Casual Male Retail Group CMRG
December 23, 2008 - 12:37pm EST by
jsc60
2008 2009
Price: 0.44 EPS
Shares Out. (in M): 0 P/E
Market Cap (in $M): 18 P/FCF
Net Debt (in $M): 0 EBIT 0 0
TEV ($): 0 TEV/EBIT

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Description

CMRG is a retailer catering to overweight men. Nothing unusual except there is very little competition for this customer, and commensurately very few choices for this customer to find a wide selection of product (sorry about that). I have never been fond of tiny cap names, with very limited float, which are resubmitted for consideration after a great decline in price. I am making an exception in this case because it is priced to bankruptcy and has a skewed investor group hurt by hedge fund/ investor concentrations/ redemptions. In my experience, VICers want exhaustive discussion of minutia on very complicated stories. If this story had enough interesting minutia, I’d oblige. But, it doesn’t.

There are three pertinent questions: will the free cash flow be sufficient to pay down debt? Will the company be acquired at a fire-sale price before current shareholders see a satisfactory return? Will the NASDAQ delist them? Suffice it to say that current management is competent, the business model is solid, and that shoppers one day will begin to shop again. The equity market has already anticipated that customers will again buy clothes, and most retailers have seen substantial rallies from their lows. CMRG is one of the exceptions.

Let’s dispatch the simple questions first: the company recently passed a poison pill; NASDAQ recently extended the “deadline” for delisting stocks which trade below $1.00 until Apr2009, so the company has until 20Oct2009 (if not extended) to cure this deficiency. (They have 180 days to cure.)

The Company has stated that it has the intention (and expectation) to retire its debt by the end of 2009. While I do not view that assertion as highly probable, debt reduction will occur at a meaningful rate, and all revolving debt should be retired by Nov2011(the expiry of the current $110m revolver).  After the debt is retired, I would be surprised if the Company did not repurchase stock again, if it remains depressed.

I will post these numbers in a table below: in the last twelve months, net income was  0.58m, d&a was 17.01m, cash flow from operations was  28.12m, and capex was 14.60m; FCF was 13.52m.  EBIT (ltm) was 3.36m, interest expense was 2.35m, and maintenance capex is about 5.00m. So paying down debt will have a big impact on net income especially as CMRG has NOLs; and, the decision to put on hold any expansion (already taken) will have a big impact on FCF.

Key to this thesis, of course, is the income statement. The math is driven entirely by traffic (the number of people who walk into the stores) because both the average selling price, and the conversion rate will remain flat to up. As in any retail business, the fixed costs (leases and people) are relatively high, so that operating leverage is very high. Comp store sales have been declining at about 5%, new store openings have been slashed, and costs “rationalized.” Ergo, projections on net income are highly variable – and based on the unknowable factor of store traffic.  That might be enough caveats to exonerate Bernie Madoff.

Before I attach the income statement and my estimates, some valuation metrics are in order:

Last Trade                           $0.44

Shares                                  41.4m

Mkt Cap                               $18.22

Total Debt                           $62.75

Cash                                      $5.85

Current EV                          $75.12

EBITDA                                 $20.37

EV/ EBITDA(ltm)               3.7x

P/ FCF(ltm)                         1.3x       

Est. Jan-10 EPS                  $.08

P/ E ‘09est                           5.1x

P/ Tang BV                          0.3x

P/ sales(est)                       0.04x    

As the Company pays down debt, reduced interest expense will have a dramatic effect on EPS. Additionally, much higher sales levels will not result in material added expenses. If the stock trades at 10x eps, it is a double from here; if it trades at 4x free cash flow, it is a triple; if it trades at 0.5x sales, it is a 10x return. Given the very high probability of debt payback, the stock is an excellent speculation.

