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Stein Mart Inc. (NASDAQ:SMRT)

F1Q08 Earnings Call

May 22, 2008 10:00 am ET

Executives

Linda M. Farthing - President, Chief Executive Officer, Director

James G. Delfs - Chief Financial Officer, Senior Vice President - Finance

William A. Moll - Executive Vice President and Chief Merchandising Officer

Michael D. Ray - Senior Vice President, Director of Stores

Analysts

Mark Montagna - CL King & Associates

Robin Murchison - SunTrust Robinson Humphrey

David M. Mann - CFA Johnson Rice & Company LLC

Operator

Good morning, my name is Jerlene and I will be your conference operator today. At this time I would like to welcome everyone to the Stein Mart Incorporated First Quarter Financial Results Conference Call. (Operator Instructions) It is now my pleasure to turn the floor over to your host Linda Farthing, President and CEO.

Linda Farthing

Good morning all. I am joined today by Jim Delfs, our Chief Financial Officer, Bill Moll, our Chief Merchandising Officer and other senior members of our management team. Jim, Bill, and I have prepared remarks and then we all will be available for your questions.

The first quarter of 2008 was extremely challenging from a sales perspective. Our comparable store sales performance was disappointing as we started to make headway with day-to-day sales. We, like most other retailers, found consumers were prompted to shop only when there was significant discounting involved. Otherwise the response has been lackluster at best.

As you recall, we responded to the worsening environment at the end of the fourth quarter by taking markdowns on seasonal merchandise which we would have traditionally marked down in the first quarter. This aggressive posture benefited merchandise margins in the first quarter, even as spring sales failed to materialize, but let me stress that the sales shortfall in the first quarter will have adverse markdown ramifications in the second quarter as we work to liquidate spring/summer merchandise.

As you can also see from our numbers, we targeted expense reduction in both advertising and the corporate office. We will continue to conserve our resources in this difficult environment. We are searching new ways to run our business more efficiently while not detracting from the customer in store experience.

We are focused on several opportunities to enhance productivity in the areas of non-merchandise procurement and other indirect spend categories. As we further define their scope and timetable, I will be sharing the specific details with you.

Unfortunately any additional expense reductions will have limited benefit in the second quarter and we will not have the opportunity to save as much on advertising expense in the second quarter as we did in the first quarter.

On that note, we are continuing to make marketing a priority though. I am very happy to welcome Glori Katz to lead our advertising, marketing, and sales promotion efforts. Her charge is to strengthen our preferred customer program, to completely review the vehicles and messages of our advertising program, and to ensure that our customer relationship management tools are providing the kind of valuable, actionable information we need to communicate with our customers.

In that vein, we have partnered with a new firm to manage our customer relationship marketing and through their analysis we are confident they will help us develop strategies for further outreach.

We also have a number or exciting merchandise initiatives under way and Bill will speak about them in more detail in a few minutes.

Overall in merchandise we are working to increase the quantity of brand name merchandise and to take advantage of more opportunistic purchases in all areas, while at the same time critical piece, keeping our inventories in line with the rate of sales. We are working towards a more focused assortment in the home area, which Bill will talk about, and continue to look for ways to improve productivity going forward.

As you know, we have scaled back our new store openings in view of the current retail environment. We opened five new stores in the first quarter, including our first store in suburban Boston. We’ve been relatively pleased with three of our spring store openings’, including the Boston store and their initial performance in this kind of environment makes us cautiously optimistic.

Two of the others are off to a slower start, but we do believe that they will perform satisfactorily over the longer term. We have one more store which will open in late summer, as well as one relocation.

Regionally our Florida, California, and Arizona stores continue to struggle disproportionately, as our experience is tracking the countries worse hit housing markets, but for the quarter we had the best performance in the North and mid Atlantic states.

Now Jim and Bill are going to go over some of the details of the first quarter and then we will be glad to take any questions.

James Delfs

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 2, 2008.

For the first quarter of 2008 total sales decreased 6.4% from the first quarter of 2007, while comp store sales decreased 9.3%. Gross profit decreased $7.2 million and as a percent of sales decreased 10 basis points.

