DESTINATION XL GROUP, INC. 10-Q 2008
Documents found in this filing:
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Quarterly Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
For the Quarterly Period Ended August 2, 2008
Commission File Number 0-15898
CASUAL MALE RETAIL GROUP, INC.
(Exact name of registrant as specified in its charter)
(Registrants telephone number, including area code)
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Yes x No ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions of large accelerated filer, accelerated filer and smaller reporting company in Rule 12b-2 of the Exchange Act.
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No x
The number of shares of common stock outstanding as of August 15, 2008 was 41,413,015.
PART I. FINANCIAL INFORMATION
CASUAL MALE RETAIL GROUP, INC.
CONSOLIDATED BALANCE SHEETS
(In thousands, except share data)
The accompanying notes are an integral part of the consolidated financial statements.
CASUAL MALE RETAIL GROUP, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
The accompanying notes are an integral part of the consolidated financial statements.
CASUAL MALE RETAIL GROUP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
The accompanying notes are an integral part of the consolidated financial statements.
CASUAL MALE RETAIL GROUP, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS EQUITY
For the six months ended August 2, 2008
The accompanying notes are an integral part of the consolidated financial statements.
CASUAL MALE RETAIL GROUP, INC,
Notes to Consolidated Financial Statements
In the opinion of management of Casual Male Retail Group, Inc., a Delaware corporation (the Company), 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 Companys audited consolidated financial statements for the fiscal year ended February 2, 2008 included in the Companys Annual Report on Form 10-K, which was filed with the Securities and Exchange Commission on March 26, 2008.
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 Companys 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 Companys 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 Companys fiscal year is a 52- or 53- week period ending on the Saturday closest to January 31. Fiscal 2008 is a 52-week period ending on January 31, 2009. Fiscal 2007 was a 52-week period ending on February 2, 2008.
Prior Year Reclassifications
Results for the second quarter and first six months of fiscal 2007 have been restated to reflect the operating results of the Companys Jared M. business as discontinued operations. See Note 5, Discontinued Operations.
The Company reports its operations as one reportable segment, Big & Tall Mens Apparel, which consists of two operating segmentsCasual Male and Rochester. 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.
Adoption of New Accounting Pronouncements
The Company has adopted the following financial accounting standards as of February 2, 2008:
Statement of Financial Accounting Standard No. 157 (FAS 157), Fair Value Measurements. FAS 157 defines fair value, establishes a framework for measuring fair value, and expands disclosures about fair value measurements.
Statement of Financial Accounting Standard No. 159 (FAS 159), The Fair Value Option for Financial Assets and Financial Liabilities, including an amendment of FASB Statement No. 115. FAS 159 permits entities to choose to measure many financial instruments and certain other items at fair value at specified election dates.
The adoption of FAS 157 and FAS 159 did not have a material impact on the Companys consolidated financial results.
The Company accounts for goodwill pursuant to SFAS No. 141, Business Combinations, and SFAS No. 142, Goodwill and Other Intangible Assets. Pursuant to SFAS 142, at least annually, the Company evaluates goodwill, based on its two separate operating segments, its Casual Male business and its Rochester business, by comparing the current carrying value of goodwill with the fair value of the net assets of the Company. The goodwill assigned to each operating segment represents the initial purchase price allocation to goodwill as a result of their respective acquisitions.
The Company accounts for stock-based compensation pursuant to the provisions of Statement of Financial Accounting Standards No. 123 (revised 2004), Share-Based Payment (SFAS 123R), which requires that all share-based payments, including grants of employee stock options, be recognized as an expense in the statement of operations based on their fair values and vesting periods. The fair value of stock options is determined using the Black-Scholes valuation model and requires the input of subjective assumptions. These assumptions include estimating the length of time employees will retain their vested stock options before exercising them (the expected term), the estimated volatility of the Companys common stock price over the expected term and the number of options that will ultimately not complete their vesting requirements (forfeitures). As required under the accounting rules, the Company reviews its valuation assumptions at each grant date and, as a result, is likely to change its 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 vesting period, net of estimated forfeitures. The estimation of stock-based awards that will ultimately vest requires significant judgment. Actual results, and future changes in estimates, may differ from the Companys current estimates.
