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Stein Mart, Inc. (NASDAQ:SMRT)

Q3 2009 Earnings Call

November 19, 2009 10:00 am ET

Executives

David Stoval – President, Chief Executive Officer

Gregory Kleffner – Chief Financial Officer

Glori Katz – Senior Vice President Marketing/Advertising

Analysts

[Jimmy Sheber – Rice Felcher]

David Mann – Johnson Rice & Company

Robin Murchison – Suntrust Robinson Humphrey

Operator

Welcome to the Stein Mart’s third quarter financial results conference call. (Operator Instructions)

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 statements, forward-looking information that is subject to risks and uncertainties. Additional information concerning those factors that could cause actual results to differ materially 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’d now like to turn the call over to Mr. David Stoval.

David Stoval

Good morning and thank you for joining us. I’m going to make some initial comments about the third quarter, progress we’ve made on several operational fronts, and our outlook for holiday. Then Greg Kleffner, our CFO will review the financials for you, and we’ll take questions after that.

We’re pleased to deliver another profitable quarter. Strategies we put in place late last year and early in 2009 have paid off in operating productivity and profitability. Keeping our inventories lean and our expense structure tightly controlled, clearly worked to improve the bottom line.

Our goal continues to be to improve our top line. While we made some modest progress in comps through the third quarter we still find sales conditions to be very challenging. Customer continues to need an additional incentive, usually a coupon, to come into the store and while we’re pleased with the level and freshness of our inventory, we did find that a lack of clearance merchandise in the third quarter further challenged our sales efforts. At the end of the third quarter our average store inventories are down more than 13% and our clearance inventory is down 34%.

Geographically, our business continues to be strongest in the west, California and Arizona. Late last month we opened our seventh store in the Phoenix/Scottsdale market and it has had a great beginning. Southeast continues to be challenging and the Gulf Coast is particularly weak. The Southeast did not [inaudible].

But work in the third quarter continues to be the casual part of the business. Denim and denim related casual tops continues to perform well as does the relaxed casual category. These items are working well in both women’s and men’s apparel.

The dress business [inaudible] as well. In shape ware, hosiery and costume jewelry are being positively influenced by the success of the dress. In men’s casual is king, and we’re pleased with our business and our men’s accessory business.

We continue to evolve the real Stein Mart shoppers marketing campaign. New TV commercials are appearing in last September. Customer research shows we’re making inroads to brand awareness and [inaudible] particularly among younger shoppers, the most significantly more dollars into the third quarter this year that kept advertising spend overall at 4% of sales similar to last year.

Social networking efforts continue to ramp up. We made an online advertising on sites like Koodo and Our Village in addition to our presence on Face Book, Twitter and the like.

I’m going to wrap up my comments about the third quarter with a supply chain update. As you know all three consolidation centers are in use and as planned, two of the three store distribution centers are fully operational. You may remember that we will not implement the California store distribution center until after the holidays.

The full transition took place during the third quarter. Store receiving operations were converted and vendors were transitioned to the new process.

As with any change of this magnitude, there were issues that created some distraction and bumps along the way, but through a tremendous amount of hard work and cooperation among vendors, merchants, operations and the store’s organization, we’re very pleased with how the process is flowing right now.

Currently, virtually all merchandise destined for stores in Atlanta and Dallas, store distribution centers is flowing through the new supply chain.

I also want to address our thinking about the store network. As you know we opened two new stores and closed 11 this year. While we are always interested in looking at exceptional opportunities, next year we’re focused primarily on relocating stores to better real estate.

Our main thrust is viewing current situations where the leases end or have provisions for early termination. We hope to take advantage of this real estate market and lock in better locations in markets where our stores could have additional opportunity.

Turning to the fourth quarter, we are aggressively going after holiday business this year. Even though inventories at most retailers are more conservative than they were a year ago, we do expect an increase in our competitive ad spending and aggressive promotion aimed at grabbing market share.

In the third quarter, we diverted ad dollars to increase our market spend in the fourth quarter. We expect to be more in the fray for post Thanksgiving and during the weeks leading to Christmas. We have significantly more days of TV and an increase in newspaper inserts this year, and of course we’ll continue online advertising and other digital media.

I think I noted the consumer appetite, just how much they intend to spend this year on who and for what. Because we’re still unsure how to predict their behavior we continue to be extremely conservative in projecting our results.

