10-K 1 d442808d10k.htm FORM 10-K Form 10-K
Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORM 10-K

 

 

 

x ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended February 2, 2013

or

 

¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from                      to                     

Commission file number 0-20052

 

 

STEIN MART, INC.

(Exact name of registrant as specified in its charter)

 

 

 

Florida   64-0466198

(State or other jurisdiction of

incorporation or organization)

 

(I.R.S. Employer

Identification Number)

 

1200 Riverplace Blvd., Jacksonville, Florida   32207
(Address of principal executive offices)   (Zip Code)

Registrant’s telephone number, including area code: (904) 346-1500

Securities registered pursuant to Section 12(b) of the Act:

 

Title of each class:

 

Name of each exchange on which registered:

Common Stock $.01 par value   The NASDAQ Global Select Market

Securities registered pursuant to Section 12(g) of the Act: NONE

 

 

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.    Yes  ¨    No  x

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.    Yes  ¨    No  x

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  x    No  ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  x    No  ¨

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.  ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer   ¨    Accelerated filer   x
Non-accelerated filer   ¨  (Do not check if a smaller reporting company)    Smaller reporting company   ¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).    Yes  ¨    No  x

The aggregate market value of the voting common stock held by non-affiliates of the Registrant as of July 28, 2012 was $221,218,432. For purposes of this response, executive officers and directors are deemed to be affiliates of the registrant and the holdings by non-affiliates was computed as 27,721,608 shares. At April 15, 2013, the Registrant had issued and outstanding an aggregate of 43,821,565 shares of its common stock.

Documents Incorporated By Reference:

Portions of the Registrant’s Proxy Statement for its 2013 Annual Meeting of Stockholders are incorporated by reference in Part III.

 

 

 


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EXPLANATORY NOTE

Stein Mart, Inc. (the “Company”) is restating in this Annual Report on Form 10-K, its consolidated prior year financial statements arising primarily from errors made in inventory markdowns, leasehold improvement costs, compensated absences (paid vacation) and other matters described in Note 2 to the Consolidated Financial Statements. In addition, prior year financial statements also reflect the correction of certain previously identified errors and out of period adjustments that were deemed immaterial to the annual or interim periods in which they relate.

On November 6, 2012, the Board of Directors of the Company, based on the recommendation of the Audit Committee and in consultation with management, concluded that our previously issued financial statements contained errors and that investors should no longer rely upon the Company’s previously released financial statements. We subsequently determined that prior annual period financial statements should be restated in this Annual Report on Form 10-K. See Note 2 to the Consolidated Financial Statements for further information. All schedules and footnotes impacted indicate the restated amounts under the caption “Restated”.

In addition to the filing of this Form 10-K, we have filed an amendment to our quarterly report on Form 10-Q for the quarterly period ended April 28, 2012 to reflect the restated financial statements which includes restated unaudited interim financial statements for the comparable period in fiscal year 2011. We have also filed quarterly reports on Form 10-Q for the quarterly periods ended July 28, 2012 and October 27, 2012 that include restated unaudited interim financial statements for the comparative fiscal year 2011 periods.

We do not intend to amend any other annual reports on Form 10-K or quarterly reports on Form 10-Q for periods affected by these errors. As a result, our prior reports should no longer be relied upon.

This Form 10-K also reflects:

 

 

the restatement of “Selected Consolidated Financial Data” in Item 6 for the fiscal years 2011, 2010, 2009 and 2008; and

 

 

Management’s Discussion and Analysis of Financial Condition and Results of Operations based on the restated financial information.

The net effect of the adjustments on the Consolidated Statements of Income was to increase Net income by $0.1 million and $7.9 million for the years ended January 28, 2012 and January 29, 2011, respectively.

 

Increase (Decrease) in Net income:    2011     2010  

Inventory markdowns

   $ 655      $ (707

Leasehold improvement costs

     1,937        2,037   

Compensated absences

     (134     429   

Other

     (2,283     47   
  

 

 

   

 

 

 

Total adjustments before tax

     175        1,806   

Income tax expense (benefit) from adjustments

     72        (6,127
  

 

 

   

 

 

 

Increase in Net income

   $ 103      $ 7,933   
  

 

 

   

 

 

 

The adjustments in “Other” in 2011 relate primarily to the reversal of a previously recorded out of period adjustment related to credit card reward income breakage of $2.0 million. The tax benefit in 2010 is related to the reversal of the valuation allowance attributable to the increase in prior period deferred tax assets due to the cumulative impact of the restatement adjustments noted above. These deferred tax assets had a full valuation allowance in 2008 and 2009.

The decrease to retained earnings from the adjustments as of January 30, 2010 is as follows:

 

Inventory markdowns

   $ (1,891

Leasehold improvement costs

     (8,982

Compensated absences

     (6,737

Other

     (81

Income tax effect of adjustments

     (12
  

 

 

 

Decrease to retained earnings

   $ (17,703
  

 

 

 

 

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STEIN MART, INC.

TABLE OF CONTENTS

This report contains forward-looking statements which are subject to certain risks, uncertainties or assumptions and may be affected by certain factors, including but not limited to the specific factors discussed in Part I, Item 1A under “Risk Factors” and Item 3 under “Legal Proceedings”; in Part II, Item 5 under “Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities”; and Part II, Item 7 under “Management’s Discussion and Analysis of Financial Condition and Results of Operations”. Wherever used, the words “plan”, “expect”, “anticipate”, “believe”, “estimate” and similar expressions identify forward-looking statements. In addition, except for historical facts, all information provided in Part II, Item 7A, under “Quantitative and Qualitative Disclosures about Market Risk” should be considered forward-looking statements. Should one or more of these risks, uncertainties or other factors materialize, or should underlying assumptions prove incorrect, actual results, performance or achievements of the Company may vary materially from any future results, performance or achievements expressed or implied by such forward-looking statements.

Forward-looking statements are based on beliefs and assumptions of the Company’s management and on information currently available to such management. Forward-looking statements speak only as of the date they are made, and the Company undertakes no obligation to publicly update or revise its forward-looking statements in light of new information or future events. Undue reliance should not be placed on such forward-looking statements, which are based on current expectations. Forward-looking statements are no guarantees of performance.

 

ITEM NO.

   PAGE  
   PART I   

1.

  

Business

     4   

1A.

  

Risk Factors

     6   

1B.

  

Unresolved Staff Comments

     10   

2.

  

Properties

     10   

3.

  

Legal Proceedings

     11   

4.

  

Mine Safety Disclosures

     11   
   PART II   

5.

