10-K 1 form10k.htm STAGE STORES 10-K 1-28-2006 Stage Stores 10-K 1-28-2006
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-K
(Mark One)
þ
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the fiscal year ended January 28, 2006

OR

¨
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the transition period from ______ to ______

Commission File No. 1-14035

Stage Stores, Inc.
(Exact name of registrant as specified in its charter)

NEVADA
91-1826900
(State or other jurisdiction of incorporation or organization)
(I.R.S. Employer Identification No.)
   
10201 MAIN STREET, HOUSTON, TEXAS
77025
(Address of principal executive offices)
(Zip Code)

Registrant's telephone number, including area code: (800) 579-2302

Securities registered pursuant to Section 12(b) of the Act:

 
Title of each class
  
Name of each exchange on which registered
  
         
 
Common Stock ($0.01 par value)
  
NYSE
  

Securities registered pursuant to Section 12(g) of the Act:

 
Title of each class
  
Name of each exchange on which registered
  
         
 
Series A Warrants (Expiration Date August 23, 2006)
  
NASDAQ
  
 
Series B Warrants (Expiration Date August 23, 2006)
  
NASDAQ
  

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.  Yes þ      No o

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.  Yes o      No þ

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes þ      No o
 
 
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer þ       Accelerated filer o       Non-accelerated filer o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes o      No þ

As of July 30, 2005 (the last business day of the registrant's most recently completed second quarter), the aggregate market value of the voting common stock of the registrant held by non-affiliates of the registrant was $801,627,469 (based upon the closing price of the registrant’s common stock as reported by NASDAQ on July 30, 2005). As of April 5, 2006, there were 26,613,717 shares of the registrant’s common stock outstanding.


APPLICABLE ONLY TO REGISTRANTS INVOLVED IN BANKRUPTCY
PROCEEDINGS DURING THE PRECEDING FIVE YEARS:

Indicate by check mark whether the registrant has filed all documents and reports required to be filed by Section 12, 13 or 15(d) of the Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a court. Yes þ      No o

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the definitive proxy statement relating to the registrant’s Annual Meeting of Shareholders to be held on June 1, 2006 (the "Proxy Statement") are incorporated by reference into Part III of this Form 10-K.

2
 
TABLE OF CONTENTS
 
 
PART I
  
 
 
Page No.
4
10
12
13
14
14
     
 
PART II
  
     
14
15
18
30
30
30
30
33
     
 
PART III
  
     
33
35
35
35
35
     
 
PART IV
  
     
35
     
39
     
F-1


In conjunction with the Company's Plan of Reorganization, on August 24, 2001, Stage Stores, Inc., a Delaware corporation, merged into its wholly-owned subsidiary, Specialty Retailers, Inc. (NV), a Nevada corporation. On the merger date, Specialty Retailers, Inc. (NV), the surviving corporation, changed its name to Stage Stores, Inc. Depending on the context and the period being referenced, Stage Stores, Inc., its affiliates and their predecessors in interest will, from time-to-time, be referred to collectively as the "Company", "Stage Stores", "Predecessor Company", or "Reorganized Company" in this Form 10-K.

References to a particular year are to the Company's fiscal year, which is the 52 or 53 week period ending on the Saturday closest to January 31st of the following calendar year. For example, a reference to "2004" is a reference to the fiscal year ended January 29, 2005, “2005” is a reference to the fiscal year ended January 28, 2006, and a reference to "2006" is a reference to the fiscal year ending February 3, 2007. Fiscal years 2003, 2004 and 2005 consisted of 52 weeks while fiscal year 2006 will consist of 53 weeks.


PART I

BUSINESS

Overview

Stage Stores is a Houston, Texas-based regional, specialty department store retailer offering moderately priced, nationally recognized brand name and private label apparel, accessories, cosmetics and footwear for the entire family. As of January 28, 2006, the Company operated 550 stores located in 31 states. The Company operates under the Stage, Bealls and Palais Royal names throughout the South Central states, and under the Peebles name throughout the Mid-Atlantic, Southeastern, Midwestern and New England states. With an average store size of approximately 18,800 selling square feet, the Company's principal focus is on consumers in small and mid-size markets which the Company believes are under-served and less competitive. Utilizing a ten mile radius from each store, approximately 61% of the Company's stores are located in small towns and communities with populations below 50,000 people, while an additional 22% of the Company's stores are located in mid-sized communities with populations between 50,000 and 150,000 people. The remaining 17% of the Company's stores are located in metropolitan areas, such as Houston and San Antonio, Texas. The Company believes that it is able to differentiate itself from the competition in the small and mid-size communities in which it operates by offering consumers access to basic as well as fashionable, brand name merchandise not typically carried by other retailers in the same market area. In the highly competitive metropolitan markets in which it operates, the Company competes against other national department store chains, which similarly offer moderately priced, brand name and private label merchandise. As a way of differentiating itself from the competition in these larger metropolitan markets, the Company offers consumers a high level of customer service in convenient locations.

Website Access to Reports

The Company makes available, free of charge, through its website, among other things, corporate governance documents, its annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and amendments to those reports as soon as reasonably practicable after they have been electronically filed with the Securities and Exchange Commission ("SEC"). They can be obtained by accessing the Company’s website at www.stagestores.com, clicking on “Investor Relations”, then “SEC filings”, then the report to be obtained. Information contained on the Company’s website is not part of this Annual Report on Form 10-K.

History

The Company was formed in 1988 when the management of Palais Royal, together with several venture capital firms, acquired the family-owned Bealls and Palais Royal chains, both of which were originally founded in the 1920's. At the time of the acquisition, Palais Royal operated primarily larger stores, which were located in and around the Houston metropolitan area while Bealls operated primarily smaller stores, which were principally located in rural Texas towns. Over the next five years, the Company concentrated on integrating the two businesses, identifying their respective strengths and developing and refining its growth strategy. During this period, the Company developed a growth strategy that was focused on expanding the Company's presence in small markets across the country through new store openings and strategic acquisitions.


However, as a result of many factors including, but not limited to, the Company's rapid growth during 1997 and 1998, significant turnover in key executive positions, significant leverage coupled with an inflexible capital structure and changes in the retail environment, the Company's financial performance deteriorated significantly during 1999 and 2000. Because of the Company's rapidly deteriorating financial performance, the Company's suppliers significantly curtailed merchandise shipments to the Company during the Spring of 2000, thereby further exacerbating the Company's financial difficulties. In order to address these financial and operational issues, the Company filed for bankruptcy on June 1, 2000 (the “Petition Date”). On August 24, 2001, pursuant to an approved Plan of Reorganization (the “Plan”) the Company emerged from the bankruptcy proceedings. On December 31, 2002, the Bankruptcy Court entered a Final Decree which closed the bankruptcy proceedings.
 