For the first six months of fiscal 2008 and fiscal 2007, the Company recognized total compensation expense of $1.1 million and $0.9 million, respectively. The total compensation cost related to non-vested awards not yet recognized as of August 2, 2008 is approximately $3.5 million which will be expensed over a weighted average remaining life of 23.3 months.
Valuation Assumptions for Stock Options
For the first six months of fiscal 2008 and fiscal 2007, 1.1 million and 0.6 million stock options were granted, respectively. The weighted-average exercise price of the 1.1 million stock options was $4.46 per share. The fair value of each option was estimated on the date of grant using the Black-Scholes option-pricing model with the following assumptions used for grants for the six months ended August 2, 2008 and August 4, 2007:
Expected volatilities are based on historical volatilities of the Companys common stock; the expected life represents the weighted average period of time that options granted are expected to be outstanding giving consideration to vesting schedules and historical exercise patterns; and the risk-free rate is based on the U.S. Treasury yield curve in effect at the time of grant for periods corresponding with the expected life of the option.
There were no material exercises of options or warrants during the first six months of fiscal 2008.
Credit Agreement with Bank of America Retail Group, Inc.
At August 2, 2008, the Company had outstanding borrowings of $44.9 million under its credit facility, as most recently amended December 20, 2007, with Bank of America, N.A. (the Credit Facility). The maturity date of the Credit Facility is October 29, 2011. Outstanding standby letters of credit were $2.2 million and outstanding documentary letters of credit were $3.0 million. Average monthly borrowings outstanding under this facility during the first six months of fiscal 2008 were approximately $50.2 million, resulting in an average unused excess availability of approximately $44.8 million. Unused excess availability at August 2, 2008 was $43.6 million. The Companys 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 this Credit Facility.
The fair value of amounts outstanding under the Credit Facility approximates the carrying value at August 2, 2008. At the Companys option, any portion of the outstanding borrowings can be converted to LIBOR-based contracts; the remainder bears interest based on prime. At August 2, 2008, the prime-based interest rate was 5.00%. The Company had approximately $37.0 million of its outstanding borrowings in LIBOR-based contracts with interest rates ranging from 3.68% to 5.21%. The LIBOR-based contracts expire at various dates between August 10, 2008 and August 24, 2008.
Master Loan and Security Agreement with Banc of America Leasing & Capital, LLC
On July 20, 2007, the Company entered into a Master Loan and Security Agreement (the Master Agreement) with Banc of America Leasing & Capital, LLC (BALC) for equipment financing. In conjunction with the Master Agreement, the Company entered into an Equipment Security Note (the First Secured Note), whereby it borrowed an aggregate of $17.4 million from BALC. The First Secured Note is due July 20, 2011.
On January 16, 2008, the Company entered into a second Equipment Security Note (the Second Secured Note) pursuant to the same terms and provisions of the Master Agreement, whereby it borrowed an additional $2.1 million. The Second Secured Note is due January 16, 2012.
Both secured notes accrue interest at a per annum rate of 1.75% plus the rate of interest equal to the 30-day published LIBOR rate. Principal and interest, in arrears, are payable monthly, commencing one month after issuance of such note. At August 2, 2008, the outstanding balance of the secured notes was $14.9 million.
Both notes are secured by a security interest in all of the Companys rights, title and interest in and to certain equipment. The Company is not subject to any financial covenants pursuant to the Master Agreement.
Earnings per Share
The following table provides a reconciliation of the number of shares outstanding for basic and diluted earnings per share:
The following potential common stock equivalents were excluded from the computation of diluted earnings per share in each period because the exercise price of such options and warrants was greater than the average market price per share of common stock for the respective periods.
The above options, which were outstanding and out-of-the-money at August 2, 2008, expire from June 14, 2011 to June 13, 2018.
