Stein Mart's (SMRT) CEO Dawn Robertson on Q1 2016 Results - Earnings Call Transcript

| About: Stein Mart, (SMRT)

Stein Mart, Inc. (NASDAQ:SMRT)

Q1 2016 Earnings Conference Call

May 19, 2016, 10:00 AM ET

Executives

Jay Stein - Chairman of the Board

Dawn Robertson - Chief Executive Officer

Gregory Kleffner - Executive Vice President and Chief Financial Officer

Analysts

Jeff Stein - Northcoast Research Group

Anthony Lebiedzinski - Sidoti & Company

David Mann - Johnson Rice

Operator

Greetings, and welcome to the Stein Mart, Inc. first quarter 2016 earnings 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 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 fiscal 2015 Form 10-K for the year ended January 30, 2016, and other filings with the SEC.

[Operator Instructions] I would now like to turn the call over to your host, Jay Stein, Chairman; and Dawn Robertson, CEO of Stein Mart. Please go ahead.

Jay Stein

Good morning. I am pleased today to be able to introduce Dawn Robertson, who is our newly appointed CEO. She was appointed in March. And I'm going to tell you how much I am truly enjoying working with her, watching both her expertise and her energy.

The short two months, since Dawn joined us, she has truly hit the road running. After working with her team, seeing some representative stores and spending time with our merchants in the market, she's made some great initial observations, and she'll share those with you this morning. After Dawn speaks, Greg will review our results for the quarter, and then take your questions after that.

This portion of our presentation has been pre-recorded. Unfortunately, I am in New York at market, and will not be able to answer your questions today. However, please know I am always available next week to do so, if you need me.

While our first quarter sales were clearly challenging, we are pleased with our earnings as we maintained a healthy gross profit rate, while controlling our expenses and leveraging them over 5% more stores.

Our first quarter sales performance was primarily impacted by two factors. First, traffic was down, which we have seen for most apparel retailers. Second, our spring selling season was hindered by the sale of higher levels of fall clearance.

As discussed in our yearend earnings call, we ended fourth quarter with more year-over-year fall seasonal inventories, because of the warmer season that we all experienced. While we clear these inventories, as expected, it certainly distracted our customer from our new spring merchandise.

Our first quarter gross profit rate was not, however, unfavorably impacted by the clearance, because we did take the appropriate markdowns at the end of the year, but it did lower our average unit retail. These factors resulted in a comp store sales decline, as you see for the quarter.

Bright spot for the quarter, indeed bright spot, was the opening of five new stores in March. Despite this quarter's challenging retail environment, this class of 2016 is truly off to a good start.

Now, I'd like to introduce to you and have you all hear from Dawn.

Dawn Robertson

Thank you, Jay, and thank you for this amazing opportunity to serve as CEO of Stein Mart. Over the past two months, since arriving at Stein Mart, I visited numerous stores and spent a great deal of time talking to merchants, management and store associates. I'm repeatedly impressed by the special place Stein Mart occupies in the hearts and wallets of our very loyal group of shoppers.

I'd like to share with you some of my initial observation for Stein Mart. First, as I perceived during my due diligence, there is a strong commitment throughout this organization. Second, our leadership group has incredible individual strength, and I'm confident that we can work together to produce great results.

Third, our stores organization execute in a strong and consistent manner, driven by good communication and extensive experience. This is a great base from which we can build this organization and strengthen our growth initiatives.

Now, let me spend a few minutes talking to you about some of the major topline sales opportunities we have. These include improving traffic and merchandise regionalization, while growing our ecommerce channel more aggressively.

Over the past several months most apparel retailers have experienced lackluster traffic to their stores. We need to change that for Stein Mart. We are looking at ways to increase traffic by ensuring our current customer increases her visits and converts each visit to sale.

We're also working on strategy to attract the modern customer that includes our current demographics and a slightly younger attitudinal customer. I firmly believe that this expansion of our customer base can have a significant impact on sales.

We're developing a new marketing strategy to reach these customer segments. Our starting point is a test with a shift of marketing channels from traditional newspaper to digital, social and broadcast, including new creative, balanced with sales promotion events. This test will take place during the third quarter and we expect to roll out a full new marketing strategy for the fourth quarter.

Other retailers have tried to change their customer in the past, often with little success. We are mindful of this, and we'll certainly go about it very cautiously, not alienating our current customer base, while testing this younger thinking for our longer-term growth.

In about 20% of our stores we will be evolving our merchandise offering by adding new modern vendors. In all stores we will be editing our assortment to improve the clarity of our offer, reduce duplication and add freshness. We are aggressively working with our vendors to execute compelling assortments.

