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Stein Mart Inc. (NASDAQ:SMRT)

Q4 2007 Earnings Call

March 20, 2008 10:00 am ET

Executives

Linda Farthing – President & CEO

James Delfs – Sr. VP Finance & CFO

Bill Moll – Executive VP, Chief Merchandising Officer

Hunt Hawkins – Executive VP & CAO

Mike Ray – Sr. VP, Director of Stores

Jay Stein - Chairman

Analysts

David Mann - Johnson Rice & Company

Shaun Smolarz - Sidoti & Company

Robin Murchison - SunTrust Robinson Humphrey

Operator

Good morning and welcome to the Stein Mart fourth quarter 2007 earnings results conference call. (Operator Instructions) It is now my pleasure to turn the floor over to your host Linda Farthing; you may begin your conference.

Linda Farthing

Good morning. I’m joined today by James Delfs, Chief Financial Officer, Bill Moll, Chief Merchandising Officer, Hunt Hawkins, Chief Administrative Officer and Mike Ray our Senior Vice President Stores. Jay Stein our Chairman is also on the phone. Jim, Bill and I have prepared remarks and then all of us will be available for questions.

This fall season was the most challenging in the company’s history and produced the worst results. We experienced a significant decline in sales and were only able to ease that trend when we offered dramatic discounts including a return-to-coupons off regular priced merchandise. We accelerated our traditional red dot clearance event which began the day after Christmas in order to move fall and winter merchandise. Even with our aggressive posture on markdowns our comps declined more than 6% in the fall season.

On a very positive note we did benefit by bringing our inventory levels to a more appropriate point and at the end of the fiscal year they were down 13.6% on an average door basis. By families of business this fall season was the most difficult for our home area; gifts and linen. Frankly this has been the case for several seasons now.

The comps for gifts and linens together were down 14.1% in the fall season after being down more than 7% in the spring season. Geographically the Florida market and in some cases the greater southeast, also weighed negatively on our performance. The Florida market where we have 17% of our stores continued its disproportionate contribution to our comparable store sales decline. And as we’ve mentioned before because of those stores’ traditional strength their poor performance is weighing more heavily on our bottom line.

Since my arrival at the end of September we have focused on four major areas. First, eliminating the fall and winter inventory in a timely manner. Second, reengineering the fall marketing program away from TV and towards direct mail, email and some ROP and third reducing all non-essential costs and modifying our real estate plans. And fourth investigating new ways to understand our customers’ purchasing patterns and how we can merchandise and market to more successfully meet their needs.

Now Jim and Bill are going to go over some of the details of the fourth quarter and year and then I will speak further about some of the initiatives outlined in today’s news release.

James Delfs

Thanks Linda. In the course of our presentation this morning and in response to your questions, we may make statements as to certain matters that constitute forward-looking statements. Additional information concerning those factors that could cause actual results to differ from those in the forward-looking statements can be found in our current report on Form 10-K for the year ended February 3rd, 2007.

In comparing this year’s total results to last year’s remember that last year was a 53-week year and last year’s fourth quarter contained 14 weeks. Comp store sales however measure the same 13-week and 52-week periods ending on February 2nd, 2008 compared to those periods ending on February 3rd, 2007.

In the fourth quarter our comp store sales decreased 6.2% and our total sales decreased 9.4%. For the fourth quarter gross profit decreased $51.4 million and as a percent of sales decreased 930 basis points. Merchandise margin decreased 760 basis points due to significantly higher markdowns, slightly offset by increased markup.

Occupancy and buying costs increased 170 basis points primarily due to additional costs related to new stores and a lack of leverage on reduced sales. For the fourth quarter SG&A expenses decreased $2.5 million but as a percent of sales increased 180 basis points because of the lack of sales leverage. We saved a total of $5.8 million in store expenses, advertising and corporate office expenses compared to last year’s fourth quarter but we also recorded an additional $3.4 million for store closing and asset impairment charges in this year’s fourth quarter.

We incurred $434,000 of net interest expense in the quarter this year compared to $90,000 of net interest expense in last year’s fourth quarter. We were borrowing under our revolver for most of the fourth quarter this year and ended the year with borrowings of $27.1 million. For the fourth quarter of 2007, we incurred a net loss of $12.1 million or $0.30 per diluted share as compared to net income of $21.1 million or $0.48 per diluted share in last year’s fourth quarter.

