UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended January 31, 2004
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
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
Securities registered pursuant to Section 12 (g) of the Act:
Title of each class: Name of each exchange on which registered:
Common Stock $.01 par value The Nasdaq Stock Market(R)
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 the filing
requirements for at least the past 90 days.
Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act).
Yes [X] No [ ]
The aggregate market value of the voting common stock held by non-affiliates of
the Registrant as of April 1, 2004 was $359,524,487. For purposes of this
response, executive officers and directors are deemed to be the affiliates of
the registrant and the holdings by non-affiliates was computed as 25,865,071
shares. At April 1, 2004, the Registrant had issued and outstanding an aggregate
of 42,086,769 shares of its common stock.
Documents Incorporated By Reference:
Portions of the Proxy Statement for Registrant's 2004 Annual Meeting of
Stockholders are incorporated in Part III and Part IV.
STEIN MART, INC.
TABLE OF CONTENTS
FORM
10-K
REPORT
ITEM NO. PAGE
- -------- ----
PART I
1. Business 3
2. Properties 8
3. Legal Proceedings 9
4. Submission of Matters to a Vote of Security Holders 9
PART II
5. Market for Registrant's Common Equity and Related Stockholder 9
Matters
6. Selected Financial Data 10
7. Management's Discussion and Analysis of Financial Condition 11
and Results of Operations
7A. Quantitative and Qualitative Disclosures about Market Risk 17
8. Financial Statements and Supplementary Data 17
9. Changes in and Disagreements With Accountants on Accounting 17
and Financial Disclosure
9A. Disclosure Controls and Procedures 17
PART III
10. Directors and Executive Officers of the Registrant 17
11. Executive Compensation 18
12. Security Ownership of Certain Beneficial Owners and Management 18
13. Certain Relationships and Related Transactions 18
PART IV
14. Principal Accountant Fees and Services 18
15. Exhibits, Financial Statement Schedules, and Reports on Form 8-K 18
SIGNATURES 19
TABLE OF CONTENTS TO FINANCIAL STATEMENTS AND SCHEDULES
Report of Independent Certified Public Accountants F-1
Balance Sheets F-2
Statements of Operations F-3
Statements of Stockholders' Equity F-4
Statements of Cash Flows F-5
Notes to Financial Statements F-6
SCHEDULES NONE
INDEX TO EXHIBITS E-1
2
PART I
ITEM 1. BUSINESS
At January 31, 2004, Stein Mart, Inc. operated a 261-store retail chain offering
the fashion merchandise, service and presentation of traditional, better
department and specialty stores at prices typically 25% to 60% less than
department stores. The Company's focused assortment of merchandise features
moderate to designer brand-name apparel, as well as accessories, gifts, linens,
shoes and fragrances. Founded by the current chairman's grandfather, the Company
operated one store until 1977, when expansion began. The Company's initial
public offering took place in April 1992.
As used herein, the terms "Company" and "Stein Mart" refer to Stein Mart, Inc.
and its wholly owned subsidiary. The Company's fiscal year ends on the Saturday
closest to January 31.
Business Strategy
The Company's business strategy is to provide a retailing concept which combines
the fashion assortment, store appearance, merchandise presentation and customer
service levels of better department and specialty stores with the value pricing
of an off-price retail format. The principal elements of the Company's business
strategy are as follows:
Timely, Consistent, Upscale Merchandise.
The Company purchases upscale, branded merchandise primarily through
preplanned buying programs similar to those used by department stores. These
preplanned buying programs enable the Company to offer fashionable,
current-season assortments on a consistent basis
Appealing Store Location, Appearance and Merchandise Presentation.
The Company locates its stores in neighborhood shopping centers in close
proximity to the better residential neighborhoods of a given community.
Optimal co-tenancy is with upscale supermarkets, drug stores, specialty
retailers and restaurants which cater to customers with above average
household income and education. Within the store, attractive displays and
signage create an upscale ambiance. Merchandise is displayed in lifestyle
groupings to encourage multiple purchases.
Emphasis on Customer Service.
Customer service is fundamental to Stein Mart's objective of building
customer loyalty. Management believes that the Company offers customer
service superior to off-price retailers and comparable to better department
stores.
Value Pricing through Vendor Relationships.
Stein Mart has longstanding relationships with many key vendors. Management
believes that the Company's purchase terms enable it to negotiate more
favorable prices from vendors than are typical in the department store
industry. Stein Mart passes these savings on to its customers through prices
that are typically 25% to 60% below those regularly charged by traditional
department stores.
Efficient Inventory Handling.
Stein Mart does not rely on a large distribution center or warehousing
facility. Rather, it primarily utilizes drop shipments from its vendors
directly to its stores. Most merchandise is received pre-ticketed and on
hangers ("floor ready"). This system enables the Company to receive
merchandise at each store on a timely basis and to save the time and expense
of handling merchandise twice, which is typical of a traditional
distribution center structure.
Target Customer
Stein Mart's target customer is a 35-60 year old female, who typically occupies
a household with above-average income and is well-educated. Whether or not she
is employed, she is less likely to have children at home. The target customer is
more attracted to a department store level of fashion, presentation and service,
but she visits large-format shopping malls only occasionally. Conversely, she
tends to be more discriminating than a typical off-price customer.
3
Merchandise Philosophy and Procurement
Stein Mart's merchandise selection is driven primarily by its merchandising
plans that are based on management's assessment of fashion trends, color and
market conditions. Within each major merchandise category, the Company seeks to
offer a focused assortment of the best-selling fashion merchandise. Branded
merchandise is complemented by a limited private label program that enhances the
Company's assortment of current fashion trends and provides key upper-end
classifications in complete size ranges. Private label merchandise comprises no
more than 10% of the merchandise assortment.
Stein Mart buys from approximately 1,800 vendors. Many of these are considered
key vendors with whom the Company enjoys longstanding working relationships that
create a continuity of preplanned buying opportunities for upscale,
current-season merchandise. To ensure the best value for its customers, the
Company purchases from vendors who manufacture merchandise in the United States
and overseas. Stein Mart is always looking for new products and vendors to keep
the merchandise assortment fresh. The Company does not have long-term or
exclusive contracts with any particular vendor. In 2003, approximately 7% of
Stein Mart's purchases were from a single vendor and less than 2% of total
purchases were from any other single vendor.
The Company employs several purchasing strategies to provide its customers with
a consistent selection of quality, fashionable merchandise at value prices: (i)
Stein Mart commits to its purchases from vendors well in advance of the selling
season, in the same manner as department stores, unlike typical off-price
retailers who rely heavily on buys of close-out merchandise or overruns; (ii)
unlike department stores, the Company typically foregoes financial supports such
as advertising allowances and return privileges in exchange for a lower purchase
price from its vendors; (iii) the Company purchases some in-season off-price and
end-of-season close-out merchandise to supplement core merchandise assortments;
(iv) the Company's information systems enable it to acquire merchandise and
track sales information on a store-by-store basis, allowing its buying staff to
respond quickly to customer buying trends; (v) key predictable items are
replenished bi-weekly or monthly; and (vi) an in-house merchandise development
department works with buyers and brand-name vendors to ensure that the
merchandise assortments offered are unique, fashionable, color-forward and of
high quality. The Company's merchandise is typically priced at levels 25% to 60%
below prices regularly charged by better department and specialty stores,
therefore offering distinct value to the Stein Mart customer.
The following reflects the percentage of the Company's sales by major
merchandise category (including sales from leased departments) for the fiscal
years indicated:
2003 2002 2001
---------- ---------- ----------
Ladies' and Boutique apparel 39% 38% 40%
Ladies' accessories 12 12 10
Men's 17 17 17
Gifts and linens 19 20 19
Leased departments 7 6 7
Children's 4 5 5
Other 2 2 2
---- ---- ----
100% 100% 100%
==== ==== ====
In 2002, Stein Mart began a series of productivity initiatives designed to
increase the dollars generated in each square foot of the stores, with a goal of
leveraging its expenses more efficiently and moving more profit dollars to the
bottom line. These initiatives included: (i) reformatting all stores to allocate
greater space and more inventory dollars to areas where the core customer shops
most intensely, e.g. ladies' apparel and Boutique, ladies' accessories and gifts
and (ii) reducing square footage in the men's and children's areas to focus on
key categories. In 2003, space re-allocation continued in Children's and Gifts,
where Home Decor was added in all stores.
Ladies' apparel, the Company's largest contributor of revenues, comprises
sportswear, petites, dresses and women's sizes at moderate to upper-moderate
prices. Stein Mart's Boutique is a key element of the Company's merchandising
strategy to attract the more fashion-conscious customers. The Boutique, a
store-within-a-store department, carries better to
4
designer ladies' apparel and offers the presentation and service levels of a
specialty boutique. Each Stein Mart store has its own Boutique, staffed
generally by women employed on a part-time basis who are civically and socially
prominent in the community. The Boutique highlights the Company's strategy of
offering upscale merchandise, presentation and service levels at value prices.
The Company's shoe department is a leased department operated in individual
stores by one of two shoe retailers. The merchandise in this department is
presented in a manner consistent with the Company's overall presentation in
other departments, stressing fashionable, current-season footwear at value
prices. This department offers a variety of men's and women's casual and dress
shoes, which complement the range of apparel available in other departments.
Shoe department leases provide for the Company to be paid base rent and/or a
percentage of sales.
Unlike many retailers, the Company does not utilize central distribution
facilities to control merchandise flow. Instead, the Company uses a drop ship
method of delivering merchandise directly from the vendor, although occasionally
a third party distributor is employed as well. The primary delivery system is
through UPS. Management feels this system, which has been developed over
numerous years, yields benefits in both time and freight cost reduction to the
Company. Management reviews the current system on a regular basis and at this
time, does not anticipate departing from its drop ship delivery system.
Store Network and Appearance
The Company prefers to locate its stores in neighborhood shopping centers in
close proximity to the better residential neighborhoods of a given community.
Stein Mart's 261 stores are located in 28 states and the District of Columbia,
primarily in the Southern half of the country, from California to the Eastern
Seaboard, and, in recent years, has also entered into the Upper Midwest and
Great Lakes states.
In order to attract its target customer, optimal co-tenancy is in neighborhood
centers with upscale supermarkets, drug stores, specialty retailers and
restaurants which cater to an upscale repeat clientele. A majority of Stein Mart
stores are located in such centers, with the remainder in strip centers, power
centers or traditional shopping malls. Three tenant representatives, working
with Company specifications, scout potential locations for future expansion
across the United States.
The typical store is approximately 37,000 gross square feet with convenient
check-out and customer service areas and attractive, individual dressing rooms.
Stein Mart's stores are designed to reflect an upscale ambiance and appearance
through attractive layout, displays and in-store signage. The Company seeks to
create excitement in its stores through the continual flow of brand-name
merchandise, sales promotions, store layout, merchandise presentation, and the
quality, value and depth of its merchandise assortment.