During 2003, the Company made the strategic decision to sell its private label credit card portfolio. On September 12, 2003, the Company sold its portfolio of private label credit card accounts, as well as other assets related to its private label credit card program, to World Financial Network National Bank and ADS Alliance Data Systems, Inc., subsidiaries of Alliance Data Systems Corporation, and realized net proceeds of approximately $172.0 million, which included prepaid marketing funds. This transaction allowed the Company to eliminate the distractions associated with managing and financing its own credit card operations, while at the same time maintain the important relationship that it has with its private label credit card customers.

On November 4, 2003, the Company redeployed the proceeds from the sale of its private label credit card portfolio and acquired Peebles Inc. (“Peebles”), a privately held, similarly focused retail company headquartered in South Hill, Virginia (the "Acquisition"), which then operated 136 stores in seventeen Mid-Atlantic, Southeastern and Midwestern states under the Peebles name. The purchase price for Peebles was $174.6 million, including acquisition costs and net of cash acquired and debt assumed. The Acquisition has been accounted for under the purchase method of accounting, and accordingly, the results of operations of Peebles have been included in the Company's consolidated financial statements from the date of acquisition. In order to maximize the potential of the Acquisition, the Company has maintained what it believes is the highly recognizable Peebles name on the stores. With the addition of Peebles, the Company believes that it has strengthened its position as one of the leading retailers of branded family apparel in small town America. The Company further believes that the Acquisition creates new opportunities for unit growth and geographical expansion and improves its competitive position.

On February 27, 2006, the Company acquired privately held B.C. Moore & Sons, Incorporated (“B.C. Moore”). In purchasing B.C. Moore, the Company acquired 78 retail locations, which are located in small markets throughout Alabama, Georgia, North Carolina and South Carolina. The Company’s integration plan calls for 69 of the acquired locations to be converted into Peebles stores, and the remaining 9 locations will be closed. The acquired B.C. Moore stores will go through several phases of operation during fiscal 2006. The stores will operate as usual until May, at which time, starting about every two weeks, a different group of stores will undertake inventory liquidation sales. Upon the completion of their liquidation activities, which should run for about four weeks, the stores will go dark. During this dark period, which should last for three to four weeks for each store, the 69 continuing stores will be remodeled as necessary, re-inventoried with Peebles merchandise assortments, new signs installed, and then reopened as Peebles stores. The grand openings of the 69 new Peebles stores will occur, also in phases, between mid-July and mid-October. The acquisition expands and strengthens the Company’s position in the Southeastern United States, and is consistent with its corporate strategy of increasing the concentration of its store base into smaller markets. 

Operations

Stores. As of January 28, 2006, the Company operated 550 stores located in 31 states. The Company operates under the Stage, Bealls and Palais Royal names throughout the South Central states, and under the Peebles name throughout the Mid-Atlantic, Southeastern, Midwestern and New England states. Although the Company's stores may be operated under any one of its four names, depending on the geographical market, the Company operates the vast majority of its stores under one concept and one strategy. Utilizing a ten mile radius from each store, approximately 61% of the Company's stores are located in small towns and communities with populations below 50,000 people, while an additional 22% of the Company's stores are located in mid-sized communities with populations between 50,000 and 150,000 people. The remaining 17% of the Company's stores are located in metropolitan areas, such as Houston and San Antonio, Texas.


In targeting small and mid-size markets, the Company has developed a store format, generally ranging in size from approximately 5,150 to 52,000 selling square feet, which is smaller than typical department stores yet large enough to offer a well edited, but broad selection of merchandise. With an average store size of approximately 18,800 selling square feet, approximately 79% of the Company's stores are located in strip shopping centers in which they are typically one of the anchor stores. In addition, 17% of the Company's stores are located in local or regional shopping malls, while the remaining 4% are located in either free standing or downtown buildings. The Company attempts to locate its stores by, or in the vicinity of, other tenants that it believes will help attract additional foot traffic to the area, such as grocery stores, drug stores or major discount stores such as Wal-Mart.

The Company's typical interior store layouts and visual merchandising displays are designed to create a friendly, modern department store environment. The Company's carefully edited assortment of merchandise is divided into distinct departments within each store which are clearly marked and easy to navigate as a result of the Company's standard "racetrack" configuration. In this configuration, the various merchandise departments are situated throughout the store in such a way that a central loop, or "racetrack", is created, which the Company believes helps enhance the customer's shopping experience by providing an open, easy-to-shop interior.

Expansion Strategy. The cornerstone of the Company's growth strategy continues to be to identify locations in small and mid-size markets that meet its demographic, competitive and profitability criteria. The Company believes that the long-term potential of its smaller markets is positive and wants to be well positioned in these markets with locations that are convenient to its customers. During 2005, the Company opened 36 new stores, with five stores opening in both Tennessee and Arkansas, and the remaining 26 stores opening in Kentucky (4), Georgia (2), Indiana (2), Mississippi (2), North Carolina (2), Ohio (2), Pennsylvania (2), Vermont (2), Texas (2), Alabama (1), Arizona (1), Connecticut (1), Kansas (1), Missouri (1), and New Jersey (1).

During 2006, the Company anticipates opening a total of 108 new stores. Sixty-nine of the 2006 openings will be converted B.C. Moore stores. On February 27, 2006, the Company acquired B.C. Moore & Sons, Inc., which then operated 78 stores in Alabama, Georgia, North Carolina, and South Carolina. The Company currently plans to convert 69 of the acquired stores to its Peebles name and format, in phases, between mid-July and mid-October. Thirty-five of the 2006 openings will be organic stores and will include the Company’s planned entry into the states of Massachusetts and Michigan. Three of the stores will be reopenings of stores that the Company closed in 2005 due to damage they sustained from Hurricane Rita, and the final store will be a reopening, in a new location, of a store that was also closed in 2005. The actual number of stores opened will be dependent upon the availability of suitable locations and current business conditions.

The Company believes that there are sufficient opportunities in small and mid-size markets to continue with its new store growth into the foreseeable future, and that it is well positioned to capitalize on those opportunities. To support its future store growth, in 2005, the Company increased the productivity and processing capacity of its South Hill, Virginia distribution center with the addition of new sortation equipment and a new warehouse management system. In addition, a new merchandise management system was installed at its South Hill administrative office in 2005.

Relocation and Remodeling. In addition to opening new stores, the Company has continued to invest in the renovation, relocation and remodeling of its existing store locations to keep them looking fresh and up-to-date. The Company believes that this enhances its customers' shopping experience and helps maintain and improve its market share in those market areas. Store remodeling projects can range from updating and improving in-store lighting, fixtures, wall merchandising and signage, to more extensive expansion projects. During 2005, the Company completed sixteen relocations, three expansions and nine remodels of stores and expects to complete seventeen relocations, five expansions and thirteen remodels of stores during fiscal 2006.

