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Stein Mart, Inc. (NASDAQ:SMRT)

Q1 2014 Earnings Conference Call

May 22, 2014 10:00 AM ET

Executives

Jay Stein – Chairman, Chief Executive Officer

Gregory W. Kleffner – EVP and Chief Financial Officer

Analysts

David Mann – Johnson Rice

Laura Champine – Canaccord

Mark Montagna – Avondale Partners

David Berman – Berman Capital

Michael Richardson – Sidoti & Company, LLC

Operator

Welcome to the Stein Mart, Inc. First Quarter 2014 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 risk 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 1, 2014.

I would now like to turn the call over to Jay Stein, CEO of Stein Mart, Inc.

Jay Stein

Good morning and I want to thank you for joining us today. I am going to make some opening comments and then will turn the call over to Greg Kleffner, our CFO who will review the results for the quarter. We will certainly take questions after that.

During our year-end earnings call, I had said the first quarter would be impacted by the slow – and not the slow start and not be typical of what we would expect for the full year. February and March as you know were definitely lower due to the cold weather and the Easter calendar shift but the weather improved and so did our sales. We recovered well and achieved a solid 2.6% comp store sale increase for the quarter and the good bottom-line results, while our earnings do not quite beat last year, we are certainly off to a good start I believe.

Importantly, even with weather impacted sales, we maintained a gross profit rate. Our earnings were impacted by our investments in new stores and our e-com business. The sales growth initiatives will in turn drive higher sales and profitability.

So again, I want you to know that as the temperature has became more seasonal in the quarter our customers did respond just like we hope they would to our great spring assortments. Through the first quarter, most of ladies apparel and our home area did just great. As expected, dresses and ladies boutique performed particularly well as our customers prepared for her wardrobe for spring and for Easter.

Our significant April dress event really benefited from the addition of television and our marketing of that event and in our home store, our Nina Campbell home collection continues to outperform, as we did more, as we add more and more categories to this line which we will continue doing more so.

So this year we are on track to open a total of 10 new stores and relocate six. Our spring store opening plans is now complete with three stores, one in Las Vegas, one in Miami which I attended and one in Washington DC which opened last week.

We'll announce the location of our seven fall stores soon. Pre-opening costs obviously will continue to slightly impact earnings this year but it is a necessity impacting our store growth and I might add all three, all three openings were way above of our expectations.

The Board and myself were obviously pleased to increase our quarterly dividend by 50%, $0.075 per share last month. We are confident our business and our ability to generate more cash that we need for our growth warrants increasing this dividend and making periodic stock buybacks which we have done as well which is a great use of our cash because it increase shareholder value.

As announced in our release, we have strengthened our e-com leadership with the addition of Sara Meza as our new director of e-commerce. At Belk, Sara was instrumental in making their website one of the fastest growing sites for three years running, so we are excited to have her on our team and we look forward to what she can do in this very important business now and in the future and I might add personally she is a really super hire for our company.

Let me say once again that we are fully focused on growing our sales to increase productivity and profitability both at our existing stores and our new ones. As our sales initiatives build, they will continue and certainly will return much.

Unfortunately, I will not be able be here for the remainder of this call today due to unavoidable travel commitment which I have to leave for right now. However, if you have any questions for me, at the end of this call, I have asked Greg to let me know and I will promise that I will certainly get back to you with an answer. You can be rest assured of that. I look forward to talking to you in the next quarter. Again, I apologize for not being able to personally answer the questions but I am always available for your questions. Now Greg will go over the operating results.

Gregory Kleffner

Thanks Jay and good morning everyone. I will walk through our first quarter results then discuss our balance sheet, store activity and sales initiatives.

Net income for the first quarter of 2014 was $14.1 million or $0.31 per diluted share compared to net income of $14.7 million or $0.33 per diluted share in 2013. First quarter adjusted net income was $14.7 million or $0.32 per diluted share, compared to adjusted net income of $14.6 million or $0.33 per diluted share in 2013.

