Casual Male Stands Tall

Higher inflation could soon start taking a toll on the U.S. consumer, and that means high-end retailers such as Coach (COH Quote) and Nordstrom (JWN Quote) could see a chill in luxury sales. So we scoured the under-$10 universe for a way to play a more budget-conscious consumer, and came up with retailer Casual Male Retail Group (CMRG Quote).

The company appeared on our radar screen as a low-dollar way to play a slowdown in consumer spending on high-end clothing. Casual Male group has been publicly traded for 15 years and sells casual and formal attire for big-and-tall men through its 500 stores in the U.S. and Europe.

Industry experts say the big-and-tall market is currently $5.5 billion to $6 billion, and research firm Thompson Davis reports that 49 states now classify 15% or more of their population as obese, vs. just four states in 1991, giving Casual Male an expanding customer base.

While investors have had their fair share of ups and downs with Casual Male -- the company has changed business strategies three times in the past 15 years -- recent events make the retailer's story compelling.

In 2004, Casual Male sold off its stake in Levi's and Dockers outlet stores and bought high-end, big-and-tall company Rochester Big & Tall. Rochester cost Casual Male $15 million in cash and the assumption of $5 million in debt, and added 22 stores to its total store count. The swap-out of outlets and into Rochester refocused Casual Male on its core business and should lead to operating efficiencies in the future.

In addition, Casual Male now carries name-brand clothing in big-and-tall sizes, providing its customers -- regardless of height or weight -- the opportunity to wear the latest in fashion. Partners include Polo, Perry Ellis and Sean John. And in 2003, the company began working with boxing legend George Foreman to offer sporty clothing for the big-and-tall male.

Casual Male announced second-quarter earning results on Aug. 18 of 4 cents a share on sales of $100.6 million, matching analyst expectations. Year over year, this represented a 23% sales improvement and a 100% EPS improvement.

The consensus outlook for full-year 2005 calls for sales of $440 million and earnings of 23 cents a share, a nice potential boost from 2004 levels when the company earned 2 cents a share on sales of $365 million. The Street's earnings consensus looks attainable given Casual Male's recent initiatives designed to increase store traffic through a customer loyalty program and its plans to add another 5% to its total store count by the end of 2006.

Despite our bullish take on the company, not everyone believes Casual Male's turnaround will gain traction with consumers.

As with most retailers, the company's success is tied to the consumer's spending habits. A slower economy could hurt the company's prospects (though we believe this could actually be a catalyst because of the lower price points at Casual Male stores). And last, about 11% of the float is sold short, although we believe this is largely the work of convertible arbitragers trying to hedge against the company's 5% convertibles due in 2024.