Destination XL (DXLG) 10-Q 2009 Q1 Quarterly report

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

Quarterly Report Pursuant to Section 13 or 15(d)

of the Securities Exchange Act of 1934

For the Quarterly Period
Ended May 3, 2008	Commission File Number 0-15898

CASUAL MALE RETAIL GROUP, INC.

(Exact name of registrant as specified in its charter)

Delaware	04-2623104
(State or other jurisdiction of incorporation or organization)	(IRS Employer Identification No.)

555 Turnpike Street, Canton, MA	02021
(Address of principal executive offices)	(Zip Code)

(781) 828-9300

(Registrant’s telephone number, including area code)

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  x    No  ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer	¨	Accelerated filer	x
Non-accelerated filer	¨	(Do not check if a smaller reporting company)
Smaller reporting company	¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ¨    No  x

The number of shares of common stock outstanding as of May 18, 2008 was 41,403,202.

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements.

CASUAL MALE RETAIL GROUP, INC.

CONSOLIDATED BALANCE SHEETS

(In thousands, except share data)

	May 3, 2008			February 2, 2008
	(unaudited)
ASSETS
Current assets:
Cash and cash equivalents	$	6,381		$	5,293
Accounts receivable		2,499			2,813
Inventories		123,558			117,787
Deferred income taxes		8,107			8,885
Prepaid expenses and other current assets		13,708			11,503
Total current assets		154,253			146,281
Property and equipment, net of accumulated depreciation and amortization		60,733			62,156
Other assets:
Goodwill		60,660			60,660
Other intangible assets		35,112			35,191
Deferred income taxes		20,420			19,732
Other assets		1,316			1,341
Total assets	$	332,494		$	325,361
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Current portion of long-term debt	$	4,874		$	4,874
Current portion of deferred gain on sale-leaseback		1,465			1,465
Accounts payable		29,153			34,187
Income taxes payable		—			—
Accrued expenses and other current liabilities		24,100			23,808
Notes payable		53,996			40,978
Total current liabilities		113,588			105,312
Long-term liabilities:
Deferred gain on sale-leaseback, net of current portion		24,546			24,912
Long-term debt, net of current portion		11,231			12,450
Other long-term liabilities		643			746
Total liabilities		150,008			143,420
Stockholders’ equity:
Preferred stock, $0.01 par value, 1,000,000 shares authorized, none outstanding at May 3, 2008 and February 2, 2008		—			—
Common stock, $0.01 par value, 75,000,000 shares authorized, 52,280,480 and 52,266,840 shares issued at May 3, 2008 and February 2, 2008, respectively		523			523
Additional paid-in capital		271,879			271,354
Accumulated deficit		(739	)		(835	)
Treasury stock at cost, 10,877,439 shares at May 3, 2008 and February 2, 2008		(87,977	)		(87,977	)
Accumulated other comprehensive loss		(1,200	)		(1,124	)
Total stockholders’ equity		182,486			181,941
Total liabilities and stockholders’ equity	$	332,494		$	325,361

The accompanying notes are an integral part of the consolidated financial statements.

CASUAL MALE RETAIL GROUP, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

(In thousands, except per share data)

(Unaudited)

	For the three months ended
	May 3, 2008			May 5, 2007
Sales	$	107,642		$	110,631
Cost of goods sold, including occupancy		59,303			60,007
Gross profit		48,339			50,624
Expenses:
Selling, general and administrative		43,320			43,342
Depreciation and amortization		4,168			4,024
Total expenses		47,488			47,366
Operating income		851			3,258
Other income, net		130			138
Interest expense, net		(821	)		(807	)
Income from continuing operations before income taxes		160			2,589
Provision for income taxes		64			1,036
Income from continuing operations		96			1,553
Loss from discontinued operations, net of taxes		—			(429	)
Net income	$	96		$	1,124
Net income per share – basic
Income from continuing operations	$	0.00		$	0.04
Loss from discontinued operations	$	0.00		$	(0.01	)
Net income per share – basic	$	0.00		$	0.03
Net income per share – diluted
Income from continuing operations	$	0.00		$	0.04
Loss from discontinued operations	$	0.00		$	(0.01	)
Net income per share – diluted	$	0.00		$	0.03
Weighted average number of common shares outstanding
- basic		41,391			42,191
- diluted		41,692			44,383

The accompanying notes are an integral part of the consolidated financial statements.