The Company employs an easily shoppable racetrack format and displays
merchandise in lifestyle groupings of apparel and accessories. Management
believes that the lifestyle grouping concept strengthens the fashion image of
its merchandise and enables the customer to locate desired merchandise in a
manner that encourages multiple purchases.
A smaller store concept is being tested with the opening of the first
collections of Stein Mart in Rolling Hills, California in October 2002. Two more
collections of Stein Mart stores were opened in 2003 and a fourth opened in
early 2004. This sub-15,000 square foot format is designed to allow the Company
to enter resort and premium markets where a full-sized Stein Mart may not be
feasible. Management will continue to monitor the results of this concept and
its role in the Company's future expansion.
Store Expansion and Closing Strategies
The Company's growth philosophy is to finance growth with internally generated
funds and continue to fill in existing markets as well as pioneer new markets.
As a result of processing approximately 3% of its merchandise through its
distribution center, the Company is not constrained geographically or by the
capacity limits of a central facility. The Company refurbishes existing retail
locations or occupies newly constructed stores, which typically are anchor
stores in new or existing shopping centers situated near upscale residential
areas, ideally with co-tenants that cater to a similar customer base. The
Company's historical ability to negotiate favorable leases and to construct
attractive stores with a relatively low investment has provided a significant
cost advantage over traditional department and fine specialty stores.
5
The cost of opening a typical new store includes approximately $450,000 to
$650,000 for fixtures, equipment, leasehold improvements and pre-opening
expenses (primarily advertising, stocking and training). Pre-opening costs are
expensed when incurred. Initial inventory investment for a new store is
approximately $1.1 million (a portion of which is financed through vendor
credit).
The Company revised its approach to selecting locations for new stores effective
with stores opening in 2002. Prior to that time, the Company's principal
consideration was population demographics, including data relating to income,
education levels, age and occupation. The availability of prime real estate
locations, existing and potential competitors, and the number of Stein Mart
stores that a market can support was also considered. The Company has since
expanded its analysis to consider psychographics (such as fashion consciousness
in the marketplace) as well as local area market research. The Company has also
retained a third-party consulting firm to analyze each potential market.
Finally, a committee of senior officers considers the collected data and
analysis, and approves any potential new store location. Using this new
approach, the Company plans to open 10-12 new stores in 2004, including the
relocation of three existing stores.
The Company regularly reviews under-performing stores and implements strategies
designed to improve their performance. After a period of analysis, if a store's
profitability does not improve, the store is considered for closure.
Customer Service
Customer service is fundamental to Stein Mart's objective of building customer
loyalty. The Company's stores offer most of the same services typically found in
better department and specialty stores, including a liberal merchandise return
policy. Each store is staffed to provide a number of sales associates to
properly attend to customer needs.
The Company's training programs for sales associates and cashiers emphasize
attentiveness and courtesy. The Company reinforces its training programs by
employing independent shoppers to monitor associates' success in implementing
the principles taught in training. Associates who are highly rated by the
shopping service receive both formal recognition and cash awards. Management
believes this program emphasizes the importance of customer service necessary to
create customer loyalty.
Marketing Research and Advertising Strategy
In 2002, the Company conducted a major consumer research project designed to
validate an earlier project that identified ideal Stein Mart customers, their
shopping preferences and the optimal marketing approaches to reach them.
Additionally, the 2002 research sought to define the key demographic and
psychographic attributes of the Company's best customers and determine how best
to find new customers with those same attributes. This research identified the
target customer as female, 35 to 60 years old, in affluent households with
above-average incomes, well-educated and less likely to have children at home.
The Company's advertising emphasizes upscale, fashion merchandise at significant
savings. In recent years, the Company has allocated the majority of its
advertising budget to the production of color pre-print inserts, which have been
distributed through newspapers and by direct mail. These pre-prints have been
supported by regular, run of press newspaper advertising, as well as limited
radio advertising at certain times of the year. Stein Mart's per-store
advertising expense is reduced by spreading its advertising over multiple stores
in a single market. Management believes the Company also enjoys substantial
word-of-mouth advertising benefits from its customer base.
After considering the results of the consumer research project, management
considered new methods and messages to attract non-customers with similar
attributes to Stein Mart's best customers. Its advertising agency developed a
new, television-based branding campaign and a new tagline ("once you go, you get
it"). This advertising campaign was tested in several markets in early fall
2003, and distributed nationally during the holiday season through cable TV
shows and selected affiliate buys targeted to similar demographics. The new
campaign which continues into 2004 is both image and event-focused, and uses
newspaper inserts, direct mail and radio, in addition to the television
advertising.
Stein Mart's Preferred Customer Program, launched in May 2001 to recognize and
reward the Company's most devoted shoppers, now has approximately two million
active members. Preferred Customers receive regular mailings regarding key
events, promotions, special members-only shopping days and special discounts
exclusive to these individuals.
6
Information Systems
The Company's information systems provide daily financial and merchandising
information that is used by management to make timely and effective purchasing
and pricing decisions and for inventory control.
The Company's inventory control system enables it to achieve economies of scale
from bulk purchases while at the same time ordering and tracking separate drop
shipments by store. Store inventory levels are regularly monitored and adjusted
as sales trends dictate. The inventory control system provides information that
enhances management's ability to make informed buying decisions and accommodate
unexpected increases or decreases in demand for a particular item. The Company
uses bar codes and bar code scanners as part of an integrated inventory
management and check-out system in its stores.
The Company's merchandise planning and allocation system enables the buyers and
planners to customize their merchandise assortments at the individual store and
department level, based on selected criteria, such as a store's selling
patterns, geography and merchandise color preferences. The ability to customize
individual store assortments enables the Company to more effectively manage
inventory, capitalize on sales trends and reduce markdowns.
A computerized merchandise replenishment system addresses the unique
requirements of store-level replenishment, allowing management to get the right
items to the stores at the right time. This system responds to market demands
quickly, efficiently and accurately, allowing merchandisers to focus on other
profit oriented tasks.
Competition
Management believes that the Company occupies a market niche closer to better
department and specialty stores than to typical off-price retail chains.
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.
The principal competitive factors in the retail apparel industry are assortment,
presentation, quality of merchandise, price, customer service, vendor relations
and store location. Management believes that the Company is well-positioned to
compete on the basis of each of these factors.
Employees
At January 31, 2004, the Company's work force consisted of approximately 14,000
employees (8,400 40-hour equivalent employees). The number of employees
fluctuates based on the particular selling season.
Trademarks
The Company owns the federally registered trademark Stein Mart(R), together with
a number of other marks used in conjunction with its private label merchandise
program. Stein Mart primarily sells branded merchandise. However, in certain
classifications of merchandise, the Company uses several private label programs
to provide additional availability of items. Management believes that its
trademarks are important but, with the exception of Stein Mart(R), not critical
to the Company's merchandising strategy.
7
ITEM 2. PROPERTIES
At January 31, 2004, the Company operated stores in the following states:
State Number of Stores
----- ----------------
Alabama 12
Arizona 6
Arkansas 3
California 18
Colorado 2
Florida 40
Georgia 18
Illinois 5
Indiana 8
Iowa 1
Kansas 1
Kentucky 3
Louisiana 10
Michigan 1
Mississippi 4
Missouri 3
Nevada 4
New York 2
North Carolina 19
Ohio 12
Oklahoma 5
Pennsylvania 1
South Carolina 12
Tennessee 14
Texas 42
Utah 2
Virginia 10
Washington DC 1
Wisconsin 2
---
261
===
The Company leases all of its store locations and therefore has been able to
grow without incurring indebtedness to acquire real estate. Management believes
that the Company has earned a reputation as an "anchor tenant," which, along
with its established operating history, has enabled it to negotiate favorable
lease terms. Most of the leases provide for minimum rents, as well as percentage
rents that are based on sales in excess of predetermined levels.
The table below reflects (i) the number of the Company's leases (as of January
31, 2004) that will expire each year if the Company does not exercise any of its
renewal options, and (ii) the number of the Company's leases that will expire
each year if the Company exercises all of its renewal options (assuming the
lease is not otherwise terminated by either party pursuant to any other
provision). The table includes the leases for the 261 store locations operated
at January 31, 2004 and 12 previously closed store locations for which the
Company is actively seeking to sublease.
8
Number of Leases Number of Leases
Expiring Each Year Expiring Each Year
if no Renewals if all Renewals
Exercised Exercised
---------------------- ----------------------
2004 18 2
2005 24 -
2006 25 1
2007 21 1
2008 35 4
2009-2013 116 23
2014-2018 34 21
2019-2046 - 221
The Company has made consistent capital commitments to maintain and improve
existing store facilities. During 2003, approximately $7.0 million was spent for
fixtures, equipment and leasehold improvements in stores opened prior to 2003.
The Company leases approximately 73,000 gross square feet of office space for
its corporate headquarters in Jacksonville, Florida. The Company also leases a
92,000 square foot distribution center in Jacksonville for the purpose of
processing a limited amount of merchandise purchases (approximately 3% of total
purchases).
ITEM 3. LEGAL PROCEEDINGS
The Company is involved in various routine legal proceedings incidental to the
conduct of its business. Management does not believe that any of these legal
proceedings will have a material adverse effect on the financial condition or
results of operations of the Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
There were no matters submitted to a vote of security holders during the fourth
quarter of fiscal 2003.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
The following table sets forth the high and low sales prices of the Common Stock
for each fiscal quarter in fiscal 2003 and 2002:
HIGH LOW
---------- ----------
Fiscal 2003:
May 3, 2003 $ 5.69 $4.22
August 2, 2003 6.27 5.35
November 1, 2003 7.58 5.00
January 31, 2004 10.94 7.07
Fiscal 2002:
May 4, 2002 $12.12 $8.74
August 3, 2002 12.32 6.89
November 2, 2002 8.75 5.37
February 1, 2003 7.85 5.20
Stein Mart's common stock trades on The Nasdaq Stock Market(R)under the trading
symbol SMRT. On April 9, 2004, there were 1,160 stockholders of record.
The Company intends to reinvest future earnings in the business and accordingly
does not anticipate paying dividends in the foreseeable future.
9
ITEM 6. SELECTED FINANCIAL DATA
(Dollars in Thousands Except Per Share Amounts and Operating Data)
The Company's financial statements have been restated to classify the results of
operations for two stores closed during the fourth quarter of 2003 as
discontinued operations for all periods.
