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Edited Transcript of SMRT earnings conference call or presentation 27-Nov-18 9:30pm GMT

Q3 2018 Stein Mart Inc Earnings Call

Jacksonville Jan 10, 2019 (Thomson StreetEvents) -- Edited Transcript of Stein Mart Inc earnings conference call or presentation Tuesday, November 27, 2018 at 9:30:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* D. Hunt Hawkins

Stein Mart, Inc. - CEO & Director

* Gregory W. Kleffner

Stein Mart, Inc. - Advisor

* MaryAnne Morin

Stein Mart, Inc. - President & Director

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Presentation

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Operator [1]

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Greetings, and welcome to the Stein Mart Third Quarter 2018 Earnings Conference Call.

In the course of this presentation, statements may be made as to certain matters that constitute forward-looking information that is subject to certain risks and uncertainties. Additional information concerning those factors that could cause actual results to differ from those in the forward-looking statements can be found in the company's fiscal 2017 annual report on Form 10-K for the year ended February 3, 2018, and other filings with the SEC. (Operator Instructions)

I would now like to turn the call over to Hunt Hawkins, CEO of Stein Mart.

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D. Hunt Hawkins, Stein Mart, Inc. - CEO & Director [2]

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Good afternoon, everyone, and welcome to Stein Mart's Third Quarter Earnings Call. With me today are our President, MaryAnne Morin; our Chief Financial Officer, Greg Kleffner; and our Director of Investor Relations, Linda Tasseff. I'll begin with some opening comments, and then I'll turn the call over to MaryAnne. And after that, Greg will review our financial results and outlook for the fourth quarter.

Overall, we're pleased with our third quarter result, which improved more than $10 million from last year. The positive comparable sales trend that began in the second quarter has improved in the third quarter, with solid sales increases in all our core apparel businesses, driven by higher regular-priced selling. The improved regular-priced selling also raised average unit retail prices. We continued to expand our gross profit rate during the quarter, which, like the second quarter, was driven by higher regular-priced selling and better inventory productivity. This trend has continued into the fourth quarter.

As anticipated, our sales were unfavorably impacted by comparisons to last year's higher clearance selling. What was unanticipated were the 2 hurricanes, which impacted expenses, traffic and sales, primarily in the Southeast and mid-Atlantic space, where we have a large number of stores. We also have the $1.1 million in unclaimed fees related to extending our credit agreements. This resulted in operating results that were lower than expected.

As we previously announced, we successfully renegotiated 5-year extended and amended credit agreements in September. In addition to extending our maturity, new arrangements improved our terms and lowered our borrowing rate. This was an important step to solidify our access to capital for a longer period of time. But even with this extension, we will continue conservatively managing our cash and availability through well-controlled expenses, reduced capital spending and inventory productivity.

Now looking to the fourth quarter. As our penetration of regular-priced selling continues to increase and clearance selling comparisons normalize, we expect our gross profit rate to increase. This, along with continued growth from our e-commerce business and lower expenses, has us well prepared for a profitable fourth quarter that will give us dramatically improved EBITDA for the year.

And now I'd like to turn the call over to MaryAnne.

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MaryAnne Morin, Stein Mart, Inc. - President & Director [3]

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Thank you, Hunt. Good afternoon, everyone. I'm pleased with our comparable sales growth. Importantly, we saw solid sales increases in all core apparel categories, with double-digit increases in regular-priced selling penetration. Our average unit retail sale increased by 9%. We had another very strong quarter in e-commerce expansion, which was a significant contributor to our sales growth. This year's lower and more normalized level of clearance selling contrasted with last year when we were working to rightsize our inventories. This has been disadvantaging top line sales comparisons all year. Thankfully, this is now behind us as we begin comparing to a more normalized prior year clearance selling in the fourth quarter.

We continue to make good progress in regular-priced selling, and our focus on inventory turn continues to improve our merchandise margin. Our customer is responding positively to newness in the assortment and more relevant product mix that is more modern, brand-focused and trend right. We are in continual test mode with new brands and categories, especially online. Women's apparel had the strongest sales for the quarter. Modern collections, sportswear, active and dresses have the highest comp increases, driven by new and expanded brands with highly recognizable names. Sales in men's apparels were also up. Cold weather categories, outerwear sweaters and accessories picked up with the arrival of cooler temperatures in October and have not slowed down. The teams have been chasing additional availability to support the strong trend.

Although our most challenged category continues to be home, where sales were down, its margin rate rose by nearly 500 basis points during the quarter. We continue to evaluate and refine the changes we have made and are testing new initiatives to get better sales results.