CASUAL MALE RETAIL GROUP, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

(Unaudited)

	Three Months Ended
	May 3, 2008			May 5, 2007
Cash flows from operating activities:
Net income	$	96		$	1,124
Adjustments to reconcile net income to net cash used for operating activities:
Loss from discontinued operations, net of tax		—			429
Depreciation and amortization		4,168			4,057
Amortization of deferred gain from sale-leaseback		(366	)		(366	)
Issuance of common stock to Board of Directors		61			49
Stock based compensation expense		464			426
Loss from disposal of property and equipment		98			—
Changes in operating assets and liabilities:
Accounts receivable		184			159
Inventories		(5,771	)		(8,155	)
Prepaid expenses		(2,178	)		660
Other assets		(4	)		(37	)
Accounts payable		(5,036	)		(4,476	)
Income taxes payable		63			521
Accrued expenses and other current liabilities		115			(5,792	)
Net cash used for operating activities		(8,106	)		(11,401	)
Cash flows from investing activities:
Additions to property and equipment		(2,735	)		(4,711	)
Net proceeds from sale of subsidiary, LP Innovations, Inc.		130			138
Net cash used for investing activities		(2,605	)		(4,573	)
Cash flows from financing activities:
Net borrowings under credit facility		13,018			47,071
Principal payments on long-term debt		(1,219	)		(688	)
Repurchase of common stock		—			(38,343	)
Issuance of common stock under option program and warrants		—			9,262
Net cash provided by financing activities		11,799			17,302
Net change in cash and cash equivalents		1,088			1,328
Cash and cash equivalents:
Beginning of the period		5,293			5,325
End of the period	$	6,381		$	6,653

The accompanying notes are an integral part of the consolidated financial statements.

CASUAL MALE RETAIL GROUP, INC.

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY

For the three months ended May 3, 2008

(In thousands)

	Common Stock			Additional Paid-in Capital		Treasury Stock					Accumulated Deficit			Accumulated other comprehensive loss			Total
	Shares	Amounts				Shares		Amounts
Balance at February 2, 2008	52,267	$	523	$	271,354	(10,877	)	$	(87,977	)	$	(835	)	$	(1,124	)	$	181,941
Stock-based compensation expense					464													464
Board of Directors compensation	13		—		61													61
Other comprehensive loss- foreign currency															(76	)		(76	)
Net income												96						96
Total comprehensive income																		20
Balance at May 3, 2008	52,280	$	523	$	271,879	(10,877	)	$	(87,977	)	$	(739	)	$	(1,200	)	$	182,486

The accompanying notes are an integral part of the consolidated financial statements.

CASUAL MALE RETAIL GROUP, INC,

Notes to Consolidated Financial Statements

1. Basis of Presentation

In the opinion of management of Casual Male Retail Group, Inc., a Delaware corporation (the “Company”), the accompanying unaudited consolidated financial statements contain all adjustments necessary for a fair presentation of the interim financial statements. These financial statements do not include all disclosures associated with annual financial statements and, accordingly, should be read in conjunction with the notes to the Company’s audited consolidated financial statements for the fiscal year ended February 2, 2008 included in the Company’s Annual Report on Form 10-K, which was filed with the Securities and Exchange Commission on March 26, 2008.

The information set forth in these statements may be subject to normal year-end adjustments. The information reflects all adjustments that, in the opinion of management, are necessary to present fairly the Company’s results of operations, financial position and cash flows for the periods indicated. The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. The Company’s business historically has been seasonal in nature, and the results of the interim periods presented are not necessarily indicative of the results to be expected for the full year.

The Company’s fiscal year is a 52- or 53- week period ending on the Saturday closest to January 31. Fiscal 2008 is a 52-week period ending on January 31, 2009. Fiscal 2007 was a 52-week period ending on February 2, 2008.

Prior Year Reclassifications

Results for the first quarter of fiscal 2007 have been restated to reflect the operating results of the Company’s Jared M. business as discontinued operations. See Note 5, “Discontinued Operations.”

Segment Information

The Company reports its operations as one reportable segment, Big & Tall Men’s Apparel, which consists of two operating segments—Casual Male and Rochester. The Company considers its operating segments to be similar in terms of economic characteristics, production processes and operations, and have therefore aggregated them into a single reporting segment.

Goodwill

The Company accounts for goodwill pursuant to SFAS No. 141,Business Combinations,and SFAS No. 142,Goodwill and Other Intangible Assets. Pursuant to SFAS 142,at least annually, the Company evaluates goodwill, based on its two separate operating segments, its Casual Male business and its Rochester business, by comparing the current carrying value of goodwill with the fair value of the net assets of the Company. The goodwill assigned to each operating segment represents the initial purchase price allocation to goodwill as a result of their respective acquisitions.

