Rough First Quarter. Stage Stores, Inc. (NYSE:SSI), a specialty retailer in small and medium-sized towns and communities across the US, had a rough go of it in its fiscal first quarter. The Houston-based operator of Beall's, Goody's, Palais Royal, Peebles and the eponymous Stage stores reported that same-store sales declined by 8.5% in its fiscal first quarter of 2016 compared to the same period a year earlier, resulting in a 9.9% decline in its net sales. As a result, Stage lost 56-cents per share in its fiscal first quarter, which was much wider than 47-cent loss predicted by analysts.
The nearly 10% decline in Stage's comparable sales was the result of a drop in store traffic and lower sales from key locations in the South and Southwestern United States, as incomes in these key markets were affected by lower oil prices and a weaker Mexican Peso.
Stage's first quarter weakness occurred against a backdrop of a tepid fiscal 2015, which saw its comparable sales drop by 2%, marking the second time in its last three fiscal years that it reported a slippage in comparable sales.
Dividend Impact and Outlook. As a result of its poor sales outlook, Stage's stock has plummeted by 72% since the end of 2014. Even as its stock price has fallen, Stage has maintained a dividend of 15-cents per share, bringing its yield to a very attractive 11.45%, which nearly tops its sector and is superior to that of sector stalwarts such as Gap (NYSE:GPS) and Guess (NYSE:GES) which we discussed here and here respectively.
Stage CEO Mike Glazer pointed out during its last earnings call that Stage has paid a dividend to investors for 44-straight quarters and is 'intensely focused' on generating cash, which presumably augurs well for the sustainability of its dividend. In this light, Stage's very high dividend yield seems almost too good to ignore and we ask the question: "should the high yield be enough to attract investors?"
Let's take a look to see whether there's substance behind Glazer's words. At first blush, it appears that Stage is on very solid financial footing, with a working capital ratio of 3.21-to-1 - that's far better than the industry Q3 average of 1.56-to-1.
However, Stage doesn't have much cash - at the end of its fiscal first quarter, it only had $16.5 million in cash, which is roughly a year's worth of dividends. In fact, if we use a more strenuous measure like Quick Ratio (which measures easily accessible sources of liquidity such as cash, its cash equivalents and its accounts receivable against its current liabilities), Stage looks a lot less attractive with a reading of just 0.11-to-1, compared to 0.32-to-1 for the rest of its peer group.
So what's the reason behind the apparent disconnect between its Working Capital and its Cash?
Quite simply, it's because the bulk of Stage's current assets are in its inventories - eighty-seven cents of each dollar of Stage's current assets are in its inventories. This wouldn't be a problem if Stage's inventories were moving very quickly - but Stage's comparable sales are declining and management mentioned that it is intent on bringing in new brands and more contemporary styles, which implies that the inventory is Stage's warehouses is not moving as much as it would like. Indeed, Stage's trailing twelve months' Sales-to-Inventory ratio is at 3.4-to-1, which is much lower than industry average of 6.7-to-1.
What's more, Stage's cash generation is suspect: its cash has dipped in three of its past four quarters - and in two of its past three fiscal years overall. To be sure, Stage has only reduced its cash by a net of $1.9 million over its last four quarters - but investors should be aware that it needed to borrow nearly $105 million during this period to covers its requirements - including its dividends.
That said, Stage's gearing isn't particularly high, with 47 cents of debt for every dollar of equity compared to 70 cents for its industry and its net interest expense remains low. Still, this bears watching - if Stage can't gain traction on its sales, it will have to continue borrowing to finance its operations as well as its dividends. Doing so will cause its gearing to rise while larger interest payments will reduce the cash available for its dividend payments (and making it less likely that Stage will raise its dividend). We emphasize, however, that Stage's current level of debt is far from unsustainable.
Going forward, the outlook for Stage is fairly sanguine: revenues are expected to rise by 25% over the next year and by 16% a year over the next five. Both rates of growth are better than what's expected for the industry and far ahead of what's anticipated for the S&P500. This suggests that analysts accept that there is merit to Stage management's strategy but we would caution against reading too much into this: even as analysts have forecasted solid growth for Stage, they've also downgraded the outlook for the current and succeeding years' earnings by over 40%. Clearly, they expect any improvements to Stage's top line to have only a muted impact on its bottom line.
We would advise investors to be cautious when investing in Stage. While the stock is down significantly since 2014 and at its lowest level in over 7 years, it remains vulnerable to further sales attrition, particularly as the economic environments remains lukewarm. At the same time, while Stage remains on solid financial footing, its ability to generate cash is a cause for some concern.
Given the balance of considerations, for Dividend Investors interested betting on a turn around, we recommend slowly accumulating Stage's stock over the next 4 to 6 months in order to take advantage of its high dividend yield while also providing a passive hedge against some near-term stock volatility.
At its current level, investors who buy $10,000 worth of shares in Stage can expect $1,145 in passive income over a year's time - but investors who are prudent and accumulate the stock as we've recommended could average a better yield in the 12 to 14% range - and set themselves up for higher capital gains going forward.
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
Additional disclosure: Black Coral Research, Inc. is a team of writers who provide unique perspective to help inform dividend investors. This article was written by Jonathan Lara, one of our Senior Analysts. We did not receive compensation for this article (other than from Seeking Alpha), and we have no business relationship with any company whose stock is mentioned in this article. Company financial data is taken from the company’s latest SEC filings unless attributed elsewhere. Black Coral Research, Inc. is not a registered investment advisor or broker/dealer. Readers are advised that the material contained herein should be used solely for informational purposes. Investing involves risk, including the loss of principal. Readers are solely responsible for their own investment decisions.