Our third quarter gross profit expansion was entirely from higher merchandise margin. Our apparel category has not only led the way with strong comp sales increases, but this is also where we saw the highest gross margin growth. We managed our inventories very efficiently and ended the quarter with 3% lower comp store inventories compared to the third quarter of 2017. This is 23% lower than 2 years ago. We feel good about our mix of regular price and clearance inventories going into the fourth quarter.

E-commerce sales were up nearly 100% through third quarter this year. Sales increases have been greatly influenced by our ship-from-store capability, expanded online assortments, greater brand awareness and site improvements that enhanced the online experience. Some of the e-commerce enhancements we implemented in the third quarter include improved checkout flow, making it easier for the customers to complete their order. We also added express checkout that allows users with the saved credit card to skip directly to payment and order review. We also optimized global shopping with refinements to make it even easier to shop using mobile devices. As a result of these and other improvements, customer visits were up 44% to last year's third quarter. Conversion, average order value and units per transaction all increased as well.

Customers' online shopping preferences are changing at a rapid pace. I'm not just referring to the product the customer desires, but where they shop and what device they use as mobile is increasingly gaining traction. As we look to the near future, we will be testing and reviewing results to enhance the mobile experience to drive online conversion and better reach customers with our marketing strategies.

With respect to marketing, we continue to optimize our advertising spend by increasing TV and digital with less newspaper in our mix compared to last year, and we have begun testing radio. With search of steinmart.com peaking during TV advertising weeks, we know TV increases traffic to our website and build our overall brand awareness. Because of this, we've nearly doubled our TV this fall to achieve 20 continuous weeks to drive brand awareness, store traffic and support our biggest events.

Now I will turn it over to Greg, who will go over our operating results. Greg?

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Gregory W. Kleffner, Stein Mart, Inc. - Advisor [4]

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Thank you, MaryAnne, and good afternoon, everyone. Our financial results for the third quarter of 2018 include items that impact year-over-year comparisons. The largest of these, as explained in our earnings release, is the $10.4 million income tax benefit in 2017. Because of this, as I review our results, I will focus on operating loss, which is before taxes instead of net loss.

Our operating loss for the third quarter was $13.4 million compared to $23.9 million in 2017. Our third quarter 2018 results include fees related to the extension of our credit agreements as well as higher expenses and lower gross profit due to the impact of the 2 hurricanes. These items total approximately $3 million together.

Net loss for the third quarter was $16.6 million or $0.36 per share in 2018 compared to $14.6 million or $0.31 per diluted share in 2017. Net loss for 2017 includes the $10.4 million income tax benefit. This improved last year's third quarter loss by $0.22 per share.

Adjusted EBITDA for the third quarter improved $11.3 million to negative $2.8 million compared to negative $14.1 million in 2017.

Comparable store sales for the third quarter increased 1.4%. E-commerce sales were up 76%, including online orders shipped from our stores. This lifted our comparable sales results by 210 basis points. E-commerce sales represented 5.5% of total sales for the quarter. Our store sales were impacted by lower traffic in the Southeast and mid-Atlantic states from the 2 hurricanes, as Hunt indicated.

Net sales for the third quarter were $279.1 million compared to 284 -- $285.4 million last year, a decrease of 2.2%. The decrease compared to our comp sales increase reflects our closing 7 underperforming stores in 2018.

Higher regular-priced selling compared to last year's higher clearance selling drove our underlying sales data. Average unit retail sales price increased significantly, driven by the higher regular-priced selling. Units per transaction were lower due to the impact of last year's higher clearance selling. And finally, the number of transactions was lower due to the lower clearance selling but was more than offset by our higher online activity.

Gross profit for the third quarter was $69.8 million or 25% of sales compared to $68.3 million or 23.9% of sales in the third quarter of 2017. The increase on our gross profit rate was primarily driven by higher merchandise margin.

Our higher merchandise margin comes from lower markdowns, offset somewhat by higher fulfillment and shipping costs from our online sales growth. Markdowns were lower this year due to lower levels of clearance selling and our improved inventory productivity.

SG&A expenses for the third quarter were $87 million compared to $95.7 million last year. The $8.7 million decrease in SG&A expenses includes cost savings in both the stores and corporate office. Included in the reduction were lower advertising expenses, as last year included cost for the launch of our new campaign. Another $2 million of the reduction is a result of closing 7 underperforming stores this year. Expense decreases were offset by the $1.1 million in advisory fees for the extension of our credit agreements that we finalized in September and $700,000 of hurricane-related expenses that will be recovered from insurance in future quarters. For all of 2018, we expect cost savings initiatives and other decreases to reduce expenses by over $30 million. A total reduction in SG&A expense for the year will be less than this due to the increases in our e-commerce expenses to support the growth of this business as well as other planned increases.

