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Stein Mart (NASDAQ:SMRT)

Q1 2013 Earnings Call

May 23, 2013 10:00 am ET

Executives

Jay Stein - Chairman, Interim Chief Executive Officer and Member of Executive Committee

Gregory W. Kleffner - Chief Financial Officer, Executive Vice President and Secretary

Analysts

Mark K. Montagna - Avondale Partners, LLC, Research Division

David M. Mann - Johnson Rice & Company, L.L.C., Research Division

Michael Richardson - Sidoti & Company, LLC

Operator

Ladies and gentlemen, thank you for standing by, and welcome to the Stein Mart, Inc. First Quarter 2013 Conference Call. In the course of the presentation this morning and in response to your questions, statements may be made as to certain matters that constitute forward-looking information that is subject to certain risks and uncertainties. Additional information concerning those factors that could cause actual results to differ from those in the forward-looking statements can be found in the company's current report on Form 10-K for the year ended February 2, 2013.

I would now like to turn the conference over to Mr. Jay Stein, CEO of Stein Mart, Inc. Mr. Stein, please go ahead.

Jay Stein

Thank you very much. Good morning, and thank you all for joining us today. I will make some opening comments and then turn the call over to Greg Kleffner, our Chief Financial Officer, who will review our results for the quarter. We'll take questions after that.

As I've said to you earlier this month, we are firmly determined to build upon last year's sales and profit increases. The successes that we've achieved in 2012 were done by returning to and executing the merchandising strategy that has been most effective for us through the years. We are off to a great start in doing this in our first quarter results.

While the quarter started slowly as sales were impacted by colder weather and the Easter calendar shift, as weather warmed up across the country, sales accelerated and we posted a very strong 8% increase in comp store sales in April and achieved a very positive bottom line result for the quarter. We achieved these sales with lower markdowns, which obviously contributed to an increase in our gross profit rate for the quarter. This sales-driven, higher profit drove our increased earnings as we leveraged what is our already well controlled expenses.

Our spring merchandise is just fabulous and as the temperature became more seasonal, our customers responded just wonderfully by going to the stores and seeing this great assortment of merchandise at a very value price. Color, as well as designer and national brands continue to drive sales, as well as our home area, which just looks great. If you haven't seen it yet, you must. You must come in to our stores and see what spring has to offer.

As an indication of just how good our prices are, I'd like to call your attention to a report that was issued this month by Mark Montagna of Avondale Partners, one of the analysts that cover us and I'm sure is on the call. The unsolicited report headline is that Stein Mart is, "immune to share show-rooming" and that "our prices beat online competition." Show-rooming, as you may or may not know, is a process of browsing and price checking items in the store before eventually buying the identical ones online. Mark's analysis showed that for a selection of 28 of our items that we matched online, we have the best prices on 21 of the items. And for all 28 items, the average, on average, we beat the best online price by 24%. Obviously, we were pleased with these results, which support our belief that our prices are extremely competitive even on online channel.

So we're opening 4 new stores this year, all in the fall. We are also relocating a total of 4 stores this year, including our Williamsburg, Virginia store, one of our Austin, Texas stores, which we relocated to a much better place during the first quarter. We are looking at numerous, really numerous real estate opportunities at this time. However, I want to -- you to be mindful that many of these locations that are currently available in key markets do not meet our needs in terms of location and economics. But we believe that the renewed energy in our real estate department, our director is terrific and we are truly, truly having a search effort that will pay off in the long run.

Now Greg will you please go over our operating results?

Gregory W. Kleffner

Thanks, Jay, and good morning, everyone. I'll walk through our first quarter results, then discuss our balance sheet and store activity and finally update everyone on our 2013 initiatives that we discussed in our year-end earnings release.

Net income for the first quarter of 2013 was $14.7 million or $0.33 per diluted share compared to net income of $10.8 million or $0.25 per diluted share in 2012. EBITDA for the first quarter was $31.2 million, which was an increase of 29% from $24.1 million in 2012.

Total sales for the first quarter of 2013 increased 3.8% from 2012, while comparable store sales increased 1.2%. The comparable store sales increase was driven mostly by an increase in average units per transaction, and that was partially offset by a slight decrease in the number of transactions.