As previously reported the 53rd week last year increased earnings per share by $0.04 for the fourth quarter and the year.

For the year, our comp store sales decreased 4% and total sales decreased 2.9%. Our gross profit decreased $54.9 million and as a percent of sales decreased 290 basis points. Merchandise margin decreased 210 basis points due to significantly higher markdowns, slightly offset by increased markup. Occupancy and buying costs increased 80 basis points primarily due to additional costs related to new stores and lack of leverage on reduced sales.

For the year SG&A expenses increase $12 million and as a percent of sales increased 160 basis points. For the year we spent an additional $5.2 million in advertising and depreciation increased $2.5 million. Store closing and asset impairment expensed $2.8 million and the balance of the SG&A increase was primarily related to the President, CEO transition.

For 2007 we incurred a net loss of $4.5 million or $0.11 per diluted share as compared to net income of $37.2 million or $0.85 per diluted share in 2006. During 2007 we repurchased 2.4 million shares of our stock for $26.9 million. We now have approximately 800,000 shares left on our authorization to repurchase.

Bill Moll

Thanks Jim, good morning. In the fourth quarter our business was difficult across all divisions with intimate apparel as the area with the smallest decrease and gifts with the largest decrease. Within the divisions the ladies area had better performance from special sizes, cashmere and status casual sportswear. Men’s had better performance from gifts, moderate sportswear and outdoor collections. Home continued to struggle although home entertainment, garden, luggage and the pet gift categories were better than the trend.

For the year, our ladies apparel business was actually flat and intimate apparel was positive. However all other categories were negative with the most troubled area being home as Linda noted in her comments. This area remains under intense scrutiny as we attempt to find the right mix of merchandise to entice customers in this environment.

As Linda noted, our year end inventories were down more than 13% on a dollar basis over 2006 thanks to our aggressive markdown posture during January. We were also significantly more current at year end with 8% fewer units of fall season merchandise than one year ago. Our trends so far in 2008 are similar to the fourth quarter. Overall although we were enthusiastic about the color being shown for spring, our initial results pointed to a more strength in the neutral palette; black and white, kaki and brown. However, most recently we are starting to see color begin to accelerate in accent pieces; primarily blue, pink and to a lesser extent yellow.

The early Easter has prompted movement in ladies dresses and men’s dress furnishings. Otherwise the strongest categories in ladies are special sizes, status casual led by denim and basic bottoms. In men’s we continue to see strength in gifts, golf apparel and shorts and swim. Within the market place itself, we see plenty of product availability and access. We are stepping up our purchase of branded merchandise and becoming more opportunistic as opportunities are presented.

Because we are very cautious in regard to the upcoming quarters we have placed advanced orders conservatively and put a high priority on being nimble moving forward into the season.

Linda Farthing

Thank you Jim and Bill, now to tell you about going forward, we are aggressively working to make 2008 a turnaround year for Stein Mart. We have examined all aspects of our business to identify ways to succeed in the current environment. While we are working to keep our overall inventories down our merchants are being encouraged as Bill pointed out to seek out more opportunistic purchases in fashion apparel and we’ll be pursuing them more vigorously than we have in recent years.

On the operations side, we are evaluating our business for further opportunities to streamline our processes and our organization. In merchandising we have a number of tests going on. First we are looking to intensify our accessory area by testing self-service jewelry displays as opposed to the attended counter displays. We’re testing fragrances in limited doors as well as adding square footage to the whole accessory complex. We see this as a great opportunity.

Second we are experimenting with restoring certain highly focused elements of children’s clothing in 40 stores where we believe its absence may have contributed to traffic declines. Third we are refocusing our home area to be much more promotional and giftable.

Fourth in all stores we’ve intensified our focus on a subset of our ladies business that we believe has strong growth possibilities. It is a more fashion-conscious customer who has a younger attitude but prefers a missy fit. Our merchants have done a great job getting access to some of these top brands and this is an area where customers are already responding very positively.

