View:
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
------------------------------
FORM 8-K
CURRENT REPORT
PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
Date of Report (Date of earliest event reported): November 11, 2003
0-15898
(Commission File Number)
------------------------------
CASUAL MALE RETAIL GROUP, INC.
(Exact name of registrant as specified in its charter)
Delaware 04-2623104
(State of Incorporation) (IRS Employer
Identification Number)
555 Turnpike Street, Canton, Massachusetts 02021
(Address of registrant's principal executive office)
(781) 828-9300 (Registrant's telephone number)
------------------------------
ITEM 9. Regulation FD Disclosure.
On November 11, 2003, the registrant announced that it intends to offer,
subject to market and other conditions, approximately $75 million in aggregate
principal amount (excluding any option for the initial purchaser to purchase
additional Notes (as defined below)) of Convertible Senior Subordinated Notes
due 2024 (the "Notes") in a private placement to qualified institutional buyers
pursuant to Rule 144A under the Securities Act of 1933, as amended (the
"Securities Act"). The registrant included, among other things, the following
discussions of Recent Developments, certain Risk Factors, Business and
Description of Material Indebtedness in the offering circular used in connection
with the offering of the Notes:
Recent Developments
On November 6, 2003, we announced total sales for the third quarter of
fiscal 2004 of $114.1 million, compared to $125.2 million for the corresponding
period of the prior year. Our total sales for the nine months ended November 1,
2003 were $326.6 million, compared to $277.3 million for the corresponding nine
months of the prior year. These results include the sales of the Casual Male
business since the date of our acquisition on May 14, 2002. We expect to report
a loss for the third quarter of fiscal 2004, adjusted for normalized tax
provisions, of between $0.01 and $0.03 per diluted share, as compared to a loss
of $0.01 per diluted share for the same period last year.
Risks Related to our Company and our Industry
Our ability to continue to expand our Casual Male stores may be limited.
A large part of our growth has resulted from the addition of new Casual
Male stores and the increased sales volume and profitability provided by these
stores. We will continue to depend on adding new stores to increase our sales
volume and profitability. We believe that our ability to increase the number of
Casual Male stores in the United States substantially in excess of the number of
our current stores will be limited due to capital constraints, market conditions
and other factors. When we enter new markets, we must:
o obtain suitable store locations in light of the local real estate
market conditions;
o hire and train personnel;
o establish distribution methods; and
o advertise our brand names and our distinguishing characteristics to
consumers who may not be familiar with us.
As a result of these and other factors, opening new stores is often costly
and entails significant risk. We cannot assure you that we will be able to open
and operate new stores on a timely and profitable basis. The costs associated
with opening new stores may negatively affect our results of operations.
We may be unable to successfully predict fashion trends and customer
preferences.
Customer tastes and fashion trends are volatile and tend to change
rapidly. Our success depends in large part upon our ability to effectively
predict and respond to changing fashion tastes and consumer demands and to
translate market trends to appropriate saleable product offerings. If we are
unable to successfully predict or respond to changing styles or trends and
misjudge the market for products or any new product lines, our sales will be
lower and we may be faced with a substantial amount of unsold inventory or
missed opportunities. In response, we may be forced to rely on additional
markdowns or promotional sales to dispose of excess, slow-moving inventory,
which would decrease our revenues and margins. In addition, the failure to
satisfy consumer demand could have serious longer-term consequences, such as an
adverse impact on our brand value and the loss of market share to our
competitors.
Our business is highly competitive, and competitive factors may reduce our
revenues and profit margins.
The United States men's big and tall apparel market is highly competitive
with many national and regional department stores, specialty apparel retailers
and discount stores offering a broad range of apparel products similar to the
products that we sell. Besides retail competitors, we consider any manufacturer
of big and tall merchandise operating in outlet malls throughout the United
States to be a competitor. It is also possible that another competitor, either a
mass merchant or a men's specialty store or specialty apparel catalog, could
gain market share in men's big and tall apparel due to more favorable pricing,
locations, brand and fashion assortment and size availability. The presence in
the marketplace of various fashion trends and the limited availability of shelf
space also can affect competition. We may not be able to compete successfully
with our competitors in the future and could lose brand recognition and market
share. A significant loss of market share would adversely affect our revenues
and results of operations.
Our sales will decline if we do not successfully advertise and market our
products.
Our business is directly affected by the success or failure of our
advertising and promotional efforts and those of our vendors. Future advertising
efforts by us, our vendors or our other licensors may be costly and may not
result in increased sales. If we were to undertake a major advertising campaign
without success, then our failure to realize any revenues from our advertising
and promotional expenditures, together with the possible adverse impact on our
brand value and loss of market share, would have a negative impact upon our
revenues. In either case, increased costs and decreased margins, accompanied by
static or decreased revenues, would cause a decline in our results of
operations.
Our success significantly depends on our key personnel and our ability to
attract and retain additional personnel.
Our future success is dependent on the personal efforts, performance and
abilities of our key management. For example, the loss of the services of David
Levin, our Chief Executive Officer, or Dennis Hernreich, our Chief Operating
Officer and Chief Financial Officer, both of whom are an integral part of our
daily operations and are primary decision makers in all our important operating
matters, could significantly impact our business until adequate replacements can
be identified and put in place. The loss of any of our senior management may
result in:
o a loss of organizational focus,
o poor operating execution;
o an inability to identify and execute potential strategic initiatives
such as joint venture and licensing opportunities;
o an impairment in our ability to identify new store locations; and
o an inability to consummate possible acquisitions.
