Stein Mart's (SMRT) CEO Hunt Hawkins on Q3 2016 Results - Earnings Call Transcript

| About: Stein Mart, (SMRT)

Stein Mart, Inc. (NASDAQ:SMRT)

Q3 2016 Earnings Conference Call

November 17, 2016 10:00 AM ET

Executives

Hunt Hawkins - Interim Chief Executive Officer

Gregory Kleffner - Chief Financial Officer

Analysts

David Mann - Johnson Rice

Operator

Greetings, and welcome to the Stein Mart, Inc. Third 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 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.

At this time, all participants will be in a listen-only mode. A question-and-answer Session will follow the formal presentation. [Operator Instructions] As a reminder, this conference call is being recorded.

I would now like to turn the call over to Hunt Hawkins, Interim CEO Stein Mart.

Hunt Hawkins

Good morning and thank you for joining us. Before we review our third quarter, I would like to introduce myself to those of you who may not know me. I have served the Company in various leadership roles for almost 23 years, most recently as the President and Chief Operating Officer. This is an important time for the Company, and I appreciate the confidence the Board has on me as their newly appointed Interim CEO.

I will make some opening comments on the third quarter and after that our CFO Greg Kleffner, will review our results in more detail and update our outlook. We will take questions after that.

As we preannounced, comparable store sales through the end of September were down 4%. In October, Hurricane Matthew severely impacted sales for several days along our southeast coastal areas, resulting in store closures and a decline in traffic and for after months most of the country experienced unseasonably warm temperatures.

Starting this spring, we implemented several important new strategies, unfortunately however, the execution of these initiatives were slog and with a substantial contributor to our third quarter sales declined in a challenging retail environment. As a result, we learnt some consequential lessons.

It is important that we evolve our merchandize assortments to attract a younger thinking customer. As we began this in the spring and going into the fall however, we did it too quickly, which alienated our loyal core customers. We have to be more thoughtful in how we change our assortments in the future.

We need to evaluate our marketing media mix and advertising messaging. Dropping our newspaper focus in the third quarter and replacing it with TV advertising highlighting our new categories and a much younger customer did not work.

Changes in how we present ourselves need to be list of book and done in ways that continue to appeal to our core customer as well as others liker, that do not shop of us, while we gain this ability with a younger thinking customer. This will involve more planning and testing as we move forward.

We must also be more powerful when making changes to our promotional strategies. `In the third quarter we replaced our [Indiscernible] with new reductions and we eliminated blue/clearance. Our customers simply didn’t understand the new offerings, so we have returned to our previous promotions, clearance terminology and methods affective November 1, while we work on a better plan for change in this area.

Combined these merchandising marketing and promotional miss taps impacted traffic and confused our customer. This led to our inability to clear spring merchandize on the timely and profitable basis during the quarter.

Despite that, going forward, we will continue to implement these important strategies and I want to discuss how we plan to execute them. With respect to merchandize assortments, we are pleased with most of our new offerings. Most notable of those is our expanded active and at leisure business.

Our current customers have liked some of what we have done with our new modern category, but we have had mixed overall results. We believe it is important for us to better address what our core customers are looking for, as well as appeal to a younger thinking customer in our core demographic.

We planned to continue building on what is working and evaluate those areas where our changes have not been as successful. For example, our modern initiative has been performing better in men's than ladies. Some of the brands are selling very well and others not as much.

The most obvious challenges in this area are the price point of many of our modern brands is much higher than where we are in the rest of the chain. Second, we believe that some of the assortment may appear too young to our customer.

And lastly we need to determine how best to market this merchandize in a way that appeals to our current customer and reach of to the younger thinking potential customers in the same demographic. We are analyzing these issues and we will be refining our merchandize assortments and how we market them.

We have reestablished our foreign media mix starting in the fourth quarter. We are looking in how we can rebuild our brand image not just advertise product and promotional pricing, we need to better understand how we can best appeal to both our current customer as well as others liker.

