UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended November 1, 2003
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 number 0-20052
STEIN MART, INC.
(Exact name of registrant as specified in its charter)
Florida 64-0466198
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
1200 Riverplace Blvd., Jacksonville, Florida 32207
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (904) 346-1500
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 [X] No [ ]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act).
Yes [X] No [ ]
At November 29, 2003, the latest practicable date, there were 41,728,621 shares
outstanding of Common Stock, $.01 par value.
STEIN MART, INC.
TABLE OF CONTENTS
PAGE
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements:
Balance Sheets at November 1, 2003, February 1, 2003 3
and November 2, 2002
Statements of Operations for the 13 Weeks and 39 Weeks 4
Ended November 1, 2003 and November 2, 2002
Statements of Cash Flows for the 39 Weeks Ended 5
November 1, 2003 and November 2, 2002
Notes to Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial 10
Condition and Results of Operations
Item 3. Quantitative and Qualitative Disclosures About Market Risk 13
Item 4. Controls and Procedures 13
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 14
SIGNATURES 15
2
Stein Mart, Inc.
Balance Sheets
(In thousands)
November 1, February 1, November 2,
2003 2003 2002
-------------- -------------- --------------
ASSETS (Unaudited) (Unaudited)
Current assets:
Cash and cash equivalents $ 13,555 $ 9,859 $ 15,525
Trade and other receivables 9,359 4,919 5,563
Inventories 365,494 297,230 385,441
Prepaid expenses and other current assets 10,115 4,361 7,779
-------------- -------------- --------------
Total current assets 398,523 316,369 414,308
Property and equipment, net 81,541 86,351 90,360
Other assets 10,091 7,497 8,021
-------------- -------------- --------------
Total assets $490,155 $410,217 $512,689
============== ============== ==============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $123,206 $ 70,472 $141,326
Accrued liabilities 58,898 53,407 56,935
Income taxes payable - 5,353 -
Notes payable to banks - 41,350 -
-------------- -------------- --------------
Total current liabilities 182,104 170,582 198,261
Notes payable to banks 74,968 - 84,700
Other liabilities 21,151 16,328 17,378
-------------- -------------- --------------
Total liabilities 278,223 186,910 300,339
COMMITMENTS AND CONTINGENCIES
Stockholders' equity:
Preferred stock - $.01 par value; 1,000,000 shares
authorized; no shares outstanding
Common stock - $.01 par value; 100,000,000 shares
authorized; 41,729,713; 41,618,678 and 41,528,067
shares issued and outstanding, respectively 417 416 415
Paid-in capital 1,374 721 -
Unearned compensation (370) - -
Retained earnings 210,511 222,170 211,935
-------------- -------------- --------------
Total stockholders' equity 211,932 223,307 212,350
-------------- -------------- --------------
Total liabilities and stockholders' equity $490,155 $410,217 $512,689
============== ============== ==============
The accompanying notes are an integral part of these financial statements.
3
Stein Mart, Inc.
Statements of Operations
(Unaudited)
(In thousands except per share amounts)
13 Weeks Ended 39 Weeks Ended
--------------------------------- ---------------------------------
November 1, November 2, November 1, November 2,
2003 2002 2003 2002
-------------- -------------- -------------- --------------
Net sales $315,942 $332,847 $950,047 $1,000,253
Cost of merchandise sold 242,385 259,162 721,504 751,933
-------------- -------------- -------------- --------------
Gross profit 73,557 73,685 228,543 248,320
Selling, general and administrative expenses 93,193 82,331 256,051 239,930
Other income, net 3,284 3,244 10,016 10,303
-------------- -------------- -------------- --------------
Income (loss) from operations (16,352) (5,402) (17,492) 18,693
Interest expense 421 797 1,313 2,080
-------------- -------------- -------------- --------------
Income (loss) before income taxes (16,773) (6,199) (18,805) 16,613
Income tax benefit (provision) 6,374 2,356 7,146 (6,313)
-------------- -------------- -------------- --------------
Net income (loss) $(10,399) $ (3,843) $(11,659) $ 10,300
============== ============== ============== ==============
Earnings (loss) per share - Basic $(0.25) $(0.09) $(0.28) $0.25
============== ============== ============== ==============
Earnings (loss) per share - Diluted $(0.25) $(0.09) $(0.28) $0.25
============== ============== ============== ==============
Weighted-average shares outstanding - Basic 41,658 41,528 41,615 41,584
============== ============== ============== ==============
Weighted-average shares outstanding -Diluted 41,658 41,528 41,615 41,828
============== ============== ============== ==============
The accompanying notes are an integral part of these financial statements.