Stock-based Compensation

The Company accounts for stock-based compensation pursuant to the provisions of Statement of Financial Accounting Standards No. 123 (revised 2004),Share-Based Payment(SFAS 123R), which requires that all share-based payments, including grants of employee stock options, be recognized as an expense in the statement of operations based on their fair values and vesting periods. The fair value of stock options is determined using the Black-Scholes valuation model and requires the input of subjective assumptions. These assumptions include estimating the length of time employees will retain their vested stock options before exercising them (the “expected term”), the estimated volatility of the Company’s common stock price over the expected term and the number of options that will ultimately not complete their vesting requirements (“forfeitures”). As required under the accounting rules, the Company reviews its valuation assumptions at each grant date and, as a result, is likely to change its valuation assumptions used to value employee stock-based awards granted in future periods. The values derived from using the Black-Scholes model are recognized

as expense over the vesting period, net of estimated forfeitures. The estimation of stock-based awards that will ultimately vest requires significant judgment. Actual results, and future changes in estimates, may differ from the Company’s current estimates.

For the first three months of fiscal 2008 and fiscal 2007, the Company recognized total compensation expense of $0.5 million and $0.4 million, respectively. The total compensation cost related to non-vested awards not yet recognized as of May 3, 2008 is approximately $3.3 million which will be expensed over a weighted average remaining life of 22.9 months.

Valuation Assumptions for Stock Options

For the first three months of fiscal 2008 and fiscal 2007, 570,000 and 458,387 stock options were granted, respectively. The weighted-average exercise price of the 570,000 stock options was $4.51 per share. The fair value of each option was estimated on the date of grant using the Black-Scholes option-pricing model with the following assumptions used for grants for the three months ended May 3, 2008 and May 5, 2007:

	May 3, 2008		May 5, 2007
Expected volatility	45.0	%	40.0	%
Risk-free interest rate	2.39	%	4.50%-4.53	%
Expected life	3.5-4.5 yrs		3.0 yrs.
Dividend rate	—		—

Expected volatilities are based on historical volatilities of the Company’s common stock; the expected life represents the weighted average period of time that options granted are expected to be outstanding giving consideration to vesting schedules and historical exercise patterns; and the risk-free rate is based on the U.S. Treasury yield curve in effect at the time of grant for periods corresponding with the expected life of the option.

There were no material exercises of options or warrants during the first quarter of fiscal 2008.

2. Debt

Credit Agreement with Bank of America Retail Group, Inc.

At May 3, 2008, the Company had outstanding borrowings of $54.0 million under its credit facility, as most recently amended December 20, 2007, with Bank of America, N.A. (the “Credit Facility”). The maturity date of the Credit Facility is October 29, 2011. Outstanding standby letters of credit were $2.7 million and outstanding documentary letters of credit were $1.1 million. Average monthly borrowings outstanding under this facility during the first three months of fiscal 2008 were approximately $50.6 million, resulting in an average unused excess availability of approximately $47.6 million. Unused excess availability at May 3, 2008 was $46.9 million. The Company’s obligations under the Credit Facility are secured by a lien on all of its assets. The Company is not subject to any financial covenants pursuant to this Credit Facility.

The fair value of amounts outstanding under the Credit Facility approximates the carrying value at May 3, 2008. At the Company’s option, any portion of the outstanding borrowings can be converted to LIBOR-based contracts; the remainder bears interest based on prime. At May 3, 2008, the prime-based interest rate was 5.00%. The Company had approximately $49.0 million of its outstanding borrowings in LIBOR-based contracts with interest rates ranging from 3.71% to 5.46%. The LIBOR-based contracts expire at various dates between May 4, 2008 and May 26, 2008.

Master Loan and Security Agreement with Banc of America Leasing & Capital, LLC

On July 20, 2007, the Company entered into a Master Loan and Security Agreement (the “Master Agreement”) with Banc of America Leasing & Capital, LLC (“BALC”) for equipment financing. In conjunction with the Master Agreement, the Company entered into an Equipment Security Note (the “First Secured Note”), whereby it borrowed an aggregate of $17.4 million from BALC. The First Secured Note is due July 20, 2011.

On January 16, 2008, the Company entered into a second Equipment Security Note (the “Second Secured Note”) pursuant to the same terms and provisions of the Master Agreement, whereby it borrowed an additional $2.1 million. The Second Secured Note is due January 16, 2012.

Both secured notes accrue interest at a per annum rate of 1.75% plus the rate of interest equal to the 30-day published LIBOR rate. Principal and interest, in arrears, are payable monthly, commencing one month after issuance of such note. At May 3, 2008, the outstanding balance of the secured notes was $16.1 million.

