Stein Mart, Inc. F2Q09 (Qtr End 08/01/09) Earnings Call Transcript

Aug.20.09 | About: Stein Mart, (SMRT)

Stein Mart, Inc. (NASDAQ:SMRT)

F2Q09 Earnings Call

August 20, 2009 10:00 am ET

Executives

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

Gregory Kleffner – 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

Jimmy [Sheber] – [Rice Felcher]

David Mann - Johnson Rice & Company

Robin Murchison - Suntrust Robinson Humphrey

Brian Gaines – Springhouse Capital

Operator

Welcome everyone to the Stein Mart second quarter financial results conference call. (Operator Instructions)

Before we begin the conference, I would like to inform you that 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 January 31, 2009.

I would now like to turn the call over to David Stovall. Mr. Stovall you may begin your conference.

David Stovall, Jr.

Good morning and thank you for joining us. We are pleased to be able to report a profit again this quarter despite the continued difficult sales environment. A number of the initiatives we spoke about last quarter are gaining traction. This morning I will update you on some specific projects. After my initial comments our new Chief Financial Officer, Greg Kleffner, will review the financials for you.

The external environment remains difficult although I think we are growing more accustomed to the diminished consumer appetite. Our observation is that the consumer is motivated to purchase if we can offer her something fresh or if an item has a value proposition too compelling to ignore. So in our attitudes areas where we are offering better branded denim and denim inspired tops at easily recognizable values, the customer is incented to buy. The same goes in our dress area where the new maxi dresses have been selling all summer.

We don’t see a major change in her behavior on the horizon so we are approaching the second half of the year with a high degree of conservatism but with an understanding that in order to improve sales we will have to have a most attractive merchandise offering. So you can continue to expect rigorous control of both inventory levels and expenses but we will be poised to chase business if the customer signals she is becoming more receptive.

Geographically our business continues to improve in the western part of the country, in Texas and in the Ohio valley area. Florida continues to be challenging although the deterioration has abated somewhat. Unfortunately, similar difficulty is now being felt in other southeastern states, especially in the Carolinas. In the third quarter the last quarter of this year’s slated store closings will occur. We will open our final location for the year in Phoenix at the end of October.

Our merchandise inventories were down more than 22% on an average store basis at the end of July. While that is a dramatic reduction it is interesting that we have had very little push back from the customer regarding the inventory levels. In fact we are getting kudos for improving the shopability of the store. Reducing our inventory has had multiple benefits including far less clearance merchandise, better sell through at regular price and improved turn. It has also helped us improve our cash position and while our heaviest delivery season is still in front of us it appears unlikely that we will need to borrow against our credit line for the remainder of the year.

We were also pleased with the impact our stronger marketing efforts had on the second quarter. Research completed in February helped shape our marketing strategies which focused on keeping our existing customers, attracting a newer younger customer, making sure we are consistently on our radar screen with more incentives for her to shop and jumping into the digital age.

For the fall season our promotional calendar will be an aggressive one although we plan the marketing spend at flat to last year. We will have significantly more days of TV versus fall 2008 with a fresh round of commercials featuring real Stein Mart shoppers. Again, we will feature the modern customer who can authentically deliver our marketing message of brand name fashion at discounted prices every day.

Tracking research from this spring shows we are making headway particularly with the younger customer while retaining our core customer. We will have a mix of media including broadcast, direct mail, newspaper, online advertising and an intensified email program. As with the case for spring, we will strategically reduce our direct mail quantities as well as our newspaper distribution.

As we told you last quarter we have begun using social media using Facebook and Twitter to engage and communicate with our Stein Mart shoppers. Our newly updated Steinmart.com website is the hub for much of this digital activity and we have had nearly half a million visitors during the first six weeks.

Finally, we believe our target customers will continue to need incentives to shop. We plan to give her reasons to shop every week. This will mean a mix of new and strengthened events along with continued attention to our best customers through our Preferred Customer program.

Our transition from drop shipping merchandise direct to stores to our new supply chain methodology continues on track. Product is flowing through the New Jersey, Dallas and California consolidation centers to our Atlanta and Dallas store distribution centers. The Dallas SDC is fully operational and the Atlanta SDC is now on track to be fully operational in two more weeks. Altogether about 88% of our stores are now receiving merchandise through the store distribution centers and we are waiting to activate the west coast distribution facility after the holidays.

