 60 basis points in occupancy costs. Our merchandise margin was negatively impacted during the third quarter of fiscal 2012 by an increase of approximately 6.5% in clearance markdowns as compared to the prior year’s third quarter. While this affected our gross margin for the third quarter of fiscal 2012, our inventory at October 27, 2012 has approximately 12% less clearance merchandise than at October 29, 2011. On a dollar basis, occupancy costs for the third quarter of fiscal 2012 increased 3.2% over the prior year. This increase is largely due to the timing of our DXL store openings and the associated pre-opening occupancy costs incurred.

For the first nine months of fiscal 2012, our gross margin rate, inclusive of occupancy costs, was 46.1% as compared to a gross margin rate of 46.9% for the first nine months of fiscal 2011. The decrease of 80 basis points for the first nine months of fiscal 2012 was the result of a decrease of 30 basis points in merchandise margins plus an increase of 50 basis points in occupancy costs, as a result of higher occupancy costs related to the timing of the DXL store openings and the associated pre-opening occupancy costs.

For fiscal 2012, we are expecting a gross margin rate of 46.4% to 46.7%. Merchandise margins are expected to improve 70 to 90 basis points , but occupancy costs will increase by 50 to 60 basis points, resulting in a gross margin rate from continuing operations for fiscal 2012 that is 10 to 40 basis points better than fiscal 2011.

Selling, General and Administrative Expenses

As a percentage of sales, SG&A expenses for the third quarter of fiscal 2012 of 42.5% were flat to the third quarter of fiscal 2011. On a dollar basis, SG&A expenses decreased $0.2 million, or 0.4%, for the third quarter of fiscal 2012 as compared to the prior year’s third quarter.

For the first nine months of fiscal 2012, SG&A expenses were 39.7% of sales as compared to 39.3% for the first nine months of fiscal 2011. On a dollar basis, SG&A expenses increased $1.0 million, or 0.9%, for the first nine months of fiscal 2012 as compared to the first nine months of fiscal 2011.

Included in SG&A costs for the third quarter and for first nine months of fiscal 2012 are approximately $2.3 million and $4.5 million, respectively, of additional costs associated with our DXL growth initiative. With the planned opening of 32 stores in fiscal 2012, 18 of which are already open, we have incurred an incremental $4.5 million in SG&A costs associated with additional pre-opening payroll, training, store operations, infrastructure and increased marketing. These increases were offset by other cost savings including the reduction in bonus accrual for the first nine months of fiscal 2012 as compared to fiscal 2011.

Our SG&A expenses from continuing operations for fiscal 2012 are expected to increase by $3.0 to $4.0 million from fiscal 2011, with SG&A expenses as a percentage of sales expected to increase by 30 to 50 basis points. The increase in dollars is primarily related to the 53rd week in fiscal 2012. On a comparable 52-week period, SG&A expenses are expected to be $0.5 million to $1.5 million higher due to increased store payroll to support our planned opening of 32 new DXL stores, incremental marketing costs associated with those new stores as well as an accrual for bonuses, which were not achieved in fiscal 2011. Overall, we expect to limit our SG&A growth rates, except where necessary to support our growth activities or where there are unanticipated costs that are necessary to support our overall activities.

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Depreciation and Amortization

Depreciation and amortization for the third quarter of fiscal 2012 was $3.8 million as compared to $3.0 million for the third quarter of fiscal 2011. For the first nine months of fiscal 2012, depreciation and amortization expense was $11.3 million as compared to $9.0 million for the first nine months of fiscal 2011. The primary reason for the increase of $0.8 million and $2.3 million for the third quarter and first nine months of fiscal 2012, respectively, was due to the amortization of approximately $0.5 million and $1.4 million for the third quarter and first nine months of fiscal 2012, respectively, associated with our “Casual Male” trademark. In the fourth quarter of fiscal 2011, our “Casual Male” trademark, with a then-carrying value of $6.1 million, was changed to a definite-lived asset which is being amortized on an accelerated basis over an estimated remaining useful life of seven years. The remainder of the increase in depreciation and amortization expense is related to our DXL store openings during the first nine months of fiscal 2012.

Interest Expense, Net

Net interest expense of $0.2 million for the third quarter of fiscal 2012 as compared to $0.1 million in the third quarter of fiscal 2011. For the first nine months of fiscal 2012, interest expense was $0.4 million and was relatively flat when compared to $0.4 million for the first nine months of fiscal 2011. Interest expense for both the quarter and first nine months has remained relatively low due to minimal borrowings on our credit facility.

Income Taxes

At October 27, 2012, our total deferred tax assets were approximately $51.7 million, with a corresponding valuation allowance of $3.6 million. The deferred tax assets include approximately $21.7 million of net operating loss carryforwards and approximately $7.7 million of deferred gain on our sale-leaseback and, to a lesser extent, other book/tax timing differences.

For the third quarter and first nine months of fiscal 2011, our effective tax rate was reduced from the statutory rate due to the utilization of our fully reserved net operating loss carryforwards. Then in the fourth quarter of fiscal 2011, we determined that it was more likely than not that we would be able to realize the benefits of substantially all of our deferred tax assets. Accordingly, in the fourth quarter of fiscal 2011, we recognized an income tax benefit of $47.8 million related to the reversal of substantially all of the deferred tax valuation allowance. As a result of the valuation allowance being reversed, we have returned to a normal tax provision. For the first nine months of fiscal 2012, our effective tax rate on income from continuing operations was 40.5% compared to 8.8% for the first nine months of fiscal 2011.