Fiscal Year Ended
------------------------------------------------------------------------
2003 2002 2001 (1) 2000 1999
------------ ------------ ------------ ------------ ------------
Statement of Operations Data:
Net sales $1,355,457 $1,401,613 $1,313,144 $1,199,635 $1,028,251
Cost of merchandise sold 1,014,695 1,054,616 997,950 891,016 775,901
------------ ------------ ------------ ------------ ------------
Gross profit 340,762 346,997 315,194 308,619 252,350
Selling, general and administrative expenses (2) 345,868 324,431 299,933 255,110 242,305
Other income, net 13,040 13,870 13,984 13,671 12,018
------------ ------------ ------------ ------------ ------------
Income from operations 7,934 36,436 29,245 67,180 22,063
Interest expense 1,688 2,604 4,000 3,309 2,485
------------ ------------ ------------ ------------ ------------
Income from continuing operations before income taxes 6,246 33,832 25,245 63,871 19,578
Provision for income taxes 2,373 12,856 9,593 24,122 7,439
------------ ------------ ------------ ------------ ------------
Income from continuing operations 3,873 20,976 15,652 39,749 12,139
Loss from discontinued operations, net of tax benefit (1,672) (286) (298) (392) (317)
------------ ------------ ------------ ------------ ------------
Net income $ 2,201 $ 20,690 $ 15,354 $ 39,357 $ 11,822
============ ============ ============ ============ ============
Basic income (loss) per share:
Continuing operations $0.09 $0.51 $0.38 $0.93 $0.27
Discontinued operations (0.04) (0.01) (0.01) (0.01) (0.01)
------------ ------------ ------------ ------------ ------------
Total $0.05 $0.50 $0.37 $0.92 $0.26
============ ============ ============ ============ ============
Diluted income (loss) per share:
Continuing operations $0.09 $0.51 $0.38 $0.92 $0.27
Discontinued operations (0.04) (0.01) (0.01) (0.01) (0.01)
------------ ------------ ------------ ------------ ------------
Total $0.05 $0.50 $0.37 $0.91 $0.26
============ ============ ============ ============ ============
Operating Data:
Stores Open at End of Period 261 265 253 226 205
Average Sales Per Store (000's) (3) $ 5,564 $ 5,741 $ 5,922 $ 6,068 $ 5,663
Average Sales Per Square Foot of Selling Area (4) $ 181 $ 184 $ 189 $ 192 $ 176
Comparable Store Net Sales (Decrease) Increase (5) (4.7%) (0.8%) (0.7%) 9.7% 2.3%
Balance Sheet Data:
Working Capital $ 186,037 $ 145,787 $ 179,212 $ 120,602 $ 117,284
Total Assets 393,029 410,217 417,672 389,989 354,094
Long-term Debt (6) 24,962 - 57,750 - -
Total Stockholders' Equity 227,678 223,307 201,895 194,028 179,912
(1) Beginning with fiscal 2001, the Company changed to a 52-53 week year ending
on the Saturday closest to January 31; previously, the Company's fiscal
year ended on the Saturday closest to December 31. Financial data for the
five-week Transition Period ended February 3, 2001 (restated for
discontinued operations) is as follows: net sales $83,572, cost of
merchandise sold $70,181, gross profit $13,391, selling, general and
administrative expenses $22,937, other income net $826, interest expense
$186, loss from continuing operations ($5,522), loss from discontinued
operations ($92), net loss ($5,614), basic and diluted loss per
share/continuing operations $(0.14).
(2) Selling, General and Administrative Expenses include store closing and
asset impairment charges of $12.2 million in 2003, $2.5 million in 2002;
$2.9 million in 2001; and $15.9 million in 1999. A $3.4 million credit
related to store closings was recorded in 2000.
(3) Average sales per store (including sales from leased shoe and fragrance
departments) for each period have been calculated by dividing (a) total
sales during such period by (b) the number of stores open at the end of
such period, in each case exclusive of stores open for less than 12 months.
All periods are calculated on a 52-week basis.
(4) Includes sales and selling space of the leased shoe and fragrance
departments. Selling area excludes administrative, receiving and storage
areas. All periods are calculated on a 52-week basis.
(5) Comparable store information for a period reflects stores open throughout
that period and for the same 52-week period in the prior year.
(6) Notes payable to banks of $41,350 at February 1, 2003 is classified as
current (see Note 6 to the Financial Statements).
10
ITEM 7. 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.
All 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 strategy to exit or improve
under-performing stores, changes in store closings, changing preferences in
apparel, changes in the level of consumer spending due to current events and/or
general economic conditions, 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.
The following should be read in conjunction with the "Selected Financial Data"
and the notes thereto and the Financial Statements and notes thereto of the
Company.
Overview
Stein Mart's 261 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 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 2003, the Company closed 16 under-performing stores whose aggregate loss
from operations for 2003 was $22.7 million. The Company also eliminated discount
coupons on full-price merchandise at the end of July 2003. Eliminating coupons
hurt comparable store sales during the Fall selling season, but resulted in more
markdown dollars being available to move seasonal goods at a faster rate, thus
providing fresher, more current merchandise.
Accomplishments during 2003 include:
o Opened 12 new stores during the year which produced $38.2 million in
sales for 2003; closed 16 under-performing stores
o Eliminated discount coupons on full-price merchandise; re-engineered
sales promotion activities and calendar to reinforce the everyday
value proposition and to make the seasonal clearance cycle more
efficient
o Reduced average store inventories by 3.2%
o Reduced shrinkage 35% for a benefit of $4.5 million as a result of a
restructured loss prevention organization and systems put in place
during the past several years
o Introduced Peck & Peck label women's clothing in Boutique and Raymond
Waites Studio in gifts and linens as unique lines for Stein Mart
11
o Launched national TV branding campaign featuring Stein Mart customers
o Entered into a new, three-year, $150 million loan agreement with added
flexibility and lower rates, as well as the opportunity to extend the
terms and increase the size of the facility.
Outlook
Over the past two years, the Company has reduced inventory levels, re-formatted
its stores, closed unprofitable locations, eliminated full-price coupons and
created a new marketing campaign. As such, the Company's preliminary outlook for
2004 is as follows:
o Negative pressure on comparable store sales should ease mid-year
(coupon elimination anniversary);
o Inventory discipline and revised clearance cycle should produce
improved merchandise freshness;
o Branding campaign/new marketing initiatives should encourage new
customer trial; and
o Improved general economy and fashion emphasis should benefit retail in
general.
Stores
The number of stores open as of January 31, 2004, February 1, 2003 and February
2, 2002 were 261, 265 and 253, respectively.
2003 2002 2001
---------- ---------- ----------
Stores at beginning of year 265 253 226
Stores opened during the year 12 16 30
Stores closed during the year (16) (4) (3)
---------- ---------- ----------
Stores at the end of year 261 265 253
========== ========== ==========
Results of Operations
The following table sets forth each line item of the Statement of Operations
expressed as a percentage of the Company's net sales:
2003 2002 2001
---------- ---------- ----------
Net sales 100.0% 100.0% 100.0%
Cost of merchandise sold 74.9 75.2 76.0
---------- ---------- ----------
Gross profit 25.1 24.8 24.0
Selling, general and administrative expenses 25.5 23.2 22.9
Other income, net 1.0 1.0 1.1
---------- ---------- ----------
Income from operations 0.6 2.6 2.2
Interest expense 0.1 0.2 0.3
---------- ---------- ----------
Income from continuing operations before income taxes 0.5 2.4 1.9
Provision for income taxes 0.2 0.9 0.7
---------- ---------- ----------
Income from continuing operations 0.3 1.5 1.2
Loss from discontinued operations, net of tax benefit (0.1) - -
---------- ---------- ----------
Net income 0.2% 1.5% 1.2%
========== ========== ==========
Store Closings
Sixteen under-performing stores were closed during 2003 (see Notes 2 and 3 to
the Financial Statements) and the Company plans to close six more stores and
relocate three stores during 2004. The closings in 2004 will be at natural lease
term expirations, so there will be no significant lease termination costs in
2004.
Two of the stores closed during the fourth quarter of 2003 resulted in the exit
from the New Mexico market and, in accordance with Statement of Financial
Accounting Standards ("SFAS") No. 144, are classified as discontinued
operations, as cash flows of these stores have been eliminated from ongoing
operations. Sales and operating losses for the 16 stores closed in 2003 and four
stores closed in 2002 are shown below for the years ended January 31, 2004 and
February 1, 2003. Included in the 2002 column are operating results of the 16
stores closed in 2003, in addition to the four stores closed in 2002.
12
2003 2002
------------ ------------
Sales from closed stores:
Included in continuing operations $ 27,358 $54,082
Included in discontinued operations 6,175 7,035
------------ ------------
$ 33,533 $61,117
============ ============
Operating losses from closed stores:
Included in continuing operations $(20,041) $(9,403)
Included in discontinued operations (2,696) (461)
------------ ------------
$(22,737) $(9,864)
============ ============
Operating losses from closed stores include the following store closing and
asset impairment expenses:
Continuing operations: 2003 2002
------------ ------------
Present value of lease termination costs $ 6,561 $ 113
Asset impairment charges 793 1,610
Severance 736 -
Third-party liquidation services 1,058 -
------------ ------------
9,148 1,723
------------ ------------
Discontinued operations:
Present value of lease termination costs 172 -
Asset impairment charges 42 -
Severance 135 -
------------ ------------
349 -
------------ ------------
Total $ 9,497 $ 1,723
============ ============
Continuing Operations
Year Ended January 31, 2004 Compared to Year Ended February 1, 2003
The 3.3% total sales decrease for the year ended January 31, 2004 from the prior
year reflects a 4.7% decrease in sales from comparable stores, the opening of 12
new stores, which contributed $38.2 million to net sales, and the closing of 16
stores. For the past three years, as a marketing vehicle to attract new
customers, the Company used various coupons that allowed customers to take a
specified percentage discount off of full-priced merchandise. As this practice
escalated, it became apparent that these coupons did not support the Company's
unique selling proposition. As a result, the Company discontinued these
`percentage off full price' coupons in July 2003. While such coupons may
continue to be used on a limited basis in new markets and specific
circumstances, the widespread distribution of full-price, percentage off coupons
has ceased. As anticipated, the discontinuation of these customer traffic
incentives hindered 2003 sales growth. However, discounts that had previously
been devoted to these coupon incentives were used to clear seasonal goods more
efficiently and create additional freshness in the inventory.
Gross profit for the year ended January 31, 2004 was $340.8 million or 25.1
percent of net sales, a 0.3 percentage point increase over gross profit of
$347.0 million or 24.8 percent of net sales for the year ended February 1, 2003.
Mark-up improved 2.1 percentage points over last year, but was offset by a 1.6
percentage point increase in markdowns and a 0.5 percentage point due to lack of
occupancy leverage. Markdowns in the stores that were going out of business
accounted for almost half of the markdown impact. Gross profit also includes a
$1.6 million inventory charge to reduce merchandise inventories to the lower of
cost or market value in the six stores planned for closing in Spring 2004.
Lastly, gross profit was favorably impacted by a 0.3 percentage point
improvement in shrinkage from last year as a result of a restructured loss
prevention organization and enhanced systems.