4
Stein Mart, Inc.
Statements of Cash Flows
(Unaudited)
(In thousands)
39 Weeks Ended
---------------------------------
November 1, November 2,
2003 2002
-------------- --------------
Cash flows from operating activities:
Net income (loss) $(11,659) $10,300
Adjustments to reconcile net income (loss) to net cash
used in operating activities:
Depreciation and amortization 14,399 13,940
Impairment of property and other assets 2,290 -
Store closing charges 6,325 -
Deferred income taxes (1,412) 2,836
Restricted stock compensation 28 -
Tax benefit from exercise of stock options - 385
Changes in assets and liabilities:
Trade and other receivables (4,440) (362)
Inventories (68,264) (89,283)
Prepaid expenses and other current assets (5,454) 2,855
Other assets (2,690) (1,909)
Accounts payable 52,734 47,651
Accrued liabilities 3,036 10,934
Income taxes payable (5,353) (4,071)
Other liabilities 2,065 952
-------------- --------------
Net cash used in operating activities (18,395) (5,772)
Cash flows used in investing activities:
Capital expenditures (11,783) (15,699)
Cash flows from financing activities:
Net borrowings under notes payable to banks 33,618 26,950
Proceeds from exercise of stock options - 789
Proceeds from employee stock purchase plan 468 482
Purchase of common stock (212) (1,501)
-------------- --------------
Net cash provided by financing activities 33,874 26,720
-------------- --------------
Net increase in cash and cash equivalents 3,696 5,249
Cash and cash equivalents at beginning of year 9,859 10,276
-------------- --------------
Cash and cash equivalents at end of period $ 13,555 $15,525
============== ==============
Supplemental disclosures of cash flow information:
Interest paid $ 1,240 $ 2,043
Income taxes paid 7,811 2,316
The accompanying notes are an integral part of these financial statements.
5
STEIN MART, INC.
NOTES TO FINANCIAL STATEMENTS
November 1, 2003
(Unaudited)
1. Summary of Significant Accounting Policies
The following accounting policies supplement those included in the notes to the
financial statements included in the Stein Mart, Inc. annual report on Form 10-K
for the year ended February 1, 2003.
Basis of Presentation
The accompanying unaudited financial statements have been prepared in accordance
with generally accepted accounting principles for interim financial information
and with the instructions to Form 10-Q. Accordingly, they do not include all of
the information and footnotes required by generally accepted accounting
principles for complete financial statements. In the opinion of management, all
adjustments (consisting of normal recurring accruals) considered necessary for a
fair presentation have been included. Operating results for the 39-week periods
are not necessarily indicative of the results that may be expected for the
entire year. For further information, refer to the financial statements and
footnotes thereto included in the Stein Mart, Inc. annual report on Form 10-K
for the year ended February 1, 2003.
Inventories
Merchandise inventories are valued at the lower of average cost or market, on a
first-in first-out basis, using the retail inventory method (RIM). RIM is an
averaging method that is widely used in the retail industry. The use of RIM
results in inventories being valued at the lower of cost or market as markdowns
are taken as a reduction of the retail values of inventories.
Based on a review of historical markdowns, current business trends and seasonal
inventory categories, additional inventory reserves may be recorded to reflect
estimated markdowns which may be required to liquidate certain inventories and
reduce inventories to the lower of cost or market. Management believes its
inventory valuation methods approximate the net realizable value of clearance
inventory and result in valuing inventory at the lower of cost or market.
