Quarterly Report
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 July 31, 2004
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
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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 August 27, 2004, the latest practicable date, the Registrant had issued and outstanding an aggregate of 42,490,339 shares of its common stock.
STEIN MART, INC.
TABLE OF CONTENTS
PAGE
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements:
Balance Sheets at July 31, 2004, January 31, 2004
and August 2, 2003 3
Statements of Operations for the 13 Weeks and 26 Weeks Ended
July 31, 2004 and August 2, 2003 4
Statements of Cash Flows for the 26 Weeks Ended
July 31, 2004 and August 2, 2003 5
Notes to Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 10
Item 3. Quantitative and Qualitative Disclosures About Market Risk 14
Item 4. Controls and Procedures 14
PART II - OTHER INFORMATION
Item 4. Submissions of Matters to a Vote of Security Holders 15
Item 6. Exhibits and Reports on Form 8-K 15
SIGNATURES 16
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Stein Mart, Inc.
Balance Sheets
(In thousands)
July 31, January 31, August 2,
2004 2004 2003
-------------- -------------- --------------
ASSETS Unaudited Unaudited
Current assets:
Cash and cash equivalents $ 39,097 $ 11,965 $ 14,516
Trade and other receivables 3,398 4,227 3,441
Inventories 265,001 283,379 299,759
Prepaid taxes 4,492 - 2,728
Prepaid expenses and other current assets 8,139 6,227 8,775
-------------- -------------- --------------
Total current assets 320,127 305,798 329,219
Property and equipment, net 78,228 76,934 84,601
Other assets 9,619 10,297 8,651
-------------- -------------- --------------
Total assets $407,974 $393,029 $422,471
============== ============== ==============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 76,307 $ 59,046 $ 71,779
Accrued liabilities 63,080 60,715 51,633
-------------- -------------- --------------
Total current liabilities 139,387 119,761 123,412
Notes payable to banks - 24,962 57,449
Other liabilities 19,648 20,628 19,314
-------------- -------------- --------------
Total liabilities 159,035 165,351 200,175
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; 42,386,629, 41,993,529 and 41,729,713
shares issued and outstanding, respectively 424 420 417
Paid-in capital 7,461 3,196 1,353
Unearned compensation (486) (309) (384)
Retained earnings 241,540 224,371 220,910
-------------- -------------- --------------
Total stockholders' equity 248,939 227,678 222,296
-------------- -------------- --------------
Total liabilities and stockholders' equity $407,974 $393,029 $422,471
============== ============== ==============
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The accompanying notes are an integral part of these financial statements.
Stein Mart, Inc.
Statements of Operations
(Unaudited)
(In thousands, except per share amounts)
13 Weeks Ended 26 Weeks Ended
--------------------------------- ---------------------------------
July 31, August 2, July 31, August 2,
2004 2003 2004 2003
-------------- -------------- -------------- --------------
Net sales $320,624 $300,954 $684,232 $629,155
Cost of merchandise sold 236,397 230,208 500,960 475,189
-------------- -------------- -------------- --------------
Gross profit 84,227 70,746 183,272 153,966
Selling, general and administrative expenses 78,631 77,537 162,475 161,280
Other income, net 3,533 3,060 7,167 6,684
-------------- -------------- -------------- --------------
Income (loss) from operations 9,129 (3,731) 27,964 (630)
Interest expense - 487 39 892
-------------- -------------- -------------- --------------
Income (loss) from continuing operations before
income taxes 9,129 (4,218) 27,925 (1,522)
Income tax benefit (provision) (3,469) 1,603 (10,611) 578
-------------- -------------- -------------- --------------
Income (loss) from continuing operations 5,660 (2,615) 17,314 (944)
Loss from discontinued operations, net of tax
benefit (6) (158) (145) (316)
-------------- -------------- -------------- --------------
Net income (loss) $ 5,654 $ (2,773) $ 17,169 $ (1,260)
============== ============== ============== ==============
Basic income (loss) per share:
Continuing operations $0.13 $(0.06) $0.41 $(0.02)
Discontinued operations - (0.01) - (0.01)
-------------- -------------- -------------- --------------
Total $0.13 $(0.07) $0.41 $(0.03)
============== ============== ============== ==============
Diluted income (loss) per share:
Continuing operations $0.13 $(0.06) $0.41 $(0.02)
Discontinued operations - (0.01) (0.01) (0.01)
-------------- -------------- -------------- --------------
Total $0.13 $(0.07) $0.40 $(0.03)
============== ============== ============== ==============
Weighted-average shares outstanding - Basic 42,148 41,601 42,074 41,594
============== ============== ============== ==============
Weighted-average shares outstanding - Diluted 42,878 41,601 42,670 41,594
============== ============== ============== ==============
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The accompanying notes are an integral part of these financial statements.