Store Closures. The Company closed fifteen locations during fiscal 2005. Four of the closures resulted from damage sustained by Hurricanes Katrina and Rita. The Company will re-open three of these locations in fiscal 2006. Three of the 2005 closures relate to consolidation of two locations within the same market to a single larger store. One of the store closures, which will be re-opened in 2006 at a new location across the street, resulted from unsuccessful lease renegotiations at the former site. The remaining seven locations were closed at or near the end of their lease term due to underperformance. These seven stores represented 0.4% of fiscal 2005 sales. The Company periodically reviews the trend of individual store performance and will close if the expected store performance does not support the required investment of capital at that location.


Store Operations. For span-of-control purposes, the Company's stores are divided into distinct regions and districts. There are currently six regions. Within these six regions, there are currently a total of 38 districts. The number of stores that each District Manager oversees depends on their proximity to each other and generally varies from a low of eleven stores to a high of 24 stores. Each store is managed by a team consisting of a Manager and a number of Assistant Managers, which is dependent on the size of the store. The selling floor staff within each store consists of both full-time and part-time associates, with temporary associates added during peak selling seasons. The Company believes that this structure provides an appropriate level of oversight, management and operational control over its store operations.

Customer Service. A primary corporate objective is to provide exceptional customer service through conveniently located stores staffed with well-trained and motivated sales associates. In order to ensure consistency of execution, each sales associate is evaluated based on the attainment of specific customer service standards, such as offering prompt and knowledgeable assistance, suggesting complementary items, helping customers open private label credit card accounts and establishing consistent contact with customers to facilitate repeat business. The Company monitors the quality of its service by utilizing "secret shoppers". The results of these customer surveys are shared and discussed with the appropriate sales associates so that excellent service can be recognized and, conversely, counseling can be used if improvements are needed. To further reinforce the Company's focus on customer service, the Company has various programs in place to recognize associates for providing outstanding customer service. The Company further extends its service philosophy through the design of its stores, as discussed above, and by locating the Store Manager on the selling floor to increase accessibility to customers.

Competitive Advantages. As a result of its small and mid-size market focus, the Company generally faces less competition for its brand name apparel because consumers in these markets typically are able to shop for branded merchandise only in regional malls, which are typically located more than 30 miles away. In those small and mid-size markets where the Company does compete for brand name apparel sales, competition generally comes from local retailers, small regional chains and to a lesser extent, national department stores. The Company believes it has a competitive advantage over local retailers and small regional chains due to its: (i) broader selection of brand name merchandise, (ii) distinctive retail concept, (iii) economies of scale, (iv) strong vendor relationships and (v) private label credit card program. The Company also believes it has a competitive advantage in small and mid-size markets over national department stores due to its experience with smaller markets. In addition, due to minimal merchandise overlap, the Company generally does not directly compete for branded apparel sales with national discounters such as Wal-Mart. In the highly competitive metropolitan markets in which it operates, the Company competes against other national department store chains, which similarly offer moderately priced, brand name and private label merchandise. As a way of differentiating itself from the competition in these larger markets, the Company offers consumers a high level of customer service in convenient locations. In addition, over the years, the Company has endeavored to nurture customer loyalty and foster name recognition through loyalty and direct marketing programs.

Merchandising Strategy. The Company's merchandising strategy focuses on matching merchandise assortments and offerings with customers' aspirations for fashionable, quality brand name apparel. Further, care is given to avoid duplication and to ensure in-stock position on size and color in all merchandise selections. The Company offers a well edited selection of moderately priced, branded merchandise within merchandise categories, such as women's, men's and children's apparel, as well as accessories, cosmetics and footwear. The merchandise selection ranges from basics, including denim, underwear and foundations, to more upscale and fashionable clothing offerings. Merchandise mix may also vary from store to store to accommodate differing demographic factors. Approximately 88% of sales consist of nationally recognized brands such as Levi Strauss, Nike, Tommy Hilfiger, Liz Claiborne, Calvin Klein, Chaps, Polo Jeanswear, Estee Lauder, Clinique, Elizabeth Arden, Nautica, K Swiss, Reebok and New Balance, while the remaining 12% of sales consist of the Company’s private label merchandise. The Company's private label portfolio includes twenty-six brands, which are developed and sourced through its membership in Associated Merchandising Corporation and Li-Fung Cooperative Buying Services, as well as through contracts with third party vendors. The Company's private label brands offer quality merchandise and excellent value. The Company expects to expand its private label business over time to approximately 15% of sales. The Company’s top 100 vendors currently account for approximately 56% of annual sales. Associated Merchandising Corporation represented 7% and 6% of the Company’s 2005 and 2004 retail purchases, respectively. The Company's merchandising activities are conducted from its corporate headquarters in Houston, Texas for its Bealls, Palais Royal and Stage locations, and from its South Hill, Virginia administrative offices for its Peebles locations.


The following table sets forth the distribution of net sales between the Company's various merchandise categories for the periods indicated:

   
Fiscal Year
  
Department
 
2005
  
 2004
  
            
Men's/Young Men's
    
     19 %
   
 
     19 %
 
Misses Sportswear
    
17
    
17
  
Children's
    
12
    
12
  
Footwear
    
12
    
12
  
Junior Sportswear
    
  9
    
  9
  
Accessories
   
  8
    
  7
  
Cosmetics
    
  6
    
  6
  
Special Sizes
    
  6
    
  5
  
Dresses
   
  4
    
  5
  
Intimate
    
   3
    
  4
  
Home & Gifts
    
   3
    
  3
  
Outerwear, Swimwear and Other
    
   1
    
  1
  
     
  100 %
 
  
  100 %
 

Marketing Strategy. The Company's primary target customers are women between the ages of 25 and 59 with annual household incomes of over $35,000 who the Company believes are the primary decision makers for their family’s clothing purchases. The Company's broad based marketing strategy is designed to establish brand loyalty, convenience and promotional positioning. The Company uses a multi-media advertising approach, including newspapers, direct mail, radio and television, to position its stores as the local destination for basic, and fashionable moderately priced brand name merchandise. In addition, the Company promotes its private label credit card and attempts to create strong customer loyalty through continuous one-on-one communication with its core private label credit card holders. The Company's best private label credit card customers are recognized and rewarded through its VIP credit card program, as discussed below, that creates greater customer retention and promotes increased purchasing activity. In addition to the information gathered from its private label credit card customers, the Company is able to capture data on selected check, debit and other third party credit card customers and incorporate this data into its marketing and merchandising programs. The Company currently captures customer data on approximately 54% of its sales. To complement its marketing efforts, the Company encourages local store involvement in local community activities.

