Filing summary
Period and issuer: This is Casual Male Retail Group, Inc.’s unaudited Form 10-Q for the three months ended April 28, 2012, filed May 18, 2012—not a 2011 Q1 filing. The company operated big-and-tall apparel stores and direct-sales businesses and reported one segment beginning in fiscal 2012. Fiscal 2012 is a 53-week year.
Key financial results
| Metric | Q1 FY2012 | Q1 FY2011 |
|---|---|---|
| Sales | $95.9 million | $95.8 million |
| Comparable-sales growth | 2.0% | Not stated here |
| Gross profit / margin | $45.7 million / 47.7% | $45.0 million / 46.9% |
| Operating income | $4.0 million | $4.8 million |
| Net income | $2.3 million | $4.2 million |
| Diluted earnings per share | $0.05 | $0.09 |
| Operating cash flow | $1.1 million | $3.1 million |
| Capital expenditures | $5.6 million | $1.9 million |
| Free cash flow (company-defined, non-GAAP) | $(4.5) million | $1.2 million |
Amounts are in U.S. dollars. Gross margin improved 80 basis points, as merchandise margin gains of 90 basis points more than offset 10 basis points of higher occupancy costs. SG&A rose 2.6% to $38.1 million, and depreciation and amortization increased to $3.7 million from $3.1 million. Operating income declined mainly because of increased trademark amortization; net income also reflected a higher tax rate.
The effective tax rate was 40.4%, versus 10.1% a year earlier, following the prior-year reversal of substantially all of the deferred-tax valuation allowance. Management’s comparable-tax-rate calculation puts Q1 FY2011 adjusted diluted EPS at $0.06; this is a non-GAAP comparison, not reported GAAP EPS.
Financial position and liquidity
At April 28, 2012, cash was $5.9 million, down from $10.4 million at January 28. Inventory was $112.2 million, up from $104.2 million at fiscal year-end and 15% above the prior-year quarter in dollars; units increased by less than 1%. Current assets were $137.0 million and current liabilities $59.0 million. Total liabilities were $83.0 million, including deferred sale-leaseback gains; the filing reports no outstanding credit-facility borrowings.
The $75 million asset-secured credit facility matures November 10, 2014, has no financial covenants, and had $71.2 million of unused excess availability at quarter-end. Standby and documentary letters of credit were $2.3 million and $1.5 million, respectively. Average quarterly borrowings were less than $150,000.
Material changes and management commentary
- Total sales were essentially flat year over year, while comparable sales increased 2.0%. Retail comparable sales rose 3.8%; U.S. direct comparable sales fell 3.9%.
- A new-format catalog performed poorly and management estimated it reduced Q1 direct sales by about $1.5 million. The company returned to its traditional catalog format in April, increased digital and email marketing, and reported direct-channel performance up 4.6% in April year over year. A redesigned catalog was planned for early fall.
- Management attributed retail growth to DXL and Casual Male XL stores, higher dollars per customer and average unit retail; store traffic was down approximately 1.6% year over year.
- The company opened six DXL stores during the quarter, bringing the total to 22. Twenty DXL stores had combined comparable sales growth of 16.3%, using predecessor-market sales for some locations that had not reached their first anniversary.
- Management described Q1 results as within expectations and highlighted improved merchandise margins. It also noted the company’s historical seasonality, with a significant share of operating income and net income typically generated in the holiday-season fourth quarter.
Outlook, plans and risks
- Fiscal 2012 sales guidance: $416.5 million to $423.9 million, based on comparable-sales growth of 4.7% to 6.6%. Gross-margin rate improvement of 60 to 100 basis points was expected.
- Management expected diluted EPS of $0.22 to $0.27, with the comparison to fiscal 2011 affected by the return to a normal tax rate. It forecast operating-income improvement of approximately 20 to 110 basis points over fiscal 2011.
- Forecast operating cash flow was $45 million, capital expenditures approximately $35 million, company-defined free cash flow approximately $10 million, and year-end cash approximately $20 million. These are management estimates, not guarantees.
- The company planned to open 35 DXL stores in fiscal 2012 and close approximately 70 existing stores, largely in markets receiving DXL locations. It projected 35–40 DXL openings annually for several years and more than 200 locations by fiscal 2017. These plans involve execution, investment and sales-growth risk.
- The European direct business was to be discontinued after continuing losses; it reported a $0.2 million operating loss in Q1 FY2012. Results were expected to be reclassified as discontinued operations after the web stores ceased operation.
- Three California wage-and-hour class-action settlements had preliminary court approval but still required final approval. Management believed accruals were sufficient and did not expect a material adverse effect.
- Management said there were no material changes to the risk factors in the fiscal 2011 Form 10-K. It cited foreign-exchange and variable-interest-rate exposure, but considered their current effects immaterial. Disclosure controls were assessed as effective.
Investor verification priorities
- Confirm the intended reporting period: the supplied filing covers Q1 2012, despite the request metadata stating 2011 Q1.
- Track whether the catalog redesign and direct-channel recovery offset the estimated $1.5 million sales shortfall.
- Monitor DXL openings, comparable sales, planned legacy-store closures, capital spending and the resulting cash and liquidity position.
- Compare actual full-year sales, margin, EPS and cash-flow results with management’s stated forecasts; note the expected tax-rate difference from prior-year reported earnings.
- Review the European-business exit and final court approval of the California settlements for any material costs or changes in classification.