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Stein Mart, Inc. (NASDAQ:SMRT)

Q2 2008 Earnings Call

August 25, 2008 10:00 am ET

Executives

Linda Farthing – President & CEO

James Delfs – Sr. VP & CFO

William Moll – Exec. VP & CMO

Michael Ray – Sr. VP & Director of Stores

Glori Katz – Sr. VP Marketing & Advertising

Analysts

Robin Murchison - SunTrust Robinson Humphrey

Mark Montagna - CL King & Associates

David Mann - Johnson Rice & Company

Unidentified Analyst

Operator

At this time I would like to welcome everyone to the Stein Mart, Inc. second quarter financial results conference call. (Operator Instructions) It is now my pleasure to turn the floor over to your host Linda Farthing; you may begin.

Linda Farthing

Good morning and thank you all for being with us today. I am joined today by Jay Stein our Chairman, James Delfs, Chief Financial Officer, William Moll, Chief Merchandising Officer and other members of our senior management team. James, William and I have prepared remarks and then we all will be available for your questions.

Obviously we are very disappointed with our second quarter loss. Our lackluster same store sales trend continued through second quarter and in response to the highly promotional environment we were forced to discount heavily in order to clear merchandise. So our top line suffered while our markdowns grew.

Regionally our northern tier of stores in Texas performed better then the company trend, while the southeast experienced the greatest drop off in sales with Florida and Arizona continuing to be the poorest performers and I’m certain you’ve heard that from other retailers.

However, we were successful in moving seasonal merchandise and at the end of the quarter our inventory was down 12.8% on an average store basis. Because of the aggressive stance we had taken on markdowns, our assortment is far more current then it was at this time last year giving us a much better platform for new fall merchandise.

We cannot control the outside environment which is now more challenging then any in recent memory and our planning for fall is necessarily prudent but we have been spending a great deal of time and some very precious resources trying to impact what we can do on our side of the business to improve our performance.

We have a number of merchandise initiatives that are in various stages of testing and in some cases implementation with an emphasis on brands to further validate our value proposition. William will speak more about them in a moment when he reviews the previous quarter, but he and his team have been working with the results of our earlier customer research to tailor our assortments to be even more compelling.

We placed a very high priority on expense reduction and productivity improvements and thus far we have made meaningful progress in the area of non-merchandise procurement and one example we have renegotiated various contractual agreements which should benefit us beginning this fall. We will also continue to update you as we can share details in other areas.

We are making definitive progress in marketing where our partnerships with a customer relationship management firm and a new advertising agency have shown promising results. We have been able to better target our direct marketing, reducing costs and improving the return on our marketing investment and freeing up marketing dollars.

We have several test initiatives planned for third quarter and if these are successful we will be able to implement more broadly in fourth quarter. To compliment our advertising initiatives, our stores will receive a new in-store graphics package for the fall season that is exciting and fresh which will also emphasize our value proposition.

As you saw in our news release we now expect to close 10 stores in 2008 as we have become much more rigorous in our expectations and focused on productivity. As of last Thursday, we opened our final new location for the year. Having completed our store opening program will allow us to concentrate all of our energy on the improvement of our business as we move into the fall.

Our objective is to provide a compelling assortment of fall and holiday merchandise as well as a very strong gift giving statement in a pleasing in-store environment with great customer service from our associates.

Now I will turn the floor over to James and he’ll review the numbers with you.

James Delfs

Thank you Linda and good morning. 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 second quarter of 2008 total sales decreased 5.8% from the second quarter of 2007 while comp store sales decreased 9.7%. Gross profit decreased $12.1 million and as a percent of sales decreased 230 basis points.

Merchandise margin decreased 60 basis points due to increased markdowns somewhat offset by increased markup. Occupancy costs increased 170 basis points primarily from lack of leverage on lower sales. For the second quarter SG&A expenses increased $4.8 million and as percent of sales increased 320 basis points.

Store operating expenses for the non-comp group of stores increased $3.4 million while operating expenses for the comp stores decreased $2.6 million. Store closing costs increased $1.3 million and we incurred certain non-recurring legal expenses and professional fees related to our ongoing expense reduction initiatives which totaled $2.4 million.

Other income was up slightly over last year due to increased credit card income. For the second quarter of 2008 we incurred a net loss of $8 million or $0.19 per share as compared to net income of $2.2 million or $0.05 per share in the second quarter of 2007.

For the first six months of 2008 total sales decreased 6.1% from the first six months of 2007 while comp store sales decreased 9.5%. Gross profit decreased $19.2 million and as a percent of sales decreased 110 basis points. Merchandise margin increased 30 basis points due to increased markup somewhat offset by increased markdowns.

