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Shawn Woodhull

CMRG AT A GLANCE

P/E ► -1.18   EV/EBITDA ► -2.24   ROA ► -41% VERY LOW ROE ► -81.9% LOW Debt to Equity ► 1.50 AVG Current Ratio ► 1.33 LOW Interest Coverage Ratio ► -37.5 LOW

 

 

 

 

 

 

Casual Male Retail sold 7.7% of the ~$6 Billion "Big and tall" men's clothing sold in the US in 2007.^[1][2]

CMRG is the only national retailer to sell exclusively men's big & tall apparel, which places it in an advantageous position as the obesity rate in the U.S. has grown tremendously in the past twenty years, from approximately 15% of the adult population in 1980 to 31% of the population in 2000.^[3] Additionally, 64% of the U.S. adult population was found to be "overweight" in 2000.^[4]

Even by the hefty standards of the big and tall market, CMRG's customers are overweight. Nationally, only 35% of male Big & Tall customers have waistlines over 46 inches. However, 75% of CMRG's customers in 2007 had waistlines larger than 48 inches. ^[5] In order to more effectively target customers with 42 - 46 inch waists, CMRG is launching a marketing initiative (through television ads) and launching three independent e-commerce sites that offer a variety of footwear and lifestyle products for men and women in the big & tall segment.

Despite earning a 44.4% gross margin on its $464 million of sales, in 2007 CMRG's operating margin was only 0.5% due to various charges related to merchandise markdowns, the discontinuation of one business venture, and $6 million of expenditures on CMRG's new direct business ventures.^[6] Low operating margins have been commonplace for CMRG since 2003, only climbing above 1.0% once in 2006 (1.3%^[7]), due to high SG&A costs and merchandise markdowns as the retailer struggled to sell all of the products on its shelves.

Business Overview

CMRG is the leading specialty retailer of men's big & tall apparel with over $464 million in sales in 2007.^[8] The men's big & tall apparel market includes sales of pants with a waist size of 42" and greater and shirts and tops with sizes of XL and greater.^[9] CMRG serves the men's big & tall market through two retail chains, Casual Male XL and Rochester Big & Tall, and a number of direct-channel operations.

In 2007, CMRG's net sales fell 0.2% to $464 million as the retailer barely turned a profit, posting a net profit of only $0.4 million on sales of $464 million.^[10] CMRG earned a healthy 44.4% gross margin in 2007 ($206 million of gross profit), higher than gross margins at other retailers in 2007 (such as 36.1% at Gap (GPS) and 34.8% at Aeropostale (ARO)).^[11][12] However due to a $6.1 million write-down on merchandise inventory, a $6 million increase in SG&A expenses related to CMRG's new direct businesses, and an operating loss of $1.5 million from these aforementioned new ventures, CMRG's earned only $11 million of operating profit for a 0.5% operating margin.^[13] Same store sales grew 2% in 2007, CMRG's fourth consecutive year of positive same store sales growth.^[14] In the first quarter of 2008, weak economic conditions helped drive a 2% decline in same store sales at CMRG's stores while net sales fell 2.8%.^[15]

CMRG has posted a gross margin above 41% annually since 2003, but hasn't earned an operating margin greater than 1.3% over the same time period.^[16]

Retail and Direct Channel Operations

• Casual Male XL: At the end of Q1 FY08, CMRG operated 402 Casual Male XL retail stores and 65 Casual Male XL outlet stores.^[17] The outlet stores offer similar merchandise as the retail locations, but at lower prices. Casual Male XL stores offer sportswear, casual apparel, dress wear and accessories in big & tall sizes. This chain carries branded merchandise, but places a heightened emphasis on CMRG's own private label merchandise as a major component (over 70% of sales) of Casual Male XL's product assortment.^[18] In addition to store operations, CMRG circulated over 11.2 million Casual Male XL catalogs and served customers through a Casual Male XL e-commerce site.^[19]

• Rochester Big & Tall: With 26 locations open at the end of Q1 FY08 (25 in the United States and 1 in London, England), Rochester Big & Tall carries similar merchandise as Casual Male XL, but with a premium twist on the store's presentation and assortment.^[20] Rochester Big & Tall sells branded merchandise from manufacturers such as Polo Ralph Lauren (RL), Tommy Bahama, Joseph Abboud and Callaway Golf. ^[21] Private labels play a smaller role in Rochester Big & Tall than in Casual Male XL, as Rochester only carries two private label brands, Rochester 1906 and Castagne, which combined to represent approximately 7% of Rochester sales in 2007.^[22] To complement its Rochester Big & Tall stores, CMRG circulated 4.9 million Rochester Big & Tall catalogs and served customers through a Rochester Big & Tall e-commerce website.^[23]

In addition to Casual Male XL and Rochester Big & Tall, CMRG launched three new big & tall direct-to-consumer retail businesses in 2007: B&T Factory Direct, LivingXL and ShoesXL.

