Casual Male Ret. Director, 10% Owner SEYMOUR HOLTZMAN bought 92310 shares on 5-24-2012 at $ 2.87
The menâ€™s big & tall apparel market, which includes pants with a waist size of 42â€ť and greater, as well as tops sized 1X and greater, generates approximately $3.5 billion to $4.0 billion in sales annually. Growth in this segment has been driven by rapidly changing market demographics.
The menâ€™s big & tall apparel market is currently served by a variety of retailers, including department stores, mass merchandisers and specialty stores. These stores typically offer a limited assortment of sizes and styles. We estimate that our current market share is approximately 11% and believe that we have the potential to reach 17% and beyond. We believe that we can ultimately achieve this goal by catering to the broader target market, attracting customers from various incomes, age and lifestyle segments and offering the widest selection of sizes and styles. A substantial opportunity continues to exist for market share growth from the lower-size range of our market, that is, men in the 42â€ť-46â€ť waist size. These sizes are usually at the high end of the size range for most retailers and, as a result, the selection is usually limited at such retailers.
We operate as a multi-channel retailer with two primary retail brands: Casual MaleXL and Rochester Clothing. The Casual MaleXL customer is a consumer of primarily moderately priced branded and private label casual sportswear and dresswear, while our Rochester Clothing customer is a luxury-oriented consumer of fine quality, designer and branded menswear. We also operate Casual MaleXL outlets for our value-oriented consumer. Lastly, we operate a Direct business both online and through our call center which caters to all of our customers across all brands. Our objective is to appeal to all of our customers by providing a good, better, best array of product assortments in all primary lifestyles with multiple and convenient ways to shop. During fiscal 2010, we launched our new store concept, DestinationXL Â® (â€śDXL Â® â€ť). Our DestinationXL store concept merges all of our brands under one roof, making it easier for our customers to find not only the merchandise they are looking for but also introduces them to extensive product assortments that we have to offer without having to shop multiple stores.
During the third quarter of fiscal 2011, we launched our new DestinationXL e-commerce site which, similar to our DXL store concept, brings all of our existing websites together, making it easier for our customer to shop the full array of product selection that we have to offer from all of our brands with the ease of one shopping cart. Full product assortments from Casual MaleXL, Rochester Clothing, ShoesXL and LivingXL can be found at www.destinationxl.com . In addition to our e-commerce and catalog businesses, we operated 7 international web stores serving twenty-six European countries during fiscal 2011. As discussed below, we will be closing these international web stores in fiscal 2012. Also, we anticipate that our first franchised DXL store will open for business in Kuwait City, Kuwait in April 2012.
Our multi-channel approach has enabled us to grow our business by offering a shopping alternative to the full spectrum of our potential target group. Through acquisitions, new business formats and new product development, we believe we cater to all income demographics from the value-oriented consumer to the high-end luxury-oriented consumer. We offer our customers merchandise in all lifestyles from casual to business, young to mature, in all large sizes from XL and up.
Another critical part of the business operation is managing the number of sizes offered to our customers and optimizing our in-stock position throughout the season. We maintain a consolidated inventory across all channels which enables us to manage our in-stock position of all sizes effectively, ultimately improving customer service. Moreover, our planning and allocation methodologies, with respect to store assortment planning, help to optimize each locationâ€™s market potential without excessive inventory levels.
Our objective over the next five years is to improve our revenues by 30-50% and more than double current operating margins. A critical component of these revenue and profitability growth objectives is to continue to expand the DXL concept both in stores and direct. We intend to open DXL stores in all major markets over the next several years by replacing Casual MaleXL stores with DXL stores. Also, we launched DestinationXL.com in the third quarter of fiscal 2011, which presents a similar customer experience as the DestinationXL store in terms of breadth and depth of product assortments in all sizes available in one place.
A key component to our business strategy, not only in DXL stores but in all of our stores, is to continue improving sales productivity. We have invested in our associates and changed our culture to a more customer-centric environment focused on helping our customer identify and select their wardrobe needs. We are seeing results of these efforts through our store metrics. Even though overall traffic to the stores is down, our average dollar per transaction is increasing. We are continually making changes to our merchandise to meet our customersâ€™ needs, varying merchandise selection by market, increasing size offerings, maintaining in-stock position on core product and offering a balanced mix of private label merchandise as well as branded apparel.
A key component of our business strategy is to offer our market a broad assortment of apparel that is appropriate to our diverse customer base. Regardless of our customersâ€™ age, socioeconomic status, and lifestyle preference, we are able to assemble a wardrobe to fit our customersâ€™ apparel needs. In addition, we offer such assortments in private label product, balanced with an array of brand name labels.
Our stores are merchandised to showcase entire outfits by lifestyle, including traditional, active, young menâ€™s, dresswear and contemporary. This format allows us to merchandise key items and seasonal goods in prominent displays and makes coordinating outfits easier for the customer while encouraging multi-item purchases. This lifestyle layout also allows us to better manage store space in each market to target local demographics. Stores are clustered to meet the demographic needs of customers by climate and ethnicity. The key item strategy is also fully integrated by lifestyle, allowing us to focus on merchandise presentation and offer our customers a compelling value proposition.
Merchandise assortments in our DXL store format are organized by lifestyle, for ease of shopping to our customers, and within each lifestyle the assortments are shown in a good, better, best visual presentation, again to benefit our customersâ€™ ease of shopping. With the â€śbestâ€ť merchandise assortments featured most prominently in the DXL store, our customers are able to visualize current fashion trends, and easily select their wardrobes within their desired price points in a convenient manner.
The Company utilizes a number of private and brand name labels in each of its concepts as described below:
Casual MaleXL Outlet
Our 60 Casual MaleXL outlet stores, with their supporting direct business, B&T Factory Direct, generates approximately 12% of our business. The demographic and socioeconomic characteristics of this market segment are value-oriented customers, which has significant growth potential for us.
We offer a private label program, specifically for our Casual MaleXL outlet stores and our B&T Factory Direct businesses, which is similar to our lifestyle private label lines found in our full-price retail stores but made at lower costs and sold at lower price points for our value-oriented customers. We currently carry Canyon Ridge Â® , which is similar in style to our Harbor Bay Â® product line, 555 Turnpikeâ„˘ , which is targeted toward our younger customers , and Fuse , a contemporary line similar in style to our Synrgyâ„˘ product line. Traveler Technology â„˘ is a traditional line similar to our Gold Seriesâ„˘ .
Casual MaleXL Retail
Our Casual Male business offers an extensive selection of quality sportswear, dress clothing, footwear and accessories for the big & tall customer at moderate prices. Our full-price Casual Male merchandise is sold through our 360 Casual MaleXL retail stores, Casual MaleXL catalogs and e-commerce site.
The majority of the Casual Male merchandise is basic or fashion-neutral items, such as jeans, casual slacks, tee-shirts, polo shirts, dress shirts and suit separates. The Casual Male customer is primarily interested in comfort and fit, at a reasonable price. As such, Casual Maleâ€™s clothing has features specifically designed for our customer, such as waist-relaxer pants, stretch belts, zipper ties, wide band socks, neck-relaxer shirts and clothing with comfort-stretch technology and reinforced stress points.
We carry several private label lines in our Casual MaleXL retail stores and direct businesses which perform very strongly and represent approximately 75% of our sales:
Harbor Bay Â® was our first proprietary brand and it continues to represent a significant portion of our business, specifically our core basic merchandise. Harbor Bay is a traditional line.
Gold Seriesâ„˘ is our core performance offering in tailored-related separates, blazers, dress slacks, dress shirts and neckwear that blends comfort features such as stretch, stain resistance and wrinkle-free fabrications with basic wardrobe essentials.
Synrgyâ„˘ targets the customer looking for a contemporary/modern look.
Oak Hill Â® is a premier line catering to those customers looking for slightly more style and quality than our Harbor Bay but still in a traditional lifestyle. In fiscal 2011, we launched an extension of this line, Oak Hill Heritage , which consists of items elevated in detail and style within Oak Hill.
True Nation Â® is a denim-inspired line consisting of vintage-screen t-shirts and wovens and is geared towards our younger customer, which we recently launched in Spring 2011.
In addition to our many private label lines, we carry several well-known brands of merchandise including: Polo Ralph Lauren Â® , Nautica Â® , Geoffrey Beene Â® , Nautica Jeans Co. Â® , Leviâ€™s Â® , Dockers Â® , Calvin Klein Â® , Reebok Â® and others.
An important element to our business is our high-end, luxury fashion apparel offered by Rochester Clothing. Approximately 13% of our business is done by Rochester Clothing, although we are seeing a potential to expand this business as our Rochester brand is being introduced to a wider group of potential customers with the launch of our DXL stores and the DestinationXL website.
