| CASUAL MALE RETAIL GROUP INC Item 1A Risk Factors The following discussion identifies certain important factors that could affect our financial position, our actual results of operations, and our actions and could cause our financial position, results of operations, and our actions to differ materially from any forward-looking statements made by or on behalf of this Company |
| Other factors, which are not identified herein, could also have such an effect |
| The following risk factors are all of the important factors of which we are aware that could cause actual results, performance or achievements to differ materially from those expressed in any of our forward-looking statements |
| We operate in a continually changing business environment and new risk factors emerge from time to time |
| Other unknown or unpredictable factors also could have material adverse effects on our future results, performance or achievements |
| We cannot assure you that projected results or events will be achieved or will occur |
| A large part of our growth has resulted from our acquisition of the Casual Male business from Casual Male Corp |
| in May 2002 and our acquisition of Rochester Big & Tall Clothing in October 2004 and the increased sales volume and profitability provided by these acquisitions |
| We believe that our current level of stores is sufficient to sustain our business and we are not dependent on adding new stores to increase our sales volume and profitability |
| However, for us to be successful in the future and maintain growth, we must be able to continue increasing our market share within the big & tall industry |
| Our growth is dependent on us being successful in attracting new target customers into our stores, catalogs and e-commerce sites |
| We can not assure you that our strategic plans will be successful in attracting customers and growing our market share |
| 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 & 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 & 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 |
| 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 |
| 16 ______________________________________________________________________ [42]Table of Contents 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 President and Chief Executive Officer, or Dennis Hernreich, our Chief Operating Officer and Chief Financial Officer, each of whom is 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 a loss of organizational focus, poor operating execution, an inability to identify and execute potential strategic initiatives, an impairment in our ability to identify new store locations, and 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 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 |
| The loss of, or disruption in, our centralized distribution center could negatively impact our business and operations |
| All merchandise for our 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 strategic 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 |
| With all of our management information systems centralized in our corporate headquarters, any disruption or destruction of our system infrastructure would materially affect our business |
| This type of disaster is mitigated by our offsite stores and disaster recovery plans, but we would still incur business interruption which could impact our business for several weeks |
| 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 merchandise we sell |
| We do not own or operate any manufacturing facilities and are therefore entirely dependent on third parties for the manufacture of the merchandise 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 60prca of our merchandise is 17 ______________________________________________________________________ [43]Table of Contents branded merchandise 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 |
| Our inability to secure 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 likely 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 US domestic suppliers who source their goods from other countries supply most of our remaining merchandise |
| 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 |
| Our business may be adversely affected by economic and foreign issues abroad |
| Over the past year, we have been working toward developing a global sourcing program to support our growing proprietary branded merchandise |
| Economic and civil unrest in areas of the world where we source such merchandise, as well as shipping and dockage issues could adversely impact the availability and cost of such merchandise |
| Political instability, the financial instability of our suppliers, merchandise quality issues, trade restrictions, tariffs, currency exchange rates, transport capacity and costs, inflation and other factors relating to foreign trade are beyond our control |
| In the event of disruptions or delays in deliveries due to economic or political conditions in foreign countries, such disruptions or delays could adversely affect our results of operations unless and until alternative supply arrangements could be made |
| These and other issues affecting our suppliers could adversely affect our business and financial performance |
| 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 |
| 18 ______________________________________________________________________ [44]Table of Contents Our business is seasonal and is affected by general economic conditions |
| Like most other retail businesses, our business is seasonal |
| Historically, over 30prca of our net sales have been made and approximately 70prca 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 |