 

Poor'09

 Good'09

 LTM Q3

 LTM Q2

 LTM Q1

Jan-08

-1.8%

-1.0%

Sales/Rev/Turnover

-1.3%

0.0%

-0.6%

-2.3%

     445.00

     450.00

 Sales/Rev/Turnover

    455.00

 461.09

    461.14

   464.13

   (254.00)

   (254.00)

 COGS/F E & P P &G

    257.12

    258.89

    257.45

    258.16

   (190.00)

   (191.10)

 SG&A/Oth Op/Dep Op & Maint

    194.52

 196.11

  195.59

    195.46

          1.00

          4.90

 Op Income (Loss)

         3.36

         6.09

         8.10

      10.51

        (2.00)

        (1.70)

 Interest Expense

         2.35

         2.81

         3.15

         3.13

        (1.00)

          3.20

 Net Inc/Net Profit (Loss)

      (0.58)

      (1.20)

      (0.61)

         0.41

        16.00

        16.00

 Deprec & Amortization

      17.01

      18.13

      17.52

      17.41

 Oth Non-Cash Adj

         5.07

         6.55

         6.94

         7.19

          3.00

          2.50

 Chg in non-cash wc

         6.63

         1.54

      (8.81)

    (13.27)

        18.00

        21.70

 Cashflow-operating act

      28.12

      25.02

      15.03

      11.74

        (5.00)

        (5.66)

 Capital Ex/Prop Add

    (14.60)

    (17.60)

    (19.40)

    (21.38)

        13.00

        16.04

 FCF 

      13.52

         7.42

      (4.37)

      (9.64)

        0.31

        0.39

 FCF/ sh

     (0.02)

        0.08

 EPS

 

Catalyst

Someone should takeover this company -- I have no idea if they will.
Debt reduction will impact EPS and investor confidence -- hence, multiples.
    sort by   Expand   New

    Description

    CMRG is a retailer catering to overweight men. Nothing unusual except there is very little competition for this customer, and commensurately very few choices for this customer to find a wide selection of product (sorry about that). I have never been fond of tiny cap names, with very limited float, which are resubmitted for consideration after a great decline in price. I am making an exception in this case because it is priced to bankruptcy and has a skewed investor group hurt by hedge fund/ investor concentrations/ redemptions. In my experience, VICers want exhaustive discussion of minutia on very complicated stories. If this story had enough interesting minutia, I’d oblige. But, it doesn’t.

    There are three pertinent questions: will the free cash flow be sufficient to pay down debt? Will the company be acquired at a fire-sale price before current shareholders see a satisfactory return? Will the NASDAQ delist them? Suffice it to say that current management is competent, the business model is solid, and that shoppers one day will begin to shop again. The equity market has already anticipated that customers will again buy clothes, and most retailers have seen substantial rallies from their lows. CMRG is one of the exceptions.

    Let’s dispatch the simple questions first: the company recently passed a poison pill; NASDAQ recently extended the “deadline” for delisting stocks which trade below $1.00 until Apr2009, so the company has until 20Oct2009 (if not extended) to cure this deficiency. (They have 180 days to cure.)

    The Company has stated that it has the intention (and expectation) to retire its debt by the end of 2009. While I do not view that assertion as highly probable, debt reduction will occur at a meaningful rate, and all revolving debt should be retired by Nov2011(the expiry of the current $110m revolver).  After the debt is retired, I would be surprised if the Company did not repurchase stock again, if it remains depressed.

    I will post these numbers in a table below: in the last twelve months, net income was  0.58m, d&a was 17.01m, cash flow from operations was  28.12m, and capex was 14.60m; FCF was 13.52m.  EBIT (ltm) was 3.36m, interest expense was 2.35m, and maintenance capex is about 5.00m. So paying down debt will have a big impact on net income especially as CMRG has NOLs; and, the decision to put on hold any expansion (already taken) will have a big impact on FCF.