The teams are working on identifying underdeveloped and hot businesses faster, shifting open to buy quickly to maximize sales opportunities. An example of this is reinventing our Fabulous Finds program, you may have heard about before, to attract customer with quick turn exciting new product.

Another significant opportunity we have to expand our sales is to improve regionalization, by developing more appropriate merchandise assortments and presentations in each region for both new and existing stores. Currently, our merchandise is slightly modified for our resort areas, the northeast and the west, but there remain significant opportunities. We are reorganizing the regions and are working on merchandising profiles for each section of our business.

Jay mentioned how well our 2016 new store group is performing in their early post-opening month. We need to maintain the performance of all of our stores and maximize new store results consistently overtime. Strategic opportunities like I just discussed will deliver solid new store sales performance.

The last major sales opportunity I'd like to talk about is aggressively growing our underpenetrated ecommerce business. We need to do this to support our omni-channel strategy, drive brand awareness and increase traffic to our bricks and mortar stores. We're developing a strategic plan to increase our ecommerce sales more significantly.

This includes a focus on merchandise assortments, creative design to improve the look and trend presentation, better photography, easy-to-read and easy-to-use copy as well as functionality changes to our site to increase conversion. A detailed digital marketing strategy is being developed to improve search engine marketing and search engine optimization, omni-channel opportunities, social media marketing, mobile and more, all utilizing site metrics.

I joined Stein Mart, because there is tremendous upside potential. These merchandising and marketing initiatives are squarely aimed at what continues to be our most important goal driving topline sales.

Before I turn the call over to Greg, I'd like to add to Jay's comments about our inventories. As Jay said, first quarter sales were impacted by the carryover of a greater amount of fall merchandise into the spring selling season.

Inventory management is an area of significant focus. If we keep our inventories controlled, this allows to shift quickly into trending categories, reducing markdowns and increasing inventory turns.

I hope these first eight week observations give you an idea of some of the opportunities that lie ahead for Stein Mart. We'll be working diligently on all these areas, and we'll talk more fully about them on future calls.

Now, I'll turn the call over to Greg, who will go over our operating results. Greg?

Gregory Kleffner

Thank you, Dawn, and good morning, everyone. I'm going to walk through our results for the quarter and discuss our balance sheet, and then growth initiatives.

Net income for the first quarter was $13.7 million or $0.30 per diluted share compared to $13.6 million or $0.29 per diluted share in 2015. First quarter adjusted EBITDA increased to $32.9 million from $30.9 million in 2015. Operating income for the first quarter was $23.1 million compared to $22.8 million in 2015.

Total sales for the first quarter increased to $355.7 million from $353.5 in 2015. The increase in total sales reflects new stores, offset by the comparable store sales decline. We had 283 stores open at the end of first quarter this year and that compares to the 270 stores at the end of the first quarter last year.

Comparable store sales for the first quarter decreased 3.4% from last year's strong first quarter comp increase of 4.8%. Same-store sales were impacted by declines in transactions and those approximate traffic, as well as declines in average unit retail.

Average unit retail was lower due to the higher amount of fall clearance selling compared to last year's first quarter, which had lower clearance after the strong 2014 holiday selling season. Units per transactions were slightly higher.

Ecommerce sales for the quarter grew by 26% during the quarter and lifted comp sales results by 40 basis points. Ecommerce represented 1.8% of the quarter's total sales. Shoe sales performance was about the same as our chain.

Gross profit for the quarter was $108.9 million or 30.6% of sales compared to $108.4 million or 30.7% of sales in the first quarter of 2015. As you can see, we maintained our gross profit rate for the quarter, because we recognized the liability associated with our excess fall seasonal inventories at the end of the year.

Pre-opening costs were $1.1 million for the quarter, including $370,000 in gross profit and $755,000 in SG&A. This compares to last year's first quarter when totaling pre-opening cost were $344,000, including $200,000 in gross profit and $144,000 in SG&A. Pre-opening costs were higher this year, because we opened five new stores compared to just one store in the first quarter of 2015.

SG&A expenses for the first quarter were $85.8 million or 24.1% of sales compared to $85.6 million or 24.2% of sales in last year's first quarter. Decreases in SG&A include higher credit card program income, lower incentive compensation and operating savings. These decreases were offset by operating expenses for our new stores.

The credit income was higher due to the improved economics from our new agreement with Synchrony Financial, and incentive compensation was lower based on our sales and earnings results.