Trends and Forces

In 1985, there were only 8 states in the U.S. where at least 10% of the population was obese.^[24]

In 1995, at least 10% of the adult population was obese in all 50 states.^[25]

In 2007, at least 25% of the adult population was obese in 30 states and at least 15% of the adult population was obese in all 50 states.^[26]

Rising Obesity Rates in the United States

As 75% of CMRG's sales are to men with 48 inch waists and larger, the majority of CMRG's business is derived from sales to men who would be classified as obese.^[27] Because CMRG is a prominent retailer for clothing sized for obese men, the company stands to gain customers and subsequently sales as obesity rates rise in the United States. Approximately 64% of adults in the United States are overweight or obese, while 31% are obese.^[28] Obesity is a condition determined by an adult's Body Mass Index, which is a ratio of weight related to height. The prevalence of overweight and obese adults in the United States has surged since 1980 when approximately 47% of the population was overweight and 15% of the population was obese.^[29] As the only major national retailer specializing in big & tall apparel and other related merchandise, CMRG stands to gain considerably if the obesity trend continues.

Narrow Operating Margins Caused by High SG&A Expenditures

Although CMRG has posted a gross margin above 41% every year since 2003, CMRG has earned an operating margin above 1.0% only once in that same time span, in 2006 when it earned a 1.3% operating margin on $465.4 million of sales.^[30] CMRG's SG&A (selling, general and administrative) expenses totaled $195.5 million in 2007, representing 42.1% of total revenue.^[31] Much of these expenses are tied to write-downs and markdowns of merchandise inventories, which occurs when a retailer is unable to sell its merchandise and either drops its prices or sells the merchandise to discounters and off-price retailers. In a single quarter, Q4 FY07, CMRG recorded $6.1 million of expenses related to merchandise write-downs due to excess levels of inventory and seasonal merchandise that CMRG was unable to sell out of its stores.^[32] These expenses significantly detract from profits and prevent CMRG from earning larger operating margins.

New Online Business Ventures: Branching Out from Men's Clothing

In 2007, CMRG launched three new direct-to-consumer catalog and e-commerce business ventures: B&T Factory Direct, LivingXL and ShoesXL. B&T Factory Direct targets value-oriented customers in the men's big & tall apparel market by offering low priced private label merchandise similar to the assortment in Casual Male XL outlet locations. In addition to the B&T Factory Direct website, CMRG circulated 1.5 million B&T Factory Direct catalogs in 2007.^[33] LivingXL targets big & tall men and women looking for plus-sized lifestyle products, including sports and outdoor accessories, patio furniture, travel and medical accessories and other household items. CMRG circulated 4.2 million LivingXL catalogs in 2007 in addition to operating the LivingXL e-commerce website.^[34] ShoesXL sells a range of men's footwear (casual, athletic, dress, formal) in extended sizes (Men's 12 to 17 with larger widths) from brands such as Timberland Company (TBL), Calvin Klein and Lacoste.^[35]

In 2007 the three new businesses combined to contribute $8.9 million (about 2% of total sales) to CMRG's total revenue, although the new ventures posted a combined $1.5 million operating loss due to the high expenses of originally establishing the ventures.^[36] In 2008 the three new direct operations continued to grow, combining for $3.6 million of sales in the first quarter of FY08, compared to $0.5 million in the same quarter of 2007.^[37] Notably, approximately 50% of LivingXL's customers are women, a segment that CMRG is newly targeting through this venture.^[38]

Increasing Marketing Efforts to Capture 42-46" Waist Customer

Approximately 65% of the men's big & tall apparel market in the United States is composed of sales to customers with waist sizes between 42" and 46".^[39] However, this segment accounted for only about 25% of CMRG's sales in 2007.^[40] Rather than shopping at CMRG's specialty big & tall stores, these customers are shopping through other channels, such as catalogs and big & tall departments at mainstream department stores. In order to capture sales from this customer segment, CMRG has increased its marketing and advertising expenditures to 8% of sales (up from 7% in 2007) to develop and launch a television ad campaign that is specifically directed at this 42-46" waist customer for 2008.^[41]

Launching European E-commerce Operations in Late 2008

In 2008, CMRG will expand upon its current European operations which in 2007 were limited to a single Rochester Big & Tall store in London. In August 2008 CMRG will launch e-commerce operations, with the assistance of e-commerce outsourcing firm GSI Commerce (GSIC), for both Casual Male XL and Rochester Big & Tall in the United Kingdom, Germany, France, Italy, Spain and the Netherlands. Over 50% of the adult population in the United Kingdom and Germany are overweight or obese, and over 25% of the adult population is obese in all six of the European countries in which CMRG is launching direct operations.^[42]

The proportion of overweight and obese adults in European populations is not as high as in the United States, but is still at record levels.^[43]

Competition

CMRG is the only national specialty retailer of men's big & tall apparel. The second largest specialty big & tall apparel retailer was Dahle's Big & Tall, which CMRG acquired in 2008. As such, CMRG's direct competition comes from big & tall direct marketers who reach customers through catalogs and e-commerce operations and department stores and discount stores and mass merchandisers with big & tall departments.