From a merchandise category standpoint, our strongest performance for the quarter were linen, ladies' career sportswear at men's furnishings. The performance of our home area carries over from last year as we continue to add strong results in all categories led by top of bed and core baby decorative pillows and sheets, particularly those in bold colors. In career sportswear, sales were driven by branded suit separates in our Attitudes department. And all of men's furnishings and tailored clothing continue to perform well above chain average.

More challenging categories for the quarter were dresses, petites and men's sportswear. For dresses, social and special occasion struggled somewhat, which was not offset by the balance of the department. Petites was weaker this year where we're working on a better balance in our casual and career assortment. In men's sportswear, seasonal categories such as shorts were disappointing, primarily due to the cooler start of the spring selling season.

Gross profit increased $6.1 million to $97.9 million as a result of the higher sales and the higher gross profit rate. The gross profit rate increased to 30.5% of sales this year from 29.7% of sales in 2012. The increase is primarily from lower markdowns as we continue to execute on improved pricing strategy.

SG&A increased only $700,000 to $73.6 million for the first quarter of 2013. Within SG&A, depreciation was up $1.7 million due to our increased capital spending. We also had $700,000 in additional professional fees associated with wrapping up our restatement. These SG&A increases were partially offset by a number of reduced costs, including $500,000 in higher credit card program income, which is now netted in SG&A, as last year we had not yet launched our new private label card. That was launched in June of last year.

Our effective income tax rate for the quarter was 39.6%, and that compared to 42.7% for 2012. Last year's rate was unfavorably impacted by nondeductible expenses for our postretirement life insurance benefit, which were eliminated in the fourth quarter last year.

Taking a look at the balance sheet, our financial position remains very strong with $84 million in cash and no debt. Cash is down from the $117 million balance at the end of the first quarter last year, primarily due to our $44 million fourth quarter dividend. Inventories increased $15.6 million or 5.9% to $278 million this year, and that supports our higher sales.

Capital expenditures totaled $7.7 million for the quarter compared to $9.1 million last year. Expenditures were higher last year primarily due to the new store openings during last year's first quarter.

Moving on to real estate, as Jay mentioned, we relocated 2 stores during the quarter. We also closed an underperforming store in Cumming, Georgia, which is north in the Atlanta market. And for the rest of year, we plan to open 4 stores, relocate 2 more stores in their respective markets and close 2 additional stores.

Now I'd like to update you on some of the other 2013 initiatives that we discussed a few weeks ago in our year-end earnings release and call.

We're on schedule to launch our new e-commerce business in the third quarter. Our business partner, GSI Commerce, which is a subsidiary of eBay, will host our website and customer service and we'll be doing our fulfillment from their facilities. As indicated in our 2013 outlook, this initiative will have a negative bottom line impact this year, primarily from startup costs of our initial expected sales volumes. In addition, margins will be lower than for our bricks and mortar stores due to fulfillment costs, which are included on our cost of sales.

We expect our e-commerce business to provide us with significant future benefit as we grow those sales and we'll keep you updated as our rollout proceeds.

For supply chain this month, we began the process of transitioning from third-party operated distribution centers to company-operated centers. Our distribution centers are located in Atlanta, Dallas and Los Angeles. Dallas is currently transitioning and should be completed by mid-June. Next will be Atlanta, which is our largest center, and should be completed in the third quarter. Los Angeles will be completed no later than early next year and might possibly move up into the end of this year. The change to company-operated distribution centers will not result in cost savings this year due to first year startup costs, initial capital requirements in the transition timeline, but it will have a positive impact from a cost standpoint in 2014. Taking the supply chain in-house will provide us with future cost savings, as well as give us some operational opportunities and advantages.

This concludes the prepared portion of our comments, and now we'll be happy to take your questions. Operator?

Question-and-Answer Session

Operator

[Operator Instructions] Our first question comes from the line of Mark Montagna with Avondale Partners.

Mark K. Montagna - Avondale Partners, LLC, Research Division

Greg and Jay, a question on the -- your various other expenses that you mentioned where you saved some money. Were those various other expenses solely from fewer store openings? Or were there some other items in there?