Occupancy costs increased 140 basis points primarily from lack of sales leverage. For the first half SG&A expenses decreased $1.1 million but as a percent of sales increased 150 basis points. Store operating expenses for the non-comp group of stores increased $6.4 million while operating expenses for the comp stores decreased $5.3 million.

Advertising decreased $5.1 million and store closing costs increased $1.2 million. The non-recurring legal and professional expenses were partially offset by reduced share based compensation expense.

Other income increased for the first half due to increased credit card income. The effective income tax benefit rate of 31.3% for the first half reflects the statutory federal and state rates but due to the small taxable loss, certain book tax differences and FIN 48 adjustments have a more significant effect on the rate.

For the year we expect the effective tax rate to be approximately 40%. For the first six months of 2008 we incurred a net loss of $1 million or $0.02 per share as compared to net income of $10.3 million or $0.24 per share for the first six months of 2007.

William Moll

Thank you James, good morning. During second quarter we had generally better performance from the ladies casual area, ladies dresses and special occasion and men’s furnishings, but continued weakness in linens, gifts and ladies career.

In ready-to-wear our ladies business has benefited from the fresh fashion in our new Attitudes department where we pulled together a branded, primarily denim-based assortment with updated styling but retaining a missy fit.

We are delivering some like-minded career pieces into the Attitudes area for fall and the customers are responding positively to that as well. We believe this area has more opportunity and our merchants are aggressively pursing it.

We continue to get a better response from novelty tops, basic pants and layering pieces and we have had some success with dresses, swim and special sizes. In ladies accessories novelty gift giving items, hosiery and small leather goods were productive.

In men’s dress furnishings and accessories did well particularly the men’s gift business which we intensified beginning pre-Father’s Day and which has continued to perform well. Men’s moderate has been a bright spot as well were updated looks in denim and related tops. As Linda mentioned, we have put a higher priority on going after branded merchandise and that’s more evident in the men’s area.

Obviously we continue to struggle with two important areas that have been challenging for the whole industry; the home area, particularly linens, and the structured career apparel in both men’s and ladies. We have reduced the overall home inventories and the square footage devoted to home has been downsized in some stores.

Home is also an area where we have been successful securing more branded merchandise for our assortment. Overall I would say that our business is being driven primarily by either basics, such as pants, dress shirts, and layering pieces, or by novelty and status, such as fashion denim and novelty tops.

The only other category I would call out is the small fun gifts that our customers love to share with their friends and family; inspirational jewelry, anything with inspirational sayings or monograms, and electronic toys and gadgets in the men’s department.

As an example of us going after this trend we’ve put alumni shops, apparel and accessories, geared to specific college sports teams in 150 of our stores and we’ve seen excellent response right out of the box.

Once again echoing Linda’s remarks, we are planning consecutively for fall and holiday but we hope to capitalize on those things that are working; basics, novelty apparel, and gift giving items. Now back to Linda.

Linda Farthing

Thanks William. I hope you all can see that we continue to be very focused on improving our performance. We are now ready to open it up for questions.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from the line of Robin Murchison - SunTrust Robinson Humphrey

Robin Murchison - SunTrust Robinson Humphrey

What is your estimate of the traffic impact on the same store sales figure? How much do you think that accounts for cost?

Michael Ray

We won’t get into the specifics of that but traffic is definitely down in the stores where we track traffic.

Robin Murchison - SunTrust Robinson Humphrey

Are there any positive metrics in terms of either AUR or units per transaction or anything like that that you can share with us?

James Delfs

All of those metrics are in the negative. The units are down as well as the average unit retail both for the quarter and for the half.

Robin Murchison - SunTrust Robinson Humphrey

When you look out to the department store sector and the ability that the department store sector has to weigh heavily on promotions, it seems like last year and in some prior years just for example a lot of times Macy’s has their big monthly sale the same weekend as maybe the 12 hour sale at Stein Mart, is there any way to get around whatever big promotional event that you are planning for a month with what some of the bigger guys are doing, or separate them somehow?

Linda Farthing

In this environment we’ve had to be much more promotional and I understand your question in terms of it hits the same day, Macy’s as for example, we’re not up against Macy’s in many of our markets and we would, the 12 hour sale is one of our best sales of the year and those have continued to be strong for us.

Robin Murchison - SunTrust Robinson Humphrey

We’ve heard, on Friday Ann Taylor second quarter earnings call, we hear Ann talking about moving away from suits and basically trying to get a little more contemporary with basics, but certainly move out of the suited traditional wear-to-work category, do you think that has any impact or if you think about that with regard to your business, keeping in mind that there is some crossover in customer base, do you think that that has any impact on how you might plan your business on a go forward basis?