Both notes are secured by a security interest in all of the Company’s rights, title and interest in and to certain equipment. The Company is not subject to any financial covenants pursuant to the Master Agreement.

3. Equity

Earnings per Share

The following table provides a reconciliation of the number of shares outstanding for basic and diluted earnings per share:

	For the three months ended
	May 3, 2008	May 5, 2007
(in thousands)
Common Stock Outstanding
Basic weighted average common shares outstanding	41,391	42,191
Common Stock Equivalents -Stock options and warrants	301	2,192
Diluted weighted average common shares outstanding	41,692	44,383

The following potential common stock equivalents were excluded from the computation of diluted earnings per share in each period because the exercise price of such options and warrants was greater than the average market price per share of common stock for the respective periods.

	For the three months ended
	May 3, 2008		May 5, 2007
(in thousands, except exercise prices)
Options		4,533		1,193
Warrants		1,058		—
Range of exercise prices of such options and warrants	$	4.35 - $12.35	$	9.27 - $12.35

The above options, which were outstanding and out-of-the-money at May 3, 2008, expire from June 14, 2011 to October 22, 2017.

4. Income Taxes

At May 3, 2008, the Company had total gross deferred tax assets of approximately $29.7 million, with a corresponding valuation allowance of $1.2 million. These tax assets principally relate to federal net operating loss carryforwards that expire from 2018 through 2024 and to a lesser extent book/tax timing differences. The valuation allowance is for losses associated with the Company’s Canada operations and certain state net operating losses, the benefit of which may not be recognized due to short carryforward periods.

The Company complies with FASB Interpretation 48,Accounting for Uncertainty in Income Taxes (“FIN 48”). A tax position is recognized as a benefit only if it is “more likely than not” that the tax position would be sustained in a tax examination, with a tax examination being presumed to occur. The amount recognized is the largest amount of tax benefit that is greater than 50% likely of being realized on examination. For tax positions not meeting the “more likely than not” test, no tax benefit is recorded. The charge for taxation is based on the results for the year as adjusted for items that are non-assessable or disallowed. The charge is calculated using tax rates that have been enacted or substantively enacted by the balance sheet date. Pursuant to FIN 48, the Company will recognize the benefit from a tax position only if it is more likely than not that the position would be sustained upon audit based solely on the technical merits of the tax position. At May 3, 2008, the Company had no material unrecognized tax benefits based on the provisions of FIN 48.

The Company is subject to U.S. federal income tax as well as income tax of multiple state and foreign jurisdictions. The Company has concluded all U.S. federal income tax matters for years through fiscal 1997, with remaining fiscal years subject to income tax examination by federal tax authorities.

The Company’s policy is to recognize accrued interest and penalties related to unrecognized tax benefits in its income tax provision. The Company has not accrued or paid interest or penalties which were material to its results of operations for the first three months of fiscal 2008.

5. Discontinued Operations

During the fourth quarter of fiscal 2007, the Company exited its Jared M. operations, and therefore results for the first quarter of fiscal 2007 have been restated to reflect the operating results of the Company’s Jared M. business as discontinued operations.

During the first quarter of fiscal 2008, the Company sold its Jared M. business to a third party for a cash purchase price of $250,000. No material gain or loss was recognized on the sale.

The following table summarizes the results from discontinued operations from the Jared M. business for the first quarter of fiscal 2007:

(in millions)	Fiscal 2007
Sales	$	0.7
Gross margin		0.3
Selling, general and administrative expenses		(1.0	)
Depreciation and amortization		—
		(0.7	)
Benefit from income taxes		0.3
Loss from discontinued operations, net of taxes	$	(0.4	)

6. Accounting Pronouncements

In December 2007, the FASB issued FAS No. 141 (revised 2007),Business Combinations, (“FAS 141R”), which changes how business combinations are accounted for and will impact financial statements both on the acquisition date and in subsequent periods. FAS 141R is effective January 1, 2009, and will be applied prospectively. The impact of adopting FAS 141R will depend on the nature and terms of future acquisitions.

In December 2007, the FASB issued FAS No. 160,Noncontrolling Interests in Consolidated Financial Statements(“FAS 160”), which changes the accounting and reporting standards for the noncontrolling interests in a subsidiary in consolidated financial statements. FAS 160 recharacterizes minority interests as noncontrolling interests and requires noncontrolling interests to be classified as a component of shareholders’ equity. FAS 160 is effective January 1, 2009 and requires retroactive adoption of the presentation and disclosure requirements for existing minority interests. The Company is currently evaluating the impact of FAS 160 on its consolidated financial statements.