From an SG&A perspective, we know we will have additional ad spend in the fourth quarter as well as costs for extra staffing to go along with the higher holiday sales volume. We expect SG&A dollars to be somewhat higher than they have been in previous quarters this year.

On the margin side, we would expect substantial improvement in the fourth quarter margin rate versus last year, particularly after we took such heavy mark downs at the end of 2008.

However, we are committed to keeping our inventories fresh and in line with sales so that we’re correctly positioned as we start the new year and we will do what we must to remain competitive throughout the season.

Now our CFO Greg Kleffner will review the numbers with you.

Gregory Kleffner

Good morning everyone. For the third quarter of 2009 our sales decreased 9.6% from the third quarter of 2008 while our comp store sales decreased 6.2%. The comp store decrease reflects a 7.7% decrease in the average transaction size, somewhat offset by a 1.5% increase in the number of transactions.

Gross profit increased $2.1 million and as a percent of sales increased by 320 basis points. Merchandise margins increased 400 basis points through increased mark up and decreased mark downs. Occupancy costs decreased $1.9 million, but the percentage of sales increased 80 basis points due to the impact of the lower sales.

For the third quarter SG&A expenses decreased $20.2 million and as a percent of sales decreased 420 basis points. Store operating expenses and depreciation decreased $13.8 million. Non buying expenses in the corporate office decreased $3.1 million. Store closing expenses decreased $2.2 million and advertising expenses decreased $1.1 million.

Other income was relatively flat in the third quarter compared to last year and this reflects the reduced issuance of our Stein Mart brand of MasterCard’s offset by income from our magazine program which started in the third quarter and our lease income was up slightly on a comparative store basis.

In the third quarter we reversed a portion of our valuation allowance for deferred tax assets as a result of a tax accounting method change. We also decreased our estimated annual effective tax rate due to changes in book tax differences. If these favorable tax adjustments had not been recorded during this period, the quarter and year to date 2009 earnings would have been $2.5 million or $0.05 per diluted share lower than what we reported.

All of this resulted in net earnings of $3.2 million or $0.07 per diluted share in the third quarter of 2009 and that compares to a loss of $14.1 million or $0.34 per diluted share in the third quarter of 2008.

The first nine months of 2009 total sales decreased 8.9% from the first nine months of 2008. Our comp store sales decreased 6.3%. The comp store decrease reflects a 7.2% decrease in the average transaction size, slightly offset by a .9% increase in the number of transactions.

Gross profit increased by $2.6 million and as a percent of sales increased by 270 basis points. Merchandise margins increased 350 basis points due to increased mark up and decreased mark downs. Buy and occupancy costs decreased $4.2 million and as a percent of sales increased to 80 basis points due to the impact of the first nine months SG&A expenses decreased $50.2 million and as a percentage of sales decreased 290 basis points.

Store operating expenses and depreciated decreased $35.8 million. Non buying expenses in the corporate office decreased $8.9 million and advertising expenses decreased $3.6 million and store closing expenses decreased $1.19 million.

I also want to note that about $12 million of year to date SG&A decreased. This came from eliminated expenses at our closed stores.

Other income decreased $2.1 million for the first nine months due to the reduced issuance of our Stein Mart branded MasterCard’s, offset some by our magazine program. Our leased shoe department was up slightly on a comparative store basis.

For the first none months of 2009, we earned $20.8 million or $0.47 per diluted share as compared to a net loss of $15.1 million or $0.37 per diluted share for the first nine months of 2008.

Cash provided by operations for the first nine months of this year was $74.8 million. We ended the quarter with no bank debt and with slightly more than $59 million in cash and cash equivalents.

We continue to expect to be debt free for the remainder of the year. Our capital expenses are on track to be in the $7 million to $8 million range. And finally, you’ll see that the inventories continue to be down substantially while accounts payable are actually up. This reflects the much more current nature of the merchandise in our stores.

We’re now ready to take questions.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from [Jimmy Sheber – Rice Felcher]

[Jimmy Sheber – Rice Felcher]

It seems like these SG&A improvements are almost accelerating and you say that Q4 SG&A will be a little bit higher than it has been in the prior quarters. You’re talking about the prior quarters of this year, is that right?

Gregory Kleffner

Yes. The SG&A in the fourth quarter will be higher, but again we’ll have a save versus last year and last year was higher also. We just want to make sure that when you look at Q2, Q3, you don’t just take the same SG&A amount and think that that will happen in Q4.