Selling, general and administrative expenses ("SG&A") were $345.9 million or
25.5 percent of net sales for the year ended January 31, 2004, a $21.0 million
increase over SG&A expenses of $324.4 million or 23.2 percent of net sales for
2002. Included in SG&A for fiscal 2003 and 2002 are store closing and asset
impairment charges of $12.2 million and $2.5 million, respectively. The increase
in these charges accounted for approximately one-third of the 2.3 percentage
point increase in SG&A as a percent of sales. SG&A increased 0.5 percent of net
sales due to
13
an increase in expenses related to the new advertising campaign and the
remaining increase is due to a lack of leverage resulting from the 4.7% decrease
in comparable store sales for fiscal year 2003.
Pre-opening expenses for the 12 stores opened in 2003 amounted to $1.8 million
and for the 16 stores opened in 2002, amounted to $3.1 million.
Other income, primarily from in-store leased shoe departments, was $13.0 million
in 2003, a slight decrease from the $13.9 million in 2002, but remained at 1.0%
of sales. An improvement in the shoe business was offset by the elimination of
fragrance as a leased department in May 2003.
Interest expense for 2003 was $1.7 million, compared to $2.6 million in 2002.
The decrease resulted from lower average borrowings at lower interest rates this
year compared to last year.
Income from continuing operations before income taxes was $6.2 million or 0.5
percent of net sales for 2003 and $33.8 million or 2.4 percent of net sales for
2002. The decrease in income from continuing operations is due to the overall
reduction in net sales, as well as operating losses of $20.0 million from the 14
stores closed in 2003 and other changes discussed above.
Year Ended February 1, 2003 Compared to Year Ended February 2, 2002
Net sales of $1.402 billion were achieved for fiscal year 2002, an increase of
$88.5 million, or 6.7 percent over net sales of $1.313 billion for fiscal year
2001. The 16 new stores opened in 2002 contributed $56.5 million to net sales.
Comparable store net sales decreased 0.8 percent from 2001.
Gross profit for 2002 was $347.0 million or 24.8 percent of net sales compared
to $315.2 million or 24.0 percent of net sales for 2001. The 0.8 percent
increase in the gross profit percent primarily resulted from inventory control
initiatives which resulted in lower markdowns, somewhat offset by higher
occupancy costs as a percent of sales.
Selling, general and administrative expenses were $324.4 million or 23.2 percent
of net sales for 2002, as compared to $299.9 million or 22.9 percent of net
sales in 2001. The 0.3 percent increase was primarily due to a lack of sales
leverage slightly offset by lower pre-opening costs. Selling, general and
administrative expenses include store closing expenses and asset impairment
charges for under-performing stores of $2.5 million in 2002 and $2.9 million in
2001.
Pre-opening expenses for the 16 stores opened in 2002 amounted to $3.1 million
and for the 30 stores opened in 2001, amounted to $5.0 million.
Other income, primarily from in-store leased shoe departments, was $13.9 million
in 2002, a slight decrease from the $14.0 million for 2001. In 2002, a new shoe
lessee, whose offerings more closely mirror the Stein Mart apparel assortment,
was chosen for approximately 60% of the stores. During the period preceding the
turnover date, a decrease in shoe sales of the predecessor shoe lessee resulted
in lower sublease income.
Interest expense for 2002 was $2.6 million, compared to $4.0 million in 2001.
The decrease resulted from lower average borrowings as a result of decreased
inventory levels on a per store basis, as well as lower interest rates in 2002
compared to 2001.
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 January 31, 2004, the Company had $12.0 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.
14
Net cash provided by operating activities was $29.9 million in 2003 and $34.7
million in 2002. The decrease in 2003 was primarily attributable to a decrease
in net income including non-cash items and decreases in inventories and accounts
payable. Inventories decreased 4.7%, or $13.9 million, to $283.4 million at
January 31, 2004 from $297.2 million at February 1, 2003. On an average store
basis, inventories were reduced 3.2% from the prior year. This decrease was the
result of recent changes to the Company's marketing, sales promotion and
clearance strategies which resulted in lower end of year inventory levels. The
decrease in accounts payable is directly related to the decrease in inventory.
Capital expenditures, primarily for the acquisition of store fixtures, equipment
and leasehold improvements and information system enhancements, were $13.3
million and $19.1 million for 2003 and 2002, respectively. The decrease was
primarily due to four fewer stores opened in 2003 than in 2002.
Cash used in financing activities was $14.4 million in 2003 and $16.1 million in
2002 and was primarily used to paydown the revolving credit facility. During
2003 and 2002, cash was also used to repurchase 50,000 shares of the Company's
common stock for $0.2 million and 220,000 shares for $1.5 million, respectively.
As of January 31, 2004, there are 1,994,200 shares which can be repurchased
pursuant to the Board of Directors current authorizations. The decision to
repurchase stock is primarily dependent on market conditions.
The Company plans to open 10-12 new stores in 2004, including the relocation of
three existing stores. Most of the 2004 store openings will occur in the second
half of the year. The cost of opening a typical new store generally ranges from
$450,000 to $650,000 for fixtures, equipment, leasehold improvements and
pre-opening costs (primarily advertising, stocking and training). Pre-opening
costs are expensed at the time of opening. Initial inventory investment for a
new store is approximately $1.1 million (a portion of which is normally financed
through vendor credit). The Company's total capital expenditures for 2004
(including amounts budgeted for new store expansion, improvements to existing
stores and information system enhancements) are anticipated to be approximately
$15 million.
The Company has a revolving credit agreement with a group of lenders, which
extends through July 2006. The agreement, which was completed in July 2003,
provides a $150 million senior revolving credit facility. Borrowings are based
on and secured by eligible inventory. 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 January
31, 2004 and February 1, 2003, outstanding borrowings were $25.0 million and
$41.4 million, respectively.
The interest rates on borrowings under the Agreement range from Prime to Prime
plus .25% per annum for Prime Rate Loans and LIBOR plus 1.50% to LIBOR plus
2.25% per annum for Eurodollar Rate Loans and are established quarterly, based
on excess availability as defined in the Agreement. As of January 31, 2004, the
interest rates for Prime Rate and Eurodollar Rate Loans were 4.13% and 2.85%,
respectively. An unused line fee of .25% to .375% per annum (.375% as of January
31, 2004) is charged on the unused portion of the revolving credit facility,
based on excess availability. The Company was in full compliance with the terms
of the Agreement as of January 31, 2004.
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.
15
Contractual Obligations
To facilitate an understanding of the Company's contractual obligations, the
following data is provided:
Payments Due By Period
------------------------------------------------------------------------
Less than 1 - 2 3 - 5 After 5
Total 1 Year Years Years Years
------------ ------------ ------------ ------------ ------------
Notes payable to banks $ 24,962 $ - $ - $ 24,962 $ -
Operating leases 394,778 62,046 57,822 142,985 131,925
------------ ------------ ------------ ------------ ------------
Total $419,740 $62,046 $57,822 $167,947 $131,925
============ ============ ============ ============ ============
The Company also has outstanding standby letters of credit totaling $5.5 million
securing certain insurance programs at January 31, 2004. If certain conditions
were met 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.
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.
Critical Accounting Policies
The preparation of the Company's financial statements requires management to
make estimates and assumptions that affect the reported amounts of assets,
liabilities, expenses and related disclosure of contingent assets and
liabilities. Management bases its estimates and judgments on historical
experience and other relevant factors, the results of which form the basis for
making judgments about the carrying values of assets and liabilities that are
not readily apparent from other sources. While the Company believes that the
historical experience and other factors considered provide a meaningful basis
for the accounting policies applied in the preparation of the financial
statements, the Company cannot guarantee that its estimates and assumptions will
be accurate, which could require the Company to make adjustments to these
estimates in future periods. Following is a summary of the more significant
accounting policies:
Inventories
Merchandise inventories are valued at the lower of average cost or market, on a
first-in first-out basis, using the retail inventory method (RIM). RIM is an
averaging method that is widely used in the retail industry. The use of RIM
results in inventories being valued at the lower of cost or market as markdowns
are taken as a reduction of the retail values of inventories.
Based on a review of historical markdowns, current business trends and seasonal
inventory categories, additional inventory reserves may be recorded to reflect
estimated markdowns which may be required to liquidate certain inventories and
reduce inventories to the lower of cost or market. Management believes its
inventory valuation methods approximate the net realizable value of clearance
inventory and result in valuing inventory at the lower of cost or market.
Long-Lived Assets
Long-lived assets are reviewed for impairment whenever events or changes in
circumstances indicate that the carrying amount of an asset may not be
recoverable. Factors used in the review include management's plans for future
operations, recent operating results and projected cash flows. An impairment
loss is recognized if the sum of the expected future undiscounted cash flows
from the use of the asset is less than the net book value of the assets. An
impairment loss is recognized if the carrying value of the asset exceeds its
fair value.
Store Closing Costs
The Company follows SFAS No. 146, "Accounting for Costs Associated with Exit or
Disposal Activities," to record store closing costs. SFAS No. 146 requires the
recognition of costs associated with exit or disposal activities when they are
incurred rather than at the date of commitment to an exit or disposal plan.
16
Insurance Reserve Estimates
The Company uses a combination of insurance and self-insurance for various risks
including workers' compensation, general liability and associate-related health
care benefits, a portion of which is paid by the covered employees. The Company
is responsible for paying the claims that are under the insured limits. The
reserves recorded for these claims are estimated actuarially, based on claims
filed and claims incurred but not reported. These reserve estimates are adjusted
based upon actual claims filed and settled. The estimated accruals for these
reserves could be significantly affected if future claims differ from historical
trends and other actuarial assumptions.
Revenue Recognition
Revenue from sales of the Company's merchandise is recognized at the time of
sale, net of any returns and allowances, discounts and percentage-off coupons.
Future merchandise returns are estimated based on historical experience. Leased
department sales are excluded from net sales; commissions, net of related
selling expenses, and rental income from leased departments are included in
other income, net.
For a complete listing of our significant accounting policies, see Note 1 to the
Financial Statements.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company is exposed to interest rate risk primarily through borrowings under
its revolving credit facility. At January 31, 2004, direct borrowings aggregated
$25.0 million. The facility permits debt commitments up to $150.0 million, has a
July 2006 maturity date and bears interest at spreads over the prime rate and
LIBOR. The average outstanding borrowings during fiscal 2003, 2002 and 2001 were
$50.0 million, $66.0 million and $82.3 million, respectively, at
weighted-average interest rates of 3.4%, 3.9% and 4.9% respectively. Management
believes that its exposure to market risk associated with its borrowings is not
material.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The financial statements of the Company and the Report of Independent Certified
Public Accountants thereon are filed pursuant to this Item 8 and are included in
this report beginning on page F-1.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
ITEM 9A. DISCLOSURE CONTROLS AND PROCEDURES
The Company's management, including Michael D. Fisher, President and Chief
Executive Officer (principal executive officer) and James G. Delfs, Senior Vice
President and Chief Financial Officer (principal financial officer), have
evaluated the effectiveness of the Company's "disclosure controls and
procedures", as such term is defined in Rules 13a-14 and 15d-14 promulgated
under the Securities Exchange Act of 1934, as amended, within 90 days of the
filing date of this Annual Report on Form 10K. Based upon their evaluation, the
principal executive officer and principal financial officer concluded that the
Company's disclosure controls and procedures are effective. There were no
significant changes in the Company's internal controls or in other factors that
could significantly affect these controls, since the date the controls were
evaluated.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The Company has adopted a code of ethics applicable to all of the Company's
officers and employees, including the Company's principal executive officer,
principal financial officer, principal accounting officer and persons performing
similar functions. The text of this code of ethics may be found on our web site
at www.steinmart.com. The Company intends to post notice of any waiver from, or
amendment to, any provision of our code of ethics on our web site.