  

Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

     11   

6.

  

Selected Consolidated Financial Data

     14   

7.

  

Management’s Discussion and Analysis of Financial Condition and Results of Operations

     15   

7A.

  

Quantitative and Qualitative Disclosures about Market Risk

     21   

8.

  

Financial Statements and Supplementary Data

     21   

9.

  

Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

     21   

9A.

  

Controls and Procedures

     21   

9B.

  

Other Information

     24   
   PART III   

10.

  

Directors, Executive Officers and Corporate Governance

     24   

11.

  

Executive Compensation

     24   

12.

  

Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

     24   

13.

  

Certain Relationships and Related Transactions, and Director Independence

     24   

14.

  

Principal Accounting Fees and Services

     24   
   PART IV   

15.

  

Exhibits, Financial Statement Schedules

     25   

SIGNATURES

     26   

 

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PART I

 

ITEM 1. BUSINESS

OVERVIEW

Headquartered in Jacksonville, Florida, Stein Mart is a national retailer offering the fashion merchandise, service and presentation of a better department or specialty store. Our focused assortment of merchandise features current-season, moderate to better fashion apparel for women and men, as well as accessories, shoes and home fashions, all offered at prices competitive with off-price retail chains. Begun in the early 1900’s as a single store in Greenville, Mississippi, we operated 263 stores in 29 states as of February 2, 2013.

As used herein, the terms “we”, “our”, “us”, “Stein Mart” and the “Company” refer to Stein Mart, Inc., a Florida corporation, and its wholly-owned subsidiaries.

KEY STRATEGIC OBJECTIVES

Our mission is to provide current season, first-quality fashion apparel, shoes, accessories and home fashion merchandise at prices comparable to off-price retail chains in a convenient, attractive, easy-to-shop location. We believe our success and future growth will depend on the consistent execution of the following:

 

   

Having a desirable, current-season assortment of designer, brand name, exclusive and proprietary fashion apparel, accessories and home fashion merchandise,

 

   

Sourcing a wide range of key brands and maintaining strong partnerships with the vendors representing those brands,

 

   

Offering everyday low prices on fashion merchandise through buying methodologies and low cost operations,

 

   

Attracting repeat and new customers through marketing and advertising programs,

 

   

Having an attractive store appearance, appealing merchandise presentation and on-demand customer service, similar to a department or specialty store, and

 

   

Locations in regional, community and neighborhood shopping centers serving a more affluent customer.

TARGET CUSTOMER

Our target customer is a 35-55 year old woman who is both style conscious and value seeking. She is typically married and college educated. She may be multi-cultural, works at least part-time in a professional position and has above-average household income.

MERCHANDISING, PURCHASING AND PRICING

Our fashion assortment is driven primarily by seasonal fashion trends and a focus on name brand and designer merchandise complemented by a select program of private label and proprietary/exclusive merchandise. In 2012, approximately 10 percent of our sales were from private label or proprietary/exclusive merchandise. The majority of merchandise is consistent from store to store, with exceptions based on individual store selling characteristics, seasonal delivery fluctuations and regional preferences.

Our merchants purchase products from approximately 1,200 vendors. None of our vendors accounted for more than 5 percent of our total purchases during 2012. We buy a majority of our merchandise at the same time and from many of the same manufacturers as traditional department/specialty stores although we generally do not require the same level of front and back-end vendor concessions, such as advertising allowances, return privileges and markdown allowances, which are common and significant in the department store industry. As a result, we believe that our buyers are able to negotiate more favorable upfront pricing terms from vendors. We also purchase merchandise opportunistically when we believe a combination of the product and the price makes it a compelling addition to our assortment. In both instances, we reflect our savings in our pricing which passes on to our customers through everyday low pricing targeted to be competitive with off-price retail chains.

Our shoe department inventory is exclusively supplied and owned by DSW, Inc. (“DSW”). DSW’s buyers determine each season’s fashion footwear assortment. We operate the shoe department and receive a percentage of net revenue in accordance with a supply agreement (the “Supply Agreement”). Commissions from this leased department are included in Net sales reported in our Consolidated Statements of Income.

 

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The following table reflects the percentage of our sales by major merchandise category, including shoe department sales, for the fiscal years indicated:

 

     2012     2011     2010  

Ladies’ and Boutique apparel

     45     45     46

Ladies’ accessories

     12     13     13

Men’s

     20     20     20

Home

     12     11     11

Shoes

     8     8     7

Other

     3     3     3
  

 

 

   

 

 

   

 

 

 
     100     100     100
  

 

 

   

 

 

   

 

 

 

LOCATIONS, GROWTH STRATEGY AND STORE APPEARANCE

On February 2, 2013, we operated 263 stores in 29 states. Our stores are located in the Northeast, Midwest, Southeast, Texas and the Southwest. We are most fully concentrated in the Southeast and Texas where 184 of our stores are located. Most locations are in neighborhood, community and regional shopping centers frequented by a more affluent customer. Our optimal co-tenants within these shopping centers cater to a similar target customer and include highly-frequented retail formats such as other apparel retailers, higher-end grocers and restaurants. All Stein Mart locations, including the corporate headquarters, are leased.

We are selectively seeking properties that strengthen our portfolio of stores in current markets. We utilize regional tenant representative brokers to help us identify potential sites for new or relocated stores. New store decisions are supported by independent sales forecasts, and approved by a real estate committee made up of senior level executives.

Our typical store is currently approximately 35,000 gross square feet with a racetrack design, convenient centralized check-out, and individual dressing rooms. We display merchandise in lifestyle groupings of apparel and accessories, which we believe enables the customer to locate desired merchandise in a manner that encourages multiple purchases. We seek to create excitement in our stores through the continual flow of fashion merchandise, targeted sales promotions, store layout, merchandise presentation, and the quality, value and depth of our merchandise assortment. Our newer stores are approximately 32,000 gross square feet with the reduction from our past stores being in smaller backrooms that can be accommodated by our newer distribution processes.

In 2010 we began selling selected merchandise offerings on the internet. This expanded to additional product offerings for 2011 and 2012. During 2012, we temporarily ceased selling merchandise on the internet as we realized we needed a world-class platform provider to maximize this important channel of business for us. Beginning in late 2013, we anticipate a relaunch of the internet site to sell merchandise. Internet sales in 2012, 2011 and 2010 amounted to less than 1% of sales.