    Key to this thesis, of course, is the income statement. The math is driven entirely by traffic (the number of people who walk into the stores) because both the average selling price, and the conversion rate will remain flat to up. As in any retail business, the fixed costs (leases and people) are relatively high, so that operating leverage is very high. Comp store sales have been declining at about 5%, new store openings have been slashed, and costs “rationalized.” Ergo, projections on net income are highly variable – and based on the unknowable factor of store traffic.  That might be enough caveats to exonerate Bernie Madoff.

    Before I attach the income statement and my estimates, some valuation metrics are in order:

    Last Trade                           $0.44

    Shares                                  41.4m

    Mkt Cap                               $18.22

    Total Debt                           $62.75

    Cash                                      $5.85

    Current EV                          $75.12

    EBITDA                                 $20.37

    EV/ EBITDA(ltm)               3.7x

    P/ FCF(ltm)                         1.3x       

    Est. Jan-10 EPS                  $.08

    P/ E ‘09est                           5.1x

    P/ Tang BV                          0.3x

    P/ sales(est)                       0.04x    

    As the Company pays down debt, reduced interest expense will have a dramatic effect on EPS. Additionally, much higher sales levels will not result in material added expenses. If the stock trades at 10x eps, it is a double from here; if it trades at 4x free cash flow, it is a triple; if it trades at 0.5x sales, it is a 10x return. Given the very high probability of debt payback, the stock is an excellent speculation.

     

    Poor'09

     Good'09

     LTM Q3

     LTM Q2

     LTM Q1

    Jan-08

    -1.8%

    -1.0%

    Sales/Rev/Turnover

    -1.3%

    0.0%

    -0.6%

    -2.3%

         445.00

         450.00

     Sales/Rev/Turnover

        455.00

     461.09

        461.14

       464.13

       (254.00)

       (254.00)

     COGS/F E & P P &G

        257.12

        258.89

        257.45

        258.16

       (190.00)

       (191.10)

     SG&A/Oth Op/Dep Op & Maint

        194.52

     196.11

      195.59

        195.46

              1.00

              4.90

     Op Income (Loss)

             3.36

             6.09

             8.10

          10.51

            (2.00)

            (1.70)

     Interest Expense

             2.35

             2.81

             3.15

             3.13

            (1.00)

              3.20

     Net Inc/Net Profit (Loss)

          (0.58)

          (1.20)

          (0.61)

             0.41

            16.00

            16.00

     Deprec & Amortization

          17.01

          18.13

          17.52

          17.41

     Oth Non-Cash Adj

             5.07

             6.55

             6.94

             7.19

              3.00

              2.50

     Chg in non-cash wc

             6.63

             1.54

          (8.81)

        (13.27)

            18.00

            21.70

     Cashflow-operating act

          28.12

          25.02

          15.03

          11.74

            (5.00)

            (5.66)

     Capital Ex/Prop Add

        (14.60)

        (17.60)

        (19.40)

        (21.38)

            13.00

            16.04

     FCF 

          13.52

             7.42

          (4.37)

          (9.64)

            0.31

            0.39

     FCF/ sh

         (0.02)

            0.08

     EPS

     

    Catalyst

    Someone should takeover this company -- I have no idea if they will.
    Debt reduction will impact EPS and investor confidence -- hence, multiples.

    Messages


    SubjectComments
    Entry12/24/2008 10:12 AM
    Membercanuck272
    I agree with you that this is a great risk-reward, and we recently bought a small position. However, I don't think you adequately spelled out the downside. Certainly, for any retailer, you have to consider the possibility that comps are down 5 or 10 or even 15% next year, and given the debt and the leverage inherent in the leases, at a certain point the company can get into real trouble with negative comps.

    Subjectcomps
    Entry12/26/2008 11:53 AM
    Memberjsc60
    I will not suggest that this company will survive another 18 mths of -10% comps. But comps have not been all that bad (in the top decile of retailers), and the "lapping" of poor sales will make the comps "better" as a simple mathematical comparison. Remember this is a free cash flow story, and even with negative comps (which I have posted), the fcf should be enough to retire some debt....and if they get down enough, the banks will extend the revolver.
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