Gregory W. Kleffner

Not really, didn't have any -- Mark, this is Greg. It didn't have anything to do with less store openings. It -- I mean, we didn't call out anything specific like we'd normally try to, but frankly, it was $100,000 here, a couple $100,000 there kind of thing, so nothing that we could call.

Jay Stein

It's across the board.

Gregory W. Kleffner

Yes.

Mark K. Montagna - Avondale Partners, LLC, Research Division

Okay. Can we expect those across the board nuggets to continue going forward?

Gregory W. Kleffner

I think we're going to stick with our guidance right now on expenses, which says we would expect them to be up slightly for the year, Mark. It's just we're one quarter in, and I'd just say I don't want to make a trend out of one quarter.

Jay Stein

So -- but you obviously know what we're going to try to do.

Gregory W. Kleffner

Sure.

Mark K. Montagna - Avondale Partners, LLC, Research Division

Sure, yes. Okay. And then, just looking at your IMU for -- have you basically reached a steady state in terms of IMU that I believe -- would you have been down this year, Q1, versus last year and we should expect this to just be steady going forward?

Jay Stein

Listen -- this is Jay. Hey -- listen, I think we've reached a plateau that we can live with very comfortably and that our -- more importantly that our customers can live with and admire.

Gregory W. Kleffner

And Mark, it was about the same as last year, so...

Jay Stein

Yes, the same.

Mark K. Montagna - Avondale Partners, LLC, Research Division

Oh, Q1 was the same?

Gregory W. Kleffner

Yes, about, yes.

Mark K. Montagna - Avondale Partners, LLC, Research Division

Okay. And then --

Jay Stein

We're doing -- the kind of comp increases we're getting, obviously, we see something is working.

Mark K. Montagna - Avondale Partners, LLC, Research Division

Okay. And then can you give us an update on the regional buying program? I haven't heard about that in a while. Is it still focused on California? Has it expanded? And then...

Jay Stein

No. Listen, Mark, I mean, we haven't mentioned it in a while. Certainly, it's ongoing. And we're becoming better equipped to do it, obviously, with the new IT programs. Certainly California, certainly resort stores, all these things we're trying to customize as much as possible.

Mark K. Montagna - Avondale Partners, LLC, Research Division

Okay. And then within men's, I'm seeing other retailers -- like Macy's has actually gone after a new line of men's products. So Jay, I'm curious in your perspective, do you see a new fashion trend with your customer in men that they're actually caring more about what they're buying and looking like and...

Jay Stein

All right. Listen, let me tell you. All right, one in all of the years I've been in this business, we have the finest men's selection, both salable, we've ever had in history for any year. But the -- no new trends per se, but, I mean, we constantly are adding online that cater to our little bit younger customer. And they're working. But by and large, our men's selection is just -- we don't have any fears are there few other retailers that offer the selection, I think, that we do right now.

Operator

Our next question comes from line of David Mann with Johnson Rice.

David M. Mann - Johnson Rice & Company, L.L.C., Research Division

First question, as it pertains to gross margin, I know you've talked about the e-commerce initiative having a negative impact on gross margins as we go along the year. But given the strong performance in the first quarter, if we look at just the gross margin that you might expect without the impact of e-commerce, should we think that some of these gains from the first quarter could be sustainable for the rest of the year?

Gregory W. Kleffner

Well, when you look, David, you'll see obviously that our rate's up a little bit. And so you've got a couple of things that happened here. Obviously, great sales is going to help us on the margin line because there's a piece of our cost, occupancy is the biggest piece that's fixed, and so it leverages us against that and helps us with the rate. So I think you look at that and obviously then, as you mentioned, the second half, there will be some pressure from e-commerce and things.

David M. Mann - Johnson Rice & Company, L.L.C., Research Division

When you think about occupancy, what kind of comp growth do you need to leverage that?

Gregory W. Kleffner

Probably 2%.

David M. Mann - Johnson Rice & Company, L.L.C., Research Division

Okay. And then in terms of your largest markets, Florida and Texas, can you talk a little bit about the trend in the quarter, what you're seeing, especially in Florida where it looks like housing is recovering nicely?

Jay Stein

David, our business very good in those 2 markets. I mean, we can't quantify it, but it is very good in these markets.