Private Label Credit Card. The Company considers its private label credit card program to be an important component of its retailing concept because it (i) enhances customer loyalty, (ii) allows the Company to identify and regularly contact its best customers and (iii) creates a comprehensive database that enables the Company to implement detailed, segmented marketing and merchandising strategies for each store. Frequent private label credit card users, through the Company's VIP credit card program, enjoy an increasing array of benefits. The Company's most active charge customers are awarded a bronze, silver or gold VIP card based on their level of annual purchases. Depending on their level, holders of these cards receive such benefits as discounted or free gift-wrapping, special promotional discounts and invitations to private "VIP Only" sales. In addition, new holders of the Company's credit card receive a 10% discount the first time they use their new card. To encourage associates to focus on getting customers to open new Company credit card accounts, the Company provides increasing incentive award payments based on the number of new private label credit card accounts activated. The penetration rate for the Company's private label credit card was approximately 32% and 35% of net sales in 2005 and 2004, respectively.

Merchandise Distribution. The Company currently distributes all merchandise to its stores through its two distribution centers, which are located in Jacksonville, Texas, and South Hill, Virginia. The Company's Jacksonville distribution center has 435,000 square feet of processing area and currently services the Company’s Bealls, Palais Royal, and Stage stores. The Company's South Hill distribution center, which has 162,240 square feet of processing area, currently serves the Company’s Peebles stores.

Incoming merchandise received at the distribution centers is inspected for quality control. The Company has formal guidelines for vendors with respect to shipping, receiving and invoicing for merchandise. Vendors that do not comply with the guidelines are charged specified fees depending upon the degree of non-compliance. These fees are intended to be a deterrent to non-compliance, as well as to offset higher costs associated with the processing of such merchandise.


The Company utilizes a third party contract carrier to deliver merchandise from both its Jacksonville and South Hill facilities. During the second quarter of 2005, the Company discontinued the use of its private fleet of trucks from its South Hill facility.

During 2005, the Company invested in new sortation equipment and a new warehouse management system in the South Hill facility to improve its capacity and productivity.  The sortation systems and software installed are the same as those used in the Jacksonville distribution center.  Upon completion of these projects, late in the fourth quarter of fiscal 2005, the Company closed its distribution center in Knoxville, Tennessee and consolidated its operations into the South Hill distribution center. In connection with this consolidation, the Company also converted the Peebles merchandise management systems from the “legacy” system to the Retek merchandise management system used in Houston.  This project was also completed late in the fourth quarter of fiscal 2005.  Having the same supply chain support systems and merchandising system in place positions the Jacksonville distribution center to service the western-most Peebles stores, beginning in mid 2006. The South Hill distribution center will continue to support new store growth in the eastern-most markets.  The Company spent approximately $12.1 million on these projects in 2005.  The expected 2006 benefits of these changes include lower overall freight and distribution center costs and improved efficiencies in inventory management practices.

Information Systems. The Company supports its retail concept by using multiple, highly integrated systems in areas such as merchandising, store operations, distribution, sales promotion, personnel management, store design and accounting.

The Company's core merchandising systems assist in planning, ordering, allocating and replenishing merchandise assortments for each store, based on specific characteristics and recent sales trends. The price change management system allows the Company to identify and mark down slow moving merchandise. The replenishment/fulfillment system allows the Company to maintain planned levels of in-stock positions in basic items such as jeans and underwear. In addition, a fully integrated warehouse management system is in place in both the Jacksonville and South Hill distribution centers.

The Company utilizes state-of-the-art point-of-sale systems with bar code scanning, electronic credit authorization, instant credit and gift card processing in its stores. These systems also allow the Company to capture customer specific sales data for use in its merchandising, marketing and loss prevention systems, while quickly servicing its customers. In the Stage Division, the Company also utilizes an automated store personnel scheduling system that analyzes historical sales trends to schedule sales staff to match customer traffic patterns, thereby minimizing store labor costs.

As noted in “Merchandise Distribution” above, the Company recently replaced the “legacy” Peebles merchandise management system previously used in South Hill with the Retek merchandise management system used in Houston.

Employees. At January 28, 2006, the Company employed a total of 13,304 employees at all of its locations, of which 1,568 were salaried and 11,736 were hourly. The Company's two administrative offices employed 547 salaried and 271 hourly employees. In its two distribution centers, the Company employed 40 salaried and 473 hourly employees. In its stores, the Company employed 981 salaried and 10,992 hourly employees. Those totals will vary during the year as the Company traditionally hires additional employees and increases the hours of part-time employees during peak seasonal selling periods. There are no collective bargaining agreements in effect with respect to any of the Company's employees. The Company maintains a good relationship with its employees.

Seasonality. The Company's business is seasonal and sales traditionally are lower during the first three quarters of the fiscal year (February through October) and higher during the last quarter of the fiscal year (November through January). The fourth quarter usually accounts for slightly more than 30% of the Company's annual sales, with the other quarters accounting for approximately 22% to 24% each. Working capital requirements fluctuate during the year as well and generally reach their highest levels during the third and fourth quarters.

Trademarks. The Company regards its trademarks and their protection as important to its success. In addition to the Bealls, Palais Royal, Peebles and Stage trademarks, the United States Patent and Trademark Office (the “USPTO”) has issued federal registrations to the Company for the following trademarks: Absolutely Active, Cape Classic, Cape Classic LTD, Casual Options, Graphite, Hannah, Hidden Fantasies, Meherrin River Outfitters, Private Expressions, Signature Studio, Sun River Clothing Co., Sun River Footwear, Rebecca Malone, Specialty Kids, and Whispers.  The Company has also filed applications with the USPTO seeking federal registrations for the following trademarks: Specialty Baby and Specialty Girl.


RISK FACTORS

The Company faces the risk of a highly competitive retail apparel industry, which may result in the loss of customers, increased spending on marketing and advertising and reduced revenues. The retail apparel business is highly competitive. Although competition varies widely from market to market, the Company faces the risk of increased competition, particularly in its more highly populated markets from national, regional and local department and specialty stores. Some of the Company's competitors are considerably larger than the Company and have substantially greater financial and other resources. Although the Company offers brands that are not available at certain other retailers, including regional and national department stores, there can be no assurance that existing or new competitors will not carry similar branded merchandise in the future, which could have a material and adverse effect on the Company's business, financial condition and cash flows.

