Filing summary
Period and entity: This filing is Casual Male Retail Group, Inc.’s Form 10-Q for the quarter ended October 27, 2012, covering fiscal 2012’s third quarter and first nine months. The request metadata identifies Destination XL Group and 2011 Q3; that does not match the filing. Fiscal 2012 ends February 2, 2013, and is a 53-week year. Amounts below are in millions of dollars unless stated otherwise.
Business context
The company operates big-and-tall men’s apparel retail and direct businesses. Its strategy is to accelerate the Destination XL (DXL) store rollout while closing nearby and other Casual Male XL locations. At quarter-end it had 34 DXL stores, 386 Casual Male XL stores and 12 Rochester stores. It reports one segment.
Financial performance and liquidity
| Metric | Third quarter 2012 | Third quarter 2011 | Nine months 2012 | Nine months 2011 |
|---|---|---|---|---|
| Sales | $88.7 | $89.0 | $284.8 | $284.8 |
| Gross profit | $39.0 | $40.0 | $131.2 | $133.5 |
| Gross margin, including occupancy | 44.0% | 45.0% | 46.1% | 46.9% |
| Operating income (loss) | $(2.5) | $(0.8) | $6.9 | $12.4 |
| Continuing operations income (loss) | $(1.6) | $(1.0) | $3.8 | $10.7 |
| Net income (loss) | $(1.6) | $(1.6) | $1.9 | $9.2 |
| Diluted EPS | $(0.03) | $(0.03) | $0.04 | $0.19 |
Third-quarter comparable sales increased 1.5% overall: retail rose 2.5%, while U.S. direct sales fell 3.0%. Nine-month comparable sales increased 1.9%, with retail up 2.6% and direct down 1.6%. The nine-month year-over-year earnings comparison is affected by fiscal 2011’s unusually low 8.8% effective tax rate; the fiscal 2012 rate was 40.5%. Management’s non-GAAP comparison adjusts fiscal 2011 to a normal tax rate and reports nine-month continuing-operations diluted EPS of $0.14, versus $0.08 in 2012.
Cash flow and balance sheet: For the first nine months, operating cash flow was $8.4, capital expenditures were $21.3, and company-defined free cash flow was negative $12.9, versus positive $0.7 a year earlier. The filing attributes much of the negative free cash flow to seasonal inventory investment and increased store investment. Cash was $5.2 at October 27, 2012, down from $10.4 at January 28, 2012; inventory was $116.1, up from $104.2 at fiscal year-end. Total assets were $254.0 and stockholders’ equity was $157.6.
Credit-facility borrowings were $7.6, with $64.4 of unused availability; the $75 million facility matures November 10, 2014, is secured by company assets and has no financial covenants. Letters of credit outstanding totaled $3.0. The filing forecasts fiscal 2012 operating cash flow of $38.0 and year-end cash of approximately $13.0.
Material changes and management commentary
- DXL comparable-store sales increased 13.8% in the quarter and 15.5% for the first nine months. DXL contributed 14% of retail sales in the quarter and 11% year to date. Management said Casual Male stores near DXL locations were experiencing sales erosion of approximately 4%, compared with 1% growth at the rest of the Casual Male chain.
- Direct-channel performance reflected a shift from catalogs to online sales: third-quarter catalog sales fell 33%, while website sales rose 11%. Nine-month catalog sales fell 25%, while website sales increased 10%.
- Gross margin declined 100 basis points in the quarter and 80 basis points year to date. Management cited clearance markdowns and higher occupancy costs, including pre-opening costs for DXL stores. SG&A was $37.7 for the quarter and $113.1 year to date; year-to-date SG&A included $4.5 of DXL-related costs.
- Depreciation and amortization increased, partly because the Casual Male trademark became a definite-lived asset in fiscal 2011 and is now being amortized. The company exited its unprofitable European direct business in the second quarter; the first nine months included a $1.1 early-termination fee. Discontinued operations generated a $1.9 loss for the nine months.
Outlook, risks and contingencies
- Management reduced fiscal 2012 sales guidance to $400–$402, from $405.5–$410, and comparable-sales guidance to 1.5%–2.0%, from 3.0%–4.0%. The revision reflected the third-quarter sales shortfall and Hurricane Sandy’s effect on the Northeast business.
- Fiscal 2012 continuing-operations diluted EPS guidance was reduced to $0.17–$0.20, from $0.22–$0.25. Management forecast a gross-margin-rate improvement of 10–40 basis points and SG&A of $155–$156.
- Management planned 32 DXL openings and approximately 69 Casual Male closures for fiscal 2012, with approximately $35 of capital expenditures. It forecast 50–60 DXL openings annually over the following three years, and estimated $15–$20 of incremental costs over that period plus $2.5–$3.0 of additional annual SG&A. These are estimates, not assured results.
- Management’s longer-term projections included fiscal 2016 sales above $600 and operating margins of at least 10%; it expected approximately $150 of capital expenditures and incremental SG&A and other costs over three years to be funded from operating cash flow. The filing cautions that forward-looking statements are subject to risks and actual results may differ.
- The business is seasonal, with a significant share of operating income typically generated in the fourth quarter. Other execution risks include store-conversion impacts, continued catalog declines, margin pressure and the costs of the accelerated rollout. The company reported no material changes to previously disclosed risk factors and said ordinary-course legal matters were not expected to materially affect results or financial position.
Investor verification priorities
- Confirm the filing and issuer match the intended security: this is a 2012 Casual Male Retail Group filing, not a 2011 Destination XL Group filing.
- Track whether revised fiscal 2012 sales, comparable-sales, EPS, cash-flow and year-end cash forecasts were achieved.
- Assess DXL store-level performance and whether growth offsets sales erosion at nearby Casual Male stores and the decline in catalog sales.
- Monitor inventory, operating cash flow, capital spending, credit-facility availability and funding needs as store openings and closures accelerate.
- Separate recurring operating performance from the European business exit, trademark amortization, DXL rollout costs and prior-year tax-rate effects.