Our Rochester Clothing stores carry a broad selection of quality apparel, at higher price points, from well-known branded manufacturers such as Polo Ralph Lauren Â® , Robert Graham Â® , Lacoste Â® , Facconable Â® , DKNY Â® , Calvin Klein Â® , Michael Kors Â® , Brioni Â® , Cutter and Buck Â® , Tommy Bahama Â® , Tommy Hilfilger Â® , Thomas Dean Â® , Paul & Shark and others. The Rochester customer is able to find a wide range of apparel from traditional and modern sportswear to suits and accessories.
We have also been building a private label program specifically for our Rochester customers. We currently carry three private label lines: Twenty Eight Degrees â„˘ is targeted as a contemporary/modern line offering sportswear, loungewear, related separates, neckwear and dress shirts, Society of One , a jeans wear brand catering to the needs of the fashion denim customer, and Rochester, a line that targets traditional luxury styles. We also offer a complete selection of suits, dress shirts and neckwear under our Rochester Black Label private label. All of our proprietary brands feature the highest quality fabrications, details and construction. These brands represented approximately 11% of Rochesterâ€™s sales for fiscal 2011. While we do not expect that private label will be as big of a contributor as it is in our Casual Male business, we do believe these lines have found a market with our customers.
We strongly believe that the Rochester brand is an integral part of our overall objective of providing a shopping alternative to the full spectrum of our target customers, from the value-oriented customer to the high-end Rochester customer.
RETAIL AND DIRECT CHANNELS
DestinationXL Stores (â€śDXLâ€ť)
Bringing all of the brands together in one format has been an important initiative for us. Our target customer group is a very diverse group, and we have previously catered to them in individual groups through our various channels and brands, such as B&T Factory Direct for our value-oriented customers, Casual MaleXL for our moderate-price customers and Rochester Clothing for our high-end customers. Through our new DXL store concept, we have merged all of our brands under one roof, making it easier for our customers to find the merchandise they are looking for without having to shop several stores, while at the same time, introducing them to our expanded selection of merchandise. The size of the DXL stores, which has almost triple the product assortments of a Casual MaleXL store, currently averages 10,000 square feet, and is expected to average closer to 8,500 to 9,000 as we open future DXL stores with square footage of between 7,000 to 10,000. To balance the potential store economics in each respective market, however, we may open 6,000 square feet stores in smaller markets.
We opened our first four stores in fiscal 2010 and based on their strong performance we opened an additional 12 DXL stores during fiscal 2011. These stores are supercenters, offering a full assortment from all of our core brands, including Casual MaleXL, Rochester Clothing and B&T Factory Direct, as well as expanded assortments of ShoesXL. The merchandise in our DXL stores are organized by lifestyle: Active, Traditional, Modern and Young Menâ€™s with a representation of all of our brands, across all channels, utilizing a good, better, best pricing structure. This new store concept is the first of its kind in the big & tall market. Depending on the customers in each respective market, we can adjust the appropriate mix of merchandise, with varying selections from B&T Factory Direct, Casual MaleXL and Rochester Clothing, to cater to each demographic market.
This store concept enables us to serve a market area more efficiently, resulting in higher operating margins and potentially resulting in greater sales volumes. We hope to be able to increase market share in each market by either (a) gaining a larger share of our existing customersâ€™ annual expenditures on apparel, or (b) increasing our market penetration with our customers whose waist size is between 42â€ť and 46â€ť, or both. Accordingly, the expectation is enhanced returns on capital and operating income from each market compared to our existing locations.
For fiscal 2011, collectively, the DXL stores continued to meet our expectations, with a comparable store sale increase of almost 13% for fiscal 2011 when compared to the prior yearâ€™s predecessor stores for each market area. For fiscal 2012, we are planning to open an additional 35 stores resulting in approximately 51 DXL stores operating at the end of the year, with at least one store located in most major metropolitan cities across the United States. In that the DXL format offers our customer a far superior customer experience compared to our existing stores, we expect to continue to open 35-40 DXL for the next several years, and expect to have 150-175 DXL store locations by fiscal 2015. Management believes there is potential to ultimately open up to 250 stores. By the end of fiscal 2012, the DXL stores are expected to be generating approximately 30% of our sales, and almost 50% by the end of fiscal 2013, on an annualized basis in our retail channel.
Casual MaleXL retail stores
At January 28, 2012, we operated 360 Casual MaleXL full-price retail stores, located primarily in strip centers, power centers or stand-alone locations. These stores offer a broad selection of basic sportswear, other casual apparel, dress wear and accessories, as well as a full complement of our private label collections. The average Casual MaleXL retail store is approximately 3,642 square feet and has approximately $169 in sales per square foot annually.
As we expand the DestinationXL stores in all major metropolitan areas in the US, we expect to close a significant portion of the existing Casual MaleXL stores. By the end of 2015, we anticipate that there will be approximately 150 Casual MaleXL stores, including outlets.
Casual MaleXL outlet stores
At January 28, 2012, we operated 60 Casual MaleXL outlet stores designed to offer a wide range of casual clothing for the big & tall customer at prices that are generally 20-25% lower than those offered at our full-price retail stores. Much of the merchandise in the outlet stores is offered with the purchasing interests of the value-oriented customer in mind. The merchandise assortments and brands carried in the outlet stores are consistent with the merchandise strategies carried in our direct business, B&T Factory Direct, which is discussed below. The average Casual MaleXL outlet store is approximately 3,141 square feet and has approximately $199 in sales per square foot annually.
Rochester Clothing stores
At January 28, 2012, we operated 14 Rochester Clothing stores, located in major cities throughout the United States and one store in London, England. The Rochester Clothing stores provide the customer with high-end merchandise from well-recognized brands. The average Rochester Clothing store is approximately 7,787 square feet and has approximately $291 in sales per square foot annually.
Our Direct Businesses
Our direct businesses, which consist of e-commerce and catalogs, are a vital part of our multi-channel business, allowing us to service our customers better whether from their home or in our store. Our direct businesses bridge that gap for us by encouraging and expecting our store associates to use our catalog and websites to help fulfill our customersâ€™ clothing needs. If an item is not available in our store, then our store associates can order the item for our customer through one of our direct channels and have it shipped to the store or directly to the customer. The success of this program represents 5% of our retail storesâ€™ sales, which are now derived from in-store orders placed through our direct channels.
DestinationXL Â® E-Commerce Site
To complete our initiative of bringing all of our brands under â€śone roofâ€ť, during the third quarter of fiscal 2011, we launched www.destinationxl.com . Similar to the store concept, this website combines all of our existing e-commerce sites into one enhanced website, with state-of-the-art features and best practices. DestinationXL allows our customers to shop across all of our brands and product extensions with ease and brings all of our customers under one concept. Their classification as a â€śRochesterâ€ť customer or a â€śCasual Maleâ€ť customer no longer limits their ability to access our full product assortment.
Each of our existing web addresses: www.casualmalexl.com , www.rochesterclothing.com , www.btdirect.com , www.livingxl.com , and www.shoesxl.com now take customers to the DestinationXL online environment where they can shop their favorite branded business or our DestinationXL superstore, all with convenience of a single cart and checkout.
From the DestinationXL website our customers have access to:
Our Casual MaleXL web store offers an assortment of merchandise similar to what is available in the Casual MaleXL stores, but also offers a broader selection of brands, styles and sizes.
Because we currently have only 14 Rochester Clothing retail locations, which may not be accessible for many of our Rochester customers, our direct businesses are a significant portion of our overall higher-end business. Our â€śRochester Big & Tallâ€ť catalog and our Rochester clothing web store offer an assortment of clothing that is similar to what can be found in our Rochester retail stores, with a broader selection in most cases.
B&T Factory Direct
Our B&T Factory Direct web store enhances our existing Casual MaleXL outlet stores. The merchandise offered in our â€śB&T Factory Directâ€ť catalogs and on our website is an expanded selection but similar to the merchandise that can be found in our Casual MaleXL outlet stores. In addition, B&T Factory Direct will often feature special clearance opportunities of product obtained from Casual MaleXL and Rochester Clothing, offering the B&T Factory Direct customer the ability to purchase branded product and fashion product for a specially reduced price.
Our LivingXL business, which includes our LivingXL web store and catalogs, specializes in the selling of select high-quality products which help larger people maintain a more comfortable lifestyle. The types of products sold on our website and in our catalogs benefit both men and women and include chairs, outdoor accessories, travel accessories, bed and bath and fitness equipment.
Our ShoesXL web store carries a complete line of menâ€™s footwear in extended sizes, offering our customers a full range of footwear in hard-to-find sizes. The assortment on ShoesXL is a reflection of our apparel, with a broad assortment from moderate to luxury and from casual to formal. ShoesXL currently has a selection of more than 500 styles of shoes, ranging in sizes from 10M to 18M and widths up to 5E. We carry a number of designer brands including Cole Haan, Allen Edmonds, Timberland, Calvin Klein, Lacoste and Bruno Magli. In addition, we have added the expanded shoe assortments within our existing Casual MaleXL and Rochester Clothing catalogs.