At August 2, 2008, the Company had total gross deferred tax assets of approximately $28.5 million, with a corresponding valuation allowance of $1.2 million. These tax assets principally relate to federal net operating loss carryforwards that expire from 2018 through 2024 and to a lesser extent book/tax timing differences. The valuation allowance is for losses associated with the Companys Canada operations and certain state net operating losses, the benefit of which may not be recognized due to short carryforward periods.
The Company complies with FASB Interpretation 48, Accounting for Uncertainty in Income Taxes (FIN 48). A tax position is recognized as a benefit only if it is more likely than not that the tax position would be sustained in a tax examination, with a tax examination being presumed to occur. The amount recognized is the largest amount of tax benefit that is greater than 50% likely of being realized on examination. For tax positions not meeting the more likely than not test, no tax benefit is recorded. The charge for taxation is based on the results for the year as adjusted for items that are non-assessable or disallowed. The charge is calculated using tax rates that have been enacted or substantively enacted by the balance sheet date. Pursuant to FIN 48, the Company will recognize the benefit from a tax position only if it is more likely than not that the position would be sustained upon audit based solely on the technical merits of the tax position. At August 2, 2008, the Company had no material unrecognized tax benefits based on the provisions of FIN 48.
The Company is subject to U.S. federal income tax as well as income tax of multiple state and foreign jurisdictions. The Company has concluded all U.S. federal income tax matters for years through fiscal 1997, with remaining fiscal years subject to income tax examination by federal tax authorities.
The Companys policy is to recognize accrued interest and penalties related to unrecognized tax benefits in its income tax provision. The Company has not accrued or paid interest or penalties which were material to its results of operations for the first six months of fiscal 2008.
During the fourth quarter of fiscal 2007, the Company exited its Jared M. operations, and therefore results for the second quarter and first six months of fiscal 2007 have been reclassified to reflect the operating results of the Companys Jared M. business as discontinued operations.
During the first quarter of fiscal 2008, the Company sold its Jared M. business to a third party for a cash purchase price of $250,000. No material gain or loss was recognized on the sale.
The following table summarizes the results from discontinued operations from the Jared M. business for the second quarter and first six months of fiscal 2007:
In December 2007, the FASB issued FAS No. 141 (revised 2007), Business Combinations, (FAS 141R), which changes how business combinations are accounted for and will impact financial statements both on the acquisition date and in subsequent periods. FAS 141R is effective January 1, 2009, and will be applied prospectively. The impact of adopting FAS 141R will depend on the nature and terms of future acquisitions.
In December 2007, the FASB issued FAS No. 160, Noncontrolling Interests in Consolidated Financial Statements (FAS 160), which changes the accounting and reporting standards for the noncontrolling interests in a subsidiary in consolidated financial statements. FAS 160 recharacterizes minority interests as noncontrolling interests and requires noncontrolling interests to be classified as a component of shareholders equity. FAS 160 is effective January 1, 2009 and requires retroactive adoption of the presentation and disclosure requirements for existing minority interests. The Company does not expect FAS 160 to have a material impact on its consolidated financial statements.
Certain statements contained in this Quarterly Report on Form 10-Q constitute forward-looking statements within the meaning of the United States Private Securities Litigation Reform Act of 1995. In some cases, forward-looking statements can be identified by the use of forward-looking terminology such as may, will, estimate, intend, plan, continue, believe, expect or anticipate or the negatives thereof, variations thereon or similar terminology. The forward-looking statements contained in this Quarterly Report are generally located in the material set forth under the heading Managements Discussion and Analysis of Financial Condition and Results of Operations, but may be found in other locations as well. These forward-looking statements generally relate to plans and objectives for future operations and are based upon managements reasonable estimates of future results or trends. The forward-looking statements in this Quarterly Report should not be regarded as a representation by us or any other person that our objectives or plans will be achieved. Numerous factors could cause our actual results to differ materially from such forward-looking statements. We encourage readers to refer to Part I, Item 1A of our Annual Report on Form 10-K for the year ended February 2, 2008, filed with the Securities and Exchange Commission on March 26, 2008, which identifies certain risks and uncertainties that may have an impact on our future earnings and the direction of our Company.
