Please ensure Javascript is enabled for purposes of website accessibility

The Biggest Problem With Stage Stores Inc. Stock

By Jeremy Bowman – Mar 26, 2016 at 11:22AM

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

There are two major reasons the department store stock has plummeted.

Specialty department store retailer Stage Stores (SSI) has been suffering of late. After three straight disappointing earning reports, the stock is trading at a five-year low, and shares have plummeted more than 60% in the past year. 

The company's biggest problem is two-fold. It operates in a struggling industry, department stores, and many of its stores are located in oil-rich parts of the country that are facing tough times with the oil bust. In its most recent quarter, the key holiday season, the company posted a profit of $0.91, down from $1.36 the previous year, and below expectations of $1.06. For the full year, earnings per share was just $0.51. 

CEO Michael Glazer concisely summarized the company's key problems, saying:

"Our holiday results were pressured by low oil prices, the devalued peso and record warm temperatures. Stores in the oil patch and along the Mexican border account for more than 40% of our sales, and the economic uncertainty in those areas negatively affected our comp sales by 240 basis points during the fourth quarter." 

Image source: Stage Stores.

Stage is not the only company to point to oil prices and currency exchange rates for driving down sales. Restoration Hardware (RH 3.87%) made a similar observation in its recent preliminary earnings report, saying that the "Canada, Texas, and Miami markets were a drag of 4 points" on revenues in the second half of the year. Chili's parent, Brinker International (EAT 1.09%), reported comps were down 2.1% in its most recent quarter,  and the Dallas-based company said same-store sales plunged 6.6% in Texas, Louisiana, and Oklahoma, parts of the country that have significant exposure to oil prices.

Unfortunately for Stage, there's little it can do to alter those conditions, and they show no sign of changing in the foreseeable future. Similarly, overcoming weakness in the department store industry won't be easy, either. Last year, sales in that category fell 2.3% according to the Census Bureau, and a number of big names, including Macy'sNordstrom, and Kohl's struggled, and many department store chains announced store closings.

Stage was among that group, saying last summer that it would close 90 of its 832 stores. The company plans to shut down 30 locations this year and will not open any. Instead it plans to invest in e-commerce and its omnichannel business and improve stores. One recent bright spot in its earnings report was 20% growth in e-commerce, but the company continues to expect headwinds in the current fiscal year, forecasting a decline in same-store sales of 1% to 3% and flat EPS growth.

Compounding the problem is Stage's generous capital return policy, which could be bleeding the company of cash it will need to turn around the business. Stage pays a quarterly dividend of $0.15, giving investors a dividend yield of 7%, but its payout ratio is 118%, meaning the current payout is unsustainable based on its current profits. Stage needs to dip into its cash reserves or borrow money to maintain the payout.

In addition, the company spent $41.6 million on share buybacks in the most recent quarter, more than double its net income for the entire year last year. During the past year, its debt burden grew from $45 million to $162 million, in part to help to help accommodate those buybacks. While Stage was able to reduce its shares outstanding by 20% with those repurchases, it could leave the company vulnerable to any potential downturn in performance.

Considering that the weakness in department store retail and low oil prices are likely to persist, Stage's performance is unlikely to improve, and the projected slide in same-store sales could only make the problem worse. Unless oil prices come roaring back, there seems little reason to bet on Stage's comeback.

Jeremy Bowman has no position in any stocks mentioned. The Motley Fool recommends Nordstrom and Restoration Hardware. 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.

Invest Smarter with The Motley Fool

Join Nearly 1 Million Premium Members Receiving…

  • New Stock Picks Each Month
  • Detailed Analysis of Companies
  • Model Portfolios
  • Live Streaming During Market Hours
  • And Much More
Get Started Now

Stocks Mentioned

Stage Stores Stock Quote
Stage Stores
Macy's Stock Quote
$23.50 (0.04%) $0.01
Kohl's Stock Quote
$32.08 (-0.99%) $0.32
Nordstrom Stock Quote
$20.97 (1.16%) $0.24
Brinker International Stock Quote
Brinker International
$33.45 (1.09%) $0.36
Rh Stock Quote
$286.83 (3.87%) $10.68

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

Related Articles

Motley Fool Returns

Motley Fool Stock Advisor

Market-beating stocks from our award-winning analyst team.

Stock Advisor Returns
S&P 500 Returns

Calculated by average return of all stock recommendations since inception of the Stock Advisor service in February of 2002. Returns as of 12/01/2022.

Discounted offers are only available to new members. Stock Advisor list price is $199 per year.

Premium Investing Services

Invest better with The Motley Fool. Get stock recommendations, portfolio guidance, and more from The Motley Fool's premium services.