ITEM 1. BUSINESS
At January 2, 1999, Stein Mart, Inc., (the "Company" or "Stein Mart") was a 182-store retail chain offering fashionable, current-season, primarily branded merchandise comparable in quality and presentation to that of traditional department and fine specialty stores at prices typically 25% to 60% below those regularly charged by such stores. The Company's focused assortment of merchandise features moderate to designer brand-name apparel for women, men and children, as well as accessories, gifts, linens, shoes and fragrances. Stein Mart operated a single store in Greenville, Mississippi from the early 1900's until 1977, when it began its expansion program. During the last five years, the Company has more than doubled the number of Stein Mart stores from 66 in 16 states at year-end 1993 to 182 in 29 states at January 2, 1999. The Company's stores, which average approximately 38,000 gross square feet, are located primarily in neighborhood shopping centers in metropolitan areas.
Business Strategy
The Company's business strategy is to (i) maintain the quality of merchandise, store appearance, merchandise presentation and customer service levels typical of traditional department and fine specialty stores and (ii) offer value pricing to its customers through its vendor relationships, tight control over corporate and store expenses and efficient management of inventory. The principal elements of the Company's business strategy are as follows:
Timely, Consistent, Upscale Merchandise. The Company purchases upscale, branded merchandise primarily through preplanned buying programs similar to those used by traditional department and fine specialty stores. These preplanned buying programs enable the Company to offer fashionable, current-season assortments on a consistent basis.
Appealing Store Appearance and Merchandise Presentation. The Company creates an ambiance in its stores similar to that of upscale retailers through attractive in-store layout and signage. Merchandise is displayed in lifestyle groupings to encourage multiple purchases.
Emphasis on Customer Service. Customer service is fundamental to Stein Mart's objective of building customer loyalty. Management believes that the Company offers customer service superior to off-price retailers and more comparable to traditional department and fine specialty stores.
Value Pricing through Vendor Relationships. In negotiating with Stein Mart, vendors do not build into their pricing structure anticipated returns or markdown and advertising allowances which are typical in the department store industry. Stein Mart passes these savings on to its customers through prices which are
typically 25% to 60% below those regularly charged by traditional department and fine specialty stores.
Efficient Inventory Handling. Stein Mart does not rely on a large distribution center or warehousing facility. Rather, it primarily utilizes drop shipments from its vendors directly to its stores. This system enables the Company to receive merchandise at each store on a timely basis and to save the time and expense of handling merchandise twice, which is typical of a traditional distribution center structure.
Operating Efficiencies. Management believes that there will be opportunities to create additional operating efficiencies as the Company continues to add stores in new and existing markets.
Expansion Strategy
The Company's expansion strategy is to add stores in new markets, including those markets with the potential for multiple stores, and existing markets to capture advertising and management efficiencies. The Company plans to open approximately 33 stores in 1999.
The Company targets metropolitan statistical areas with populations of 125,000 or more for new store expansion. In determining where to locate new stores, the Company evaluates detailed demographic information, including, among other factors, data relating to income, education levels, age, occupation, the availability of prime real estate locations, existing and potential competitors, and the number of Stein Mart stores that a market can support. As a result of processing less than 10% of its merchandise through its distribution center, the Company is not constrained geographically or by the capacity limits of a central facility. This allows management to concentrate on the best real estate opportunities in targeted markets.
The Company refurbishes existing retail locations or occupies newly constructed stores, which typically are anchor stores in new or existing shopping centers situated near upscale residential areas, ideally with co-tenants that cater to a similar customer base. The Company's ability to negotiate favorable leases and to construct attractive stores with a relatively low investment provides a significant cost advantage over traditional department and fine specialty stores. The cost of opening a typical new store includes approximately $450,000 to $650,000 for fixtures, equipment, leasehold improvements and pre-opening expenses (primarily advertising, stocking and training). Pre-opening costs are expensed when incurred. Initial inventory investment for a new store is approximately $1 million (a portion of which is financed through vendor credit).
Merchandising
Stein Mart's focused assortment of merchandise features moderate to designer brand-name apparel for women, men and children, as well as accessories, gifts, linens, shoes and fragrances. Branded merchandise is complemented by a limited private label program that enhances the Company's assortments of current fashion trends and provides key upper-end classifications in complete size ranges.