Because we have been able to make this transition in a timely manner we have already begun to realize some of the benefits of the new supply chain methodology earlier than expected. Some of the headcount reductions in the individual store receiving areas have already begun and we will see additional benefit in the second half of the year, ahead of our original timeline which called for the cost savings to begin in 2010.

At this point in the call I would like to introduce our new CFO, Greg Kleffner. Greg joined us last week and comes to us from the Kellwood Company where he was Chief Financial Officer. Prior to Kellwood, Greg has a 25 year career with Arthur Anderson as an audit advisory partner in St. Louis serving several large retail clients. Greg is going to review this quarter and the six month financial results with you and then we would be happy to answer your questions. Greg?

Gregory Kleffner

Thank you Dave and good morning everyone. For the second quarter 2009 total sales decreased 7.7% from the second quarter of 2008 while comp store sales decreased 4.5%. The comp store decrease reflects a 7% decrease in average transaction size somewhat offset by a 2.5% increase in the number of transactions.

Gross profit increased $1.3 million and as a percent of sales increased by 240 basis points. Merchandise margins increased 300 basis points due to increased mark up and decreased mark downs. Buying and occupancy costs decreased $1.9 million but the percentage of sales increased 60 basis points due to the impact of lower sales.

For the second quarter SG&A expenses decreased $18.3 million and as a percent of sales decreased 390 basis points. Store operating expenses and depreciation decreased $10.8 million. Non-buying expenses in the corporate office decreased $4.7 million and advertising expenses decreased $2.8 million. Other income was down $1.1 million in the second quarter compared to last year. That decrease reflects reduced issuance and use of our Stein Mart branded Master Card.

The effective tax rate for the second quarter 2009 was 72.6%. This resulted from changing from the discrete period method we used in the first quarter. It compares to a more normalized rate of 35.4% for the first six months of 2009 that was calculated using the estimated annual tax rate. If the estimated annual rate had been able to be used for both the first and second quarters of 2009 our second quarter earnings would have been $2.1 million or $0.05 per share higher with an offsetting decrease in the first quarter.

All of this for the second quarter resulted in our net earnings of $1.5 million or $0.04 per share. That compares to a loss of $8 million or $0.19 per share in the second quarter of 2008. For the first six months of 2009 total sales decreased 8.5% from the first six months of 2008 while comp store sales decreased 6.3%. The comp sales decrease reflects a 6.9% decrease in average transaction size slightly offset by a 0.6% increase in the number of transactions.

Our gross profit increased by $0.4 million and as a percent of sales increased by 250 basis points for the first six months of the year. Merchandise margins increased 330 basis points due to increased mark up and decreased mark downs. Buying and occupancy costs decreased $2.3 million but as a percent of sales increased 80 basis points due to the impact of lower sales.

For the first half SG&A expenses decreased $30 million and as a percent of sales decreased by 230 basis points. Our store operating expenses and depreciation decreased $21.7 million. Non-buying expenses is the corporate office decreased by $5.8 million and advertising expenses decreased $2.5 million. Other income decreased $2 million for the first half due to the reduced issuance and use of our Stein Mart branded Master Card.

For the first six months of 2009 we earned $17.6 million or $0.41 per share as compared to a net loss of $1 million or $0.02 for the first six months of 2008. Cash provided by operations in the first half of this year was $58.8 million. We ended the second quarter with no bank debt and with $45 million in cash and cash equivalents. This was resultant from both our profitability and a reduction in our inventories. When you look at the balance sheet you will see that our inventories are down substantially while accounts payable are close to our historic levels. This reflects the much more current nature of the merchandise we have in our stores right now.

As Dave indicated it does not appear we will need to use our credit line for the rest of the year. On a final liquidity note, after the end of the quarter so it won’t be in our balance sheet or our cash flow for the quarter, but as expected we received almost $20 million in income tax refunds which further solidifies our cash position.

At this point we would be happy to take your questions.

Question-and-Answer Session

Operator

(Operator Instructions) The first question comes from the line of Jimmy [Sheber] – [Rice Felcher].

Jimmy [Sheber] – [Rice Felcher]

Could you go over the tax rate? I want to make sure I understand that. Let me repeat, you provided an 80% provision of income before taxes here. I understand there is some catch up from the lower rate last quarter. Does that imply you are looking for some rather hefty profits in Q3 and Q4 or how should I look at that?