These adverse results could, among other things, reduce potential
revenues, prevent us from diversifying our product lines and geographic
concentrations, and expose us to downturns in our markets. The loss of those
individuals as well as our chairman, Seymour Holtzman, who also has many years
of experience in the capital markets, could negatively impact our ability to
obtain additional debt or equity financing for our operations or to refinance
existing indebtedness, or the terms that might be negotiated for such financing
or refinancing. Those circumstances in turn could ultimately result in a
significant decline in profitability and decline in our financial condition. The
competition is intense for the type of highly skilled individuals with relevant
industry experience that we require and we may not be able to attract and retain
new employees of the caliber needed to achieve our objectives.
We need to timely complete the implementation of our information systems and
control procedures.
We depend heavily upon technology and information systems to control
inventory, sales, markdowns, merchandise on hand and other critical information.
Any significant deficiencies in our management information systems resulting in
less than optimal systems performance could have a negative impact upon our
business. For example, since the information systems provide vital information
with respect to specific merchandise sales at the SKU level, replenishment
requirements to maintain optimum inventory levels, and sell through data from
which markdown requirements are identified to most productively sell through
poor selling SKU's, if that information is not consistently provided on a timely
and accurate basis our sales could be severely impacted, or our gross margins
could be adversely affected.
We periodically review, improve and, under certain circumstances, replace
our technology and management information systems to provide enhanced support to
all operating areas. If such upgrades and enhancements are not successfully
implemented, then the current systems may not be able to continue to support
adequately our management information requirements. Currently, we are undergoing
a significant effort to replace our existing antiquated legacy systems, as part
of the process of integrating the historical Designs, Inc. and Casual Male
operations. It is critically important to the successful operation of our
business that the implementation of our systems integration process, which
entails the replacement, enhancement, or upgrade of all Casual Male's vital
former information systems, be completed within budget and timely without
disruption to our daily operations. We anticipate that the implementation will
require approximately 12 months to complete at a remaining cost of $1.8 million.
If we are unable to complete these projects within budget and on time, our
operating results will suffer.
The loss of, or disruption in, our centralized distribution center could
negatively impact our business and operations.
All merchandise for our Casual Male stores is received into our
centralized distribution center in Canton, Massachusetts, where the inventory is
then processed, sorted and shipped to our stores. We depend in large part on the
orderly operation of this receiving and distribution process, which depends, in
turn, on adherence to shipping schedules and effective management of the
distribution center. Although we believe that our receiving and distribution
process is efficient and well positioned to support our expansion plans, we
cannot assure you that events beyond our control, such as disruptions in
operations due to fire or other catastrophic events, employee matters or
shipping problems, would not result in delays in the delivery of merchandise to
our stores.
Although we maintain business interruption and property insurance, we
cannot assure you that our insurance will be sufficient, or that insurance
proceeds will be timely paid to us, in the event our distribution center is shut
down for any reason or if we incur higher costs and longer lead times in
connection with a distribution at our distribution center.
We are dependent on third parties for the manufacture of the products we sell.
We do not own or operate any manufacturing facilities and are therefore
entirely dependent on third parties for the manufacture of the products we sell.
Without adequate supplies of merchandise to sell to our customers in the
merchandise styles and fashions demanded by our particular customer base, sales
would decrease materially and our business would suffer. Furthermore,
approximately 75% of our merchandise is private label items made specifically
for Casual Male and our customers. In the event that manufacturers are unable or
unwilling to ship products to us in a timely manner or continue to manufacture
products for us, we would have to rely on other current manufacturing sources or
identify and qualify new manufacturers. We might not be able to identify or
qualify such manufacturers for existing or new products in a timely manner and
such manufacturers might not allocate sufficient capacity to us in order to meet
our requirements. The consequences of not securing adequate and timely supplies
of private label merchandise would negatively impact proper inventory levels,
sales and gross margin rates, and ultimately our results of operations.
In addition, even if our current manufacturers continue to manufacture our
products, they may not maintain adequate controls with respect to product
specifications and quality and may not continue to produce products that are
consistent with our standards. If we are forced to rely on products of inferior
quality, then our brand recognition and customer satisfaction would be likely to
suffer. These manufacturers may also increase the cost to us of the products we
purchase from them. If our suppliers increase our costs, our margins may be
adversely affected.
Should we experience significant unanticipated demand, we will be required
to significantly expand our access to manufacturing, both from current and new
manufacturing sources. If such additional manufacturing capacity is not
available on terms as favorable as those obtained from current sources, then our
revenues or margins, or both, will suffer.
In addition, a significant portion of our merchandise is directly imported
from other countries, and U.S. domestic suppliers who source their goods from
other countries supply most of our remaining merchandise. If imported goods
become difficult or impossible to bring into the United States, due to tariffs,
embargoes or other reasons and if we cannot obtain such merchandise from other
sources at similar costs, then our sales, gross margins and profit margins would
significantly decline. Furthermore, in the event that commercial transportation
is curtailed or substantially delayed, we may not be able to maintain adequate
inventory levels of important merchandise levels on a consistent basis, which
would negatively impact our sales and potentially erode the confidence of our
customer base, leading to further loss of sales and an adverse impact on our
results of operations.
In extreme circumstances, it may be necessary to close less productive
stores so as to consolidate important merchandise categories into our most
productive stores, which would severely impact our results of operations and
cash flow.
Exiting our Levi's(R)/Dockers(R) business may subject us to significant costs
and divert resources.
In light of the continued significant deterioration in our
Levi's(R)/Dockers(R) operations, we announced that we would downsize and
eventually exit this business. In connection with this restructuring, we have
incurred and will need to continue to incur significant exit costs associated
with the termination of leases, liquidation of inventory and various employee
matters. In addition, the restructuring of this business may divert managerial
and other resources from our core businesses and may subject us to litigation.
We have recorded restructuring charges totaling $41.3 million to date in
connection with the restructuring of our Levi's(R)/Dockers(R) business, and
expect to record additional restructuring charges as we complete this
initiative. These charges have reduced and will continue to reduce our net
income, and if future charges exceed our expectations, our stock price may be
adversely affected.