From the DestinationXL homepage customers can also search across all of our brands without having to specifically shop Casual Male versus Rochester. By searching for a shirt in their size, DestinationXL will provide them product selection from all three of our concepts, from value-oriented to luxury. Customers can tailor their search enabling them to shop more effectively with ease.
Seymour Holtzman , has been a director since April 7, 2000 and Chairman of the Board since April 11, 2000. On May 25, 2001, the Board of Directors hired Mr. Holtzman as an employee. Mr. Holtzman has been involved in the retail business for over 35 years. For many years, he has been the President and Chief Executive Officer of Jewelcor, Incorporated, a former New York Stock Exchange listed company that operated a chain of retail stores. From 1986 to 1988, Mr. Holtzman was Chairman of the Board and Chief Executive Officer of Gruen Marketing Corporation, an American Stock Exchange listed company involved in the nationwide distribution of watches. For at least the last five years, Mr. Holtzman has served as Chairman and Chief Executive Officer of Jewelcor Management, Inc., a company primarily involved in investment and management services. Mr. Holtzman is owner and Chief Executive Officer of each of C.D. Peacock, Inc., a Chicago, Illinois retail jewelry establishment, and Homeclick, LLC, a privately held internet retailer specializing in luxury brands for the home. Mr. Holtzman was the Chief Executive Officer and Co-Chairman of the Board of George Foreman Enterprises, Inc. (OTCBB: â€śGFME.PKâ€ť), formerly MM Companies, Inc., until his resignation in November 2010. Mr. Holtzman is a successful entrepreneur with extensive experience working with public companies and provides valuable insight to the Board with respect to strategic planning.
David A. Levin has been our President and Chief Executive Officer since April 10, 2000 and a director since April 11, 2000. From 1999 to 2000, he served as the Executive Vice President of eOutlet.com. Mr. Levin was President of Camp Coleman, a division of The Coleman Company, from 1998 to 1999. Prior to that, Mr. Levin was President of Parade of Shoes, a division of J. Baker, Inc., from 1995 to 1997. Mr. Levin was also President of Prestige Fragrance & Cosmetics, a division of Revlon, Inc., from 1991 to 1995. Mr. Levin has worked in the retail industry for over 30 years. Since joining the Company, Mr. Levin has been instrumental in transforming the Company from a company which exclusively operated Levi Strauss & Co. branded apparel to the largest specialty retailer of big & tall menâ€™s apparel. In addition, Mr. Levin brings to the Board valuable experience in merchandising and marketing initiatives.
Alan S. Bernikow has been a director since June 29, 2003. From 1998 until his retirement in May 2003, Mr. Bernikow was the Deputy Chief Executive Officer at Deloitte & Touche LLP where he was responsible for assisting the firm on special projects such as firm mergers and acquisitions, litigation matters and partner affairs. He was a member of Deloitte & Toucheâ€™s Executive & Management Committees; Chairman for the Professional Asset Indemnity Limited (â€śPAILâ€ť Bermuda) Big 4 Insurance Representatives; and President for the PAIL Vermont Insurance Company Big 4 Insurance Representatives. Mr. Bernikow joined Touche Ross, the predecessor firm of Deloitte & Touche LLP, in 1977, prior to which Mr. Bernikow was the National Administrative Partner in Charge for the accounting firm of J.K. Lasser & Company. Mr. Bernikow is a member of the Board of Directors of Revlon, Inc. and Revlon Consumer Products Corporation and serves as Chairman of the Audit Committee of Revlon, Inc.; as well as Chairman of the Revlon, Inc. Compensation and Stock Plan Committee; a member of the Board of Directors of Mack-Cali, as well as the Chairman of the Audit Committee of Mack-Cali; a member of the Board of Premier American Bank, as well a member of the Compensation Committee and Chairman of the Audit Committee of Premier American Bank; and serves as a Director of the Board of the UBS Global Asset Management (US) Inc.â€”a wholly owned subsidiary of UBS AG, including serving as Chairman of its Audit Committee. Mr. Bernikow has had extensive international experience in his role in Deloitte & Toucheâ€™s management/risk management group, as well as worldwide insurance responsibilities. Mr. Bernikow provides the Board with substantial financial expertise and strategic planning as a result of his years of experience at Deloitte & Touche LLP. His strong financial background qualifies him as an â€śaudit committee financial expertâ€ť. Mr. Bernikow provides the Board with valuable insight with respect to financial reporting based on his experiences serving on the audit committees of several boards.
Jesse Choper has been a director since October 8, 1999. Mr. Choper is the Earl Warren Professor of Public Law at the University of California at Berkeley School of Law, where he has taught since 1965. From 1960 to 1961, Professor Choper was a law clerk for Supreme Court Chief Justice Earl Warren. Mr. Choper is a member of the California Horseracing Board. Mr. Choper was a member of the Board of Directors of George Foreman Enterprises, Inc. (OTCBB: â€śGFME.PKâ€ť) until his resignation in November 2010. Mr. Choper provides valuable legal expertise to the Board. His specific legal background makes him an authority on ethical behavior and he provides valuable insight with respect to corporate governance. Mr. Choperâ€™s tenure and service as a director for over ten years is also considered a valuable asset to the Board.
John E. Kyees has been a director since May 3, 2010. From 2003 until his retirement in 2010, Mr. Kyees was the Chief Financial Officer of Urban Outfitters, Inc. Mr. Kyees continues to serve as the Chief of Investor Relations for Urban Outfitters. Prior to that, from 2002 to 2003, Mr. Kyees was the Chief Financial Officer and Chief Administrative Officer of bebe Stores, Inc. Mr. Kyees is a member of the Board of Directors of Vera Bradley and serves as Chairman of the Audit Committee and Compensation Committee and is a member of the Nominating and Corporate Governance Committee. Mr. Kyees brings to the Board extensive executive level retail experience having served as Chief Financial Officer for several prominent retailers. His insight with respect to merchandising, operational activities and finance is an asset to our Board. Institutional Investor magazine selected Mr. Kyees as a top specialty retail chief financial officer on five separate occasions, evidencing his strong skills in corporate finance, strategic and accounting matters.
Ward K. Mooney has been a director since July 31, 2006. In 2005, Mr. Mooney was a founding partner of Crystal Financial LLC and since March 2010 has been the Chief Executive Officer. Prior to that, Mr. Mooney was the President of Bank of America Retail Finance Group and Chief Operating Officer of Back Bay Capital, both of which were formerly Bank of Boston businesses which Mr. Mooney founded. Mr. Mooney provides the Board with valuable insight with respect to his extensive experience as a lender in the apparel industry.
George T. Porter , Jr . has been a director since October 28, 1999. Mr. Porter was President of Leviâ€™s USA for Levi Strauss & Co. from 1994 to 1997. Beginning in 1974, Mr. Porter held various positions at Levi Strauss & Co., including President of Leviâ€™s Menâ€™s Jeans Division. Mr. Porter was also Corporate Vice President and General Manager of Nike USA from 1997 to 1998. Mr. Porter provides the Board with extensive merchandising experience having worked at two highly prominent companies. Mr. Porterâ€™s tenure and service as a director for over ten years is also considered a valuable asset to the Board.
Mitchell S. Presser has been a director since May 1, 2007. Since November 2006, Mr. Presser has been a founding partner of Paine & Partners, LLC, a private equity firm. Prior to that, Mr. Presser was a law partner with Wachtell, Lipton, Rosen & Katz, specializing in mergers & acquisitions. Mr. Presser serves as a director on the boards of three privately-held companies. Mr. Presserâ€™s extensive experience in private equity and strategic planning provides valuable insight to the Board.
All directors hold office until the next Annual Meeting of Stockholders and until their respective successors have been duly elected and qualified or until their earlier death, resignation or removal.
Non-Director Executive Officers
Dennis R. Hernreich , 54, has been our Executive Vice President, Chief Operating Officer, Chief Financial Officer, Treasurer and Secretary since September 2002. Prior to that, Mr. Hernreich served as our Senior Vice President, Chief Financial Officer and Treasurer upon joining us on September 5, 2000. Prior to joining our Company, from 1996 through 1999, Mr. Hernreich held the position of Senior Vice President and Chief Financial Officer of Loehmannâ€™s, a national retailer of womenâ€™s apparel. From 1999 to August 2000, Mr. Hernreich was Senior Vice President and Chief Financial Officer of Pennsylvania Fashions, Inc., a 275-store retail outlet chain operating under the name Rue 21.
Francis Chane , 48, has been our Senior Vice President of Distribution & Logistics since June 2011. Prior to that, Mr. Chane was our Vice President of Distribution & Logistics since joining the Company in June 2008. Prior to joining our Company, Mr. Chane was Vice President Operations & Facilities for Redcats USA, a division of the French multi-national company PPR, from 1999 to April 2008.