Revenue Recognition
Revenue from sales of the Company's merchandise is recognized at the time of
sale, net of any returns and allowances, discounts and percentage-off coupons.
Future merchandise returns are estimated based on historical experience. Leased
department sales are excluded from net sales; commissions, net of related
selling expenses, and rental income from leased departments are included in
other income, net.
Statements of Operations Classifications
Cost of merchandise sold includes merchandise costs, net of vendor discounts and
allowances, freight and inventory shrinkage; store occupancy costs (including
rent, common area maintenance, real estate taxes, utilities and maintenance);
payroll, benefits and travel costs directly associated with buying inventory;
and costs of operating the distribution warehouse.
Selling, general and administrative expenses include store operating expenses,
such as payroll and benefit costs, advertising, store supplies, depreciation and
other direct selling costs, and costs associated with the Company's corporate
functions.
2. Impairment of Long-lived Assets
The Company follows Statement of Financial Accounting Standards ("SFAS") No.
144, "Accounting for the Impairment or Disposal of Long-lived Assets," which
requires impairment losses to be recorded on long-lived assets used in
operations whenever events or changes in circumstances indicate that the net
carrying amounts may not be recoverable. An impairment loss is recognized if the
sum of the expected future undiscounted cash flows from the use of the assets is
less than the net book value of the assets. During the third quarter of 2003,
the
6
STEIN MART, INC.
NOTES TO FINANCIAL STATEMENTS
November 1, 2003
(Unaudited)
Company recorded a pre-tax non-cash asset impairment charge of $1.5 million to
reduce the carrying value of property and equipment of certain under-performing
stores to their respective estimated fair value. This charge is included in
selling, general and administrative expenses in the Statement of Operations for
the 13 and 39 weeks ended November 1, 2003.
During the first quarter of 2003, the Company recorded an asset impairment
charge of $0.8 million to reduce the carrying value of property and equipment of
four of the stores closing in 2003. This charge is included in selling, general
and administrative expenses in the Statements of Operations for the 39 weeks
ended November 1, 2003.
3. Store Closings
During 2003, management decided to close 16 under-performing stores. Two stores
were closed during the first quarter, two during the second quarter and eight
during the third quarter, incurring pre-tax charges of $6.6 million for the
present value of lease termination costs. The remaining four stores will close
during the fourth quarter with an estimated $0.3 million charge for lease
termination costs. Severance costs of $0.7 million were also recorded during
2003. Lease termination costs are net of estimated sublease income that could
reasonably be obtained for the properties. In the event the Company is not
successful in subleasing closed store locations when management expects,
additional reserves for store closing costs may be recorded. Total store closing
charges for 2003 are estimated to be approximately $10.0 million, including
other related store closing expenses.
The following tables show the activity in the store closing reserve (in
thousands):
Feb. 1, Nov. 1,
2003 Charges Payments 2003
---------- ---------- ---------- ----------
Lease termination costs $4,982 $6,587 $(1,816) $9,753
Severance - 687 (455) 232
---------- ---------- ---------- ----------
$4,982 $7,274 $(2,271) $9,985
========== ========== ========== ==========
Feb. 2, Nov 2,
2002 Charges Payments 2002
---------- ---------- ---------- ----------
Lease termination costs $5,680 - $(478) $5,202
Severance - - - -
---------- ---------- ---------- ----------
$5,680 - $(478) $5,202
========== ========== ========== ==========
The store closing reserve at November 1, 2003, February 1, 2003 and November 2,
2002 includes a current portion (in Accrued liabilities) of $3.6 million, $1.5
million and $1.4 million, respectively, and a long-term portion (in Other
liabilities) of $6.4 million, $3.5 million and $3.8 million, respectively.
Sales and operating losses of the 12 stores closed and the four stores closing
during 2003 are shown below (in thousands):
Net Loss From
Sales Operations
---------- ----------
For the 13 weeks ended November 1, 2003 $ 6,411 $ (9,725)
========== ==========
For the 39 weeks ended November 1, 2003 $30,886 $(20,467)
========== ==========
7
STEIN MART, INC.