An economic downturn, decline in consumer confidence or unusual weather patterns could negatively impact the Company's business and financial condition. A substantial portion of the Company's operations is located in the South Central and Mid-Atlantic states. In addition, many of the Company's stores are situated in small towns and rural environments that are substantially dependent upon the local economy. The retail apparel business is dependent upon the level of consumer spending, which may be adversely affected by an economic downturn, or a decline in consumer confidence, employment levels in the Company’s markets, energy and gasoline prices and other factors influencing discretionary consumer spending. An economic downturn or decline in consumer confidence, particularly in the South Central and Mid-Atlantic states and any state (such as Texas or Louisiana) from which the Company derives a significant portion of its net sales, could have a material and adverse effect on the Company's business, financial condition and cash flows, including affecting demand for the Company's products.

The Company's success depends, in part, upon its ability to anticipate and respond to changing consumer preferences and fashion trends in a timely manner. Although the Company attempts to stay abreast of emerging lifestyles and consumer preferences affecting its merchandise, any sustained failure by the Company to identify and respond to such trends could have a material and adverse effect on the Company's business, financial condition and cash flows.

The Company's business is seasonal and sales traditionally are lower during the first three quarters of the fiscal year (February through October) and higher during the last quarter of the fiscal year (November through January). The fourth quarter usually accounts for slightly more than 30% of the Company's annual sales, with the other quarters accounting for approximately 22% to 24% each. Working capital requirements fluctuate during the year as well and generally reach their highest levels during the third and fourth quarters.

The Company's business depends, in part, on normal weather patterns across its markets. Any unusual weather patterns in the Company's markets can have a material and adverse impact on the Company's business, financial condition and cash flows.

War, acts of terrorism and natural disasters may create uncertainty and may result in reduced revenues. The Company cannot predict, with any degree of certainty, what effect, if any, war, acts of terrorism and natural disasters, if any, will have on the Company, its operations, the other risk factors discussed herein and the forward-looking statements made by the Company in this Annual Report on Form 10-K. However, the consequences of these events could have a material and adverse effect on the Company's business, financial condition and cash flows.

Government laws and regulations could adversely impact the Company’s business and financial condition and cash flows. The Company, like other businesses, is subject to various federal, state and local government laws and regulations including, but not limited to, tax laws, which may be changed from time to time in response to economic or political conditions. For instance, the Company's operating subsidiary is a Texas limited partnership. The State of Texas has been considering several proposals which would have the effect of potentially increasing the tax burden for businesses operating in the State of Texas, such as a tax on revenues or a tax based on payroll. The Company cannot predict whether existing laws or regulations, as currently interpreted or as reinterpreted in the future, or future laws and regulations, could materially and adversely affect the results of its operations, financial condition and cash flows.


The Company cannot guarantee that it will reach its targets for opening new stores or that the new stores, including those opened through acquisition, will operate profitably when opened. The success of the Company's expansion strategy depends upon many factors, including the ability of the Company to obtain suitable sites for new stores at acceptable costs, to hire, train and retain qualified personnel and to integrate new stores into existing information systems and operations. The Company cannot guarantee that it will reach its targets for opening new stores or that such stores, including those opened through acquisition, will operate profitably when opened. If the Company fails to effectively implement its expansion strategy, it could have a material and adverse effect on the Company's business, financial condition and cash flows.

If the Company is not able to obtain merchandise product on normal trade terms, its business, financial condition, and cash flows could be adversely impacted. The Company is highly dependent on obtaining merchandise product on normal trade terms. If the Company does not meet its performance objectives, the Company's key vendors and factors may become more restrictive in granting trade credit by either reducing the Company's credit lines or shortening payment terms. The tightening of credit from the vendor or factor community could have a material adverse impact on the Company's business, financial condition and cash flows.   
 
A catastrophic event affecting any of the Company's buying, distribution or other corporate operations could adversely impact the use of those facilities and could result in reduced revenues and loss of customers. The Company's buying, distribution and other corporate operations are in highly centralized locations. The Company's operations could be materially and adversely affected if a catastrophic event (such as, but not limited to, fire, hurricanes or floods) impacts the use of these facilities. There can be no assurances that the Company would be successful in obtaining alternative servicing facilities in a timely manner if such a catastrophic event should occur.

Covenants in the Company’s Revolving Credit Facility agreement may impose operating restrictions, impede or adversely affect the Company’s ability to pay dividends or repurchase common shares and raise capital through the sale of stock and other securities. The Company’s Revolving Credit Facility agreement contains covenants which, among other things, restrict (i) the amount of additional debt or capital lease obligations, (ii) the amount of capital expenditures, payment of dividends and repurchase of common stock under certain circumstances and (iii) related party transactions. In addition, any material or adverse developments affecting the business of the Company could significantly limit its ability to meet its obligations as they become due or to comply with the various covenant requirements contained in the Company's Revolving Credit Facility agreement.

If the Company's trademarks are successfully challenged, the outcome of those disputes could require the Company to abandon one or more of its trademarks. The Company regards its trademarks and their protection as important to its success. However, the Company cannot be sure that any trademark held by it will give it a competitive advantage or will not be challenged by third parties. Although the Company intends to vigorously protect its trademarks, the cost of litigation to uphold the validity and prevent infringement of trademarks can be substantial and the outcome of those disputes could require the Company to abandon one or more of its trademarks.

A work slowdown, stoppage or other disruption by employees of carriers, shippers and other providers of merchandise transportation services could have a material adverse effect on the Company’s business and financial condition. The Company’s vendors rely on shippers, carriers and other providers of merchandise transportation services (collectively “Transportation Providers”) to deliver merchandise from their manufacturers, both in the United States and abroad, to the vendors’ distribution centers in the United States. The Company’s vendors and the Company also rely on Transportation Providers to transport merchandise from the vendors’ distribution centers to the Company’s distribution centers. The Company also relies on Transportation Providers to transport merchandise from its distribution centers to its stores. However, if work slowdowns, stoppages or other disruptions affect the transportation of merchandise between the vendors and their manufacturers, especially those manufacturers outside the United States, or between the vendors and the Company, the Company’s business, financial condition and cash flows could be adversely affected.

Any devaluation of the Mexican peso, or imposition of restrictions on the access of citizens of Mexico to the Company’s stores, could adversely impact the Company’s business and financial condition. Approximately 5% of the Company’s stores are located in cities that either border Mexico or that the Company considers to be in close proximity to Mexico. The Company estimates that approximately 8% of its revenues are derived from those stores. While purchases in those stores are made in United States dollars, a devaluation of the Mexican peso could negatively affect the exchange rate between the peso and the dollar, which would result in reduced purchasing power on the part of the Company’s customers who are citizens of Mexico. In that event, revenues attributable to those stores could be reduced. In addition, due to global uncertainties, including threats or acts of terrorism, it is possible that tighter restrictions may be imposed by the Federal government on the ability of citizens of Mexico to cross the border into the United States. In that case, revenues attributable to the Company’s stores regularly frequented by citizens of Mexico could be reduced.