Stein Mart, Inc.
Statements of Cash Flows
(Unaudited)
(In thousands)
26 Weeks Ended
---------------------------------
July 31, August 2,
2004 2003
-------------- --------------
Cash flows from operating activities:
Net income (loss) $17,169 $(1,260)
Adjustments to reconcile net income (loss) to net cash provided by
(used in) operating activities:
Depreciation and amortization 8,817 9,660
Impairment (recovery) of property and other assets (245) 765
Store closing charges 231 1,529
Deferred income taxes 34 700
Restricted stock compensation 49 13
Tax benefit from exercise of stock options 665 -
Changes in assets and liabilities:
Trade and other receivables 829 1,478
Inventories 18,378 (2,529)
Prepaid taxes (4,492) (2,728)
Prepaid expenses and other current assets (1,239) (4,610)
Other assets 678 (1,250)
Accounts payable 17,261 1,307
Accrued liabilities 2,447 (2,697)
Income taxes payable - (5,353)
Other liabilities (2,000) 1,876
-------------- --------------
Net cash provided by (used in) operating activities 58,582 (3,099)
Cash flows used in investing activities:
Capital expenditures (9,866) (8,579)
Cash flows from financing activities:
Net (payments) borrowings under notes payable to banks (24,962) 16,099
Proceeds from exercise of stock options 2,972 -
Proceeds from employee stock purchase plan 406 448
Purchase of common stock - (212)
-------------- --------------
Net cash (used in) provided by financing activities (21,584) 16,335
-------------- --------------
Net increase in cash and cash equivalents 27,132 4,657
Cash and cash equivalents at beginning of year 11,965 9,859
-------------- --------------
Cash and cash equivalents at end of period $39,097 $14,516
============== ==============
Supplemental disclosures of cash flow information:
Interest paid $ 65 $ 920
Income taxes paid 15,146 6,596
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The accompanying notes are an integral part of these financial statements.
STEIN MART, INC.
NOTES TO FINANCIAL STATEMENTS
July 31, 2004
(Unaudited)
(Dollars in tables in thousands, except per share amounts)
1. 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 26-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 January 31, 2004.
Certain reclassifications have been made to the 2003 financial statements to conform to the 2004 presentation.
2. Stock-Based Compensation The Company has adopted the disclosure-only provisions of Statement of Financial Accounting Standards ("SFAS") No. 123, as amended by SFAS No. 148, "Accounting for Stock-Based Compensation". Accordingly, no compensation cost has been recognized for the Company's 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 and earnings per share would have been changed to the following pro forma amounts:
13 Weeks Ended 26 Weeks Ended
--------------------------------- ---------------------------------
July 31, August 2, July 31, August 2,
2004 2003 2004 2003
-------------- -------------- -------------- --------------
Net income (loss) - as reported $5,654 $(2,773) $17,169 $(1,260)
Add: Restricted stock-based employee
compensation expense included in reported
net income (loss), net of related tax effects 24 9 30 9
Deduct: Total stock-based employee
compensation expense determined under the
fair value based method for all awards, net of
related tax effects (293) (373) (569) (742)
-------------- -------------- -------------- --------------
Net income (loss) - pro forma $5,385 $(3,137) $16,630 $(1,993)
============== ============== ============== ==============
Basic earnings (loss) per share - as reported $0.13 $(0.07) $0.41 $(0.03)
Diluted earnings (loss) per share - as reported $0.13 $(0.07) $0.40 $(0.03)
Basic earnings (loss) per share - pro forma $0.13 $(0.08) $0.40 $(0.05)
Diluted earnings (loss) per share - pro forma $0.13 $(0.08) $0.39 $(0.05)
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3. Discontinued Operations
Two of the stores closed during 2003 and one store closed during 2004 (see Note
4) are reported as discontinued operations. SFAS No. 144 requires closed stores
to be classified as discontinued operations when the operations and cash flows
of the stores have been eliminated from ongoing operations. To determine if cash
flows have been eliminated from ongoing operations, management evaluated a
number of factors, including: proximity to a
STEIN MART, INC.
