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Stein Mart, Inc. (NASDAQ:SMRT)

F4Q08 Earnings Call

March 19, 2009 10:00 am ET

Executives

David H. Stovall, Jr. – President and Chief Executive Officer

James Delfs – Senior Vice President and Chief Financial Officer

Glori Katz - Senior Vice President, Marketing/Advertising

Michael D. Ray - Senior Vice President, Stores

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

Analysts

Robin Murchison - Suntrust Robinson Humphrey

David Mann - Johnson Rice & Company

Operator

Good morning. My name is [Christy] and I will be your conference operator today. At this time I would like to welcome everyone to the Stein Mart, Inc. 2008 financial results conference call. (Operator Instructions)

I will now turn the call over to David Stovall, President and CEO.

David H. Stovall, Jr.

Thank you. Good morning and thank you for joining us. In just a few moments Jim Delfs, our Chief Financial Officer will go over the numbers with you. But first, I want to give your our agenda for this call.

After Jim's review I'll discuss the changes that have occurred and are occurring at Stein Mart. I'll then talk about our strategic reactions to the current economic environment. And finally, I'll give you more detail regarding our focus for 2009.

There are also members of our management team here who will be available during the question-and-answer should you have further questions about merchandise, finance, store operations or marketing.

So I'll now turn it over to Jim Delfs. Jim?

James Delfs

Thanks, Dave, and good morning, everyone. Let me first remind you of our safe harbor statement.

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.

In addition, we report consolidated financial results in accordance with generally accepted accounting principals or GAAP. However, to supplement these consolidated financial results, management believes that certain non-GAAP operating results, which exclude asset impairment, store closing, and certain other charges, may provide a more meaningful measure on which to compare our results of operations between periods. We believe these non-GAAP results provide useful information to both management and investors by excluding certain expenses that we believe impact the comparability of our operating results. A reconciliation of 2008 and 2007 fourth quarter and total year net loss per diluted share on a GAAP basis to adjusted net loss per diluted share on a non-GAAP basis are presented in today's news release.

On the statement of operations for the fourth quarter of 2008, net sales decreased 12.8% to $363.9 million from $417.4 million in the same period the previous year. Comp store sales for the quarter decreased 12%, driven by a 9% decrease in the average transaction and a 3% decrease in the number of transactions.

Gross profit decreased to $54.9 million or 15.1% of net sales compared to $84.1 million or 20.1% of net sales in the fourth quarter last year. The 500 basis point decrease in the gross profit rate resulted from a 320 basis point increase in markdowns and a 260 basis point increase in buying and occupancy costs, slightly offset by an 80 basis point increase in markup.

SG&A expenses were $117.1 million or 32.2% of net sales as compared to $106.2 million or 25.4% of net sales during the same period last year. Excluding asset impairment and store closing charges, SG&A expenses in the fourth quarter of 2008 were $96.1 million or 26.4% of net sales compared to $101.6 million or 24.3% of net sales in the same period last year. This $5.5 million decrease in SG&A resulted from significant reductions in advertising and store operating expenses, somewhat offset by professional fees related to our expense reduction initiatives. The SG&A rate was higher due to a lack of sales leverage.

Excluding the $40.1 million in charges for asset impairments, store closings and deferred tax asset valuation allowance, the company had an adjusted net loss of $23.8 million or $0.57 per diluted share in the fourth quarter of 2008 compared to an adjusted net loss of $9.4 million or $0.23 per diluted share in the fourth quarter of 2007.

For the year 2008, net sales decreased 9% to $1.3265 billion from $1.4576 billion last year. Comp store sales for the year decreased 10.9%, driven by a 6.3% decrease in the average transaction and a 4.6% decrease in the number of transactions.

For the year, gross profit decreased to $294.2 million or 22.2% of net sales compared to $361.4 million or 24.8% of net sales in 2007. The 260 basis point decrease in the gross profit rate resulted from a 110 basis point increase in markdowns and a 200 basis point increase in buying and occupancy costs, slightly offset by a 50 basis point increase in markups.

For the year, SG&A expenses were $394.8 million or 29.8% of net sales as compared to $388.6 million or 26.7% of net sales last year. Excluding asset impairment and store closing charges, SG&A expenses were $369.3 million or 27.8% of net sales in 2008 compared to $383.4 million or 26.3% of net sales last year. This $14.1 million decrease in SG&A resulted from significant reductions in advertising and store operating expenses, somewhat offset by professional fees related to our expense reduction initiatives. The SG&A rate for the year was higher due to a lack of sales leverage.

Excluding the $44.4 million in charges for asset impairments, store closings and deferred tax asset valuation allowance, the company had an adjusted net loss of $36.2 million or $0.87 per diluted share for the year compared to an adjusted net loss of $1.5 million or $0.04 per diluted share in 2007.