Other information required by this item appears under the caption "Election of
Directors" in the Company's Proxy Statement for its 2004 Annual Meeting of
Stockholders and is incorporated by reference.
17
ITEM 11. EXECUTIVE COMPENSATION
The information required by this item appears under the caption "Executive
Compensation" in the Company's Proxy Statement for its 2004 Annual Meeting of
Stockholders and is incorporated by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this item appears under the caption "Voting
Securities" in the Company's Proxy Statement for its 2004 Annual Meeting of
Stockholders and is incorporated by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this item appears under the caption "Certain
Transactions; Compensation Committee Interlocks and Insider Participation" in
the Company's Proxy Statement for its 2004 Annual Meeting of Stockholders and is
incorporated by reference.
PART IV
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
The information required by this item appears under the caption "Independent
Certified Public Accountants" in the Company's Proxy Statement for its 2004
Annual Meeting of Stockholders and is incorporated by reference.
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
15(a)(1) Financial Statements
The documents listed below are filed as part of this Form 10-K:
Page in
Form 10-K
---------
Report of Independent Certified Public Accountants F-1
Balance Sheets F-2
Statements of Operations F-3
Statements of Stockholders' Equity F-4
Statements of Cash Flows F-5
Notes to Financial Statements F-6
15(a)(2) Financial Statement Schedules
All schedules are omitted because they are not applicable or the required
information is presented in the financial statements or notes thereto.
15(a)(3) Exhibits
See Index to Exhibits which begins on Page E-1.
15(b) Reports on Form 8-K
The Company did not file a report on Form 8-K during the quarter ended January
31, 2004.
18
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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: April 14, 2004 By: /s/ Michael D. Fisher
--------------------------------------
Michael D. Fisher, President and Chief
Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed by the following persons on behalf of the registrant and in the
capacities indicated on the 14thd day of April, 2004.
/s/ Jay Stein /s/ Linda McFarland Farthing
- ------------------------------------- --------------------------------------
Jay Stein Linda McFarland Farthing
Chairman of the Board Director
/s/ John H. Williams, Jr. /s/ Mitchell W. Legler
- ------------------------------------- --------------------------------------
John H. Williams, Jr. Mitchell W. Legler
Vice Chairman Director
/s/ Michael D. Fisher /s/ Michael D. Rose
- ------------------------------------- --------------------------------------
Michael D. Fisher Michael D. Rose
President and Chief Executive Officer Director
/s/ James G. Delfs /s/ Richard L. Sisisky
- ------------------------------------- --------------------------------------
James G. Delfs Richard L. Sisisky
Senior Vice President and Chief Director
Financial Officer
/s/ Clayton E. Roberson, Jr. /s/ Martin E. Stein, Jr.
- ------------------------------------- --------------------------------------
Clayton E. Roberson, Jr. Martin E. Stein, Jr.
Vice President and Controller Director
/s/ Alvin R. Carpenter /s/ J. Wayne Weaver
- ------------------------------------- --------------------------------------
Alvin R. Carpenter J. Wayne Weaver
Director Director
/s/ James H. Winston
--------------------------------------
James H. Winston
Director
19
Report of Independent Certified Public Accountants
To the Board of Directors
and Stockholders of Stein Mart, Inc.
In our opinion, the accompanying financial statements appearing on pages F-2
through F-16 of this annual report present fairly, in all material respects, the
financial position of Stein Mart, Inc. at January 31, 2004 and February 1, 2003,
and the results of its operations and its cash flows for each of the three years
in the period ended January 31, 2004, in conformity with accounting principles
generally accepted in the United States of America. These financial statements
are the responsibility of the Company's management; our responsibility is to
express an opinion on these financial statements based on our audits. We
conducted our audits of these statements in accordance with auditing standards
generally accepted in the United States of America, which require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
/s/ PricewaterhouseCoopers LLP
- ------------------------------
Jacksonville, Florida
March 19, 2004
F-1
Stein Mart, Inc.
Balance Sheets
(In thousands)
January 31, February 1,
2004 2003
-------------- --------------
ASSETS
Current assets:
Cash and cash equivalents $ 11,965 $ 9,859
Trade and other receivables 4,227 4,919
Inventories 283,379 297,230
Prepaid expenses and other current assets 6,227 4,361
-------------- --------------
Total current assets 305,798 316,369
Property and equipment, net 76,934 86,351
Other assets 10,297 7,497
-------------- --------------
Total assets $393,029 $410,217
============== ==============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 59,046 $ 70,472
Accrued liabilities 60,715 53,407
Income taxes payable - 5,353
Notes payable to banks - 41,350
-------------- --------------
Total current liabilities 119,761 170,582
Notes payable to banks 24,962 -
Other liabilities 20,628 16,328
-------------- --------------
Total liabilities 165,351 186,910
COMMITMENTS AND CONTINGENCIES (Note 7)
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; 41,993,529 and 41,618,678 shares issued
and outstanding, respectively 420 416
Paid-in capital 3,196 721
Unearned compensation (309) -
Retained earnings 224,371 222,170
-------------- --------------
Total stockholders' equity 227,678 223,307
-------------- --------------
Total liabilities and stockholders' equity $393,029 $410,217
============== ==============
The accompanying notes are an integral part of these financial statements.
F-2
Stein Mart, Inc.
Statements of Operations
(In thousands except per share amounts)
For The 52 Weeks Ended
------------------------------------------------
January 31, February 1, February 2,
2004 2003 2002
-------------- -------------- --------------
Net sales $1,355,457 $1,401,613 $1,313,144
Cost of merchandise sold 1,014,695 1,054,616 997,950
-------------- -------------- --------------
Gross profit 340,762 346,997 315,194
Selling, general and administrative expenses 345,868 324,431 299,933
Other income, net 13,040 13,870 13,984
-------------- -------------- --------------
Income from operations 7,934 36,436 29,245
Interest expense 1,688 2,604 4,000
-------------- -------------- --------------
Income from continuing operations before income taxes 6,246 33,832 25,245
Provision for income taxes 2,373 12,856 9,593
-------------- -------------- --------------
Income from continuing operations 3,873 20,976 15,652
Loss from discontinued operations, net of tax benefit (1,672) (286) (298)
-------------- -------------- --------------
Net income $ 2,201 $ 20,690 $ 15,354
============== ============== ==============
Basic income (loss) per share:
Continuing operations $0.09 $0.51 $0.38
Discontinued operations (0.04) (0.01) (0.01)
-------------- -------------- --------------
Total $0.05 $0.50 $0.37
============== ============== ==============
Diluted income (loss) per share:
Continuing operations $0.09 $0.51 $0.38
Discontinued operations (0.04) (0.01) (0.01)
-------------- -------------- --------------
Total $0.05 $0.50 $0.37
============== ============== ==============
Weighted-average shares outstanding - Basic 41,649 41,575 41,176
============== ============== ==============
Weighted-average shares outstanding - Diluted 41,701 41,764 41,493
============== ============== ==============
The accompanying notes are an integral part of these financial statements.
F-3
Stein Mart, Inc.
Statements of Stockholders' Equity
(In thousands)
Unearned Total
Common Paid-in Compen- Retained Stockholders'
Stock Capital sation Earnings Equity
-------------- -------------- -------------- -------------- --------------
Balance at February 3, 2001 $415 $ 77 $ - $187,999 $188,491
Net income 15,354 15,354
Common shares issued under
stock option plan and related
income tax benefits 5 3,067 3,072
Common shares issued under
employee stock purchase plan 2 995 997
Reacquired shares (7) (4,139) (1,873) (6,019)
-------------- -------------- -------------- -------------- --------------
Balance at February 2, 2002 415 - - 201,480 201,895
Net income 20,690 20,690
Common shares issued under
stock option plan and related
income tax benefits 2 1,193 1,195
Common shares issued under
employee stock purchase plan 1 1,027 1,028
Reacquired shares (2) (1,499) (1,501)
-------------- -------------- -------------- -------------- --------------
Balance at February 1, 2003 416 721 - 222,170 223,307
Net income 2,201 2,201
Common shares issued under
stock option plan and related
income tax benefits 2 1,433 1,435
Common shares issued under
employee stock purchase plan 2 908 910
Reacquired shares (212) (212)
Restricted stock compensation 346 (309) 37
-------------- -------------- -------------- -------------- --------------
Balance at January 31, 2004 $420 $3,196 $(309) $224,371 $227,678
============== ============== ============== ============== ==============
The accompanying notes are an integral part of these financial statements.
F-4
Stein Mart, Inc.
Statements of Cash Flows
(In thousands)
For The 52 Weeks Ended
------------------------------------------------
January 31, February 1, February 2,
2004 2003 2002
-------------- -------------- --------------
Cash flows from operating activities:
Net income $ 2,201 $20,690 $15,354
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 18,975 18,770 16,822
Impairment of property and other assets 3,881 2,709 1,114
Store closing charges 5,883 113 2,206
Deferred income taxes (1,734) 9,193 (4,999)
Restricted stock compensation 37 - -
Tax benefit from exercise of stock options 164 385 1,024
Changes in assets and liabilities:
Trade and other receivables 692 282 (1,752)
Inventories 13,851 (1,072) (13,260)
Prepaid expenses and other current assets (2,062) 32 (641)
Other assets (2,896) (1,542) (619)
Accounts payable (11,426) (23,203) 13,180
Accrued liabilities 4,340 7,293 1,503
Income taxes payable (5,353) 1,282 (728)
Other liabilities 3,315 (214) 448
-------------- -------------- --------------
Net cash provided by operating activities 29,868 34,718 29,652
Cash flows used in investing activities:
Capital expenditures (13,343) (19,072) (24,982)
Cash flows from financing activities:
Net borrowings under notes payable to banks (16,388) (16,400) (2,486)
Proceeds from exercise of stock options 1,271 810 2,048
Proceeds from employee stock purchase plan 910 1,028 997
Purchase of common stock (212) (1,501) (6,019)
-------------- -------------- --------------
Net cash used in financing activities (14,419) (16,063) (5,460)
-------------- -------------- --------------
Net increase (decrease) in cash and cash equivalents 2,106 (417) (790)
Cash and cash equivalents at beginning of year 9,859 10,276 11,066
-------------- -------------- --------------
Cash and cash equivalents at end of year $11,965 $ 9,859 $10,276
============== ============== ==============
Supplemental disclosures of cash flow information:
Interest paid $ 1,702 $ 2,567 $ 3,980
Income taxes paid 7,723 2,392 14,221
The accompanying notes are an integral part of these financial statements.