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

FORWARD-LOOKING STATEMENTS

Certain statements contained in this Quarterly Report on Form 10-Q constitute “forward-looking statements” within the meaning of the United States Private Securities Litigation Reform Act of 1995. In some cases, forward-looking statements can be identified by the use of forward-looking terminology such as “may,” “will,” “estimate,” “intend,” “plan,” “continue,” “believe,” “expect” or “anticipate” or the negatives thereof, variations thereon or similar terminology. The forward-looking statements contained in this Quarterly Report are generally located in the material set forth under the heading “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” but may be found in other locations as well. These forward-looking statements generally relate to plans and objectives for future operations and are based upon management’s reasonable estimates of future results or trends. The forward-looking statements in this Quarterly Report should not be regarded as a representation by us or any other person that our objectives or plans will be achieved. Numerous factors could cause our actual results to differ materially from such forward-looking statements. We encourage readers to refer to Part I, Item 1A of our Annual Report on Form 10-K for the year ended February 2, 2008, filed with the Securities and Exchange Commission on March 26, 2008, which identifies certain risks and uncertainties that may have an impact on our future earnings and the direction of our Company.

All subsequent written and oral forward-looking statements attributable to us or to persons acting on our behalf are expressly qualified in their entirety by the foregoing. These forward-looking statements speak only as of the date of the document in which they are made. We disclaim any obligation or undertaking to provide any updates or revisions to any forward-looking statement to reflect any change in our expectations or any change in events, conditions or circumstances in which the forward-looking statement is based.

BUSINESS SUMMARY

Casual Male Retail Group, Inc. together with our subsidiaries (the “Company”) is the largest specialty retailer of big & tall men’s apparel with retail operations throughout the United States, Canada and London, England. We operate 466 Casual Male XL retail and outlet stores, 26 Rochester Big & Tall stores and a direct to consumer business, which includes several catalogs and e-commerce sites.

Unless the context indicates otherwise, all references to “we,” “ours,” “our,” “us” and “the Company” refer to Casual Male Retail Group, Inc. and its consolidated subsidiaries. We refer to our fiscal years which end on February 2, 2008 and February 3, 2007 as “fiscal 2008” and “fiscal 2007,” respectively.

When discussing sales growth, we refer to the term “comparable sales.” Comparable sales for all periods discussed include our retail stores that have been open for at least one full year together with our e-commerce and catalog sales. Stores that may have been remodeled, expanded or re-located during the period are also included in our determination of comparable sales. We include our direct businesses as part of our calculation of comparable sales because we are a multi-channel retailer, offering our customers convenient alternatives for their shopping. The method of calculating comparative store sales varies across the retail industry and, as a result, our calculation of comparable sales is not necessarily comparable to similarly titled measures reported by other companies.

RESULTS OF OPERATIONS

Financial Summary

Our net income for the first quarter fiscal 2008 was $96,000, or $0.00 per diluted share, as compared to $1.1 million, or $.03 per diluted share, for the first quarter of fiscal 2007. As we had expected, our decrease in earnings from last year for the first quarter were the result of our sales shortfall. Customer traffic to our retail and direct channels continues to be negatively impacted by the current economic environment. However, our sales productivity as measured by customer conversion and dollars per transaction has improved in the first quarter helping to moderate the lower customer traffic.

Although we were not able to produce sales growth during the first quarter, we were able to maintain our merchandise margins and control our selling, general and administrative (“SG&A”) costs, while still working on investing in our marketing campaigns and growing our direct businesses.

Given that the first quarter results were in line with our expectations, we anticipate that our fiscal 2008 earnings will still approximate $0.25-$0.30 per diluted share. During this fiscal year, we expect to increase our market share by:

• intensifying our goal of improving market share by increasing our marketing spend to almost 8% of sales, up from just over 7% in fiscal 2007. This increase will support the mass media marketing campaign which is planned for the second quarter of fiscal 2008, without compromising our traditional direct mail campaigns;

• increasing focus on customer service by providing better sales training and development tools to our sales associates to enhance our customer experience;

• improving upon our methodology of planning and allocating appropriate assortments to each store, considering the demographics and lifestyle tendencies of each store location;

• continuing to grow our direct businesses, including Living XL, Shoes XL and B&T Factory Direct; and

• launching our primary brands, Casual Male XL and Rochester, on web sites in the European Union in the third quarter of fiscal 2008.

Sales

For the first quarter of fiscal 2008, sales of $107.6 million were down slightly when compared to sales of $110.6 million for the first quarter of fiscal 2007. The sales shortfall of $3.0 million was primarily driven by a decrease in our comparable sales of 2.0%, which includes a comparable sales decrease of 4.7% from our core businesses. Our non-core businesses, which include Living XL, Shoes XL and B&T Factory Direct, generated sales of $3.6 million for the first quarter of fiscal 2008 as compared to $0.5 million for last year’s first quarter.