NOTES TO FINANCIAL STATEMENTS
remaining store, physical location within a metropolitan or non-metropolitan area and transferability of sales between open and closed locations. Based on these criteria, management determined that these three closed stores should be accounted for as discontinued operations. The prior year's operating activities for these stores have also been reclassified to "Loss from discontinued operations, net of tax benefit" in the accompanying Statements of Operations.
Discontinued operations generated no sales during the second quarter of 2004, sales of $2.6 million during the second quarter of 2003 and sales of $0.9 million and $5.0 million during the first half of 2004 and 2003, respectively. Loss from discontinued operations, net of tax benefit includes the following components:
13 Weeks Ended 26 Weeks Ended
--------------------------------- ---------------------------------
July 31, Aug. 2, July 31, Aug. 2,
2004 2003 2004 2003
-------------- -------------- -------------- --------------
Loss from operations $(10) $(255) $(234) $(510)
Income tax benefit 4 97 89 194
-------------- -------------- -------------- --------------
Loss from discontinued operations,
net of tax benefit $(6) $(158) $(145) $(316)
============== ============== ============== ==============
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See Note 4 for a description of store closing costs and asset impairment charges included in loss from discontinued operations for the first half of 2004 and 2003.
4. Store Closing Charges and Impairment of Long-Lived Assets The Company closed six under-performing stores during the first half of 2004, incurring minimal lease termination and severance costs. One more store is planned to close during the third quarter and one other is planned for relocation within the same metropolitan area during the third quarter. During the second quarter of 2004, the Company recovered $0.2 million of asset impairment charges recorded during 2003, as the actual loss incurred to dispose of certain assets was lower than previously estimated. The Company will incur minimal lease termination and severance charges during the remainder of 2004 to complete the store closing and relocation.
The Company closed 16 under-performing stores during 2003, four of which were closed during the first half of 2003. During the first half of 2003, the Company incurred a pre-tax asset impairment charge of $0.8 million to reduce the carrying value of property and equipment of these stores to their respective estimated fair value. All store closing and asset impairment charges are included in selling, general and administrative expenses in the Statements of Operations, except for $154,000 in 2004 and $177,000 in 2003 which are included in loss from discontinued operations, net of tax benefit for the 26-week periods.
The following tables show the activity in the store closing reserve for the first half of 2004 and 2003:
Jan. 31, July 31,
2004 Charges Payments 2004
-------------- -------------- -------------- --------------
Continuing operations:
Lease termination costs $8,780 $101 $1,437 $7,444
Severance 131 473 553 51
Other 105 - 105 -
-------------- -------------- -------------- --------------
9,016 574 2,095 7,495
-------------- -------------- -------------- --------------
Discontinued operations:
Lease termination costs 159 77 236 -
Severance 19 77 96 -
-------------- -------------- -------------- --------------
178 154 332 -
-------------- -------------- -------------- --------------
Total store closing reserve $9,194 $728 $2,427 $7,495
============== ============== ============== ==============
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STEIN MART, INC.
NOTES TO FINANCIAL STATEMENTS
Feb. 1, Aug. 2,
2003 Charges Payments 2003
-------------- -------------- -------------- --------------
Continuing operations:
Lease termination costs $4,982 $1,000 $714 $5,268
Severance - 394 - 394
-------------- -------------- -------------- --------------
4,982 1,394 714 5,662
Discontinued operations:
Severance - 135 - 135
-------------- -------------- -------------- --------------
Total store closing reserve $4,982 $1,529 $714 $5,797
============== ============== ============== ==============
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The store closing reserve at July 31, 2004, January 31, 2004 and August 2, 2003 includes a current portion (in accrued liabilities) of $3.5 million, $2.8 million and $1.9 million, respectively, and a long-term portion (in other liabilities) of $4.0 million, $6.4 million and $3.9 million, respectively.
The tables below set forth the components of loss from operations for all stores closed during 2004 and 2003. The 2004 tables present the losses from the six stores that closed during the first half of 2004. The 2003 tables present the sum of the losses from the six stores that closed during the first half of 2004 and the 16 stores closed during fiscal year 2003.