All subsequent written and oral forward-looking statements attributable to us or to persons acting on our behalf are expressly qualified in their entirety by the foregoing. These forward-looking statements speak only as of the date of the document in which they are made. We disclaim any obligation or undertaking to provide any updates or revisions to any forward-looking statement to reflect any change in our expectations or any change in events, conditions or circumstances in which the forward-looking statement is based.
Casual Male Retail Group, Inc. together with our subsidiaries (the Company) is the largest specialty retailer of big & tall mens apparel with retail operations throughout the United States, Canada and London, England. We operate 463 Casual Male XL retail and outlet stores, 27 Rochester Clothing stores and a direct to consumer business, which includes several catalogs and e-commerce sites.
Unless the context indicates otherwise, all references to we, ours, our, us and the Company refer to Casual Male Retail Group, Inc. and its consolidated subsidiaries. We refer to our fiscal years which end on January 31, 2009 and February 2, 2008 as fiscal 2008 and fiscal 2007, respectively.
When discussing sales growth, we refer to the term comparable sales. Comparable sales for all periods discussed include our retail stores that have been open for at least one full year together with our e-commerce and catalog sales. Stores that may have been remodeled, expanded or re-located during the period are also included in our determination of comparable sales. We include our direct businesses as part of our calculation of comparable sales because we are a multi-channel retailer, offering our customers convenient alternatives for their shopping. The method of calculating comparable sales varies across the retail industry and, as a result, our calculation of comparable sales is not necessarily comparable to similarly titled measures reported by other companies.
RESULTS OF OPERATIONS
Our net income for the second quarter of fiscal 2008 was $1.9 million, or $0.05 per diluted share, as compared to $2.5 million, or $0.06 per diluted share, for the second quarter of fiscal 2007. For the first six months of fiscal 2008, net income was $2.0 million, or $0.05 per diluted share, as compared to $3.6 million, or $0.08 per diluted share, for the first six months of fiscal 2007.
Our shortfall in earnings for fiscal 2008 continues to be negatively impacted by the current economic trends. However, during the second quarter of fiscal 2008, we saw gradual improvement in our comparable sales as well as with our overall sales productivity, as measured by customer conversion and dollars per transaction. Our comparable sales increase of 0.3% for the second quarter of fiscal 2008 was up against a 3.9% comparable sales increase in fiscal 2007 and our year to date comparable sales decrease of 0.8% was up against a 5.0% comparable sales increase for the first six months of fiscal 2007. We anticipate some benefit in sales for the remainder of fiscal 2008, as our comparable sales percentage for the second half of fiscal 2007 was a decrease of 0.6%. In addition, we continue to be committed to managing our selling, general and administrative (SG&A) costs, while still working on investing in our marketing campaigns and growing our direct businesses.
From a financial position perspective, we have decreased our inventory position at the end of the second quarter by approximately 6% over the prior year second quarter and reduced our capital expenditures by approximately $3.8 million as compared to the same period of the prior year. Our free cash flow (as defined below under Presentation of Non-GAAP Measure) for the first six months approximated $2.4 million compared to negative free cash flow of $14.6 million for the same time period last year. Our borrowings under our credit facility were $44.9 million with unused availability under the facility of approximately $43.6 million at the end of the second quarter.
Although our results through the end of the second quarter were in line with our expectations, we have reduced our earnings guidance for fiscal 2008 by $0.03 per diluted share to approximately $0.22-$0.27 per diluted share. The earnings guidance was adjusted primarily as a result of expectations of continued weakness in the economy and softness in traffic and sales trends. We have also included incremental SG&A expenses in the fourth quarter of fiscal 2008 for our recently acquired store locations from Dahle Management Corporation, which is discussed below under Liquidity and Capital Resources.
Our overall objective for this fiscal year continues to be to increase our market share by:
Presentation of Non-GAAP Measure
The presentation of non-GAAP free cash flow is not a measure determined by generally accepted accounting principles (GAAP) and should not be considered superior to or as a substitute for net income or cash flows from operating activities or any other measure of performance derived in accordance with GAAP. We calculate free cash flows as cash flow from operating activities ($9.2 million in 2008 and negative $4.1 million in 2007) less capital expenditures ($6.8 million in 2008 and $10.5 million in 2007). We believe that inclusion of this non-GAAP measure helps investors to gain a better understanding of our performance, especially when comparing such results to previous periods.
