STEIN MART, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
July 30, 2005
(Unaudited)
(Dollars in tables in thousands, except per share amounts)

1.     Basis of Presentation

The accompanying unaudited consolidated 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 statement 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 consolidated financial statements and footnotes thereto included in the Stein Mart, Inc. annual report on Form 10-K for the year ended January 29, 2005.

The Company has reclassified its auction rate securities of $18.1 million, previously classified in “Cash and cash equivalents,” as “Short-term investments” on the Consolidated Balance Sheet as of July 31, 2004 to be consistent with the classification in the consolidated financial statements for the year ended January 29, 2005. Corresponding adjustments have been made to the prior period’s Consolidated Statement of Cash Flows to reflect purchases and sales of auction rate securities as investing, rather than as a component of cash and cash equivalents. Certain other reclassifications have also been made to the 2004 consolidated financial statements to conform to the 2005 presentation.

2.     Stock-Based Compensation

The Company currently follows the disclosure-only provisions of Statement of Financial Accounting Standards (“SFAS”) No. 123, “Accounting for Stock-Based Compensation”, as amended by SFAS No. 148. 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 Accounting Principles Board (“APB”) Opinion No. 25, “Accounting for Stock Issued to Employees”. The employee compensation cost is included in net income, as reported, throughout the vesting period. Had the compensation cost of the Company’s stock-based plans been recorded 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:

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STEIN MART, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

In December 2004, the FASB issued SFAS No. 123R, “Share-Based Payment”, which revises SFAS No. 123 and supersedes APB Opinion No. 25. This Statement focuses primarily on accounting for transactions in which an entity obtains employee services in share-based payment transactions. This Statement requires an entity to recognize the cost of employee services received in share-based payment transactions and measure the cost of the award at fair value on the grant date. That cost will be recognized over the period during which an employee is required to provide service in exchange for the award. As amended by the Securities Exchange Commission in April 2005, the provisions of SFAS No. 123R are effective no later than the beginning of the first fiscal year that begins after June 15, 2005. Accordingly, the Company will adopt SFAS No. 123R in the first quarter of 2006. The Company is evaluating the requirements of SFAS No. 123R and has not yet determined the effect of adopting SFAS No. 123R, nor has the Company determined whether the adoption will result in amounts that are similar to the current pro forma disclosures under SFAS No. 123.

3.     Discontinued Operations

One store that closed during 2004 resulted in the exit from a market. 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. There are no discontinued operations included in operating results for 2005. During the first half of 2004, discontinued operations generated sales of $0.9 million, loss from operations of $0.2 million, income tax benefit of $0.1 million and loss from discontinued operations, net of tax benefit of $0.1 million. See Note 4 for a description of store closing costs included in loss from discontinued operations for the first half of 2004.

4.     Store Closing Charges and Impairment of Long-Lived Assets

The Company closed six stores during the first half of 2005 incurring $0.9 million of lease termination and severance costs. One more store is planned to close during the fourth quarter of 2005. Lease termination fees of $150,000 were also incurred during the first half of 2005 related to the upcoming store closing.

The Company closed seven stores during 2004, six of which were closed during the first half of 2004. Lease termination and severance costs were $0.7 million during the first half of 2004. All store closing charges are included in selling, general and administrative expenses in the Consolidated Statements of Operations, except for $154,000 in 2004 which is included in loss from discontinued operations for the 26-weeks ended July 31, 2004.

The following tables show the activity in the store closing reserve for the first half of 2005 and 2004:

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The store closing reserve at July 30, 2005, January 29, 2005 and July 31, 2004 includes a current portion (in accrued liabilities) of $2.4 million, $3.0 million and $3.5 million, respectively, and a long-term portion (in other liabilities) of $3.3 million, $4.0 million and $4.0 million, respectively.

The tables below set forth the components of loss from operations for all stores closed during 2005 and 2004. The 2005 tables present the losses from the six stores that closed during the first half of 2005. The 2004 tables present the sum of the losses from the six stores that closed during the first half of 2005 and the seven stores closed during fiscal year 2004.

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5.     Revolving Credit Facility

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 stand-by letters of credit of $7.0 million at July 30, 2005. At July 30, 2005 there were no direct borrowings under the credit facility and no Event of Default existed under the terms of the Agreement.

6.     Stockholders’ Equity and Earnings Per Share

During the first half of 2005, the Company repurchased 296,550 shares of its common stock in the open market at a cost of $6.6 million. As of July 30, 2005, there are 1,697,650 shares which can be repurchased pursuant to the Board of Directors’ current authorization.