Operating Results Of Closed Stores Included In:
----------------------------------------------------
Continuing Discontinued Total Closed
13 weeks ended July 31, 2004: Operations Operations Stores
----------------------------- -------------- -------------- --------------
Sales $ 657 $ - $ 657
Cost of sales 720 4 724
-------------- -------------- --------------
Gross profit (63) (4) (67)
Selling, general and administrative expenses 338 6 344
Other income, net 11 - 11
-------------- -------------- --------------
Loss from operations $ (390) $ (10) $ (400)
============== ============== ==============
# of stores closed in 2004 5 1 6
============== ============== ==============
Continuing Discontinued Total Closed
13 weeks ended August 2, 2003: Operations Operations Stores
------------------------------ -------------- -------------- --------------
Sales $15,807 $2,594 $18,401
Cost of sales 17,136 2,050 19,186
-------------- -------------- --------------
Gross profit (1,329) 544 (785)
Selling, general and administrative expenses 5,589 818 6,407
Other income, net 105 19 124
-------------- -------------- --------------
Loss from operations $(6,813) $ (255) $(7,068)
============== ============== ==============
# of stores closed in 2004 and 2003 19 3 22
============== ============== ==============
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STEIN MART, INC.
NOTES TO FINANCIAL STATEMENTS
Operating Results Of Closed Stores Included In:
----------------------------------------------------
Continuing Discontinued Total Closed
26 weeks ended July 31, 2004: Operations Operations Stores
----------------------------- -------------- -------------- --------------
Sales $ 4,827 $ 942 $ 5,769
Cost of sales 4,802 752 5,554
-------------- -------------- --------------
Gross profit 25 190 215
Selling, general and administrative expenses 1,821 424 2,245
Other income, net 32 - 32
-------------- -------------- --------------
Loss from operations $ (1,764) $ (234) $ (1,998)
============== ============== ==============
# of stores closed in 2004 5 1 6
============== ============== ==============
Continuing Discontinued Total Closed
26 weeks ended August 2, 2003: Operations Operations Stores
------------------------------ -------------- -------------- --------------
Sales $ 30,005 $4,950 $ 34,955
Cost of sales 30,261 3,930 34,191
-------------- -------------- --------------
Gross profit (256) 1,020 764
Selling, general and administrative expenses 10,735 1,578 12,313
Other income, net 295 48 343
-------------- -------------- --------------
Loss from operations $(10,696) $ (510) $(11,206)
============== ============== ==============
# of stores closed in 2004 and 2003 19 3 22
============== ============== ==============
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5. Notes Payable to Banks The Company has a three-year $150 million senior revolving credit agreement (the "Agreement") with a group of lenders, with an initial term ending July 2006. 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. The Company had outstanding commercial and stand-by letters of credit of $0.9 million and $5.3 million, respectively, at July 31, 2004. There were no direct borrowings under the Agreement at July 31, 2004.
6. Stockholders' Equity and Earnings Per Share During the first half of 2003, the Company repurchased 50,000 shares of its common stock at a cost of $212,000. No shares have been repurchased in 2004.
Basic earnings per share is computed by dividing net income by the weighted-average number of common shares outstanding for the period. Diluted earnings per share is computed by dividing net income by the weighted-average number of common shares outstanding plus common stock equivalents related to stock options and restricted stock for each period. Common stock equivalents are not included in the diluted loss per share calculations for the 13 weeks and the 26 weeks ended August 2, 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 26 Weeks Ended
--------------------------------- ---------------------------------
July 31, August 2, July 31, August 2,
2004 2003 2004 2003
-------------- -------------- -------------- --------------
Weighted-average number of common shares 42,148 41,601 42,074 41,594
Common stock equivalents 730 - 596 -
-------------- -------------- -------------- --------------
Weighted-average number of common shares
plus common stock equivalents 42,878 41,601 42,670 41,594
============== ============== ============== ==============
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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, changing preferences in apparel, changes in consumer spending due to current events and/or general economic conditions, the effectiveness of new advertising, marketing and promotional strategies, adequate sources of 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.