For the second quarter of fiscal 2008, total sales of $113.5 million were flat when compared to the second quarter of fiscal year 2007. Comparable sales for the second quarter increased 0.3% when compared to the same period of the prior year. This increase was driven by a 15.3% increase in sales from our direct businesses and was offset by a 2.2% decrease in sales from our retail business. Our core business, which includes just our Casual Male and Rochester businesses, had a comparable sales decrease of 2.1% for the second quarter of fiscal 2008.
For the first six months of fiscal 2008, sales decreased 1.4% to $221.1 million as compared to $224.2 million for the first six months of fiscal 2007. The sales shortfall of $3.1 million was primarily driven by a decrease in our comparable sales of 0.8%, which includes a comparable sales decrease of 3.4% from our core businesses. Our direct businesses increased 12.2% for the first six months of fiscal 2008; however, this increase was offset by a decrease of 3.1% in sales from our retail businesses.
Our non-core businesses, which include LivingXL, ShoesXL and B&T Factory Direct, generated sales of $4.5 million and $8.1 million for the second quarter and first six months of fiscal 2008, respectively, as compared to sales of $1.4 million and $1.9 million for the second quarter and first six months of fiscal 2007, respectively.
Even though traffic continues to be down, our sales productivity in our retail channel, as measured by customer conversion rate and dollars per transaction, has increased by approximately 5.2%, offsetting the negative customer traffic trends. This increase is a direct result of our focus on customer service, with improved sales training, development tools and sales productivity measurement and reporting application available to all of our stores.
During the second quarter of fiscal 2008, we launched our new mass media campaign aimed towards attracting a new customer to our stores and direct businesses, specifically focusing our advertising on our XL size customers who may not presently shop Casual Male XL. Based on the positive results we saw during the second quarter, we plan to continue this advertising campaign through the end of fiscal 2008.
Given the continued uncertainty in the retail market, for fiscal 2008 we anticipate that our sales will approximate $470 to $475 million, based on comparable sales from our core businesses of between flat to -2.0% for the full fiscal year.
Gross Profit Margin
For the second quarter of fiscal 2008, our gross margin rate, inclusive of occupancy costs, was 45.2% as compared to a gross margin rate of 46.5% for the second quarter of fiscal 2007. The decrease in gross margin rate was the result of an 80 basis point decrease in merchandise margins and a 50 basis point increase in occupancy costs as a percentage of sales. Our increased occupancy costs increased 4% over the prior year quarter due to new store openings and scheduled rent escalations. The decrease in merchandise margins was negatively effected by: (i) an increase in costs associated with our loyalty program due to increased participation, (ii) increased postage costs from our direct businesses due to increased fuel costs, and (iii) a slight deterioration in our initial margins due to a shift in sales mix from our higher margin core businesses to our lower margin non-core businesses.
For the first six months of fiscal 2008, our gross margin rate was 45.1% as compared to 46.2% for the first six months of fiscal 2007. The decrease in margin rate was the result of a 40 basis point decrease in merchandise margin and a 70 basis point increase in occupancy costs. As with the second quarter of fiscal 2008, merchandise margins were negatively impacted by increased costs associated with our loyalty program and postage costs.
We anticipate that our gross margins for fiscal 2008 will increase by approximately 25 to 50 basis points over fiscal 2007 gross margin levels exclusive of the $6.1 million of inventory adjustments recorded in the fourth quarter of fiscal 2007. We expect that our merchandise margins in the second half of fiscal 2008 will approximate a 100-150 basis point improvement over the prior year levels.
Selling, General and Administrative Expenses
SG&A expenses for the second quarter of fiscal 2008 were 38.3% of sales as compared to 37.8% for the second quarter of fiscal 2007. On a dollar basis, SG&A expenses increased 1.4% for the second quarter of fiscal 2008 as compared to the prior year, with a decrease of 2.0% from our core businesses. SG&A costs for our non-core businesses increased $1.3 million for the second quarter of fiscal 2008 as compared to the prior years second quarter.