UNRESOLVED STAFF COMMENTS

None.
 
PROPERTIES

The Company's corporate headquarters are located in a leased 130,000 square foot building in Houston, Texas, while it owns the 28,000 square foot Peebles office building located in South Hill, Virginia. The Company also owns its distribution centers in Jacksonville, Texas, and South Hill, Virginia. The leased distribution center in Knoxville, Tennessee, which had been operated under a lease agreement, was closed and consolidated into the South Hill distribution center in December 2005 and the related lease agreement was terminated in March 2006.

At January 28, 2006, the Company operated 550 stores, located in 31 states, as follows:

 
State
  
Number of
Stores
  
 
Alabama
  
10
 
 
Arizona
  
5
 
 
Arkansas
  
19
 
 
Colorado
  
1
 
 
Connecticut
  
1
 
 
Delaware
  
3
 
 
Florida
  
2
 
 
Georgia
 
2
 
 
Illinois
  
2
 
 
Indiana
  
6
 
 
Iowa
  
1
 
 
Kansas
  
6
 
 
Kentucky
  
15
 
 
Louisiana
  
49
 
 
Maryland
  
7
 
 
Mississippi
  
12
 
 
Missouri
  
13
 
 
New Hampshire
  
1
 
 
New Jersey
  
5
 
 
New Mexico
  
19
 
 
New York
  
5
 
 
North Carolina
  
15
 
 
Ohio
  
18
 
 
Oklahoma
  
33
 
 
Pennsylvania
  
13
 
 
South Carolina
  
3
 
 
Tennessee
  
18
 
 
Texas
  
222
 
 
Vermont
  
3
 
 
Virginia
  
33
 
 
West Virginia
  
8
 
 
Total
  
550
 

Stores range in size from approximately 5,150 to 52,000 selling square feet, with the average being approximately 18,800 selling square feet. The Company's stores are primarily located in strip shopping centers. The majority of leases provide for a base rent plus payments for expenses incurred by the landlord, such as common area maintenance and insurance. Certain leases provide for contingent rents that are not measurable at inception. These contingent rents are primarily based on a percentage of sales that are in excess of a predetermined level. The Company leases all but three of its stores.


LEGAL PROCEEDINGS

From time to time, the Company and its subsidiaries are involved in various legal proceedings arising in the ordinary course of their business. Management does not believe that any pending legal proceedings, either individually or in the aggregate, are material to the financial position, results of operations or cash flows of the Company or its subsidiaries.

SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

No matters were submitted to a vote of security holders during the quarter ended January 28, 2006.

PART II

MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

Market Information

The principal market for the Company's common stock has been the NASDAQ National Market, where it traded under the symbol "STGS". On March 16, 2006, the Company began trading on the New York Stock Exchange under the symbol “SSI.” The following table sets forth the high and low sales prices per share of the Company's common stock for each quarter in 2005 and 2004 as reported on the NASDAQ National Market:

   
Common Stock Market Price *
  
2005
  
High
  
Low
  
First Quarter
  
$
27.57
  
$
24.59
  
Second Quarter
    
32.07
   
24.82
 
Third Quarter
   
30.77
   
23.68
 
Fourth Quarter
   
32.39
   
26.61
 
               
2004
              
First Quarter
  
$
28.01
  
$
21.29
  
Second Quarter
    
27.78
   
21.59
 
Third Quarter
   
25.05
   
20.81
 
Fourth Quarter
    
28.33
   
22.20
 

* Stock prices are restated to reflect the impact of a 3-for-2 stock split which was paid in the form of a stock dividend on August 19, 2005.

Holders

As of April 5, 2006, which is the record date for the determination of shareholders entitled to vote at the Company's 2006 Annual Meeting of Shareholders, there were 567 holders of record of the Company’s common stock.


Dividends

The Company initiated a quarterly cash dividend of 2.5 cents per share during the 2005 fiscal year. The total dividend payments were $0.7 million in each of the third and fourth quarters. While the Company expects to continue payment of quarterly dividends, the declaration and payment of future dividends by the Company are subject to the discretion of the Board. Any future determination to pay dividends will depend on the Company's results of operations and financial condition, as well as meeting certain criteria under its Revolving Credit Facility (as defined in Liquidity and Capital Resources) and other factors deemed relevant by the Board.

Stock Repurchase Program

The Company’s Board of Directors has approved various stock repurchase programs, which have been completed through January 28, 2006, as follows (in thousands):

Stock Repurchase Programs
 
Date Approved
 
Date Completed
 
Amount
 
Shares Repurchased *
  
                   
2002 Stock Repurchase Programs
   
July 29, 2002 & September 19, 2002
    
February 1, 2003
  
$
25,000
    
1,724
  
                           
2003 Stock Repurchase Program
   
October 1, 2003
    
May 25, 2004
    
50,000
   
2,077
  
                           
2005 Stock Repurchase Program
   
July 5, 2005
    
October 29, 2005
    
30,000
   
1,124
  
               
$
105,000
    
4,925
  
                           
 Stock repuchases using proceeds from the exercise of employee stock options
  
$
38,515
    
1,523
  
                           
 
           Total  
$
143,515
    
6,448
 

* Shares repurchased are restated to reflect the impact of a 3-for-2 stock split which was paid in the form of a stock dividend on August 19, 2005.

The Company did not purchase any of its common stock during the quarter ended January 28, 2006. At April 5, 2006, approximately $8.1 million was available to the Company for stock repurchases with proceeds from the exercise of employee stock options.
 
SELECTED FINANCIAL DATA

The following sets forth selected consolidated financial data for the periods indicated. The selected consolidated financial data should be read in conjunction with the Company's Consolidated Financial Statements included herein. All amounts are stated in thousands, except for per share data and number of stores.

 
   
Predecessor Company
      
Reorganized Company
  
   
Fiscal Year
      
 
  
Fiscal Year
  
   
Thirty Weeks Ended September 1, 2001
      
Twenty-Two Weeks Ended February 2, 2002
  
2002
  
2003 (1)
      
2004
  
2005
  
Statement of operations data:
                                  
Net sales
  
$
461,642
        
$
393,933
  
$
875,557
  
$
972,212
        
$
1,243,851
  
$
1,344,100
  
Cost of sales and related buying, occupancy and distribution expenses
    
320,554
         
276,544
   
611,293
   
694,055
         
884,291
   
952,680
 
Gross profit
    
141,088
         
117,389
   
264,264
   
278,157
         
359,560
   
391,420
 
Selling, general and administrative expenses
    
105,578
         
82,332
   
176,202
   
200,713
         
274,265
   
296,543
 
Store opening costs
    
-
         
85
   
1,271
   
3,068
         
2,172
   
3,210
 
Reorganization expense and store closure costs
    
23,141
 
(2)
 