Part of this is our media mix and part of this is our marketing messaging. We have added new talent in our marketing area and we will be analyzing how best to make progress in a way that does not alienate our current core customers.

Our pricing comparisons show that we offer value more comparable to the off price retailers in the department stores. When we promote on top of these value prices however, we will too much like the department store.

We have created a customer expectation for our promotions a couponing that we need to address. This need to be done carefully so is not the harm traffic. We have been able to do this in the past, as we did several years ago, when we substantially reduced our regular price coupon.

Getting back to the quarter, our sales were challenging, our results were severely impacted by our lower gross profit rate, which reflects higher markdowns and higher occupancy costs, which negatively leveraged on lower sales.

More than half the rate decline was due to higher markdowns and most of that related to clearing spring merchandize during the quarter. We also had more coupon usage and cleared non-performing categories primarily in men's and accessories.

New leadership has been reinvading men's with a focus on brands, trends and newness for about a year and it has steadily improved. In accessories however, with the leadership changes more recent we are just starting to see improvements. Reinventing our accessories area is a huge opportunity for us which we are pursuing aggressively.

As we move forward, we need to better understand the external factors that have been impacting the apparel retail industry; while these factors are not under our control; they are a signal for us to be much more disciplined in our buy; reserving more for in-season opportunistic buys on improving our inventory returns.

While we have been receiving our inventories close at the time of sale, we simply have been buying too aggressively and have committed to more fall of goods then our current demand supports.

While our inventories were 3.5%, lower than last year at the end of the third quarter on a per store basis. As I said, we remain concerned with how our purchase commitments line up with this challenging apparel retail environment. We will do whatever is necessary during the first quarter to position ourselves, as we should, going into 2017.

To repeat a remark we made earlier this year; inventory management is an area of significant focus. If we keep our inventories in controlled, this will allow us to shift quickly into trending categories, reducing markdowns and increasing inventory returns.

Better sales and inventory productivity are the keys to our achieving greater levels of profitability. Many of the strategies we have talked about today will be continued under the guidance of the new President and Chief Merchandizing Officer.

As you know, we are actively searching for an individual who can partner with our team members to develop and execute the tactics to drive to improve results. To that end, we have spoken with a number of very strong candidates and hope to update you with the results of our search [design] (Ph).

On the positive side, we are very pleased with our new fall stores which are performing above plan. We are also excited about the five new stores and one relocation that we are planning to open in the spring.

Our spring is complete and the leases are executed, while we are finalizing our fall plan. Store growth is still extremely important for us, but we want to be fully focused on the performance of our existing stores, so that we open new stores in improved chain.

Our 2017 store plan also includes closing four underperforming stores at their natural lease expiration dates. As we look to fourth quarter and beyond, we will continue working on the sales and operating initiatives we have discussed today.

Getting our merchandizing assortment right; reassessing our marketing media mix and messaging; and developing a better promotional strategy while keeping our inventories in check. We want our customers to see us as more of an off price destination with merchandize that is fresh and messaging is all about value.

We are confident we can accomplish this and get our business back to the profitability levels we all expect.

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

Gregory Kleffner

Thank you, Hunt, and good morning everyone. Our net loss for the third quarter was $11 million or $0.24 per dilutive share and that compares to $200,000 or $0.01 per diluted share in 2015.

Capital stores sales for the third quarter decrease 4.6%. Same-store sales were impacted by decline in transactions, which was driven by traffic as well as lower average unit retail prices. These were partially offset by an increase in units per transaction.

Total sales for the third quarter decreased slightly to $299.5 million from $300.7 million in 2015. The decrease in total sales reflects the comparable stores sales decrease, mostly offset by sales from our new stores.

We had 290 stores open at the end of the third quarter this year, compared 274 stores at the end of the third quarter last year. Last year, we opened four stores in November, so we will end the year with our current 290 stores versus 278 last year.