Other income for the year was down $975,000, but as a percent of sales both our income from the leased shoe department and from our credit card program were flat to last year.

Interest expense increased $959,000 over last year due to increased borrowings at lower interest rates.

Even with the disappointing earnings result for the year, we still generated $19.4 million of cash from operations, a $1.5 million increase over last year. We reduced our inventories in line with our sales, kept the inventory turning, with additional markdowns, and ended the year with average store inventories down almost 20%.

As previously reported, we drew down additional cash from our revolving credit facility in the third quarter as we were building seasonal inventories and approaching our peak borrowing needs and in light of the uncertainties in the financial credit markets at that time. At year end we had invested excess cash in short-term U.S. Treasury securities and subsequent to year end we liquidated those investments and paid down that portion of the outstanding notes payable to banks.

Now I'll turn the call back over to Dave.

David H. Stovall, Jr.

Thanks, Jim.

Our disappointing fourth quarter capped an extremely challenging year for Stein Mart and we're obviously unhappy with the results. The deteriorating environment during the fall season prompted unprecedented reactions from retailers and we were forced to respond. The markdown cost was painful and expensive, but essential to keeping inventories in line and preserving cash, which clearly became our goal.

We expect 2009 to be challenging for sure and we believe we've created a realistic plan for operating our business. We have two important goals for this year - first, to make our sales plan and second, to manage the cost structure to realistic expectations of the sales level. The net effect of accomplishing both will be a positive cash flow for the business.

Now I want to talk about how we're approaching these two important objectives. Job one is to make our sales plan, both by keeping our current customers and increasing their purchases and by bringing new customers into the stores. To that end, we're aggressively working with our vendors to provide more recognizable brands and a better initial price on merchandise since we know that today is all about value. The reality in the current marketplace is that there is an increased availability of high-quality very desirable merchandise at extremely attractive prices. We're taking advantage of these opportunities and passing that value along to our customers, and the key to our inventory management strategy lies in maintaining our flexibility, going after only the most sought-after merchandise and not letting inventories get ahead of the sales results.

In addition, we need to broaden our traditional clientele base to include customers that are more youthful in both age and attitude, and we're pursing them by investing in more modern merchandise categories in ladies, men's and accessories and featuring them more prominently on our sales floors. We've also targeted merchandise we're calling Fabulous Finds - exceptional, limited time items with a must have it cachet - and our customers' in-store experience is being geared to a stronger, more visible signing highlighting both brand names and values.

In the marketing arena we're introducing an elite preferred customer program to reinvigorate our best and most loyal Stein Mart fans, and just this week we've launched our new television advertising, with a specific appeal to a broader customer target. We will also be using direct mail and e-mail in a more focused manner to reach our best customers and to prospect for new ones, and we're expanding our interactive electronic marketing methods to communicate more often with our customers.

While our most important goal is to make sales plan, our other major emphasis is on cost savings and ultimately on positive cash flow. Our news release reviewed the various cost reductions started in 2008. We now expect those actions, including the reduction in force at corporate and in the stores, as well as management salary reductions, elimination of certain benefits and the nonmerchandise procurement effort will provide $40 to $50 million in expense relief in 2009. Additionally, we expect our supply chain savings to more than offset the startup costs as we make the transition in 2009, and when it is fully operational in 2010, we expect this initiative to generate additional annual cost savings of $20 to $25 million.

As you know, we've trimmed our new store opening plan to just two stores in 2009 and we expect CapEx to between $8 and $9 million in 2009, down from $19 million in '08. Overall, our goal is to continue to manage the business to be cash flow positive. You should know that every salary management associate is being directly incented toward that goal. I can assure you our entire organization has positive cash flow as their focus this year.

While I've only been on board for a short time, I've visited numerous stores, participated in market research with customers and spent a great deal of time talking to merchants, management and store associates. I am repeatedly struck by the special place Stein Mart occupies in the hearts and wallets of a very loyal and enthusiastic group of shoppers. Our customers are a little shell shocked right now and unsure about many of the larger economic issues, but they want us to succeed and be there for them. I believe more firmly than ever if we can cast the Stein Mart net a little wider, gain the attention of more of our customers' friends and contemporaries, we will be able to return this company to profitability.

No question that we have our work cut out for us, particularly in the current environment. But from my new vantage point, I believe we have three things strongly in our favor - first, a loyal, committed customer base; second, strong relationships with the vendor community, who value our access to better customers and the fact that we have ample liquidity under our existing credit agreement; and finally, a demonstrated commitment to keep our inventories and our expenses in line with our sales levels in order to generate positive cash flow. None of these is a guarantee, but together they're a good foundation for us to improve our business going forward.