William Moll

Yes I do, that’s why if you noticed in my comments, structured sportswear both men’s and women’s has been difficult. I do believe we have a nice career business in Stein Mart and what we try to do is relax a lot of these jackets and relax some of the sweater offerings so where cardigans are doing very well right now, when traditionally you might have a more structured jacket that would do better. So yes, we are seeing exactly what’s taking place on that avenue and I think the new Attitudes area as the career part comes in this month and next month, you’ll see those changes.

Operator

Your next question comes from the line of Mark Montagna - CL King & Associates

Mark Montagna - CL King & Associates

During your prepared remarks you mentioned you have different merchandise initiatives at various stages, can you possibly talk about some of those. I know you had the jewelry initiative, I was wondering, a status update on that, and any other updates on other initiatives that you might have?

William Moll

We did do a jewelry test out there and it was inconclusive in some ways, it did show that we have a table opportunity in certain gift giving products for fourth quarter which we’ve gone ahead and moving forward on that on how we purchase tables and the product and getting prepared for the ever important fourth quarter. The kid’s test as you know went in around the first part of August so it’s pretty inconclusive but its up and running in all 40 stores.

One of our largest tests which I spoke of was Attitudes which we’ve been pleased with at this point in time. So those are the main initiatives that we talked about and have up and running.

Mark Montagna - CL King & Associates

Talking about tailoring assortment to customer research, can you expand on that topic? Is that driven by, is it as simple as just going into more brands? But I’m sure there’s more to it then just that.

Linda Farthing

Our customer research did say that they wanted to see more brands. They also said that they wanted to see a greater expanded size range. They mentioned size is an issue. They mentioned wanting many of our customers responded that they wanted to see younger looking Attitude product which is the Attitudes area is a result of that, heard a little bit of that in the men’s area as well. So that kind of summarizes some of the key findings that we’ve had. As I said the size issue did come up and we have addressed that in our automatic replenishment program.

Mark Montagna - CL King & Associates

On the press release from last week and also today you mentioned, it sounds like expense opportunities, today you mentioned non-merchandise procurement, some changes in I guess contracts, can you expand on that so I can try to gauge the magnitude of expense savings that you might have?

James Delfs

As Linda said, our focus has been on the indirect spend which are the non-merchandise procurement functions and we have been successful in renegotiating certain contracts. There will be some benefit in the back half of this year but obviously it’s in 2009 that we’ll recognize a full year’s worth of benefit off of those improvements and those contractual changes.

Mark Montagna - CL King & Associates

So there’s not, is there a big chunk of expense savings or is it a lot of singles as opposed to triples and home runs?

James Delfs

Most of its singles and a few doubles thrown in.

Mark Montagna - CL King & Associates

You mentioned marketing, and I’m just trying to understand how the marketing may change, are you going for a different message in terms of the, with the marketing that you’re going to do this fall?

Glori Katz

There’s really a couple of things that we’re looking at. First of all we have to make sure we’re spending our dollars as efficiently as possible so we’ve put a lot of emphasis on looking at what we can do from a media standpoint, direct marketing being a big chunk of that. But then of course the message is key. We have a new partnership, new advertising agency partnership; they have begun to show us work that we’re hoping we can put into test even before the end of this third quarter that can have some impact in fourth quarter.

Certainly the message that we come up with for third quarter would find its way into our holiday advertising and it definitely needs to communicate our value proposition very strongly as we go forward.

Linda Farthing

That is key, getting the message of this value proposition out to our consumer, that’s the thing we are focusing on.

Mark Montagna - CL King & Associates

So that’s what your research has shown you is that that’s the key element that you need to get out there?

Glori Katz

It’s clear that she’s not really giving us the full credit for being a resource to her during this kind of economic situation we’re in and we should be able to take advantage of our position and get the credit we deserve. So really its research along with what we know anecdotally suggests that that’s what we need to do. We need to attract a new customer with that strong value proposition.

Linda Farthing

The current Stein Mart customer understands, it’s the other people that we’re wanting to bring in.

Mark Montagna - CL King & Associates

In terms of the branded merchandise, it sounds like you’re going to emphasize brands more, how is the mix going to change? I’m looking in terms of what percentage of merchandise was branded last year in the third quarter and what percent will be branded this year in the third quarter and perhaps even beyond that, how do you expect it to change next year?

William Moll

That is definitely something that evolves because as you know, a lot of the brands have gone away with some of the changes mainly in the apparel market so it will take about until probably this time next year that we’ll be more pleased with where we’re taking it so it’s a slow process but the goal is to be well over 50% is our long-term goal, but we will see how this bubbles up and as we said in the remarks, men’s has had more opportunity of brands and ladies, we see many more opportunities coming in in the first quarter of next year and be much more aggressive on that. So 50% and exceeding that is our goal going into next year.