Our results of operations will be adversely affected if our George Foreman line
of apparel is unsuccessful.
We have entered into an exclusive endorsement and licensing arrangement
for a men's apparel line with George Foreman, the well-known boxing personality.
Under the terms of this arrangement, we are obligated to make significant
payments to Mr. Foreman regardless of the
success of the product line, and we intend to incur significant marketing costs
in connection with the promotion of this product line. As a result of these
expenditures, if sales from this product line do not meet our expectations our
results of operations will be adversely affected. Furthermore, we are subject to
risks associated with having our brand identified with a celebrity personality.
If our customers do not care for Mr. Foreman, or if this product line is not
successful, our brand value will suffer.
The loss of any of our key trademarks or licenses could adversely affect demand
for our products.
We own and use a number of trademarks and operate under several trademark
license agreements. We believe that these trademarks have significant value and
are instrumental in our ability to create and sustain demand for and to market
our products. We cannot assure you that these trademarks and licensing
agreements will remain in effect and enforceable or that any license agreements,
upon expiration can be renewed on acceptable terms or at all. In addition, any
future disputes concerning these trademarks and licenses may cause us to incur
significant litigation costs or force us to suspend use of the disputed
trademarks.
Our business is seasonal and is affected by general economic conditions.
Like most other retail businesses, our business is seasonal. Historically,
over 30% of our net sales have been made and approximately 70% of our operating
income has been generated during November, December and January. Like other
retail businesses, our operations may be negatively affected by local, regional
or national economic conditions, such as levels of disposable consumer income,
consumer debt, interest rates and consumer confidence. Any economic downturn
might cause consumers to reduce their spending, which could negatively affect
our sales. A sustained economic downturn would likely have an adverse affect on
our results of operations.
Acts of terrorism could negatively impact our operating results and financial
condition.
The continued threat of terrorism and heightened security measures in
response to an act of terrorism may disrupt commerce and undermine consumer
confidence which could negatively impact our sales by causing consumer spending
to decline. Furthermore, an act of terrorism or war, or the threat thereof,
could negatively impact our business by interfering with our ability to obtain
merchandise from vendors or substitute suppliers at similar costs in a timely
manner.
Our cost savings and expense reductions resulting from the acquisition of Casual
Male may be less than anticipated.
We anticipate significant, continued cost savings following our May 2002
acquisition of substantially all the assets of Casual Male, primarily through
headcount reductions, renegotiations of contractual arrangements for supplies
and services associated with the operation for more favorable pricing terms,
elimination of inefficient and costly business processes and costs by
streamlining our management information systems and economies of scale in
purchasing. It is possible that some of the contemplated reductions could fail
to take place on the scale proposed due to unforeseen or underestimated needs
for the employees in question. It is also possible that the
cost savings associated with achieving purchasing economies fail to materialize
due to unsuccessful negotiations with key vendors. There is also a cost to
realizing the potential savings and these costs could potentially be higher than
originally contemplated in management's projections. In such an instance, the
amount of the cost savings would be offset by the higher costs of realizing the
savings, thereby reducing the overall benefit of the acquisition of Casual Male
and reducing our expected profitability. If there are substantial failures to
achieve these cost savings, cash flow and the servicing of debt related to that
acquisition could also be reduced.
We face greater challenges in managing several brands in multiple channels of
distribution.
Several retailers have had problems executing a corporate strategy aimed
at operating multiple brands in multiple channels. We have expertise in the
outlet channel of distribution, but our acquisition of Casual Male caused us to
conduct operations in the specialty store and internet channels of distribution.
We are now also responsible for all aspects of brand management with respect to
the Casual Male brand, including advertising and promotion, and the servicing
and merchandising of private label merchandise, which currently represent
approximately 75% of Casual Male's merchandise inventory. Under our current
operating model, this function is mostly the responsibility of the branded
manufacturer. If the managing of multiple brands within multiple channels is
poorly executed, we will not achieve our expected level of profitability, and
could ultimately be compelled to eliminate the multiple brand strategy so that
the organization may focus on a single brand strategy.
A reduction in the size of our target market and shifts in customer purchasing
habits will adversely affect our sales.
As more and more food retailers begin to compete on the basis of providing
more healthy menus, and American popular culture becomes more health conscious,
the size of our target demographic could decrease, resulting in lower sales. In
addition, recent statistics have shown that the overall levels of the men's
apparel sales have been decreasing, in part due to a lesser percentage of men's
apparel being bought by women. If this trend continues and we are unable to
adjust our business model to reflect the trend, our results of operations and
cash flow will be impacted.
OUR BUSINESS
Our Company
We are the largest specialty retailer of big and tall men's apparel in the
United States. We operate 480 Casual Male Big & Tall stores, the Casual Male
catalog business, two e-commerce websites, 58 Levi's" / Dockers" Outlet by
Designs and 21 Ecko Unltd." outlet stores, all of which are located throughout
the United States and Puerto Rico.
History
We were incorporated in the State of Delaware in 1976 under the name
Designs, Inc. Until fiscal 1996, we operated exclusively Levi Strauss & Co.
branded apparel mall and outlet stores. In fiscal 1996, we began seeing limited
growth opportunities with Levi Strauss & Co. and started to embark on several
private label diversification strategies. We ultimately abandoned these
strategies due to a variety of reasons including lack of brand recognition of
our private labels by our customers. As a result of these failed strategies, we
incurred an aggregate of $85.6 million of operating losses during the fiscal
years 1998, 1999 and 2000.