For the first six months of fiscal 2008, SG&A expenses were 39.3% of sales as compared to 38.5% of sales for the first six months of fiscal 2007. For the first six months of fiscal 2008, SG&A costs for our non-core businesses increased $3.0 million over the same period of the prior year while expenses for our core businesses decreased 3.0%.
Although strong expense control continues to be a priority for us in fiscal 2008, it is also important that we invest our SG&A dollars into our key marketing and merchandising initiatives as discussed above. For fiscal 2008, we expect our SG&A levels to approximate $181.0 million to $182.0 million as compared to $178.1 million in fiscal 2007. This estimate has been revised slightly in anticipation of the conversion of the 8 acquired Dahle store locations to Casual Male XL stores in the fourth quarter of fiscal 2008. See Liquidity and Capital Resources below for a full discussion of the Dahles Big and Tall store acquisition.
Interest Expense, Net
Net interest expense was $0.7 million for the second quarter of fiscal 2008 as compared to $1.1 million for the second quarter of fiscal 2007. For the first six months of fiscal 2008, net interest expense was $1.6 million as compared to $1.9 million for the prior year. Although average borrowings for the first six months of fiscal 2008 are slightly higher than the prior year, our average interest rate costs are lower due to reduced interest rates. The average interest rate of all of our borrowings at the end of the second quarter of fiscal 2008 approximated 4.3% compared to approximately 7.2% at the end of the second quarter of fiscal 2007. See our Liquidity and Capital Resources discussion below.
As a result of the net operating loss carryforwards available to us, we expect that cash payments for taxes will continue to be minimal at this time. At August 2, 2008, our total gross deferred tax assets were approximately $28.5 million, with a corresponding valuation allowance of $1.2 million. These tax assets principally relate to federal net operating loss carryforwards that expire through 2024. The valuation allowance of $1.2 million is for losses associated with our Canadian operations and certain state net operating losses, the benefit of which may not be recognized due to short carryforward periods.
For the second quarter of fiscal 2008, we had net income of $1.9 million, or $0.05 per diluted share, as compared to net income of $2.5 million, or $0.06 per diluted share, for the second quarter of fiscal 2007. For the six months ended August 2, 2008, we had net income of $2.0 million, or $0.05 per diluted share, as compared to net income of $3.6 million, or $0.08 per diluted share, for the six months ended August 4, 2007. The results for the second quarter and first six months of fiscal 2007, included a loss from discontinued operations of $0.4 million, or $(0.01) per diluted share, and $0.9 million, or $(0.02) per diluted share, respectively, related to our Jared M. business, which we exited in the fourth quarter of fiscal 2007. See Note 5 to the Consolidated Financial Statements for more information.
At August 2, 2008, total inventory was $112.7 million compared to $117.8 million at February 2, 2008 and $119.7 million at August 4, 2007.
Inventory at the end of the second quarter of fiscal 2008 decreased 4.3% as compared to February 2, 2008 and decreased 5.8% compared to August 4, 2007. The decrease is the result of reductions of inventory in our Casual Male division as part of managing our inventory levels and in our Rochester retail stores as part of our shift in merchandising strategy from moderate to high-fashion merchandise. This decrease was partially offset by increases in inventory levels among our growing direct businesses. We expect to reduce inventory levels by $10 -$15 million by the end of fiscal 2008.
Historically and consistent with the retail industry, we have experienced seasonal fluctuations in revenues and income, with increases traditionally occurring during our third and fourth quarters as a result of the Fall and Holiday seasons.
LIQUIDITY AND CAPITAL RESOURCES
Our primary cash needs are for working capital (essentially inventory requirements) and capital expenditures. Specifically, our capital expenditure program includes projects for new store openings, relocations and remodeling, downsizing or combining existing stores, and improvements and integration of our systems infrastructure. We expect that cash flow from operations, external borrowings and trade credit will enable us to finance our current working capital and expansion requirements. We have financed our working capital requirements, store expansion program, stock repurchase programs and acquisitions with cash flow from operations, external borrowings, and proceeds from equity and debt offerings. Our objective is to maintain a positive cash flow after capital expenditures such that we can support our growth activities with operational cash flows without incurring additional debt.