| 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 and the Rochester brand, including advertising and promotion, and the servicing and merchandising of private label merchandise |
| 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 |
| Acts of terrorism or a catastrophic event could negatively impact our operating results and financial condition |
| Unforeseen events, including war, terrorism and other international conflicts, public health issues, and natural disasters such as earthquakes, hurricanes or other adverse weather and climate conditions, whether occurring in the US or abroad, could disrupt our operations, or the operations of our vendors and other suppliers, or result in political or economic instability |
| 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 |
| During the third quarter of fiscal 2005, four of our Casual Male stores were closed as a result of Hurricanes Katrina, Rita and Wilma |
| One of the four reopened in November 2005 and we expect to re-open the remaining stores during fiscal 2006 |
| The hurricanes did not have a material impact on our financial condition or results of operations for fiscal 2005, and are not expected to have a material impact on our financial condition or results of operations for fiscal 2006 |
| Our property coverage and business interruption insurance mitigated the losses we incurred during fiscal 2005 |
| Risks Related to Our Corporate Structure and Stock Our stock price has been and may continue to be extremely volatile due to many factors |
| The market price of our common stock has fluctuated in the past and may increase or decrease rapidly in the future depending on news announcements and changes in general market conditions |
| Between January 31, 2003 and March 15, 2006, the closing price of our common stock ranged from a low of dlra1dtta95 per share to a high of dlra10dtta56 per share |
| The following factors, among others, may cause significant fluctuations in our stock price: • news announcements regarding quarterly or annual results of operations; • monthly comparable store sales; 19 ______________________________________________________________________ [45]Table of Contents • acquisitions; • competitive developments; • litigation affecting us; or • market views as to the prospects of the retail industry generally |
| Rights of our stockholders may be negatively affected if we issue any of the shares of preferred stock which our Board of Directors has authorized for issuance |
| We have available for issuance 1cmam000cmam000 shares of preferred stock, par value $ |
| Our Board of Directors is authorized to issue any or all of this preferred stock, in one or more series, without any further action on the part of stockholders |
| The rights of our stockholders may be negatively affected if we issue a series of preferred stock in the future that has preference over our common stock with respect to the payment of dividends or distribution upon our liquidation, dissolution or winding up |
| State laws and our certificate of incorporation may inhibit potential acquisition bids that could be beneficial to our stockholders |
| We are subject to certain provisions of Delaware law, which could also delay or make more difficult a merger, tender offer or proxy contest involving us |
| In particular, Section 203 of the Delaware General Corporation Law prohibits a Delaware corporation from engaging in certain business combinations with any interested stockholder for a period of three years unless specific conditions are met |
| In addition, certain provisions of Delaware law could have the effect of delaying, deferring or preventing a change in control of us, including, without limitation, discouraging a proxy contest or making more difficult the acquisition of a substantial block of our common stock |
| The provisions could also limit the price that investors might be willing to pay in the future for shares of our common stock |
| Conversion of the Company’s convertible notes could result in dilution to holders of our common stock |
| If the holders of the Company’s dlra94dtta7 million of convertible notes due 2024 convert such notes, we would be required to issue to such holders approximately 8dtta9 million additional shares of common stock, which would result in dilution to holders of our common stock |
| During the fourth quarter of fiscal 2005, we bought back approximately dlra5dtta3 million of these 2024 convertible notes |
| Substantial leverage and debt service obligations may adversely affect our cash flow |
| At January 28, 2006, we had approximately dlra104dtta5 million of long-term indebtedness |
| We may be unable to generate cash sufficient to pay the principal of, interest on and other amounts due in respect of our indebtedness when due |
| We may also obtain additional long-term debt, working capital lines of credit and lease lines and borrow additional amounts under our existing credit facility |
| Our substantial leverage could have significant negative consequences, including: • increasing our vulnerability to general adverse economic and industry conditions; • limiting our ability to obtain additional financing; • requiring the dedication of a portion of our expected cash flow from operations to service our indebtedness, thereby reducing the amount of our expected cash flow available for other purposes, including capital expenditures; • limiting our flexibility in planning for, or reacting to, changes in our business and the industry in which we compete; and • placing us at a possible competitive disadvantage relative to less leveraged competitors and competitors that have better access to capital resources |