Thank you and now we'll take your questions.

Question-and-Answer Session

Operator

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

Robin Murchison - Suntrust Robinson Humphrey

I wanted to ask you about the tone of the environment and the consumer vis-à-vis the holiday period. Is it your sense that the environment is maybe not as combative if only because the retailers have had more time to adjust inventory levels and initiate a more defensive plan? And then also what is your sense of the appetite on the consumers' part in early spring?

David H. Stovall, Jr.

I think we know that her behavior has changed, that she's going about things differently. She still wants to shop, but we know that she's shopping in her closet. She's buying single pieces rather than entire outfits and accessorizing where she can. She's being very selective. She knows that everybody's competing for her business and she expects incentives to get her to come in.

We are reacting to that through our marketing campaign, both with outreach to new customers as well as trying to develop our better customers and increasing our share of their wallets. In terms of how other retailers are reacting, it still feels like a very aggressive environment out there to me even though, as we know, inventories are probably less of a challenge to most folks. But it does appear to still be a highly competitive environment trying to get market share out of what may be a smaller wallet.

Robin Murchison - Suntrust Robinson Humphrey

David or Jim, also, let me ask you, the programs that you outlined, the new elite preferred customer program, the TV, the direct mail and the e-mail, and then the interactive program, how should we be thinking about marketing and customer outreach program expenses in the new year vis-à-vis last year?

Glori Katz

While our dollars are slightly less for 2009 as a percent of sales, they're up slightly at approximately 3.8% of sales. We have made a change in the focus of our media mix in order to add TV, but with other things this is the right thing to do to reach this new customer.

Robin Murchison - Suntrust Robinson Humphrey

And also if I could just kind of get a little insight, it's very clear in the stores, particularly in boutiques, the shift to the sizeable addition, if you will, of a younger attitude - a bit more trendy, a bit less suited, quote-unquote looking. Can you give us any insight as to how that is working for you?

David H. Stovall, Jr.

It's off to a very positive start. And it's customers of all ages who are responding to this - it's younger in age and younger and attitude. And this is what we hear from our store associates, we see happening in the stores, and we actually have decided to increase that inventory going forward because we think we can take advantage of that trend.

Robin Murchison - Suntrust Robinson Humphrey

In the press release you do talk about reduced home area, gifts and linen space allocation and inventory levels. What does this mean in terms of allocation of that space within the stores?

David H. Stovall, Jr.

It's down about 15% from prior levels and the expansion is going toward accessories for the most part, although in some cases women's apparel, with these attitudes and more modern merchandise, is getting some of that space.

Operator

Your next question comes from David Mann - Johnson Rice & Company.

David Mann - Johnson Rice & Company

My first question, as you come Stein Mart and you're looking at how they should be positioned relative to your former employer and other competitors out there, have you been able to delve into any customer research to try and determine where the proper positioning of Stein Mart is, where the customer wants you to be?

David H. Stovall, Jr.

We've actually completed a fairly small research project in a qualitative way where we did six focus groups in three markets - Atlanta, Birmingham and Dallas - and also did an online version across the country, and so we've got probably 80 to 90 opinions. And we looked at customers who know us, who used to shop with us, but now are not shopping with us. So we didn't go after our very loyal customers; what we wanted to find out is how do we get into the wallets of customers who aren't now crossing our threshold.

And we saw a couple of things. Primarily what we saw is she says that we're not high enough on her radar screen when she makes her decision as to where to go to shop. She's changed her behavior in terms of that she's shopping less. She still loves to shop - she's a shopper at heart  but she's shopping less because of her economic either condition or her concerns, and she is reacting to incentives. But what we think we find is that - and we do know this - when these 80 to 90 women who aren't shopping us went into our stores, they were excited about what they saw and most, in fact, made a purchase. And they said would come back.

So what we believe is that if we can get our message on their radar screens about our value and about our fashion message that we will have more people come in. That's the primarily driving force behind the television campaign that started Monday and behind our direct mail and e-mail efforts as we try to attract more customers.

David Mann - Johnson Rice & Company

In terms of regional issues, can you just comment on the trend in Florida, in particular, and any special efforts to try and jump start things in that market?

David H. Stovall, Jr.

As you know, Florida has been a challenge for us; it was particularly difficult, as was the Southeast, in the fourth quarter.

We have put together a plan for South Florida to try to jump start some of that business and it's just beginning. And in terms of the current trend, we've probably seen a little stabilization there, so we feel hopeful that that business may have bottomed out for us.

But we'll let you know at the end of the first quarter whether or not we've seen results from our intensification effort in South Florida and what the results are.