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 for each period.

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):

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Stein Mart, Inc.

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 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 259 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 second quarter ended July 30, 2005, comparable store sales increased 3.0% on top of last year’s 10.3% gain. Better-than-expected full-price selling of the seasonal transition merchandise assortment, coupled with an accelerated clearance program, resulted in net income more than doubling to $11.6 million compared to $5.7 million in the year ago quarter. The largest contributor to improved net income was gross profit, which increased to $96.3 million from $83.9 million in the year ago quarter. As a percent of net sales, gross profit increased primarily from higher initial mark-up and decreased markdowns. Selling, general and administrative expenses, as a percent of net sales, decreased 0.3 percentage point due to better expense productivity. On an average stores basis, inventories were approximately flat compared to last year.

During the first half of 2005, comparable store sales increased 3.1% on top of last year’s 11.1% gain. Again, the sales improvement came from more full-price selling and a more productive clearance cycle. Net income increased 65% to $28.4 million from $17.2 million last year. Gross profit increased to $208.0 million compared to $182.7 million in 2004. As a percent of net sales, gross profit increased primarily from higher initial mark-up and decreased markdowns. The Company’s performance has also benefited from closing seven under-performing stores in 2004 and six in the first half of 2005. These stores had operating losses of $1.3 million and $2.9 million in the first half of 2005 and 2004, respectively.

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Stein Mart, Inc.

Our progress each quarter is the direct result of the traction we continue to gain from:

Outlook

During the third quarter of 2005, the Company will continue to focus on the following:

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Stein Mart, Inc.

Store Closings

The Company closed six stores during the first half of 2005 and plans to close one more store during the fourth quarter of 2005. Seven stores were closed during 2004, six of which were closed during the first half of 2004. One store that closed during 2004 resulted in the exit from a market and, in accordance with SFAS No. 144, is classified as discontinued operations as cash flows from this store have been eliminated from ongoing operations.

Sales and operating losses for the six stores closed in 2005 and the seven stores closed during fiscal year 2004 are shown below for the 13 weeks and 26 weeks ended July 30, 2005 and July 31, 2004. Included in the 2004 column are operating results of the seven stores closed in 2004, in addition to six stores closed in 2005.

Operating losses from closed stores include the following store closing and asset impairment (recovery) charges:

Continuing Operations

For the 13 weeks ended July 30, 2005 compared to the 13 weeks ended July 31, 2004

The 5.1% total increase in net sales for the 13 weeks ended July 30, 2005 from the same 2004 period reflects a 3.0% increase in net sales from comparable stores and the opening of four new stores and the closing of six stores during the first half of 2005.

Gross profit for the 13 weeks ended July 30, 2005 was $96.3 million or 28.6 percent of net sales, a 2.4 percentage point increase over gross profit of $83.9 million or 26.2 percent of net sales for the second quarter of 2004. Mark-up improved 1.2 percentage point, markdowns decreased by 1.0 percentage point, shrinkage expense decreased 0.1 percentage point and occupancy costs decreased 0.1 percentage point.

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Stein Mart, Inc.

Selling, general and administrative (“SG&A”) expenses were $81.5 million or 24.2 percent of net sales for the 13 weeks ended July 30, 2005, as compared to $78.4 million or 24.5 percent of net sales for the same 2004 quarter. The 0.3 percentage point decrease in SG&A expenses as a percent of net sales is primarily due to the leveraging of expenses as a result of the 3.0 percent increase in comparable store sales.

The Company earned interest income of $433,000 and $73,000 on its cash and short-term investments during the second quarter of 2005 and 2004, respectively.

For the 26 weeks ended July 30, 2005 compared to the 26 weeks ended July 31, 2004

The 4.9% total increase in net sales for the 26 weeks ended July 30, 2005 from the same 2004 period reflects a 3.1% increase in net sales from comparable stores, the opening of four new stores and the closing of six stores.

Gross profit for the 26 weeks ended July 30, 2005 was $208.0 million or 29.0 percent of net sales a 2.3 percentage point increase over gross profit of $182.7 million or 26.7 percent of net sales for the first half of 2004. Mark-up improved 1.1 percentage point, markdowns decreased 0.9 percentage point, shrinkage expense decreased 0.2 percentage point and occupancy costs decreased 0.1 percentage point.

