Stein Mart Bankruptcy Risk Increases in 2018 Amid Debt Burden of Over $170M

Stein Mart Bankruptcy Risk Increases
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Stein Mart, Inc. (NASDAQ:SMRT), a discount clothing store chain founded in 1902, may file for bankruptcy in 2018. The company is in ninth place in Time magazine’s list of 15 retailers most likely to file for bankruptcy in 2018. Is Stein Mart going out of business? No (at least not yet).

Like many department stores, Stein Mart could file for bankruptcy protection because of a decline in its sales and revenue. Between $3.0 million and $5.0 million of the company’s annual net income is actually from Stein Mart’ private label credit card program, not from clothing sales.

The company recently embarked on a cost-cutting project. In October 2017, the company laid off 10% of the employees at its corporate offices and suspended its quarterly dividends to save costs.

Based in Jacksonville, Florida, Stein Mart has 293 locations and 11,000 employees in 31 U.S. states. It also has a debt burden of $170.0 million. It has been predicted that Stein Mart’s increasing debt may force it to file for Chapter 11 protection shortly. Its stock price has fallen from $28.00 in recent years to less than $1.00 now.

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Retail industry challenges like the “Amazon effect,” online shopping, and competition from other retail chains is making it hard for companies like Stein Mart to survive.

Stein Mart Reported 3rd Consecutive Quarterly Sales Decline in 2017

Stein Mart reported quarterly losses in 2017, due to a decline in sales. In the third quarter of 2017, comparable store sales were down by 6.9% and flat in October. Diluted losses per share were $0.31, compared to $0.24 in 2016.

Total losses for the third quarter of 2017 were $14.6 million, compared to a net loss of $11.0 million in 2016. From January to September 2017, the net loss was $23.9 million, compared to net income of $5.3 million for the same period of 2016.

On the plus side, average store inventories were down by 20%, and borrowings were $29.0 million lower than in 2016’s third quarter.

Details of the company’s sales, gross profit, expenses, balance sheet, and cash flows are as follows:

Sales

For 2017 Q3, total sales declined 4.7% to $285.4 million, while comparable store sales decreased by 6.9%. Closures or reduced hours because of hurricanes Harvey and Irma directly impacted about one-third of the chain. Total sales declined by 4.2% to $933.8 million in the first nine months of 2017, while comparable store sales were down by 6.5% in that period.

Gross profit

For 2017 Q3, the gross profit was $68.3 million, or 23.9% of sales, compared to $72.7 million, or 24.3% of sales, in 2016. The gross profit rate was lower because there were higher occupancy costs while there were lower sales volumes. The merchandise margin rate was high because there were fewer price markdowns and there was improved productivity.

From January to September 2017, the gross profit was $228.5 million, or 24.5% of sales, compared to $271.0 million, or 27.8% of sales, in 2016. These figures are due to more markdowns in the first half of 2017 and, to a lesser extent, due to higher occupancy costs while there were lower sales.

Expenses: Selling, General, and Administrative

For 2017 Q3, selling, general and administrative (SG&A) expenses were $92.2 million, compared to $89.0 million in 2016. Some $5.5 million of expenses included included higher new store expenses, higher advertising expenses, consulting and severance costs related to the company’s cost-reduction initiative, and hurricane-related expenses. From January to September 2017, SG&A expenses were $263.9 million, compared to $259.3 million in the same period of 2016.

Balance Sheet

At the end of the third quarter of 2017, inventories were $311.0 million, compared to $384.0 million during the same period in 2016. Average inventories per store were down 20%, compared to the same period in 2016. At the end of the third quarter of 2017, borrowings under credit facilities were $151.0 million, compared to $180.0 million at the end of the third quarter of 2016. Unused availability was $95.0 million at the end of the third quarter.

Cash Flows

From January to September 2017, cash flow was $52.8 million, compared to $57.2 million in the same period of 2016. From January to September 2017, capital expenditures totaled $17.2 million, compared to $35.0 million in the same period of 2016.

Here are Stein Mart’s recent sales revenue figures, which show that the company’s sales declined in 2017.

2017 Sales 2016 Sales
October 31 $285.4 Million $299.5 Million
July 31 $311.0 Million $319.8 Million
April 30 $337.3 Million $355.7 Million
January 31 $385.5 Million $394.1 Million

Stein Mart’s Cost-cutting Measures Included Reduction of Corporate Office Staff

In October 2017, Stein Mart announced that it would eliminate approximately 10% of its corporate office staff as a cost-cutting measure. Other cost-cutting measures have included reducing inventories by 15%, cutting capital expenditures by $22.0 million compared to the prior year, and suspending the quarterly dividend ($14.0 million in annual savings).

When all is accounted for, the company is expected to save roughly $10.0 million (pre-tax) in 2018.

CEO Hunt Hawkins said, “While we believe our sales-driving strategies are now taking hold, we are still in a very challenging retail environment. With this in mind, we are taking the necessary steps to better position our company for long-term success.”

Retail store companies like Stein Mart filing for bankruptcy are a part of an ongoing trend these days. Other retail options, like online shopping—where there are plenty of choices, sorting options, the best deals, huge discounts, and quick delivery— are making it hard for the traditional retail sector to survive.

Sources:

5 chains possibly headed for bankruptcy in 2018,” Modern Cities, January 7, 2018.

Investment Lessons From Stein Mart, Inc.’s Fall,” The Conservative Income Investor, January 2, 2018.

Stein Mart, Inc. Reports Third Quarter Fiscal 2017 Results,” GlobeNewswire, November 15, 2017.

Stein Mart Revenue (Quarterly): 285.40M for Oct. 31, 2017,” YCharts, October 31, 2017.

Stein Mart Announces Cost Reductions,” Stein Mart, Inc., October 26, 2017.

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