Interest expense for the quarter was $1.9 million higher than last year. Our borrowing levels were higher than they were last year at this time. Also, the blended interest rate on our debt is higher due to the term loan, which was new in March. Third quarter interest expense also included $300,000 in early termination fees for the reduction in our term loan in connection with the extension and amendment of our credit agreements. The reduced term loan will lower our interest expense going forward. Even with this reduction, availability stays the same under the combined credit agreements as the decrease from the term loan is offset by increased availability under our revolving credit agreement.

Third quarter 2018 results include just $171,000 of income tax expense, which represents certain state taxes. This compares to an income tax benefit of $10.4 million in 2017. We will not have a tax benefit in 2018 like we did in 2017. The 2017 Tax Act changed the carryback rules for 2018 and future years, and as a result, we were unable to carry back our 2018 losses. We also continue to have a valuation allowance established against deferred tax assets that was established at the end of 2017. With our loss carryforward and valuation allowance, we expect our effective tax rate to be close to 0 for all of 2018.

Now I'll touch on the results for our first 9 months. Our operating loss for the first 9 months of 2018 was $1.7 million. This was a dramatic $33.6 million improvement from our $35.4 million operating loss in 2017. Net loss for the first 9 months of 2018 was $10.4 million or $0.22 per diluted share compared to $23.9 million or $0.52 per diluted share for the first 9 months of 2017. Consistent with the quarter, our 2018 year-to-date results do not include an income tax benefit. The $14.9 million income tax benefit recorded for the first 9 months of 2017 improved net loss per share by $0.32 last year.

An important measure of our improved financial condition is our adjusted EBITDA. For the first 9 months of 2018, adjusted EBITDA increased by $33.3 million to $25.9 million compared to negative $7.4 million for the first 9 months last year.

Comparable store sales for the first 9 months of 2018 increased 0.4%. E-commerce sales were up 96% in the first 9 months of 2018, including online orders shipped from our stores. This was 5.4% of our total sales and lifted our comparable sales results by 240 basis points.

Net sales for the first 9 months of 2018 were $916.8 million. This is a 1.8% decrease over last year's $933.8 million. Compared with our comparable sales increase, total sales decreased due to closing underperforming stores.

Gross profit for the first 9 months of 2018 was $245.3 million or 26.8% of sales compared to $228.5 million or 24.5% of sales in 2017. The higher rate for the first 9 months primarily reflects our higher gross margin from the lower markdowns year-over-year.

SG&A expenses for the first 9 months of 2018 were $258.6 million compared to $274.6 million in 2017, a reduction of $16 million.

Taking a look at the balance sheet and cash flows. Inventories at the end of the third quarter of 2018 were $305 million compared to $311 million at the end of the third quarter last year. Average inventories per store were down 3% compared to last year's third quarter. E-commerce inventories increased total inventories by 2.4% in support of our growing online sales. Capital expenditures were $7.4 million for the first 9 months of 2018, which compares to $17.2 million in 2017. We continue to expect 2018 capital spending to be approximately $10 million compared to $21 million in 2017, primarily due to fewer new stores and lower IT investments. Total borrowings were $191 million at the end of the third quarter compared to $151 million at the same time last year. Debt levels are higher than last year due to lower vendor and factor credit lines, which began in early 2018.

So safely, all of these tightening happened in the first quarter. While our trade credit levels remain lower than last year at this time, it's important to note that as our earnings and cash flows have improved, we've received increase credit from our vendors and their factors since the first quarter constrictions. Unused availability under our credit facility, plus additional amounts available to borrow under life insurance policies, was $87.7 million at the end of the third quarter.

I'll wrap up with a review of our outlook. We're continuing to project fourth quarter operating income to be higher than last year's $4.1 million operating income. As a reminder, last year's fourth quarter benefited from the 53rd additional week. We expect our gross profit rate this year to be higher than in last year's fourth quarter, with continued improvements in inventory productivity. And SG&A expenses continue to be well controlled, and for the fourth quarter will again be lower than in 2017.

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D. Hunt Hawkins, Stein Mart, Inc. - CEO & Director [5]

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Thank you, Greg. This will conclude today's call. As I look to the remainder of the year, I'm encouraged by the progress we've made on our strategic initiatives. Sales are on a positive trend with strength in our core apparel business. Inventory productivity has been and will continue to drive regular-priced selling and gross profit expansion. And our financial position is stronger from our improving results, well-controlled spending and new longer-term credit agreement.

Of course, we are always available to answer any questions you may have. To reach us, you can call our Director of Investor Relations, Linda Tasseff. Her contact information is included in our earnings release and posted on our website.

So thank you, all, for joining us today, and we look forward to talking with you after our fourth quarter.

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Operator [6]

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This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation.