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Edited Transcript of SMRT earnings conference call or presentation 13-Mar-19 8:30pm GMT

Q4 2018 Stein Mart Inc Earnings Call

Jacksonville Mar 20, 2019 (Thomson StreetEvents) -- Edited Transcript of Stein Mart Inc earnings conference call or presentation Wednesday, March 13, 2019 at 8:30:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* D. Hunt Hawkins

Stein Mart, Inc. - CEO & Director

* James B. Brown

Stein Mart, Inc. - Executive VP & CFO

* 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 Fourth 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 materially 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 conference over to your host, Hunt Hawkins, CEO of Stein Mart. Thank you. You may begin.

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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 Fourth Quarter Earnings Call. With me today are our President, MaryAnne Morin; our Chief Financial Officer, James Brown; and our Director of Investor Relations, Linda Tasseff. As in the past, I'll begin with some opening comments, and then I'll turn the call over to MaryAnne. After that, James will review our financial results and our outlook.

Our 2018 results reflects several initiatives that were implemented under a leadership team that has been in place for just 2 years. And we have accomplished so much during this time, moving with strategic urgency, and we're not finished. We've touched every aspect of the business. We've evolved our product mix and reset our entire store to reflect our merchandising changes. We improved our inventory management and productivity. We substantially grew our e-commerce business. We launched a new advertising campaign. We increased our credit card program penetration to nearly 20% of sales. And we've improved our financial position, which included extending our credit agreements.

Because of these initiatives, our operating results for 2018 were significantly better than last year, with key financial indicators improving. Higher regular-priced selling and better inventory productivity drove our gross profit 180 basis points and $6.8 million higher for the year on lower sales. SG&A expenses were significantly lower as a result of cost savings initiatives that reduced expenses by more than $30 million. And lastly, adjusted EBITDA, an important measure of our financial condition, increased $32 million.

And our full year results could have even been better if our sales trends through the third quarter had continued into the fourth quarter. While conversion was good in the fourth quarter, holiday sales were below our expectations, with traffic impacted by changes we made to our holiday marketing strategy. And MaryAnne will discuss those marketing changes shortly.

Consistent with the first 9 months of the year, however, our gross profit rate improved during the quarter, and we continued to control our expenses and inventory levels well. We conservatively managed our cash in 2018. And for 2019, we have planned our expenses and capital investments consistent with those lower 2018 levels. And we will continue to be efficient to ensure our dollars are well spent, including to deleverage our balance sheet.

So as we begin 2019, we're excited about our new initiatives, which are focused on sales growth. And although early first quarter sales have been a bit challenging, these initiatives give us the opportunity to improve our annual results over last year. Our goal is to continue to build on our sales and deliver consistent comp sales performance. And we're confident as our sales base grows, so will our earnings as operating expenses leverage on those higher sales.

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. We made significant progress in 2018 on several initiatives: product mix, omni and e-com, inventory productivity and evolving the Stein Mart brand image. I am proud of the progress the teams have made on improving inventory management and expanding gross profit rates. We have been relentless in recalibrating every step in the buying cycle to raise the performance standards. The results are paying off. We are turning faster, markdowns have decreased and our average unit retail has increased by 8%. Inventory levels were down 4% at the end of the year and, on a 2-year basis, have declined by almost 15%.

And with all that said, we know we need to keep pressing because there is more work to be done. We are continually evolving the product mix, so that it is more relevant to our broader base of consumers. The customers' appetite for newness is strong, and we are moving quickly to understand how far we can push it. We are working harder on store profiles and reporting, so that we can maximize the lifestyle specific to that location. And we have adopted an "always be testing" entrepreneurial spirit that encourages the teams to test different approaches to determine what is new and next.

As we look at the categories that had performed best in 2018, our apparel classifications were our strongest, and home was our most difficult. And while home sales were lower, we improved its margin rate by over 500 basis points.

In assessing our product categories, it was apparent we were missing 1 major business, children's. At one point, kids had been a major sales contributor for Stein Mart. I'm happy to say we'll be back in the kid's business in the majority of our stores and e-com in fall of 2019.

E-commerce. E-com is in hyper-growth mode. Steinmart.com sales were up more than 60% this past year and now represent more than 5% of our total sales. This serves as the ultimate marketing machine as consumers check out the website before going into a store. We love the multichannel customer for the simple reason that they spend more.

Our growth has been the function of several initiatives. We opened all our store inventory to fulfill e-com sales. And we continually make site improvements to enhance the shopping experience. We have expanded our product offerings through vendor drop ship, which is a double win since we do not actually own the inventory.

The "find it in store" function allows the customer to see what is available in their local stores for immediate purchase. This has been clicked on over 2 million times. We are implementing more real-time individualization that personalizes each customer's view based on their browsing and shopping history. With over half of all shopping journeys now starting on a mobile device, we are focused on making the mobile experience as frictionless as possible since we expect customers to increasingly choose to shop this way.

All these and other refinements have resulted in increased customer visits, conversion, average order value and satisfaction. And the great thing is, we have so much opportunity ahead.

In 2019, our e-com initiative will increase sales and improve profitability. We are currently piloting endless aisle in our 45 Florida stores, with all stores rolling out in the second quarter. This mobile technology opens our chain-wide inventory to all stores, so associates can locate products that their store has sold out of or does not carry for their customer. The same device also does mobile checkout to expedite line busting during peak selling periods.

Another tool we are implementing is called Smart Fulfillment Logic, which is a technology that will identify the best and most profitable location, either warehouse or store, from which to ship a web order. This will reduce shipping costs and transit time.

In the third quarter, we expect to launch our biggest customer-facing digital enhancement yet, buy online, pick up in store. Based on industry stats, we expect this to be 10% to 15% of our web sales that will shift to in-store pickup. This will be a store traffic driver, reduce shipping costs and expand customer satisfaction. And just as important, these omni capabilities will differentiate Stein Mart from our off-price competitors and make shopping with us more convenient for our customers.

Now moving on to marketing. We have made significant shifts in how we promote our media mix in the last 2 years, with keeping direct mail steady while dramatically increasing digital and broadcast and significantly decreasing newspaper. Customer acquisition, growing and updating the Stein Mart brand awareness is essential as is finding the appropriate balance of promotional marketing that has been showing declining returns.

In the fourth quarter, we made a few changes versus 2017 in how we planned our marketing and promotional positioning. We were less promotional than the previous year, focusing on everyday low pricing instead of high-low pricing and coupons worked for us in Q3, but it did not resonate as well in what turned out to be a highly promotional fourth quarter.

Our marketing spend was planned down to last year. In 2017, we spent over our normal level, and in 2018, we returned to normalized levels. The vehicles we reduced or eliminated to accomplish this impacted us more than projected. This hit us particularly hard in weeks 2 and 3 of December. And finally, our broadcast spend was exclusively national cable, which was also a change to last year. In hindsight, based on how consumers are changing their viewing habits, this was not the optimal way to utilize our dollars.

So in 2019, we have integrated our broadcast media into our digital media agency to bring us best-in-class intelligence to navigate the rapidly changing media landscape. We will be much more targeted and nimble on how we spend our marketing dollars. We will be testing and reacting, much like we do with product, to determine the best mix to acquire customers and keep our current customers.

Customer personalization will get a boost from a new technology tool called Campaign Management, which will enable us to personalize e-mail and direct mail messaging to unlock incremental sales and talk to the customer the way they shop. This includes reminding the customers that they don't complete the purchase of the item in their online cart, knowing the items they browse and telling them when they are on sale and sending them direct mail books that are tailored to their modern or classic preferences.

The last sales-enhancing initiative I would like to mention is our new rewards program. Our current credit card program is a sales driver for us, but it can do more. This fall, we are merging our credit card with our preferred customer program under our new SMart Rewards card. We have simplified the messaging of this to make it easier for our associates to explain the terrific benefits to our customers. We will be reissuing cards to all our existing cardholders. The increased marketing and energy we will invest in this relaunch is expected to have a positive impact.

Now over to James to discuss our operating results.

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James B. Brown, Stein Mart, Inc. - Executive VP & CFO [4]

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Thank you, MaryAnne, and good afternoon, everyone. Our financial results for 2018 and 2017 include items that impact year-over-year comparisons. These items are listed in Note 1 to our earnings release, which reconciles reported to adjusted non-GAAP results. I will review the more impactful of these items with you today.

Operating income for the fourth quarter was $6.6 million compared to $4.1 million for 2017. Fourth quarter adjusted operating income was $5.6 million in 2018 and $6.9 million in 2017.

Net income for the fourth quarter of 2018 was $4.4 million or $0.09 per share compared to a net loss of $400,000 or $0.01 per share in 2017. Fourth quarter adjusted net income was $3.4 million or $0.07 per share in 2018 and $3.5 million or $0.08 per share in 2017.

Comparable sales for the fourth quarter decreased 3.5% on a shifted basis. This compares to sales for the 13-week period ended February 3, 2018, and removes the impact of the 53rd week in fiscal 2017.

E-commerce sales, which are included in comp sales, were up 15%, including online orders shipped from our stores. This lifted our comparable sales results by 100 basis points. E-commerce sales as a whole represented 5.8% of our net sales for the quarter.

As Hunt and Mary indicated, sales were impacted by lower traffic caused by changes made to our holiday marketing strategy. Transaction, which reflects traffic and units per transaction, were lower. Average unit retail sales price increased, driven by higher regular-priced selling.

Net sales for the fourth quarter of 2018 were $340.8 million compared to $384.9 million in 2017. The decrease reflects lower comparable sales, the prior benefit of the extra 53rd week in 2017 and the impact of closing 8 underperforming stores in 2018.

Gross profit for the fourth quarter of 2018 was $92.5 million or 27.1% of sales compared to $102.4 million or 26.6% of sales in the fourth quarter of 2017. The increase in our gross profit rate was primarily due to higher merchandise margin, offset by the deleverage of occupancy cost on a lower sales base. Our higher merchandise margin comes from reduced markdowns and improved inventory productivity.