Gregory Kleffner

As you noted, the effective tax rate for the second quarter was 72.6%. You are right, that resulted from our changing from the discrete period method we used in the first quarter. At that point we had not been able to make a reliable estimate of the annual effective rate for the year. We now believe a reliable estimate can be made and so we have calculated the provision using what we estimate the rate for the entire year will be which is the 35.4%. So that was the catch up second quarter versus first quarter.

Jimmy [Sheber] – [Rice Felcher]

A minute ago you mentioned $20 million in a tax refund. Did I understand correctly in you said that is not included in the $45 million shown on balance sheet at the end of the quarter?

Gregory Kleffner

That is not included so it is in addition to. Yes.

Operator

The next question comes from the line of David Mann - Johnson Rice & Company.

David Mann - Johnson Rice & Company

In terms of the cost savings estimate you had given earlier in the year it sounds like you just said you had $30 million lower SG&A year-to-date. Can you reconcile that with the previous estimate of $40-50 million in savings for the year? Does that now mean we should expect at least the $50 million or perhaps something higher than that?

Gregory Kleffner

At this point we are on track to meet and possibly exceed the previous estimate of $40-50 million for SG&A savings.

David Mann - Johnson Rice & Company

In terms of what you have said earlier about the supply chain can you give us a sense on how much benefit you might expect in terms of those savings from the back half and just remind us if there is sort of a $20 million SG&A over the course of the implementation?

David Stovall, Jr.

I think the answer is the SG&A save started earlier than we originally expected. Ultimately how much we realize over the long-term depends somewhat on the volume of receipts. When receipts are lower we will save less. Greater receipts, greater savings. When the sales and receipts grow we will save more. Most of this is in the SG&A and the question will be over the length of time of implementation we will get the $20 million it is just the timing wont’ be as we originally said all next year. We have already started to get some now and we will continue to get that probably well into next year.

David Mann - Johnson Rice & Company

What is different now that is allowing you to get savings versus your previous estimate? Was it just conservatism about how it would be implemented?

David Stovall, Jr.

I think it was driven by conservatism. Secondly, knowing some of the headcount reductions as we got an open position we saved that position open so that we had more opportunities for displaced people to be able to go other places which is a very good thing.

David Mann - Johnson Rice & Company

Can you at least give us a sense on quantifying how much you might be getting now this year versus what would have happened next year?

David Stovall, Jr.

Actually that is a difficult challenge. At this point I am not able to give you that except to say that the $20 million is still part of the save we will get from this implementation.

David Mann - Johnson Rice & Company

On gross margin I think last quarter you talked about how some of those year-over-year improvements in gross margin may have not been sustainable and now it seems like with the report and gross margin improvement this quarter you were able to drive some nice sustainability. Can you give us a sense on how that bodes for the rest of the year? Specifically second quarter versus third quarter it looks like you were a little more aggressive in clearance at the end of the second quarter. Is that the case and does that have implications for the quarter gross margin?

David Stovall, Jr.

The strategy has always been to keep our inventories fresh and to take mark downs when they needed to be taken. As we started at the end of last year and continued through the first and second quarter we are on target to continue with that. We are pleased with our gross margin progress. We think lower inventories will help us in the long run keep that strategy.

David Mann - Johnson Rice & Company

Could you just clarify, did you accelerate your mark downs from what might have historically been taken in Q3?

David Stovall, Jr.

The answer is yes we did.

Operator

The next question comes from the line of Robin Murchison - Suntrust Robinson Humphrey.

Robin Murchison - Suntrust Robinson Humphrey

Question on the vendor community in terms of product availability and what you see going on in pricing. Clearly some of the vendors out there have tightened up their operations and so I am just wondering as you look at the second half of the year and forward what kind of benefit or what do you think you can see or realize in terms of product availability for one? Do you think it is going to continue to flow? In terms of also pricing benefit, some retailers are indicating a 4-6% improvement in lower costs for the second half and even a little bit more than that in the first half of next year. From your perspective what do you see?

David Stovall, Jr.

Right now there is still plenty of merchandise in the channel available for purchase. We are watching it closely. We are aware of the actions vendors are taking given the continued difficult economic environment and we do think it could be more of a challenge going forward but we are paying close attention to that and making sure we are partnering with our vendors so they know what we expect them to provide.

As far as product costs, we have seen some lessening of product cost but actually it hasn’t been significant yet from our vendors. In terms of future reductions while we were hopeful of those I don’t know we have seen any evidence that is going to happen.

