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Stein Mart, Inc. (NASDAQ:SMRT)

Q2 2014 Results Earnings Conference Call

August 21, 2014, 10:00 AM ET

Executives

Jay Stein - Chairman and CEO

Greg Kleffner - EVP and CFO

Analysts

Mark Montagna - Avondale

Laura Champine - Canaccord Genuity

David Mann - Johnson Rice

Operator

Welcome to the Stein Mart, Inc. Second 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 and most recent quarterly report on Form 10-Q.

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

Jay Stein

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

We're pleased to add another quarter to the string of positive comps that we now enjoyed for the ninth consecutive quarter. During the time when economic factors and world event continue to influence this consumer -- our consumer, we view this quarter 1.3% comp store increase as a small, but a very hard earned accomplishment, particularly as we were up against a very strong 6.4% comp increase in the second quarter last year.

I want to add as an aside, I can tell you that August sales have improved from these numbers. While our new store's sales added an incremental 1.2% to our total sales increase for the quarter, sales for us were unusually choppy. May was the strongest month in the quarter. July started out weaker, but ended much stronger as early fall merchandise began to arrive in our stores.

I am sure you're wondering why our recent sales trend is not as strong as it has been. Well, certainly if we had all the answers, and those involved things that we can impact, then our business would be stronger. Having said that, let me share with you what we think is happening.

This retail environment has been very promotional lately. While some had successful driven incremental sales, most have sacrificed their margins. As a value retailer and every day low price retailer, we will not participate in extreme promotions to drive sales.

We believe that our best -- our best long-term approach is to continue executing our current growth strategy. Our model, which includes designer and national brands expanding our presence through new stores, improving our shopping experience by relocating and remodeling stores and growing our Ecomm business and our every day low price will greatly increase our sales and our growth.

These strategies will benefit us as we head into the fall season with our inventories in good shape and our merchandize looking very, very good. I invite all of you to come in and see for yourself just how good we look early so far this year.

Now back to our second quarter results. Second quarter earnings were impacted by a lower gross profit rate and our 1.3% comp store increase that did not leverage increases in operating expenses.

In addition, our results were impacted as you saw by higher professional fees related to our SEC investigation, a much, much higher medical cost, expected startup losses from our Ecomm and new store preopening expenses.

While earnings were lower than last year, it's important to remember, I am pleased too that our second quarter is far less meaningful than our first and fourth. We know that we're on the right track with our growth initiative and we have much larger increases ahead of us.

Please note that our ladies apparel and our home fashion categories were our best performers in the quarter. While men and accessories performed lower than the chain, neither, neither one were significantly lower and the gap between the highest and the lowest performing categories has narrowed greatly.

Soft home, the largest comp store increase in the chain, led by top of bed, sheets, bath towels and good results from our new Nina Home collections.

Ladies apparel, petites, maxi, sundresses, boutique, all of those areas, exciting areas, were very strong for us.

In accessories, our weak trend in fashion jewelry, I am pleased to say has greatly improved as well. We've added new jewelry brands. We've elevated the look and the price point of that merchandize.

Our focus and depth in key designer brands make handbags much, much more of a winner, and our neckwear and scarves are doing extremely well.

In men's furnishing, our check accessories, gifts and lounge wear continue to lead our pack. As we mentioned in our release, we have a slightly revised, our fall of 2014 store plans to open six new stores and relocate four, as we decided to relocate our Franklin, Tennessee store rather than opening a new store in Nashville market.

We've also decided to close a underperforming store in Daphne, Alabama in October. While we've formally announced all fall locations, and their opening dates soon, Greg will preview the timing of these stores for you in a moment.

Please note that I am looking forward to this fall and beyond. We're encouraged as we see the growth of our efforts having an improved impact on our business. Our eCommerce business is steadily improving with an increased merchandize presentation and improved customer shopping experience.

This fall, you will certainly see incremental sales increases as we open and relocate these ten stores and you'll definitely find truly even better merchandise and more exciting brands than we've ever had in our lives.

So at this point, I'll turn the program over to Greg.

Greg Kleffner

Thank you, Jay and good morning, everyone.

I'll walk through our second quarter results and then discuss our balance sheet and store activity as well as give you an update on our growth initiatives and expectations for the remainder of the year.

Net income for the second quarter of 2014 was $1.7 million or $0.04 per diluted share, compared to net income of $3.4 million or $0.08 per diluted share in 2013. Second quarter adjusted net income was $2.8 million or $0.06 per diluted share, compared to adjusted net income of $4.5 million or $0.10 per diluted share in 2013.

Second quarter 2014 results include $2.1 million higher healthcare cost, which I'll talk about more in depth in a minute and $600,000 in higher preopening costs. These increases total $1.6 million after-tax or $0.04 per diluted share.