For the first six months of fiscal 2008, cash provided by operating activities was $9.2 million as compared to cash used for operating activities of $4.1 million for the corresponding period of the prior year. The improvement in cash flow from operating activities was primarily due to the reduction in inventory and other working capital accounts.
In addition to cash flow from operations, our other primary source of working capital is our credit facility with Bank of America, N.A. (the Credit Facility) for a total commitment of $110 million. The maturity date of the Credit Facility is October 29, 2011. Borrowings under the Credit Facility bear interest at variable rates based on Bank of Americas prime rate or the London Interbank Offering Rate (LIBOR) and vary depending on our levels of excess availability. Our Credit Facility is described in more detail in Note 2 to the Notes to the Consolidated Financial Statements.
We had outstanding borrowings under the Credit Facility at August 2, 2008 of $44.9 million. Outstanding standby letters of credit were $2.2 million and outstanding documentary letters of credit were $3.0 million. Average monthly borrowings outstanding under this facility during the first six months of fiscal 2008 were approximately $50.2 million, resulting in an average unused excess availability of approximately $44.8 million. Unused excess availability at August 2, 2008 was $43.6 million. Our obligations under the Credit Facility are secured by a lien on all of our assets.
Master Loan and Security Agreement
On July 20, 2007, we entered into a Master Loan and Security Agreement (the Master Agreement) with Banc of America Leasing & Capital, LLC (BALC) for equipment financing. In conjunction with the Master Agreement, we entered into an Equipment Security Note (the First Secured Note), whereby we borrowed an aggregate of $17.4 million from BALC. The First Secured Note is due July 20, 2011.
On January 16, 2008, we entered into a second Equipment Security Note (the Second Secured Note), pursuant to the same terms and provisions of the Master Agreement, whereby we borrowed an additional $2.1 million. The Second Secured Note is due January 16, 2012.
Both secured notes accrue interest at a per annum rate of 1.75% plus the rate of interest equal to the 30-day published LIBOR rate. Principal and interest, in arrears, are payable monthly on each note, commencing one month after issuance of such note. We are subject to a prepayment penalty on both secured notes equal to 1% of the prepaid principal until the first anniversary of the respective secured note, 0.5% of the prepaid principal from the first day after the first anniversary through the end of the second anniversary and no prepayment penalty thereafter. At August 2, 2008, the outstanding balance of the secured notes was $14.9 million.
Both notes are secured by a security interest in all of our rights, title and interest in and to certain equipment.
During the second quarter of fiscal 2008, we acquired certain assets of Dahle Management Corporation (Dahle), an operator of 15 big and tall mens apparel stores located in nine states. Under the asset purchase agreement, the operations of 8 Dahles Big and Tall mens stores were acquired and will be converted to Casual Male XL retail locations prior to the 2008 Holiday selling season. The 7 remaining locations, all of which compete directly with our Casual Male XL business, will be closed by Dahle prior to January 2009. In addition to the store locations, we also acquired Dahles customer list from their internet and catalog business, as well as their retail business.
Stock Repurchase Program
During fiscal 2006, our Board of Directors adopted a $75 million stock repurchase program, which was scheduled to terminate on December 31, 2007. On January 9, 2008, our Board of Directors extended this repurchase program authorizing us to continue to repurchase the approximately $24.1 million remaining under the program. The repurchases may be made through open market and privately negotiated transactions pursuant to Rule 10b-18 of the Securities Exchange Act of 1934, as amended (the Exchange Act). The stock repurchase program will expire on December 31, 2008, but may be terminated earlier at any time without prior notice.
No repurchases were made during the first six months of fiscal 2008. As of August 2, 2008, we have repurchased approximately 4.3 million shares for an aggregate price of $50.9 million pursuant to this program.