Discontinued Operations

In the second quarter of fiscal 2012, we closed our European direct business. The operating results for the European direct business have been reclassified to discontinued operations for all periods. Included in the results for the first nine months of fiscal 2012 is an early termination fee of $1.1 million which was paid to our vendor, who provided the web store design, order processing, fulfillment and customer call center services for our European web stores.

Net Income

For the third quarter of fiscal 2012, we had a net loss of $1.6 million, or $(0.03) per diluted share, compared to a net loss of $1.6 million, or $(0.03) per diluted share, for the third quarter of fiscal 2011.

For the first nine months of fiscal 2012, net income was $1.9 million, or $0.04 per diluted share, compared to net income of $9.2 million, or $0.19 per diluted share, for the first nine months of fiscal 2011. Assuming a normal tax rate of 40.0% for fiscal 2011, adjusted net income for the first nine months of fiscal 2011 was $0.11 per diluted share.

The decrease of $0.07 per diluted share in earnings for the first nine months of fiscal 2012, on a comparative tax basis with fiscal 2011, is due to a decrease in income from continuing operations as a result of increased occupancy costs, SG&A expenses and increased trademark amortization of approximately $6.6 million, or $0.08 per diluted share, associated with our DXL rollout.

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Inventory

At October 27, 2012, total inventory was $116.1 million compared to $104.2 million at January 28, 2012 and $114.9 million at October 27, 2011. Because of the upcoming “Holiday” selling season, our inventory levels are typically higher when compared to year-end balances.

Inventory at October 27, 2012 increased by approximately 1.0% as compared to October 29, 2011. This is primarily the result of cost increases and shifting of our product mix. On a unit basis, inventory has decreased 9.2%. Unit inventories in branded product have increased by approximately 35% over the prior year to support the DXL store product assortments, which has a greater brand assortment than the Casual Male XL stores.

SEASONALITY

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

LIQUIDITY AND CAPITAL RESOURCES

Our primary sources of liquidity are cash generated from operations and availability under our credit facility, as amended, with Bank of America, N.A (“Credit Facility”). Our current cash needs are primarily for working capital (essentially inventory requirements), capital expenditures and growth initiatives. As discussed below, our capital expenditures for fiscal 2012 are expected to be $35.0 million, primarily related to the planned opening of 32 new Destination XL stores and information technology projects.

We currently believe that our existing cash generated by operations together with our availability under our credit facility will be sufficient within current forecasts for us to meet our foreseeable liquidity requirements. For the first nine months of fiscal 2012, free cash flow, which we define as cash flow from operating activities, less capital expenditures and discretionary store asset acquisitions, if any, decreased by $13.6 million to $(12.9) million from $0.7 million for the first nine months of fiscal 2011. This decrease in free cash flow was principally due to the increase in capital expenditures of $10.3 million related to the new store openings, $5.2 million of occupancy and SG&A expenses related to our DXL growth initiatives and a prepayment penalty included in our discontinued operations of approximately $1.1 million. See “Presentation of Non-GAAP Measure” above regarding non-GAAP free cash flow.

The Credit Facility provides for a maximum committed borrowing of $75 million, which, pursuant to an accordion feature, may be increased to $125 million upon our request and the agreement of the lender(s) participating in the increase. The Credit Facility includes a sublimit of $20 million for commercial and standby letters of credit and a sublimit of up to $15 million for Swingline Loans. The maturity date of the Credit Facility is November 10, 2014. Our Credit Facility is described in more detail in Note 2 to the Notes to the Consolidated Financial Statements.

We had outstanding borrowings of $7.6 million under the Credit Facility at October 27, 2012. Outstanding standby letters of credit were $2.1 million and outstanding documentary letters of credit were $0.9 million. The average monthly borrowing outstanding under this facility during the first nine months of fiscal 2012 was approximately $1.0 million, resulting in an average unused excess availability of approximately $69.2 million. Unused excess availability at October 27, 2012 was $64.4 million. Our obligations under the Credit Facility are secured by a lien on all of our assets. The facility contains no financial covenants.

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Total cash outlays for capital expenditures for the first nine months of fiscal 2012 and fiscal 2011 were $21.3 million and $11.0 million, respectively. The capital expenditures incurred in the first nine months of fiscal 2012 were primarily related to the 18 new DXL stores that opened during the first nine months of fiscal 2012.

For fiscal 2012, our capital expenditures are expected to be approximately $35.0 million. The budget includes approximately $26.8 million related to the opening of 32 new Destination XL stores and approximately $4.6 million for continued information technology projects, including further web-related enhancements and upgraded planning and allocation software, with the remainder for general overhead projects. In addition, we expect to close approximately 69 existing stores, most of which are in connection with the opening of our new DXL stores.

For the remainder of fiscal 2012, we expect to open an additional 14 DXL locations. In connection with those store openings, we expect to close an additional 33 Casual Male XL stores by the end of fiscal 2012, resulting in a 413 stores at the end of fiscal 2012. For fiscal 2013, we currently plan to open 63 DXL stores and close approximately 120 Casual Male XL stores.

CRITICAL ACCOUNTING POLICIES

There have been no material changes to the critical accounting policies and estimates disclosed in our Annual Report on Form 10-K for the year ended January 28, 2012 filed with the SEC on March 16, 2012.