Adjusted EBITDA for the first quarter was $32.4 million, an $800,000 increase from $31.6 million in 2013.

Comparable store sales for the first quarter of 2014 increased 2.6% over last year’s first quarter. The same store sales increase was driven by increases in average unit retail prices and average units per transaction somewhat offset by a decrease in the number of transactions. Total sales for the first quarter were $328.9 million compared to last year's first quarter sales of $321.4 million.

Shoe sales in our leased department increased at a rate lower than for our chain. Gross profit for the first quarter was a $104.3 million or 31.7% of sales. Including the $3 million impact of our accounting estimate change in the fourth quarter last year gross profit for the first quarter of 2013 would have been $100.9 million or 31.4% of sales.

The 30 basis points increase in the gross profit rate was primarily the result of higher mark up offset by higher mark downs compared to last year due to the slow start to the first quarter this year caused by poor weather and increased occupancy and pre-opening cost due to new stores as well as higher rents of existing stores as we exercised expansion options.

We continue to expect our gross profit rate for the full year 2014 to be slightly lower than the 29.1% rate we reported for 2013. Pre-opening cost which are included in both gross profit and SG&A expenses were $1.3 million for the first quarter of 2014 compared to $500,000 in the first quarter last year.

SG&A for the first quarter was $81.2 million including the $4.1 million impact of our 2013 accounting estimate change, SG&A for the first quarter of 2013 would have been $77.7 million. The $3.5 million increase in SG&A expenses includes $1.6 million higher advertising expense mostly related to the addition of television for our more expensive April dress event and to drive first quarter sales.

Higher store payroll primarily due to new and relocated stores as well as planned payroll increases and higher healthcare cost compared to last year's first quarter which have more favorable claims experience. These increases were somewhat offset by higher credit card program income.

Our effective income tax rate for the quarter was 38.9% and this compares to 39.6% rate last year and is around the 39% rate we expect for the full year. Taking a look at the balance sheet, our financial position remains strong with $88.3 million in cash and no debt.

Inventories at the end of the quarter are up 6% to $295.2 million. Including the impact of the $5 million decrease from our fourth quarter 2013 accounting estimate change, inventories would be up 8%. This increase includes higher advance to support our higher sales, increased levels in our home area support higher sales and our new Nina Home line, inventory for our new online store and one additional store at this quarter's end and lastly inventory that has arrived for our two new stores that opened last week.

Capital expenditures totaled $9.2 million for the quarter, compared to $7.7 million last year. Expenditures were higher this year primarily due to our increased number of new and relocated stores. We are now estimating the capital expenditures will be approximately $43 million this year. This is the $5 million increase from our earlier estimate of $38 million. $2.5 million of this increase is for the information technology enhancements as we are in accelerating certain expenditures and increasing others to enhance point of sales credit card capabilities.

The other $2.5 million is for the configuration of our corporate office space in connection with the finalization of our ten year extension of our lease. We are receiving incentives for our corporate office lease extension that along with lower rent will fund this spend and actually lower our annual cost.

Now I would like to briefly update you on our sales and other growth initiatives. Starting with our real estate activity, we opened one store, closed two stores and relocated three stores during the quarter. As Jay said, for the full year we are planning to open total of 16 new and relocated stores. As a remainder we expect the total sales will increase almost 1.5% more than our comparable store sales increases for the year due to the new stores net of two closings. Most of this increase will be in the second half as that is one majority of our new stores will open.

Our e-commerce business is coming along nicely. We are very focused on driving more traffic to our site and we are excited to be adding mobile capabilities later this year.

Finally our credit card program continues to grow. Our first quarter 2014 penetration is about 3% higher than the first quarter of 2013 at over 10%.

This concludes the prepared portion of our comments and now I would be happy to take your questions. Operator?