You can see that we managed first quarter SG&A very tightly and below expectations with the challenging sales environment we experienced. We aren't going to update our SG&A outlook until next quarter, but we'll definitely keep managing our expenses very aggressively.

Interest expense was slightly higher for the quarter this year, because we did not begin borrowing on our credit facility until the end of February last year, and that was when we paid our special dividend. Our effective tax rate for the quarter was 38% that compared to 38.5% in last year's first quarter.

Now, taking a look at the balance sheet. Total inventories at the end of the quarter were $317 million compared to $303 million at the end of the first quarter last year. The 4.7% increase reflects this year's higher number of stores. Average inventories per store were flat compared to the end of the first quarter last year.

Capital expenditures totaled $11.3 million for the first quarter of 2016 or $10.9 million net of tenant improvement allowances. This compares to $7.1 million and $3.3 million net of tenant improvement allowances in 2015.Capital expenditures were higher this year in the quarter, due to a greater number of new store openings.

Borrowings under our credit facilities were $149 million at the end of the first quarter and our unused availability was $113 million.

Now, I'd like to update you on our existing sales growth initiatives. Let me start with the real estate activity. We opened five new stores during the quarter and all of those in March. And of that group, we opened a second sister store to our very successful Naples, Florida location. This newest Naples store had record-breaking grand opening sales and we really love to have more stores just like this.

We previously indicated that we'd open at least 12 stores and closed just one this year for a net increase of 11. We're now expecting to open a total of 13 and we'll be closing two stores. Our eight new fall stores are scheduled to open in October and November and our two closings will be in August and another at the end of January.

In our outlook last quarter, we estimated the new stores to drive sales increases of 4% above our comparable store sales results for the year. We continue to believe that it will be at least that much.

As we discussed on our yearend earnings call, we're looking forward to the upcoming launch of our newly improved ecommerce site. As Dawn indicated, our ecommerce business is underpenetrated and it's a key component of our longer-term sales and operating plans.

We're focused on building this business to a much larger scale and having it be a profit contributor. This launch is an important step that will underpin the more aggressive growth strategy that we're working on.

The penetration from credit card program continues to grow significantly and was 15.6% through the first quarter. That's up from 14.2% at the end of the year and 12.4% in the first quarter last year.

This program provides us a platform to connect with our very important credit card customer and drive loyalty and sales with all of our customers. It's also important that the improved economics that benefit our bottomline will grow significantly, as we continue to increase our penetration.

This concludes the prepared portion of our comments. As a reminder, we're joined today by investors and others who are listening via webcast, and as a result can't ask questions on this call. Following the call, our Director of Investor Relations, Linda Tasseff, and I, will be available throughout the day to answer follow-up questions any of you may have.

Now, we're happy to take questions from those of you on the call. So, operator?

Question-and-Answer Session

Operator

[Operator Instructions] Our first question today is coming from Jeff Stein from Northcoast Research Group.

Jeff Stein

So I have a couple of questions. The first one is for Greg. Wondering if you could tell us what the merchandise margins were in the first quarter on your spring goods? And given the fact it was such a highly promotional environment, Greg, I'm just kind of curious, do you think that you guys were aggressive enough on pricing to remain competitive and maintain your market share during the first quarter?

Gregory Kleffner

Obviously, we don't talk specifically about our merchandise margins, but I would say that we were happy with those for the spring merchandise. And I think we were -- the environment is difficult or challenging out there, obviously, but I think we're feeling good about where we ended the quarter and what we did during the quarter in that challenging environment.

Jeff Stein

Do you think that, given the fact that industry inventories have bloated, are you confident you can maintain kind of level merchandise margins as you look to the second quarter or do you think you may need to be more aggressive?

Gregory Kleffner

Well, certainly, at this point, as you know, we're sticking with our outlook that we set for the year, which we'd increase the gross profit rate by about 50 basis points for the year. And just a reminder, most of that's in the second half. So I guess, by extension, saying that at this point we don't expect anything really any different than last year in the second quarter.

Jeff Stein

A couple questions for Dawn. I was kind of intrigued by your comment regarding taking a look at trying to attract younger consumers to the store. So wondering exactly what that means? What kind of merchandise do you plan on bringing in? Are you going to have a section of the store that you're going to carve out for that younger customer? If so how large might that be? And then, secondarily, do you see any need or thoughts behind possibly changing the way Stein Mart buys, perhaps, for example, moving up the percentage of merchandise that you buy opportunistically as opposed to buying upfront?

Dawn Robertson

Let me answer those first ones. It's not younger merchandise, but more younger attitudinal. So what we believe is that we're going to test it in 60 stores and we're going to carve out a portion of the store in those areas. In those areas, it's a couple of stores in a market, so that we can market to this perhaps new customer.