Big & Tall Direct Marketers:

• King Size Catalog: This big & tall apparel catalog is owned by Redcats USA, which is a wholly owned subsidiary of French congolomerate, PPR SA (PP-FR).

Department Stores:

• J.C. Penney (JCP): J.C. Penney's stores include big & tall sections and the retailer also circulates a Big & Tall Collection catalog.
• Nordstrom (JWN)
• Macy's Inc. (M)
• Men's Wearhouse (MW)

Discount Stores and Mass Merchandisers:

• Wal-Mart Stores (WMT)
• Target (TGT)
• TJX Companies (TJX)
• Ross Stores (ROST)

References

1. ↑ Casual Male Retail Group (CMRG) Annual Report 2008, Our Industry, pg. 6
2. ↑ Casual Male Retail Group (CMRG) Annual Report 2008, Selected Financial Data, pg. 29
3. ↑ NAASO The Obesity Society, "Obesity Statistics: U.S. Obesity Trends"
4. ↑ NAASO The Obesity Society, "Obesity Statistics: U.S. Obesity Trends"
5. ↑ Casual Male Retail Group (CMRG) Annual Report 2008, Letter to Shareholders, pg. 2
6. ↑ Casual Male Retail Group (CMRG) Annual Report 2008, Selected Financial Data, pg. 29
7. ↑ Casual Male Retail Group (CMRG) Annual Report 2008, Selected Financial Data, pg. 29
8. ↑ Casual Male Retail Group (CMRG) Annual Report 2008, Selected Financial Data, pg. 29
9. ↑ Casual Male Retail Group (CMRG) Annual Report 2008, Our Industry, pg. 6
10. ↑ Casual Male Retail Group (CMRG) Annual Report 2008, Selected Financial Data, pg. 29
11. ↑ Gap (GPS) Annual Report 2007, "Results of Operations", p. 18
12. ↑ Aeropostale (ARO) Press Release, Fourth Quarter Earnings Release
13. ↑ Casual Male Retail Group (CMRG) Annual Report 2008, Selected Financial Data, pg. 29
14. ↑ Casual Male Retail Group (CMRG) Annual Report 2008, Selected Financial Data, pg. 29
15. ↑ Casual Male Retail Group (CMRG) Press Release, First Quarter 2008
16. ↑ Casual Male Retail Group (CMRG) Annual Report 2008, Selected Financial Data, pg. 29
17. ↑ Casual Male Retail Group (CMRG) Press Release, First Quarter 2008
18. ↑ Casual Male Retail Group (CMRG) Annual Report 2008, Merchandise, pg. 7
19. ↑ Casual Male Retail Group (CMRG) Annual Report 2008, Casual Male XL Direct Business, pg. 8
20. ↑ Casual Male Retail Group (CMRG) Press Release, First Quarter 2008
21. ↑ Casual Male Retail Group (CMRG) Annual Report 2008, Rochester Business, pg. 9
22. ↑ Casual Male Retail Group (CMRG) Annual Report 2008, Rochester Business, pg. 9
23. ↑ Casual Male Retail Group (CMRG) Annual Report 2008, Rochester Big & Tall Direct Business, pg. 9
24. ↑ Center for Disease Control, U.S. Obesity Trends 1985-2007
25. ↑ Center for Disease Control, U.S. Obesity Trends 1985-2007
26. ↑ Center for Disease Control, U.S. Obesity Trends 1985-2007
27. ↑ Casual Male Retail Group (CMRG) Annual Report 2008, Letter to Shareholders, pg. 2
28. ↑ NAASO The Obesity Society, "Obesity Statistics: U.S. Obesity Trends"
29. ↑ NAASO The Obesity Society, "Obesity Statistics: U.S. Obesity Trends"
30. ↑ Casual Male Retail Group (CMRG) Annual Report 2008, Selected Financial Data, pg. 29
31. ↑ Casual Male Retail Group (CMRG) Annual Report 2008, Selected Financial Data, pg. 29
32. ↑ Casual Male Retail Group (CMRG) Annual Report 2008, Inventory, pg. 42
33. ↑ Casual Male Retail Group (CMRG) Annual Report 2008, B&T Factory Direct, pg. 8
34. ↑ Casual Male Retail Group (CMRG) Annual Report 2008, Living XL, pg. 10
35. ↑ Casual Male Retail Group (CMRG) Annual Report 2008, ShoesXL, pg. 10
36. ↑ Casual Male Retail Group (CMRG) Annual Report 2008, Summary, pg. 31
37. ↑ Seeking Alpha, "Casual Male Retail Group Earnings Call Transcript First Quarter 2008"
38. ↑ Seeking Alpha, "Casual Male Retail Group Earnings Call Transcript"
39. ↑ Casual Male Retail Group (CMRG) Annual Report 2008, Letter to Shareholders, pg. 2
40. ↑ Casual Male Retail Group (CMRG) Annual Report 2008, Letter to Shareholders, pg. 2
41. ↑ Casual Male Retail Group (CMRG) Annual Report 2008, Marketing and Advertising, pg. 12
42. ↑ EuroState Year Book 2006-2007
43. ↑ EuroState Year Book 2006-2007