In October 1999, our stockholders elected a new board of directors, which
subsequently appointed a new Chairman of the Board and management team. Under
this new management, we achieved significant cost reductions in both our store
and overhead operations, resulting in an improvement in our financial
performance beginning in fiscal 2001. With this new effective low-cost structure
in place, we renewed our strategy to become the premier operator in the outlet
channel for other well-known branded manufacturers, including Candie's, Inc., a
leading designer and marketer of young women's footwear, apparel and
accessories. In April 2002, we entered into a joint venture with Ecko Complex,
LLC, a leading design-driven lifestyle brand targeting young men and women.
Under this joint venture agreement, we plan to exclusively open and operate 75
Ecko Unltd." branded outlet stores throughout the United States over a six-year
period.
While implementing these initiatives, but with limited opportunity to
expand our mature Levi's"/Dockers" business, we acquired the Casual Male
business from Casual Male Corp. in May 2002 at a bankruptcy court-ordered
auction. At the time of the acquisition, Casual Male was the largest retailer in
the United States of men's clothing in the big and tall market. We paid
approximately $170 million for the Casual Male business, including the
assumption of certain operating liabilities. In view of the significance of this
acquisition to our growth and future identity, on August 8, 2002, our
stockholders voted to change our name to "Casual Male Retail Group, Inc."
Prior to our acquisition of Casual Male, it was operated as a subsidiary
of J. Baker, Inc., a conglomerate primarily comprised of several footwear retail
chains and the Casual Male business. Due to lack of infrastructure investment in
Casual Male, the business was operated with antiquated management information
systems, which perpetuated inefficient processes, resulting in an inflated and
inefficient cost structure and a flat share of the growing big and tall men's
apparel market. Our objective was to improve profitability by reducing Casual
Male's expense base, optimizing its operating efficiencies and improving its
merchandising to position the Casual Male business for future growth.
Following the Casual Male acquisition, we re-evaluated our strategic
initiatives. In light of the significant opportunity to grow the Casual Male
business and the continued significant deterioration in our Levi's"/Dockers"
business, we announced that we would downsize and eventually exit the
Levi's"/Dockers" business. We also announced that we would exit the Candies"
outlet business, which we completed by the end of fiscal 2003. These decisions
enabled management to focus our resources primarily on growing our more
profitable Casual Male business and, to a lesser extent, expanding the
operations of our Ecko joint venture.
Since the Casual Male acquisition, we have operated in two segments: our
"Casual Male business" and our "other branded apparel businesses."
Casual Male Business
The Casual Male business, which represented approximately 68.8% of our
revenues for the nine months ended November 1, 2003, is a multi-channel retailer
offering what we believe to be high quality casual wear to the big and tall male
customer. We offer our merchandise to customers through diverse selling and
marketing channels, including 480 retail and outlet stores in 44 states, which
operate under the names "Casual Male Big & Tall," "Casual Male Big & Tall
Outlet," a catalog and two e-commerce sites.
We offer an extensive selection of casual wear for the big and tall male
customer. Seventy-five percent of the merchandise we offer is private label,
manufactured primarily under our Harbor Bay brand name. We also carry a wide
range of well-known brand name merchandise including, Adidas(R), Ecko(R),
Polo(R) Ralph Lauren, Sean John(R), Sketchers(R), Levi's(R), Dockers(R) and
others. Casual Male's merchandise is primarily moderately priced casual wear,
with the remainder comprised of suits, suit separates, dress shirts, dress
pants, and related accessories. Casual Male's clothing has features specifically
designed for our target customers, such as waist-relaxer pants, stretch belts,
zipper ties, wide band socks, neck-relaxer shirts and clothing with stretch
technology and reinforced at stress points. Independent tests have shown our
merchandise to be among the highest in quality of all major brands.
Industry
NPD Research estimates that the men's big and tall apparel market, which
includes pants with a waist size 44" and greater as well as tops sized 1X and
greater, generated approximately $5.3 billion in sales in 2002. This highly
fragmented market represents approximately 13% of the overall men's apparel
business. In 2002, sales of men's big and tall apparel increased 1.4%, while
overall men's apparel sales declined 0.7%. Growth in this segment has been
driven by rapidly changing market demographics. Currently, 64% of U.S. adults
are overweight or obese, up from 56% six years ago. Additionally, in 2001, 49
states classified 15% or more of their total adult population as obese, versus
four states in 1991. Moreover, 29 states classified 20% or more of their total
adult population as obese. According to the Center for Disease Control, the rate
of obesity for the under-30 age group is growing faster than any other segment
of the population. These statistics suggest that there is a significant gap
between the market share of the big and tall apparel market and the overall
percentage of the population classified as obese.
The men's big and tall apparel market is current 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. By
offering the widest selection of sizes and styles, the specialty channel has
gained significant market share over the past five years, accounting for 26.2%
of men's big and tall apparel sales in 2002 versus 22.7% in 1998.
Multi-Channel Strategy
We try to appeal to all of our customers by providing multiple ways to
shop. The Casual Male customer is often a destination shopper when it comes to
purchasing apparel for himself. For customers that are somewhat uncomfortable in
a traditional shopping environment, we offer them the opportunity to shop
through our catalog and through our e-commerce sites. We have recently begun to
coordinate our merchandising and marketing across our stores, catalog and
websites.
Retail stores. We operate 415 Casual Male Big & Tall full-price retail stores,
located primarily in strip centers, power centers or stand-alone locations.
These stores target the middle-income customer seeking good quality at moderate
prices. These stores offer a broad selection of basic sportswear and other
casual apparel, as well as dress wear and accessories. The average Casual Male
Big & Tall retail store is approximately 3,400 square feet and generates
approximately $185 in sales per gross square foot annually. We believe we have a
significant opportunity to grow our retail store base, and we have identified
more than 250 additional locations. We intend to open 15-20 net new retail
stores during fiscal 2005 and an additional 25-30 net new retail stores in
fiscal 2006.