David Mann - Johnson Rice & Company

In terms of the regional performance, were the Goody store closings having any effect on you and into Q1 as well? And if so, any change now that those stores are closed?

David H. Stovall, Jr.

Minimal.

Operator

Your next question comes from Robin Murchison - Suntrust Robinson Humphrey.

Robin Murchison - Suntrust Robinson Humphrey

I wanted to just circle back to new TV commercials. You're on cable, not network, correct?

Glori Katz

We actually have a media mix that includes cable nationally so we were able to impact all our stores, and then in some very key spot markets, about 30 spot markets, we have a mix of some kind. And then we also have some of the prime access, early morning programming, so we do have a mix, and that 30 markets is actually a bigger mix of spot television than we've had before.

Robin Murchison - Suntrust Robinson Humphrey

And then the cable stations - HGTV - what else?

Glori Katz

Right. HGTV, Food Network, but we also are on the Style Channel. We've even put some of our weight in some of the news networks, so we have a pretty big mix. But definitely concentrated on that female shopper, so HGTV, Food are probably getting the bulk of that buy.

Operator

Your next question comes from David Mann - Johnson Rice & Company.

David Mann - Johnson Rice & Company

You've talked a little bit about hoping to hit a sales plan. While I suspect you're not going to disclose that, given that you're driving your inventory per store down 20%, it would seem like you're planning things very conservatively on the sales line. Is there any kind of thoughts or insights you can provide on how we should think about what you're hoping to achieve there?

David H. Stovall, Jr.

Well, we have a very conservative approach, David, you're right. And what we're doing is maintaining our flexibility in our inventory management, trying to keep powder dry and take advantage of the opportunistic buys that are out there. And as I said earlier, they're out there. So as we find opportunities, particularly where we have a growing business where, for example, not only our attitudes business, our younger, modern business is good, so is our dress business, we're looking to take advantage of those kinds of things. And with our inventories where they are, we're able to do that.

David Mann - Johnson Rice & Company

In terms of what you said, you would expect to get some vendor support or at least sharper pricing, should we expect initial markups to improve in 2009 or would you pass that all along?

David H. Stovall, Jr.

I think we would probably try to pass that on to the customer in those cases.

David Mann - Johnson Rice & Company

A couple of housekeeping questions on costs. Professional fees in the quarter, how much would that have been?

James Delfs

I don't want to divulge something that is - a fee structure that we don't want to let out and our consultants certainly wouldn't want it let out. In the quarter it was not a big amount. For the year it was a sizeable amount, but the point is, as Dave said, we anticipate somewhere in the neighborhood of $40 to $50 million worth of reductions in SG&A, so the savings are a very big multiple of what the cost was.

David Mann - Johnson Rice & Company

And the supply chain benefits are not included in that $40 to $50 million number?

James Delfs

That is correct.

David Mann - Johnson Rice & Company

In terms of your footwear area, can you just give an update on how you feel like that's performing and what opportunities do you see there in 2009?

Michael D. Ray

The shoe business trend has been running right along with ours. We've seen some slight improvement in the fourth quarter and in February.

David Mann - Johnson Rice & Company

And then in terms of the store level performance, you've said you're going to close 10 to 13. Number one, any common thread or factors in terms those stores that you are closing? And then beyond that 10 to 13, are there any stores that would be unprofitable on a four-wall basis?

D. Hunt Hawkins

David, would you repeat the last part of that question for me?

David Mann - Johnson Rice & Company

Beyond those 10 to 13 stores that were already slated to be closed, do you have any stores that are unprofitable of negative cash flow on a four-wall basis?

D. Hunt Hawkins

Certainly we have stores that are unprofitable on a four-wall basis. As we said before, what we do, we look at all the stores; we analyze them looking at a number of variables that may impact their profitability, and then we'll make a decision whether it's more cost-effective for us to close it or to maintain it. And we continue to review that on a regular basis.

David H. Stovall, Jr.

David, let me add one more thing to that. In spite of the fact that certainly we do have some stores that are in negative cash flow - in this environment, not surprising - but the point is that we still generated over $19 million worth of cash in total for the year.

David Mann - Johnson Rice & Company

Do you see an opportunity to go to our landlords like many retailers are to get rent reductions?

D. Hunt Hawkins

Yes. And we are doing so in our CNMV cooperative and seeing some success.

Operator

(Operator Instructions) There are no further questions. Do you have any closing remarks?

David H. Stovall, Jr.

Thank you.

Operator

Thank you for participating in today's call. You may now disconnect.

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Source: Stein Mart, Inc. F4Q08 (Qtr End 1/31/09) Earnings Call Transcript
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