NOTES TO FINANCIAL STATEMENTS
November 1, 2003
(Unaudited)
4. Accrued Liabilities
Accrued liabilities consist of the following:
Nov. 1, Nov. 2,
2003 2002
---------- ----------
Taxes, other than income taxes $17,370 $17,790
Compensation and employee benefits 12,709 12,794
Unredeemed gift and returns cards 10,201 8,045
Other 18,618 18,306
---------- ----------
$58,898 $56,935
========== ==========
5. Notes Payable to Banks
In July 2003, the Company completed a three-year $150 million senior revolving
credit agreement (the "Agreement") with a group of lenders to replace its
existing loan facility. Under the terms of the Agreement, the Company has the
option to increase the facility by an additional $25 million and to extend the
terms for an additional year.
Borrowings under the Agreement are based on and secured by eligible inventory.
The Company routinely issues standby and commercial letters of credit for
purposes of securing foreign sourced merchandise and certain insurance programs.
Outstanding letters of credit reduce availability under the credit agreement.
The Company had $5.6 million in outstanding letters of credit as of November 1,
2003.
The interest rates on borrowings under the Agreement range from Prime to Prime
plus .25% per annum for Prime Rate Loans and LIBOR plus 1.50% to LIBOR plus
2.25% per annum for Eurodollar Rate Loans and are established quarterly, based
on excess availability as defined in the Agreement. As of November 1, 2003, the
interest rates for Prime Rate and Eurodollar Rate Loans were 4.13% and 2.87%,
respectively. An unused line fee of .25% to .375% per annum (.375% as of
November 1, 2003) is charged on the unused portion of the revolving credit
facility, based on excess availability. The Company was in full compliance with
the terms of the Agreement as of November 1, 2003.
All borrowings bear interest at variable rates that approximate current market
rates and therefore the carrying value of these borrowings approximates fair
value.
Notes payable to banks was classified as current at February 1, 2003 because
management's projections indicated that the Company would not be in compliance
with certain of the financial covenants under the previous credit agreement as
of the end of the first quarter 2003.
6. Accounting For Stock-Based Compensation
In 2002, the Compensation Committee of the Board of Directors determined that it
was appropriate to undertake an overall review of the Company's compensation
strategies. As part of this overall review, it was decided that starting in
fiscal 2003 restricted stock awards, as provided for in the Stein Mart, Inc.
2001 Omnibus Plan, in addition to stock options would be granted as part of the
Long-term Compensation portion of the compensation program. A total of 72,026
restricted shares were issued to key employees in May 2003 at $5.53 per share,
the market value at date of grant. Shares awarded under the plan entitle the
shareholder to all rights of common stock ownership except that the shares may
not be sold, transferred, pledged, exchanged or otherwise disposed of during the
restriction period. Vesting occurs seven years following the date of grant or at
the end of the second fiscal year following date of grant, if certain defined
Company performance goals are achieved.
8
STEIN MART, INC.