Overview
Stein Mart's 257 stores offer the fashion merchandise, service and presentation
of a better department or specialty store, at prices competitive with off-price
retail chains. Currently with locations from California to New York, Stein
Mart's focused assortment of merchandise features moderate to designer
brand-name apparel for women, men and young children, as well as accessories,
gifts, linens and shoes. Management believes that Stein Mart differentiates
itself from typical off-price retailers by offering: (i) current-season
merchandise carried by better department and specialty stores at value prices,
(ii) a stronger merchandising "statement," with more depth of color and size,
and (iii) merchandise presentation more comparable to other upscale retailers.
The Company faces competition for customers and for access to quality merchandise from better department stores, fine specialty stores and, to a lesser degree, from off-price retail chains. Many of these competitors are units of large national or regional chains that have substantially greater resources than the Company. The retail apparel industry is highly fragmented and competitive, and the off-price retail business may become even more competitive in the future.
During the current quarter, the Company continued to experience strong customer
response to the full-priced spring fashion assortment, as well as greater
clearance efficiency, as markdowns were taken on seasonal inventory. Second
quarter 2004 earnings improvement was attributable to:
o A 10.3% increase in comparable store sales, leveraging of selling,
general and administrative expenses as a result of higher sales
volume, and reduced store closing and impairment charges
o An improvement in gross profit due to higher initial mark-up, a
reduced markdown rate and better occupancy leverage
o The closure of 16 under-performing stores during 2003 and six stores
during the first half of 2004. Those stores had operating losses of
$0.4 million and $7.1 million in the second quarter of 2004 and 2003,
respectively. For the first six months, those stores had operating
losses of $2.0 million this year compared to $11.2 million last year.
Outlook
The Company will continue its seasonal clearance activity into early September,
as well as the corresponding marketing program. New fall fashion is being
supported with fashion advertising circulars, direct mail and, in mid-September,
a new series of national TV commercials. Management's plan is to continue
spending advertising dollars to support branding and seasonal fashion/lifestyle
statements, rather than promotional activity.
Stein Mart, Inc.
Management expects comparable store sales for the third quarter to increase 6-8 percent. Because of the emphasis on clearance activity in August and early September, comparable store trends are expected to be more modest at the beginning of the quarter and improve as fall fashion selling becomes more prevalent in the latter weeks of the period. This trend traditionally results in a third quarter loss.
Stores
The number of stores open as of July 31, 2004 and August 2, 2003 were 257 and
270, respectively.
13 Weeks Ended 26 Weeks Ended
--------------------------------- ---------------------------------
July 31, August 2, July 31, August 2,
2004 2003 2004 2003
-------------- -------------- -------------- --------------
Stores at beginning of period 258 270 261 265
Stores opened during the period 1 2 2 9
Stores closed during the period (2) (2) (6) (4)
-------------- -------------- -------------- --------------
Stores at the end of period 257 270 257 270
============== ============== ============== ==============
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For the remainder of the year, the Company expects to open seven new stores, including one relocation, and close one store.
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 (numbers may not add
due to rounding):
13 Weeks Ended 26 Weeks Ended
--------------------------------- ---------------------------------
July 31, August 2, July 31, August 2,
2004 2003 2004 2003
-------------- -------------- -------------- --------------
Net sales 100.0% 100.0% 100.0% 100.0%
Cost of merchandise sold 73.7 76.5 73.2 75.5
-------------- -------------- -------------- --------------
Gross profit 26.3 23.5 26.8 24.5
Selling, general and administrative
expenses 24.5 25.8 23.7 25.6
Other income, net 1.1 1.0 1.0 1.1
-------------- -------------- -------------- --------------
Income (loss) from operations 2.8 (1.2) 4.1 (0.1)
Interest expense - 0.2 - 0.1
-------------- -------------- -------------- --------------
Income (loss) from continuing operations
before income taxes 2.8 (1.4) 4.1 (0.2)
Income tax benefit (provision) (1.1) 0.5 (1.6) 0.1
-------------- -------------- -------------- --------------
Income (loss) from continuing operations 1.8 (0.9) 2.5 (0.2)
Loss from discontinued operations, net
of tax benefit - (0.1) - (0.1)
-------------- -------------- -------------- --------------
Net income (loss) 1.8% (0.9)% 2.5% (0.2)%
============== ============== ============== ==============
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Store Closings
The Company closed six stores during 2004 and plans to close one store and
relocate one store during the remainder of 2004. Sixteen under-performing stores
were closed during 2003, four of which were closed during the
Stein Mart, Inc.
first half of 2003. The 2004 store closings will be at natural lease term expirations, so there will be no significant lease termination costs in 2004.