Merchandise margin increased 110 basis points due to increased mark up and decreased markdowns. Occupancy and buying costs increased 120 basis points, primarily due to costs from additional stores and lack of leverage on reduced sales.

For the first quarter SG&A expenses decreased $5.9 million, but as a percent of sales increased 10 basis points. Even with 14 additional stores, store operating expenses and depreciation increased only $400, 000.00, while advertising decreased $4.6 million and corporate expenses decreased $1.6 million.

Other income grew to 1.7% of sales in the first quarter of this year, from 1.4% of sales last year. The increase is due to the increased number of credit cards issued. The effective tax rate increased to 40.5% in this year’s first quarter: that rate reflects the statutory, federal, and state rates, certain permanent book tax differences, and the impact of unrecognized tax benefits in accordance with FASB interpretation #48.

For the first quarter of 2008 net income was $7 million or $0.17 per diluted share, as compared to net income of $8.1 million or $0.18 per diluted share in 2007.

William Moll

At the end of first quarter inventories were down 13.5% on an average store basis. The best categories in the first quarter were, in men’s: dress furnishings, moderate collections, and golf, in ladies: career tops, casual status denim, and dresses; meanwhile, special sizes had another very good quarter. In the accessory world, hosiery and handbags were the better categories. The toughest businesses were linens and home décor, as well as career collection business in both ladies and the boutique.

As Linda mentioned, we do have some exciting merchandise initiatives underway. As we told you, we are putting more recognizable brands on the floor and our customers have seen such names as Mac Studio, DKNY jeans, Lucky Brand jeans, Papagallo, Izod, Costa Boda, and Fitz and Floyd, to name just a few.

We continue to seek opportunistic buys where they fit into our business and there is certainly availability out there for these. Our challenge remains buying it in a way to make it meaningful to our customers. We had encouraging response to our denim based assortment from our shopper with a younger attitude who wants a missy fit and we now have added career items targeted to this customer in more than half of our stores, with all stores expected to receive this merchandise in the fall season.

Giftables have been an important category this spring. We’ve seen a good response to gifts in both the men’s and women’s accessory area. In the men’s area this includes a giftable electronics. In ladies, this includes boxed jewelry, bath sets, etc… In home we are deemphasizing furniture and home décor in favor of more giftable items such as crystal, home entertainment, and lamps. In linens we are taking an aggressive price point stance on bedding, towels, sheets, and top of bed.

In general, we see the customer responding to sharply re-priced novelty items that make her feel better.

We continue to test a number of initiatives. Our initial test of open sell jewelry was encouraging and now we will roll it out to a few more stores for further feedback.

Fragrances are in 50 stores, with more expected to be in place this fall and as promised the reinstatement of a more focused kids business should be in 40 stores in August.

I did want to comment that although our apparel categories held up relatively well in the first quarter, the overall apparel business has noticeably weakened in the past few weeks with a greater decline in ladies than in men’s.

This trend reinforces our current posture, which is to be especially cautious as we plan for the back half of the year, and we will continue to do this until this is a catalyst for the business.

Linda Farthing

I hope you all can see that although the macro environment is very challenging, we are working hard to not only navigate these difficult times, but to invest in ideas and strategies that will improve our business going forward.

………..

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from Mark Montagna with CL King.

Mark Montagna - CL King & Associates

You mentioned deemphasizing home and linens, which I’m curious when you expect to get to your planned inventory levels for this. Then, I imagine you’re probably going to reposition some of the square footage, which is probably a fairly large project. How long will it take to get to the planned inventory levels and then to reposition square footage?

William Moll

It will probably be at the end of fiscal 2008 that we will be at the position that I really wanted to be, but this process has started in place right now and you will see changes taking place in the third quarter of this fiscal year.

Mark Montagna - CL King & Associates

When you say get it to this, are you referring to the inventory, or are you referring to inventory and square footage?

William Moll

Both.

Mark Montagna - CL King & Associates

All right, that’s pretty quick. You said apparel has weakened in the past few weeks. Does that mean that the comps thus far through May are actually weaker than the trend for the first quarter?