F-5
STEIN MART, INC.
NOTES TO FINANCIAL STATEMENTS
January 31, 2004
(Dollars in tables in thousands except per share amounts)
1. Summary of Significant Accounting Policies and Other Information
At January 31, 2004 the Company operated a chain of 261 off-price retail stores
in 28 states and the District of Columbia. Each store offers women's, men's and
children's apparel, as well as accessories, gifts, linens and shoes.
Fiscal Year End
The Company's fiscal year ends on the Saturday closest to January 31. Results
for 2003, 2002 and 2001 are for the 52 weeks ended January 31, 2004, February 1,
2003 and February 2, 2002, respectively.
Use of Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
Cash and Cash Equivalents
Cash and cash equivalents include cash on hand, demand deposits and short-term
investments with original maturities of three months or less.
Inventories
Merchandise inventories are valued at the lower of average cost or market, on a
first-in first-out basis, using the retail inventory method (RIM). RIM is an
averaging method that is widely used in the retail industry. The use of RIM
results in inventories being valued at the lower of cost or market as markdowns
are taken as a reduction of the retail values of inventories.
Based on a review of historical markdowns, current business trends and seasonal
inventory categories, additional inventory reserves may be recorded to reflect
estimated markdowns which may be required to liquidate certain inventories and
reduce inventories to the lower of cost or market. Management believes its
inventory valuation methods approximate the net realizable value of clearance
inventory and result in valuing inventory at the lower of cost or market.
Property and Equipment
Property and equipment are stated at cost, less accumulated depreciation and
amortization. Depreciation is computed using the straight-line method over
estimated useful lives of 3-10 years for furniture, fixtures and equipment and
5-15 years for leasehold improvements. Leasehold improvements are amortized over
the shorter of the estimated useful lives of the improvements or the term of the
lease.
Impairment of Long Lived Assets
The Company follows Statement of Financial Accounting Standards ("SFAS") No.
144, "Accounting for the Impairment or Disposal of Long-Lived Assets," which
requires impairment losses to be recorded on long-lived assets used in
operations whenever events or changes in circumstances indicate that the net
carrying amounts may not be recoverable. An impairment loss is recognized if the
sum of the expected future undiscounted cash flows from the use of the assets is
less than the net book value of the assets. An impairment loss is recognized if
the carrying value of the asset exceeds its fair value. Impairment reviews are
performed for individual stores. Factors used in the review include management's
plans for future operations, recent operating results and projected cash flows.
Store Closing Costs
The Company follows SFAS No. 146, "Accounting for Costs Associated with Exit or
Disposal Activities," to record store closing costs. SFAS No. 146 requires the
recognition of costs associated with exit or disposal activities when they are
incurred rather than at the date of commitment to an exit or disposal plan.
F-6
STEIN MART, INC.
NOTES TO FINANCIAL STATEMENTS
Insurance Reserves
The Company uses a combination of insurance and self-insurance for various risks
including workers' compensation, general liability and associate-related health
care benefits. Claim liabilities are estimated actuarially, based on claims
filed and claims incurred but not reported.
Store Pre-Opening Costs
New store pre-opening costs are expensed as incurred.
Revenue Recognition
Revenue from sales of the Company's merchandise is recognized at the time of
sale, net of any returns and allowances, discounts and percentage-off coupons.
Future merchandise returns are estimated based on historical experience. Leased
department sales are excluded from net sales; commissions, net of related
selling expenses, and rental income from leased departments are included in
other income, net.
Advertising Expense
Advertising costs are expensed as incurred. Advertising expenses of $57,390,000,
$51,653,000 and $46,576,000 are reflected in selling, general and administrative
expenses in the Statements of Operations for 2003, 2002 and 2001, respectively.
Income Taxes
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes.
Earnings Per Share
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):
2003 2002 2001
-------- -------- --------
Weighted-average number of common shares 41,649 41,575 41,176
Stock options 52 189 317
-------- -------- --------
Weighted-average number of common
shares plus common stock equivalents 41,701 41,764 41,493
======== ======== ========
Statements of Operations Classifications
Cost of merchandise sold includes merchandise costs, net of vendor discounts and
allowances, freight and inventory shrinkage; store occupancy costs (including
rent, common area maintenance, real estate taxes, utilities and maintenance);
payroll, benefits and travel costs directly associated with buying inventory;
and costs of operating the distribution warehouse.
Selling, general and administrative expenses include store operating expenses,
such as payroll and benefit costs, advertising, store supplies, depreciation and
other direct selling costs, and costs associated with the Company's corporate
functions.
Reclassifications
Certain reclassifications have been made in prior years' financial statements to
conform to classifications used in the current year.
F-7
STEIN MART, INC.
NOTES TO FINANCIAL STATEMENTS
Stock-Based Compensation
The Company has adopted the disclosure-only provisions of SFAS No. 123, as
amended by SFAS No. 148, "Accounting for Stock-Based Compensation," and intends
to retain the intrinsic value method of accounting for stock-based compensation
which it currently uses. 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 (in thousands
except per share amounts):
2003 2002 2001
-------------- -------------- --------------
Net income - as reported $2,201 $20,690 $15,354
Add: Restricted stock-based employee
compensation expense included in reported
net income, net of related tax effects 23 - -
Deduct: Total stock-based employee
compensation expense determined under the
fair value based method for all awards, net of
related tax effects (1,209) (1,741) (2,087)
-------------- -------------- --------------
Net income - pro forma $1,015 $18,949 $13,267
============== ============== ==============
Basic earnings per share - as reported $0.05 $0.50 $0.37
Diluted earnings per share - as reported $0.05 $0.50 $0.37
Basic earnings per share - pro forma $0.02 $0.46 $0.32
Diluted earnings per share - pro forma $0.02 $0.45 $0.32
The effects of applying this Statement for pro forma disclosures are not likely
to be representative of the effects on reported net income for future years,
because options vest over several years and additional awards are made each
year. In determining the pro forma compensation cost, the weighted-average fair
value of options granted during fiscal 2003, 2002 and 2001 was estimated to be
$3, $5 and $5, respectively, using the Black-Scholes options pricing model. The
following weighted-average assumptions were used for grants made during 2003,
2002 and 2001: dividend yield of 0.0%, expected volatility of 51.8%, 51.9% and
51.7%, respectively, risk-free interest rate of 3.0%, 3.8% and 4.8%,
respectively and expected lives of 5.0, 5.0 and 7.0, respectively.
2. Discontinued Operations
Two of the stores closed during the fourth quarter of 2003 (see Note 3) resulted
in the exit from the New Mexico 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. To determine if cash
flows have been eliminated from ongoing operations, management evaluated a
number of factors, including: proximity to a 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 those two closed stores should be accounted for as discontinued
operations. The prior years' operating activities for these two stores have also
been reclassified to "Loss from discontinued operations" in the accompanying
Statements of Operations.
F-8
STEIN MART, INC.
NOTES TO FINANCIAL STATEMENTS
Discontinued operations generated sales of $6.2 million, $7.0 million and $7.0
million, in 2003, 2002 and 2001, respectively. Loss from discontinued operations
includes the following components:
2003 2002 2001
-------------- -------------- --------------
Loss from operations $(2,696) $(461) $(481)
Income tax benefit 1,024 175 183
-------------- -------------- --------------
Loss from discontinued operations, net of tax benefit $(1,672) $(286) $(298)
============== ============== ==============
See Note 3 for a description of store closing costs and asset impairment charges
included in loss from discontinued operations for 2003.
3. Store Closing Charges and Impairment of Long-Lived Assets
In January 2004, the Company announced plans to close six stores and to relocate
three other stores in 2004 within the same metropolitan areas. A pre-tax asset
impairment charge of $1.3 million was recorded during 2003 to reduce the
carrying value of property and equipment for these nine stores to their
respective fair value. A $1.6 million inventory charge was also recorded to
reduce merchandise inventories in these stores to their estimated realizable
value. The estimated charges that will be recorded in 2004 are approximately
$1.5 million for the present value of lease termination costs and severance
charges.
The Company closed 16 under-performing stores during 2003 incurring pre-tax
charges of $6.7 million for the present value of lease termination costs. The
Company also incurred pre-tax asset impairment charges of $2.6 million during
2003 and $2.4 million during 2002 to reduce the carrying value of property and
equipment of these and certain other under-performing stores to their respective
estimated fair value. Severance costs of $0.9 million were also incurred during
2003. Lease termination costs are net of estimated sublease income that could
reasonably be obtained for the properties. In the event the Company is not
successful in subleasing closed store locations when management expects,
additional reserves for store closing costs may be recorded. All of these
charges are included in selling, general and administrative expenses in the
Statement of Operations for 2003 and 2002, except for $349,000 in 2003 and
$50,000 in 2002 which are included in loss from discontinued operations.
During 2001, the Company recorded a pre-tax charge of $2.9 million, including
$2.2 million for the estimated cost of lease terminations and $0.7 million for
the impairment of certain property and equipment for four stores that were
closed in 2002. The charges are included in selling, general and administrative
expenses in the Statement of Operations for 2001.
The following tables show the activity in the store closing reserve (in
thousands):
Feb. 1, Jan. 31,
2003 Charges Payments 2004
-------------- -------------- -------------- --------------
Continuing operations:
Lease termination costs $4,982 $6,561 $(2,763) $8,780
Severance - 736 (586) 150
Other - 105 - 105
-------------- -------------- -------------- --------------
4,982 7,402 (3,349) 9,035
-------------- -------------- -------------- --------------
Discontinued operations:
Lease termination costs - 172 (13) 159
Severance - 135 (135) -
-------------- -------------- -------------- --------------
- 307 (148) 159
-------------- -------------- -------------- --------------
Total store closing reserve $4,982 $7,709 $(3,497) $9,194
============== ============== ============== ==============
F-9
STEIN MART, INC.
NOTES TO FINANCIAL STATEMENTS
Feb. 2, Feb. 1,
Continuing operations: 2002 Charges Payments 2003
-------------- -------------- -------------- --------------
Lease termination costs $5,680 $ 113 $ (811) $4,982
============== ============== ============== ==============
Feb. 3, Feb. 2,
Continuing operations 2001 Charges Payments 2002
-------------- -------------- -------------- --------------
Lease termination costs $4,984 $2,206 $(1,510) $5,680
============== ============== ============== ==============
The store closing reserve at January 31, 2004, February 1, 2003 and February 2,
2002 includes a current portion (in accrued liabilities) of $2.8 million, $1.5
million and $1.0 million, respectively, and a long-term portion (in other
liabilities) of $6.4 million, $3.5 million and $4.7 million, respectively.