NOTES TO FINANCIAL STATEMENTS
November 1, 2003
(Unaudited)
The Company has adopted the disclosure-only provisions of SFAS No. 123, as
amended by SFAS No. 148, "Accounting for Stock-Based Compensation," and intends
to retain the intrinsic value method of accounting for stock-based compensation
which it currently uses. Accordingly, no compensation cost has been recognized
for the stock option plans. Restricted stock awards issued by the Company are
accounted for in accordance with APB 25. The employee compensation cost is
included in net income, as reported, throughout the vesting period. Had
compensation cost of the Company's stock-based plans been determined consistent
with the provisions of SFAS No. 123, the Company's net income (loss) and
earnings (loss) per share would have been changed to the following pro forma
amounts (in thousands except per share amounts):
13 Weeks Ended 39 Weeks Ended
----------------------- -----------------------
Nov. 1, Nov. 2, Nov. 1, Nov. 2,
2003 2002 2003 2002
---------- ---------- ---------- ----------
Net income (loss) - as reported $(10,399) $(3,843) $(11,659) $10,300
Add: Restricted stock-based employee
compensation expense included in reported
net income (loss), net of related tax effects 9 - 18 -
Deduct: Total stock-based employee
compensation expense determined under the
fair value based method for all awards, net of
related tax effects (363) (408) (1,105) (1,304)
---------- ---------- ---------- ----------
Net income (loss) - pro forma $(10,753) $(4,251) $(12,746) $ 8,996
========== ========== ========== ==========
Basic earnings (loss) per share - as reported $(0.25) $(0.09) $(0.28) $0.25
Diluted earnings (loss) per share - as reported $(0.25) $(0.09) $(0.28) $0.25
Basic earnings (loss) per share - pro forma $(0.26) $(0.10) $(0.31) $0.22
Diluted earnings (loss) per share - pro forma $(0.26) $(0.10) $(0.31) $0.22
7. Earnings (Loss) Per Share and Stockholders' Equity
Basic earnings (loss) per share is computed by dividing net income (loss) by the
weighted-average number of common shares outstanding for the period. Diluted
earnings (loss) per share is computed by dividing net income (loss) by the
weighted-average number of common shares outstanding plus common stock
equivalents for each period. Common stock equivalents are not included in the
diluted loss per share calculations for the 13-week periods ended November 1,
2003 and November 2, 2002 and the 39-week period ended November 1, 2003 because
they are anti-dilutive.
A reconciliation of weighted-average number of common shares to weighted-average
number of common shares plus common stock equivalents is as follows (000's):
13 Weeks Ended 39 Weeks Ended
----------------------- -----------------------
Nov. 1, Nov 2, Nov. 1, Nov. 2,
2003 2002 2003 2002
---------- ---------- ---------- ----------
Weighted-average number of common shares 41,658 41,528 41,615 41,584
Stock options - - - 244
---------- ---------- ---------- ----------
Weighted-average number of common shares
plus common stock equivalents 41,658 41,528 41,615 41,828
========== ========== ========== ==========
The Company repurchased 50,000 shares and 220,000 shares during the first 39
weeks of 2003 and 2002, at a cost of $0.2 million and $1.5 million,
respectively.
9
Stein Mart, Inc.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
This document includes a number of forward-looking statements which reflect the
Company's current views with respect to future events and financial performance.
Wherever used, the words "plan", "expect", "anticipate", "believe", "estimate"
and similar expressions identify forward looking statements.
Any such forward-looking statements contained in this document are subject to
risks and uncertainties that could cause the Company's actual results of
operations to differ materially from historical results or current expectations.
These risks include, without limitation, ongoing competition from other
retailers many of whom are larger and have greater financial and marketing
resources, the availability of suitable new store sites at acceptable lease
terms, ability to successfully implement strategies to exit or improve
under-performing stores, changes in store closings, changing preferences in
apparel, changes in the level of consumer spending due to current events and/or
general economic conditions, the effectiveness of planned advertising,
marketing, and promotional strategies, adequate sources of designer and
brand-name merchandise at acceptable prices, and the Company's ability to
attract and retain qualified employees to support planned growth.
The Company does not undertake to publicly update or revise its forward-looking
statements even if experience or future changes make clear that any projected
results expressed or implied therein will not be realized.
Results of Operations
The following table sets forth, for the periods indicated, the percentage of the
Company's net sales represented by each line item presented:
13 Weeks Ended 39 Weeks Ended
----------------------- -----------------------
Nov. 1, Nov. 2, Nov. 1, Nov. 2,
2003 2002 2003 2002
---------- ---------- ---------- ----------
Net sales 100.0% 100.0% 100.0% 100.0%
Cost of merchandise sold 76.7 77.9 75.9 75.2
---------- ---------- ---------- ----------
Gross profit 23.3 22.1 24.1 24.8
Selling, general and
administrative expenses 29.5 24.7 27.0 24.0
Other income, net 1.0 1.0 1.1 1.1
---------- ---------- ---------- ----------
Income (loss) from operations (5.2) (1.6) (1.8) 1.9
Interest expense 0.1 0.3 0.2 0.2
---------- ---------- ---------- ----------
Income (loss) before income taxes (5.3) (1.9) (2.0) 1.7
Income tax benefit (provision) 2.0 0.7 0.8 (0.7)
---------- ---------- ---------- ----------
Net income (loss) (3.3)% (1.2)% (1.2)% 1.0%
========== ========== ========== ==========
Stores
The stores open as of November 1, 2003 and November 2, 2002 were 264 and 266
respectively.
