It's certainly no secret that department stores are among the most troubled of all retail businesses, given their relatively large physical footprints, high operating costs, and disrupted business models courtesy of the Internet. Still, some are prospering through this difficult time by differentiating themselves. Jacksonville, Fla.-based Stein Mart (SMRT) is one of those that has found a way to make it despite strong industry headwinds. In the company's recently released earnings, profits were up nearly 50%, which should have sent shares higher -- instead they dropped. The reason was not to do with operating performance, but the announcement of an SEC investigation into the restatement of prior financial results, along with a change in auditors. Is this unfair punishment to an otherwise strong performer?
Strong earnings
Stein Mart earned $0.08 per share on $3.4 million in net income this past quarter, up from $0.05 per share in the year-ago quarter. Revenue rose roughly 4% to $291 million. Analysts were expecting roughly the same numbers.
On stores opened at least one year, a great metric for the viability of a chain's stores, comparables rose 6.4% -- a particularly juicy number for a time that Jim Cramer recently noted is the worst period he can remember for the retail industry.
Stein Mart is seeing higher-margin items selling better than before, combined with a lean cost structure, which is how the bottom line was able to grow so substantially over the relatively minor top-line sales figure. The company's customers are mainly female, and many of them are snowbirds from the North coming down to the Southeast during the winter months. Management was very excited to be launching Stein Mart's Internet business, a method that they believe will allow loyal snowbird customers to shop Stein Mart's attractive deals year-round.
For those who either are snowbirds themselves or have spent substantial time around the demographic (the author hails from Sarasota, Fla., home of the snowbird), it is not difficult to see why this is an exciting development.
EBITDA for the quarter grew from $7.3 million in 2012 to $12.8 million.
Looking ahead
On an operating level, Stein Mart's business looks very attractive. The company has yet to tap into the e-commerce world, where most retailers have found their growth lately. This leaves a long runway for the company to increase earnings, stores aside. Management has closed underperformers, and is expanding the chain to other states, including California and Colorado. The company has $48 million in cash and no debt on the books.
On a trailing basis, EV to EBITDA is 7.22, which makes it a reasonably valued stock with interesting growth potential.
The question with Stein Mart is the SEC investigation, of which we know little other than the aforementioned reasons for the case. Management has been mute on the subject, on advice of council. Though, with the strong current performance, and apparently no question as to the company's balance sheet accounting (which is immaculate-looking), the investigation does not appear to threaten anything other than legal expenses.
Trading five points down, and possibly more in coming days, Stein Mart may be a briefly discounted stock with appealing upside potential.
