A. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Nature of Business

Casual Male Retail Group, Inc. (“Company”) is the largest specialty retailer of big & tall men’s apparel. The Company operates under the trade names of Casual MaleXL^®, Casual MaleXL Outlets, DestinationXL^® (“DXL^®”), Rochester Clothing, B&T Factory Direct, ShoesXL^® and LivingXL^®. At January 28, 2012, the Company operated 420 Casual MaleXL retail and outlet stores located throughout the United States, 16 DXL stores and 14 Rochester Clothing stores located in major U.S. cities, including one store in London, England. The Company also operates a direct business throughout the United States, Canada and Europe which includes several catalogs and e-commerce sites to support its brands and product extensions.

Basis of Presentation

The consolidated financial statements include the accounts of the Company and its subsidiaries. All significant intercompany accounts, transactions and profits are eliminated.

The accompanying financial statements have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent liabilities as of the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from estimates.

Reclassifications

Certain amounts in the prior year’s financial statements have been reclassified to conform to the current year’s presentation.

Subsequent Events

All appropriate subsequent event disclosures, if any, have been made in these Notes to the Consolidated Financial Statements.

Segment Reporting

The Company reports its operations as one reportable segment, Big & Tall Men’s Apparel, which consists of its three operating segments – B&T Factory Direct, Casual MaleXL and Rochester Clothing. The Company considers its operating segments to be similar in terms of economic characteristic, production processes and operations, and have therefore aggregated them into a single reporting segment. The Company’s DXL store format carries merchandise from all three of the Company’s operating segments. The operating results and assets of the Company’s direct businesses, LivingXL, ShoesXL and the Company’s International Web Stores, are immaterial.

Fiscal Year

The Company’s fiscal year is a 52-week or 53-week period ending on the Saturday closest to January 31. Fiscal years 2011, 2010 and 2009 ended on January 28, 2012, January 29, 2011 and January 30, 2010, respectively, and were all 52-week periods.

Cash and Cash Equivalents

Cash and cash equivalents consist of cash in banks and short-term investments, which have a maturity of ninety days or less when acquired. Included in cash equivalents are credit card and debit card receivables from banks, which generally settle within two to four business days.

Fair Value of Financial Instruments

ASC Topic 825, Financial Instruments, requires disclosure of the fair value of certain financial instruments. The carrying amounts of cash and cash equivalents, accounts receivable, accounts payable, accrued expenses and short-term borrowings approximate fair value because of the short maturity of these instruments.

ASC Topic 820, Fair Value Measurements and Disclosures, defines fair value, establishes a framework for measuring fair value and enhances disclosures about fair value measurements.

The valuation techniques utilized are based upon observable and unobservable inputs. Observable inputs reflect market data obtained from independent sources, while unobservable inputs reflect internal market assumptions. Topic 820 establishes the following fair value hierarchy:

Level 1 – Quoted prices in active markets for identical assets or liabilities.

Level 2 – Observable inputs other than Level 1 prices such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the related asset or liabilities.

Level 3 – Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of assets or liabilities.

The Company utilizes observable market inputs (quoted market prices) when measuring fair value whenever possible.

The fair value of indefinite-lived assets, which consists of the Company’s “Casual Male” and “Rochester” trademarks are measured on a non-recurring basis in connection with the Company’s annual impairment test. The fair value of each trademark is determined using a projected discounted cash flow analysis based on unobservable inputs and are classified within Level 3 of the valuation hierarchy. See Intangibles below.

Retail stores that have indicators of impairment and which fail the recoverability test are measured for impairment by comparing the fair value of the assets against their carrying value. Fair value of the assets is estimated using a projected discounted cash flow analysis and is classified within Level 3 of the valuation hierarchy. See Impairment of Long-Lived Assets below.

Inventories

All inventories are valued at the lower of cost or market, using a weighted-average cost method.

