VideoWhat was Dennis Hernreich thinking? Four years ago, Hernreich, then CFO and chief operating officer of the sputtering Designs Inc., was part of a management team that set out to revitalize a dying retail clothing company by buying another failing clothing company.
In 2002, he and the company's chief executive officer, David Levin, orchestrated the acquisition of a bankrupt retail chain called Casual Male. That year, the combined company reported a net income loss of $38 million. "We wanted to bring [Designs Inc.] back to life, and the growth strategy we found for it was Casual Male," asserted Hernreich.
The unusual strategy worked. In its 2006 second quarter filing, the company, now known as Casual Male Retail Group (CMRG), reported net income of $1.4 million, a radical turnaround from the $1.9 million net income loss it reported during for the same quarter last year. Quarterly sales are up as well, hitting $103 million in the second quarter of this year, which is a 5 percent gain in comparison to the same quarter of 2005.
The company's reach has expanded too. CMRG now operates two chains in the U.S. and Canada: Casual Male XL, which carries moderately priced clothing, and the higher-end Rochester Clothing, which it acquired in 2004. Both units also operate catalog and Web businesses.
Last year, CMRG reported net income of $10.8 million. According to Hernreich, since the acquisition of Casual Male, he and Levin have "been busy."
A Chicago native, Hernreich, now CMRG's finance chief and COO, is an Arthur Andersen-trained accountant. He learned how to be a CFO while working in the oil and gas business, becoming a finance chief of an independent exploration-and-production company during the late 1970s and early 1980s, until oil dropped to $10 a barrel. He then moved to The Equity Group, where he worked on mergers and acquisitions. After that Hernreich became the CFO of a regional Midwest discount retailer owned by The Equity Group, and eventually came east to take the top finance post at Loehmann's, a clothing retailer in New York.
CFO.com caught up with Hernreich to ask him about the turnaround, the metrics he keeps an eye on, balancing the CFO and COO positions, and how his mid-cap company has dealt with Sarbanes-Oxley. Here's what he had to say.
CFO.com: CMRG got off to a rocky start—not unexpectedly, since you combined a financially failing company with a bankrupt one. Why did you pursue that strategy?
Dennis Hernreich: David (Levin) and I were working together at Designs Inc., which owned and operated the Levi's/Dockers outlet stores. Levi's sales had been declining for over a decade. The proliferation of branded denim, like Polo, Nautica, American Eagle, and Abercrombie [and Fitch] were eating away at Levi's market share. There was no growth future for Designs Inc. based upon its current business plan.
So you bought another failing clothing business?
Yes. [Casual Male's parent company] J. Baker had a sick balance sheet, and in the summer of 2001 it went bankrupt. But the bankruptcy created an opportunity for us. We liked Casual Male for a number of reasons. It had a dominant market position, being the primary specialty company in the big-and-tall-man space. It was over expensed and over invested in infrastructure, and the brand was tired, and not being developed. We thought the company was a ripe acquisition, and that if managed right, could reach its full potential.
Where did you start?
CMRG divested the businesses [linked] to the old Designs Inc. That included the Levi's business. We had a lot of diversion, distractions, and losses as a result of those businesses. We also installed new information technology systems at CMRG. The Casual Male was run on old IBM mainframes using COBOL. We replaced the mainframe with mini computers and client seats. By July 2004, the new systems were up and running supply-chain and merchandising-planning applications, as well as warehouse-management systems. We also installed a CRM [customer relationship management] database operation—we're a big direct-mail marketer.
Are you saying that computer efficiencies brought the business back to life?
We are more efficient and manage inventory better. But the systems allow us to cater to our niche—the big and tall guy. The new systems gave us the ability to micro-merchandise. Our customer comes from all walks of life, all demographics and market segments. So understanding him, catering to him, finding him, is elusive. He tends to blend into his neighbors where he lives. So theoretically, there should be no one [Casual Male XL store that looks alike. From a practical perspective that's a bit of a stretch, but a Miami store should be different than a Chicago store, which should be different from an L.A. store. With the new [IT] infrastructure in place, the company's operating metrics begun to improve.
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