NASDAQ:SMRT Stein Mart
Sector financial performance:
This company, who primarily sells women’s apparel and accessories with their own brands and targets at women over 40 years old, has been grouped into women’s apparel retailer (over 40 years old) sector in clothing industry.
As our data indicated, almost all of retailers in this sector have been experiencing straight decrease in their comparable sales numbers since 2015. The decrease rate has reached average 7% in 2016/7. What caused more concerns is that comparable sales continued declining while companies significantly lowered down their products’ price. It seems that sales are not or less sensitive to price so that companies often experienced decrease in both volume and selling price. Sales from ecommerce seems to grow fast (some of company offer around 30% growth rate). However, ecommerce sales are usually accounting for only 2-3% of total sales in this sector and not able to offset the loss of those companies from their stores.
However, starting from 2018, some of companies have been seen to be able to re-raise price/less discounting without further hurting traffic, which, together with strong growth in e-commerce, has resulted in slowing down or even reverting of a downward trend in their comparable sales. While there is a positive signal rising in this sector, many companies in this sector seem to still be struggling with traffic and worsen cash flowing resulted from discounting.
In addition, we are still trying to figure out what exactly cause the decrease in sales. As we had discussed, there are no apparent evidences to prove that the decline in sales of women’s apparels has derived from decrease in demand for those products since we did not see any fundamental changes in factors such as macroeconomy or consumers’ lifestyle. We think the decrease in sales is from the general decrease in traffic, which has been a result of less in-store shopping activities as many shopping activities are being replaced by online shopping. Therefore, the direct result is that for those products that consumers can buy online the sales move from in-store to e-commerce and for a small portion of those products that consumers do not like to buy online the sales may just go away. However, since consumers still need those products, while they are not buying as many as before due to reduced visits of stores, they still need them to maintain the basic demand. Therefore, we think the decrease in comparable sales for those apparels will not be permanent and it will slow down in 1-2 years when it hits another decrease of 10%.
Therefore, intensive markdowns of price and deleverage of costs as a result of decreasing sales significantly dragged down companies’ margins, which were already low, lower and even into negative number. As we can see that a typical gross margin range is between 27-38% with a SG&A range of 27-34% and the operating margin is between -7-5%.
According our analysis, the enterprise price/EBI ratio for a typical company with positive cash flow is 18 with interest/EBI ratio of 35%. The typical enterprise price/sales ratio for those companies with negative cash flow is 0.31.
Data indicated that this company’s comparable store sales have decreased about 6%, 4% and 0% in the past three years reflecting tremendous pressure on sales since we see even deeper promotion or markdowns was not able to boost the in store sales. However, it seems that the downward trend in comparable sales slowed down and bounced up in 2018, which presents flat decline (0.7% up for 2Q) for first half of 2018 due to less promotions/higher price and strong growth in e-commerce.
The first 26 weeks of fiscal 2018 compared with the same period of 2017
The net sales decreased about 1.7% (0% for 2Q). Comparable stores sales (include e-commerce) was flat (increased 0.7% for 2Q) driven by less discount/higher price offset by declining transactions and units per transaction and by ecommerce increase of105% (128% for 2Q). In-store comparable sales estimated decreased by 1.1% for 2Q, 1.9% for 1Q, or 1.6% for first half of 2018.
Fiscal 2017 compared with 2016
The net sales decreased about 3% primarily attributable to decrease of about 6.2% in comparable stores sales. Ecommerce increased 34% (2.9% of total sales) and contributed 0.8% increase to comparable sales. Comparable sales went down primarily due to reduced transaction counts and as well to lower price.
Fiscal 2016 compared with 2015
The net sales were flat in fiscal 2016 compared with 2015, primarily attributable to decrease of about 4.3% in comparable stores sales. Ecommerce increased 30%. Comparable sales went down primarily due to reduced transaction counts and as well to lower price.
Fiscal 2015 compared with 2014
The net sales increased 3.2% in fiscal 2015 compared with 2014. Comparable stores sales increased 0.3%, primarily attributable to increase in average transaction size and price but offset by decrease in transaction counts.
This company’ gross margin is currently 26.5% (buying and occupancy costs included) up 140 basis points from 2017 primarily due to raising price/less discounting offset by increasing shipping costs. With leveraging SG&A expenses as a result of re-bouncing sales, this company’s operating margin has gone up to about -0.5% so far.
This stock currently has a stock price/sales ratio of 0.22, which we think is relatively undervalued (estimated $2-3.3) considering its strong growth in e-commerce and slowing declining in store traffic.