BERKO: Deciding whether to invest in Stein Mart

By: Malcolm Berko//April 19, 2017//

BERKO: Deciding whether to invest in Stein Mart

By: Malcolm Berko//April 19, 2017//

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Dear Mr. Berko: Why has Stein Mart done so badly in the past 10 years? What is wrong with the company? Does it really yield 11 percent? My stockbroker suggested I buy 5,000 shares “because it’s a good gamble”! — PE, Oklahoma City
Dear PE: The company’s biggest problem is tired, incompetent management. Stein Mart (SMRT-$2.50) isn’t a good gamble; it’s a rank gamble. SMRT would become a good gamble only if its price were to rise after your buying it. And SMRT has ugly management that knows little about marketing.
SMRT sells fashion merchandise and accessories for men and women, as well as home fashions and accessories. It’s a fun place to shop for merchandise one might also find in better department and specialty stores, as its prices are what one might find at large discount or off-price retail chains. I’ve purchased name-brand shirts (Polo) and pants (Michael Kors) at SMRT for one-third their cost at Dillard’s or Macy’s. My wife has purchased brand-name sweaters, slacks, linens and activewear, and my kids have bought quality household products, such as dinnerware, lamps and tables. SMRT carries such brand names as Hugo Boss, Gucci, Kate Spade, Burberry, Nine West and Greg Norman Collection, and every once in a while, it features popular-brand golf balls at $7.95 a dozen that the pro shops sell for $24.95. SMRT’s target customer is the fashion-conscious 30- to 60-year-old woman with a median family income of $110,000. However, SMRT also carries a broad line of youthful apparel and accessories that enjoys rising popularity.
Though I like its merchandise, I don’t care for this 109-year-old company, which has struggled and failed for over a decade to find its footing in an increasingly crowded retail environment. The retail industry is facing some serious challengers, and big companies such as Macy’s, Kohl’s, Sears, J.C. Penney, The Limited, hhgregg, Gander Mountain and Chico’s are closing store doors. But SMRT’s management continues to open new stores despite the fact that a growing number of its stores are hurting. Revenues have been declining since 2003, when SMRT topped out at $1.7 billion from 263 stores. A dozen years later, with 278 stores, SMRT booked $1.36 billion in revenues. And the revenue numbers were virtually unchanged last year, when SMRT had 285 locations. The holiday season was very sad. Comparable store revenues were off 4.7 percent, while gross revenues were 2 percent below the previous year’s results — even with more stores. And in a risible attempt to move inventory last quarter, witless management increased its markdowns and discount levels. It worked, but net income collapsed to 7 cents a share, failing to cover the 30-cent dividend. Yes, the dividend from this retailer yields 11 percent, but I think this iffy dividend must be cut.
SMRT, headquartered in Jacksonville, Florida, has 11,000 employees, has 285 stores in 30 states and plans to open five new stores in 2017. Management’s continuing merchandising missteps have pushed the stock below $3 a share. And those missteps are reflected in SMRT’s net profit margins, which have fallen from a high of 2.8 percent to an embarrassingly low 0.3 percent last year. The consensus on Wall Street suggests that SMRT’s revenues will be flat for 2017, though some cost cutting may increase net profit margins to 1 percent. And I did notice that John H. Williams Jr., vice chairman of the board, purchased 38,000 shares at $5.10 a share around Thanksgiving. Apparently, Johnny Jr. believes that the dividend, which at that time yielded 6 percent, is safe.
Some research organizations suggest that at $2.50, there’s little downside to the stock. Value Line commented, “The only way to go from these levels is up for SMRT, and we think it will best the overall market in the coming six to 12 months.” They believe that the current entry point is attractive and that patient, long-term investors should expect strong appreciation potential. And they may also know that Ross Stores (ROST-$63), a $12 billion-revenue off-price retailer, may be interested in adding a cousin to its successful retail family.

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