We're going to test it. We're going to learn. We have added brands to that assortment. And we're developing a new marketing strategy, which will reach some of those customer segments kind of with a more modern approach. We talked a little bit about the some of the shifting of our testing of our new marketing in third quarter, which is where we'll be doing that. So we are working to kind of better tailor some of those assortments for that modern customer.

Now, what percent of the store? It will vary by store based upon the size and what other areas are doing well in the store, but we are going to test it first in these markets that have been carefully chosen based on the lot of demographics and current analysis that we have of the stores.

Second question was very much about how we're going to buy for all stores. We do believe that there is some opportunities for more opportunistic buying. We are going to continue to have great assortments upfront, which is really what we're known for, and I think it differentiator for us, but there is an opportunity for some more opportunistic buying and specifically based on the current environment.

Operator

Our next question today is coming from Anthony Lebiedzinski from Sidoti & Company.

Anthony Lebiedzinski

So my first question is for Dawn and welcome aboard. Can you give us some sense as to or give us some examples perhaps of some new brands or new vendors that you are looking to partner with to attract this more modern or new younger customer as you described before?

Dawn Robertson

We can't really call out the vendors at this point. It will begin in August. I can tell you some of the timing though. Running through October, we'll really start marketing and in the September, October timeframe, we wouldn't want to call those out quite yet, as we conclude all those deals. But we're happy to talk about it as we move forward.

Anthony Lebiedzinski

And I may have missed this, but, Greg, did you give any breakdown as far as what your performance was geographically? Just curious specifically about Texas and some of the oil patch states, how you performed there first quarter?

Gregory Kleffner

Sure, Anthony. We didn't give a lot, but Texas has certainly been a little more challenging for us. I would say not as much more challenging as you might expect in some of the other results. And within Texas, you can certainly see sort of the oil impact differentially.

Anthony Lebiedzinski

And then also, so in your investor presentation, you talked about updating SG&A expense outlook after the second quarter. Can you give us sort of any sense of anything more than that as to what you're thinking?

Gregory Kleffner

I saw your note this morning, I'm not sure everybody did, but certainly our first quarter results came in lower than the expectations, that we have said I think with our outlook. A lot of moving parts here, obviously, we've got some initiatives and things in process, but you've got a challenging environment.

At this point, we just don't want to give updated numbers, but we're going to definitely keep managing our SG&A real aggressively. And I think, as you sort of noted, we'll probably give an update in the second quarter, but didn't want to tie into the specific number after just one quarter this year.

Anthony Lebiedzinski

Last question, so you seem to be happy about your new store performance. You highlighted that the Naples locations, which I think implies that was even better than your Long Island store opening last year. So can you just give us a sense to like what's driving the strong new store performance? Any sort of factors that you can point to specifically as to why the new openings are doing so well?

Gregory Kleffner

Anthony, I'd say that the new openings are doing well on a selective basis. So we've called out -- I mean we've talked about a couple of that you mentioned here. I mean, Naples is obviously right in our sweet spot. I mean, if that hadn't been really good, I think we'd all be shocked. So while it's better than we would have thought, I don't know I'd put that shocking, that's great.

But that said we need to do better overall for all our new stores. I think Commack started out good; Rochester Hills is another one you didn't call out, but started really good. So I think we've done good on an average basis and had some real home runs as you've mentioned.

Dawn Robertson

I'll add little bit to that. The stores that have opened very successfully have opened successfully because they've had great assortments. And as we think more and more this regionalization, we believe we can mirror that in some of the North Eastern areas, in California. We had some stores open in Northeast that actually did well. So we were very encouraged by that, little different assortment, more regionalization and we'll be building on that.

So to Greg's point, Naples, which, of course, is right in our wheelhouse, we did really well with. We really understand that customer did well. And some of those additional stores we opened did really, really well. And then we actually surprised ourselves in some of the Northeast stores we opened because we did work on changing those assortments and it worked. So we're going to build that on that as we go forward.

Operator

Our next question is coming from David Mann from Johnson Rice.

David Mann

Let me add my welcome to you as well, Dawn. First question was on this test to attract a younger customer. It seems like Stein Mart has had past attempts to do that. I'm just curious what might be different in the test you're about to run versus some of the past efforts and initiatives that may not have been as successful?

Dawn Robertson

Well, thanks for the welcome. Just to clear up and make sure everybody is really clear, because I spend a lot of time talking about this with the teams here in the company, it's not necessarily a younger age, and I think that's one of the biggest differences in this test versus things that have happened in the past, it's about a younger attitude; the current customers who are 40 and 50 and today have a younger attitude, than they perhaps did when my mother was that age.