The table below sets forth the components of loss from operations for stores
closed in 2003, 2002 and 2001. The 2003 table presents the losses from the 16
stores that closed in 2003; the 2002 table presents the sum of the losses from
the 16 stores closed in 2003 and the four stores closed in 2002; and the 2001
table presents the sum of the losses of the 16 stores closed in 2003, the four
stores closed in 2002 and the three stores closed in 2001.
Operating Results of Closed Stores Included In:
------------------------------------------------
Continuing Discontinued Total Closed
Year ended January 31, 2004: Operations Operations Stores
-------------- -------------- --------------
Sales $ 27,358 $ 6,175 $ 33,533
Cost of sales 30,962 6,765 37,727
-------------- -------------- --------------
Gross margin (3,604) (590) (4,194)
Selling, general and administrative expenses 16,639 2,139 18,778
Other income, net 202 33 235
-------------- -------------- --------------
Loss from operations $(20,041) $(2,696) $(22,737)
============== ============== ==============
# of stores closed in 2003 14 2 16
============== ============== ==============
Continuing Discontinued Total Closed
Year ended February 1, 2003: Operations Operations Stores
-------------- -------------- --------------
Sales $54,082 $7,035 $61,117
Cost of sales 46,535 5,501 52,036
-------------- -------------- --------------
Gross margin 7,547 1,534 9,081
Selling, general and administrative expenses 17,721 2,078 19,799
Other income, net 771 83 854
-------------- -------------- --------------
Loss from operations $(9,403) $(461) $(9,864)
============== ============== ==============
# of stores closed in 2003 and 2002 18 2 20
============== ============== ==============
Continuing Discontinued Total Closed
Year ended February 2, 2002: Operations Operations Stores
-------------- -------------- --------------
Sales $ 63,923 $7,046 $ 70,969
Cost of sales 53,491 5,617 59,108
-------------- -------------- --------------
Gross margin 10,432 1,429 11,861
Selling, general and administrative expenses 21,809 2,004 23,813
Other income, net 928 94 1,022
-------------- -------------- --------------
Loss from operations $(10,449) $ (481) $(10,930)
============== ============== ==============
# of stores closed in 2003, 2002 and 2001 21 2 23
============== ============== ==============
F-10
STEIN MART, INC.
NOTES TO FINANCIAL STATEMENTS
4. Property and Equipment, Net
Property and equipment and the related accumulated depreciation and amortization
are as follows:
Jan. 31, Feb. 1,
2004 2003
-------------- --------------
Furniture, fixtures and equipment $151,100 $145,285
Leasehold improvements 51,017 49,471
-------------- --------------
202,117 194,756
Less: accumulated depreciation and amortization 125,183 108,405
-------------- --------------
$ 76,934 $ 86,351
============== ==============
5. Accrued Liabilities
The major components of accrued liabilities are as follows:
Jan. 31, Feb. 1,
2004 2003
-------------- --------------
Compensation and employee benefits $14,389 $13,302
Unredeemed gift and returns cards 14,434 12,545
Property taxes 10,668 10,323
Payroll and other taxes 6,312 4,772
Store closing reserve 2,827 1,461
Other 12,085 11,004
-------------- --------------
$60,715 $53,407
============== ==============
6. Notes Payable to Banks
In July 2003, the Company completed a three-year $150 million senior revolving
credit agreement (the "Agreement") with a group of lenders to replace its
existing loan facility. 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.
Borrowings under the Agreement are based on and secured by eligible inventory.
The Company routinely issues commercial and standby letters of credit for
purposes of securing foreign sourced merchandise and certain insurance programs.
Outstanding letters of credit reduce availability under the credit agreement.
The Company had outstanding commercial and stand-by letters of credit of $0.2
million and $5.5 million, respectively, at January 31, 2004.
The interest rates on borrowings under the Agreement range from Prime to Prime
plus .25% per annum for Prime Rate Loans and LIBOR plus 1.50% to LIBOR plus
2.25% per annum for Eurodollar Rate Loans and are established quarterly, based
on excess availability as defined in the Agreement. As of January 31, 2004, the
interest rates for Prime Rate and Eurodollar Rate Loans were 4.13% and 2.85%,
respectively. An unused line fee of .25% to .375% per annum (.375% as of January
31, 2004) is charged on the unused portion of the revolving credit facility,
based on excess availability. The Company was in full compliance with the terms
of the Agreement as of January 31, 2004.
All borrowings bear interest at variable rates that approximate current market
rates and therefore the carrying value of these borrowings approximates fair
value.
Notes payable to banks was classified as current at February 1, 2003 because
management's projections indicated that the Company would not be in compliance
with certain of the financial covenants under the previous credit agreement as
of the end of the first quarter 2003
7. Leased Facilities and Commitments
The Company leases all of its retail and support facilities. Annual store rent
is generally comprised of a fixed minimum amount plus a contingent amount based
on a percentage of sales exceeding a stipulated amount. Most leases also require
additional payments covering real estate taxes, common area costs and insurance.
F-11
STEIN MART, INC.
NOTES TO FINANCIAL STATEMENTS
Rent expense is as follows:
2003 2002 2001
-------------- -------------- --------------
Minimum rental $62,869 $60,805 $55,278
Contingent rentals 441 678 889
-------------- -------------- --------------
$63,310 $61,483 $56,167
============== ============== ==============
At January 31, 2004, for the majority of its retail and corporate facilities,
the Company was committed under noncancellable leases with remaining terms of up
to 15 years. Future minimum payments under noncancellable leases are:
2004 $62,046
2005 57,822
2006 52,761
2007 47,829
2008 42,395
Thereafter 131,925
--------------
$394,778
==============
During the periods presented, the Company subleased the space for shoe and
fragrance departments in all of its stores. As of March 2003, the Company owns
and operates the fragrance department. Sales from leased departments are
excluded from sales of the Company. Sublease rental income of $12,097,300,
$12,440,500 and $12,524,700, is included in other income, net in the Statements
of Operations for 2003, 2002 and 2001, respectively.
8. Income Taxes
The income tax provision is as follows:
2003 2002 2001
-------------- -------------- --------------
Current:
Federal $3,783 $ 3,374 $13,440
State 324 289 1,152
-------------- -------------- --------------
Total 4,107 3,663 14,592
-------------- -------------- --------------
Deferred:
Federal (1,597) 8,467 (4,604)
State (137) 726 (395)
-------------- -------------- --------------
Total (1,734) 9,193 (4,999)
-------------- -------------- --------------
Income tax provision $2,373 $12,856 $ 9,593
============== ============== ==============
The income tax provision excludes the income tax benefit related to losses from
discontinued operations in the amount of $1.0 million in 2003 and $0.2 million
in 2002 and 2001 (see Note 2).
Income taxes at the federal statutory rate of 35 percent differ from amounts
provided as follows:
2003 2002 2001
-------------- -------------- --------------
Federal tax at the statutory rate $2,186 $11,841 $8,836
State income taxes, net of federal benefit 324 536 466
Other, net (137) 479 291
-------------- -------------- --------------
Total income tax provision $2,373 $12,856 $9,593
============== ============== ==============
Effective tax rate 38.0% 38.0% 38.0%
============== ============== ==============
F-12
STEIN MART, INC.
NOTES TO FINANCIAL STATEMENTS
Temporary differences, which give rise to deferred tax assets and liabilities,
are as follows:
Jan. 31, Feb. 1,
2004 2003
-------------- --------------
Deferred tax assets:
Store closing reserves $ 3,437 $ 1,893
Accrued liabilities 3,752 2,863
NOL carryforward 684 241
Other 14 -
-------------- --------------
7,887 4,997
-------------- --------------
Deferred tax liabilities:
Property and equipment 13,139 13,064
Inventory 2,971 3,060
Prepaid items 1,670 500
-------------- --------------
17,780 16,624
-------------- --------------
Net deferred tax liability $(9,893) $(11,627)
============== ==============
At January 31, 2004, the Company had approximately $16 million in state net
operating loss ("NOL") carryforwards, which the Company anticipates utilizing in
2004.
Deferred tax assets and liabilities are reflected on the Company's Balance
Sheets as follows:
Jan. 31, Feb.1,
2004 2003
-------------- --------------
Current deferred tax liabilities (included in
accrued liabilities) $ (201) $ -
Current deferred tax assets (included in
prepaid expenses and other current assets) - 196
Non-current deferred tax liabilities (included
in other liabilities) (9,692) (11,823)
-------------- --------------
Net deferred tax liability $(9,893) $(11,627)
============== ==============
The exercise of certain stock options which have been granted under the
Company's stock option plans gives rise to compensation which is includable in
the taxable income of the applicable employees and deductible by the Company for
federal and state income tax purposes. Such compensation results from increases
in the market value of the Company's common stock subsequent to the date of
grant of the applicable exercised stock options, and in accordance with
Accounting Principles Board Opinion No. 25, such compensation is not recognized
as an expense for financial accounting purposes and the related tax benefits are
recorded directly in paid-in capital.
9. Stockholders' Equity
During 2003, 2002 and 2001, the Company repurchased 50,000, 220,000, and 657,600
shares of its common stock in the open market at a total cost of $212,000,
$1,501,000 and $6,019,000, respectively. As of January 31, 2004, there are
1,994,200 shares which can be repurchased pursuant to the Board of Directors'
current authorizations.
10. Stock Option and Purchase Plans
In 2001, the shareholders approved a new stock option plan (the "Omnibus Plan"),
under which a maximum of 4,500,000 shares of the Company's common stock may be
issued. Shares covered by unexercised options that terminate or shares that are
forfeited may be subject to new awards. The Omnibus Plan replaced the Company's
Employee Stock and Director Stock Option Plans (the "Previous Plans") under
which there were 3,098,048 options to purchase shares outstanding as of January
31, 2004. Upon approval of the Omnibus Plan, no further options have been or
will be issued
F-13
STEIN MART, INC.
NOTES TO FINANCIAL STATEMENTS
under the Previous Plans. The term of the Omnibus Plan is indefinite, except
that no incentive stock option award can be granted after the tenth anniversary
of the plan.
In 2002, the Compensation Committee of the Board of Directors determined that it
was appropriate to undertake an overall review of the Company's compensation
strategies. As part of this review, it was decided that starting in fiscal 2003
restricted stock awards, as provided for in the Omnibus Plan, in addition to
stock options would be granted as part of the Long-term Compensation portion of
the compensation program. A total of 72,026 restricted shares were issued to key
employees in May 2003 at $5.53 per share, the market value at date of grant. At
January 31, 2004, these awards, net of forfeitures, aggregated 62,532 shares.
Shares awarded under the plan entitle the shareholder to all rights of common
stock ownership except that the shares may not be sold, transferred, pledged,
exchanged or otherwise disposed of during the restriction period. Vesting occurs
seven years following the date of grant or at the end of the second fiscal year
following the date of grant, if certain defined Company performance goals are
achieved. Unvested shares are forfeited upon termination of employment.