Two of the 16 stores closed during 2003 and one of the six stores closed during the first half of 2004 are classified as discontinued operations in accordance with SFAS No. 144, as cash flows of these stores have been eliminated from ongoing operations. Sales and operating losses for the six stores closed in 2004 and the 16 stores closed during fiscal year 2003 are shown below for the 13 weeks and 26 weeks ended July 31, 2004 and August 2, 2003. Included in the 2003 column are operating results of the 16 stores closed in 2003, in addition to six stores closed in 2004.
13 Weeks Ended 26 Weeks Ended
--------------------------------- ---------------------------------
July 31, August 2, July 31, August 2,
2004 2003 2004 2003
-------------- -------------- -------------- --------------
Sales from closed stores:
Included in continuing operations $ 657 $ 15,807 $ 4,827 $ 30,005
Included in discontinued operations - 2,594 942 4,950
-------------- -------------- -------------- --------------
$ 657 $ 18,401 $ 5,769 $ 34,955
============== ============== ============== ==============
Operating losses from closed stores:
Included in continuing operations $(390) $ (6,813) $(1,764) $(10,696)
Included in discontinued operations (10) (255) (234) (510)
-------------- -------------- -------------- --------------
$(400) $ (7,068) $(1,998) $(11,206)
============== ============== ============== ==============
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Operating losses from closed stores include the following store closing and asset impairment expenses:
13 Weeks Ended 26 Weeks Ended
--------------------------------- ---------------------------------
July 31, August 2, July 31, August 2,
Continuing operations: 2004 2003 2004 2003
-------------- -------------- -------------- --------------
Lease termination costs $ 101 $ 1,000 $ 101 $ 1,000
Asset impairment (recovery) charges (245) 18 (245) 741
Severance 130 394 473 394
Other 82 539 141 539
-------------- -------------- -------------- --------------
68 1,951 470 2,674
-------------- -------------- -------------- --------------
Discontinued operations:
Lease termination costs - 77 -
Asset impairment charges - - - 42
Severance - 135 77 135
-------------- -------------- -------------- --------------
- 135 154 177
-------------- -------------- -------------- --------------
Total $ 68 $ 2,086 $ 624 $ 2,851
============== ============== ============== ==============
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Continuing Operations
For the 13 weeks ended July 31, 2004 compared to the 13 weeks ended August 2,
2003
The 6.5% total sales increase for the 13 weeks ended July 31, 2004 from the same
2003 period reflects a 10.3% increase in sales from comparable stores and a net
decrease in the total number of stores from 270 at the end of the second quarter
2003 to 257 at the end of the second quarter 2004.
Gross profit for the 13 weeks ended July 31, 2004 was $84.2 million or 26.3 percent of net sales, a 2.8 percentage point increase over gross profit of $70.7 million or 23.5 percent of net sales for the second quarter of 2003. Mark-up improved 1.0 percentage point, markdowns decreased by 1.1 percentage points and occupancy decreased 0.6 percentage point as a result of higher per store sales productivity in the second quarter this year compared to last year.
Stein Mart, Inc.
Selling, general and administrative expenses ("SG&A") were $78.6 million or 24.5 percent of net sales for the 13 weeks ended July 31, 2004, as compared to $77.5 million or 25.8 percent of net sales for the same 2003 quarter. The 1.3 percentage point decrease in SG&A expenses as a percent of sales is due to the leveraging of expenses as a result of the 10.3 percent increase in comparable store sales and lower store closing costs this quarter. Included in SG&A expenses for the second quarter of 2004 and 2003 are store closing and asset impairment charges of $0.1 million and $2.0 million, respectively.
Income from operations for the 13 weeks ended July 31, 2004 was $9.1 million, as compared to a loss from operations of $(3.7) million for the same 2003 quarter. Approximately one-half of this earnings improvement is the result of eliminating the effect of operating losses of under-performing stores that were closed during 2003 and the first quarter of 2004.
