Tuesday, July 27, 1999
Stage Stores Inc.
Price (7/26/99): $7 1/4
HOW DID IT FIND TROUBLE?
To an actor, there is nothing worse than an empty stage. For apparel retailer Stage Stores (NYSE: SGE), the curtain has come barreling down over the past year. Maybe breaking down the financial malaise into acts of quarterly demise will make things clear...
Act I, Q2 1998 -- The family apparel chain was generating rave reviews on Wall Street. In June the shares were trading as high as $53 3/4. Then the trap door came undone. While analysts were expecting a healthy $0.28 a share showing for the July quarter, the company shocked the crowd by pre-announcing that earnings would come in at less than a nickel a share. Bad show! The shareholders boo-hissed and the stock got pelted.
Act 2, Q3 1998 -- With pessimism swelling like a musical boom from the orchestra pit, the company turned around and, midway through the third quarter, announced that it was comfortable with the watered down projections for $0.06 a share. However, along with that September announcement came a dubious warning flag that the trends were beginning to fall apart. They did -- and the retailer ultimately reported a loss for the quarter.
Act 3, Q4 1998 and Q1 1999 -- The seasonally spiked holiday quarter should have brought some relief, but all it delivered was more red ink. With a poorly planned clearance sale, it also led to inventory problems that carried over into the new fiscal year.
Clearly it's been a rough year for Stage Stores, but what comes next? Epilog or Intermission?
Houston-based Stage Stores owns and operates a chain of close to 700 stores specializing in brand name family apparel. Under the storefront names of Stage, Bealls, and Palais Royal the company caters to small markets. 75% of its stores are located in cities where the population is less than 30,000.
12-month sales: $1163.4 million
12-month income: ($7.6 million)*
12-month EPS: ($0.26)*
Profit Margin: N/A
Market Cap: $203 million
(*Before accounting change)
Cash: $8.6 million
Current Assets: $512.2 million
Current Liabilities: $137.2 million
Long-term Debt: $495.7 million
HOW COULD YOU HAVE SEEN IT COMING?
Stage Stores thought it had the perfect play. By focusing on modest townships and avoiding large cities, it had a clear advantage in terms of competition. The big chains weren't nimble enough to enter a market that didn't take much to lead to saturation. Yet Stage Stores sold brand names in places where the customers used to have to make long commutes to find the nearest regional malls.
While the niche initially proved effective, it did not last. As the national department stores continued to canvass the countryside, the options grew for the patron. Then again, Stage was also expanding -- throughout 34 different states at last count. The geographic diversity was challenging for a company catering to the smallest of markets, and that is why a clearance sale will rarely lead to universally successful results.
How could you have seen this coming? Last summer the downturn came swift and sudden. However, back in September, the stock shot up to the mid-teens despite the company warning investors that it was cautious about the months ahead. That was a timely point to exit the Stage. The concern would naturally lead to an overambitious clearance sale. When the racks were picked dry, it posed an even stiffer challenge for the April 1999 quarter -- lack of inventory.
WHERE TO FROM HERE?
Is it a guilded Stage or a guiled one? Trading at book value and hoping not to disappoint investors yet again, the company is buzzing. It is closing down three dozen underperforming stores and has set up a snazzy website, complete with online coupons and clever content like its Short Survival Tips.
Most of the analysts are frozen on a "hold" rating -- a deathwish by definition. Yet Wall Street cannot come to a consensus on the company going forward. Earnings projections this year go from as low as $0.38 to as high as $0.65 a share. Next year the range narrows with the average estimate pegged at $0.74 pere share. The caveat here is that the analysts have generally guessed poorly on Stage over the past four quarters.
Will the company Stage a comeback? After showing double-digit same-store sales declines for the April quarter, the company has to prove that it has its inventory woes licked and that the chain is appealing again. That's the curtain call. Is all the world a Stage?
-Rick Aristotle Munarriz (firstname.lastname@example.org)
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