Our retail channel had a comparable decrease of 4.1% for the first quarter which was partially offset by an increase of 9.4% from our direct channel businesses. During the first quarter, our sales productivity in our retail channel, as measured by customer conversion rate and dollars per transaction, improved by approximately 5% partially offsetting the negative customer traffic trends.

In May and June 2008, we will be launching our new mass media campaign. Our intent is that this media blitz will attract a new customer to our stores and direct businesses. We will be focusing our advertising on our “XL” size customers who may not presently shop Casual Male XL.

Given the uncertainty in the retail market, for fiscal 2008 we anticipate that our sales will approximate $470 to $480 million, based on comparable sales from our core businesses of between flat to -2.0%.

Gross Profit Margin

For the first quarter of fiscal 2008, our gross margin rate, inclusive of occupancy costs, was 44.9% as compared to a gross margin rate of 45.8% for the first quarter of fiscal 2007. The decrease in gross margin rate, was the result of a 90 basis point increase in occupancy costs as a percentage of sales. This increase is due partly to increased costs associated with four new store openings during the first quarter of fiscal 2008 as well as the impact of occupancy, as a percentage, on a lower sales base. Merchandise margins remained the same for the first quarter of fiscal 2008 as compared to last year.

We anticipate that our gross margins for fiscal 2008 will be approximately 50 basis points over fiscal 2007 gross margin levels, with the improvement expected in the second half of the year.

Selling, General and Administrative Expenses

SG&A expenses for the first quarter of fiscal 2008 were 40.2% of sales as compared to 39.2% for the first quarter of fiscal 2007. On a dollar basis, our SG&A costs were flat compared to the prior year’s first quarter. During the first quarter of fiscal 2008, SG&A costs for our non-core businesses increased $1.7 million over the prior year. This increase was largely offset by improved productivity in our distribution center and by overall cost savings in our corporate overhead.

For fiscal 2008, we expect our SG&A levels to approximate $180.0 million as compared to $178.1 million in fiscal 2007. Although strong expense control will be a priority for us in fiscal 2008, it will also be important that we invest our SG&A dollars into our key marketing and merchandising initiatives as discussed above.

Interest Expense, Net

Net interest expense was $0.8 million for the first quarter of fiscal 2008 and fiscal 2007. Although average borrowings for the first quarter of fiscal 2008 are higher than the prior year, our average interest rate costs are lower due to reduced interest rates. Our average interest rate at the end of the first quarter of fiscal 2008 approximated 4.5% compared to approximately 7.0% at the end of the first quarter of fiscal 2007. See our Liquidity and Capital Resources discussion below.

Income Taxes

Based on net operating loss carryforwards available to us, we expect that cash payments for taxes will continue to be minimal at this time. At May 3, 2008, our total gross deferred tax assets were approximately $29.7 million, with a corresponding valuation allowance of $1.2 million. These tax assets principally relate to federal net operating loss carryforwards that expire through 2024. The valuation allowance of $1.2 million is for losses associated with our Canadian operations and certain state net operating losses, the benefit of which may not be recognized due to short carryforward periods.

Net Income

For the first quarter of fiscal 2008, we had net income of $96,000, or $0.00 per diluted share, as compared to net income of $1.1 million, or $0.03 per diluted share, for the first quarter of fiscal 2007. The results for the first quarter of fiscal 2007, included a loss from discontinued operations of $0.4 million, or $(0.01) per diluted share, related to our Jared M. business, which we exited in the fourth quarter of fiscal 2007. See Note 5 to the Consolidated Financial Statements for more information.

Inventory

At May 3, 2008, total inventory was $123.6 million compared to $117.8 million at February 2, 2008 and $122.7 million at May 5, 2007.

Inventory at the end of the first quarter of fiscal 2008 increased 4.9% as compared to February 2, 2008 and increased less than 1.0% compared to May 5, 2007. The increase in inventory during the first quarter represents seasonal inventory buildup for our spring season which was less in the first quarter of 2008 compared to last year’s 7% increase during the first quarter of 2007. We expect to reduce inventory levels by the end of the year by at least 10%.

SEASONALITY

Historically and consistent with the retail industry, we have experienced seasonal fluctuations in revenues and income, with increases traditionally occurring during our third and fourth quarters as a result of the “Fall” and “Holiday” seasons.