Property and Equipment

Property and equipment are stated at cost. Major additions and improvements are capitalized while repairs and maintenance are charged to expense as incurred. Upon retirement or other disposition, the cost and related depreciation of the assets are removed from the accounts and the resulting gain or loss, if any, is reflected in income. Depreciation is computed on the straight-line method over the assets’ estimated useful lives as follows:


Furniture and fixtures		Five to ten years
Equipment		Five to ten years
Leasehold improvements		Lesser of useful lives or related lease term
Hardware and software		Three to seven years

Intangibles

ASC Topic 805, Business Combinations, requires that all business combinations be accounted for under the purchase method. The statement further requires separate recognition of intangible assets that meet one of two criteria set forth in the statement. Under ASC Topic 350, Intangibles Goodwill and Other, goodwill and intangible assets with indefinite lives are tested at least annually for impairment. At each reporting period, management analyzes current events and circumstances to determine whether the indefinite life classification for each trademark continues to be valid. If circumstances warrant a change to a finite life, the carrying value of the intangible asset would then be amortized prospectively over the estimated remaining useful life. Separable intangible assets with defined lives will continue to be amortized over their useful lives.

At least annually, as of the Company’s December month-end, the Company evaluates its trademarks, based on two separate operating segments, its Casual Male business and its Rochester business. The Company performs an impairment analysis and records an impairment charge for any intangible assets with a carrying value in excess of its fair value.

During the fourth quarter of fiscal 2011, both the “Casual Male” trademark and the “Rochester” trademark were tested for potential impairment, utilizing an income approach with applicable royalty rates applied.

During the fourth quarter of fiscal 2011, the Company recorded a non-cash impairment charge of $23.1 million against its “Casual Male” trademark. This charge is reflected in “Provision for Trademark Impairment” for the year ended January 28, 2012. In connection with the Company’s expansion of its new DXL store concept, the Company has closed a total of 36 Casual MaleXL stores over the past two fiscal years and expects to close approximately another 70 stores in fiscal 2012. As the Company continues to open DXL stores, it expects to close existing Casual MaleXL stores in those respective markets. By fiscal 2015, the Company expects approximately 150 Casual MaleXL retail and outlet stores will be open. As a result, the discounted future cash flow projections were not sufficient to support the carrying value of the “Casual Male” trademark. At January 28, 2012, the “Casual Male” trademark has a carrying value of $6.1 million. Because the trademark can no longer be considered an indefinite-lived asset, the Company will amortize the remaining carrying value of $6.1 million, on an accelerated basis consistent with projected cash flows, over its estimated remaining useful life of seven years.

The Company concluded that the “Rochester” trademark, with a carrying value of $1.5 million at January 28, 2012, was not impaired. Although the Company expects that some of the Rochester locations will close as part of the DXL expansion, the Rochester Clothing stores that will remain open are currently expected to generate sufficient cash flows to support the carrying value of $1.5 million for the “Rochester” trademark.

Below is a table showing the changes in the carrying value of the Company’s intangible assets from January 29, 2011 to January 28, 2012:


(in thousands)	January 29, 2011		Additions		Impairment			Amortization			January 28, 2012
“Rochester” trademark	$	1,500	$	—	$	—		$	—		$	1,500
“Casual Male” trademark ⁽¹⁾		29,200		—		(23,110	)		—			6,090
Other intangibles ⁽²⁾		1,562		—		—			(498	)		1,064

Total intangible assets	$	32,262		—	$	(23,110	)	$	(498	)	$	8,654

(1)	Beginning in fiscal 2012, the “Casual Male” trademark will be accounted for as a finite-lived asset. Accordingly, the remaining balance of $6.1 million will be amortized, on an accelerated basis consistent with projected discounted cash flows, over 7 years.

(2)	Approximately $0.1 million of the $0.5 million of amortization, which relates to the amortization of favorable lease commitments, was included in costs of good sold (as part of occupancy costs) on the Consolidated Statement of Operations for fiscal 2011.

Other intangibles, which include customer lists, non-compete agreements and favorable lease commitments, are the only other intangible assets with finite lives, which range from 3 to 16 years based on each asset’s estimated economic useful life. The weighted average amortization period remaining for other intangibles is 3.6 years.