Selling, general and administrative (“SG&A”) expenses were $170.5 million or 23.8 percent of net sales for the 26 weeks ended July 30, 2005, as compared to $161.9 million or 23.7 percent of net sales for the same 2004 period. The 0.1 percentage point increase in SG&A expenses as a percent of net sales is primarily due to higher store closing charges in the first half of 2005 compared to the first half of 2004. Included in SG&A expenses for the first half of 2005 are store closing charges of $1.2 million, including $0.1 million in lease termination fees related to a future store closing. Store closing charges, net of asset impairment recoveries, were $0.5 million for the first half of 2004.

The Company earned interest income of $827,000 and $73,000 on its cash and short-term investments during the first half of 2005 and 2004, respectively. The Company has not borrowed on its revolving credit agreement since the first quarter of 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. 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. As of July 30, 2005, the Company had $18.9 million in cash and cash equivalents and $76.0 million in short-term investments.

Net cash provided by operating activities was $15.3 million for the first half of 2005 compared to $58.5 million for the first half of 2004. More cash was used by operating activities during the first half of 2005 compared to the first half of 2004 primarily due to a $26.3 million decrease in accounts payable during the first half of 2005 compared to a $17.4 million increase in accounts payable during the first half of 2004. This significant change in accounts payable is due to an increase in the year-end 2004 accounts payable balance compared to the year-end 2003 balance resulting from more current merchandise receipts at the end 2004.

Net cash used in investing activities was $19.4 million for the first half of 2005 compared to $27.8 million for the first half of 2004. Cash provided by operations during the first half of 2004 and 2005 enabled the Company to invest in short-term investments. Capital expenditures, primarily for the acquisition of store fixtures, equipment and leasehold improvements and information system enhancements, were $15.9 million and $9.8 million for the first half of 2005 and 2004, respectively. Capital expenditures were higher in the first half of 2005 compared to the first half of 2004 due primarily to enhancements to the point of sale system and remodeling costs for existing

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Stein Mart, Inc.

stores. Total 2005 capital expenditures, which include ongoing enhancements to the point of sale system and inventory management system developments, are anticipated to be approximately $30 million.

Net cash provided by financing activities was $2.8 million during first half of 2005 compared to net cash used in financing activities of $21.6 million during the first half of 2004. More cash was used in financing activities during the first half of 2004 as a result of the Company eliminating borrowings under its revolving credit agreement. In May 2005, the Company announced an annual cash dividend of $0.25 per share, to be paid quarterly. The first dividend payment of $0.0625 per share was paid in June 2005. In August 2005, the Board of Directors approved the second quarterly dividend of $0.0625 per share which will be paid in September 2005.

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. At July 30, 2005 there were no direct borrowings under the credit facility and no Event of Default existed under terms of the Agreement.

The Company believes that expected net cash provided by operating activities and unused borrowing capacity under the revolving credit agreement will be sufficient to fund anticipated current and long-term capital expenditures, working capital requirements and dividend payments. Should current operating conditions deteriorate, management can borrow on the revolving credit agreement or adjust operating plans, including new store rollout.

At July 30, 2005, the Company had no direct borrowings on its credit facility. Other long-term liabilities on the balance sheet include deferred income taxes, deferred compensation and other long-term liabilities that do not have specific due dates, so are excluded from the preceding table. Other long-term liabilities also include long-term store closing reserves, a component of which is future minimum payments under non-cancelable leases for closed stores, net of estimated sublease income. These future minimum lease payments total $15.3 million and are included in the above table.

Off-Balance Sheet Arrangements

The Company has outstanding standby letters of credit totaling $7.0 million securing certain insurance programs at July 30, 2005. If certain conditions occurred under these arrangements, the Company would be required to satisfy the obligations in cash. Due to the nature of these arrangements and based on historical experience, the Company does not expect to make any payments; therefore, the letters of credit are excluded from the preceding table. There are no other off-balance sheet arrangements that could affect the financial condition of the Company.

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.

The Company is exposed to interest rate risk primarily through borrowings under its revolving credit facility. The Company eliminated borrowings under its credit facility during the first quarter of 2004 and, at July 30, 2005, had no direct borrowings on its credit facility.

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Stein Mart, Inc.

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-15(e) 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 were effective as of July 30, 2005. There have been no changes in the Company’s internal controls over financial reporting identified in connection with this evaluation that occurred during the quarter ended July 30, 2005 that have affected, or are reasonably likely to materially affect, the Company’s internal controls over financial reporting.