Stein Mart (SMRT) posted 3Q earnings of $0.02, topping consensus of $0.01, and revenues of $303.7 million, marginally beating expectations. Sales were up 4.5% y/y, EPS went from $0.01 in 3Q13 to $0.02 in 3Q14, and comparable store sales were up 3.1%. EBITDA also expanded by 2.7% y/y. Modestly solid results. But we point out that over the last 2 years, sales are up 4.8%, while operating expenses are up 14%. And over that same period, days in inventory have jumped 35%. SMRT's days in inventory are now double of TJX (TJX) and Ross Stores (ROST), and even higher than Sears (SHLD).
Shares are up 5% on the week thanks to the earnings beat.
We covered SMRT last year, since then it's been a volatile ride. Shares have traded anywhere from $11.25 up to $15.75. We noted back then that the return of Stein could be a key catalyst - as we believe strong management has been instrumental in why TJX/ROST have continued to crush the market regardless of the economic backdrop. As we noted,
Another key tailwind is that Jay Stein is back in the saddle as CEO at SMRT, officially. In 2002, Jay Stein stepped down as CEO. SMRT then went through four CEOs before bringing back Jay Stein in September 2011. Back in July, Jay Stein removed the title interim CEO and became permanent CEO.
But we're finding it hard to be patient. SMRT's EBITDA margin and ROE lags major peers like TJX/ROST heftily. Its valuation, on an EV/EBITDA basis, is only a 15% discount to TJX/ROST. We also have SMRT trading at 18.5x forward earnings, in line with TJX/ROST.
All this leaves little margin for error in Stein's turnaround. A full blown turnaround and Stein's promise of getting EBIT back to the 2005 glory days. The free cash generation, although looked to be on the mend, has since started to dwindle again - with SMRT generating a mere $0.40 in FCFPS over the TTM.
We need to put SMRT on pause for now and would no longer want to be owners. The current state of the turnaround doesn't sync with the valuation.