Management believes that Stein Mart differentiates itself from typical off-price retailers by offering: (i) a higher percentage of current-season merchandise carried by traditional department and fine specialty stores at moderate to better price levels, (ii) a stronger merchandising "statement," consistently offering more depth of color and size in individual stockkeeping units, and (iii) a merchandise presentation more comparable to traditional department and fine specialty stores.
The Company identifies and responds to the latest fashion trends. Within each major merchandise category, the Company offers a focused assortment of the best-selling department and fine specialty store items. Stein Mart's merchandise selection is driven primarily by its own merchandising plans which are based on management's assessment of fashion trends, color, and market conditions. This strategy distinguishes Stein Mart from traditional off-price retailers who achieve cost savings by responding to unplanned buying opportunities. The Company's merchandise is typically priced at levels 25% to 60% below prices regularly charged by traditional department and fine specialty stores, therefore offering distinct value to the Stein Mart customer.
The following reflects the percentage of the Company's revenues by major merchandise category for the periods indicated:
Fiscal Year Ended -------------------------------------------- December 28, January 3, January 2, 1996 1998 1999 ------------ ---------- ---------- Ladies' and Boutique apparel 36% 38% 38% Ladies' accessories 11 11 11 Men's and young men's 20 19 19 Gifts and linens 18 17 18 Shoes (leased department) 8 8 7 Children's 6 6 6 Other 1 1 1 ---- ---- ---- 100% 100% 100% ==== ==== ====
Ladies' apparel, the Company's largest contributor of revenues, consists of distinctive presentations of dresses, sportswear, petites, juniors and women's sizes at moderate to upper-moderate prices. Stein Mart's distinctive Boutique is a key element of the Company's merchandising strategy to attract the more fashion-conscious customers. The Boutique, a store-within-a-store department, carries better to designer ladies' apparel and offers the presentation and service levels of a fine specialty boutique. Each Stein Mart store has its own Boutique, staffed generally by women employed on a part-time basis who are civically and socially prominent in the community. The Boutique highlights the Company's strategy of offering upscale merchandise, presentation and service levels at value prices.
The Company's typical store layout emphasizes ladies' accessories as the fashion focus at the front of each store. The key merchandise in this department is fashion-oriented, brand-name, designer and private label jewelry, as well as scarves, hosiery, leather goods, bath products and fragrances.
Men's and young men's areas together provide the second largest contribution to revenues. Menswear consists of sportswear, suits, sportcoats, slacks, dress furnishings and a Big and Tall assortment. The Company believes that its merchandise presentation is particularly strong in men's better sportswear.
Stein Mart's gifts and linens departments consist primarily of a broad assortment of fashion-oriented gifts (rather than basic items) for the home and a wide range of table, bath and bed linens and, in some stores, decorative fabrics. The presentation in this distinctive department emphasizes fashion, lifestyle and seasonal themes and includes the full range of merchandise available in a typical department store. The strength of this category has been the consistent presentation with a higher percentage mix of better goods.
Stein Mart's children's department offers a range of apparel for infants and children and features an infants' gift boutique.
The Company's shoe department is a leased department operated in individual stores by one of two shoe retailers. The merchandise in this department is presented in a manner consistent with the Company's overall presentation in other departments, stressing fashionable, current-season footwear at value prices. This department offers a variety of men's and women's casual and dress shoes, which complement the range of apparel available in other departments. Shoe department leases provide for the Company to be paid the greater of an annual base rent or a percentage of sales. Almost all of the leases currently pay on the percentage of sales basis.
In 1995, the Company began leasing its fragrance department to a third-party operator. The operating agreement requires the third-party operator to pay the Company the greater of an annual base amount or a percentage of sales.
Store Appearance
Stein Mart's stores are designed to reflect the upscale ambiance and appearance of traditional department and fine specialty stores through attractive layout, displays and in-store signage. The typical store is approximately 38,000 gross square feet with convenient check-out and customer service areas and attractive, individual dressing rooms. The Company seeks to create excitement in its stores through the continual flow of brand-name merchandise, sales promotions, store layout, merchandise presentation, and the quality, value and depth of its merchandise assortment.
The Company displays merchandise in lifestyle groupings of apparel and accessories. Management believes that the lifestyle grouping concept strengthens the fashion image of its merchandise and enables the customer to locate desired merchandise in a manner that encourages multiple purchases.