Angela Chew , 44, has been our Vice President of Global Sourcing since May 2010. From October 2009 through May 2010, Ms. Chew was our Senior Director of Global Sourcing. Prior to that, Ms. Chew was our Director of Global Sourcing from February 2009 to October 2009. Prior to joining our Company, from October 2007 to December 2008 Ms. Chew was the Senior Product Merchant for Redcats USA. From 2007 to 2009, Ms. Chew was an Independent Retail Consultant and Analyst with the Gerson Lehrman Group and, from August 2006 to December 2006, the Executive Vice President of Global Sourcing for Rocawear.
Richard Della Bernarda, 49, has been our Senior Vice President and Chief Marketing Officer since June 2007. Mr. Della Bernarda began his career with Casual Male Corp. in 1992 and joined our Company in May 2002 as part of our acquisition of Casual Male Corp. as our Senior Vice President of Marketing.
Kenneth M. Ederle, 46, has been our Senior Vice Presidentâ€”General Merchandise Manager DXL since May 2011. Prior to that, Mr. Ederle was our Vice President, General Merchandise Manager of Rochester Clothing from August 2008 until May 2011. From January 2008 to August 2008, Mr. Ederle was our Merchandise Manager of Sportswear for Rochester Clothing and prior to that was one of our Merchandise Managers for Casual Male from November 2006 to December 2007. Prior to joining the Company in 2006, Mr. Ederle was a Senior Buyer and Senior Planner for Limited Brands.
Jack R. McKinney , 55, has been our Senior Vice President and Chief Information Officer since June 2002. Mr. McKinney began his career with Casual Male Corp. in 1997 and joined our Company in May 2002 as part of our acquisition of Casual Male Corp.
Robert S. Molloy , 51, has been our Senior Vice President and General Counsel since April 2010. Prior to that, Mr. Molloy was the Vice President and General Counsel since joining the Company in February 2008. Prior to joining the Company, Mr. Molloy served as Vice President, Assistant General Counsel at Staples, Inc. from May 1999 to February 2008. Prior to May 1999, Mr. Molloy served as a trial attorney.
Francie Nguyen , 46, joined our Company in May 2011 as Senior Vice Presidentâ€”CMRG Direct Business. Prior to that, Ms. Nguyen was the General Manager, President of Womenâ€™s, Menâ€™s and Kids Apparel, Footwear and Home at Hanover Direct from May 2008 until May 2011. From October 2005 to May 2008, Ms. Nguyen was the Vice President of Merchandising, Womenâ€™s Fashion and Home at Spiegel.
Brian Reaves , 50, joined our Company in May 2010 as our Senior Vice President of Store Sales and Operations. Prior to joining our Company, Mr. Reaves was the Vice Presidentâ€”Outreach and Group Sales for Davidâ€™s Bridal from 2007 to 2009. Before that, Mr. Reaves was the Senior Vice President of Sales for The Bridal Group from 2004 to 2007.
Peter E. Schmitz , 52, joined the Company in August 2007 as our Senior Vice President, Real Estate and Store Development. Prior to that, Mr. Schmitz was the Vice President of Real Estate for Brooks/Eckerd Pharmacy Chain since 1995.
Vickie S. Smith , 54, joined the Company in February 2008 as our Senior Vice President, Planning and Allocation. Prior to that, Ms. Smith worked at Urban Brands as Senior Vice President, Planning, Allocation and Marketing from May 2006 to November 2007. From May 2001 to December 2005, Ms. Smith was the Vice President, Corporate Planning and Allocation at JC Penney.
Peter H. Stratton, Jr ., 39, has been our Senior Vice President of Finance, Corporate Controller and Chief Accounting Officer since August 2009. Mr. Stratton joined us in June 2009 as Vice President of Finance. From May 2007 to June 2009, he served as Senior Director of Corporate Accounting at BearingPoint, Inc. Prior to May 2007, Mr. Stratton held various finance and accounting leadership positions at Legal Sea Foods, Inc., Shawâ€™s Supermarkets, Inc. and Cintas Corporation.
Walter E. Sprague, 62, has been our Senior Vice President of Human Resources since May 2006. From August 2003 through April 2006, Mr. Sprague was our Vice President of Human Resources. Prior to joining our Company, Mr. Sprague was the Managing Director Northeast, for Marc-Allen Associates, a nationwide executive recruiting firm. From 1996 to 2002, Mr. Sprague was the Assistant Vice Presidentâ€”Senior Director of Human Resources for Foot Locker Inc. and prior to that, the Assistant Vice Presidentâ€”Senior Director of Human Resources for Woolworth Corporation, the predecessor company to Foot Locker Inc.
John R. Wagner , 56, has been our Vice President, Merchandise Manager for Tailored Clothing and Furnishings since November 2010. In April 2011, Mr. Wagner assumed the oversight responsibilities for Shoes XL and Accessories for Rochester Clothing and Casual Male XL. Prior to joining our company, Mr. Wagner was President of Innovative Sourcing Group, a New York based product development and sourcing firm specializing in menâ€™s apparel. From 2001 to 2007, Mr. Wagner held the positions of Vice President of Manufacturing and Product Development and Vice President of Tailored Clothing for S&K Famous Brands, a menâ€™s specialty retail chain based in Richmond, Virginia.
MANAGEMENT DISCUSSION FROM LATEST 10K
2011 Financial Summary
Our sales performance for fiscal 2011 was below our expectations, due principally to the slowdown in store traffic we experienced in the second half of fiscal 2011. While sales for the first six months of fiscal 2011 showed positive improvements with store traffic down only 1.5% and comparable sales up 3.5%, we saw a negative shift in the third quarter with store traffic down 5.6%. Traffic improved slightly during the fourth quarter of fiscal 2011, but the unseasonably warm weather and highly promotional retail environment continued to affect our sales negatively. For fiscal 2011, our comparable sales increased 2.1% over fiscal 2010.
In order to maintain appropriate inventory levels and improve customer traffic, in the fourth quarter of fiscal 2011, we increased our promotional activity and reduced pricing on our seasonal inventory, which had a negative impact on our gross margin rate for fiscal 2011. However, gross margin rate for fiscal 2011 still showed an improvement over fiscal 2010 of approximately 40 basis points.
Although our sales shortfall resulted in our operating income, before impairment charges, being relatively flat to fiscal 2010, we saw many positive signs of growth within our business. During fiscal 2011, we opened 12 additional DestinationXL Â® (â€śDXL Â® â€ť) stores, bringing our total to 16. Fourteen of these stores are considered â€ścomp storesâ€ť and had a combined comparable sales increase of 12.8% for fiscal 2011 when compared to the prior year predecessor sales in each market. Once a DXL store has fully matured, which we estimate to be 36 months, EBITDA (Earnings Before Interest, Taxes, Depreciation and Amortization) margins are expected to be 25%- 35%.
We are also very excited about the launch of our new DestinationXL website, which we launched during the third quarter of fiscal 2011. Similar to the performance of our DXL stores, we see significant opportunities in the growth of our direct business by combining all of our existing e-commerce sites into one enhanced website, with state-of-the-art features and best practices. DestinationXL allows our customers to shop across all of our brands and product extensions with ease and brings all of our customers under one concept. Their classification as a â€śRochester Clothingâ€ť or â€śCasual Maleâ€ť customer no longer limits their ability to access our full product assortment.
From a liquidity perspective, we have been able to fund both our store and e-commerce growth through earnings. During most of fiscal 2011, we maintained full availability under our revolving credit facility with average borrowings under $1.0 million. At year end, we have no outstanding debt and cash of $10.4 million.
Net income for fiscal 2011, was $42.7 million, or $0.89 per diluted share, as compared to $15.4 million, or $0.32 per diluted share, for fiscal 2010. Included in our results for fiscal 2011 is a non-cash impairment charge of $23.1 million, or $0.29 per diluted share, related to the partial write-down of our â€śCasual Maleâ€ť trademark. With the success of our DXL store concept, we have closed 36 Casual MaleXL stores over the past two years and plan to close an additional 70 stores in fiscal 2012. With an expected 35-40 DXL stores opening each year, we expect that only approximately 150 Casual MaleXL retail and outlet stores will remain open by the end of 2015. As a result, we could not support the existing carrying value of the â€śCasual Maleâ€ť trademark with this reduced Casual MaleXL store base, which will continue to decrease as DXL stores are opened.
In addition, in the fourth quarter of fiscal 2011, we recognized a total income tax benefit of $47.8 million, which included a non-recurring income tax benefit of $42.5 million, or $0.88 per diluted share, for the reversal of the valuation allowance.
Net income for fiscal 2011 was $0.89 per diluted share. Adjusting for the impairment charge of $0.29 per diluted share and the non-recurring income tax benefit of $0.88 per diluted share, our adjusted net income per diluted share (Non-GAAP) was $0.30 per diluted share, which was in line with our earnings guidance for fiscal 2011 of $0.28 to $0.29 per diluted share. See â€śPresentation of Non-GAAP Measuresâ€ť below for a reconciliation of GAAP net income per diluted share to adjusted net income per diluted share (Non-GAAP).