CUSTOMER SERVICE

Our stores offer many services typically found in better department or specialty stores, such as a liberal merchandise return policy, merchandise locator service, a Preferred Customer program, co-branded credit card and private label credit card programs, and electronic gift cards. Each store is staffed with a number of sales associates to provide on-demand customer service. Our stores have their own Boutique, generally staffed by specially-recruited associates who typically work one day a week. We believe this staffing approach adds credibility and fashion integrity to the department.

MARKETING

Our marketing efforts are focused on deepening our relationship with our best customers in order to increase our share of her spending. We engage in periodic market research, including accessing our proprietary customer panel, to identify how best to reach each of these audiences and, in consultation with our outside advertising and direct-marketing agencies, we adjust our marketing focus accordingly.

Our advertising stresses upscale fashion merchandise at discount prices. We utilize a combination of full-color circulars (both inserted in newspapers and mailed directly to homes), direct mail, newspaper run of press (ROP) advertising, and email to distribute our sales promotion messages. To reach a broader audience, increase brand awareness and drive promotional events, we use both television and radio advertising. We utilize digital media including online advertising and have a presence on social networking sites, including Facebook and Twitter.

Our Preferred Customer Card program is an important marketing tool. Preferred Customer Card customers receive preview copies of select circulars mailed to their home, members only shopping days, birthday discounts and special email announcements. This program provides useful database information regarding customer preferences, habits and advertising receptivity.

 

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Stein Mart Credit Card holders (co-branded and private label cards) receive advance notice of sales events and special promotional offers including Extra Savings Events which occur periodically throughout the year and provide incremental savings on purchases made with the Stein Mart credit card during these events.

Stein Mart co-branded credit card holders also participate in the credit card rewards program, which provides for an incentive to cardholders in the form of reward certificates based on their cumulative purchases made on the credit card.

We have an Internet site, www.steinmart.com, to promote Stein Mart’s fashion point of view, as well as provide information for customers regarding store locations, brands, products and selected sales promotion activity. Visitors to the website may apply for the co-branded credit card or private label credit card, sign up to be Preferred Customers, sign up for email notifications or purchase gift cards. Beginning in mid to late 2013, we anticipate a relaunch of the internet site to sell merchandise.

COMPETITION

Our primary competitors are department and specialty stores, as well as conventional off-price retail chains. From our customer’s perspective, we believe we differentiate ourselves from department stores and specialty stores due to our (i) everyday low pricing, (ii) convenient locations in shopping centers, and (iii) assortments that are more edited than department stores and more varied than specialty stores. We believe we differentiate ourselves from typical off-price retail chains by offering (i) primarily current-season first–quality merchandise carried by better department or specialty stores, (ii) a stronger merchandising “statement,” consistently offering more depth of color and size in individual stock-keeping units, (iii) merchandise presentation and customer service more comparable to upscale retailers and (iv) competitive price levels.

DISTRIBUTION

We utilize a third-party logistics network (“supply chain”) to move product through third-party consolidation centers located in New Jersey, Atlanta and Los Angeles to third-party store distribution centers (“DCs”) located in Atlanta, Dallas and Los Angeles. This supply chain methodology enables us to aggregate merchandise from all vendors at the DCs where it is received and checked to ensure it is floor ready for our stores. The DCs are automated and virtually all of our vendors are now electronic data interchange (“EDI”) capable so we are able to cross-dock a high percentage of our receipts. Store deliveries are made by contract carriers to the stores once or twice a week depending on location and store volume. We are in the process of transitioning from third-party operated store distribution centers to company-operated store distribution centers beginning in the second quarter of fiscal 2013.

EMPLOYEES

As of February 2, 2013, our work force consisted of approximately 10,900 employees (5,000 40-hour equivalent employees). Each of our stores employs an average of 40 persons. The number of employees fluctuates during the year based on the particular selling season.

SEASONALITY

Our business is seasonal. Sales and profitability are historically higher in the first and fourth quarters of the fiscal year, which include the spring and holiday seasons.

TRADEMARKS

We own the federally registered trademark Stein Mart®, together with a number of other marks used in conjunction with our private label merchandise program. Management believes that our trademarks are important, but with the exception of Stein Mart®, not critical to our merchandising strategy.

AVAILABLE INFORMATION

Copies of our annual report on Form 10-K, proxy statement, quarterly reports on Form 10-Q, current reports on Form 8-K, and any amendments to those filings are available free of charge on the investor relations portion of our website at http://ir.steinmart.com (click on “SEC Filings”). Also available free of charge on the www.steinmart.com website (click on “About us”; click on “Corporate Governance”) are the charters for the Audit Committee, the Compensation Committee, the Corporate Governance Committee, and the Strategic Planning Committee, as well as the Code of Conduct and Corporate Governance Guidelines. Printed copies of these items are available free of charge upon request by writing Stein Mart, Inc., 1200 Riverplace Boulevard, Jacksonville, FL 32207, Attention: Stockholder Relations.

 

ITEM 1A. RISK FACTORS

Our results of operations and financial condition can be adversely affected by numerous risks and uncertainties. In evaluating the Company, the risks and uncertainties described below and the matters described in “Forward-Looking Statements” should be considered carefully. Should any of these risks actually materialize, our business, financial condition, and future prospects could be negatively impacted.

 

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Our sales and operating results are affected by consumer sensitivity to economic conditions. The retail apparel business is dependent upon consumer spending and, as a fashion retailer, we rely on the expenditure of discretionary income for most, if not all, of our sales. Economic factors impacting consumer confidence and levels of consumer spending include levels of employment, the housing market, prevailing interest rates, tax policies, personal bankruptcies, energy costs and availability and cost of credit. Consumer confidence is also affected by both domestic and international events. Deterioration in the level of consumer spending could have a material adverse effect on our results of operations.

We face intense competition in the retail industry. We face intense competition for customers from department stores, specialty stores, regional and national off-price retail chains and Internet and mail-order retailers. Many of these competitors are larger and have significantly greater financial and marketing resources than we do. In addition, many department stores and other competitors have become more promotional and have reduced their price points. Certain department stores and certain of our vendors have opened outlet stores which offer merchandise at prices that are competitive with ours. Many of our competitors have significant Internet sales. While we maintain an Internet site and have plans to start selling merchandise on the Internet in 2013, we currently only sell gift cards on the Internet. If we fail to successfully compete, our profitability and results of operations could be harmed.