Robin Murchison - Suntrust Robinson Humphrey

Are you finding you are getting, are you continuing to attract new vendors?

David Stovall, Jr.

Yes we are.

Robin Murchison - Suntrust Robinson Humphrey

Are you doing any focus groups currently?

Glori Katz

We continue to do brand tracking and we will have three more waves of that brand tracking through the fall season. That was just talking to customers, not so much in focus groups but more in answering our specific questionnaire that relates to brand awareness and advertising awareness. We are looking at other opportunities to talk to consumers about other areas of our business and probably will involve some additional groups before we are through the end of the year.

Robin Murchison - Suntrust Robinson Humphrey

Do you have any data that points to the average profile of your customer either age, income or all of the above? I am just wondering if you are seeing some sort of a transition or pick up maybe at the lower age range or higher range. Whatever you have. Is there any intelligence on that?

Glori Katz

Brand tracking has shown that our effort in trying to reach the younger customer our advertising has been paying off. Not only in terms of brand and advertising awareness but also in purchase interest. We have been able to support that in some of the data in our consumer database which suggests that especially among newer customers we have seen a reduction in the mean age. I think that is because we have attracted this younger customer and also attracted a better customer profile which will bode well for the future.

Robin Murchison - Suntrust Robinson Humphrey

Can you call out an age on that or no?

Glori Katz

No. It is a mean age younger than we have seen before and we are pleased with that progress.

Robin Murchison - Suntrust Robinson Humphrey

I am also wondering when do you think you will begin to rethink the store unit growth plan or your system size plan? I am sure it is not this year but I’m just wondering when you might return to some type of incremental store growth.

David Stovall, Jr.

I think that is a very good question. As we see our merchandise offerings begin to work better and our cash position being where it is it is certainly something we are looking forward to undertaking. At this point it is a little premature to talk about that.

Robin Murchison - Suntrust Robinson Humphrey

Have you all said anything about California, how California is performing?

David Stovall, Jr.

California is one of our strongest markets. That customer is really responding to our emphasis on the updated, on the casual and on the attitude looks in both the women’s and men’s area. They like our offerings and that business has been one of our leading spaces.

Robin Murchison - Suntrust Robinson Humphrey

Lastly, can I ask you to characterize the men’s business? What are you seeing there or what do you expect to see there?

David Stovall, Jr.

We are seeing a strong trend driven by denim and denim friendly tops. We are seeing positive results in the golf business. The furnishings clothing side of the business continues to be difficult.

Robin Murchison - Suntrust Robinson Humphrey

I think you had an event in your gift and home, maybe your linens category; there was one weekend where you had an event. I know that historically that has been a little more of a problematic category and I wonder if you could just talk about that part of your business? I assume it continues to underperform but I just wanted to get an update.

David Stovall, Jr.

It does continue to underperform.

Operator

The next question comes from the line of Brian Gaines – Springhouse Capital.

Brian Gaines – Springhouse Capital

Some more questions on the sourcing. It is good to see it is already rolling through. Just trying to understand of the $40-50 million in cost savings you talked about does that overlap with the $20 million sourcing or should I think about them as distinct?

Gregory Kleffner

They are distinct.

Brian Gaines – Springhouse Capital

Just to understand a little more, what cost would you be running now, maybe the first question is where is that sourcing? Was that mostly just in SG&A line? Or some COGS or kind of split?

David Stovall, Jr.

It is mostly SG&A.

Brian Gaines – Springhouse Capital

Most of it is just less employee needed at prospective stores?

David Stovall, Jr.

That is correct.

Brian Gaines – Springhouse Capital

Are there extra costs you are running now, I think before you talked about extra costs related to the sourcing initiative. Is there any way to quantify how much those costs are? What they are so we can sort of try and quantify?

David Stovall, Jr.

Not really.

Brian Gaines – Springhouse Capital

What would they be? The extra costs you would be running?

David Stovall, Jr.

Start up costs, some transition costs, some systems investments to make sure we are handling the product like we should be handling it. Extra focus, extra audit and extra time.

Operator

At this time we have no further questions. I will now turn the call back over to Mr. Stovall for any closing remarks.

David Stovall, Jr.

Thank you very much everybody for joining us this morning and for your confidence in our company. This concludes the second quarter conference call. Thank you.

Operator

Thank you. This concludes today’s conference call. You may now disconnect.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!