Fiscal 2012 Outlook
For fiscal 2012 we are planning on a sales range of $416.5 to $423.9 million, which is based on a comparable sales increase of 4.7% to 6.6%. This sales increase is driven by the expansion of our DXL stores and by continued growth in our direct businesses. We expect to improve our gross margin rate by an additional 60 to 100 basis points from fiscal 2011. This increase is based on merchandise margins improving by approximately 50 to 110 basis points with a Â±10 basis point change in occupancy costs. Selling, general and administrative (â€śSG&Aâ€ť) costs are planned to increase by approximately $6.0 to $7.4 million, primarily due to the 53 rd week in fiscal 2012. On a comparable 52-week period, SG&A costs are expected to increase $3.5 to $5.0 million due to additional store payroll and advertising costs associated with our planned DXL store openings and expected bonus accruals. As a percentage of sales, SG&A expenses are expected to decrease by 30 to 70 basis points.
While operating income is expected to increase by approximately 20 to 110 basis points over fiscal 2011, our earnings for fiscal 2012 are expected to be between $0.22 -$0.27 per diluted share, primarily due to us returning to a normal tax position. For the past two fiscal years, our deferred tax assets have been fully reserved, which has resulted in a minimal tax provision of approximately 10%. In the fourth quarter of fiscal 2011, we reversed substantially all of our tax valuation allowance. As a result, we expect our effective tax rate for fiscal 2012 to be approximately 41.0%. In addition, because our â€śCasual Maleâ€ť trademark will now be a finite-lived asset, we will be incurring incremental amortization of approximately $1.8 million for fiscal 2012, as we amortize the remaining asset on an accelerated basis over a 7-year remaining life.
From a liquidity perspective, we expect cash flow from operating activities of $45.0 million, resulting in free cash flow (as defined below under â€śPresentation of Non-GAAP Measuresâ€ť) of approximately $10.0 million. We expect our cash balances to increase to $20.0 million by the end of fiscal 2012. Our capital expenditures for fiscal 2012 are expected to be approximately $35.0 million. These expenditures will primarily be spent on our planned opening of 35 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 70 existing stores.
Presentation of Non-GAAP Measures
Adjusted Net Income Per Diluted Share -Non-GAAP
The presentation of non-GAAP â€śadjusted net income per diluted shareâ€ť is not a measure determined by generally accepted accounting principles (â€śGAAPâ€ť) 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 the inclusion of this non-GAAP measure and the identification of unusual or certain non-recurring adjustments and non-cash items enhance an investorâ€™s understanding of the underlying trends in our business and provide for better comparability between different periods in different years.
Sales for fiscal 2011 increased $4.0 million, or 1.0%, to $397.7 million as compared to $393.6 million in fiscal 2010. Comparable sales for fiscal 2011 increased 2.1% when compared to the fiscal 2010. On a comparable basis, sales from our retail business increased 2.4% and sales from our domestic direct business increased 1.5%. Our international direct business decreased 8.4%. Contributing to our increased comparable sales of 2.1% was an increase of 12.8% from our 14 comparable DXL stores. As planned, we started to increase prices during the first quarter of fiscal 2011 within certain merchandise categories. For fiscal 2011, our average unit retail price increased approximately 6.4% over the prior year. This increase is due partly to product price increases, and partly to the result of improved sales productivity by our selling associates.
Sales for the first six months of fiscal 2011 were trending in line with our expectations, with a comparable sales increase of 3.5% and store traffic down only 1.5%. However, in the third quarter of fiscal 2011, store traffic was down 5.6% and although it slightly improved in the fourth quarter to a negative 3.7%, our sales were adversely impacted. The unseasonably mild winter was also a contributing factor to the decrease in store traffic during the second half of fiscal 2011. As a result, sales for fiscal 2011 were below our expectations, primarily driven by a total decrease in store traffic of approximately 3.1% for the year when compared to the fiscal 2010. While we continue to see improvements in our â€śaverage retailâ€ť metrics, store traffic continues to directly affect our sales.
Sales for fiscal 2010 decreased $1.5 million, or 0.4%, to $393.6 million as compared to $395.2 million in fiscal 2009. Comparable sales for fiscal 2010 increased 1.5% when compared to the same period of the prior year. This comparable sales increase consisted of a 0.5% increase in sales from our Casual MaleXL business and a 2.7% increase in our Rochester business. Our Rochester clothing business was most affected by the economic recession; as a result, we saw improvements in our Rochester clothing business as our high-end customers started returning. Our B&T Factory Direct business, which caters to our value-oriented customer, increased 13.4% over fiscal 2009, representing two years of double-digit increases for this direct business.
Our comparable sales increase for fiscal 2010 of 1.5% was primarily attributable to improvements in sales productivity. While store traffic was still down 4.2% for fiscal 2010, it was a substantial improvement from -9.7% experienced in fiscal 2009. In addition, we saw improvements each quarter in our conversion rate (the percentage of store customers who make a purchase) as well as improvements in dollars spent per transaction. These improvements were largely attributable to ongoing efforts within store operations to develop a stronger sales force that is sales-driven and focused on serving the customer. On a comparable basis, sales from our direct businesses increased by 3.2% and sales from our retail business increased 1.1%.
We are expecting fiscal 2012 sales volumes to increase by approximately 4.7%-6.6%, with total sales to be between $416.5 to $423.9 million. We expect comparable sales growth to approximate between 4.7%-6.6%.
Gross margin rate for fiscal 2011 was 46.2% as compared to 45.8% for fiscal 2010 and 44.2% for fiscal 2009. The increase of 40 basis points for fiscal 2011 was comprised of a 25 basis point increase in merchandise margin and an improvement of 15 basis points in occupancy costs. Our merchandise margin improvement of 25 basis points was below our expected merchandise margins for fiscal 2011. In response to the decrease in store traffic that we continued to experience in the fourth quarter of fiscal 2011, we increased our promotional activity and reduced pricing on our seasonal inventory, which had a negative impact on our gross margin rate for fiscal 2011. However, overall we continue to see improvement in our merchandise margins as a result of our inventory management and the benefit from our growing global sourcing activities. As expected, on a dollar basis, occupancy costs for fiscal 2011 were flat with fiscal 2010.
The increase of 166 basis points for fiscal 2010 was comprised of a 96 basis point increase in merchandise margin and an increase of 70 basis points in occupancy costs. Our occupancy costs improvement of 70 basis points was the result of the annualization of our rent-reduction efforts with landlords that occurred primarily in fiscal 2009.
For fiscal 2012, we are expecting that our occupancy costs, on a dollar-basis, will increase approximately $2.4 to 4.5 million as a result of adding approximately 35 DXL stores in fiscal 2012. As a result, we expect occupancy costs will be Â±10 basis points. From a merchandise margin perspective, we are planning a continued improvement of approximately 50 to 110 basis points. Accordingly, for fiscal 2012, we are expecting gross margin will improve by approximately 60 to 100 basis points.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
SG&A expenses as a percentage of sales for fiscal 2011, 2010 and 2009 were 38.9%, 38.3% and 38.2%, respectively.
On a dollar basis, SG&A expenses for fiscal 2011 increased $3.8 million, or 2.5%, to $154.8 million as compared to SG&A expenses of $150.9 million in fiscal 2010. The increase of $3.8 million, which was slightly favorable to plan, was primarily due to increases of approximately $4.0 million in payroll-related expenses, such as modest salary increases, severance payments, reinstatement of the 401K employer match, as well as increased staffing in our global sourcing and merchandise areas. SG&A expenses also increased by $2.3 million, related to accruals for anticipated litigation settlements, primarily associated with three California wage and hour class actions suits, and legal expense to date. Offsetting the increases in SG&A was approximately $4.8 million in savings due to the Companyâ€™s inability to achieve its targets for bonus for fiscal 2011 as compared to fiscal 2010.
SG&A expenses for fiscal 2010 of $150.9 million were essentially flat to fiscal 2009 SG&A expenses of $151.0 million. As planned, we maintained a similar cost structure to fiscal 2009 and limited our SG&A expense to those programs supporting our growth activities. For fiscal 2010, we continued to realize cost savings from several of our 2009 cost reduction initiatives, such as reductions in store payroll and lower distribution costs. These cost savings absorbed increases in expenses principally related to our DXL stores.
SG&A expense management is a significant priority for us. While we are expecting our SG&A expenses to increase by $6.0 to $7.4 million for fiscal 2012, SG&A expenses as a percentage of sales is expected to decrease by 30 to 70 basis points. The increase in dollars is primarily related to the 53 rd week in fiscal 2012. On a comparable 52-week period, SG&A expenses are expected to increase $3.5 million to $5.0 million due to increased store payroll to support our planned opening of 35 new DXL stores, incremental marketing costs associated with targeting 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.