13 Weeks Ended 39 Weeks Ended
----------------------- -----------------------
Nov. 1, Nov. 2, Nov. 1, Nov. 2,
2003 2002 2003 2002
---------- ---------- ---------- ----------
Stores at beginning of period 270 261 265 253
Stores opened in the period 2 5 11 16
Stores closed in the period (8) - (12) (3)
---------- ---------- ---------- ----------
Stores at the end of period 264 266 264 266
========== ========== ========== ==========
10
Stein Mart, Inc.
Store Closings
During 2003, management decided to close 16 under-performing stores (see Note 3
to the Financial Statements). Two stores were closed during the first quarter,
two during the second quarter and eight during the third quarter. The remaining
four will close in the fourth quarter. Total store closing charges for 2003 are
estimated to be approximately $10.0 million, including other related store
closing expenses.
Sales and operating losses of the 12 stores closed and the four stores closing
during 2003 are shown below (in thousands):
Net Loss From
Sales Operations
---------- ----------
For the 13 weeks ended November 1, 2003 $ 6,411 $ (9,725)
========== ==========
For the 39 weeks ended November 1, 2003 $30,886 $(20,467)
========== ==========
For the 13 weeks ended November 1, 2003 compared with the 13 weeks ended
November 2, 2002:
The 5.1% total sales decrease for the 13 weeks ended November 1, 2003 from the
prior year reflects a 5.8% decrease in sales from "comparable" stores (defined
as stores that have been open throughout this period and for the entire prior
year), the opening of 2 new stores, the closing of 8 stores and the 13-week
impact of the non-comparable stores opened in 2002 and 2003.
Gross profit for the quarter ended November 1, 2003 was $73.6 million or 23.3
percent of net sales, a 1.2 percentage point increase from gross profit of $73.7
million or 22.1 percent of net sales for the third quarter of 2002. Mark-up
improved over last year, but was offset by higher markdowns and a lack of
occupancy leverage. Additional markdowns in the going out of business stores
represented a 0.8 percentage point decrease in gross profit.
Selling, general and administrative expenses were $93.2 million or 29.5 percent
of net sales for the quarter ended November 1, 2003, as compared to $82.3
million or 24.7 percent of net sales for the same 2002 quarter. Approximately
half of the 4.8 percentage point increase in selling, general and administrative
expenses as a percent of sales is due to a pre-tax asset impairment charge of
$1.5 million for under-performing stores and store closing expenses of $6.2
million, including a $5.6 million charge for the present value of lease
termination costs for eight stores closed in the third quarter, $0.2 million for
severance costs (see Note 3 to the Financial Statements) and $0.4 million of
other related store closing expenses. The balance of the increase was due to a
lack of leverage resulting from the 5.8% decrease in comparable store net sales,
as well as additional expenses related to a new advertising campaign.
Other income, primarily from in-store leased shoe departments, was $3.3 million
and $3.2 million for the third quarter of 2003 and 2002, respectively.
Interest expense was $0.4 million for the third quarter of 2003 and $0.8 million
for the third quarter of 2002. The decrease resulted from lower average
borrowings at lower interest rates during the third quarter this year compared
to last year.
Net loss for the third quarter of 2003 was $(10.4) million or $(0.25) loss per
share compared to net loss of $(3.8) million or $(0.09) loss per share for the
same quarter last year. The pre-tax loss from operations incurred by the 16
stores closed or closing during 2003 totaled $(9.7) million or $(0.14) after tax
loss per share in the third quarter of 2003. Excluding the losses from these
stores, the loss per share would have been $(0.11).