Question-and-Answer-Session

Operator

(Operator Instructions) And our first question comes from the line of David Mann from Johnson Rice. Your line is open.

David Mann – Johnson Rice

Thank you. Good morning. Great job. In terms of the inventory growth and margin, can you just elaborate a little bit on the quality of the inventory coming out of the quarter given you said you took some additional mark downs in Q1, should we expect some additional mark downs potentially in Q2 based on the sell through rate you have seen thus far?

Gregory Kleffner

David, thanks for your comments. Right now we are happy with the freshness of our inventory, obviously there is a lot of things going on when you look at first quarter particularly this year with the slow start and then the later Easter. Right now we are comfortable with the freshness and it's really too early in the next quarter to really talk about how the second quarter sales are going to impact those markdowns going forward.

David Mann – Johnson Rice

Okay, great. And then in terms of advertising, was the first quarter spend, was that a more of a onetime thing given the events are going on or should we expect some increased advertising around future events as well and where should the full year percent of sales end up in terms of advertising spend?

Gregory Kleffner

We are expecting advertising to be up about $1.5 million for this year and that should be slightly lower percentage of sales as we leverage against higher sales. So I think it’s - most of that obviously happen in the first quarter than but this, the new stores do drive some of that additional advertising. So there will be some shifts there but $1.5 million for the year is what we are expecting.

David Mann – Johnson Rice

Great. Thank you.

Gregory Kleffner

Sure. Thanks, David.

Operator

And our next question comes from Laura Champine from Canaccord. Your line is open. Laura Champine your line is open.

Laura Champine – Canaccord

Good morning. Greg, could you talk a little more on why your gross margin would end up down for the year because you just put up some pretty nice leverage in a tough sales quarter.

Gregory Kleffner

I agree and we knew that was going to get us. There is a couple of things going on here and one is that ladies which basically sort of pushed back the sort of startup clearance out of the first quarter and I don't want to, don't be alarmed about the second quarter because it's really about the whole year, but you have got the same impacts that we talked about at yearend are going to get us for the whole year. So you got the lower e-commerce margin, you have got the higher penetration of home sales which has little lower margin. Those things we really didn’t talk about at yearend but the large number of new stores for partial year because they have got the increased pre-opening, some – little higher occupancy and things so that sort of gets us. The other thing when you look, if you look in that note three on the press release that talks about the estimate change, we have more challenging compares when you look at last year for the rest of the year versus what we had in Q1 and that's particularly the case in Q2 and Q4. So at this point I think we are still telling you that we think that the gross margin rate will be slightly – gross profit rate will be slightly lower than it was last year.

Laura Champine – Canaccord

Okay, thank you.

Gregory Kleffner

Sure. Thanks Laura.

Operator

And our next question comes from Mark Montagna from Avondale Partners. Your line is open.

Mark Montagna - Avondale Partners

Hi. Just a question on your e-commerce spend. Can you help us understand how much higher that e-com spend was this year in Q1 versus last year which I guess is probably mostly development?

Gregory Kleffner

Mark, the way we are really talking about it and then looking at is the overall loss and the loss is really the investment in e-commerce and I think we said that was – it was in the note here just a second, make sure I get it for you, it is about $650,000 higher than it was last year.

Mark Montagna - Avondale Partners

Okay, and then so for the full year…

Gregory Kleffner

I am sorry, it was $300,000 higher than the last year. It was $600,000 this year, it was about $300,000 last year.

Mark Montagna - Avondale Partners

Okay. So for the full year you are still expecting e-commerce to register a loss, is that correct?

Gregory Kleffner

Yes, we are, and it's all volume driven. I mean we just need to get the volume up and make some other operational tweaks and just get better and frankly that business is it's improving and Sara has brought a lot of really good ideas with her and we are happy with how we are progressing on that.

Mark Montagna - Avondale Partners

Okay, and I think I might have missed this, could you get a number for how much higher on a full year basis store pre-opening expenses are going to be?