LIQUIDITY AND CAPITAL RESOURCES

Our primary cash needs are for working capital (essentially inventory requirements) and capital expenditures. Specifically, our capital expenditure program includes projects for new store openings, relocations and remodeling, downsizing or combining existing stores, and improvements and integration of our systems infrastructure. We expect that cash flow from operations, external borrowings and

trade credit will enable us to finance our current working capital and expansion requirements. We have financed our working capital requirements, store expansion program, stock repurchase programs and acquisitions with cash flow from operations, external borrowings, and proceeds from equity and debt offerings. Our objective is to maintain a positive cash flow after capital expenditures such that we can support our growth activities with operational cash flows without incurring additional debt.

For the first three months of fiscal 2008, cash used by operating activities was $8.1 million as compared to $11.4 million for the corresponding period of the prior year. The improvement in cash flow from operating activities was primarily due to the timing of cash flow of our working capital accounts, such as inventory purchases.

In addition to cash flow from operations, our other primary source of working capital is our credit facility with Bank of America, N.A. (the “Credit Facility”) for a total commitment of $110 million. The maturity date of the Credit Facility is October 29, 2011. Borrowings under the Credit Facility bear interest at variable rates based on Bank of America’s prime rate or the London Interbank Offering Rate (“LIBOR”) and vary depending on our levels of excess availability. Our Credit Facility is described in more detail in Note 2 to the Notes to the Consolidated Financial Statements.

We had outstanding borrowings under the Credit Facility at May 3, 2008 of $54.0 million. Outstanding standby letters of credit were $2.7 million and outstanding documentary letters of credit were $1.1 million. Average monthly borrowings outstanding under this facility during the first three months of fiscal 2008 were approximately $50.6 million, resulting in an average unused excess availability of approximately $47.6 million. Unused excess availability at May 3, 2008 was $46.9 million. Our obligations under the Credit Facility are secured by a lien on all of our assets.

Master Loan and Security Agreement

On July 20, 2007, we entered into a Master Loan and Security Agreement (the “Master Agreement”) with Banc of America Leasing & Capital, LLC (“BALC”) for equipment financing. In conjunction with the Master Agreement, we entered into an Equipment Security Note (the “First Secured Note”), whereby we borrowed an aggregate of $17.4 million from BALC. The First Secured Note is due July 20, 2011.

On January 16, 2008, we entered into a second Equipment Security Note (the “Second Secured Note”), pursuant to the same terms and provisions of the Master Agreement, whereby we borrowed an additional $2.1 million. The Second Secured Note is due January 16, 2012.

Both secured notes accrue interest at a per annum rate of 1.75% plus the rate of interest equal to the 30-day published LIBOR rate. Principal and interest, in arrears, are payable monthly on each note, commencing one month after issuance of such note. We are subject to a prepayment penalty on both secured notes equal to 1% of the prepaid principal until the first anniversary of the respective secured note, 0.5% of the prepaid principal from the first day after the first anniversary through the end of the second anniversary and no prepayment penalty thereafter. At May 3, 2008, the outstanding balance of the secured notes was $16.1 million.

Both notes are secured by a security interest in all of our rights, title and interest in and to certain equipment.

Stock Repurchase Program

During fiscal 2006, our Board of Directors adopted a $75 million stock repurchase program, which was scheduled to terminate on December 31, 2007. On January 9, 2008, our Board of Directors extended this repurchase program authorizing us to continue to repurchase the approximately $24.1 million remaining under the program. The repurchases may be made through open market and privately negotiated transactions pursuant to Rule 10b-18 of the Exchange Act. The stock repurchase program will expire on December 31, 2008, but may be terminated earlier at any time without prior notice. Through May 3, 2008, we have repurchased approximately 4.3 million shares for an aggregate price of $50.9 million pursuant to this program. No repurchases were made during the first three months of fiscal 2008.

Capital Expenditures

The following table sets forth the stores opened and related square footage at May 3, 2008 and May 5, 2007, respectively:

	At May 3, 2008		At May 5, 2007
Store Concept	Number of Stores	Square Footage	Number of Stores	Square Footage
(square footage in thousands)
Casual Male XL	466	1,616	473	1,635
Rochester Big & Tall	26	216	22	201
Sears Canada	—	—	12	14
Total Stores	492	1,832	510	1,850

Total cash outlays for capital expenditures for the first three months of fiscal 2008 were $2.7 million as compared to $4.7 million for the first three months of fiscal 2007. Below is a summary of store openings and closings since February 2, 2008:

	Casual Male		Rochester Big &Tall	Total stores
At February 2, 2008	462		26	488
New outlet stores	1		—	1
New retail stores	4		—	4
Closed stores	(1	)	—	(1	)
At May 3, 2008	466		26	492

We expect our total capital expenditures for fiscal 2008 will be approximately $11.5 million, of which $5.9 million relates to capital for new stores, relocations and remodels. The budget also includes approximately $3.4 million for system enhancements, including our inventory integration project. Included in store expansion are funds to relocate approximately 10 of our existing Casual Male XL retail stores at an estimated $150,000 for each location.