Customer Service
Customer service is fundamental to Stein Mart's objective of building customer loyalty. The Company's stores offer most of the same services typically found in traditional department and fine specialty stores such as alterations and a liberal merchandise return policy. Each store is staffed to provide a number of sales associates to properly attend to customer needs.
The Company's training programs for sales associates and cashiers emphasize attentiveness, courtesy and the effective use of selling techniques. The Company reinforces its training programs by employing independent shopping services to monitor associates' success in implementing the principles taught in sales training. Associates who are highly rated by the shopping service receive both formal recognition and cash awards. Management believes this program emphasizes the importance of customer service necessary to create customer loyalty.
Vendor Relationships and Buying
Stein Mart buys from over 2,900 vendors. Many of these are considered key vendors, with whom the Company enjoys longstanding working relationships that create a continuity of preplanned buying opportunities for upscale, current-season merchandise. Most of the Company's vendors are based in the United States, which generally reduces the time necessary to purchase and obtain shipments and allows the Company to react to merchandise trends in a timely fashion. The Company does not have long-term or exclusive contracts with any particular vendor. In 1998, less than 2% of Stein Mart's purchases were from any single vendor.
The Company employs several purchasing strategies to provide its customers with a consistent selection of quality, fashionable merchandise at value prices: (i) Stein Mart commits to its purchases from vendors well in advance of the selling season, in the same manner as department stores, unlike typical off-price retailers who rely heavily on buys of close-out merchandise or overruns; (ii) the Company's information systems enable it to acquire merchandise and track sales information on a store-by-store basis, allowing its buying staff to respond quickly to customer buying trends; and (iii) an in-house merchandise development department works with buyers and brand-name vendors to
ensure that the merchandise assortments offered are unique, fashionable, color-forward and of high quality.
Stein Mart negotiates favorable prices from its vendors by not requiring advertising and markdown allowances or return privileges that are typical in the department store industry, resulting in savings that the Company passes along to its customers in the form of prices that are typically 25% to 60% below those regularly charged by traditional department and fine specialty stores.
The Company's buying staff is headed by the Executive Vice President, Merchandising, who is supported by four Vice Presidents - General Merchandising Managers, nine Divisional Merchandising Managers and 34 buyers. In addition to base salary, the merchandising staff receives incentive compensation for achieving certain sales goals within their areas of responsibility. Historically, the Company has had very low turnover within its buying staff, enabling it to capitalize on an experienced, respected group of buyers capable of maintaining and enhancing the Company's vendor relationships.
Information Systems
The Company's information systems provide daily financial and merchandising information that is used by management to make timely and effective purchasing and pricing decisions and for inventory control.
The Company's inventory control system enables it to achieve economies of scale from bulk purchases while at the same time ordering and tracking separate drop shipments by store. Store inventory levels are regularly monitored and adjusted as sales trends dictate. The inventory control system provides information that enhances management's ability to make informed buying decisions and accommodate unexpected increases or decreases in demand for a particular item. The Company uses bar codes and bar code scanners as part of an integrated inventory management and check-out system in its stores.
The Company's merchandise planning and allocation system enables the merchandise buyers to customize their merchandise assortments at the individual store and department level, based on selected criteria, such as a store's selling patterns, geography and merchandise color preferences. The ability to customize individual store assortments enables the Company to more effectively manage inventory, capitalize on sales trends and reduce markdowns.
A computerized time management system assists management in scheduling store associates' hours based on individual store's own customer traffic patterns and necessary tasks. This system helps to maximize customer service levels and enhance efficiency.
Store Operations
The Company has five Vice Presidents - Regional Directors of Stores who report to the Executive Vice President, Stores. Two of the Vice Presidents each directly oversee 12 to 13 stores and three of the Vice Presidents have District Directors of Stores reporting to them, who are each responsible for overseeing 8 to 13 stores. Each Vice President's and District Director's compensation includes an incentive component based on overall performance. Each Stein Mart store is managed by a general manager who reports directly to a Vice President or a District Director. Store general managers are responsible for individual store operations, including hiring, motivating and supervising sales associates; receiving and effectively presenting merchandise; and implementing price change determinations made by the Company's buying staff. Store general managers receive incentive compensation based upon operating results in several key areas, including increases in store sales. In addition to the store general manager and two assistant store managers, each Stein Mart store employs an average of 55 persons as department managers, sales associates, cashiers and in other positions.