SG&A expenses for the fourth quarter were $89.5 million compared to $101.5 million in 2017. This represents a $12 million reduction and leverage of 10 basis points on reduced net sales. The decrease in SG&A expense is primarily due to cost savings in both the stores and the corporate office, lower advertising expenses and the impact of closing 8 underperforming stores this year. Advertising expenses were lower due to planned reductions because we were less efficient with our spend in 2017. Fourth quarter 2018 SG&A expenses also benefited from a $3.3 million decrease in accrued compensated absences as a result of a change to our vacation policy.

Interest expense for the fourth quarter was $1.1 million higher than last year. The increase is due to a higher blended interest rate on debt due to the term loan, which was new in March of 2018, and overall higher interest rates.

Fourth quarter 2018 results include a $316,000 income tax benefit compared to income tax expense of $3.2 million in 2017. The fourth quarter of 2017 included $2.2 million additional expense related to the 2017 Tax Act items, including a valuation allowance established against deferred tax assets. The small amount of income tax in the 2018 fourth quarter and year reflects our full year net operating loss position, along with a continuation of the valuation allowance.

Now I'll touch on results for the year. Our operating income for 2018 was $4.9 million compared to an operating loss of $31.2 million in 2017. Adjusted operating income for 2018 was $6.3 million. This was a dramatic improvement of more than $33 million from the adjusted operating loss of $26.9 million in 2017.

Net loss for 2018 was $6 million or $0.13 per share compared to a net loss of $24.3 million or $0.52 per share in 2017. Adjusted net loss was $4.5 million or $0.10 per share in 2018 compared to $19.9 million or $0.43 per share in 2017. The $11.7 million income tax benefit recorded in 2017 improved net loss per share by $0.25 last year.

Another measure of our improved financial condition is our adjusted EBITDA. For 2018, adjusted EBITDA increased by $31.9 million to $39.5 million compared to $7.6 million for 2017.

Comparable store sales for 2018 decreased 1% on a shifted basis. E-commerce sales were up 62%, including online orders shipped from our stores. Online sales lifted our comparable sales results by 130 basis points and represented 5.3% of net sales for the year.

Net sales for 2018 were $1.26 billion compared to $1.32 billion in 2017. Net sales were impacted by comparable sales results, the closing of 8 underperforming stores in fiscal 2018 as well as the benefit of a 53rd week in fiscal 2017.

Gross profit for 2018 was $337.8 million or 26.9% of sales compared to $330.9 million or 25.1% of sales in 2017. The 180 basis point increase in the gross profit rate reflects our higher merchandise margins from lower markdowns. The increase was partially offset by the deleverage of occupancy costs on lower sales.

SG&A expenses for 2018 decreased $28 million or leveraged 80 basis points to $348.1 million compared to $376.1 million in 2017. The lower expenses were primarily due to cost saving initiatives and other decreases that reduced expenses by over $30 million in 2018. Expense reductions were partially offset by higher e-commerce expenses to support the growth of this business. SG&A expenses for 2018 also include the benefit of the $3.3 million decrease in accrued compensated absences recorded in the fourth quarter.

Taking a look at the balance sheet and cash flows. Inventory at the end of 2018 was $255.9 million compared to $270.2 million at the end of 2017. Average store inventories were down 4.3% compared to the end of 2017. Total inventories were even lower due to fewer stores at the end of 2018.

Capital expenditures were $9 million in 2018 and $21.2 million in 2017. The decrease was due to fewer new stores and lower IT investments compared to last year. We are planning 2019 capital expenditures flat to 2018.

Credit terms from our vendors and factors, which were constricted during the first quarter of 2018, increased in the second half of the year but not back to historical levels. This is reflected by the $29.8 million lower accounts payable balance at the end of 2018 compared to the end of 2017. While our trade credit levels remained lower than last year, our earnings and cash flows have improved.

Despite the trade credit tightening, total borrowings decreased to $154 million at the end of 2018 compared to $156 million at the end of 2017. Unused availability under our credit facility, plus additional amounts available to borrow under life insurance policies, was $72.7 million at the end of 2018, which is a $16 million increase over 2017.

I will wrap up with a review of our 2019 outlook. We expect the following factors to influence our business in 2019. We anticipate flat to low single-digit increases in comparable sales, with our e-commerce business continuing to grow. We expect to maintain our improved 2018 gross profit rate from leverage of occupancy cost being offset by higher e-commerce fulfillment cost. SG&A expenses are expected to be about the same as in 2018, as we continue to conservatively manage our cash and availability to well-controlled expenses. Interest expense is estimated to be $1.5 million lower, due mainly to lower debt levels as we grow sales and maintain expense control.

Lastly, we are not planning to open any new stores in 2019. We closed 3 stores in February and plan to close 1 more store during the first half of the year for a total of 4 store closings in 2019.

Now back to you, Hunt, for closing comments.

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

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Thank you, James. This will conclude today's call. Our teams have accomplished so much over the past 2 years. And as I mentioned at the start of our conversation, we will continue to build upon the foundation that we have laid. And this, combined with our new initiatives, will give us the opportunity to improve our 2019 results from last year.

As always, we are 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 first quarter results.

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Operator [6]

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