PROVISION FOR TRADEMARK IMPAIRMENT
In the fourth quarter of fiscal 2011, we recorded a non-cash impairment charge of $23.1 million against our â€śCasual Maleâ€ť trademark. With the success of our DXL store concept, we have closed 36 Casual MaleXL stores over the past two years and plan to close an additional 70 stores in fiscal 2012. With an expected 35-40 DXL stores opening each year, we expect that only approximately 150 Casual MaleXL retail and outlet stores will remain open by the end of 2015. As a result, we could not support the existing carrying value of the â€śCasual Maleâ€ť trademark with this reduced Casual MaleXL store base, which will continue to decrease as DXL stores are opened. As a result, the carrying value of the â€śCasual Maleâ€ť trademark was greater than the fair value of the trademark as valued using a discounted future cash flow approach. At January 28, 2012, the â€śCasual Maleâ€ť trademark has a carrying value of $6.1 million, which will be amortized on an accelerated basis over 7 years. For more information regarding this impairment, see â€śCritical Accounting Policiesâ€”Intangibles.â€ť
We did not have any significant impairments in fiscal 2010 and fiscal 2009.
DEPRECIATION AND AMORTIZATION
Depreciation and amortization expense was $12.6 million for fiscal 2011, $13.2 million for fiscal 2010 and $15.5 million for fiscal 2009. Depreciation and amortization expense for fiscal 2011 has decreased as compared to fiscal 2010 and 2009, primarily as a result of fully amortized assets and the timing of capital expenditures during fiscal 2011. Approximately half of our capital expenditures in fiscal 2011 occurred in the fourth quarter of fiscal 2011.
OTHER INCOME (EXPENSE)
During fiscal 2011, we recorded other expense of $0.3 million for professional services related to non-operating activities. For fiscal 2010 and fiscal 2009, we recognized other income of $0.5 million and $0.6 million, respectively, related to the remaining income recognized on our sale of LP Innovations, Inc.
INTEREST EXPENSE, NET
Net interest expense was $0.6 million in fiscal 2011 as compared to $0.7 million in fiscal 2010 and $1.1 million in fiscal 2009. The continued reduction in interest costs over the past two years was due to a total repayment of both our long-term debt as well as our credit facility. The interest expense for fiscal 2011 primarily relates to the unused line fee on our credit facility as a result of having minimal borrowings during fiscal 2011. Our average borrowings under our credit line during fiscal 2011 were less than $1.0 million as compared to $5.2 million in fiscal 2010 and $32.1 million in fiscal 2009.
See â€śLiquidity and Capital Resourcesâ€ť for more discussion regarding our current debt obligations and future liquidity needs.
Pursuant to accounting rules, realization of our deferred tax assets, which relate principally to federal net operating loss carryforwards, which expire from 2022 through 2031, is dependent on generating sufficient taxable income in the near term.
In fiscal 2008, the weakened economy had a negative impact on our revenue and profitability. Further, the conditions of the economy also negatively impacted our market value as a result of the deterioration of the capital markets which resulted in substantial impairments, contributing to our operating loss. Accordingly, due to our cumulative operating losses as well as our uncertainty at that time regarding the economy and our ability to generate future taxable income to realize all of our deferred tax assets, in fiscal 2008, we recorded a charge of $28.6 million to establish a valuation allowance against our deferred tax assets.
During 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 in the United States. In reaching this determination, we considered the positive evidence of three years of improved profitability, our expectations regarding the generation of future taxable income, and our current market position and expected growth. As a result, we recognized a total income tax benefit of approximately $47.8 million related to the reversal of the deferred tax valuation allowance. We have retained a valuation allowance of $0.9 million in the United States related to foreign tax credits and various state and local operating loss carryforwards that are subject to restrictive rules for future utilization and a valuation allowance totaling $2.1 million against deferred tax assets for our operations in the Netherlands and Canada.
CRITICAL ACCOUNTING POLICIES
Our financial statements are based on the application of significant accounting policies, many of which require our management to make significant estimates and assumptions (see Note A to the Notes to the Consolidated Financial Statements). We believe that the following items involve some of the more critical judgments in the application of accounting policies that currently affect our financial condition and results of operations.
We measure compensation cost for all stock-based awards at fair value on date of grant and recognize compensation over the service period for awards expected to vest. The fair value of our stock options is determined using the Black-Scholes valuation model, which requires the input of highly subjective assumptions. These assumptions include estimating the length of time employees will retain their vested stock options before exercising them (the â€śexpected termâ€ť), the estimated volatility of our common stock price over the expected term and the number of options that will ultimately not complete their vesting requirements (â€śforfeituresâ€ť). Changes in these subjective assumptions can materially affect the estimate of fair value of stock-based compensation and, consequently, the related amount recognized as an expense on the consolidated statements of operations. As required under the accounting rules, we review our valuation assumptions at each grant date and, as a result, we are likely to change our valuation assumptions used to value employee stock-based awards granted in future periods. The values derived from using the Black-Scholes model are recognized as expense over the service period, net of estimated forfeitures. Actual results, and future changes in estimates, may differ substantially from these current estimates. For fiscal 2011, 2010 and 2009, we recognized total compensation expense of $1.3 million, $2.1 million and $0.5 million, respectively. Compensation expense of $2.1 million for fiscal 2010 included an accrual of approximately $0.7 million which reflected the estimated accrual for equity awards that were granted in March 2011 pursuant to our Longâ€“Term Incentive Plan for fiscal 2010. We did not achieve our targets under the Long-Term Incentive Plan for fiscal 2011, accordingly, there was no estimated accrual for future grants of equity awards. See Note F to the Notes to the Consolidated Financial Statements.
We value inventory at the lower of cost or market, using a weighted-average cost method. We review our inventory to identify slow-moving and broken assortments. We use markdowns to clear merchandise and will record inventory reserves if the estimated future selling price is less than cost. In addition, an inventory shrink estimate is made each period that reduces the value of inventory for lost or stolen merchandise. We perform physical inventories through the year and adjust the shrink reserves accordingly.
Impairment of Long-Lived Assets
We review our long-lived assets for impairment when indicators of impairment are present and the undiscounted cash flow estimated to be generated by those assets is less than the assetsâ€™ carrying amount. We evaluate our long-lived assets for impairment at a store level for all our retail locations. If actual market conditions are less favorable than management's projections, future write-offs may be necessary.
There were no material impairment charges for long-lived assets in fiscal 2011, fiscal 2010 or fiscal 2009.
In accordance with ASC Topic 350, Intangibles Goodwill and Other , we evaluate our intangible assets with indefinite-lives at least annually for impairment by analyzing the estimated fair value.
At December 31, 2011, we performed our annual testing of both our â€śCasual Maleâ€ť trademark and our â€śRochesterâ€ť trademark for potential impairment. Utilizing an income approach with appropriate royalty rates applied, we concluded that the â€śRochesterâ€ť trademark, with a carrying value of $1.5 million, was not impaired.
During the fourth quarter of fiscal 2011, we recorded a non-cash impairment charge of $23.1 million against our â€śCasual Maleâ€ť trademark. In connection with our expansion of our new DXL store concept, we have closed a total of 36 Casual MaleXL stores over the past two fiscal years and expect to close another 70 stores in fiscal 2012. As we continue to open DXL stores, we expect to close existing Casual MaleXL stores in those respective markets. As a result, the fair value, as determined using an income approach with applicable royalty rates applied, was not sufficient to support the carrying value of our â€śCasual Maleâ€ť trademark. At January 28, 2012, the â€śCasual Maleâ€ť trademark has a carrying value of $6.1 million. The remaining carrying value of the â€śCasual Maleâ€ť trademark will be amortized, on an accelerated basis, over its estimated remaining useful live of 7 years.
We recorded a valuation allowance to reduce our deferred tax assets to the amount that is more likely than not to be realized. We have considered estimated future taxable income and ongoing tax planning strategies in assessing the amount needed for the valuation allowance. During the fourth quarter of fiscal 2011, we determined that it is more likely than not that we will be able to realize the benefits of substantially all of our deferred tax assets. In reaching this determination, we considered the positive earnings of the last three fiscal years, our expectations of future taxable income and our current market position and opportunities for growth. Accordingly, we recognized an income tax benefit of $47.8 million due to the reversal of the deferred asset valuation allowance. See â€śIncome Taxesâ€ť above for more discussion.
MANAGEMENT DISCUSSION FOR LATEST QUARTER
Basis of Presentation
In the opinion of management of Casual Male Retail Group, Inc., a Delaware corporation (the â€śCompanyâ€ť), the accompanying unaudited consolidated financial statements contain all adjustments necessary for a fair presentation of the interim financial statements. These financial statements do not include all disclosures associated with annual financial statements and, accordingly, should be read in conjunction with the notes to the Companyâ€™s audited consolidated financial statements for the fiscal year ended January 28, 2012 included in the Companyâ€™s Annual Report on Form 10-K, which was filed with the Securities and Exchange Commission on March 16, 2012.
The information set forth in these statements may be subject to normal year-end adjustments. The information reflects all adjustments that, in the opinion of management, are necessary to present fairly the Companyâ€™s results of operations, financial position and cash flows for the periods indicated. The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. The Companyâ€™s business historically has been seasonal in nature, and the results of the interim periods presented are not necessarily indicative of the results to be expected for the full year.
