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This report 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 herein 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, changes in the level of consumer spending or preferences in apparel, adequate sources of designer and brand-name merchandise at acceptable prices, and the Company's ability to attract and retain qualified employees to support planned growth.
The Company does not undertake to publicly update or revise its forward-looking statements even if experience or future changes make clear that any projected results expressed or implied therein will not be realized.
Results of Operations
The information in the following table is presented as a percentage of net sales for the periods indicated:
Quarter Ended Nine Months Ended
--------------------------- --------------------------
10/2/99 10/3/98 10/2/99 10/3/98
------------- ------------ ------------ ------------
Net sales 100.0% 100.0% 100.0% 100.0%
Cost of merchandise sold 78.8 80.4 75.9 76.2
------------- ------------ ------------ ------------
Gross profit 21.2 19.6 24.1 23.8
Selling, general and
administrative expenses 24.1 24.5 23.5 23.6
Other income, net 1.2 1.3 1.3 1.3
------------- ------------ ------------ ------------
Income (loss) from operations (1.7) (3.6) 1.9 1.5
Interest expense 0.2 0.4 0.3 0.2
------------- ------------ ------------ ------------
Income (loss) before income taxes (1.9) (4.0) 1.6 1.3
Income tax (provision) benefit .7 1.5 (0.6) (0.5)
============= ============ ============ ============
Net income (loss) (1.2%) (2.5%) 1.0% 0.8%
============= ============ ============ ============
Stein Mart, Inc.
Management's Discussion and Analysis of
Financial Condition and Results of Operations
For the three months ended October 2, 1999 compared with the three months ended October 3, 1998:
Seven stores were opened during the third quarter this year, bringing to 203 the number of stores in operation this year compared to 172 stores in operation at the end of the third quarter of 1998.
Net sales for the quarter ended October 2, 1999 were $227.6 million, an 18.5 percent increase over the $192.1 million for the third quarter of 1998. Comparable store net sales increased 4.2 percent from the third quarter of 1998.
Gross profit for the quarter ended October 2, 1999 was $48.4 million compared to $37.6 million for the third quarter of 1998. Gross profit was 21.2 percent of net sales for the third quarter of 1999 and 19.6 percent of net sales for the third quarter of 1998. The 1.6 percent increase in the gross profit percentage resulted primarily from lower markdowns.
Selling, general and administrative expenses were $55.0 million or 24.1 percent of net sales for the quarter ended October 2, 1999 compared to $47.1 million or 24.5 percent of net sales for the same 1998 quarter. The $7.9 million increase in selling, general and administrative expenses is primarily due to the additional stores in operation during the third quarter of 1999 as compared to the number of stores in operation during the third quarter of 1998. The decrease of 0.4 percent of net sales is primarily due to leveraging expenses.
Other income, primarily from in-store leased shoe departments, increased to $2.8 million for the third quarter of 1999 compared to $2.5 million for the third quarter of 1998. The increase resulted from the additional stores operated during the quarter this year.
Interest expense was $629,000 for the third quarter of 1999 and $690,000 for the third quarter of 1998. The decrease in interest expense resulted from slightly higher average borrowings offset by lower interest rates during the third quarter this year compared to last year. The increased borrowings were primarily used to fund operating activities.
Net loss for the third quarter of 1999 was $2.8 million or $0.06 diluted loss per share compared to a net loss of $4.7 million or $0.10 diluted loss per share for the third quarter of 1998.
Stein Mart, Inc.
Management's Discussion and Analysis of
Financial Condition and Results of Operations
For the nine months ended October 2, 1999 compared with the nine months ended October 3, 1998:
Twenty-two stores were opened and one store was closed during the first nine months of 1999 and twenty-one stores were opened during the first nine months of 1998.
Net sales for the first nine months of 1999 were $684.6 million, an 18.9 percent increase over sales of $575.6 million for the first nine months of 1998. Comparable store net sales for the first nine months of 1999 increased by 4.1 percent from the first nine months of 1998.
Gross profit for the first nine months of 1999 was $165.0 million or 24.1 percent of net sales compared to $136.8 million or 23.8 percent of net sales for the same nine month period of 1998. The 0.3 percent increase in the gross profit percent resulted primarily from lower markdowns offset by slight increases in occupancy costs and the effect of recording physical inventory results during the first quarter of 1999.
Selling, general and administrative expenses were $160.8 million or 23.5 percent of net sales for the first nine months of 1999 and $135.5 million or 23.6 percent for the first nine months of 1998. The $25.3 million increase in selling, general and administrative expenses is primarily due to the additional stores in operation during the first nine months of 1999 as compared to the number of stores in operation during the first nine months of 1998.
Other income, primarily from in-store leased shoe departments, increased to $8.5 million for the first nine months of 1999 compared to $7.5 million for the first nine months of 1998. The increase resulted primarily from the additional stores operated during the first nine months this year.