Across the chain we have in store emphasis on two things; highlighting the values within the stores and reemphasizing customer service at all associate levels. This customer service sets us apart from the major discounters. We’ve also introduced permanent signage, season signage and new price point toppers in every department. We are also addressing the key area of marketing. Our biggest challenge far and away is finding the appropriate blend of marketing vehicles to get feet to our doors. As you know we moved away from a branded TV message to a much more promotional and value-based theme this fall.

We are utilizing email more than ever before and we have been intensifying our direct mail offering and newspaper inserts. We will be evaluating the effectiveness of our advertising vehicles in the coming months.

We’ve done quite a bit of primary customer research with our best customers and those who have not shopped with us in recent months. We’ve studied the capabilities of our customer database and we have contracted with an outside vendor to help us extract more of what is stored there.

Finally I think it is important to note that in this challenging environment we are being very cautious about controlling expenses and preserving cash. First we have slowed our new store opening program until the business outlook improves. Second we have tabled all but the most essential new expenses. Third we have suspended both the dividend payment and our repurchase of stock and fourth we are reviewing the cost factors of individual line items as well as the key processes for opportunities to do business more efficiently.

It is important to note our borrowing capability is more than adequate for our business but I think it is only prudent as they say to keep our powder dry.

In closing it is fair to say that we believe if we keep our inventory aligned with the sales trends and our costs controlled we can make 2008 a better year for Stein Mart.

Now we’ll be glad to take your questions.

Question-and-Answer Session

Operator

Your first question comes from David Mann - Johnson Rice & Company

David Mann - Johnson Rice & Company

Linda, in terms of the efforts that you’re taking to reduce costs, can you highlight perhaps any areas that you think there’s the greatest opportunity and what percentage comp might you need under this sort of heightened cost control structure to lever your SG&A costs?

Linda Farthing

David let me respond first by saying we’re not giving any kind of guidance in terms of comps. In terms what we have done from a cost cutting standpoint, we have actually had some reductions in staff. We have had a reduction in hours in stores but we’re being very cautious to make sure we continue to have the service level that a customer expects from a Stein Mart store. But I’m not going to give you a specific comp number at this point in time and to let you also know we are continuing to evaluate where we have additional opportunities so this is a work in process.

David Mann - Johnson Rice & Company

Very good. In terms of the tests that you’ve highlighted which of those do you think has the opportunity to impact performance the quickest and which of those will take some time and are very much in a very pilot stage?

Linda Farthing

The area we’re already getting positive response is in the what I’ll call…we have various names for it, but it’s really an updated missy customer. We’ve had great response there already. We feel good about that. We have a lot of opportunity in accessories that will take time. The addition of the children’s to the 40 doors that will give us additional volumes opportunity but again its 40 doors and we are going to evaluate that very carefully. The tests in terms of improvement in processes, those tests will take a little longer.

David Mann - Johnson Rice & Company

And just for quantification the updated missy area, what percentage of the mix might that represent similarly accessories and then lastly how big is home and what direction…how much smaller do you think you can take that?

Linda Farthing

I’m going to turn part of that over to Bill and then I’ll pull it back and kind of summarize.

Bill Moll

On thinking percentages David, it’s a good question, I’d say in the…it’s probably in the 5% range in the updated missy that Linda talked about but we have to remember that what we have going on in the store right is the first piece of this. If you walk into our stores in the attitudes area which is what we’re starting to set up, it is a casual led by denim. There are career and related separates that will be in here in June that will take that to a different level and once again as Linda said, it’s a test so we’re working through that. I think that the jewelry part which is in the very early parts of the test, the initial results are exciting and I think there’s nice dollars that will come out of that in both enhanced service and how we can show the product better to the consumer. The home part, a lot of the space is coming from home and to be totally honest with you as we redo the home world, by deemphasizing parts of furniture and home décor we’ll see where that goes because we do have a very healthy and I think good home entertainment and giftable parts of that. And the pet business which is a nice niche business. So I can’t give you total percentages because I don’t really have them right now. I think that these movements you will see in the stores as the seasons unfold to show nice growth and nice potential.