Mark Montagna - CL King & Associates

Where do you stand right now?

William Moll

Men’s is actually over that number, ready-to-wear is probably in the 40 percentile number.

Operator

Your next question comes fro the line of David Mann - Johnson Rice & Company

David Mann - Johnson Rice & Company

On the move to brands, can you give us a sense on the margin impact that that may have?

William Moll

There will not be a margin impact on that.

Linda Farthing

[We’re] able to buy the brands advantageously so we’ll leave it at that.

David Mann - Johnson Rice & Company

On the 10 stores you’re closing, can you give a sense on what the operating performance on those stores are?

James Delfs

Only to say that certainly the reason they’re closing is because they were not making a positive contribution.

David Mann - Johnson Rice & Company

But as a group how much of an operating drag will you be removing?

James Delfs

I don’t have that number in front of me.

David Mann - Johnson Rice & Company

On the marketing side, are you going to be changing the amount you’re spending in the back half versus last year and on the message, will you be putting brands more integrated into that message?

Glori Katz

We’re going to keep our spend as a percentage of sales consistent to where we’ve been so there won’t be a change there but we are looking at a message that can really hit the value proposition on all the important [tenants] and certainly brands will be integrated into that message.

David Mann - Johnson Rice & Company

In terms of any kind of apparel inflation what are you expecting to see given all the top bids out there?

William Moll

We definitely have seen some push up inflation for third and fourth quarters at this point in time, but it’s a constant negotiation with the marketplace to see where it ends up. But you’re seeing it out there.

David Mann - Johnson Rice & Company

So should we expect your IMU to be pared a little bit?

William Moll

I don’t believe that will be affected, we’re negotiating as best we can not to have that affected.

David Mann - Johnson Rice & Company

Given the storm coming across Florida, can you just give a sense was there any material impact on store traffic or closings?

Michael Ray

Virtually every store in Florida was impacted, we didn’t sustain any damage. We have very few closings as a result the traffic was substantially down and customers’ focus was elsewhere rather then shopping for apparel.

David Mann - Johnson Rice & Company

But in the context of the quarter should that be that meaningful?

Michael Ray

No, I don’t believe it will and we’ll know more this week as people get back out of their homes and into our stores.

Operator

Your final question comes from the line of an Unidentified Analyst

Unidentified Analyst

What is the remaining CapEx for the rest of the year?

James Delfs

In total, we’re looking at $16 million and $19 million for the year in total.

Unidentified Analyst

And then with the stores that you close, are those in a particular geographic location or are those all across the board?

James Delfs

They’re generally not any specific geographic area, they are spread around.

Unidentified Analyst

I think you are doing a great job of expense control, but from what I’ve seen its, and I can understand you can’t control the outside force in terms of the economy but it looks like there’s been a merchandise problem for quite a few years because if I look into 2005, you had five months of negative comps, six months in 2006, and then last year you had 10 months, and then this year six out of seven have been negative, and I’m just trying to figure out, can you articulate what the value proposition is because when you see a lot of retailers across the board, whether its full price high end retailers all the way down to department stores, even to off price retailers it seems like everyone is selling branded stuff at big discount so if you focus mostly on exclusive label type of items, and someone can pay slightly more to get branded products, it seems like that value proposition will have shrunk considerably. I’m just trying to get an idea of what you’re doing to address that in terms of certain categories like the women’s area in particular?

William Moll

What we’re doing is we’re being very aggressive with our marketplace. We study how our products are being sold, our [leg] products are being sold in all of our competition both in the department store sector and the off price sector and I think that as Glori spoke what the initiative is to show that we have a very compelling value proposition for the fashion trends with the brands that I feel customers are looking for so its been a readjustment in places but we have taken that along and I think that as we unfold a marketing program we will show that we have a strong value message out there on product in day and day on atmosphere from an every day value proposition.

Unidentified Analyst

With the linens, are you going to keep that segment in terms of your square footage allocation, do you have any plans to reduce that?

William Moll

We’re looking at reducing home in general.

Linda Farthing

And that’s been a process that’s been in place this year as we continue to see the home area declining for us, that’s been something well underway.

Operator

There are no further questions at this time; I would like to turn it back over to management for any closing remarks.

Linda Farthing

Well again we thank you for your time and your interest and especially being flexible due to our unpredictable weather last week. This concludes our conference call.

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Source: Stein Mart, Inc. F2Q08 (Qtr End 08/02/08) Earnings Call Transcript
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