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Stein Mart, Inc. (NASDAQ:SMRT)

F3Q08 Earnings Call

November 20, 2008 10:00 am ET

Executives

Linda Farthing – President and Chief Executive Officer

James Delfs – Senior Vice President and Chief Financial Officer

D. Hunt Hawkins - Chief Administrative Officer and Executive Vice President, Operations

William Moll – Executive Vice President and Chief Merchandising Officer

Analysts

David Mann - Johnson Rice & Company

Robin Murchison - Suntrust Robinson Humphrey

Operator

Good morning. My name is [Vanessa] and I will be your conference operator today. At this time I would like to welcome everyone to the Stein Mart third quarter financial results conference call. (Operator Instructions)

I would now like to turn the call over to Linda Farthing, President and CEO. Please go ahead, ma'am.

Linda Farthing

Thank you, Vanessa. Good morning, everyone. Thank you for being with us to discuss our third quarter results. I will make opening remarks and then Jim Delfs, our Chief Financial Officer, will review the quarter and year-to-date financials. After our prepared remarks, Jim and I and other members of the management team will be glad to take your questions.

Third quarter was, in a word, unprecedented. I don't need to tell you how difficult the environment is - you're all very much aware of that - or I don't need to tell you how customers appear to be paralyzed by the daily headlines.

On our last conference call, I told you that in light of the challenging environment, our planning for fall was prudent, and quite frankly at that time it seemed to be very prudent. But the sales slowdown that slowdown that has occurred over the last several weeks has been extraordinary, beyond anyone's possible imagination.

We believe our target customer's confidence has been badly shaken by recent developments and her appetite for shopping clearly has been diminished. It has become a battle to get her into the door, and once there it takes a surprisingly deep discount to open her wallet.

We have seen some modest success in some areas where we feature novelty merchandise or where we have an exceptional brand name and, conversely, we're doing well with the basic layering pieces. She is replenishing what she needs in her wardrobe. Sales in merchandise other than those two categories remain challenging, and I would say that's to say the least.

Geographically, Florida continues to significantly lag the chain in sales, while the mid-South region is performing better than the company trend.

We were able to reduce our year-over-year inventory - [it's down 12-2] - to be in line with our sales trends at the end of third quarter, but I must emphasize it came at a great cost to our bottom line. Although we have been persistently adjusting our inventory plan as the economic climate worsened, no one could have anticipated the degree of comp declines that we and others have been having. It will need even more aggressive markdowns in the fourth quarter to end the year with season-appropriate inventories at the proper levels. And it is critical to us that our inventory be current as we move to the spring season.

Looking ahead, we are being very, very, very - underline, underline - conservative for the spring season, not only to keep inventories in line but so that we can have plenty of firepower to take advantage of the great brand opportunities that have been presenting themselves to us. We are holding the inventories extremely tight, and we certainly are not planning to have any of these issues in the spring season.

Our marketing message is more focused on our value offering these days. You've probably seen our emphasis on a different kind of discount store, and you will see it in both our advertising and our instore signage. And I'm sure you've seen "Love Shopping, Love Saving" tag line. It sums up what we believe our customer's unique relationship with Stein Mart is. And we talk about the fact, when you mention Stein Mart to someone, their immediate response is, "Wow, I love Stein Mart."

Much of our work this quarter was in testing and learning from various media mix options, including alternative direct mail formats, better market stratification, reduced newspaper circulation and direct mail quantities. The more successful of these strategies are being intensified for fourth quarter and will certainly take us into 2009.

We are already seeing a startling amount of promotional activity and I'm sure you've all been seeing that, and our strategy will be to focus on key events with aggressive offers, using mass media to drive traffic as well as sharpen focus on our efficient direct marketing for a better integrated plan. Going forward, we are committed to keeping flexibility in our plan so we can react quickly to a very fluid environment.

Expense reduction continues to be paramount in our effort to operate efficiently through this business downturn. As we had said in our news release, our strategic review prompted a reduction in managerial headcount and associate work force hours and renegotiated contracts for nonmerchandise procurement. These expense reductions, while initially offset by certain fees and severance costs, will have a significant benefit in 2009 and even greater benefit beyond 2009, and we will quantify them as they occur.