Linda Farthing

David let me summarize that piece, just say we are really looking at the productivity dollars per square foot within our stores and looking to maximize those and obviously as we evaluate that are also looking at the margin potential within each of the businesses. And as you can imagine accessories has the greatest margin opportunity for us.

David Mann - Johnson Rice & Company

Very good, thank you.

Operator

Your next question comes from Shaun Smolarz - Sidoti & Company

Shaun Smolarz - Sidoti & Company

My first question is could you please elaborate on the percent of the comp base that’s Florida and when you expect the state’s economy to improve?

Linda Farthing

I’m going to turn that question to our Senior VP of Stores, Mike Ray.

Mike Ray

David our Florida base accounts are 17% of our sales and 15% of our stores. As far as predicting when the economy is going to change, that would be very hard for us to predict at this point but we are seeing some mild stabilization of that business and the narrowing of the gap between our comps and Florida’s comps.

Shaun Smolarz - Sidoti & Company

Okay great. And from a merchandising perspective could you discuss some of the developments regarding national brands and how the company’s responding to some pressure from some of these brands that will have or will be discontinued?

Bill Moll

Excellent question Shaun, it’s a challenge in the business. I think you have to look at it in two phases. The men’s market has been very positive in that we really have not seen that pressure. We’ve been able to add many brands in there. We’ve been able to intensify the brands like Iza, Chaps, Jeffrey Bean; the list continues and we’ve really been very selective on how we drive that business. We saw opportunistic buys with labels like Arrow and we’re able to grow that. Women’s obviously in the Jones Apparel world and in the Liz Claiborne world have been more challenging but should be noted that the Liz Claiborne brands to which where shelves are sold we really did not do much business…really did no business with those brands. We still carry the Liz Claiborne brand and have no problem with goods there. The challenge is with when you look in the Jones Apparel worlds, our Jones & Co. brand which is a proprietary product that we’ve had on our floor now for approximately a year, we’ve been able to grow that and have been very pleased with that. We’ve picked up areas in the casual denim businesses where we’ve added many recognizable brands and really don’t see a problem in growing that part of the business.

Shaun Smolarz - Sidoti & Company

And how about on the Ralph Lauren side?

Bill Moll

Well as we discussed, the Ralph Lauren has pulled out of this channel distribution and we have put in the Polo jeans label in our stores and have been pleased with how that’s moving as the spring season unfolds. So nothing really new on that venue.

Shaun Smolarz - Sidoti & Company

Alright, and from a strategic brand image and marketing perspective how concerned are you by pricing pressure from the full priced department stores who are virtually discount stores in disguise right now?

Bill Moll

Well look its retailing and do I feel the pressure? Sure I feel the pressure. I think we all do. I think we have good merchants that are negotiating proper price value relations and we’re pleased with the values that we’re showing on our floor right now.

Linda Farthing

Shaun to also add to that, one of the things that we’re looking at in our pricing is to….we’re realizing that the department stores are tending to be with their couponing anywhere from 15% to 20% off the retail price and so we are looking as Bill said, for sharper prices so that we can be like at the 30% level below department stores. It depends on the category but we certainly are very much aware of that and know that we need to be addressing it.

Shaun Smolarz - Sidoti & Company

And then my final question is how much availability is currently on the credit line?

James Delfs

We have ample borrowing capability. It’s $100 million facility and it has an accordion feature that’ll take us if need be to $150 million.

Shaun Smolarz - Sidoti & Company

Alright, thank you very much.

Operator

Your next question comes from Robin Murchison - SunTrust Robinson Humphrey

Robin Murchison - SunTrust Robinson Humphrey

A couple of questions, first of all did I hear you say you spent an incremental $5.2 million on marketing, was that for the year or for the quarter?

James Delfs

That was for the year.

Robin Murchison - SunTrust Robinson Humphrey

That was for the year so that cost you about $0.08 then?

James Delfs

Approximately, yes.

Robin Murchison - SunTrust Robinson Humphrey

Okay and then for Bill, when you intensify the self-service displays for accessories, I mean some of the stuff that you’ve got behind those…in the cases that have to be shown, I mean sport some pretty, you know relatively higher price points. How do you manage that if you bring it out of the case?