Unanticipated changes in fashion trends and changing consumer preferences may adversely affect our sales. Our success depends in part upon our ability to anticipate and respond to changing consumer preferences and fashion trends in a timely manner. Although we attempt to stay abreast of the fashion tastes of our customers and provide merchandise that satisfies customer demand, fashion trends can change rapidly and we cannot assure that we will accurately anticipate shifts in fashion trends and adjust our merchandise mix to appeal to changing consumer tastes in a timely manner. If we misjudge the market for our products or are unsuccessful in responding to changes in fashion trends or in market demand, we could experience insufficient inventory levels and missed opportunities, or excess inventory levels and higher markdowns, either of which would have a material adverse effect on our financial condition and results of operations.

Our advertising, marketing and promotional strategies may be ineffective. Our profitability and results of operations may be materially affected by the effectiveness and efficiency of our marketing expenditures and our ability to select the right markets and media in which to advertise. In particular, we may not be successful in our efforts to create greater awareness of our stores and promotions, identify the most effective and efficient level of spending in each market and specific media vehicle and determine the appropriate creative message and media mix for our advertising, marketing and promotional expenditures. While we utilize different types of media, daily newspapers are an important delivery vehicle for press advertising and circular insertions. The newspaper business is under increasing economic pressure, and the demise of certain newspapers would jeopardize an important distribution method for our advertising. As readers shift away from newspapers, our success will depend more on our effective use of other forms of media for our advertising, marketing and promotional strategies. Our planned marketing expenditures may not result in increased revenues. In addition, if we are not able to manage our marketing expenditures on a cost-effective basis, our profitability and results of operations could be materially adversely affected.

We may be unable to raise additional capital, if needed, or to raise capital on favorable terms. If our existing cash, cash generated from operations and funds available under our revolving credit agreement were insufficient to fund our future operations, including capital expenditures, or repay debt when it becomes due, we may need to raise additional funds through public or private equity or debt financing. If unfavorable capital or credit market conditions exist if and when we were to seek additional financing, we may not be able to raise sufficient capital on favorable terms or on a timely basis, if at all. Failure to obtain capital on acceptable terms when required could have a material adverse effect on our business including an inability to fund new growth and other capital expenditures.

We may be unable to negotiate acceptable lease terms with current and potential landlords. Our growth and success depends in part on our ability to renew and enter into new leases for successful stores. There is no assurance that we will be able to re-negotiate leases at similar or satisfactory terms at the end of the lease, and we could be forced to move or exit trade areas if another favorable arrangement cannot be made. There is also no assurance that we will be able to negotiate satisfactory terms on new or replacement stores.

We may not be able to exit under-performing stores on acceptable terms. As part of our strategy, we close certain under-performing stores, generally based on the lack of store profitability. Such closures subject us to costs, including lease termination payments and the write-down of leasehold improvements, equipment, furniture, fixtures and inventory. For early terminations, we may remain liable for future lease obligations which could adversely affect our profitability and results of operations.

Because of our focus on keeping our inventory at the forefront of fashion trends, extreme and/or unseasonable weather conditions could force us to have higher inventory markdowns. Our business is susceptible to unseasonable weather conditions. For example, extended periods of unseasonably warm temperatures during the fall season or cool weather during the spring season could render a portion of our inventory incompatible with those unseasonable conditions. Prolonged unseasonable weather conditions could have a material adverse effect on our business, financial condition and results of operations. In addition, hurricanes or other extreme weather conditions over a prolonged period might make it difficult for our customers to travel to our stores, which could have a material adverse effect on our business, financial condition and results of operations.

 

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A lack of adequate sources of merchandise at acceptable prices may adversely affect our sales. Our business is dependent to a significant degree upon our ability to purchase fashion and brand name merchandise, and to do so at acceptable wholesale prices. We continuously seek out buying opportunities and compete for these opportunities with other retailers. In the event of a further decrease in retail sales and the resulting pressure on manufacturers, the opportunities to purchase merchandise could become limited by the consolidation or demise of merchandise vendors. Our ability to obtain merchandise may also depend on manufacturers’ ability to obtain vendor financing through banks and factoring companies. To the extent they are unable to secure sufficient credit, they may not be able to sell to us at acceptable terms. Although we do not depend on any single vendor or group of vendors and believe we can successfully compete in seeking out new vendors, the loss of key vendors could make it difficult for us to acquire sufficient quantities and an appropriate mix of merchandise, and to do so at acceptable prices which could have a material adverse effect on our results of operations.

Increases in the price of merchandise, could increase our costs which could negatively impact our margins. Our procurement of goods and services from outside the United States is subject to risks associated with political or financial instability, trade restrictions, tariffs, currency exchange rates, transport capacity and costs and other factors relating to foreign trade. In addition, our procurement of all our goods and services is subject to the effects of price increases which we may or may not be able to pass through to our customers. All of these factors may affect our ability to access suitable merchandise on acceptable terms and are beyond our control and could negatively impact our margins.

We are dependent on certain key personnel and our ability to attract and retain qualified employees. Our business is dependent on attracting and retaining quality employees. Many of our employees are in entry level or part-time positions with historically high rates of turnover. Our ability to meet our labor needs while controlling the costs associated with hiring and training new employees is subject to external factors such as unemployment levels, prevailing wage rates, minimum wage legislation and changing demographics. Our success also depends to a significant extent upon the efforts and abilities of our senior executives. Competition for key executives in the retail industry is intense, and our operations could be adversely affected if we cannot retain our key executives. Any circumstances that adversely impact our ability to attract, train, develop and retain quality individuals throughout the organization could adversely affect our business and results of operations.

Increases in the cost of employee benefits could impact our financial results and cash flow. Our expenses relating to employee health benefits are significant. Unfavorable changes in the cost of such benefits could impact our financial results and cash flow. Healthcare costs have risen significantly in recent years, and recent legislative and private sector initiatives regarding healthcare reform could result in significant changes to the U.S. healthcare system. We are not able at this time to determine the impact that healthcare reform could have on the cost of our employee health benefits.

The seasonality of our business and fluctuations in sales and operating results could cause volatility in the price of our common stock. Our business is seasonal with our highest sales occurring in the first and fourth quarters, which include the spring and holiday seasons. Our annual operating results depend significantly upon sales generated during these quarters, and any factor that negatively impacts these selling seasons could have a material adverse effect on our results of operations for the entire year. Comparable store sales and quarterly operating results have fluctuated in the past and are expected to continue to fluctuate in the future. Our stock price is influenced by these financial fluctuations, as well as other factors, including economic conditions, timing of promotional events, actions of competitors, inventory management, changes in fashion trends and unseasonable weather conditions.