The Companyâ€™s fiscal year is a 52- or 53- week period ending on the Saturday closest to January 31. Fiscal 2012 is a 53-week period ending on February 2, 2013. Fiscal 2011 was a 52-week period ending on January 28, 2012.
Through the end of fiscal 2011, the Company managed its business using three operating segments â€“ B&T Factory Directâ„˘, Casual Male XLÂ® and Rochester Clothing. However, with the continued expansion of the DestinationXLÂ® (â€śDXLÂ®â€ť) store format and the merger of all of the Companyâ€™s websites into one consolidated site, www.destinationxl.com, which carries merchandise from all three of these business formats, the businesses are now managed using retail and direct, as opposed to the previous store formats.
Effective the first quarter of fiscal 2012, the Company reports its operations as one reportable segment, Big & Tall Menâ€™s Apparel, which consists of two principal operating segments: its retail business and its direct businesses. The Company considers its operating segments to be similar in terms of economic characteristics, production processes and operations, and have therefore aggregated them into a single reporting segment. The direct operating segment includes the operating results and assets for LivingXLÂ®, ShoesXLÂ® and the Companyâ€™s International Web Stores, which are immaterial.
At April 28, 2012, the â€śCasual Maleâ€ť trademark has a carrying value of $5.6 million and is considered a definite-lived asset. The Company is amortizing the remaining carrying value of $5.6 million, on an accelerated basis consistent with projected cash flows, over its estimated remaining useful life of seven years.
The Companyâ€™s â€śRochesterâ€ť trademark is considered an indefinite-lived intangible asset and has a carrying value of $1.5 million. During the first three months of fiscal 2012, no event or circumstance occurred which would cause a reduction in the fair value of the Companyâ€™s reporting units, requiring interim testing of the Companyâ€™s â€śRochesterâ€ť trademark.
Fair Value of Financial Instruments
ASC Topic 825, Financial Instruments, requires disclosure of the fair value of certain financial instruments. The carrying amounts for the Companyâ€™s long-term debt approximate fair value as the interest rates and terms are substantially similar to those that could be obtained currently for similar instruments. The carrying amounts of cash and cash equivalents, accounts receivable, accounts payable, accrued expenses and short-term borrowings approximate fair value because of the short maturity of these instruments.
Recently Issued Accounting Pronouncements
The Company has reviewed accounting pronouncements and interpretations thereof that have effective dates during the periods reported and in future periods. The Company believes that the following impending standards may have an impact on its future filings. The applicability of any standard will be evaluated by the Company and is still subject to review by the Company.
In June 2011, the FASB issued ASU No. 2011-05, Comprehensive Income (Topic 220)â€“Presentation of Comprehensive Income , to make the presentation of items within other comprehensive income (â€śOCIâ€ť) more prominent. In December 2011, the FASB issued ASU 2011-12, â€ś Deferral of the Effective Date for Amendments to the Presentation of Reclassifications of Items Out of Accumulated Other Comprehensive Income in Accounting Standards Update No. 2011-05 â€ť. The new standard requires companies to present items of net income, items of OCI and total comprehensive income in one continuous statement or two separate consecutive statements, and companies are no longer allowed to present items of OCI in the statement of stockholdersâ€™ equity. This new update is effective for interim and annual periods beginning after December 15, 2011. The Company adopted this new standard in the first quarter of fiscal 2012 by including a separate Consolidated Statement of Comprehensive Income. There was no other impact on the Companyâ€™s financial statements.
Credit Agreement with Bank of America Retail Group, Inc.
The Company has a credit facility with Bank of America, N.A., most recently amended on November 10, 2010 (the â€śCredit Facilityâ€ť).
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 the request of the Company 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.
Borrowings made pursuant to the Credit Facility will bear interest at a rate equal to the base rate (determined as the highest of (a) Bank of America N.A.â€™s prime rate, (b) the Federal Funds rate plus 0.50% and (c) the one month LIBOR rate) plus a varying percentage, based on the Companyâ€™s borrowing base, of 1.00-1.25% for prime-based borrowings and 2.00-2.25% for LIBOR-based borrowings. The Company is also subject to an unused line fee. At April 28, 2012, the Companyâ€™s prime-based interest rate was 4.25%.
The Companyâ€™s obligations under the Credit Facility are secured by a lien on all of its assets. The Company is not subject to any financial covenants pursuant to the Credit Facility.
At April 28, 2012, the Company had no borrowings outstanding under the Credit Facility. Outstanding standby letters of credit were $2.3 million and documentary letters of credit were $1.5 million. Unused excess availability at April 28, 2012 was $71.2 million. Average borrowings outstanding under this facility during the first quarter of fiscal 2012 were less than $150,000, resulting in an average unused excess availability of approximately $69.1 million. The Companyâ€™s ability to borrow under the Credit Facility is determined using an availability formula based on eligible assets, with increased advance rates based on seasonality.
Hi, it's Jeff Unger. Good morning everybody. On our call today is David Levin, our President and CEO; and Dennis Hernreich, Executive Vice President, Chief Operating Officer and Chief Financial Officer. Iâ€™d like to read our forward-looking statements and then turn the call over to David.
Todayâ€™s discussion will contain certain forward-looking statements concerning the companyâ€™s operations, performance and financial conditions including sales, expenses, gross margins, capital expenditures, earnings per share, store openings and closings and other matters.
Such forward-looking statements are subject to various risks and uncertainties that could cause the actual results to differ materially from those assumptions mentioned today, due to a variety of factors that affect the company. Information regarding risks and uncertainties are detailed in the companyâ€™s filings with the Securities and Exchange Commission. Our complete Safe Harbor statement is available at www.casualmale.com.
Now, I would like to turn the call over to David.
Thank you, Jeff. Today we announced our third quarter financial results. We are very pleased that the initiatives we enacted to adjust to a difficult retail environment continued to perform to our expectations. Sales for the quarter came in as we expected. Our comps were down 10.6%, which was an improvement from being down 14.1% in the second quarter. At the same time we had a reduction in SG&A of $7.5 million or 18% to offset the loss of top line sales. Included in the lowering of SG&A was a 40% cut in our marketing expenses. We also did not anniversary two promotional events in the quarter. No doubt, this has had an impact on our comp sales, but our strategy this year continues to focus on cash flow and the bottom line.
At the same time, we do not believe we are losing any significant market share. We have surveyed several thousand of our existing customers, who have not made a purchase for over 12 months and approximately 90% of them say they deferred shopping during this time period. They plan on shopping our stores when they are ready to make a purchase.
Weâ€™ve been diligent about our ability to manage our inventory and maximize any gross margin opportunities. Through a combination of improved IMUs, less promotional activity and greater sell-throughs at regular price, our merchandise margins continue to improve from last year. This quarter merchandise margins improved by 240 basis points and we anticipate a 700 to 800 basis points improvement in the fourth quarter.
Our inventories at this fiscal end of the year should be down by another $10 million with much less seasonal carryover than we faced going into spring last year.
During the last webcast, I mentioned that weâ€™re opening a new prototype version next spring that we hope will be the model of the future development of the hybrid strategy. Today, Iâ€™d like to give more color as to what this strategy entails.
Prior to the conversion of the five hybrid stores, we had conducted an extensive study among our customers as to what they envision as their ideal shopping experience as a big and tall customer. When we laid out to them, the concept of a superstore where their choices would be expanded along with wider aisles, bigger dressing rooms and onsite tailor and a more exciting presentation of our Lifestyle brands, they highly endorsed the proposition.
The customer focus groups and surveys respondents gave us a strong indication, that they would be willing to drive at least an hour, to shop a superstore concept, even willing to bypass the existing store in their own neighborhood.
The five hybrid stores we converted this last July were a consolidation of existing Casual Male stores, into Rochester locations that were in close proximity, to the Casual Male stores
By combining the two enemies into one hybrid store due to limited floor space capacity, we had to eliminate about 60% of the Rochester assortment. What we are talking about in the superstore which we are naming, Destination Xl, is a full assortment of Casual Male Rochester and even valued price product from B&T factory outlet along with an expanded assortment from ShoesXL, and key items from our LivingXL division.
For example, instead of a limited assortment of about 15 Screen Tees Destination will offer over 60 styles, shoes will go from 40 styles to well over 100 styles. Consider this a Casual Male store on steroids.
The average square footage required to house this assortment will be from 10,000 to 12,000 square feet. As we open a new superstore , it will also mean we will be closing two to three existing Casual Male stores in that market. So while we see a drop in store counts and a probably a net zero square footage growth, we anticipate that our profitability will improve dramatically.
We plan an opening three Destination XL stores in 2010, tweak the prototype accordingly, and assuming this task is successful, then start a rollout process over the next five years.