So we are really going after a younger attitudinal customer versus young. Don't misunderstand. This is not a focus on millennials at all, so don't even think that. But it's more about more modern product, modern product that women who go from 30 to 70 would wear. So it's not necessarily an age, but more about modern product, and when we identify the vendors that will even help you understand it even better. So the biggest difference in testing this in these stores versus before is how we chose the stores, which was based on metrics and demographics, and the second one is, it is an attitude not necessarily an age.

David Mann

In terms of your comment about possibly doing more opportunistic buys, in the past, when the company has been asked about that, it seems like there were some supply chain constraints that might have prevented that. So I'm just curious, is there anything that needs to be done supply chain wise to allow you to buy opportunistically much more aggressively? And will there be additional costs that we need to think about to accommodate that?

Dawn Robertson

Interesting, I've spend a bit a time on that since I've been here. And we have the supply chain that we need to do so. We had to change some of our processes, which we've done. And as a result there won't be additional cost involved. We'll be able to get them to flow through the distribution centers timely, which is also important, when you do more opportunistic buys. So I'm pretty encouraged that we'll be able to execute it with no additional costs, but will help us as we go forward in this environment.

David Mann

And just to refresh, what percentage of purchases now might be done opportunistically into the season? And how much do you think that could move or what kind of target might you have?

Dawn Robertson

Well, as we look at it, it really varies by zone. So we don't really look at it as a company, but more by category of business, because obviously, from the variety of candy to top of bed, to men's, to women's, really, really changes. We're really going through area by area and looking at it. We want to ensure that we keep our differentiator, which is strong product upfront, but we do believe in some of the key ones we have real opportunity. And as we go forward we can define that more clearly. But we really look at it by category frankly more than as a total.

David Mann

And how quickly might we expect to see off-price opportunistic buys accelerate as a percentage of some of these categories that you're focused on?

Dawn Robertson

Second and third quarter of this year.

David Mann

And then one last question, in terms of ecommerce, I think when the company announced that they were going into ecommerce, it was talked about a certain pace that would grow it over time and not necessarily pressure the P&L. Can you talk a little bit about becoming more aggressive with your ecommerce initiatives? How we should think about that having an impact on the P&L in terms of investments or additional expense?

Dawn Robertson

We are being more aggressive in growing ecommerce. It should not affect the P&L as far as expense or additional investments. It should affect the P&L in a positive manner as we grow the sales. The investment has been realized and forecasted. We do not plan on exceeding that investment going forward, but rather driving sales more quickly.

Operator

We do have a follow-up from Jeff Stein from Northcoast Research Group.

Jeff Stein

Greg, wondering what your ecommerce loss was during the quarter? And then just on the subject of wages, we are starting to see a lot of movements within certain states about raising the minimum wage, in some cases, as high as $15 and I am wondering, as you look at the various regions and states you operate in, are you seeing any incremental pressures over and above where you've taken wage rates?

Gregory Kleffner

So the ecommerce loss -- and you can see that back in our adjusted EBITDA tables little over $1 million this quarter. Now to caution everybody, there is some art in how you allocate market and everything here, because obviously, some of that marketing, while it's allocated to ecommerce now, it benefits the whole chain.

So that was a little higher than we would have wanted. Certainly the sales in the first quarter aren't exactly what we would like them to cost, a lot of them are fixed. But as Dawn said, big focus area for us. I think all the focus is on growing sales, which will ultimately help the economics of that.

On the labor front, the wage increases, right now a lot of these minimum wage things, fortunately, I think are in some of the higher cost states, anyway, so our wages are right now closer to those higher minimums. And while they say $15 for an hour, in a lot of cases a lot of those $15 an hour are five years down the road and things.

So right now not experiencing a lot of, I guess, unanticipated upward pressure. And we pay regionally competitive. So as you might expect, in some of these places where they have these higher moves on those minimum wages, we're already higher wages anyway, because we have to be to get the people we need to work in our stores.

Operator

We've reached the end of our question-and-answer session. I'll just turn the floor back over to Ms. Robertson for any further closing comments.

End of Q&A

Dawn Robertson

Well, I want to thank you for your time today. I look forward to talking to you next quarter, and at which time I'll really be able to talk to you about the strategies in more detail. And I look forward to talking to you soon. Thank you.

Operator

Thank you. That does conclude today's teleconference. You may disconnect your line at this time. And have a wonderful day. We thank you for your participation today.

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!