Gregory Kleffner

Yes, we have said at yearend that we are expecting to be about $4 million versus about $3 million in 2013.

Mark Montagna - Avondale Partners

Okay. And then what about your expectations for depreciation on a full-year basis?

Gregory Kleffner

I think, we at year end said that we would be about $2 million increase based on the recent CapEx expenditures and right now that's - we continue to see that.

Mark Montagna - Avondale Partners

Okay, and then more broadly, are you seeing evidence of new customers emerging at Stein Mart?

Gregory Kleffner

I think, yes, probably all the time, I think we are seeing a little bit younger as we move forward and then the other thing we see is particularly when we open new stores is obviously you have seen new customers and that's the reason we opened lot of the new stores, and a lot of the places we are opening those we get a little younger customer, a little more maybe fashion forward or I guess you might call it customer so I think yes in general.

Mark Montagna - Avondale Partners

Okay, and then when you look at the comps, are these being driven more by just store traffic, or is it more average ticket?

Gregory Kleffner

Oh no, it's ticket because it's -- transactions were actually down slightly, traffic down slightly but AUR or the unit retail prices, average unit retail prices, and the number of units were both up and were both driving the increase.

Operator

(Operator Instructions) Our next question comes from David Berman from Berman Capital. Your line is open.

David Berman - Berman Capital

Hi guys. A few questions if I may, first of all if you can talk about the latest thinking about what to do with $2 a share in cash that you have [not] [ph] got. Second question is if you could please talk about how the new stores are doing, I believe you have got four new stores and especially if you can comment about the London stores that you have. And the third question is to do with your same store sales, I mean when you look at the comparisons this month it seems like you [inaudible] very strong [inaudible] last year, so if you had a positive comp I think there will be a win even under normalized weather but then after that I am wondering if we go back to mid single digit so what kind of comps you expect? Thanks a lot.

Gregory Kleffner

Hello David. Let me hope I’ll get all these here, you can chime back in at the end if I missed all those, so excess cash as you saw this last quarter we increased our quarterly dividend up to $0.075 a quarter which was 50% increase so certainly we are mindful of returning cash in that manner to the shareholders and looking at our cash in that way. We did also some opportunistic purchases, there was only 210,000 shares total but $2.6 million but we will continue to look at that when we think it’s opportunistic [inaudible] price for us we’ll do that. So we are very focused on that. We talked about our new stores, we basically -- our new stores are doing really well. I’d say generally they are meeting expectations, 2014 openings I called out and particularly though are really, we are very excited so far we had three new stores, Las Vegas, Aventura and Falls Church and we are – I would say at this point very, very pleased with those, that’s obviously a few weeks in but we are very, very pleased with those. And I can't remember, did you have another question there David?

David Berman - Berman capital

Yes, so what about May, compared to the next few months?

Gregory Kleffner

Well, I mean, I think looking at what we did in April and we had great sales increase was on when things warmed up and with Easter shift and also at this point we are a couple of weeks in but we will see what we do in few weeks when we announce that and at this point I think we are all hopeful is weather continues to be good and help and not hurt us really but sales could be strong.

David Berman - Berman capital

Okay. All right. And the new store thing, Loehmann?

Gregory Kleffner

Which one?

David Berman - Berman capital

The Loehmann’s new stores, the stores of Loehmann.

Gregory Kleffner

The three new stores, the Aventura and Falls Church, yes, those are the openings that was last week and those are we are very, very pleased with how those went and I know the store at Aventura even with pouring rain all day it was very pretty much full to the gills the whole day and we had great results for that day, and through the weekend Falls Church was very, very busy too. We are reaching, in both those cases, a great example of reaching out to customers that really just couldn’t easily shop us before, in Miami we just I mean I think our nearest stores there is a fair number of miles north of there and Falls Church was just not very penetrated in that whole metro DC area and we really need to do a lot more there. So these are two great, great opportunities for us.