The following table sets forth the stores opened and related square footage at August 2, 2008 and August 4, 2007, respectively:
Total cash outlays for capital expenditures for the first six months of fiscal 2008 were $6.8 million as compared to $10.5 million for the first six months of fiscal 2007. Below is a summary of store openings and closings since February 2, 2008:
We expect our total capital expenditures for fiscal 2008 will be approximately $11.5 million, of which $5.9 million relates to capital for new stores, relocations and remodels. The budget also includes approximately $3.4 million for system enhancements, including our inventory integration project. Included in store expansion are funds to relocate approximately 10 of our existing Casual Male XL retail stores at an estimated cost of $150,000 for each location.
For the remainder of fiscal 2008, we intend to open ten new Casual Male XL retail stores, which include the 8 stores being converted from Dahle to Casual Male XL. We also expect to close 5 existing Casual Male XL retail and outlet stores as their respective leases expire and relocating 7 other store locations.
CRITICAL ACCOUNTING POLICIES
There have been no material changes to the critical accounting policies and estimates disclosed in our Annual Report on Form 10-K for the year ended February 2, 2008 filed with the SEC on March 26, 2008.
In the normal course of business, our financial position and results of operations are routinely subject to a variety of risks, including market risk associated with interest rate movements on borrowings and foreign currency fluctuations. We regularly assess these risks and have established policies and business practices to protect against the adverse effects of these and other potential exposures.
We utilize cash from operations and from our Credit Facility to fund our working capital needs. Our Credit Facility is not used for trading or speculative purposes. In addition, we have available letters of credit as sources of financing for our working capital requirements. Borrowings under the Credit Facility, which expires October 29, 2011, bear interest at variable rates based on Bank of Americas prime rate or the LIBOR. At August 2, 2008, the interest rate on our prime based borrowings was 5.00%. Approximately $37.0 million of our outstanding borrowings were in LIBOR contracts with interest rates ranging between 3.68% and 5.21%. Based upon a sensitivity analysis as of August 2, 2008, assuming average outstanding borrowing during the first six months of fiscal 2008 of $50.2 million, a 50 basis point increase in interest rates would have resulted in a potential increase in interest expense of approximately $251,000.
Our Sears Canada catalog operations conduct business in Canadian dollars and our Rochester Clothing store located in London, England conducts business in British pounds. If the value of the Canadian dollar or the British pound against the U.S. dollar weakens, the revenues and earnings of these operations will be reduced when they are translated to U.S. dollars. Also, the value of these assets to U.S. dollars may decline. As of August 2, 2008, sales from our Sears Canada operations and our London Rochester Clothing store were immaterial to consolidated sales. As such, we believe that movement in foreign currency exchange rates will not have a material adverse affect on our financial position or results of operations.
Evaluation of Disclosure Controls and Procedures
As required by Rule 13a-15 under the Exchange Act, our management, under the supervision and with the participation of our Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) as of August 2, 2008. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is accumulated and communicated to the companys management, including its principal executive and principal financial officers, as appropriate to allow timely decisions regarding required disclosure. Management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving their objectives and management necessarily applies its judgment in evaluating the cost-benefit relationship of possible controls and procedures. Based on this evaluation, our Chief Executive Officer and Chief Financial Officer concluded that, as of August 2, 2008, our disclosure controls and procedures were effective, in that they provide reasonable assurance that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SECs rules and forms.
Changes in Internal Control over Financial Reporting
No change in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) occurred during the quarter ended August 2, 2008 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
PART II. OTHER INFORMATION
We are subject to various legal proceedings and claims that arise in the ordinary course of business. We believe that the resolution of these matters will not have an adverse impact on our operations or financial position.
There have been no material changes to the risk factors as previously disclosed in Part I, Item 1A (Risk Factors) of our Annual Report on Form 10-K for the year ended February 2, 2008 filed with the SEC on March 26, 2008.
We held our 2008 Annual Meeting of Stockholders on July 31, 2008. The matters submitted to a vote of our stockholders were (i) the election of eight directors and (ii) the approval of an amendment to our 2006 Incentive Compensation Plan increasing the total number of shares of common stock authorized for issuance under the plan by 1,500,000 shares, from 2,500,000 to 4,000,000 shares.
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.