Stein Mart: That Sinking Feeling

| About: Stein Mart, (SMRT)
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Stein Mart’s leadership has been thrown for a loop with the departure of CEO Dawn Robertson after a brief six-month reign.

Robertson was introducing changes to Stein Mart that would have benefited the company in the longer term but her departure makes it unlikely that these changes will stick.

Consequently, there is too much uncertainty surrounding the stock right now and while we like its dividend yield, we would caution against buying the stock for now.

Stein Mart CEO Resigns After just Six Months. Stein Mart Inc. (NASDAQ:SMRT) announced recently that its CEO, Dawn Robertson, had resigned effective September 27th - just around six months after assuming the CEO position from Jay Stein in mid-March this year.

The change comes as a surprise considering that Robertson has been credited with initiating several important sales initiatives for the company. No official reason was given for Robertson's departure although the company's press release provided guidance that Stein Mart's same store sales had fallen by 4% so far in the company's fiscal 3rd quarter (which ends on October 29). The dip follows a 1.4% decline in Stein Mart's 2nd quarter same store sales.

The comparable store sales attrition that Stein Mart experienced during Robertson's tenure likely contributed to her departure. A company veteran, Hunt Hawkins, has replaced her as Interim CEO and the company has initiated a search for a new chief merchandising officer - a role that Robertson held during her tenure.

An Unwelcomed Change. A CEO change is sometimes a welcome development for a company since it's usually perceived to represent a shift in direction - but Stein Mart's stock has fallen by 19% since Robertson's departure, suggesting that the market was unhappy with the change.

Stein Mart's stock had been up by close to 13% in the year to before Robertson's departure, which includes a 2nd quarter earnings miss, implying that the Street was willing to give Robertson the benefit of the doubt and time to implement her strategy, which has included skewing Stein Mart's merchandising younger, emphasizing athleisure and evolving the customer experience. This seems to have come at the cost of alienating Stein Mart's older customers, as evidenced by Hunt's statement that "implementation has been too rapid and has been challenging for our customers."

Muddled Outlook. On the face of it, Stein Mart was looking to have a decent fiscal 2016 - while the company had missed its second quarter results, on an aggregate basis, its first half performance was ahead of analysts' expectations by $0.02 per share. What's more, its performance in the first half notwithstanding, it was expecting same store sales to grow by 4% and anticipating a 50-basis point increase in its gross margin (which had come it at 28.3% in 2015). Stein Mart was also anticipating a $10 million reduction in its operating overhead, even with a bump in its fiscal third quarter expenses associated with new store openings.

All of this is thrown into question now with the appointment of Hunt, who is a 20-year company veteran. The move to appoint an 'old hand,' though presumably interim in nature, says 'back to the old' and suggests that company veterans (and possibly, members of the board) had been uncomfortable with the pace of change that Robertson was introducing. In all likelihood, the company's stumble out of the gates in the third quarter was enough to push Robertson out, even though, on the face of it, they've acknowledged that her moves would benefit the company in the future.

Management succession is actually something of an issue for Stein Mart, which has seen several leadership changes under Chairman Jay Stein since 2007. The leadership change from Robertson to Hunt will cost the company $1.6 million (or a charge of around $0.03 per diluted share) and with a Chief Merchandising Officer still to be named, it's worth questioning whether Stein Mart's product initiatives under Robertson will be sustained, particularly its emphasis on younger - or at least customers with a younger attitude who may not quite be the same as Stein Mart's traditional base of middle-aged women.

Given the expected decline for the third quarter, it's difficult to see how Stein Mart can even meet its full year forecast of 4% comparable same store growth - it would need to see a huge, 7% to 9% same stores figure in the fourth quarter to see those numbers. What's more, Hurricane Matthew is likely to have caused temporary store closures, further impacting Stein Mart's already weak comps for the third quarter.

Attractive Dividend. The one silver lining to the dip in Stein Mart's stock price is that it has pushed its dividend yield higher to 4.8%. Investors who purchase $10,000 worth of the stock today can expect to receive $480 in annual dividend checks. The question for investors is whether they should, given the turmoil in Stein Mart. This yield is more than triple that of the Russell 2000 and is among the highest for apparel stores.

Investors concerned about Stein Mart's ability to sustain its dividends shouldn't be - the company has a strong base of working capital - around $1.77 for every dollar of its short-term liabilities and, in any case, Stein Mart's dividends are small - just around $14 million per year. For the most part, Stein Mart's financials are solid - it has a bit more debt than its industry peers - but the company has significant tangible assets to cover its long-term indebtedness.

Not As Cheap As It Looks. Stein Mart is currently trading at just 13-times its trailing earnings, which is considerably less than both the S&P500 and the Russell 2000, the latter of which is trading at an incredibly lofty 87.5-times trailing earnings. In this light, Stein Mart might seem cheap - but with a muddled outlook given its recent CEO change, its forward earnings multiple is probably the better measure.

On a forward basis, Stein Mart's trading at 16-times the consensus estimate for fiscal 2016. Our own estimate for fiscal 2016 is $0.35 per share, so it's trading at 17.5-times that basis. Both estimates are lower than the relevant multiples for either the S&P500 or the Russell 2000. For Fiscal 2017, we see Stein Mart delivering $0.48 of earnings per share - for 2017 earnings multiple of 12.8-times.

Conclusion. While the consensus calls for a target price of $7.50, we believe that the current market price is justified for Stein Mart - the simple fact of the matter is that there is just too much uncertainty for the stock right now and investors would be wise to avoid it for now.

After all, it's still to be determined whether the board and management will continue to pursue Robertson's strategy now that she's departed or if they'll change their direction entirely with a new permanent CEO and Merchandising Officer - or whether it will retain Hunt and go back to its old strategy of catering mainly to middle-aged women. This uncertainty makes us believe that Stein Mart's multiple should be somewhere in the 10 to 11-times forward earnings range - or a target price of $5.04 per share.

Consequently, although we like Stein Mart's generous dividend yield, we can't say the same thing for the stock's fundamentals. Where it currently stands, the stock is going nowhere and the only time we'd consider buying the stock is a considerably lower price than where it's currently at.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: Black Coral Research, Inc. is a team of writers who provide unique perspective to help inform dividend investors. This article was written by Jonathan Lara, one of our Senior Analysts. We did not receive compensation for this article (other than from Seeking Alpha), and we have no business relationship with any company whose stock is mentioned in this article. Company financial data is taken from the company’s latest SEC filings unless attributed elsewhere. Black Coral Research, Inc. is not a registered investment advisor or broker/dealer. Readers are advised that the material contained herein should be used solely for informational purposes. Investing involves risk, including the loss of principal. Readers are solely responsible for their own investment decisions.