William Moll

We can’t give guidance on those numbers right now, Mark.

Mark Montagna - CL King & Associates

Then just regarding the clearance inventory at the end of the first quarter, it sounds like it’s not quite at the planned levels that you had perhaps hoped for at the beginning of the quarter. Is that fair and then what percent of the total inventory would be clearance this year versus last year?

William Moll

No, clearance aged goods are actually in a better position than we anticipated. I do not have the percent with me right now, but no we feel that we are clearing goods at the rate we went to. It’s just overall business, as Linda stated, was off of our comp plan.

Linda Farthing

The issue is, in terms of spring/summer goods that we obviously would not have addressed early in the first quarter, because the weather hadn’t warmed up. I mean these are things based on rate of sale that we’ll need to address in the second quarter.

Mark Montagna - CL King & Associates

I guess that’s where I’m a little confused. It sounds like you have some markdown liabilities, more than you would have liked to have had heading into the second quarter. Is that fair or?

Linda Farthing

That is fair. When you end up with a -9 comp for the first quarter, that, although we did plan our inventories very conservatively, we did not plan them for that level of business, so that is correct.

Mark Montagna - CL King & Associates

That means that you’ve, given the weather was pretty cold all around, it sounds like you’ve perhaps held off on taking markdowns when normally you would have, in anticipation of the customer finally coming due to the weather.

Linda Farthing

We didn’t really hold off. I don’t think we want to say we held off, it’s just that the rate of sale was not what we would have liked it to have been and so therefore it’s going to impact second quarter.

Mark Montagna - CL King & Associates

Just regarding marketing, is there any way of quantifying how much of a savings you have in the first quarter and then perhaps how much less of a savings you would have in the second quarter?

William Moll

We identified that we had saved $4.6 million in the first quarter this year versus last years first quarter. As Linda also said, the opportunity in the second quarter for a save is not going to be nearly that big in marketing advertising.

Linda Farthing

Mark, a little further, when we analyzed our annual marketing spend, first quarter last year we had spent a lot of dollars on things that really did not produce the business for us and so we pulled back on those. It was also more than we probably should have spent last year in first quarter. But, there was other opportunity for savings there.

Mark Montagna - CL King & Associates

The Q2 savings could be even categorized as being a meaningful amount or is it just a small savings that it’s almost a rounding error?

William Moll

I think the magnitude is going to be small.

Operator

Your next question comes from Robin Murchison with SunTrust.

Robin Murchison - SunTrust Robinson Humphrey

How much do you all expect to spend percentage wise or is there any quantification in terms of marketing promotions or marketing advertising, I should say, that spend this year versus last year?

Linda Farthing

We try to stay at a 3.5% on marketing and obviously that flux, if the business doesn’t respond in the way we think that, obviously percentage game it would be higher, but we are, Glori Katz has been here a little less than a month now and she is analyzing everything and putting together for us a program for third and fourth quarter. There may be some times we spend a little more than the 3.5%, but that’s kind of the ballpark.

Robin Murchison - SunTrust Robinson Humphrey

I think last year it was higher than that.

James Delfs

It was higher because the sales did not materialize to the extent that we had anticipated.

Robin Murchison - SunTrust Robinson Humphrey

Yesterday I received at my home the memorial day sale flyer and I noticed on the back it said requested in home May 14 - May16 and yet yesterday was May 21. Maybe that was due to some sort of a bulk mail, but clearly you might have lost some input over the prior weekend, I would think, from the drive of this promotional piece.

Linda Farthing

There was a glitch and we believe that it did have some impact; to what degree we don’t know, but the positive is that the customer can use it through the 26th, so what we missed last weekend we’re hoping to get in this weekend. In this environment it’s real difficult to project how much is because all of them didn’t get out on time versus what’s really going on in the macro environment.

Robin Murchison - SunTrust Robinson Humphrey

A longer tail, it does have a longer tail I guess.

Linda Farthing

It does, it does have a longer, through May 26th.