  
-
   
-
   
-
         
-
   
-
 
Fresh-start adjustments
    
35,249
 
(3)
 
  
-
   
-
   
-
         
-
   
-
 
Gain on debt discharge
    
(265,978
)
(3)
 
  
-
   
-
   
-
         
-
   
-
 
Interest, net
    
10,651
 
(4)
 
  
581
   
1,777
   
2,509
         
2,515
   
2,958
 
Gain on sale of private label credit card portfolio, net
    
-
         
-
   
-
   
(12,218
)
        
-
   
-
 
Income before income tax expense
    
232,447
         
34,391
   
85,014
   
84,085
         
80,608
   
88,709
 
Income tax expense
    
15
         
12,730
   
31,455
   
30,691
         
29,220
   
32,822
 
Net income
 
$
232,432
        
$
21,661
  
$
53,559
  
$
53,394
        
$
51,388
  
$
55,887
  
                                                   
Basic earnings per common share (5)
  
$
8.27
        
$
1.08
  
$
1.83
  
$
1.87
        
$
1.87
  
$
2.07
  
Basic weighted average common shares outstanding (5)
    
28,096
         
29,960
   
29,325
   
28,505
         
27,424
   
27,046
 
                                                   
Diluted earnings per common share (5)
  
$
8.27
        
$
1.08
  
$
1.70
  
$
1.76
        
$
1.72
  
$
1.90
  
Diluted weighted average common sharesoutstanding (5)
    
28,096
         
30,141
   
31,439
   
30,275
         
29,842
   
29,360
 
                                                   
Margin and other data:
                                                  
Gross profit margin (6)
    
30.6
%
        
29.8
%
  
30.2
%
  
28.6
%
        
28.9
%
  
29.1
%
Selling, general and administrative expense rate (7)
    
22.9
%
        
20.9
%
  
20.1
%
  
20.6
%
        
22.0
%
  
22.1
%
Capital expenditures
    
6,318
         
15,437
   
47,880
   
46,432
         
47,890
   
75,168
 
Construction allowances from landlords
    
-
         
150
   
3,908
   
9,488
         
3,104
   
13,302
 
Stock repurchases
    
-
         
-
   
25,461
   
7,666
         
61,701
   
48,687
 
Proceeds from exercise of stock options and warrants, including tax benefit
    
-
         
-
   
1,537
   
10,393
         
20,437
   
15,498
 
Cash dividends on common stock
    
-
         
-
   
-
   
-
         
-
   
1,347
 
                                                   
Store data:
                                                  
Comparable store sales growth (8)
    
18.4
%
        
12.2
%
  
1.6
%
  
(4.1
%)
        
2.5
%
  
5.4
%
Store openings
    
-
         
3
    
14
    
170
 
(9)
 
  
22
   
36
 
Store closings
    
6
         
3
    
2
    
6
         
11
   
15
 
Number of stores open at end of period
    
342
         
342
    
354
    
518
         
529
   
550
 
Total selling area square footage at end of period
   
5,879
         
5,869
   
6,079
   
9,914
         
10,001
   
10,377
 
                                                   
 
    
Predecessor Company
 
 
 
 
Reorganized Company
 
 
 
September 1,
 
 
 
 
 
February 2,
 
 
February 1,
 
 
January 31,
 
 
 
 
 
January 29,
 
 
January 28,
 
 
 
 
2001
 
 
 
 
 
2002
 
 
2003
 
 
2004
 
 
 
 
 
2005
 
 
2006
 
Balance sheet data (at end of period)
                                                  
Working capital
  
$
208,409
        
$
237,540
  
$
273,486
  
$
230,538
        
$
225,161
  
$
222,510
  
Total assets
    
421,101
         
457,227
   
534,136
   
669,091
         
686,999
   
731,653
 
Debt obligations
    
873
         
1,070
   
882
   
13,119
         
3,178
   
3,053
 
Stockholders' equity
   
300,000
         
339,951
   
411,006
   
470,338
         
481,273
   
501,832
 
____________________________________________________________

(1)
The financial results of Peebles have been included in the Company's consolidated financial statements from November 2, 2003, the effective date of the Acquisition for accounting purposes.

(2)
Represents the net expense resulting from the Bankruptcy Proceedings and subsequent reorganization efforts.

(3)
With the change in ownership resulting from the Plan, the Company adopted fresh-start reporting in accordance with the recommended accounting principles for entities emerging from Chapter 11 set forth in the American Institute of Certified Public Accountants SOP 90-7 "Financial Reporting by Entities in Reorganization Under the Bankruptcy Code". The adjustments to reflect the consummation of the Plan, including the gain on discharge of pre-petition liabilities and the adjustment to record assets and liabilities at their fair values, are reflected in the accompanying consolidated financial data for the period ended September 1, 2001.

(4)
For the thirty weeks ended September 1, 2001, this represents interest on the debtor-in-possession facility. The Company ceased accruing interest expense on pre-petition debt after the Petition Date.

(5)
The share and per share information for all periods presented of the Reorganized Company have been restated to reflect the 3-for-2 stock split which was paid in the form of a stock dividend on August 19, 2005.

(6)
Depreciation expense associated with store locations, information systems and the distribution centers are included as a component of cost of sales. Depreciation expense included in cost of sales as a rate of sales was 0.9%, 1.1%, 1.5%, 2.1% and 2.1% in the twenty-two weeks ended February 2, 2002 and fiscal years 2002, 2003, 2004 and 2005, respectively. The increase in depreciation expense over this period as a rate of sales is the result of the (i) the acquisition of Peebles on November 4, 2003 with the associated increase in depreciable assets, (ii) capital expenditures since the Company's emergence from bankruptcy and (iii) the relatively low depreciation basis of fixed assets associated with the stores which were open at the time of emergence from bankruptcy due to the application of fresh-start reporting.

(7)
SG&A expenses in the twenty-two weeks ended February 2, 2002, fiscal years 2002 and 2003 included, as an offset to selling, general and administrative expenses, the net income contribution from the Stage private label credit card portfolio prior to its sale on September 12, 2003, which included service charge and late fee income, operating expenses incurred by the Company in origination of credit, customer service and collection activities, interest expense on securitization facility borrowings and certain other items (collectively “Net Credit Income”). Net Credit Income in the twenty-two weeks ended February 2, 2002, fiscal 2002 and 2003 was 1.0%, 2.2%, and 1.4% of sales, respectively.

(8)
Comparable store sales growth is based on sales growth for those stores which have been opened at least fourteen months prior to the reporting period. These results do not include comparable store performance of stores acquired in the Acquisition prior to the date of the Acquisition.

(9)
Includes 136 stores acquired in the Acquisition.
 