Interest expense was $1.6 million and $1.5 million for the first nine months of 1999 and 1998, respectively. The slight increase in interest expense resulted from higher average borrowings offset by slightly lower interest rates during the first nine months of 1999 compared to last year. The increased borrowings were primarily used to fund operating activities.
Net income for the first nine months of 1999 was $6.9 million or $0.15 diluted earnings per share compared to net income of $4.5 million or $0.10 diluted earnings per share for the first nine months of 1998.
Stein Mart, Inc.
Management's Discussion and Analysis of
Financial Condition and Results of Operations
Liquidity and Capital Resources
Net cash used in operating activities was $45.7 million and $52.9 million for the first nine months of 1999 and 1998, respectively. During the first nine months of 1999 and 1998, cash was used to increase inventories by $55.7 and $74.0 million, respectively, primarily related to new store openings. Cash was also used to reduce liabilities by $4.0 million during the first nine months of 1999. During the same period of 1998, cash was provided by a $21.0 million increase in liabilities. Based on historical cash flow results, operating activities are expected to produce positive cash flow for the year ending January 1, 2000.
During the first nine months of 1999 and 1998, cash flow used in investing activities was $16.2 million and $16.6 million, respectively, primarily for acquisition of fixtures, equipment, and leasehold improvements for new stores and information system enhancements. Total capital expenditures for 1999 are projected to be approximately $24.0 million.
Cash flow from financing activities was $52.4 million for the first nine months of 1999 and $51.5 million for the first nine months of 1998, which reflected in both periods net borrowings under the Company's revolving credit agreement to meet seasonal working capital requirements. This year's first nine months includes $0.3 million of proceeds from the exercise of stock options and related income tax benefits compared to $3.5 million in last year's first nine months. During both 1999 and 1998, the first nine months includes $1.0 million of proceeds from the employee stock purchase plan. During the first nine months of 1999, cash was used to repurchase 1,002,800 shares of the Company's common stock for $6.9 million and in last year's first nine months 1,008,500 shares were repurchased for $11.6 million.
The Company believes that cash flow generated from operating activities, bank borrowings and vendor credit will be sufficient to fund current and long-term capital expenditures and working capital requirements.
Seasonality and Inflation
The Company's business is seasonal in nature with the fourth quarter, which includes the Christmas selling season, historically accounting for the largest percentage of the Company's net sales and operating income. Accordingly, selling, general and administrative expenses are typically higher as a percentage of net sales during the first three quarters of each year.
Inflation affects the costs incurred by the Company in the purchase of merchandise, the leasing of its stores, and in certain components of its selling, general and administrative expenses. The Company has been successful in offsetting the effects of inflation through the control of expenses during the past three years. However, there can be no assurance that inflation will not have a material effect in the future.
Stein Mart, Inc.
Management's Discussion and Analysis of
Financial Condition and Results of Operations
Year 2000 Issue
Beginning in 1997, the Company conducted a comprehensive review of its information technology systems and other equipment and services to determine those which will be impacted by the Year 2000 Issue (i.e., the inability of some technology and equipment to accurately read and process certain dates including all dates in the Year 2000 and thereafter). As a result of this review, the Company developed and commenced a five-phase program to resolve its Year 2000 issues. The program phases include: (i) analysis and inventorying of existing systems, applications, software and hardware to determine if Year 2000 modifications are required; (ii) development of those systems requiring modification; (iii) testing for and validation of Year 2000 compliance, including integration testing; (iv) installation of modified applications and software in a production environment; and (v) final confirmation at an offsite disaster recovery facility where the Year 2000 date can be simulated.
The Company categorized as "mission critical" those systems whose failure could cause cessation of store operations, or could otherwise have a sustained and significant detrimental financial impact on the Company. These systems enable the Company to maintain sales, order and receive merchandise and pay employees and vendors. All mission critical systems have been completed through all phases of the program.
The Company performs system upgrades and purchases new systems, applications, software and hardware in the ordinary course of business. Since 1996, the Company has only purchased software and systems that are Year 2000 compliant or require little modification to remedy Year 2000 issues. As a result, the Company has been able to minimize the financial impact of its Year 2000 costs and such costs have not been material to the Company's financial position, results of operations or cash flows.
Management believes that it has taken a reasonable approach to resolve the Year 2000 issues. However, there can be no assurance that all of the Company's Year 2000 issues or those of key third parties upon whom the Company relies for goods and services will be resolved or satisfactorily addressed before the Year 2000 commences. If the Company or its key vendors fail to address the Year 2000 issues in a timely manner, and there are no alternatives available to the Company, then the Company could experience a material adverse impact on its results of operations or financial position.
Store Closings and Related Costs
The Company is developing a plan to close certain under-performing stores. The Company anticipates closing four stores by the end of 1999 and an additional five to six stores during the year 2000. In the fourth quarter of 1999, the Company expects to record one-time, pre-tax charges of no more than $22 million, resulting from store closings, related inventory writedowns and other closing costs.
Stein Mart, Inc.