Importantly during the quarter, we were able to clear our spring and summer inventories really well, so head into fall with our seasonal merchandize in good shape.

Total sales for the second quarter were $298.2 million, which was a 2.5% increase over last year's second quarter sales of $291 million.

Comparable store sales for the second quarter of 2014 increased 1.3% over last year’s second quarter. This same store sales increase was driven by increases in average unit retail prices and average units per transactions of just over 1%, which were somewhat offset by a decrease in the number of transactions of just over 1%.

As Jay indicated, based on our measurements in selected stores, the decrease in transactions comes from lower traffic. ECommerce sales, which are included in our comparable store sales, were just under 1% of our total sales for the quarter.

Shoe sales in our leased department increased at a higher rate than our chain in the second quarter. Gross profit for the second quarter was $84.2 million or 28.3% of sales. Including the $4.2 million impact of last year's fourth quarter accounting estimate change, gross profit for the second quarter of 2013 would have been $84.5 million or 29% of sales.

The 70 basis point decrease in the gross profit rate resulted from higher markdowns compared to last year and increased occupancy from new stores including preopening cost that were $200,000 more than they were in 2013.

These decreases were partially offset by higher mark-up. The higher markdowns did not result from more promotions, but were part of our normal clearance cadence. The higher markdowns did include $600,000 for inventory at stores closing as part of relocations in the third quarter.

For reporting purposes, we markdown our book inventories for closing stores generally in the quarter proceeding the actual closing. For the second quarter, this effectively moved markdowns associated with those third quarter store closing sales up into the second quarter. This increased second quarter markdowns this year compared to last year, as we did not have similar closings in 2013.

Preopening cost which are included in both gross profit and SG&A expenses, totaled $600,000 for the second quarter of 2014. This compares with the second quarter last year when preopening costs were negligible. SG&A for the second quarter was $81.5 million.

Including the $3.1 million impact of our 2013 accounting estimate change, SG&A for the second quarter of 2013 would have been $77.6 million. The $3.9 million increase in SG&A expenses includes $2.1 million of higher healthcare cost compared to last year's second quarter and just to cover those for a minute, we really had an unusually high number of large associate medical claims this quarter, compared to last year's second quarter when we had very favorable claims experience. Unfortunately, that was in excess of anything we would have reasonably forecast for this year.

SG&A also includes $1 million of higher professional fees associated with the SEC investigation and lastly we had higher store payroll and selling expenses due to new stores as well as planned payroll increases.

All of these increases were somewhat offset by higher credit card program income and our effective income tax rate for the second quarter was 36.2%.

Now I'll touch on our first half results. Adjusted net income for the first six months was $17.5 million, or $0.38 per diluted share compared to $19.2 million or $0.43 per diluted share in 2013. Adjusted EBITDA for the first half was $44.8 million compared to $46.4 million in 2013.

Total sales for the first half were $627 million, which is a 2.4% increase over last year's first half sales of $612.3 million. Comparable store sales increased 2% in the first half.

This same store sales increase was driven by increases in average of retail prices and average units per transactions, again somewhat offset by a decrease in the number of transactions. Slightly less than 1% of our sales in the first half again came from our eCommerce business.

Gross profit for the six months was $188.6 million or 30.1% of sales. Including the $7.2 million impact of last year's accounting estimate change gross profit for the first half of 2013 would have been $185.5 million or 30.3% of sales.

The 20 basis point decrease in the gross profit rate was primarily the result of higher markdowns and occupancy costs, including preopening costs, which were mostly offset by higher markup.

SG&A for the second half of 2014 was $162.7 million including the $7.2 million impact of our 2013 accounting estimate change SG&A for the second half of 2013 would have been $155.2 million.

The $7.5 million increase in SG&A expenses includes again the healthcare costs and for the first half, these were $2.7 higher than last year for the reasons that I already discussed.

We also had higher first quarter advertising expenses of $1.9 million. We had professional fees associated with the SEC investigation. They were $600,000 higher than in 2013 for the first half and finally store payroll and selling expenses were higher to the new and relocated stores as well as planned payroll increases. These additional SG&A amounts were somewhat offset by higher credit card program income again.

Our effective income tax rate for the first half was 38.6% compared to 39.8% last year. Taking a look at the balance sheet, our financial position remains strong with $53.1 million in cash and no debt. Inventories at the end of the quarter were up 6.2% to $266.2 million.

Adjusting for the impact of last year’s accounting estimate change and higher inventories at the end of the second quarter for eCommerce and stores opening in the third quarter, average inventories per store were up 5.1%. This increase reflects planned investments to drive growth and well-performing merchandized categories in home and accessory.

We also had higher in-transit inventories, which is a timing difference versus last year as well as some opportunistic buys. As I said earlier, we were able to effectively clear our seasonal merchandize and as a result our spring and summer seasonal inventory levels are the same as at the end of second quarter last year.

