This is a summary of the third quarter fiscal 2008 earnings call conducted by Stein Mart Inc. (SMRT) on November 20, 2008.
Management:
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President and CEO: Linda Farthing
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Senior VP and Chief Financial Officer: James Delfs
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Chief Administrative Officer and Executive VP, Operations: D. Hunt Hawkins
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Executive VP and Chief Merchandising Officer: William Moll
Key Investor Issues:
- For the third quarter, the company incurred a net loss of $14.1 million or $0.34 per share vs. a net loss of $2.7 million or $0.06 per share in 2007.
- Net sales lost 10.4% to $298.8 million for the quarter from $333.3 million last year.
- Same-store sales decreased 12.6% from a year ago.
- Due to higher markdowns, gross profit decreased to $67.5 million or 22.6% of sales compared to $86.2 million or 25.9% of sales last year.
- SG&A expenses were $93.5 million or 31.3% of sales as compared to $97.2 million or 29.2% of sales during the same period last year.
Third Quarter Highlights:
The company’s target customer''s confidence has been badly shaken by recent developments and their appetite for shopping clearly has been diminished. The company has seen some modest success in some areas where Stein Mart features novelty merchandise or where it has an exceptional brand name and, conversely, it is doing well with the basic layering pieces. Sales in merchandise other than those two categories remain challenging.
Geographically, Florida continues to significantly lag the chain in sales, while the mid-South region is performing better than the company trend.
Stein Mart was able to reduce its year-over-year inventory to be in line with the sales trends at the end of third quarter, but it came at a great cost to the bottom line. Although the company has been persistently adjusting the inventory plan as the economic climate worsened, no one could have anticipated the degree of comp declines that Stein Mart and others have been having. It will need even more aggressive markdowns in the fourth quarter to end the year with season-appropriate inventories at the proper levels. And it is critical to Stein Mart that its inventory be current as it moves to the spring season.
Looking ahead, Stein Mart is conservative for the spring season, not only to keep inventories in line but so that the company can have plenty of firepower to take advantage of the brand opportunities. The company is holding the inventories extremely tight, and is not planning to have any of these issues in the spring season.
The company’s marketing message is more focused on the value offering.
Much of the work this quarter was in testing and learning from various media mix options, including alternative direct mail formats, better market stratification, reduced newspaper circulation and direct mail quantities. The more successful of these strategies are being intensified for fourth quarter and will take Stein Mart into 2009.
The company is seeing a startling amount of promotional activity and its strategy will be to focus on key events with aggressive offers, using mass media to drive traffic as well as sharpen focus on the efficient direct marketing for a better integrated plan.
Expense reduction continues to be paramount in the company’s effort to operate efficiently through this business downturn.
The company’s strategic review prompted a reduction in managerial headcount and associate work force hours and renegotiated contracts for nonmerchandise procurement. These expense reductions, while initially offset by certain fees and severance costs, will have a significant benefit in 2009 and even greater benefit beyond 2009.
The most notable outcome is the transformation of the supply chain management distribution process as Stein Mart transitions to third-party providers to efficiently move its merchandise from vendors through distribution centers to the stores. The new system will begin to give the company logistical efficiencies without the capital expenses of building DCs.
The company is currently reviewing proposals from a number of third-party logistic providers, and the expectation is to transition into this new system in the second half of the next year. When fully implemented, this new supply chain management process is expected to produce significant expense savings.
Stein Mart is focused on cash and liquidity, and to that end it continues to do everything possible to maximize its financial flexibility.
In addition to cutting operating expenses, the company has expanded its credit facility, Stein Mart scaled back its opening plans to one store, and plans significant reduction in capital expenditures in 2009. And the company previously had suspended the dividend and the stock buyback.
For the third quarter of 2008, total sales decreased 10.4% from the third quarter of 2007, while comp store sales decreased 12.6%.
- Gross profit decreased $18.7 million and as a percent of sales decreased 330 basis points.
- Merchandise margin decreased 95 basis points due to increased markdowns, slightly offset by increased markups.
- Buying and occupancy costs increased 235 basis points due to increased occupancy costs and lack of leverage on lower sales.
For the third quarter, SG&A expenses decreased $3.7 million, but as a percent of sales increased 210 basis points.
- Store operating expenses for the non-comp group of stores increased $1 million, while operating expenses for the comp stores decreased $2 million.
- Advertising expense decreased $5.2 million and share-based compensation decreased $1.4 million.
- Store closing costs increased $2.6 million, and the balance of the change in SG&A resulted primarily from increased professional fees and benefit costs.
- Other income decreased from last year due to decreases in both credit card income and leased shoe department income.
