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Why Shares of Stage Stores Inc. Slumped Today

By Timothy Green - May 19, 2015 at 5:07PM

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Mixed earnings results and declining comparable sales disappointed investors.

Although we don't believe in timing the market or panicking over market movements, we do like to keep an eye on big changes -- just in case they're material to our investing thesis.

What: Shares of Stage Stores (SSI) slumped on Tuesday after the company reported mixed first-quarter earnings. The stock closed at $16.50, down 12% on the day.

So what: Stage Stores reported revenue of $369.3 million, down 0.7% year over year and about $10 million shy of analyst expectations. Comparable-store sales decreased by 1.1% at the company's 853 specialty department stores, while direct-to-consumer sales increased by 31% year over year.

Stage Stores managed to beat analyst estimates for earnings by a penny per share, reporting a loss of $0.27 per share. This is a significant improvement compared to the first quarter of 2014, when the company posted a $0.38-per-share loss. A slightly higher gross margin along with slightly lower operating expenses as a percentage of revenue allowed Stage Stores to improve profitability despite the decline in revenue.

The company expects comparable-store sales for fiscal 2015 to range from being flat to seeing a 2% increase, with EPS expected to be between $1.20 and $1.28. This guidance represents a slight improvement over 2014, when the company reported EPS from continuing operations of $1.19.

Now what: With essentially all of Stage Stores' profits coming in the holiday quarter, the results of the first quarter are far less important. While the company improved profitability, declining comparable-store sales seems to have disappointed investors.

With earnings expected to increase by at most 7.5% during 2015, valuation also may have been behind the extreme reaction to Stage Stores' results. Stage Stores traded at around 15 times forward earnings going into the earnings report, and for a retailer without much of a growth story, that seems high. Revenue has grown very slowly over the past decade, and EPS has fluctuated around the same level.

Expectations may have simply been too high, and the stock is being punished as a result.

Timothy Green has no position in any stocks mentioned. The Motley Fool recommends Apple. The Motley Fool owns shares of Apple. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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