If the third parties that we currently rely on for a majority of the distribution aspects of our business experience labor strikes, increased fuel costs, or do not adequately perform our distribution functions, our business could be disrupted and our cost of goods could increase. We are dependent on our ability to receive merchandise in our stores throughout the United States in a timely manner. We currently depend on vendors and logistics providers to sort and pack substantially all of our merchandise and on third parties to deliver this merchandise to our stores. These vendors and logistics providers may experience labor strikes or other disruptions in the future, the resolution of which will be out of our control, and could result in a material disruption in our business. Any failure by these third parties to respond adequately to our distribution needs, including labor strikes or other disruptions in the business, would disrupt our operations and negatively impact our profitability. In addition, although fluctuations in the price of fuel have not materially affected our cost of goods in recent years, if we are unable to mitigate cost increases sufficiently through our pricing actions, our profitability may decrease.

We are planning to transition a majority of our distribution functions away from third-party vendors and logistics providers and will perform such functions in the future and if we experience any business interruptions or disruptions in the distribution process, our profitability could be materially impacted. We currently depend on third-party vendors and logistics providers to sort and pack substantially all of our merchandise and on third parties to deliver this merchandise to our stores. We are planning to transition all of our distribution centers and certain of our consolidation centers away from third parties and plan to perform these distribution functions internally in the future. In the event that we experience problems transitioning our third-party operated distribution centers or consolidation

 

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centers to us that impede the timeliness or fulfillment quality of the products being distributed, or any of our centers becomes inaccessible, or is otherwise not fully usable, it would have a material adverse effect on our ability to distribute our products, which in turn would have a material adverse effect on our sales, profitability, financial condition and operating performance.

Failure of information technology could disrupt operations and harm our business. The operation of our business and the effective execution of our merchandising and distribution strategies is dependent in large measure on the effectiveness of our information technology systems. The reliability and capacity of our information technology systems are critical and any disruptions affecting our information technology systems may have a material adverse impact on our business.

Unauthorized disclosure of sensitive or confidential customer or employee information could severely damage our reputation, expose us to risks of litigation and liability, disrupt our operations and harm our business. As part of our normal course of business, we collect, process and retain sensitive and confidential customer and employee information. In addition, we accept and transmit credit card applications through our retail locations pursuant to our credit card agreement with GE Capital Retail Bank (“GE”). Despite the security measures we have in place, our facilities and systems, and those of our third-party service providers, such as GE, may be vulnerable to security breaches, acts of vandalism, computer viruses, misplaced or lost data, programming and/or human errors, or other similar events. Any security breach involving the misappropriation, loss or other unauthorized disclosure of confidential information, whether by us or our service providers, could severely damage our reputation, expose us to risks of litigation and liability, disrupt our operations and harm our business.

We rely on a single supplier for shoes sold by our shoe department and disruptions with that supplier could materially affect our reputation, operations or financial results. We have an agreement with DSW to be the exclusive supplier of shoes sold in our shoe departments. We rely on DSW to determine the quantity and mix of shoes to be sold, the prices at which such items are to be sold and the fulfillment and continuing supply of inventory. If DSW was unable to provide us with sufficient amounts of inventory or inventory that meets the fashion preferences of our customers or if DSW was unable to continue being our supplier of shoes, we may attract fewer customers and experience a loss in net sales, which could materially affect our reputation, operations or financial results.

We have engaged a single third-party provider to create, operate and maintain our e-commerce website operations, and disruptions with the provider or in the services it provides to us could materially affect our reputation, operations or financial results. We have contracted with a single third party to create, operate and host our e-commerce website and provide related order fulfillment and customer service. We will rely on that party’s operational, privacy and security procedures and controls to operate and host our e-commerce business. Failure by such third party to adequately service these aspects of our e-commerce business could result in a prolonged disruption that affects our customers’ ability to utilize our website or receive product in a timely manner. As a result, we may lose customer sales and/or experience increased costs, which could materially affect our reputation, operations or financial results. In addition, the e-commerce operations also involve other risks that could have an impact on our results of operations including but not limited to diversion of sales from our physical stores, liability for online content, credit card fraud and risks related to the failure of the computer systems that operate the website and its related support systems, any of which could have a material adverse effect on our business.

Acts or threats of terrorism, violence or unfavorable political conditions could harm our business. Acts of terrorism or war may disrupt commerce and undermine consumer confidence, which could negatively impact our sales revenue by causing consumer spending to decline. Also, an act of terrorism or war, or the threat thereof, could negatively impact our business by interfering with our ability to obtain merchandise from vendors. Inability to obtain merchandise from our vendors or substitute suppliers at similar costs in a timely manner could have a material adverse effect on our operating results and financial condition.

Our failure to adequately protect our trademark Stein Mart®, and, to a lesser extent, the various other marks we use in conjunction with our private label merchandise program, may have a negative impact on our brand image. We believe that our trademark Stein Mart® and, to a lesser extent, the various other marks that we use in connection with our private label merchandise program, are important to us because we feel that these brands have characteristics unique to our business. We have obtained a federal registration of the Stein Mart® trademark and various other trademarks in the United States. We cannot assure you that the registrations that we have obtained will prevent the imitation of our business or infringement of our intellectual property rights by others. If we are unable to protect our brand or our brand becomes associated with lesser characteristics or otherwise carries a negative connotation, our brand image, and consequently the results of our operations, could be materially adversely affected.

Failure to comply with legal and regulatory requirements may adversely impact our business and results of operations. Our business is subject to many legal and regulatory requirements, including, among others, employment, trade, healthcare, tax, securities and privacy laws and regulations. In addition, in the future there may be legal or regulatory requirements or more stringent interpretations of applicable requirements, which could increase the complexity of the regulatory environment in which we operate and the cost of compliance.

 

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The restatement of our financial statements has consumed a significant amount of our time and resources and may have a material adverse effect on our reputation, business and stock price. As described earlier, we have restated our prior financial statements. The restatement process was highly time and resource-intensive and involved substantial attention from management and significant legal and accounting costs. Furthermore, we cannot guarantee that we will have no inquiries from the Securities and Exchange Commission (“SEC”) regarding our restated financial statements or matters relating thereto. Any future inquiries from the SEC as a result of the restatement of our historical financial statements will, regardless of the outcome, likely consume a significant amount of our resources in addition to those resources already consumed in connection with the restatement itself. Further, many companies that have been required to restate their financial statements have experienced a decline in stock price and shareholder lawsuits related thereto.