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION

Forward Looking Statements
 
Certain statements in this Form 10-K contain or may contain forward-looking statements that are subject to known and unknown risks, uncertainties and other factors which may cause actual results, performance or achievements to be materially different from any future results, performance or achievements expressed or implied by these forward-looking statements. These forward-looking statements were based on various factors and were derived utilizing numerous assumptions and other factors that could cause actual results to differ materially from those in the forward-looking statements. These factors include, but are not limited to, the ability of the Company and its subsidiaries to maintain normal trade terms with vendors, the ability of the Company and its subsidiaries to comply with the various covenant requirements contained in the Company's Revolving Credit Facility (as defined below), the demand for apparel and other factors. The demand for apparel and sales volume can be affected by significant changes in economic conditions, including an economic downturn, employment levels in our markets, consumer confidence, energy and gasoline prices, and other factors influencing discretionary consumer spending. Other factors affecting the demand for apparel and sale volume include unusual weather patterns, an increase in the level of competition in the Company's market areas, competitors' marketing strategies, changes in fashion trends, changes in the average cost of merchandise purchased for resale, availability of product on normal payment terms and the failure to achieve the expected results of the Company's merchandising and marketing plans as well as its store opening plans. The occurrence of any of the above could have a material and adverse impact on the Company's operating results. Most of these factors are difficult to predict accurately and are generally beyond the Company's control. Readers should consider the areas of risk described in connection with any forward-looking statements that may be made in this Form 10-K. Readers should carefully review this Form 10-K in its entirety, including but not limited to the Company's financial statements and the notes thereto and the risks described in Item 1A - "Risk Factors". Except for the Company's ongoing obligations to disclose material information under the Federal securities laws, the Company undertakes no obligation to release publicly any revisions to any forward-looking statements, to report events or to report the occurrence of unanticipated events. For any forward-looking statements contained in any document, the Company claims the protection of the safe harbor for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995.

General

Stage Stores is a Houston, Texas-based regional, specialty department store retailer offering moderately priced, nationally recognized brand name and private label apparel, accessories, cosmetics and footwear for the entire family. As of January 28, 2006, the Company operated 550 stores located in 31 states. The Company operates under the Stage, Bealls and Palais Royal names throughout the South Central states, and under the Peebles name throughout the Mid-Atlantic, Southeastern, Midwestern and New England states. With an average store size of approximately 18,800 selling square feet, the Company's principal focus is on consumers in small and mid-size markets which the Company believes are under-served and less competitive. Utilizing a ten mile radius from each store, approximately 61% of the Company's stores are located in small towns and communities with populations below 50,000 people, while an additional 22% of the Company's stores are located in mid-sized communities with populations between 50,000 and 150,000 people. The remaining 17% of the Company's stores are located in metropolitan areas, such as Houston and San Antonio, Texas. The Company believes that it is able to differentiate itself from the competition in the small and mid-size communities in which it operates by offering consumers access to basic as well as fashionable, brand name merchandise not typically carried by other retailers in the same market area. In the highly competitive metropolitan markets in which it operates, the Company competes against other national department store chains, which similarly offer moderately priced, brand name and private label merchandise. As a way of differentiating itself from the competition in these larger metropolitan markets, the Company offers consumers a high level of customer service in convenient locations.

During 2003, the Company made the strategic decision to sell the Stage Stores' private label credit card portfolio (the "Stage Portfolio"). On September 12, 2003, the Company sold the Stage Portfolio, as well as other assets related to its private label credit card program, to World Financial Network National Bank (the "Bank") and ADS Alliance Data Systems, Inc., subsidiaries of Alliance Data Systems Corporation, and realized proceeds of approximately $172.0 million, which included prepaid marketing funds.


On November 4, 2003, the Company redeployed the proceeds from the sale of the Stage Portfolio and acquired Peebles Inc. ("Peebles"), a privately held, similarly focused retail company headquartered in South Hill, Virginia (the "Acquisition"). The purchase price paid for Peebles was $174.6 million, including acquisition costs and net of cash acquired and debt assumed. The Acquisition has been accounted for under the purchase method of accounting, and accordingly, the results of operations of Peebles have been included in the Company's consolidated financial statements from the date of acquisition (the beginning of the fourth quarter of 2003). In order to maximize the potential of the Acquisition, the Company has maintained what it believes is the highly recognizable Peebles name on the stores. With the addition of Peebles, the Company believes that it has strengthened its position as one of the leading retailers of branded family apparel in small town America. The Company further believes that the Acquisition creates new opportunities for unit growth and geographical expansion and improves its competitive position.

On February 27, 2006, the Company acquired privately held B.C. Moore & Sons, Incorporated (“B.C. Moore”). In purchasing B.C. Moore, the Company acquired 78 retail locations, which are located in small markets throughout Alabama, Georgia, North Carolina and South Carolina. The Company’s integration plan calls for 69 of the acquired locations to be converted into Peebles stores, and the remaining 9 locations will be closed. The acquired B.C. Moore stores will go through several phases of operation during fiscal 2006. The stores will operate as usual until May, at which time, starting about every two weeks, a different group of stores will undertake inventory liquidation sales. Upon the completion of their liquidation activities, which should run for about four weeks, the stores will go dark. During this dark period, which should last for three to four weeks for each store, the 69 continuing stores will be remodeled as necessary, re-inventoried with Peebles merchandise assortments, new signs installed, and then reopened as Peebles stores. The grand openings of the 69 new Peebles stores will occur, also in phases, between mid-July and mid-October. The acquisition expands and strengthens the Company’s position in the Southeastern United States, and is consistent with its corporate strategy of increasing the concentration of its store base into smaller markets.

The financial information, discussion and analysis that follow should be read in conjunction with the Company's Consolidated Financial Statements included elsewhere herein.

Results of Operations

The following table sets forth the results of operations as a percentage of sales for the periods indicated:

   
Fiscal Year
  
   
2005
  
2004
  
2003
  
               
Net sales
   
100.0
%   
 
100.0
%   
 
100.0
%
Cost of sales and related buying, occupancy and distribution expenses
    
70.9
    
71.1
   
71.4
 
Gross profit margin
    
29.1
    
28.9
   
28.6
 
Selling, general and administrative expenses
    
22.1
    
22.0
   
20.6
 
Store opening costs
    
0.2
    
0.2
   
0.3
 
Interest, net
    
0.2
    
0.2
   
0.3
 
Income before income tax and gain on sale of the Stage Portfolio
    
6.6
    
6.5
   
7.4
 
Gain on sale of private label credit card portfolio, net
    
-
   
-
   
(1.3
)
Income before income tax
    
6.6
    
6.5
   
8.7
 
Income tax expense
    
2.4
    
2.3
   
3.2
 
Net income *
    
4.2
%
  
4.2
%