For the 39 weeks ended November 1, 2003 compared with the 39 weeks ended
November 2, 2002:
The 5.0% total sales decrease for the 39 weeks ended November 1, 2003 from the
prior year reflects a 7.0% decrease in sales from comparable stores, the opening
of 11 new stores, the closing of 12 stores and the 39-week impact of the
non-comparable stores opened in 2002.
11
Stein Mart, Inc.
Gross profit for the 39 weeks ended November 1, 2003 was $228.5 million or 24.1
percent of net sales, a 0.7 percentage point decrease from gross profit of
$248.3 million or 24.8 percent of net sales in the first 39 weeks of 2002.
Mark-up improved over last year, but was more than offset by higher markdowns
and a lack of occupancy leverage. Additional markdowns in the stores that were
in a going-out-of-business process accounted for almost half of the markdown
impact.
Selling, general and administrative expenses were $256.1 million or 27.0 percent
of net sales for the 39 weeks ended November 1, 2003, as compared to $239.9
million or 24.0 percent of net sales for the same 2002 period. More than
one-third of the 3.0 percentage point increase in selling, general and
administrative expenses as a percent of sales is due to store closing expenses
of $9.1 million and a pre-tax asset impairment charge of $1.5 million for
under-performing stores. The remaining increase is due to a lack of leverage
resulting from the 7.0% decrease in comparable store sales for the first 39
weeks of 2003 and, to a lesser extent, expenses related to a new advertising
campaign. Store closing expenses include a $6.6 million charge for the present
value of lease termination costs for 12 closed stores, a pre-tax asset
impairment charge of $0.8 million related to 2003 store closings, $0.7 million
for severance costs (see Note 3 to the Financial Statements) and $1.0 million of
other related store closing expenses.
Other income, primarily from in-store leased shoe departments, was $10.0 million
and $10.3 million for the first 39 weeks of 2003 and 2002, respectively.
Interest expense was $1.3 million and $2.1 million for the first 39 weeks of
2003 and 2002, respectively. The decrease resulted from lower average borrowings
at lower interest rates this year compared to last year.
Net loss for the first 39 weeks of 2003 was $(11.7) million or $(0.28) loss per
share compared to net income of $10.3 million or $0.25 earnings per share for
the first 39 weeks of 2002. The pre-tax loss from operations incurred by the 16
stores closed or closing during 2003 totaled $(20.5) million or $(0.30) after
tax loss per share in the first 39 weeks of 2003. Excluding the losses from
these stores, the 39 weeks ended November 1, 2003 would have shown earnings of
$0.02 per share.
Liquidity and Capital Resources
Net cash used in operating activities was $18.4 million for the 39 weeks ended
November 1, 2003 and $5.8 million for the 39 weeks ended November 2, 2002. The
primary use of cash in operations for the 39 weeks ended November 1, 2003
resulted from the net loss of $11.7 million reduced by non-cash expenses for
depreciation and amortization, asset impairments and store closing charges.
Additionally, cash was used to finance merchandise inventory.
During the first 39 weeks of 2003 and 2002, cash flows used in investing
activities amounted to $11.8 million and $15.7 million, respectively, primarily
for acquisition of fixtures, equipment, and leasehold improvements for new and
existing stores. Total capital expenditures for 2003 are anticipated to be
approximately $13 million.
Cash flows from financing activities were $33.9 million and $26.7 million for
the first 39 weeks of 2003 and 2002, respectively, reflecting primarily net
borrowing under the Company's revolving credit agreement to meet working capital
requirements.
As discussed in Note 5 to the Financial Statements, in July 2003 the Company
completed a three-year $150 million senior revolving credit agreement to replace
its existing loan facility. The Company believes that cash flow generated from
operating activities, bank borrowings and vendor credit will be sufficient to
fund current and long-term capital expenditures and working capital
requirements.