Outlet stores. We operate 65 Casual Male Big & Tall outlet stores designed to
offer a wide range of casual clothing for the big and tall customer at prices
that are generally 20-25% lower than those offered at our retail stores. Most of
the merchandise in our outlet stores is offered with the purchasing interests of
the value-oriented customer in mind. These stores also serve as a distribution
channel for clearance and other slow moving inventory. Approximately 20% of the
merchandise in our outlet stores originates from our retail stores. The average
Casual Male outlet store is approximately 3,100 square feet and generates
approximately $185 in sales per gross square foot annually. We believe that
there are 50 additional locations suitable for a Casual Male outlet store. We
intend to open 5-10 net new outlet stores in each of fiscal 2005 and fiscal
2006.
Catalog. Our "Casual Male Big & Tall" catalog offers an assortment of casual
merchandise similar to what is available in our stores, but also offers a
broader selection of dress apparel, such as sportcoats, suit separates and other
tailored clothing. We intend to issue 17 editions of our catalog this year. In
fiscal 2003, we circulated a total of 7.2 million catalogs. In fiscal 2005, we
will seek to enhance the productivity of our catalog by focusing our mailings on
a more targeted basis, based on historical buying patterns. We recently began
transitioning our REPP Big & Tall catalog customers to our Casual Male Big &
Tall catalog.
E-Commerce. We currently have two e-commerce websites: www.casualmale.com and
www.reppbigandtall.com. These sites offer substantially the same merchandise as
is offered in our catalog. We currently process and fulfill orders from our web
sites through our distribution center. Although to date our e-commerce web sites
have generated relatively small sales volume, we see the internet as a
significant growth opportunity. For example, in addition to our traditional
on-line business, we recently launched Casual Male Big & Tall apparel shops on
Amazon.com. We expect our relationship with Amazon.com will provide further
growth and brand identity for our Casual Male business.
Merchandising
We offer a wide range of quality casual and dress apparel and footwear for
big and tall men at moderate prices. Over half of our merchandise is basic or
fashion-neutral items, such as jeans, casual slacks, tee-shirts and polo shirts.
While our Casual Male business carries several brand names, we also offer
"private label" merchandise made specifically for Casual Male, such as our
Harbor Bay" private label, which accounts for approximately 75% of Casual Male's
total merchandise.
We recently completed a roll-out of our new lifestyle format in all of our
Casual Male Big and Tall stores. Stores are now merchandised to showcase entire
outfits by lifestyle, such as traditional, active and contemporary. This allows
us to merchandise key items and seasonal goods in prominent displays, makes
coordinating outfits easier and encourages multi-item purchases. This lifestyle
layout allows us to better manage store space in each market to target local
demographics. Our key item strategy allows us to focus our merchandise
presentation and offer our customers a compelling value proposition. By taking
advantage of volume purchasing discounts, we are able to promote these key items
across our entire chain without sacrificing our gross margins.
We believe that the "under 30" big and tall age group has been
under-served by apparel retailers and see this target group as an opportunity to
increase our revenues. In order to attract "under 30" big and tall customers, we
introduced more younger-oriented branded merchandise into approximately 200 of
our Casual Male Big & Tall retail stores. This merchandise includes such brands
as Ecko Unltd.(R), Sean John(R), Rocawear(R), Shady(R) and Karl Kani(R).
In June 2003, we announced an exclusive marketing agreement with George
Foreman to promote the Casual Male brand. We are also launching an exclusive
line of clothing with the George Foreman brand, including casualwear, dresswear
and accessories in Spring 2004. This line will include the Comfort
Zone(TM)technology that we previously sold under our private label brand. In
addition, we will be introducing in 60 of our stores a George Foreman signature
collection, a line of clothing made with premium fabrics and offered at
generally higher price points.
We implemented several new merchandising strategies during fiscal 2004.
Specifically, we recently launched a custom fit program, by which customers can
purchase at our retail stores, from our e-commerce sites or through our catalogs
certain styles of pants and shirts that are custom made to their specific fit
requirements. We also broadened our merchandise offerings in activewear by
introducing certain branded merchandise, such as professional sports team
apparel.
Marketing and Advertising
Our marketing department creates and implements a wide variety of
national, regional and local advertising, direct marketing and sales promotion
programs. These television, radio and direct mail programs are designed to
increase sales and customer awareness of the Casual Male brand name. Local store
marketing activities occur on a regular basis and include store opening events
and in-store promotion programs.
Advertising and marketing costs for the Casual Male businesses represent
approximately 6% of the revenue from the Casual Male business. This includes
creating and distributing 7.2 million catalogs, advertising and all in-store
signage for our more than 480 stores, and
supporting e-commerce efforts. Approximately 80% of our total marketing budget
is spent on targeting the customer directly through our catalog. Our customer
database contains more than 2.5 million customers, including their respective
Casual Male purchase histories.
In fiscal 2005, we anticipate increasing our overall advertising budget as
a percentage of sales. We will launch a broad-range advertising campaign
commencing in March 2004 in connection with our agreement with George Foreman.
We also plan to shift a portion of our marketing expenditures from direct
marketing to mass media.
Competition
Our Casual Male business faces competition from a variety of sources,
including department stores, specialty stores, discount and off-price retailers
as well as other retailers that sell big and tall merchandise. While we have
successfully competed on the basis of merchandise selection, favorable pricing,
customer service and desirable store locations, we cannot assure you that other
retailers will not adopt merchandising and marketing concepts similar to those
of ours. In addition, discount retailers with significant buying power, such as
Wal-Mart, JC Penney and Target, represent a source of competition for us.
The United States men's big and tall apparel market is highly competitive
with many national and regional department stores, specialty apparel retailers,
single market operators and discount stores offering a broad range of apparel
products similar to the products that we sell. Besides retail competitors, we
consider any casual apparel manufacturer operating in outlet malls throughout
the United States to be a competitor in the casual apparel market. We believe we
are the only national operator of apparel stores focused on the men's big and
tall market. The next largest specialty retailer focused on our niche is
Rochester Big and Tall, which operates 22 stores.