The Omnibus Plan, consistent with the Previous Plans, provides that shares of
common stock may be granted to certain key employees and outside directors
through non-qualified stock options, incentive stock options, stock appreciation
rights, performance awards, restricted stock, or any other award made under the
terms of the plan. The Board of Directors, or its delegated authority,
determines the exercise price and all other terms of all grants. In general,
one-third of the options granted in the past have become exercisable on the
third, fourth and fifth anniversary dates of grant and expire ten years after
the date of grant. No stock appreciation rights have been granted under this or
the prior plan.
Activity for these fixed-price option plans is as follows:
Number Weighted-
of Average
Shares Exercise
(000) Price
-------------- --------------
Outstanding at February 3, 2001 4,542 $10.63
Granted 1,146 8.54
Exercised (549) 3.58
Forfeited (359) 13.90
-------------- --------------
Outstanding at February 2, 2002 4,780 10.70
Granted 514 10.63
Exercised (166) 4.58
Forfeited (97) 10.49
-------------- --------------
Outstanding at February 1, 2003 5,031 10.90
Granted 303 4.74
Exercised (251) 4.79
Forfeited (727) 9.06
-------------- --------------
Outstanding at January 31, 2004 4,356 $11.13
============== ==============
Exercisable stock options were 2.611 million, 2.625 million and 2.004 million,
at January 31, 2004, February 1, 2003 and February 2, 2002, respectively.
F-14
STEIN MART, INC.
NOTES TO FINANCIAL STATEMENTS
The following table summarizes information about fixed-price stock options
outstanding at January 31, 2004:
Options Outstanding Options Exercisable
---------------------------------------------------- ---------------------------------
Weighted-
Average Weighted- Weighted-
Range of Number Remaining Average Number Average
Exercise Outstanding Contractual Exercise Exercisable Exercise
Prices (000) Life (Years) Price (000) Price
- ---------------- --------------- ---------------- --------------- --------------- ---------------
$ 5.00 - 7.00 588 5.4 $ 6.04 320 $ 6.19
$ 7.75 - 10.19 1,192 6.7 8.45 252 8.91
$10.90 - 13.82 2,106 4.2 13.11 1,630 13.67
$14.25 - 16.59 470 4.3 15.40 409 15.41
--------------- ---------------- --------------- --------------- ---------------
4,356 5.0 $11.13 2,611 $11.13
=============== ================ =============== =============== ===============
The Company has an Employee Stock Purchase Plan (the "Stock Purchase Plan")
whereby all employees who complete six months employment with the Company and
who work on a full-time basis or are regularly scheduled to work more than 20
hours per week are eligible to participate in the Stock Purchase Plan.
Participants in the Stock Purchase Plan are permitted to use their payroll
deductions to acquire shares at 85% of the fair market value of the Company's
stock determined at either the beginning or end of each option period. In 2003,
2002 and 2001, the participants acquired 179,902 shares, 173,048 shares and
127,220 shares of the Company's common stock at weighted-average per share
prices of $4.92, $5.94 and $7.84 per share, respectively.
11. Employee Benefit Plans
The Company has a defined contribution retirement plan covering employees who
are at least 21 years of age, have completed at least one year of service and
who work at least 1,000 hours annually. Under the profit sharing portion of the
plan, the Company can make discretionary contributions which vest at a rate of
20 percent per year after two years of service. The Company matches 50 percent
of the employee's voluntary pre-tax contributions up to a maximum of four
percent of the employee's compensation. The Company's matching portion vests in
accordance with the plan's vesting schedule. Total Company contributions under
the retirement plan were $1,044,000, $1,627,000 and $1,571,000 for 2003, 2002
and 2001, respectively.
The Company has an executive split dollar life insurance plan wherein eligible
executives are provided with pre-retirement life insurance protection based upon
three to five times base salary. Upon retirement, the executive is provided with
life insurance protection based upon one and one-half to two and one-half times
final base salary. The expense for this plan was $229,000, $331,000 and $293,000
in 2003, 2002 and 2001, respectively.
The Company also has an executive deferral plan providing officers and key
executives with the opportunity to participate in an unfunded, deferred
compensation program. Effective November 1, 2002, the plan was amended to
include director-level employees. Under the program, participants may defer up
to 100% of their base compensation and bonuses earned. The Company will match
the officers and key executives' contributions 100%, and the directors'
contributions 50%, up to the first 10% of compensation deferred. A participant's
Company matching contributions and related investment earnings are 20% vested
after four years of participation in the plan and increase 20% per year through
the eighth year, at which time a participant is fully vested. The total of
participant deferrals and Company matching contributions was $3,446,000 at
January 31, 2004, $2,286,000 at February 1, 2003 and $1,504,000 at February 2,
2002 and is included in other liabilities. The expense for this plan was
$747,000, $611,000 and $495,000 in 2003, 2002 and 2001, respectively.
In connection with the above two plans, whole life insurance contracts were
purchased on the related participants. At January 31, 2004 and February 1, 2003
the cash surrender value of these policies was $5,515,000 and $3,132,000,
respectively, and is included in other assets.
F-15
STEIN MART, INC.
NOTES TO FINANCIAL STATEMENTS
12. Quarterly Results of Operations (Unaudited)
The Company's quarterly operating results have been restated to reflect
discontinued operations (Note 2) for all periods presented.
13 Weeks Ended
-----------------------------------------------------------------
May 3, Aug. 2, Nov. 1, Jan. 31,
Year Ended January 31, 2004 2003 2003 2003 2004
-------------- -------------- -------------- --------------
Net sales $329,050 $301,767 $314,479 $410,161
Gross profit 83,416 70,962 73,679 112,705
Income (loss) from continuing operations 1,685 (2,648) (10,060) 14,896
Loss from discontinued operations (172) (125) (339) (1,036)
-------------- -------------- -------------- --------------
Net income (loss) $ 1,513 $ (2,773) $(10,399) $ 13,860
============== ============== ============== ==============
Basic income (loss) per share:
Continuing operations $ 0.04 $ (0.07) $ (0.24) $ 0.36
Discontinued operations - - (0.01) (0.03)
-------------- -------------- -------------- --------------
Total $ 0.04 $ (0.07) $ (0.25) $ 0.33
============== ============== ============== ==============
Diluted income (loss) per share:
Continuing operations $ 0.04 $ (0.07) $ (0.24) $ 0.36
Discontinued operations - - (0.01) (0.03)
-------------- -------------- -------------- --------------
Total $ 0.04 $ (0.07) $ (0.25) $ 0.33
============== ============== ============== ==============
13 Weeks Ended
-----------------------------------------------------------------
May 4, Aug. 3, Nov. 2, Feb. 1,
Year Ended February 1, 2003 2002 2002 2002 2003
-------------- -------------- -------------- --------------
Net sales $354,292 $309,882 $331,139 $406,300
Gross profit 96,163 77,729 73,318 99,787
Income (loss) from continuing operations 11,430 2,830 (3,768) 10,484
Loss from discontinued operations (62) (55) (75) (94)
-------------- -------------- -------------- --------------
Net income (loss) $ 11,368 $ 2,775 $ (3,843) $ 10,390
============== ============== ============== ==============
Basic income (loss) per share:
Continuing operations $ 0.27 $ 0.07 $ (0.09) $ 0.25
Discontinued operations* - - - -
-------------- -------------- -------------- --------------
Total $ 0.27 $ 0.07 $ (0.09) $ 0.25
============== ============== ============== ==============
Diluted income (loss) per share:
Continuing operations $ 0.27 $ 0.07 $ (0.09) $ 0.25
Discontinued operations* - - - -
-------------- -------------- -------------- --------------
Total $ 0.27 $ 0.07 $ (0.09) $ 0.25
============== ============== ============== ==============
* Loss per share from discontinued operations rounds to zero on a quarterly
basis, but rounds to $(0.01) for the year ended February 1, 2003.
13. Legal Proceedings
The Company is involved in various routine legal proceedings incidental to the
conduct of its business. Management, based upon the advice of outside legal
counsel, does not believe that any of these legal proceedings will have a
material adverse effect on the Company's financial condition, results of
operations or cash flows.
F-16
INDEX TO EXHIBITS
*3.1 Articles of Incorporation of the Registrant
3.2 Bylaws of the registrant, amended September 8, 2003 (filed herein)
4.1 Provisions of the Articles of Incorporation and Bylaws of the
Registrant defining rights of shareholders of Common Stock of the
Registrant (incorporated by reference to the Registrant's Annual
Report on Form 10-K for the fiscal year ended December 30, 2000)
*4.2 Form of stock certificate for Common Stock
~*10.1 Form of Director's and Officer's Indemnification Agreement
10.2 Loan and Security Agreement dated July 18, 2003, among Stein Mart,
Inc., Wachovia Bank, National Association and Fleet Retail Finance,
Inc. as Co-Arrangers, Congress Financial Corporation (Florida)
as Administrative and Collateral Agent, General Electric capital
Corporation as Documentation Agent and the Lenders (as such terms
are defined in the Credit Agreement) (incorporated by reference
to the Registrant's Quarterly Report on Form 10-Q for the quarter
ended August 2, 2003)
~*10.3 Employee Stock Plan
~*10.4 Form of Non-Qualified Stock Option Agreement
~*10.5 Form of Incentive Stock Option Agreement
*10.6 Profit Sharing Plan
~*10.7 Executive Health Plan
~*10.8 Director Stock Option Plan
~^10.9 Executive Split Dollar Plan
10.10 Executive Deferral Plan, amended November 1, 2002 (filed herein)
10.11 2001 Omnibus Plan (incorporated by reference to the Company's Form
S-8 Registration Statement filed on August 7, 2001)
10.12 Form of Restricted Share Award Agreement for Key Employees, pursuant
to Omnibus Plan (filed herein)
23.1 Consent of PricewaterhouseCoopers LLP (filed herein)
31.1 Certification of Chief Executive Officer Pursuant to Section 302 of
the Sarbanes Oxley Act of 2002 (filed herein)
31.2 Certification of Chief Financial Officer Pursuant to Section 302 of
the Sarbanes Oxley Act of 2002 (filed herein)
32.1 Certification of the Chief Executive Officer Pursuant to 18 U.S.C.
Section 1350 (filed herein)
32.2 Certification of the Chief Financial Officer Pursuant to 18 U.S.C.
Section 1350 (filed herein)
99.3 Audit Committee Charter, amended April 7, 2004 (filed herein)
99.4 Compensation Committee Charter, amended April 7, 2004 (filed herein)
99.5 Corporate Governance Committee Charter, amended April 7, 2004 (filed
herein)
* Previously filed as Exhibit to Form S-1 Registration Statement
33-46322 and incorporated herein by reference.
^ Previously filed as Exhibit to the Company's Form 10-K for the
fiscal year ended January 1, 2000 and incorporated herein by
reference.
~ Management Contracts or Compensatory Plan or arrangements filed
pursuant to S-K 601 (10) (iii) (A).
E-1