Bill Moll

Well Robin, good question. Where the higher price points for example sterling silver, will stay in the case line and we’ll have the case line manned. So we’re watching price points very carefully but when you look at earrings, necklaces, certain price points of watches, we’ve been able to bring those out of the case line and been very happy with it so we’re still cognizant of the shrink issues and where price points are relative to be in case lines we will keep them there. We’re not bringing it all out of the case line.

Robin Murchison - SunTrust Robinson Humphrey

Okay then I want to ask you about the updated missy customer, in boutique especially there’s one side of the boutique seems to be more traditional boutique offerings that we’ve seen for awhile and I’ve noticed like the other more casual side has repositioned I think some of your denim, some of your branded denim, I’ve seen Lucky in there, and then some complimentary tops, pieces that are not the same brand but that work with the product. Are we looking at…if you take the boutique in total, are we looking at shifting square footage…or shifting the productivity of that square footage to a perhaps a higher fashion casual content or is it just a test, what are you thinking in terms of managing it. Because it sort of looks like it’s for two different customers.

Bill Moll

Robin, great observation, the first and foremost point to talk about is what Linda spoke to of the updated missy is not boutique. That is not touching the boutique business at all. The boutique business is still there, it’s still in the same drive it was before with Peck & Peck as its lead and then some great brands that are in, you’ll see Michael Kars in all doors, you’ll see many different brands now…Anne Klein and things like this. We have a casual version of that which is led by Vera Christina which is doing quite well in the casual part of the boutique. The updated missy is truly updated missy from the ladies world. We married beside it just because of how the floor space is and how it can go from the casual portion of boutique then into this casual part. But as I stated the young business, the next part of the young business will be related separates and some collections portions of that. So it really isn’t boutique and the brands…the ladies area that will be there, yes you saw Lucky and you can see Seven 7, Nine West and so we have those businesses in there and but is not part of the boutique world.

Linda Farthing

Robin, good observations and one of the comments that I would make as this business grows it will probably not remain beside the boutique area. We’re probably going to be putting it out into the center of the floor. I mean this is a major test because we’re starting…it’s not, I don’t want to say test, because that implies it’s not in all stores. But we are testing it in all stores and it will seek its level based on customer votes and when the customer votes aggressively for it we will be expanding the square footage and probably be moving it away from the boutique area.

Robin Murchison - SunTrust Robinson Humphrey

Okay and one more if I can with Bill, where are we in the dress cycle, the skirt cycle and the pants and bottoms cycle. We hear anecdotally from some retailers that pants and bottoms are slower but yet the dress cycle…we’ve sort of been there for a few quarters now, do you think it persists through this year, or just through spring or what are your thoughts?

Bill Moll

Well one at a time, dresses…you know we’re going quarter by quarter Robin. We’ve been very pleased with the dress business, very pleased with the offerings we have right now, the value, the colors, the silhouettes. We’ve expanded it from as you remember a year ago was virtually all matt jersey. We’ve expanded that whole category and we’re pleased with it. I think with dresses you have to watch it on a quarter by quarter basis but we have to also realize that as you observe on the street more and more ladies are wearing dresses and so it’s opened up a nice business and we’re going to watch it carefully. The nice thing is it’s probably the closest to need business of our purchasing power so I think we can watch that and evaluate it.

Pants, your observation is correct. The bottom business has been interesting. Skirts have been difficult, but pants have been nice. We’ve been very pleased with our pant business. I think the merchants have done an outstanding job of expanding the sizing, bringing shorts in and testing out the short length in pants which is different than petites because of the rise. But we’ve been pleased with the pant business. It’s generally out of the basic side of that business which is really what’s happening in the economy right now.

Robin Murchison - SunTrust Robinson Humphrey

Okay great thank you very much. Good luck.

Operator

There appears to be no further questions at this time; I’ll turn the floor back over to Linda Farthing for any further or closing remarks.

Linda Farthing

Again I’d like to thank all of you for being with us today and we really appreciate your interest in Stein Mart. And I want to repeat just know that we are committed to make this 2008 a significantly better year for Stein Mart than last year.

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Source: Stein Mart Inc., F4Q07 (Qtr End 02/02/08) Earnings Call Transcript

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