Robin Murchison - SunTrust Robinson Humphrey

You mentioned, Linda, that a noticeable traffic in sales slow down. Are you able to correlate that with this recent spike at all in energy costs? Do you think that has anything to do with it?

Linda Farthing

When she goes to the pump and it costs her $100.00 or $80.00, that’s got to have a psychological impact even with the fact that we do have a little more upscale customer than some.

Robin Murchison - SunTrust Robinson Humphrey

It sounds like that even though we may have an improvement in weather, certainly more conducive weather trends, that the relative recent rise at the pump causes you concern to question whether or not it’s going to be enough of a driver.

Linda Farthing

I wish I could give you the answer to that, Robin. I think that’s a question that all retailers are struggling with now. We are seeing a definite pick up in our warm weather product that is definitely happening.

Operator

Your last question comes from David Mann of Johnson Rice.

David M. Mann - CFA Johnson Rice & Company LLC

I have a question on the SG&A line item, or a comment you made about future cost reduction. Can you give us a sense on over time what the opportunity is there?

Linda Farthing

As I stated, I will be quantifying that as we go forward. I don’t want to give that to you now because we’re still working through the details, but we are looking at indirect spend non-merchandise procurement.

We’re looking at line-by-line from an expense standpoint: just to give you an example we saved well over $1 million on deferring our management meeting that we typically have; that’s just one little example, but there are some definite opportunities we see going forward that will impact us, predominantly in fourth quarter with some saves in the third quarter.

David M. Mann - CFA Johnson Rice & Company LLC

In terms of the opportunistic purchases that you’ve made, can you give us a sense of, first of all what percentage of the mix are we talking about; how much more do you expect to ramp that? Is this merchandise which will flow potentially better to help your IMU or are you going to price it aggressively, or are you pricing it aggressively?

William Moll

We are pricing it aggressively. The exact percent of it I don’t have. It’s probably the low teens though, but it is opportunistic buys that are out there that we are working the best to keep it to flow and how our product is flowing in the store and it’s been very aggressively worked on and you will see more of it on the store as we go forward.

David M. Mann - CFA Johnson Rice & Company LLC

Just to get an idea, you’ve been encouraged by how, what’s already been in the store, how that’s sold?

William Moll

Yes, very much so, very much so.

David M. Mann - CFA Johnson Rice & Company LLC

In terms of the relationship with the SW, can you give us an idea of how that footwear area is performing relative to the entire store?

Linda Farthing

I’m going to have Mike Ray who is over our stores respond to that.

Mike Ray

Basically, there sales trend is mirroring ours. They’re following what we’re doing.

David M. Mann - CFA Johnson Rice & Company LLC

In terms of your, given the sense of the outlook, the general sense that you’re giving, do you expect that you’re going to have more stores to close if this environment continues? Is that something we should start thinking about that you’re looking at?

William Moll

In the past we’ve said that on an annual basis we review all of our underperforming stores and make a decision as to whether it’s better to continue to operate them or to close them. It comes down to the terms of the lease and it’s a financial decision. At this point we’ve identified, as we said, six stores that we intend to close this year.

David M. Mann - CFA Johnson Rice & Company LLC

On the home business, can you just remind us what percent of the entire business is that, how poorly is it performing in terms of the comp trend and perhaps how much that’s hurting you?

William Moll

It is our worse performing business. It’s currently about 14% of our business and unfortunately that’s, imagine it’s worse than our total trend. I do feel comfortable that we have a lot of actionable points, that I stated, that this will level itself off, but as we know from an industry wide this has been a very difficult business. So as Linda said, it’s 14% of our total business right now.

David M. Mann - CFA Johnson Rice & Company LLC

I’m not sure I heard your answer earlier, but is it correct that you’re not reducing the square footage related to that?

William Moll

No we are reducing the square footage. That will start in the third quarter of this year.

Linda Farthing

Thank you to all of you for your interest and time this morning. I just want you all to know that this Stein Mart team is committed to maximize our performance.

This concludes our conference call.

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Source: Stein Mart Inc., F1Q08 (Qtr End 5/3/08) Earnings Call Transcript
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