Interest expense was $487,000 for the second quarter of 2003. As a result of increased sales, decreased inventories and ongoing expense control, there were no borrowings, and therefore no interest expense, during the second quarter of 2004.
For the 26 weeks ended July 31, 2004 compared to the 26 weeks ended August 2,
2003
The 8.8% total sales increase for the 26 weeks ended July 31, 2004 from the same
2003 period reflects an 11.1% increase in sales from comparable stores and a net
decrease in the total number of stores from 270 at August 2, 2003 to 257 at July
31, 2004.
Gross profit for the 26 weeks ended July 31, 2004 was $183.3 million or 26.8 percent of net sales a 2.3 percentage point increase over gross profit of $154.0 million or 24.5 percent of net sales for the first half of 2003. The increase was due to a 1.6 percentage point increase in mark-up and a 0.7 percentage point decrease in occupancy as a result of higher per store sales productivity in the first half this year compared to last year.
Selling, general and administrative expenses ("SG&A") were $162.5 million or 23.7 percent of net sales for the 26 weeks ended July 31, 2004, as compared to $161.3 million or 25.6 percent of net sales for the same 2003 period. The 1.9 percentage point decrease in SG&A expenses as a percent of sales is primarily due to the leveraging of expenses as a result of the 11.1 percent increase in comparable store sales. Included in SG&A expenses for the first half of 2004 and 2003 are store closing and asset impairment charges of $0.5 million and $2.7 million, respectively.
Income from operations for the first half of 2004 was $28.0 million compared to a loss from operations of $(0.6) million for the first half of 2003. Approximately one-third of this earnings improvement is the result of eliminating the effect of operating losses of under-performing stores that were closed during 2003 and 2004.
Interest expense was $39,000 and $892,000 for the first half of 2004 and 2003, respectively. The decrease resulted from lower average borrowings, as well as slightly lower interest rates during this year compared to last year. There were no borrowings at July 31, 2004.
Liquidity and Capital Resources
The Company's primary source of liquidity is the sale of its merchandise
inventories. Capital requirements and working capital needs are funded through a
combination of internally generated funds, a revolving credit facility and
credit terms from vendors. As of July 31, 2004, the Company had $39.1 million in
cash and cash equivalents. Working capital is needed to support store
inventories and capital investments for new store openings and to maintain
existing stores. Historically, the Company's working capital needs are lowest in
the first quarter and highest in either the third or fourth quarter in
anticipation of the fourth quarter peak selling season.
Net cash provided by operating activities was $58.6 million for the first half of 2004 compared to net cash used in operating activities of $3.1 million for the first half of 2003. The increase in cash for 2004 is primarily attributable to an increase in net income including non-cash items, a decrease in inventories and an increase in accounts payable
Stein Mart, Inc.
from the end of the year, offset by an increase in income taxes paid. On an average store basis, inventories were reduced 7.1% from the prior year due to increased sales resulting from the Company's continued focus on marketing, sales promotion and clearance strategies.
Capital expenditures were higher for the first half of 2004 compared to the first half of 2003 primarily due to enhancements of the point of sale and merchandising systems. New store capital expenditures are lower this year compared to last year due to fewer store openings. For the remainder of 2004, the Company expects to open seven new stores, including one relocation. Total capital expenditures for 2004 are anticipated to be approximately $15 million.
Cash used in financing activities was $21.6 million during first half of 2004 compared to $16.3 million of cash provided by financing activities during the first half of 2003. Cash provided by operating activities of $58.6 million enabled the Company to eliminate borrowings under the revolving credit agreement at the end of the first quarter.
The Company has a $150 million senior revolving credit agreement with a group of lenders, with an initial term ending July 2006. Borrowings are based on and secured by eligible inventory and certain other assets. Due to the seasonal nature of the Company's business, the Company's bank borrowings fluctuate during the year, typically reaching their highest levels during the third or fourth quarter, as the Company builds its inventory for the Christmas selling season. At July 31, 2004 there were no outstanding borrowings under the credit facility and no Event of Default existed under the terms of the Agreement.
The Company believes that expected net cash provided by operating activities and bank borrowings will be sufficient to fund anticipated current and long-term capital expenditures and working capital requirements. Should current operating conditions deteriorate, management can adjust operating plans, including new store rollout. In addition, there is unused borrowing capacity under the revolving credit agreement.