Stein Mart stores are generally open 11 hours per day, 6 days a week, and on Sunday afternoons. The store hours are extended during the Christmas selling season.
Advertising and Sales Promotion
The Company's advertising strategy stresses the offering of upscale, branded merchandise at significant savings. The Company generally allocates the majority of its advertising budget to newspaper advertising, employing a combination of image, price-and-item and sales event approaches. While newspaper and color inserts will continue to be an integral part of the media mix, radio, television and direct mail will be utilized in selected markets. Stein Mart's per-store advertising expense is reduced by spreading its advertising over multiple stores in a single market. Management believes the Company also enjoys substantial word-of-mouth advertising benefits from its customer base.
Competition
Management believes that the Company occupies a market niche closer to traditional department stores than typical off-price retail chains. The Company faces competition for customers and for access to quality merchandise from traditional department stores, fine specialty stores and, to a lesser degree, from off-price retail chains. Many of these competitors are units of large national or regional chains that have substantially greater resources than the Company. The retail apparel industry is highly fragmented and competitive, and the off-price retail business may become even more competitive in the future.
The principal competitive factors in the retail apparel industry are assortment, presentation, quality of merchandise, price, customer service, vendor relations and store location. Management believes that the Company is well-positioned to compete on the basis of each of these factors.
Employees
At January 2, 1999, the Company's work force consisted of approximately 10,500 employees (6,700 40-hour equivalent employees). The number of employees fluctuates based on the particular selling season.
Trademarks
The Company owns the federally registered trademark Stein Mart(R), together with a number of other marks used in conjunction with its private label merchandise program. Stein Mart primarily sells branded merchandise. However, in certain classifications of merchandise, the Company uses several private label programs to provide additional availability of items. Management believes that its trademarks are important but, with the exception of Stein Mart(R), not critical to the Company's merchandising strategy.
ITEM 2.
ITEM 2. PROPERTIES
At January 2, 1999, the Company operated stores in the following states:
State Number of Stores ----- ---------------- Alabama 5 Arizona 6 Arkansas 5 California 2 Colorado 3 Florida 24 Georgia 13 Illinois 4 Indiana 5 Iowa 2 Kansas 2 Kentucky 3 Louisiana 8 Mississippi 4 Missouri 2 Nebraska 1 Nevada 2 New Mexico 2 New York 2 North Carolina 12 Ohio 10 Oklahoma 4 Pennsylvania 1 South Carolina 4 South Dakota 1 Tennessee 10 Texas 34 Virginia 6 Wisconsin 5 ---- ====
The Company leases all of its store locations and therefore has been able to grow without incurring indebtedness to acquire real estate. Management believes that the Company has earned a reputation as an "anchor tenant," which, along with its established operating history, has enabled it to negotiate favorable lease terms. Most of the leases provide for minimum rents, as well as percentage rents that are based on sales in excess of predetermined levels.
The table below reflects (i) the number of the Company's leases (as of January 2, 1999) that will expire each year if the Company does not exercise any of its renewal options, and (ii) the number of the Company's leases that will expire each year if the Company exercises all of its renewal options (assuming the lease is not otherwise terminated by either party pursuant to any other provision).
Number of Leases Number of Leases Expiring Each Year Expiring Each Year if no Renewals if all Renewals Exercised Exercised ------------------ ------------------ 1999 1 0 2000 8 0 2001 7 0 2002 7 0 2003 14 0 2004-2008 105 6 2009-2013 39 22 2014-2045 1 154
The Company has made consistent capital commitments to maintain and improve existing store facilities. During 1998, approximately $4.2 million was spent to upgrade computer equipment, fixtures, equipment and leasehold improvements in stores opened prior to 1998.
The Company leases approximately 54,000 gross square feet of office space for its corporate headquarters in Jacksonville, Florida. The Company also leases a 92,000 square foot distribution center in Jacksonville for the purpose of processing a limited amount of merchandise (less than 10%).
The Company continually evaluates underperforming stores and may choose to close selected underperforming stores. In accordance with this policy, the Company closed its Denver, Colorado store in May 1992, its Plantation, Florida store in February 1996 and its Milpitas, California store in December 1998. A new store at a different location was opened in Denver in March 1996 and a new store will be opening in Plantation, Florida in Fall 1999.
ITEM 3.
