Business Context and Reporting Period
Company: Casual Male Retail Group, Inc. (formerly Designs, Inc.)
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: August 2, 2003 (Second Quarter of Fiscal 2004)
Business Overview: The Company is the largest specialty retailer of big and tall men's apparel. Following the acquisition of Casual Male Corp. in May 2002, operations are divided into two segments: the Casual Male business (retail, outlet, catalog, and e-commerce) and Other Branded Apparel (Levi's/Dockers and EcKo Unltd. outlet stores). The Company is actively executing an exit strategy for its Levi's/Dockers business.
Key Financial Metrics
| Metric (in thousands) | Three Months Ended Aug 2, 2003 |
Six Months Ended Aug 2, 2003 |
Six Months Ended Aug 3, 2002 |
|---|---|---|---|
| Sales | $112,034 | $211,500 | $141,987 |
| Gross Profit | $40,119 | $75,487 | $45,284 |
| Gross Margin Rate | 35.8% | 35.7% | 31.9% |
| Operating Income (Loss) | $3,706 | $3,889 | $(6,792) |
| Net Income (Loss) | $658 | $(2,097) | $(14,710) |
| EPS (Diluted) | $0.02 | $(0.06) | $(0.95) |
| Cash and Equivalents | $4,322 | (Balance Sheet Data) | |
| Total Debt (Current + Long-Term) | $117,343 | ||
| Working Capital | $53,823 | (Current Assets $119,354 - Current Liab. $65,531) |
Cash Flow (Six Months Ended Aug 2, 2003):
- Operating Activities: $2,551 (Positive)
- Investing Activities: $(6,016)
- Financing Activities: $3,095
Material Changes vs. Prior Period
- Profitability Turnaround: The Company reported a net income of $658,000 for the quarter, a significant improvement from a net loss of $12.9 million in the same period of the prior year. This improvement is largely due to the absence of the $11.1 million restructuring charge recorded in the prior year's second quarter.
- Revenue Growth: Sales increased 1.8% year-over-year for the quarter ($112.0M vs $110.0M) and 49.0% for the six-month period ($211.5M vs $142.0M), driven by the full inclusion of the Casual Male acquisition.
- Segment Performance:
- Casual Male: Generated operating income of $4.2M for the quarter. Pro forma comparable store sales decreased 2.3% due to increased markdowns to clear spring inventory.
- Other Branded Apparel: Recorded an operating loss of $0.5M for the quarter. Sales declined 12.8% year-over-year for the six-month period due to the erosion of Levi's/Dockers brands and store closures.
- Restructuring: No restructuring charges were recorded in the current quarter. The Company continues to close Levi's/Dockers stores, with a remaining reserve of $13.6 million as of August 2, 2003.
Outlook, Risks, and Management Commentary
- Guidance and Initiatives: Management plans to introduce new merchandising initiatives in the second half of fiscal 2004, including extended sizes for tall customers and expanded young men's assortments. Capital expenditures for fiscal 2004 are expected to be between $12.0 million and $14.0 million, focusing on store expansion and systems upgrades.
- Liquidity: The Company maintains a $120 million credit facility with Fleet Retail Finance, Inc. As of August 2, 2003, $50.3 million was outstanding, with approximately $15.4 million in unused availability. Management believes cash flow from operations and the credit facility are sufficient to meet debt service and operating needs.
- Debt Structure: The Company carries significant long-term debt, including senior subordinated notes with interest rates ranging from 5% to 12%. Interest expense increased to $5.9 million for the six-month period due to debt incurred for the Casual Male acquisition.
- Tax Position: The Company has fully reserved approximately $35.3 million in deferred tax assets due to uncertainty regarding future taxable income. Realization of these assets depends on achieving sustained profitability.
- Seasonality: The business is seasonal, with revenues traditionally increasing in the third and fourth quarters (Fall and Holiday seasons).
Investor Verification Checklist
- Inventory Levels: Verify the $100.9 million inventory balance, noting the $8.2 million reserve related to exiting Levi's/Dockers stores and the impact of markdowns on future margins.
- Debt Covenants: Confirm continued compliance with the $120 million credit facility covenants, particularly given the variable interest rate exposure and high leverage.
- Store Closure Progress: Monitor the execution of the exit strategy for the Levi's/Dockers segment and the associated cash outflows from the $13.6 million remaining reserve.
- Deferred Tax Assets: Assess the likelihood of the Company generating sufficient taxable income to utilize the $35.3 million in net operating loss carryforwards.
- Related Party Transactions: Review the $11.4 million private placement of senior subordinated notes to related parties (including Jewelcor Management Inc.) and the associated warrant issuances.