For the remainder of fiscal 2008, we intend to open two new Casual Male XL retail stores, one Casual Male XL outlet store and one Rochester Big & Tall store. We also expect to close 7 existing Casual Male XL retail and outlet stores as their respective leases expire.

CRITICAL ACCOUNTING POLICIES

There have been no material changes to the critical accounting policies and estimates disclosed in our Annual Report on Form 10-K for the year ended February 2, 2008 filed with the SEC on March 26, 2008.

Item 3. Quantitative and Qualitative Disclosures About Market Risk.

In the normal course of business, our financial position and results of operations are routinely subject to a variety of risks, including market risk associated with interest rate movements on borrowings and foreign currency fluctuations. We regularly assess these risks and have established policies and business practices to protect against the adverse effects of these and other potential exposures.

Interest Rates

We utilize cash from operations and from our Credit Facility to fund our working capital needs. Our Credit Facility is not used for trading or speculative purposes. In addition, we have available letters of credit as sources of financing for our working capital requirements. Borrowings under the Credit Facility, which expires October 29, 2008, bear interest at variable rates based on Bank of America’s prime rate or the LIBOR. At May 3, 2008, the interest rate on our prime based borrowings was 5.00%. Approximately $49.0 million of our outstanding borrowings were in LIBOR contracts with interest rates ranging between 3.71% and 5.46%. Based upon a sensitivity analysis as of May 3, 2008, assuming average outstanding borrowing during the first three months of fiscal 2008 of $50.6 million, a 50 basis point increase in interest rates would have resulted in a potential increase in interest expense of approximately $253,000.

Foreign Currency

Our Sears Canada catalog operations conduct business in Canadian dollars and our Rochester Big & Tall Clothing store located in London, England conducts business in British pounds. If the value of the Canadian dollar or the British pound against the U.S. dollar weakens, the revenues and earnings of these operations will be reduced when they are translated to U.S. dollars. Also, the value of these assets to U.S. dollars may decline. As of May 3, 2008, sales from our Sears Canada operations and our London Rochester Big & Tall store were immaterial to consolidated sales. As such, we believe that movement in foreign currency exchange rates will not have a material adverse affect on our financial position or results of operations.

Item 4. Controls and Procedures.

Evaluation of Disclosure Controls and Procedures

As required by Rule 13a-15 under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), our management, under the supervision and with the participation of our Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) as of May 3, 2008. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is accumulated and communicated to the company’s management, including its principal executive and principal financial officers, as appropriate to allow timely decisions regarding required disclosure. Management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving their objectives and management necessarily applies its judgment in evaluating the cost-benefit relationship of possible controls and procedures. Based on this evaluation, our Chief Executive Officer and Chief Financial Officer concluded that, as of May 3, 2008, our disclosure controls and procedures were effective, in that they provide reasonable assurance that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms.

Changes in Internal Control over Financial Reporting

No change in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) occurred during the quarter ended May 3, 2008 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

PART II. OTHER INFORMATION

Item 1. Legal Proceedings.

We are subject to various legal proceedings and claims that arise in the ordinary course of business. We believe that the resolution of these matters will not have an adverse impact on our operations or financial position.

Item 1A. Risk Factors.

There have been no material changes to the risk factors as previously disclosed in Part I, Item 1A (“Risk Factors”) of our Annual Report on Form 10-K for the year ended February 2, 2008 filed with the SEC on March 26, 2008.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.

None.

Item 3. Defaults Upon Senior Securities.

None.

Item 4. Submission of Matters to a Vote of Security Holders.

None.

Item 5. Other Information.

None.

Item 6. Exhibits.

10.1	Employment Agreement between the Company and Wayne P. Diller dated April 28, 2008.
10.2	Employment Agreement between the Company and H. James Metscher dated March 28, 2008.
10.3	Employment Agreement between the Company and Robert S. Molloy dated February 4, 2008.
31.1	Certification of the Chief Executive Officer of the Company pursuant to Rule 13a-14(a) under the Securities Exchange Act of 1934.
31.2	Certification of the Chief Financial Officer of the Company pursuant to Rule 13a-14(a) under the Securities Exchange Act of 1934.
32.1	Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32.2	Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

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.
Date: May 23, 2008	By:	/S/ SHERI A. KNIGHT
		Sheri A. Knight
		Senior Vice President of Finance and Corporate Controller