E-commerce sales for the quarter grew by 31% and lifted comp sales results by 50 basis points. Our online business represented 2.2% of the quarter's total sales. Shoe sales performed better than the chain.

Gross profit for the quarter was $72.7 million or 24.3% of sales that compares to $82.2 million or 27.3% of sales in third quarter of 2015. The lower rate reflects higher markdowns and the impact of higher occupancy cost.

As Hunt said, markdowns were higher this year to clear spring merchandize that didn’t sell as well as planned throughout the quarter due to promotional changes that confused our customer and did not drive traffic.

We have also tried to drive traffic with coupons during the quarter and as a result had more coupon usage. And furthermore, we took additional markdowns to clear currencies and merchandize in non-performing categories.

The occupancy costs were higher in large part due to our new stores and/or what we anticipated, but leveraged negatively due to our software sales.

Pre-opening costs were $2.2 million for the quarter, including $800,000 in gross profit and $1.4 million in SG&A expenses. This compares to last year's third quarter when total pre-opening costs were $1.8 million including $800,000 in gross profit and $1 billion in SG&A.

SG&A expenses for the third quarter were $89 million compared to $81.5 million last year. This year's third quarter includes the $1.4 million charge related to our former CEO's resignation in September.

The remaining $6.1 million increase in SG&A from 2015 includes additional operating expenses from new stores considerably higher advertising and higher incentive compensation somewhat offset by higher credit card program income.

You can see that we continue to manage SG&A expenses very tightly especially considering the additional operating expenses associated with having nearly 6% more stores than last year.

Advertising expense was higher because we added incremental TV advertising during the quarter as part of the change in medium mix that Hunt talked about. And we also had additional advertising expense to support our new stores.

We did not accrue incentive compensation this quarter, but that expense was higher as we had a credit last year due to a reversal of previously accrued amounts based on our results.

Credit card income was higher due to the improved economics from our new agreement with Synchrony Financial and our better penetration.

Now, I'll touch on results for the first nine-months. Net income for the first nine-months of 2016 was $5.3 million or $0.11 per diluted share compared to $17.5 million or $0.37 per diluted share in 2015. Adjusted EBITDA for the first nine-months was $42.5 million compared to $55.7 million last year.

Comparable store sales for the first nine-months decreased 3.1%, same-store sales were impacted by decline in transactions, which was driven by traffic and also partially lower average unit retail prices. E-commerce contributed 40 basis points to our comparable store sales.

Total sales for the first nine-months were $975 million, which is the 1% increase over last year's first nine-months sales of $966 million. Gross profit for the first nine-months was $271 million or 27.8% of sales compare to $279.5 million and 28.9% of sales last year.

The rate for the first nine-months again reflects the higher markdowns along with the impact of higher occupancy costs.

Pre-opening costs were $3.5 million in the first nine-months of 2016 including $1.3 million in gross profit and $2.2 million in SG&A. This compares with the first nine-months of last year when pre-opening costs were $2.7 million including $1.5 million in gross profit and $1.2 million in SG&A. Pre-opening costs were higher this year due to the greater number of stores that we opened.

SG&A expenses for the first nine-months of 2016 were $259.3 million compare to $248.6 million last year. This year's expenses include $1.9 million in higher cost for actual and anticipated legal settlement and the $1.4 million charge for executive severance.

Excluding these costs from each period SG&A expenses for the first nine-months would be $256 million or 26.3% of sales compare to $248.5 million or 25.7% of sales in 2015.

Our effective income tax rate for the first nine-months was 40.3%, which compares to 38.7% last year. A higher rate this year was due to timing items that impacted the quarter, but we still expect our full-year rate to be less than 38.5%.

Taking a look at the balance sheet, inventories at the end of the quarter were $384 million compared to $373 million at the end of the third quarter last year. The slight increase in total inventories was driven our 16 additional stores. Average inventories per store were down 3.5% from the end of the third quarter last year.