ITEM 3. LEGAL PROCEEDINGS
The Company is involved in various routine legal proceedings incidental to the conduct of its business. Management does not believe that any of these legal proceedings will have a material adverse effect on the financial condition or results of operations of the Company.
ITEM 4.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
There were no matters submitted to a vote of security holders during the fourth quarter of 1998.
PART II
ITEM 5.
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The information required by this item is incorporated by reference and is shown in Exhibit 13.
ITEM 6.
ITEM 6. SELECTED FINANCIAL DATA
The information required by this item is incorporated by reference and is shown in Exhibit 13.
ITEM 7.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The information required by this item is incorporated by reference and is shown in Exhibit 13.
ITEM 8.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The financial statements with PricewaterhouseCoopers LLP report dated February 19, 1999, are incorporated by reference in the Form 10-K Annual Report and are shown in Exhibit 13.
ITEM 9.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
PART III
ITEM 10.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by this item appears under the caption "Election of Directors" in the Company's Proxy Statement for its 1999 Annual Meeting of Stockholders and is incorporated by reference.
ITEM 11.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this item appears under the caption "Executive Compensation" in the Company's Proxy Statement for its 1999 Annual Meeting of Stockholders and is incorporated by reference.
ITEM 12.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this item appears under the caption "Voting Securities" in the Company's Proxy Statement for its 1999 Annual Meeting of Stockholders and is incorporated by reference.
ITEM 13.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this item appears under the caption "Certain Transactions; Compensation Committee Interlocks and Insider Participation" in the Company's Proxy Statement for its 1999 Annual Meeting of Stockholders and is incorporated by reference.
PART IV
ITEM 14.
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
Financial Statements
The financial statements shown in Exhibit 13 are hereby incorporated by reference.
Financial Statement Schedules
All schedules are omitted because they are not applicable or the required information is presented in the financial statements or notes thereto.
Reports on Form 8-K
The Company did not file a report on Form 8-K during the quarter ended January 2, 1999.
Exhibits
* 3A - Articles of Incorporation of the registrant
* 3B - Bylaws of the registrant
4A - See Exhibits 3A and 3B for provisions of the Articles of Incorporation and Bylaws of the Registrant defining rights of holders of Common Stock of the registrant
* 4B - Form of stock certificate for Common Stock
~*10E - Form of Director's and Officer's Indemnification Agreement
10F - Loan Agreement and related promissory notes between the registrant and NationsBank, N.A. and SunTrust Bank, North Florida, N.A (previously filed as Exhibit 10 to Registrant's 10-Q for the quarter ended October 3, 1998 and incorporated herein by reference)
~*10G - Employee Stock Plan
~*10H - Form of Non-Qualified Stock Option Agreement
~*10I - Form of Incentive Stock Option Agreement
*10J - Profit Sharing Plan
~*10K - Executive Health Plan
~*10L - Director Stock Option Plan
13 - Portions of 1998 Annual Report incorporated by reference into 1998 Annual Report on Form 10K.
23 - Consent of PricewaterhouseCoopers LLP
27 - Financial Data Schedule
* Previously filed as Exhibit to Form S-1 Registration Statement 33-46322 and incorporated herein by reference. ~ Management Contracts or Compensatory Plan or Arrangements filed pursuant to S-K 601 (10)(iii)(A).
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
STEIN MART, INC.
Date: April 1, 1999 By: /s/ Jay Stein -------------------------------- Jay Stein, Chairman of the Board and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed by the following persons on behalf of the registrant and in the capacities indicated on the 1st day of April, 1999.
/s/ Jay Stein /s/ Alvin R. Carpenter - ---------------------------- ---------------------- Jay Stein Alvin R. Carpenter Chairman of the Board and Director Chief Executive Officer
/s/ John H. Williams, Jr. /s/ Albert Ernest, Jr. - ---------------------------- ---------------------- John H. Williams, Jr. Albert Ernest, Jr. President, Chief Operating Director Officer and Director
/s/ James G. Delfs /s/ Mitchell W. Legler - ---------------------------- ---------------------- James G. Delfs Mitchell W. Legler Senior Vice President, Director Chief Financial Officer
/s/ Clayton E. Roberson, Jr. /s/ Michael D. Rose - ---------------------------- ---------------------- Clayton E. Roberson, Jr. Michael D. Rose Vice President, Controller Director
/s/ James H. Winston ---------------------- James H. Winston Director