The most notable outcome is the transformation of our supply chain management distribution process as we transition to third-party providers to efficiently move our merchandise from vendors through distribution centers to the stores. The new system will begin to give us logistical efficiencies without the capital expenses of building DCs.

We are currently reviewing proposals from a number of third-party logistic providers, and our expectation is to transition into this new system in the second half of the next year. When fully implemented, this new supply chain management process is expected to produce significant expense savings, and I must tell you the total team is working very hard on this and are very excited about the expense saving capabilities there.

We are focused on cash and liquidity, and to that end we continue to do everything possible to maximize our financial flexibility. In addition to cutting operating expenses, we have expanded our credit facility, we scaled back our opening plans to one store, and we plan significant reduction in capital expenditures in 2009. And, of course, we previously had suspended the dividend and the stock buyback.

Before I close, I just want to comment on our recent announcement regarding a search for a new CEO. While I believe strongly that Stein Mart has a bright future ahead and we have fantastic people within our organization, we are in for a protracted recovery given the current macroeconomic environment.

Sadly, for personal reasons, it was my choice to implement a search for my successor. He or she should have the vision and fortitude to take this business far into the future, and we are looking for a seasoned leader to do just that. The new CEO must be able to move quickly in this environment, build upon what's already here and the initiatives that are well under way, and position the company for when the current situation eases and a more normalized consumer environment returns. We will keep you posted on our progress in the search as we go along.

And I will now turn this over to Jim Delfs to recap the financial aspects of the quarter.

James Delfs

Thank you, Linda, and good morning, everyone.

In the course of our presentation this morning and in response to your questions, we may make statements as to certain matters that constitute forward-looking statements. Additional information concerning those factors that could cause actual results to differ from those in the forward-looking statements can be found in our current report on Form 10-K for the year ended February 2, 2008.

For the third quarter of 2008, total sales decreased 10.4% from the third quarter of 2007, while comp store sales decreased 12.6%. Gross profit decreased $18.7 million and as a percent of sales decreased 330 basis points.

Merchandise margin decreased 95 basis points due to increased markdowns, slightly offset by increased markups.

Buying and occupancy costs increased 235 basis points due to increased occupancy costs and lack of leverage on lower sales.

For the third quarter, SG&A expenses decreased $3.7 million, but as a percent of sales increased 210 basis points.

Store operating expenses for the non-comp group of stores increased $1 million, while operating expenses for the comp stores decreased $2 million.

Advertising expense decreased $5.2 million and share-based compensation decreased $1.4 million.

Store closing costs increased $2.6 million, and the balance of the change in SG&A resulted primarily from increased professional fees and benefit costs.

Other income decreased from last year due to decreases in both credit card income and leased shoe department income.

For the third quarter of 2008, we incurred a net loss of $14.1 million or $0.34 per share as compared to a net loss of $2.7 million or $0.06 per share in the third quarter of 2007.

For the first nine months of 2008, total sales decreased 7.5% from the first nine months of 2007, while comp store sales decreased 10.5%.

Gross profit decreased $38 million and as a percent of sales decreased 180 basis points.

Merchandise margin decreased 10 basis points due to increased markdowns, mostly offset by increased markup.

Buying and occupancy costs increased 170 basis points due to increased occupancy costs and lack of sales leverage.

For the nine months, SG&A expenses decreased $4.8 million but, as a percent of sales, increased 170 basis points. Store operating expenses for the non-comp group of stores increased $7.4 million while operating expenses for the comp stores decreased $7.3 million.

Advertising expense decreased $10.3 million and store closing costs increased $3.8 million.

Decreased share-based compensation expense was partially offset by increased professional fees and benefit costs.

The effective income tax benefit of 34.5% for the nine months reflects the statutory federal and state rates, as well as [inaudible] tax differences and FIN 48 adjustments. For the year, we expect the effective tax rate to be approximately 35%.

For the nine months of 2008, we incurred a net loss of $15.1 million or $0.37 per share as compared to net income of $7.6 million or $0.18 per share for the nine months of 2007.

During the third quarter we drew down a total of $100 million or two-thirds of our revolving credit facility. Although we did not need the extra funds for operations, we felt it was a prudent decision in the current uncertain financial environment.

As you can see on the balance sheet, at the end of the quarter we still had $65 million in cash and equivalents. We anticipate that our current liquidity will be more than sufficient to meet our peak needs in the fourth quarter.