[Jimmy Sheber – Rice Felcher]

You’ve done a great job with bringing the SG&A numbers down, but how much more do you think you can go with that?

Gregory Kleffner

I think we need to get to the end of the year and we’re looking at that and reassess at that time and we’ll have a better idea at that point.

[Jimmy Sheber – Rice Felcher]

On the sourcing, I guess I’ve asked this question before, but I want to keep on top of it. You’ve got your model where you’re buying excess inventories, and close out in the fall. The department stores, the Penny’s the Macy’s etc. that keep going on leaner inventory, we hear from our vendor contacts that the vendors are running with leaner inventory, is that going to affect your ability to source goods?

David Stoval

Surplus inventory is becoming tighter, but we’re still finding significant opportunity. We’re in the value business so we’re going to give the customer the best merchandise at the best price. At this point, some of what’s going on in the department store world hasn’t really affected our ability to secure merchandise.

[Jimmy Sheber – Rice Felcher]

So you haven’t done any thing like trying to source more of your goods at origin than you already are?

David Stoval

We’re trying to find the best goods at the best prices and we’re using all channels to look at so we can find it.

Operator

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

David Mann – Johnson Rice & Company

My first question is on the supply chain. If you look at some of the issues that you said might have hurt you in the quarter, were you able to put a pencil and paper to get a sense on what kind of cost you had to incur to rectify things and how much in sales you might have lost from out of stocks caused by that?

Gregory Kleffner

I think the supply chain isn’t really as much a cost issue as it really is, and we probably overstated. I think number one we’ve done a really nice job of getting those and learning from the first and really getting a lot of the issues, a lot of which we expected behind us pretty quickly.

So I don’t think it’s really a cost issue as much as it is we’re working on making sure the flow to the stores is happening as quickly as possible so we get the merchandise out there and I think with the multiple variables involved in that, it’s really tough to tell you exactly how much that might have impacted sales. We don’t think that’s a substantial problem.

David Mann – Johnson Rice & Company

Do you feel that those issues have now been rectified going into holiday?

Gregory Kleffner

Yes.

David Mann – Johnson Rice & Company

In terms of the last question, that expense savings, I guess in the past you talked about $40 million to $50 million in savings for this year. I know you’ve gotten some from supply chain on top of that. Looking at the year to date numbers, you’re already at $50 million. Can you parse through compared to that $40 million to $50 million target, how much of that is done? Will you achieve that? And also supply chain savings, how much of that, I guess $20 million plus you already achieved.

Gregory Kleffner

A couple of things; one is I want to emphasize the one thing I said in my comments and that was that about $12 million of our decreased SG&A is just the result of having closed stores and the SG&A that just went away with those stores. So when you look at what we’ve saved to date, we never counted in the $40 million or $50 million just closing some stores because obviously marketing goes with that.

So that’s one thing when you look at that against our original $40 million to $50 million estimate. Certainly I think we look at the high end of that $40 million to $50 million as where we’ll end up. And yes, we have received some savings from supply chain. There’s also been some implementation costs that offset that a little bit this year, and those will continue for some time and the additional benefits will continue really well into 2010 until we settle down to a final run rate.

David Mann – Johnson Rice & Company

The footwear business, we’re hearing from every footwear retailer that that business has really been strong. How is your footwear business been doing?

David Stoval

The footwear business is strong. It’s trending better than the company. It’s led by the boots and the bootie business and the updated styles in our assortment.

Operator

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

Robin Murchison – Suntrust Robinson Humphrey

When you look overall at your merchandise assortment across all the venues, and you think about how you’ve loaded the merchandise versus consumer appetite to shop, how much of the merchandise assortment do you think you can still improve upon or at this point are you pretty comfortable with where it is, and it’s a matter of she should decide to open up her wallet a little bit more.

David Stoval

It’s a little of both. There are places where I think we’ve made great progress in our assortment and there are other opportunities. One of the most specific opportunities that we think we’ve got where we may be able to go out too far is in the career assortments for women and for men. And so we’ve got opportunities there, and we’re working on changing that mix to better focus on that career oriented customer.

We’ve mentioned home in the past. We’ve had new leadership in the home store and we think that that will help us as we go forward, and there’s still a lot of work to do there.