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
The Company is exposed to interest rate risk primarily through borrowings under
its revolving credit facility. At July 31, 2004, the Company had no outstanding
borrowings. The facility permits debt commitments up to $150.0 million and bears
interest at spreads over the prime rate and LIBOR. Management believes that its
exposure to market risk associated with its borrowings is not material.
Item 4. Controls and Procedures
The Company's management, including the Chief Executive Officer and Chief
Financial Officer, have evaluated the effectiveness of the Company's disclosure
controls and procedures, as defined in Exchange Act Rules 13a-14 and 15d-14 of
the Securities Exchange Act of 1934, as amended, (the "Exchange Act"). Based
upon this evaluation, the Chief Executive Officer and Chief Financial Officer
have 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 these internal
controls subsequent to the date of evaluation.
Stein Mart, Inc.
PART II - OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders
The Annual Meeting of Stockholders of Stein Mart, Inc. was held on June 8, 2004.
At the meeting all of the Company's directors were elected to serve for one-year
terms. The vote for each nominee for director was as follows:
Votes
Name of Director Votes For Withheld
-------------------------- -------------- -------------
Alvin R. Carpenter 38,765,732 1,442,661
Linda McFarland Farthing 31,915,297 8,293,096
Michael D. Fisher 38,105,925 2,102,468
Mitchell W. Legler 37,862,563 2,345,830
Michael D. Rose 37,923,163 2,285,230
Richard L. Sisisky 37,949,391 2,259,002
Jay Stein 38,071,654 2,136,739
Martin E. Stein, Jr. 38,037,981 2,170,412
J. Wayne Weaver 38,779,986 1,428,407
John H. Williams, Jr. 38,071,767 2,136,626
James H. Winston 31,856,646 8,351,747
Item 6. Exhibits and Reports on Form 8-K
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(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:
A press release dated August 5, 2004 was filed in a Form 8-K on August 11,
2004 that included earnings guidance for the quarterly period ended July
31, 2004.
A press release dated August 19, 2004 was filed in a Form 8-K on August 20, 2004 to report second quarter and first half of 2004 financial results.
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: September 8, 2004 By: /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
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Exhibit 31.1
Certification of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
I, Michael D. Fisher, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Stein Mart, Inc.;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of Stein Mart, Inc. as of, and for, the periods presented in this report;
4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:
a. Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
b. Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
c. Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting.
5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent function):
a. All significant deficiencies and material weaknesses in the design or operation of internal controls over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and
b. Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls over financial reporting.
Date: September 8, 2004 /s/ Michael D. Fisher
-------------------------------------
Michael D. Fisher
President and Chief Executive Officer
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Exhibit 31.2
Certification of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
I, James G. Delfs, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Stein Mart, Inc.;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of Stein Mart, Inc. as of, and for, the periods presented in this report;
4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:
a. Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
b. Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
c. Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting.
5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent function):
a. All significant deficiencies and material weaknesses in the design or operation of internal controls over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and
b. Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls over financial reporting.
Date: September 8, 2004 /s/ James G. Delfs
-------------------------------------
James G. Delfs
Chief Financial Officer
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Exhibit 32.1
Written Statement of the Chief Executive Officer Pursuant to 18 U.S.C.
Section 1350
Solely for the purposes of complying with 18 U.S.C. Section 1350, I, the undersigned President and Chief Executive Officer of Stein Mart, Inc. (the "Company"), hereby certify that:
1. the Quarterly Report on Form 10-Q of the Company for the quarter ended
July 31, 2004 (the "Report") fully complies with the requirements of
Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
2. the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.
Date: September 8, 2004 /s/ Michael D. Fisher
-------------------------------------
Michael D. Fisher
President and Chief Executive Officer
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Exhibit 32.2
Written Statement of the Chief Financial Officer Pursuant to 18 U.S.C.
Section 1350
Solely for the purposes of complying with 18 U.S.C. Section 1350, I, the undersigned Chief Financial Officer of Stein Mart, Inc. (the "Company"), hereby certify that:
1. the Quarterly Report on Form 10-Q of the Company for the quarter ended
July 31, 2004 (the "Report") fully complies with the requirements of
Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
2. the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.
Date: September 8, 2004 /s/ James G. Delfs
-------------------------------------
James G. Delfs
Chief Financial Officer
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End of Filing