Capital expenditures totaled $22.3 million for first six months and that compares to $19 million last year. Expenditures in the first half were higher this year primarily due to our increased number of new and relocated stores.

Now I would like to briefly update you on some of our growth initiatives and conclude with our updated outlook for the remainder of the year. Starting with our real estate activity, for the full year we'll be opening a total of nine stores, relocating seven stores and closing three.

The three new and three relocated stores that we opened this spring are performing really well and we are on track to open six new stores and four relocated stores this fall, which I indicated, which will give us 270 stores at the end of this year.

The timing of our fall store openings are right now planned to be three at the end of fiscal September, one at the end of October, one in early November and the last in early December.

We continue to improve our eCommerce business and are working to drive more traffic to the site by expanding our online merchandize offering, providing a more cohesive experience across print, social, website and mobile, adding engaging content on the site, including special category groupings to encourage shopping and finally we're excited about the launch of our mobile optimized site for tablet and smartphones during the third quarter and that will really enhance our customer's shopping experience.

Regarding our credit card program, our penetration continues to increase, which have risen from 8% in 2013 to over 10% through this year's second quarter. So let's review our updated 2014 outlook.

We continue to expect that new stores will increase sales and estimated 1.5% above comparable store increases for the full year. This will lift our second half sales about 2.5% above our comparable store increases.

As we indicated at the beginning of the year, we continue to anticipate that our full year gross profit rate will be slightly lower than the 29.1% reported for 2013. For SG&A we are now expecting second half expenses to be approximately $7 million lower than the $178.5 million reported last year. This will result in full year SG&A expenses of approximately $8 million higher than the $326.5 million we reported last year.

As previously discussed, our full year estimate includes increases and new store preopening, depreciation and first quarter advertisement expenses. Our full year estimate now also includes the $1.3 million in legal costs related to the SEC investigation that we incurred in the first half of 2014.

And I want to make sure you know that we've not included investigation costs that may be incurred in the second half in our estimates. Lastly, we continue to believe that our effective tax rate will be around 39%.

This concludes the prepared portion of our comments and now we are happy to take your questions. Operator?

Question-and-Answer-Session

Operator

(Operator Instructions) Your first question comes from Mark Montagna with Avondale. Your line is open.

Mark Montagna - Avondale

Hi thank you. Just looking at the preopening expenses, can you walk us through what your expectations are for increases or decreases related to that for the third quarter and fourth quarter and then related markdowns like you had to take here in the second quarter?

Greg Kleffner

Sure Mark and good morning.

Mark Montagna - Avondale

Good morning

Greg Kleffner

We are looking at having preopening costs of about $4 million this year, versus $2 million last year in total and if you look at year-to-date, were -- so that $2 million increase for the year and year-to-date we were at about $1.2 million.

So that rest of that comes in the third and fourth quarter, really in the third quarter frankly, because they're pretty much all open then. And just on -- the $600,000 of the store closing expense, that's really the only one that will crossover quarters.

Mark Montagna - Avondale

Okay. And then do you recall how much that expense was last year? I am trying to understand what the…

Greg Kleffner

You’re talking about the markdown?

Mark Montagna - Avondale

No, not the markdown, really the preopening expenses that looks like it's going to be up $2.8 million here in the third quarter. How does that compare to last year?

Greg Kleffner

I got the year right here and I know last year for the whole year it was $2 million.

Mark Montagna - Avondale

Okay. All right. And then looking at the gross margin decline, how much of that was deleverage versus merchandize margin?

Greg Kleffner

I would say it was probably about half and half there was little bit of both. Clearly, the sales -- where we were for the quarter were -- didn't really quite leverage our expenses at least on ongoing basis.

Now we did a good job, I think of expenses overall other than the medical. The medical expenses have come in where we forecast our other reductions would have taken care of things and we would have been a little more closely to where everybody would have expected.

Mark Montagna - Avondale

Again -- so then talking about expenses, you're planning on higher payroll expenses. I am just wondering why is that?

Greg Kleffner

Well you got two things, one is the new stores and that's the biggest piece of it, but we also in selected stores, where we had big increases in sales in the last couple of years added some assistant managers and a little bit of headcount, but I would say, the biggest increase still is driven by the new stores.

Mark Montagna - Avondale

Okay. And then just lastly looking at the inventory increase, how much of that is from just staging inventory for the new stores, so they’re just kind of sitting in the distribution center and not ready to be sold.

Greg Kleffner

The easy way to answer that is one, we’ve looked and we said I think we had a 6.1% increase in inventory and then we said, the average per store is 5.1%. So look at the combination of eCommerce and some other -- and that would have been about 1% or so.

Mark Montagna - Avondale

Okay. So when you said 5.1%, that’s for actively opened stores that people can buy merchandize.