David Berman - Berman capital

Right. Okay and well good luck and keep it up and also inventory seems to be little bit better control than they were the prior quarters, just in terms of inventory of sales growth rate?

Gregory Kleffner

Yes, I mean I don't think we are ever – some of this is trying to balance making sure that you have the right inventories in the store to sell and you have got store openings and other things so we have been happy with our inventories in general and so we are just not with pleased with at all.

David Berman - Berman capital

Alright. Okay great. Thank you very much.

Gregory Kleffner

Thank you David.

David Berman - Berman capital

Okay.

Operator

And Mark Montagna could you please re-queue by pressing star one, you’re removed in error? And Mr. Montagna your line is open.

Mark Montagna - Avondale Partners

Okay. Just have a follow-up question. Can you tell us whether – help us understand any comp differential during the quarter for warm weather regions versus cold weather region that were more impacted by store closure than perhaps down south. Was there a measurable difference?

Gregory Kleffner

Yes Mark, I mean you really could see the weather I mean you didn’t have to really look at the weather reports rather to look at our sales in the stores and geographic whether to know weather was cold or just (inaudible) cold. So it was – it clearly showed up in our sales by geography.

Mark Montagna - Avondale Partners

Alright, so if we were to just look at say your core marks to the southeast, clearly that must have been measurably stronger than other region therefore that would be a pretty good indication of how favorable your merchandize is and hopefully how well you might track in second quarter.

Gregory Kleffner

I think you are exactly right and I think forward in particularly was had good results. California was good some of the fire and stuff on California so it just varied by market and every place but really the Florida and even in Florida, it had some seasonally cool weather you know cool in Florida is straightway away not as bad as cool in other places but a lot of impacts in that February/March time period.

Mark Montagna - Avondale Partners

Okay. That's perfect. Thank you.

Gregory Kleffner

Sure. Thank you Mark.

Operator

(Operator Instructions) And our next question comes from Michael Richardson from Sidoti. Your line is open.

Michael Richardson – Sidoti & Company, LLC

Yes, good morning and thanks for taking my question. The stores you are going to opening in the fall all those leases are signed, those are ready to go there is no risk that any of those are going to fall through?

Gregory Kleffner

I would say never signed ever but I would say very, very little risk at this point I mean yes number one, all those leases are signed, something sort of catastrophic would have to happen not that, certainly don't expect any reason that we can't do those seven.

Michael Richardson – Sidoti & Company, LLC

Okay and home obviously continues to perform well, is that primarily still the soft home or it's in the improvement with the hard home probably fill?

Gregory W. Kleffner

Hard home is kind of actually a little bit soft. Soft still leads the way generally but the hard home and (inaudible) and all playable and all table top and all has done better lately.

Michael Richardson – Sidoti & Company, LLC

Okay. Can you just remind us how much you have left on the share repurchase program authorization?

Gregory W. Kleffner

About 500,000 shares.

Michael Richardson – Sidoti & Company, LLC

About 500,000 shares okay. And just the last one I will jump in and I will jump out. If you could have added any new brands that you are very excited about recently that you should call out sort of outperforming is gaining a lot of attraction?

Gregory W. Kleffner

Yes, well Nina Home is certainly I think the biggest deal we have out there and that's exclusive with the Stein Mart really differentiates us from the other off price retailers so that's a key one. I would say Vince Camuto in Ladies, Fossil handbags, to just took out a couple.

Michael Richardson – Sidoti & Company, LLC

Great. Thanks Greg.

Gregory W. Kleffner

Sure, thank you Mike

Operator

And we have no further questions in queue. We will turn the call back to the presenters.

Gregory W. Kleffner

Okay. Thank you all for joining us and thank you for your time today. We look forward to talking to you next quarter. Bye.

Operator

This concludes today's conference call. You may now disconnect.

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