The gross carrying amount and accumulated amortization of these other intangibles, subject to amortization, were $4.4 million and $3.3 million, respectively, at January 28, 2012 and $4.4 million and $2.8 million, respectively, at January 29, 2011. Amortization expense for fiscal 2011, 2010 and 2009 was $0.5 million, $0.5 million and $0.6 million, respectively.

Expected amortization expense for other intangible assets, including our “Casual Male” trademark, for the next five fiscal years is as follows:


FISCAL YEAR	(in thousands)
2012	$	2,186
2013	$	1,647
2014	$	1,157
2015	$	868
2016	$	643

Pre-opening Costs

The Company expenses all pre-opening costs for its stores as incurred.

Advertising Costs

The Company expenses in-store advertising costs as incurred. Direct response advertising costs, which consist of catalog production and postage costs, are deferred and amortized over the period of expected direct marketing revenues, which is less than one year. Direct response costs which were deferred at January 28, 2012 and January 29, 2011 were $0.7 million and $1.2 million, respectively. Advertising expense, which is included in selling, general and administrative expenses, was $19.6 million, $19.0 million and $19.1 million for fiscal 2011, 2010 and 2009, respectively.

Revenue Recognition

Revenue from the Company’s retail store operation is recorded upon purchase of merchandise by customers, net of an allowance for sales returns and allowances. Revenue from the Company’s catalog and e-commerce operations is recognized at the time a customer order is shipped, net of an allowance for sales returns and allowances.

Accumulated Other Comprehensive Income (Loss)

Other comprehensive income (loss) include amounts related to foreign currency, pension and its supplemental executive retirement plan (“SERP”) and are reported in the Consolidated Statements of Stockholders’ Equity. The components of the accumulated other comprehensive income (loss) at January 28, 2012 and January 29, 2011 are as follows:


(in thousands)	January 28, 2012			January 29, 2011
Foreign currency	$	233		$	261
Pension and SERP		(5,949	)		(4,297	)

Total accumulated other comprehensive loss	$	(5,716	)	$	(4,036	)

Foreign Currency Translation

At January 28, 2012, the Company operates a direct business in Canada and has one Rochester Clothing store located in London, England. Assets and liabilities of these operations are translated into U.S. dollars at the exchange rates in effect at each balance sheet date. Stockholders’ equity is translated at applicable historical exchange rates. Income, expense and cash flow items are translated at average exchange rates during the period. Resulting translation adjustments are reported as a separate component of stockholders’ equity.

Shipping and Handling Costs

Shipping and handling costs are included in cost of sales for all periods presented.

Income Taxes

Deferred income taxes are provided to recognize the effect of temporary differences between tax and financial statement reporting. Such taxes are provided for using enacted tax rates expected to be in place when such temporary differences are realized. A valuation allowance is recorded to reduce deferred tax assets if it is determined that it is more likely than not that the full deferred tax asset would not be realized. If it is subsequently determined that a deferred tax asset will more likely than not be realized, a credit to earnings is recorded to reduce the allowance.

ASC Topic 740, Income Taxes (“ASC 740”) clarifies a company’s accounting for uncertain income tax positions that are recognized in its financial statements and also provides guidance on a company’s de-recognition of uncertain positions, financial statement classification, accounting for interest and penalties, accounting for interim periods, and disclosure requirements. In accordance with ASC 740, 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 January 28, 2012 and January 29, 2011, the Company had no material unrecognized tax benefits based on the provisions of ASC 740.

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 1998, 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 fiscal 2011, fiscal 2010 or fiscal 2009.

Net Income Per Share

Basic earnings per share are computed by dividing net income by the weighted average number of shares of common stock outstanding during the respective period. Diluted earnings per share is determined by giving effect to unvested shares of restricted stock and the exercise of stock options and warrants using the treasury stock method. The following table provides a reconciliation of the number of shares outstanding for basic and diluted earnings per share:


	FISCAL YEARS ENDED
(in thousands)	January 28, 2012		January 29, 2011		January 30, 2010
Net Income:
Net income—Basic and Diluted	$	42,663	$	15,371	$	6,110
Weighted Average Shares Outstanding:
Basic weighted-average common shares outstanding		47,424		46,946		43,552
Stock options and warrants		620		619		430

Diluted weighted-average shares outstanding		48,044		47,565		43,982

The following potential common stock equivalents were excluded from the computation of diluted earnings per share in each year 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 or the impact of ASC Topic 718, Compensation – Stock Compensation, primarily related to unearned compensation.