Our catalog business has several competitors, including Brylane's King
Size Catalog and JC Penney's Big and Tall Collection catalog.
Other Branded Apparel Businesses
Ecko Unltd.(R)
We have entered into a joint venture with Ecko Complex, LLC, under which
we own and manage retail outlet stores bearing the name Ecko Unltd.(R) and
featuring Ecko(R) branded merchandise. We believe that our Ecko(R) Unltd. outlet
stores represent an opportunity in the outlet marketplace for the underdeveloped
young men's and junior market because Ecko(R) is believed to be a cross-over
youth brand appealing to both urban and suburban youth with a core customer
between the ages of 14 to 24. Accordingly, these stores provide a broad
selection of regular size merchandise ranging from hip-hop to extreme sports,
and street-wear to fraternity wear, with a core menswear line consisting of
fleece, twill and denim bottoms, wovens, printed tee shirts, knits and sweaters.
The average Ecko outlet store is approximately 3,500 sq. ft. and generates an
average of $350 in sales per gross square foot annually. We currently operate 21
Ecko outlet stores and we
believe we have an opportunity to open a total of 75 stores. We intend to open
20-25 net new Ecko stores in fiscal 2005.
In November 2003, we will open a mall-based, full-priced Ecko-branded
retail store. In addition, in fiscal 2005 we will operate Ecko's e-commerce
business pursuant to the joint venture agreement. As part of the operations, we
will manage Ecko's e-commerce fulfillment, customer service and its overall
infrastructure. Management believes that our Ecko Unltd." outlet stores compete
with other outlet apparel retailers on the basis of selection of quality,
service and price. We stress product training with our sales staff and, with the
assistance of merchandise materials from Ecko Complex, LLC, provide our sales
personnel with substantial product knowledge and training across all product
lines.
We own 50.5% of this joint venture and Ecko owns the remaining 49.5% of
the joint venture. Under the terms of our joint venture agreement, we manage the
Ecko retail outlet stores and Ecko contributes to the joint venture their
trademark and our merchandise requirements at cost. Further, we contribute all
real estate and operating requirements of the retail outlet stores, including
but not limited to, the real estate leases, payroll needs and advertising. Each
partner shares in the operating profits of the joint venture, after each partner
has received reimbursement for its cost contributions. Under the terms of the
agreement, we must maintain a prescribed store opening schedule and open 75
stores over a six-year period in order to maintain the joint venture's
exclusivity. At certain times during the term of the agreement, we may exercise
an option to sell our share of the joint venture to Ecko, and Ecko has an option
to acquire our share of the joint venture at a price based on the performance of
the Ecko retail outlet stores.
Levi's(R)/Dockers(R) Outlets
We announced in fiscal 2003 that we would be exiting our
Levi's(R)/Dockers(R) business outlet business. We currently operate 80
Levi's(R)/Dockers(R) outlet stores, 22 of which we are in the process of
closing. We plan to close the remaining stores in the next 24 months. We expect
that our remaining 58 Levi's(R)/Dockers(R) stores will either be closed at the
end of their respective lease terms or through negotiation with their respective
landlords. Until such closings, these remaining stores will continue to offer an
exclusive selection of Levi Strauss & Co. brands of merchandise, which include
Levi's(R)/Dockers(R) brands, at outlet prices. As such, we will continue to work
with Levi Strauss & Co. on obtaining competitive costs for our products and,
based on availability, will stock these remaining stores with a higher level of
close-out merchandise, which will enable us to maintain our margin levels. We
expect that these remaining stores will operate at a break-even level.
Distribution
We acquired our property in Canton, Massachusetts, our corporate offices
and distribution center, as part of our acquisition of the Casual Male business.
At the end of fiscal 2003, we terminated the leases of our two other
distribution centers, which were located in Orlando, Florida, and centralized
all of our distribution operations in Canton.
We believe that having one centralized distribution facility minimizes the
delivered cost of merchandise and maximizes the in-stock position of our stores.
We also believe that the centralized distribution system enables our stores to
maximize selling space by reducing necessary levels of back-room stock carried
in each store. In addition, our distribution center provides order fulfillment
services for our e-commerce and catalog businesses.
In fiscal 2004, we partnered with United Parcel Service to improve upon
our distribution methods and reduce shipping costs as a result of not having to
use third party trucking companies. By utilizing UPS, we are able to track all
deliveries from the warehouse to the individual stores and the status of
in-transit shipments. In fiscal 2005, we expect to implement Manhattan
Associates' PKMS warehousing application for our distribution center systems,
which is expected to significantly streamline our distribution processes,
enhance in-transit times, and significantly reduce distribution costs.
Management Information Systems
Since our acquisition of the Casual Male business, one of our primary
goals has been to integrate our systems with those of the acquired business and
to upgrade and enhance current systems where necessary. We have identified
significant cost savings and synergies that we believe can only be realized upon
the completion of this integration and upgrade of the system infrastructure.
At the time of our acquisition, the Casual Male business operated
primarily on an IBM mainframe platform. The mainframe based system included an
internally supported enterprise retail system and a human resource/payroll
application. Our then-existing e-commerce/catalog fulfillment infrastructure
operated on a Hewlett-Packard environment on Ecometry software, and the
remainder of our business operated on an IBM 400 platform. Our financial systems
were supported by a client server environment.
Presently, our management information systems, which are located at our
corporate headquarters in Canton and at all of our retail stores, consist of a
full range of retail merchandising and financial systems that include
merchandise planning and reporting, distribution center processing, inventory
allocation, sales reporting and financial processing and reporting. Until
integration is complete, our Casual Male business will continue to operate
primarily on a mainframe platform, with the e-commerce/catalog business on the
HP environment, and the remainder of the business will operate on the IBM AS/400
platform.