Robin Murchison – Suntrust Robinson Humphrey

When you consider the store size, do you still think the current size of the store, and I believe it’s about 34,000 square feet, it might be around 30,000, but is that the right size for a store, and when you look at the allocation of space by category, is there any repositioning that you would like to do, maybe come out of some home and reallocate that to another area. How do you think about that?

David Stoval

We do think the 30,000 to 35,000 square feet sized store represents us well. We are testing in some stores, some space allocation changes, reducing home in some places and expanding accessories and expanding the dress business. So we’re going after the strong businesses.

It’s still too early to tell whether those steps are paying off or not, but we’ll certainly watch that as we allocate space for spring.

Robin Murchison – Suntrust Robinson Humphrey

You brought in toddlers. Can you comment on how that’s doing?

David Stoval

We’re testing kids. We expanded the test from 40 to 46 stores. We’re still evaluating that test. We’ll have more information I think after the fourth quarter.

Robin Murchison – Suntrust Robinson Humphrey

We’re hearing from a lot of the women’s apparel retailers about how strong accessory trends are necklaces and sort of big bold pieces in this category to complete periods of higher merchandise margin. Can you comment on that category? Are you where you want to be in it? Is there additional opportunity as you look ahead to spring?

David Stoval

We’ve seen a real jump in the costume jewelry business by being in the kinds of things you’re talking about. The hand bag business continues to be a weak part of the accessory business, but the rest of accessories has been strong. And yes, we see it continuing on a go forward basis for spring.

It may be as much as how she’s shopping that she’s buying a new accessory item to update the existing wardrobe.

Robin Murchison – Suntrust Robinson Humphrey

If there is opportunity, the vendor wholesale base out there clearly dealing with perhaps less demand from the department store sector, but wouldn’t there on the flip side be opportunity for you because they presumably want to, the vendor wholesale base looks for alternative distribution channels. Isn’t that a benefit? You’re not getting your merchandise from sell offs from department store retailers as much as you are contracting your own deals with the vendor/manufacturer side.

David Stoval

That’s correct. We’re seeing more opportunities open up for us.

Operator

Your next question comes from [Jimmy Sheber – Rice Felcher]

[Jimmy Sheber – Rice Felcher]

You mentioned in your prepared remarks some younger customers. Can you expand on that a little bit? I know you’ve been making an effort to try and draw in a younger customer, or at least present some younger merchandise to your existing customers. How is that going?

Glori Katz

What we’re seeing is that transactions are up and I think that indicates that we’ve attracted the new and younger customer with the marketing strategy. She seems to be reacting favorably to our value message and a more modern assortment. We’ve also been successful at reactivating lapsed customers, customers in our data base who haven’t shopped with us in more than a year.

We realized that TV advertising has made up more top of mind with that customer again. So we’re pleased with the progress we’ve made against adding new customers.

[Jimmy Sheber – Rice Felcher]

Bringing in customers who haven’t been in in a year that sounds great. Last quarter you said that you saw some possible signs of bottoming in the Florida business. I know you have a big install base in Florida. How has that progressed? Is that improving or is it just bouncing along the bottom? How is that working in Florida?

David Stoval

The Florida business is inconsistent. We’ve got some but it’s not steadily there.

[Jimmy Sheber – Rice Felcher]

But it’s picked up so much in California for you. I might have missed this, but have you discussed the store opening or store closing plans for next year? You net closures of stores, how do you see yourself in 2010?

David Stoval

We have not yet finalized our 2010 real estate strategy.

[Jimmy Sheber – Rice Felcher]

The last thing I wanted to ask about is some of these other retailers; they’re seeing these fantastic increases in year over year online sales. How are you positioning yourselves for that? Can you talk about that a little bit?

David Stoval

We’re not currently in the online business although you can purchase gift cards. We are actively in the social networking business and it’s something that we’ve looked at but haven’t made any decision yet.

Operator

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

David Mann – Johnson Rice & Company

Can you talk a little bit about what you expect your year end inventory to look like given how successful you’ve been in taking it down?

Gregory Kleffner

I think if you look at the, probably the way to go on that is almost two years back because you can see that this quarter we continued to be down substantially but now as much as we were in the prior because last year we were already down 12% against 2007. So probably look at a two year decrease, and I think that 25% decrease over two years is a good thing to look at.

Operator

There are no further questions at this time.

David Stoval

Thank you for joining us this morning and for your confidence in our company. This concludes our third quarter conference call.

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Source: Stein Mart, Inc. Q3 2009 Earnings Call Transcript

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