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Stein Mart, Inc.
New Marketing Initiative
For the past three years, as a marketing vehicle to attract new customers, the
Company has used various coupons that allowed customers to take a specified
percentage discount off of full-priced merchandise. As this practice escalated,
it became apparent that these coupons did not support the Company's unique
selling proposition. As a result, the Company discontinued these `percentage off
full price' coupons as of the last weekend in July 2003. While coupons may
continue to be used on a limited basis in new markets and specific
circumstances, the widespread distribution of full-price, percentage off coupons
has ceased.
As anticipated, the discontinuation of these customer traffic incentives has
hindered sales growth. However, discounts that had previously been devoted to
these coupon incentives are now being used to clear seasonal goods more
efficiently and create additional freshness in the inventory.
In the third quarter of 2003, the Company began a new advertising campaign to
showcase its unique blend of fashion merchandise, outstanding value and
convenient locations. The new campaign is both image and event-focused, and uses
newspaper inserts, direct mail, radio and television advertising which was
rolled out nationwide in October.
Fourth Quarter 2003 Expectations
Although response to the Company's fall merchandise assortment has been
encouraging, fourth quarter sales will be disadvantaged by comparisons to almost
daily coupons in November and December 2002. Consequently, management expects
comparable store sales to decline in the mid-single digit range for those two
months, with an opportunity for improvement in January. As a result of tighter
inventory control and profitability initiatives, as well as some initial benefit
from the new advertising campaign, the Company now expects to approach
profitability for the year, in spite of negative comparable store sales and
including the costs of closing 16 stores.
Seasonality
The Company's business is seasonal in nature with a higher percentage of the
Company's merchandise sales and earnings generated in the fall and holiday
selling seasons. Accordingly, selling, general and administrative expenses are
typically higher as a percent of net sales during the first three quarters of
each year.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Interest on the Company's borrowings under its revolving credit agreement is
based on variable interest rates and is, therefore, affected by changes in
market interest rates. The Company does not use derivative financial instruments
to hedge the interest rate exposure and does not engage in financial
transactions for trading or speculative purposes. As of November 1, 2003, the
Company had $75.0 million of long-term debt outstanding through Prime Rate and
Eurodollar Rate Loans accruing interest at rates of 4.13% and 2.87%,
respectively. The Company does not consider the potential losses in future
earnings and cash flows from reasonably possible near term changes in interest
rates to be material.
ITEM 4. CONTROLS AND PROCEDURES
As of November 1, 2003, the Company carried out an evaluation, under the
supervision and with the participation of the Company's management, including
the Company's Chief Executive Officer and Chief Financial Officer, of the
effectiveness of the design and operation of the Company's disclosure controls
and procedures pursuant to Rules 13a-14 and 15d-14 of the Securities Exchange
Act of 1934 (the "Exchange Act"). Based upon that evaluation, the Chief
Executive Officer and Chief Financial Officer concluded that the Company's
disclosure controls and procedures are effective in alerting them to material
information relating to the Company required to be included in the Company's
Exchange Act filings in a timely manner.
There have been no significant changes in the Company's internal controls or in
other factors that could significantly affect internal controls subsequent to
the date the Company carried out its evaluation.
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Stein Mart, Inc.
PART II - OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
31.1 Certification of Chief Executive Officer Pursuant to Section
302 of the Sarbanes-Oxley Act of 2002
31.2 Certification of Chief Financial Officer Pursuant to Section
302 of the Sarbanes-Oxley Act of 2002
32.1 Certification of the Chief Executive Officer Pursuant to 18
U.S.C. Section 1350
32.2 Certification of the Chief Financial Officer Pursuant to 18
U.S.C. Section 1350
(b) Reports on Form 8-K:
None
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Stein Mart, Inc.
Date: December 15, 2003 /s/ Michael D. Fisher
-------------------------------------
Michael D. Fisher
President and Chief Executive Officer
/s/ James G. Delfs
-------------------------------------
James G. Delfs
Senior Vice President and Chief
Financial Officer
15