In February 2003, we completed the conversion of the Casual Male business
to our Lawson Financial System. Management now has several tools from which to
manage our business on a consolidated level in a more efficient and effective
manner. We recently implemented the JDA E3 Advanced Replenishment system for the
Casual Male business. This system will be integrated with the current Casual
Male business mainframe platform in an effort to improve sales opportunities and
better manage inventories of basic merchandise.
During fiscal 2005, we plan to complete the systems integration work to
upgrade our merchandising systems to the JDA Portfolio Solutions, specifically
the MMS Merchandise
Management System, E3 Advanced Replenishment, Retail Ideas Data Warehouse, and
Arthur Merchandise Planning and Advanced Allocation systems. In addition, we
also plan to convert our distribution system to Manhattan Associates' PKMS
distribution system.
To implement these initiatives, we spent approximately $4.1 million in
fiscal 2003, will spend approximately $2.7 million in fiscal 2004 and expect to
spend approximately $1.1 million in fiscal 2005 primarily on systems
enhancement, implementation and maintenance. Once our systems are fully
implemented, we should be able to improve sales, better manage our inventory
levels and streamline operations by:
o sharing information with vendors through EDI;
o reducing merchandising in-transit times;
o creating more advanced methods to replenish inventory;
o improving information databases;
o planning store merchandise assortments; and
o reducing MIS related corporate overhead.
Currently, all of our stores have point-of-sale terminals supplied by IBM,
Fujitsu and NCR. The Casual Male business is supported by a point-of-sale
business application provided by Triversity, and the remainder of our business
is supported by a point-of-sale business application by CRS. We utilize a
Microsoft NT / Windows 2000 environment running on a local area network to
communicate and work-share within our corporate headquarters. We also utilize
the services of ADP to prepare, distribute and report our weekly payroll. All of
our payroll processing was consolidated onto the ADP processing effective
January 1, 2003.
Seasonality
Consistent with the retail apparel industry, our business is seasonal. The
Casual Male business traditionally generates the largest volume of its sales
during the Fathers Day selling season in June and the Christmas selling season
in December. Our outlet business, which includes our Levi's"/Dockers" and Ecko
Unltd." outlet stores, traditionally generates largest volumes during the
back-to-school selling season in August and the Christmas selling season in
December. The majority of our operating income is generated in the fourth
quarter as a result of the impact of the Christmas selling season.
Trademarks/Trademark License Agreements and Patents
We own several servicemarks and trademarks relating to our Casual Male
business, including Casual Male(R), Casual Male Big & Tall(R), Harbor Bay(R),
"GF Sport by George Foreman" and "Comfort Zone by George Foreman." We have
applied for a registration of the mark "GF
Sport by George Foreman." We also have pending a U.S. patent application for an
extendable collar system, which is marketed as "neck relaxer."
We operate our Levi's(R)/Dockers(R) business under a trademark license
agreement with Levi Strauss & Co. This agreement authorizes us to use certain
Levi Strauss & Co. trademarks in connection with the operation of our
Levi's(R)/Dockers(R) Outlet by Designs in 25 states in the eastern portion of
the United States and in Puerto Rico. Under our joint venture agreement with
Ecko, we use the Ecko(R) trademark in connection with the operations of our Ecko
Unltd.(R) outlet stores.
Employees
As of November 1, 2003, we had approximately 4,346 employees, of whom
2,826 were full-time personnel. We hire additional temporary employees during
the peak Fall and holiday seasons. None of our employees is represented by any
collective bargaining agreement. We believe our relationship with our employees
is good.
Properties
Our corporate offices and distribution center are located at 555 Turnpike
Street in Canton, Massachusetts. This facility is located on 37 acres of land
and is owned by one of our subsidiaries. The property, which was acquired by us
as part of our Casual Male acquisition, is subject to an outstanding mortgage of
$10.9 million at November 1, 2003. The mortgage is secured by the real estate
and the buildings. The property contains about 750,000 square feet, which
includes approximately 150,000 square feet of office space.
We remain liable on our lease, which expires in January 2006, for our
previous corporate offices located in Needham, Massachusetts. With the exception
of our loss-prevention subsidiary, LP Innovations, Inc., which occupies
approximately 19,000 square feet of the Needham facility, we have relocated all
operations to our Canton offices. Subsequent to March 1, 2003, we entered into a
sub-lease agreement whereby we lease to a third party approximately 17,000
square feet of the total 80,000 square feet of leased space at the Needham
facility. This sublease agreement expires in January 2006.
All of our retail and outlet stores are leased by us directly from
shopping center owners. The store leases are generally five years in length and
generally contain renewal options extending their terms to between 5 and 10
years. Sites for store expansion are selected on the basis of several factors
intended to maximize the exposure of each store to our target customers. These
factors include the demographic profile of the area in which the site is
located, the types of stores and other retailers in the area, the location of
the store within the center and the attractiveness of the store layout. We also
utilize financial models to project the profitability of each location using
assumptions such as the center's sales per square foot averages, estimated
occupancy costs and return on investment requirements. We believe that our
selection of locations enables our stores to attract customers from the general
shopping traffic and to generate our own customers from surrounding areas.
Legal Proceedings
On October 15, 2003, a class action lawsuit was filed against us in the
Superior Court of California, County of Santa Clara, by Robin J. Tucker, a
former employee. The complaint alleges, among other things, that we failed to
pay overtime compensation and to provide meal and rest periods to our California
store managers for the period from May 14, 2002 to the present. We believe we
have substantial legal defenses to these claims and intend to vigorously defend
this action. However, we cannot assure you that such claims will not be
successful in whole or in part.
Although we are a party to litigation and claims arising in the course of
our business, management does not expect the results of these actions to have a
material adverse effect on our business or financial condition.