We have identified material weaknesses in our internal control over financial reporting which may, if not remediated, result in additional material misstatements in our financial statements. Our management is responsible for establishing and maintaining adequate internal control over our financial reporting, as defined in Rule 13a-15(f) under the Securities Exchange Act of 1934. As disclosed in Item 9A, “Controls and Procedures,” management identified material weaknesses in our internal control over financial reporting related to inventory markdowns, leasehold improvements, compensated absences (paid vacation), indirect overhead cost capitalization, software asset amortization periods and retirements, control environment and information technology communication. A material weakness is defined as a deficiency, or combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of our annual or interim financial statements will not be prevented or detected on a timely basis. As a result of material weaknesses, our management concluded that our internal control over financial reporting and related disclosure controls and procedures were not effective based on criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission. We are actively engaged in developing a remediation plan designed to address these material weaknesses. If our remedial measures are insufficient to address the material weaknesses, or if additional material weaknesses or significant deficiencies in our internal control are discovered or occur in the future, our financial statements may contain material misstatements and we could be required to restate our financial results.

 

ITEM 1B. UNRESOLVED STAFF COMMENTS

None.

 

ITEM 2. PROPERTIES

Stores

The following table summarizes our store count activity during the last three fiscal years:

 

     2012     2011     2010  

Stores at beginning of year

     262        264        267   

Stores opened during the year

     6        3        2   

Stores closed during the year

     (5     (5     (5
  

 

 

   

 

 

   

 

 

 

Stores at end of year

     263        262        264   
  

 

 

   

 

 

   

 

 

 

As of February 2, 2013, our stores operated in the following 29 states:

 

State

   Number of
Stores
    

State

   Number of
Stores
 
Alabama      9       Missouri      3   
Arizona      10       Nevada      4   
Arkansas      2       New Jersey      4   
California      19       New York      3   
Colorado      3       North Carolina      20   
Florida      44       Ohio      8   
Georgia      13       Oklahoma      4   
Illinois      4       Pennsylvania      4   
Indiana      7       South Carolina      12   
Kansas      2       Tennessee      13   
Kentucky      2       Texas      43   
Louisiana      8       Utah      1   
Massachusetts      1       Virginia      12   
Michigan      1       Wisconsin      1   
Mississippi      6         

 

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We lease all of our store locations, generally for 10 years with options to extend the lease term for two or more 5-year periods. We have the right to terminate some of these leases before the expiration date under specified circumstances and some with specified termination payments. Most of our leases provide for fixed minimum rents, as well as contingent amounts based on a percentage of sales in excess of specified levels. We also lease our 107,000 square foot corporate headquarters in Jacksonville, Florida and a distribution/warehouse facility in Georgia.

As of February 2, 2013, the current terms of our 263 stores (assuming we exercise all lease renewal options) were as follows:

 

Years Lease Term Expire

   Number of
Leases
Expiring
 

2013

     3   

2014 – 2017

     9   

2018 – 2022

     32   

2023 – 2027

     80   

2028 and later

     139   

 

ITEM 3. LEGAL PROCEEDINGS

We are involved in various routine legal proceedings incidental to the conduct of our business. Management, based upon the advice of outside legal counsel, does not believe that any of these legal proceedings will have a material adverse effect on our financial condition, results of operations or cash flows.

 

ITEM 4. MINE SAFETY DISCLOSURES

Not applicable.

PART II

 

ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

Market Price and Related Matters

Our common stock trades on The NASDAQ Global Select Market (“NASDAQ”) under the trading symbol “SMRT”. On April 15, 2013, there were 914 shareholders of record. The following table sets forth the high and low sales prices of our common stock per NASDAQ for each quarter in the years ended February 2, 2013 and January 28, 2012:

 

     2012      2011  
     High      Low      High      Low  

First Quarter

   $ 7.58       $ 6.02       $ 10.95       $ 7.75   

Second Quarter

     8.29         6.05         10.94         8.05   

Third Quarter

     9.34         7.58         9.66         5.65   

Fourth Quarter

     8.88         6.56         7.48         5.96   

Dividends

On November 27, 2012, the Board of Directors declared a special cash dividend of $1.00 per common share that was paid on December 24, 2012 to shareholders of record on December 10, 2012. There were no cash dividends declared or paid in fiscal 2011.

 

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Issuer Purchases of Equity Securities

The following table provides information regarding repurchases of our common stock during the quarter ended February 2, 2013:

 

ISSUER PURCHASES OF EQUITY SECURITIES

 

Period

   Total
number of
shares
purchased
     Average
price
paid per
share
     Total
number of
shares
purchased as
part of
publicly
announced
plans or
programs (1)
     Maximum
number of
shares that
may yet be
purchased
under the
plans or
programs (1)
 

October 28, 2012 – November 24, 2012

     601       $ 7.52         601         970,688   

November 25, 2012 – December 29, 2012

     79,755         7.21         79,755         890,933   

December 30, 2012 – February 2, 2013

     —           —           —           890,933   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

     80,356       $ 7.21         80,356         890,933   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

(1) Our Open Market Repurchase Program is conducted pursuant to authorizations made from time to time by our Board of Directors.

Equity Compensation Plan Information

The following table presents information about our common stock that may be issued under equity-based compensation plans as of February 2, 2013:

 

Plan Category

   (a)
Number of
securities to
be issued
upon

exercise of
outstanding
options,
warrants and
rights
(in thousands)
     (b)
Weighted-
average
exercise
price of
outstanding
options,
warrants
and rights
($) (1)
     (c)
Number  of
securities
remaining
available for
future
issuance
under equity
compensation
plans
(excluding
securities in
column (a))
(in thousands)
 

Equity compensation plans approved by shareholders

     3,269       $ 8.63         4,388   

Equity compensation plans not approved by shareholders

     —           —           —     
  

 

 

    

 

 

    

 

 

 

Total

     3,269       $ 8.63         4,388   
  

 

 

    

 

 

    

 

 

 

 

(1) The weighted average exercise price does not take into account 1.7 million shares issuable related to restricted stock and performance share awards which have no exercise price.

 

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Performance Graph

The following graph compares the cumulative five-year stockholder return on our common stock with the cumulative total return to the NASDAQ Composite Index and the S&P 500 Apparel Retail Index. The comparison assumes $100 was invested at the beginning of the five year period in Stein Mart, Inc. stock and in each of the indices shown and assumes reinvestment of any dividends.

 

LOGO

 

     2/2/2008      1/31/2009      1/30/2010      1/29/2011      1/28/2012      2/2/2013  

Stein Mart, Inc.