Where and when we open, will be dependent on existing on existing terms of the stores that we do believe we need to close, as to how many superstores we see long-term that is still a working-in-progress. So we see many markets that can support a full Rochester store, that have plenty of customers that would by Rochester brands such as Polo, Calvin Klein and Michel Kors, a store of this nature could have relevance in most of our markets across the country such as Kansas City, S Louis, Minneapolis, Cleveland. These are all are on our radar screen.
On average our customer shop at our stores 2.2 times a year and when he shops he is serious about filing his wardrobe needs for the season. By offering the broadest selection will make his shopping experience that much more rewarding. We're pleased with the financial metrics we are delivering with the current hybrids. Destination XL stores should only improve upon that performance.
As I commented on the last call CMRG will have lost about $70 million in top line sales over the last two years. We believe when the retail environment gets healthy again, we will have the opportunity to recapture those sales. With our new expense structure firmly in place we anticipate strong cash flow and operating margins over time.
Now, Dennis will review the financial results for Q3 and year-to-date.
Thank you David and good morning everyone. Thanks for joining us as we review our third quarter results and discuss our outlook for the balance of the year. We are very pleased to report that despite an over 11% drop in sales for both the quarter and the nine months, the companyâ€™s pretax earnings have improve by almost $4million for the quarter and over $5 million for the nine months compared to the corresponding periods of a year ago.
This was accomplished by excellent execution of the company's operating norm of offering meaningful wardrobe alternatives in our other Lifestyle product assortments in a wide range of sizes to our loyal customer base within the financial disciplines of responsible inventory levels, strong merchandize margins and tight SG&A control.
During the quarter and nine months, the companyâ€™s merchandize margins improved by 240 basis points and 125 basis points respectively, while SG&A levels have been reduced by approximately 17% in each period.
At the end of the quarter inventory levels have been reduced by 17% from a year ago, and as a result earnings per share performance improved to a loss of $0.03 for the quarter and $0.06 for the nine months compared to $0.08 loss in last yearâ€™s third quarter and of $0.03 loss for last year's nine months.
Most importantly the companyâ€™s free cash flow has just improved by over $50 million for the year so far, compared to last year's nine months. The companyâ€™s free cash flow improvement together with just under a $5 million share equity sale, producing net proceeds of approximately $12.5 million enabled us to reduce our debt levels from $72 million a year ago to just under $35 million at the end of the third quarter.
In addition, the companyâ€™s equity availability under its revolver facility currently approximates $50 million.
For 2009, I expect the company will generate free cash flow between $15 million and $20 million with debt levels lower to approximately the same $15 to $20 million at the end of year.
The companyâ€™s sales levels for fiscal 2009 are expected approximate between $390 million and 395 million or down 11% to 12%.
Merchandize margins to have improved by approximately 300 basis to 325 basis points with gross margins after occupancy is expected to improve by at least a 100 basis points with an approximate 15% decline in SG&A.
Our 2009 estimates for gross margin and SG&A have largely remained constant throughout the year and the free cash flow narrowed slightly by $5 million from previous estimates to reflect actual performance to the third quarter and our cautious posture with respect to the fourth quarter sales trends.
In 2010, given the company's dedicated and loyal customer base and by staying within this operating model, I just described, I expect the company to continue to generate free cash flow at 2009 levels and slightly better with flat sales.
As David mentioned with a 10% sales recovery overtime beyond 2010 we would expect CMRG to generate 8% to 9% EBITDA or EBIT margins that is driven by the same operating model approach of nominal SG&A growth, solid merchandise margins producing a free cash flow that would approximate this EBIT level flow into a debt free balance sheet.
The company's current and future free cash flow is expected to be adequate for CMRG to pursue and fund it's initiative to explore the DXL format David described and if successful growing it out, while also eliminating balance of the companyâ€™s debt net in cash in the balance sheet.
The Destination XL economic proposition offers a compelling shopping experience likely producing greater sales volumes, higher operating margins and greater rates of return on capital compared to any existing Casual Male store.
The first step towards the DXL were the five hybrid stores opened in late quarter two and early quarter three, which have met both our sales and our cash flow expectations collectively annualizing to a cash flow margin of close to 15%, which is up from breakeven level for the store separately the previous year.
In the event, the Destination XL test stores are successful most of our markets would support a Destination XL, which would require five or more years to rollout.
Iâ€™ll now highlight the primary components of Q3 results, starting with sales. For the third quarter, total sales decreased by 11.3% to $88.7 million when compared to total sales of $100 million for the third quarter of last year. Comparable sales for the third quarter decreased 10.6% when compared to the same period of the prior year. This decrease consisted of 9.1% decrease from Casual Male and a 20.6% decrease in our Rochester business.
Similar to other high-end retailers, the Rochester division has been significantly impacted by the recession but as expected sales declines are beginning to moderate.
For the first nine months of fiscal 2009, total sales decreased by 11.4% to $284.5 million when compared to $321.1 million for the first nine months of last year. Sales shortfall of $36.6 million was driven by a decrease in our comparable sales of 11.8%, which includes a comparable sales decrease of 8.9% from Casual Male and a 24.6% decrease from Rochester.
As has been consistent throughout 2009, decreased customer traffic explains the drop in top line sales.
For the quarter the companyâ€™s retail channel average, transaction level was virtually flat to last year and conversion of customer traffic increased by 2.5%. While our customer does make a visit, they're buying at pre-recessionary levels, which say a lot about the strength of our customer base, and the product assortments and wardrobing ideas assembled by our merchandizing team.
Previous to the third quarter the average, transaction levels were approximately 5% below last year caused mostly by Rochesterâ€™s just over 10% drop, which again has began to moderate in the third quarter.
Another noteworthy healthy trend in our business, which has important implications for the company's longer term free cash flow is, that the quarter four sales contribution has significantly moderated from prior years and CMRG sales are more evenly distributed by quarter.
In 2006 over 31% of the companyâ€™s sales were generated in quarter four, while in 2009 weâ€™re expecting just over 27%. Therefore profitability has become less seasonal and somewhat more evenly distributed throughout the year in contrast to 2006 where more than 50% of the companyâ€™s profitability occurred in quarter four.
For the third quarter, our gross margin rate inclusive of occupancy cost was 42.7% compared to gross margin rate of 42.2% for last years third quarter. The increase of 50 basis points was the result of increased merchandise margins for the third quarter of 240 basis points offset by an increase of 190 basis points in occupancy cost.
The unfavorable occupancy rate continues to be a result of relatively fixed occupancy cost over a decreased sales base, the actual occupancy cost in dollars for the third quarter were flat to last year.
We expected a merchandise margin improvement during the quarter given the low inventory levels and higher rate of full price selling compared to a year ago.
For the first nine months, our gross margin rate was 43.3% as compared to 44.2% for the nine months of last year. The decrease in gross margin rate was the result of a 125 basis point increase in merchandise margins, offset by a 215 basis point increase in occupancy cost.
Similar to the third quarter results, occupancy cost as a percentage of sales for the first nine months are unfavorable due to the relatively fixed cost over a decreased sales base, and likewise occupancy costs in dollars were flat to last year's nine-month period.
Our merchandise margin increase of a moderate 125 basis points reflects the impact during the first quarter of '09 of some residual fourth quarter '08 clearance merchandise.
As stated above, we anticipate our merchandise margins for the full year of 2009 to increase by between 300 to 325 basis points over last year, partially offset by unfavorable deleveraging the fixed occupancy cost by approximately 190 to 200 basis points for an expected gross margins improvement of between 110 to 125 basis points for the year.
SG&A expenses for the third quarter of '09 were 39.8% of sales, as compared to 42.7% for the third quarter of last year. On a dollar basis SG&A decreased by $7.5 million, or 17.4% in comparison to last year's third quarter.
For the nine months SG&A expenses were 37.9% of sales as compared to 40.3% for last year's nine month period. On a dollar basis, SG&A dropped by $21.6 million, or 16.7% when compared to last year's same period.
Approximately half of these savings was a result of our revised marketing objectives, which have been refined to focus on our most productive customer base.
As the percentage of sales, marketing spend has dropped by approximately 280 basis points in quarter three and for the nine months. The remainder of these savings resulted from our cost reduction efforts throughout the organization, including corporate overhead distribution, field productivity and staff reductions.
With the weakness in sales continuing this quarter, strong expense control has been a significant priority for us. We remain committed to managing our SG&A cost while continuing to invest in our marketing campaigns and growing our direct businesses.
As mentioned above, we expect to reduce our annual SG&A expenses for '09 by approximately 15% to $152 million or $26 million less than 2008. At the end of the quarter, CMRG had 485 stores after closing 10 stores and opening one store during the year.
We are expecting to end the year with 480 stores after five more store closings planned for the fourth quarter. For the year, eight of the store closings have been Rochester stores. We expect for 2009 that 98% of Casual Male Retail Group's store portfolio will be profitable on a four-wall basis.
This concludes my comments on our third quarter results and financial expectations for the year. Kevin, David and I will be happy to answer any questions.