David M. Mann - Johnson Rice & Company, L.L.C., Research Division

Okay. And then the home business, you gave up several thousand basis points over the last 5 to 10 years. When you look out, how much of that do you think you can recover in terms of as a category?

Jay Stein

I don't know how to answer that. I mean, it's my goal to recover 100% of that, and eventually we will.

Gregory W. Kleffner

And David, just in the last year, we've recovered -- 1% more of our sales is now in the home area, and that's really significant when you look at our comp sales increases. So that means it was comping above the chain enough that it gained 1% on the whole chain, which for them is a lot.

Jay Stein

David, we've spoken -- I mean, I don't think there's a -- I don't think -- I could be wrong, there's a retailer in the country that is seeing the kind of linen increases that we are, bar none. It's been so -- we've been blessed it's been so successful.

David M. Mann - Johnson Rice & Company, L.L.C., Research Division

Do you -- when you're looking at the other side of the home business, the harder side, are -- what's your sense there of the trend? And is that starting uptick in a nice way as well?

Jay Stein

Absolutely. But it -- absolutely, absolutely. But I mean it's paled by linen, but it's certainly up double digits.

Gregory W. Kleffner

It's above chain.

David M. Mann - Johnson Rice & Company, L.L.C., Research Division

Okay. One last question. When you think about capital allocation, you're obviously investing some in the business with systems, but you've been very good to shareholders with special dividends. How should we think about how you're looking at use of cash given it looks like it's going to build up back again? I mean, is share repurchase going to creep back into the equation?

Gregory W. Kleffner

Well, David, as you'd said, we've obviously looked at ways we can return value to our shareholders, we've done that with dividends last -- a couple of dividends in the last few years. We obviously, I think, first priorities are invest in the business. I mean, the sales increase, there's some investment in inventories you see. Obviously, we're investing in our stores and in the information systems. All the information systems is -- we're largely behind the largest investments of that. So we're going to continue to look at ways that we can return value to our shareholders, and obviously, buying back stock is one of those things.

Operator

[Operator Instructions] Our next question comes on the line of Mike Richardson with Sidoti.

Michael Richardson - Sidoti & Company, LLC

Just a couple of quick follow-ups here, how much is left on the current buyback authorization? And if you can give us an update on the CEO search, that will be great.

Gregory W. Kleffner

Yes. It's about 900,000 shares on the buyback, Mike, are left.

Jay Stein

And Mike, I'm -- not a lot I can say. We have not -- we have not found -- we have not been presented with anyone that we felt comfortable enough to run this business in the near-term. And I feel very comfortable in that role.

Michael Richardson - Sidoti & Company, LLC

Obviously, things are working well. Just 2 more quick ones and then I'll jump out and let somebody jump in. I think you may have mentioned this on the call before, Greg. How many store remodels are you planning to do this year?

Gregory W. Kleffner

We're going to be in the -- last couple of years, we've done 40 or 50 a year. We're going to be down more in the 25 range, I believe, this year. We're always -- a lot of people -- sort of the follow-on to that is when are we going to be done with that? And I say, we'll never been done, we're always going to be looking at our stores and how we can keep them fresh. It's just we were catching up in the last 2 years with that sort of, 40, 50 a year levels.

Michael Richardson - Sidoti & Company, LLC

Okay. And last one, if you'd share, what's the penetration rate on that private label card?

Gregory W. Kleffner

I don't want to share that. I will just say that the 2 cards together are up quite a bit. We were in the, call it, mid-single digits range with the -- before the private label card and we definitely want to get in and go well into the double-digit range, because the one that we always harp on is that those customers right now spend quite a bit more. Our current best customers spend quite a bit more than our average customers that look just like them but don't have the card.

Operator

[Operator Instructions]

Jay Stein

Look, if there are no further questions, thank you for being with us today. Thank you for caring about this company just like we do. This is a new Stein Mart, we've got a great team. And I hope the results you'll see in the short-term is going to be very convincing that we're a very high retailer. Our customers seem to be very happy with our inventory and the kind of presentation that we give, and I look forward to the results. So thank you, all.

Gregory W. Kleffner

Thanks. Good-bye.

Operator

Ladies and gentlemen, thank you again for your participation on today's conference call. You may now disconnect.

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