   $ 100.00       $ 19.9       $ 134.6       $ 142.9       $ 133.2       $ 178.3   

NASDAQ Composite

     100.00         62.0         90.9         114.9         122.7         140.6   

S&P 500 Apparel Retail

     100.00         50.1         99.1         129.8         171.1         230.8   

* * * * *

The stock performance graph should not be deemed filed or incorporated by reference into any other filings made by us under the Securities Act of 1933 or the Securities Exchange Act of 1934, except to the extent that we specifically incorporate the stock performance graph by reference in another filing.

 

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ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA (Dollars in Thousands, Except Per Share and Per Square Foot Data)

The following selected consolidated financial data for 2012, 2011 and 2010 have been derived from our audited Consolidated Financial Statements and should be read in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our Consolidated Financial Statements and notes thereto and the other information contained elsewhere in this Form 10-K. The selected consolidated financial data for 2009 and 2008 have been derived from our unaudited Consolidated Financial Statements not included herein. See the “Explanatory Note” to this Annual Report on Form 10-K and Note 2 to our Consolidated Financial Statements in Item 8 for further information regarding the restated financial information presented below.

Other than our Quarterly Report on Form 10-Q/A for April 28, 2012 and our Quarterly Reports on Form 10-Q for the quarterly periods ended on July 28, 2012 and October 27, 2012, the financial information that has been previously filed or otherwise reported for these periods is superseded by the information in this Annual Report on Form 10-K, and the financial statements and related financial information contained in previously-filed reports should no longer be relied upon.

 

    2012 (1)     2011 (5)     2010 (5)     (Unaudited)
2009 (6)
    (Unaudited)
2008 (6)
 
          (Restated)     (Restated)     (Restated)     (Restated)  

Consolidated Statement of Operations Data:

         

Net sales

  $ 1,232,366      $ 1,177,951      $ 1,201,081      $ 1,235,958      $ 1,345,042   

Cost of merchandise sold

    889,736        858,335        868,415        882,716        1,016,160   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Gross profit

    342,630        319,616        332,666        353,242        328,882   

Selling, general and administrative expenses

    306,407        287,184        277,330        319,317        401,193   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating income (loss)

    36,223        32,432        55,336        33,925        (72,311

Interest expense, net

    225        286        338        650        1,961   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) before income taxes

    35,998        32,146        54,998        33,275        (74,272

Income tax expense (benefit)

    10,971        12,215        (1,688     10,869        (1,519
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss)

  $ 25,027      $ 19,931      $ 56,686      $ 22,406      $ (72,753
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Basic income (loss) per share

  $ 0.57      $ 0.45      $ 1.28      $ 0.52      $ (1.76

Diluted income (loss) per share

  $ 0.57      $ 0.44      $ 1.26      $ 0.51      $ (1.76

Cash dividends paid per share

  $ 1.00      $ —        $ 0.50      $ —        $ —     

Consolidated Operating Data:

         

Stores open at end of period

    263        262        264        267        276   

Sales per store (2)

  $ 4,879      $ 4,793      $ 4,813      $ 4,845      $ 5,113   

Sales per square foot (3)

  $ 169      $ 161      $ 161      $ 160      $ 170   

Comparable store net sales increase (decrease) (4)

    2.7     (1.1 )%      (1.8 )%      (5.6 )%      (10.9 )% 

Consolidated Balance Sheet Data:

         

Working capital

  $ 136,352      $ 172,898      $ 171,038      $ 153,356      $ 203,862   

Total assets

    491,709        479,583        442,023        402,434        453,403   

Long-term debt

    —          —          —          —          100,000   

Capital lease obligations/long-term

    —          1,480        —          —          —     

Total shareholders’ equity

    234,034        249,671        237,481        197,986        169,794   

 

(1) 2012 is a 53-week year; all others are 52-week years.
(2) Sales per store is calculated by dividing (a) total sales including shoe department sales for stores open at the end of the year, excluding stores open for less than 12-months by (b) the number of stores open at the end of such period, exclusive of stores open for less than 12 months. Internet sales are excluded from the calculation.
(3) Sales per square foot is calculated by dividing (a) total sales including shoe department sales for stores open at the end of the year, excluding stores open for less than 12 months by (b) square footage for stores open at the end of the year, excluding stores open for less than 12 months. Internet sales are excluded from the calculation.
(4) Comparable store sales information for a period reflects stores open throughout that period and for the same 52-week period in the prior year and internet sales, except for the year 2012. Comparable store net sales increase for 2012 compares sales for the 52 weeks ended January 26, 2013 to the 52 weeks ended January 28, 2012. Comparable store sales does not include leased department commissions.
(5) See Note 2, “Restatement of Financial Statements” in the Notes to Consolidated Financial Statements in Item 8, “Financial Statements and Supplementary Data” of this Form 10-K for the effect of these corrections and changes.
(6) This period has been restated to conform with the corrections and changes as discussed in Note 2, “Restatement of Financial Statements” in the Notes to Consolidated Financial Statements in Item 8, “Financial Statements and Supplementary Data” of this Form 10-K.

 

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ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The discussion and analysis set forth below in this Item 7 has been amended and restated to reflect the restatement of our financial statements as described in the Explanatory Note to this Annual Report on Form 10-K and in Note 2 of the Notes to Consolidated Financial Statements included elsewhere in this Annual Report.

The following discussion should be read in conjunction with our audited Consolidated Financial Statements and notes thereto included elsewhere in this Form 10-K. The following discussion and analysis contains forward-looking statements which involve risks and uncertainties, and our actual results could differ materially from those anticipated in these forward-looking statements as a result of certain factors, including those set forth in the table of contents.

Overview

We are a national retailer offering the fashion merchandise, service and presentation of a better department or specialty store at prices comparable to off-price retail chains. Our focused assortment of merchandise features current-season moderate to better fashion apparel for women and men, as well as accessories, shoes and home fashions.

2012 Highlights

Comparable store sales for 2012 increased 2.7 percent compared to 2011 and total sales increased 4.6 percent. Net income for 2012 was $25.0 million or $0.57 per diluted share compared to $19.9 million or $0.44 per diluted share for 2011.

Cash and cash equivalents at year-end 2012 was $67.2 million after payment of a $43.8 million dividend, compared to $94.1 million at year-end 2011. We had no outstanding debt at fiscal year-end.

2013 Outlook

In 2013, we are continuing to embrace our value proposition with controlled couponing and even lower prices on selected merchandise. Our goal is to build on the sales increases we experienced in 2012 primarily by deepening our relationship with existing customers, attracting new customers and increasing our share of existing customers’ spending.