Greg Kleffner

Yeah. I hesitate to quite call it a comp increase, but it’s pretty close to a comparable store increase in inventories.

Mark Montagna - Avondale

Okay. All right. Great. Thank you.

Greg Kleffner

Thank you, Mark.

Operator

Your next question comes from the line of Laura Champine from Canaccord. Your line is open.

Laura Champine - Canaccord Genuity

I wanted to ask about the advertising expense. It’s interesting to us that advertising expenses of the brands in the stores look better, but traffic is down. Is there a way that you can be more efficient in your ads than the lower ad spend, or is there a way that you can more effectively advertise and try to drive traffic better than you have so far this year.

Jay Stein

Let me try to answer that. We’re very reliant today on all the social media that we use. That’s very economical. We’re also reliant on a list of three million best friends, which is our best customers, again that is very economical. I mean, listen in times like these, we want to get our name before the public as much as possible.

Obviously [ROP] (ph) and our flyers, very elegant flyers, the best way we know how to do it and they are expensive. So we’re very mindful of the advertising cost, but in these times, we don’t think that we should retrench dramatically. We want our name out there.

Greg Kleffner

Laura, this is Greg. Let me just add one additional thing. I would say that certainly opening new stores carries with it a little heavier advertising expense and certainly the sum of that increase over the years can be because of that.

Laura Champine - Canaccord Genuity

Got it. Thank you.

Greg Kleffner

Thank you, Laura.

Operator

Your next question comes from the line of David Mann with Johnson Rice. Your line is open.

David Mann - Johnson Rice

Yes, thank you. Good morning. A question about SG&A. It looks like you lowered your guidance for expenses for the full year, yet you had a little bit higher in the second quarter or so. Can you just give us a sense on -- when you look at the back half, where will expenses be lower than you previously thought?

Greg Kleffner

David, this is Greg and good morning. Yeah, you’re right because if you go back to the beginning of the year, we said we’d be $10 million less than what we reported last year and now its $8 million. So that was $2 million plus -- I am sorry the increase.

So that was a $2 million increase and then the $1.3 million in investigation costs weren’t in that original estimate. So you effectively have a little more than a $3 million decrease. We continue to look hard at expenses a little bit in the stores. I think we’re being very efficient out there with our folks out there and that’s where most of the expense happens a little bit of incentive compensation here at corporate and just other things.

Certainly the medical costs in the second quarter we certainly hope don’t continue to increase. We clearly expected an increase in medical costs just not near where they were. So it’s a little bit of everything.

David Mann - Johnson Rice

Okay. That was very helpful. And then going back to your comment about same store inventories for the back half being in sort of the 5%ish kind of range, can you just reconcile the thought process about that with the fact that your comps were up 2% in the first half.

So do you -- are you making bigger investments to try and -- or how do you think about the comps? Let me start over. Just reconcile the two because we would think that you might be expecting a higher comp if you’re making the investment.

Greg Kleffner

Oh! We certainly like a higher comp and so I think investing in inventory is certainly -- is part of that. If you look again at what we’ve said and very clear it is the home and accessories is really a big driver of that, so we’re investing in areas that we’ve had and continue to expect to have increased business.

The other thing that happened, remember I mentioned it wasn’t in the press release, but we did have a little more in transit inventory too, so some of this is just timing. The second quarter is always a challenge David, because you’re bringing in that new fall merchandise. In a few days here or there, it can cause some pretty big blips in how that arrives and then transit was clearly higher this year than last year.

David Mann - Johnson Rice

And then one last question about store growth with two parts to it, first, how is the pro forma or how are the stores performing relative to the performance that you had and then secondly, how does the pipeline look for next year, maybe early thoughts on how much growth you’ll have then?

Greg Kleffner

Yeah, our new stores are doing well. I would say they’re pretty much in line with what we’ve expected with a couple of really big winners, particularly in the last couple of years, just to really -- I think we got a really good store opening process that we go through and do that.

It’s too early to say much about next year other than to say clearly this year was sort of a step-up here in terms of really increasing our number of store openings and relocations to some degree and those are important for us too.

Certainly our expectation going forward is this sort of sets a new bar and so if you look at the nine new and seven relocations, I would certainly expect next year to be at or above that level.

David Mann - Johnson Rice

Very good. Thank you.

Greg Kleffner

Sure. Thanks David.

Operator

(Operator instructions) Since there are no further questions at this time, this concludes the conference call and Jay will make the final remarks.

Jay Stein

Yes. Thank you. Once again, thank you for being our partners in this endeavor. Thank you for being on this call. We look forward to our third and fourth quarter and we will anticipate being on this call can be the kind of news that you want to hear. Thanks.

Greg Kleffner

Bye.

Operator

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

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Source: Stein Mart's (SMRT) CEO Jay Stein on Q2 2014 Results - Earnings Call Transcript

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