DESCRIPTION OF MATERIAL INDEBTEDNESS
The following summary of material indebtedness does not purport to be a
complete description of all the terms of these instruments and may not contain
all the material terms of these instruments.
Summary of Material Indebtedness
As of November 1, 2003, our long-term debt was as follows:
(in thousands)
--------------
Credit facility.......................................... $49,474
Term loan................................................ 5,562
12% senior subordinated notes due 2007(1)................ 24,500
5% subordinated notes due 2007........................... 9,625
12% senior subordinated notes due 2010(1)................ 29,560
Mortgage note............................................ 10,958
Total.................................................... $129,679
- -----------
(1) Amounts shown above are inclusive of unamortized warrants described under
12% Senior Subordinated Notes due 2007 and 12% Senior Subordinated Notes
due 2010.
Credit Facility
We have a credit facility with Fleet Retail Finance, Inc., which facility
was most recently amended on November 3, 2003. This credit facility, which
expires on May 14, 2006, provides for a
total commitment of $90 million with our ability to issue documentary and
standby letters of credit of up to $20 million. Our ability to borrow under this
credit facility is determined using an availability formula based on eligible
assets. Our obligations under the credit facility are secured by a lien on all
of our assets. The credit facility includes certain covenants and events of
default customary for credit facilities of this nature, including certain
operating covenants, change of control provisions and limitations on payment of
dividends by us. Borrowings under our credit facility accrue interest at
variable rates. For amounts outstanding under our credit facility, these
interest rates at November 1, 2003 were approximately 4.50% on average for prime
based borrowings and ranged in average between 3.88% to 3.99% for various LIBOR
contracts.
As of November 1, 2003, we had outstanding borrowings of approximately
$49.5 million under the credit facility. Outstanding standby letters of credit
were $775,000 and outstanding documentary letters of credit were approximately
$0.1 million as of November 1, 2003. Average borrowings outstanding under the
credit facility during the first six months of fiscal year 2004 were
approximately $57.1 million, resulting in a corresponding average unused
availability of approximately $16.3 million. As of November 1, 2003, the unused
availability was approximately $29.5 million.
Term Loan
On May 14, 2002, we entered into a three-year term loan with Back Bay
Capital, a subsidiary of Fleet Retail Finance, Inc. This facility expires on May
14, 2006. Interest on the term loan includes a 12% coupon, 3% paid-in-kind and a
3% annual commitment fee, for a total annual yield of 18%. The term loan has the
same operating restrictions as our credit facility. As of August 2, 2003, the
amount of the term loan was $15.4 million. During the third quarter, we made a
payment of $10.0 million in principal. As of November 1, 2003, the remaining
outstanding principal under the term loan was $5.6 million. We have repaid all
amounts outstanding under our term loan.
12% Senior Subordinated Notes due 2007
In May 2002, we also issued $24.5 million principal amount of 12% senior
subordinated notes due 2007 through private placements. The carrying value of
$17.2 million at November 1, 2003 is net of the assigned value of unamortized
warrants to acquire 1,715,000 shares of our common stock at an exercise price of
$0.01 per share and additional detachable warrants to acquire 1,176,471 shares
of our common stock at an exercise price of $8.50 per share.
5% Subordinated Notes due 2007
Also in May 2002 we issued $11.0 million principal amount of 5%
subordinated notes due 2007 through a private placement to the Kellwood Company,
with whom we have entered into a product sourcing agreement. Since May 2003, we
have been required to make principal payments in the amount of $687,500 at the
end of each of our fiscal quarters through the remaining term of the notes.
Accordingly, during each of the second quarter and third quarter of fiscal 2004,
we made a quarterly principal payment of $687,500.
Mortgage Note
In connection with the Casual Male acquisition, we also assumed an
outstanding mortgage note for real estate and buildings located in Canton,
Massachusetts. The mortgage note, which bears interest at an annual rate of 9%,
had an outstanding principal balance of $10.9 million as of November 1, 2003.
12% Senior Subordinated Notes due 2010
Through the end of the third quarter of fiscal year 2004, we issued
through private placements an aggregate of approximately $29.6 million principal
amount of 12% senior subordinated notes due 2010. We also issued, through such
private placements, detachable warrants to purchase 1,182,400 shares of common
stock at exercise prices ranging from $4.76 to $7.63 per share. Such exercise
prices represent the average of the closing prices of our common stock quoted on
the Nasdaq National Market for the period of 30 trading days ending prior to
each of the respective issue dates. The net proceeds from these issuances were
used to reduce borrowings outstanding under our credit facility.
Certain Restrictive Covenants
Our credit facility and our agreements with the holders of our 12% Senior
Subordinated Notes due 2007 and 12% Senior Subordinated Notes due 2010 contain,
among other things, covenants that restrict our and certain of our subsidiaries'
ability to finance future operations or capital needs or to engage in other
business activities. In addition, the senior credit facility and our agreements
with the holders of our 12% Senior Subordinated Notes due 2007 and 12% Senior
Subordinated Notes due 2010 restrict, among other things, our and certain of our
subsidiaries' ability to:
o incur additional indebtedness;
o pay dividends or distributions, or make certain other restricted payments;
o purchase or redeem capital stock;
o make investments and extend credit;
o engage in certain transaction with affiliates;
o engage in sale-leaseback transactions;
o consummate certain asset sales;
o effect a consolidation or merger or sell, transfer, lease, or otherwise
dispose of all or substantially all of our assets; and
o create certain liens and other encumbrances on our assets.
SIGNATURES
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.
CASUAL MALE RETAIL GROUP, INC.
By: /s/ Dennis R. Hernreich
------------------------------
Name: Dennis R. Hernreich
Title: Executive Vice President and
Chief Financial Officer
Date: November 12, 2003