	FISCAL YEARS ENDED
(in thousands, except exercise prices)	January 28, 2012		January 29, 2011		January 30, 2010
Options		2,755		2,808		3,383
Warrants		—		—		1,058
Ranges of exercise prices of such options and warrants	$	3.23 – $10.26	$	3.98 – $10.26	$	2.38 – $10.26

Stock-based Compensation

ASC Topic 718, Compensation – Stock Compensation, requires measurement of compensation cost for all stock awards at fair value on date of grant and recognition of compensation over the service period for awards expected to vest. 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 awards that will ultimately vest requires significant judgment. Actual results, and future changes in estimates, may differ from the Company’s current estimates.

For fiscal 2011, the Company recognized total compensation expense of $1.3 million, or $1.2 million after tax. For fiscal 2010 and fiscal 2009, the Company recognized $2.1 million and $0.5 million, respectively, with no corresponding tax benefit. Compensation expense for fiscal 2010 included $0.7 million related to the accrual for potential stock awards that were granted in March 2011 pursuant to the Company’s Long-Term Incentive Plan for fiscal 2010.

The total compensation cost related to non-vested awards not yet recognized is approximately $1.1 million which will be expensed, on a straight-line basis, over a weighted average remaining life of 27 months. The total fair value of options vested was $1.1 million for fiscal 2011 and $0.1 million for fiscal 2010.

Valuation Assumptions for Stock Options

The fair value of each option grant is estimated on the date of grant using the Black-Scholes option-pricing model with the following weighted-average assumptions used for grants in fiscal 2011 and fiscal 2010. There were no option grants during fiscal 2009.


	FISCAL YEARS ENDED
	January 28, 2012	January 29, 2011	January 30, 2010
Expected volatility	55.0%	55.0%	n/a
Risk-free interest rate	0.32%-1.89%	1.14%-1.55%	n/a
Expected life	2.5-4.5	2.1-3.0	n/a
Dividend rate	—	—	n/a
Weighted average fair value of options granted	$1.53	$1.07	n/a

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.

Impairment of Long-Lived Assets

The Company reviews its long-lived assets for events or changes in circumstances that might indicate the carrying amount of the assets may not be recoverable. The Company assesses the recoverability of the assets by determining whether the carrying value of such assets over their respective remaining lives can be recovered through projected undiscounted future cash flows. The amount of impairment, if any, is measured based on projected discounted future cash flows using a discount rate reflecting the Company’s average cost of funds.

There were no material impairment charges in fiscal 2011, fiscal 2010 or fiscal 2009.

Recent Accounting Pronouncements

The Company has reviewed accounting pronouncements and interpretations thereof that have effective dates during the periods reported and in future periods. The Company believes that the following impending standards may have an impact on its future filings. The applicability of any standard will be evaluated by the Company and is still subject to review by the Company.

In May 2011, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2011-04—Fair Value Measurement (Topic 820)—Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs. The amendments in this update change the wording used to describe the requirements in U.S. GAAP for measuring fair value and for disclosing information about fair value measurements to ensure consistency between U.S. GAAP and IFRS. This update is effective for interim and annual periods beginning after December 15, 2011. The Company does not expect the adoption of ASU No. 2011-04 to have a material impact on the Company’s financial statements.

In June 2011, the FASB issued ASU No. 2011-05, Comprehensive Income (Topic 220)—Presentation of Comprehensive Income, to make the presentation of items within other comprehensive income (“OCI”) more prominent. The new standard will require companies to present items of net income, items of OCI and total comprehensive income in one continuous statement or two separate consecutive statements, and companies will no longer be allowed to present items of OCI in the statement of stockholders’ equity. This new update is effective for interim and annual periods beginning after December 15, 2011. The adoption of this new standard may change the order in which certain financial statements are presented and will provide additional detail in those financial statements when applicable, but will not have any other impact on the Company’s financial statements.