Capital expenditures totaled $35 million for the first nine-months of 2016 were $32.3 million net of tenant improvement allowance. This compares to $34.5 million or $24.4 million net of tenant improvement allowances in 2015. We continue to expect capital expenditures will be approximately $33 million net of allowances for 2016, which compare to $32 million net of allowances for 2015.

Borrowings under our credit facilities were $180 million at the end of the third quarter and our unused availability was $77 million. Last year, borrowings were $192 million at the end of the third quarter, and unused availability was $75 million.

Before I discuss our updated 2016 outlook, I would like to talk about our credit card program briefly. Penetration of our credit card continues to grow and was 16.1% through the first nine-months; this is solid increase from the 13.8% penetration through the first nine-months of last year.

The improved economics we are seeing from our new credit card agreement we entered into this year as well as the impact of our higher penetration continue to benefit our bottom line by offsetting SG&A expenses.

Based on our results through the third quarter, our 2016 outlook for gross profit and SG&A expenses has changed. Due to higher markdowns and deleveraging of occupancy costs, we now expect our full-year gross profit rate to be lower than in 2015.

For SG&A we are now forecasting our expenses for the full-year to be slightly lower than our previous estimate of $360 million even including the legal and severance amounts already discussed.

This concludes the prepared portion of our comments, and as a reminder we are joined today by investors and others who are listening via webcast and because of that can't ask questions on the call.

Following the call, we will be available throughout the day to answer follow-up questions any of you may have.

Now we are happy to take questions from those of you on the call. Operator.

Question-and-Answer Session

Operator

Thank you. We will now be conducting a question-and-answer session. [Operator Instructions] Thank you, our first question comes from the line of David Mann with Johnson Rice. Please proceed with your question.

David Mann

Yes, thank you good morning. A question about some of the strategy issues you are dealing with. Can you talk a little bit with this need to attracting a younger customer about any kind of success you are doing that and any reason to get some confidence that you will be able to walk this tight route of attracting a younger customer without alienating the core older customer. Thank you.

Hunt Hawkins

Thank you David, this is Hunt. Let me clarify, I don't want to say younger, I want to say younger thinking. I think it's an important distinction. We certainly are trying to go after a junior’s customer here; we are trying to get some idea. It is still in our core demographic, but is younger than our primary core customer.

So, we self-analyze, I think we were too abrupt obviously in the changes that we made during the third quarter and we will still look at that and learn from those mistakes, but we are reasonably optimistic about being able to attract that customer. So we have now, we just don’t have as many as we like.

David Mann

And can you talk a little bit sometimes on these calls you talked about regional performance, is there anything to call out there and specifically on California or in Texas?

Hunt Hawkins

Yes, I would tell you that California actually performed best during the third quarter; Texas really performed at the chain. So our performance was best in the west and in the northeast and we lagged a little bit in the southeast, primarily due to the hurricane that impacted about 20% of stores in total.

David Mann

And then in terms of CapEx plans maybe for next year, I know maybe premature for you to give specific plans, but given you are in the middle of sort of executing the strategy and looking for a Chief Merchant. Some flux here, I'm just curious how you are looking towards next year in terms of leveled CapEx and new store plan?

Gregory Kleffner

David its Greg and thanks for being with us. We all are working on that right now, I would say in a high level our thinking really isn’t a lot different than it's been in the past. We talked about the numbers of stores we have for spring in the script and I think fall sort of coming together now, so will know that better, but somewhere in the neighborhood of where we have been for 2016.

David Mann

Thank you.

Gregory Kleffner

Thank you David.

Operator

[Operator Instructions] Mr. Hawkins, it appears we have no further questions at this time. I would now like to turn the floor back over to you for closing comments.

Hunt Hawkins

All right, well I just thank everybody for today and look forward to talking with you at our fourth quarter results.

Operator

Ladies and gentlemen, this does conclude today's teleconference. You may disconnect your lines at this time. Thank you for your participation and have a wonderful day.

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