Linda?

Linda Farthing

This concludes our prepared remarks. We will now be happy to take your questions. Vanessa?

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from David Mann - Johnson Rice & Company.

David Mann - Johnson Rice & Company

Jim, you just talked about key borrowing. Can you just give us a sense on how much you're, you know, what that net debt number would look like at peak?

James Delfs

David, we're probably going to peak in our net borrowings either later this week or early next week, and it will be just slightly higher than what it was at the end of the quarter.

David Mann - Johnson Rice & Company

In terms of your store base plans, I know you're not talking about really opening any, but can you just give us an update on if they're going to be any more closings and how many stores you anticipate in this tough environment will be losing money on a four-wall basis?

D. Hunt Hawkins

For '09 we anticipate closing approximately 10 stores.

Linda Farthing

And opening one store, David.

David Mann - Johnson Rice & Company

And then in terms of some of these SG&A initiatives, can you give us a sense in terms of, you know, should we expect your SG&A to be down a lot on an absolute dollar basis when we take out for some of those closings?

James Delfs

For the year, David, yes, our SG&A expenses are going to be less than they were last year.

David Mann - Johnson Rice & Company

No, I'm talking about for '09.

James Delfs

In '09, we'll give you an update of the saves as they occur. As [inaudible] said, the impact is going to certainly be more in '09 and it's going to be more in the latter half of '09 as supply chain goes into effect.

David Mann - Johnson Rice & Company

Can you give an update on how the DSW shoe departments are performing for you?

D. Hunt Hawkins

David, they're basically following our same sales trend.

Operator

(Operator Instructions) Your next question comes from Robin Murchison - Suntrust Robinson Humphrey.

Robin Murchison - Suntrust Robinson Humphrey

I wanted to ask you a couple of questions, if I can push a little bit on this change in terms of distribution from drop ship. Is there anyway you can put color around in terms of helping us try to figure out how much benefit this could be?

Linda Farthing

I'm turning this over to Hunt Hawkins, our EVP.

D. Hunt Hawkins

I certainly think expense reductions in '09 will more than offset our startup costs, but where we're going to see the significant reduction will be in 2010 and beyond.

Robin Murchison - Suntrust Robinson Humphrey

Let me ask you this, if you can answer. Would distribution to the store account for more than or somewhere between 5% and 10% of product cost presently? I mean, I assume you're carrying that in product cost; your gross margin is not pure merchandise margin.

James Delfs

It certainly includes transportation costs as they're incurred in the current environment, yes, Robin.

Robin Murchison - Suntrust Robinson Humphrey

Would that be somewhere between 5% and 10%?

James Delfs

We don't have that information at our fingertips right now. We can certainly get back to you on that one, Robin.

Linda Farthing

Jim will get back to you on that.

Robin Murchison - Suntrust Robinson Humphrey

Is Bill there?

Linda Farthing

Yes.

Robin Murchison - Suntrust Robinson Humphrey

I'm noticing lately some Lafayette 148 merchandise in the Boutique, which is quite a nice line. One store associate indicated to me that it was selling nicely, doing well with it. I'm just wondering, do you have any or what sort of leverage might you have with the vendor base out there, you know, a vendor base that is clearly struggling with placement of merchandise as orders are cut back. Does that help you in any way in terms of them looking for alternative retail venues.

William Moll

Yes, Robin. As you can see with Lafayette 148, this current environment has opened up avenues that we have not had in the past. We've obviously talked to many people, but the doors are opening better for us and we're taking advantage every place we can.

Robin Murchison - Suntrust Robinson Humphrey

Bill, do you think we'll see maybe some new lines in the spring that we don't have yet?

William Moll

Yes, we will. We feel very comfortable with that.

Operator

At this time there are no further questions. I would now like to turn the call over to the presenters for closing remarks.

Linda Farthing

Well, I just want to again thank you all for your time and being on the call. These certainly are challenging times for everyone, and we are looking to maximize whatever is there for us. So we're up against a big fourth quarter, very aggressive, both to liquidate product and to drive traffic into the store, but we're being as optimistic as we can in this kind of environment.

This concludes our conference call for today.

Operator

This concludes today's conference call. Thank you for your participation. You may now disconnect.

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