We expect the following factors to influence our business in 2013:

 

   

The gross profit rate is expected to be slightly lower than in 2012 as we continue to manage our selling prices and couponing and from lower margins on e-commerce sales in the second half of the year.

 

   

Selling, general and administrative (“SG&A”) expenses are expected to increase approximately $3-4 million as a result of the following:

 

   

We will incur approximately $3.0 million in start-up costs related to the launch of our new e-commerce business and the transition of our supply chain from third-party to company-operated locations.

 

   

Depreciation will increase by approximately $3.0 million as a result of recent years’ investments in capital.

 

   

2012 SG&A included the impact of certain expenses and income not expected to reoccur in 2013, including $4.0 million of professional fees related to the restatement of our financial statements and $2.1 million of breakage income on unused gift and merchandise return cards as a result of changes in breakage assumptions.

 

   

The effective tax rate for the year is expected to be approximately 39.5 percent.

 

   

Current plans are to open four stores, close three stores and relocate four stores to better locations in their respective markets in 2013.

 

   

Capital expenditures for 2013 are expected to be approximately $34 million, including $14 million for continuing information system upgrades, $5 million for distribution center equipment and software, and the remainder for new and relocated stores, store remodels and new fixtures.

We will be launching our new e-commerce business in mid to late 2013 with a representative merchandise selection. This will enable us to reach new customers and increase our share of existing customers’ spend through a multi-channel approach. As noted above, this initiative will actually have a negative bottom line impact in 2013 from start-up costs and margins that are lower than for our brick and mortar stores due to relatively high fulfillment costs at our initial expected sales volume levels. This is an important initiative from which we expect significant future benefit as we grow our sales.

Another important initiative for 2013 is the transition of our supply chain distribution centers from third-party to company-operated locations beginning in the second quarter. While this change will not result in an immediate savings in distribution expenses due to start-up costs and an initial capital investment in equipment and software, this initiative offers an excellent return on our investment with positive impact starting in 2014.

 

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Results of Operations

The following table sets forth each line item of the Consolidated Statements of Income expressed as a percentage of net sales:

 

     2012     2011     2010  
           (Restated)     (Restated)  

Net sales

     100.0     100.0     100.0

Cost of merchandise sold

     72.2     72.9     72.3
  

 

 

   

 

 

   

 

 

 

Gross profit

     27.8     27.1     27.7

Selling, general and administrative expenses

     24.9     24.4     23.1
  

 

 

   

 

 

   

 

 

 

Operating income

     2.9     2.7     4.6

Interest expense, net

     0.0     0.0     0.0
  

 

 

   

 

 

   

 

 

 

Income before income taxes

     2.9     2.7     4.6

Income tax expense (benefit)

     0.9     1.0     (0.1 )% 
  

 

 

   

 

 

   

 

 

 

Net income

     2.0     1.7     4.7
  

 

 

   

 

 

   

 

 

 

2012 Compared to 2011

Net Sales. The following table provides net sales for fiscal 2012 compared to fiscal 2011 (dollar amounts in thousands):

 

     2012      2011      Increase  
            (Restated)         

Net sales

   $ 1,232,366       $ 1,177,951       $ 54,415   

Sales percent increase:

        

Total net sales

           4.6

Comparable store sales

           2.7

The comparable store sales increase was driven by increases in the number of transactions, the average units per transaction, and average unit retail prices.

Gross Profit. The following table compares gross profit for fiscal 2012 to fiscal 2011 (dollar amounts in thousands):

 

     2012     2011     Increase  
           (Restated)        

Gross profit

   $ 342,630      $ 319,616      $ 23,014   

Percentage of net sales

     27.8     27.1     0.7

Gross profit as a percent of sales for 2012 increased from 2011 primarily due to lower markdowns resulting from our strategy of reducing coupons applicable to our regular-priced merchandise.

Selling, General and Administrative Expenses. The following table compares SG&A expenses for fiscal 2012 to fiscal 2011 (dollar amounts in thousands):

 

     2012     2011     Increase  
           (Restated)        

Selling, general and administrative expenses

   $ 306,407      $ 287,184      $ 19,223   

Percentage of net sales

     24.9     24.4     0.5

SG&A expenses increased primarily due to a $9.4 million increase in corporate expenses, $5.2 million increase in store expenses, $5.3 million increase in depreciation expense, $4.1 million decrease in credit card program income and a $1.0 million decrease in other income, partially offset by a $3.7 million decrease in advertising expenses and $2.1 million increase in breakage income on unused gift cards and merchandise return cards.

Corporate expenses increased primarily due to $4.0 million in legal and accounting costs related to the restatement as well as higher compensation and benefit costs. Store expenses increased primarily due to higher compensation costs, partially offset by a decrease in credit card interchange fees. Credit card program income decreased primarily due to a performance-based incentive from GE Capital Retail Bank (“GE”) related to the final program year of our prior co-brand agreement received in 2011 as well as the elimination of new account fees when we entered into the Amended and Restated Co-Brand and Private Label Credit Card Consumer Program Agreement

 

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with GE in October 2011. Advertising expenses decreased due to the reduction of certain media usage. The increase in breakage income on unused gift cards and merchandise return cards is a result of an update in our breakage assumptions during the second quarter of 2012.

Income Taxes. The following table compares income tax expense for fiscal 2012 to fiscal 2011 (dollar amounts in thousands):

 

     2012     2011     Decrease  
           (Restated)        

Income tax expense

   $ 10,971      $ 12,215      $ (1,244

Effective tax rate (“ETR”)

     30.5     38.0     (7.5 )% 

Income tax expense for 2012 was favorably impacted by non-taxable income related to the elimination of post-retirement life insurance benefit of $6.4 million.

2011 Compared to 2010

Net Sales. The following table provides net sales for fiscal 2011 compared to fiscal 2010 (dollar amounts in thousands):

 

     2011      2010      Decrease  
     (Restated)      (Restated)         

Net sales

   $ 1,177,951       $ 1,201,081       $ (23,130

Sales percent decrease:

        

Total net sales

           (1.9 )% 

Comparable store sales

           (1.1 )% 

The comparable store sales decrease was driven by decreases in the number of transactions and the average units per transaction, partially offset by an increase in average unit retail prices.

Gross Profit. The following table compares gross profit for fiscal 2011 to fiscal 2010 (dollar amounts in thousands):

 

     2011     2010     Decrease  
     (Restated)     (Restated)        

Gross profit

   $ 319,616      $ 332,666      $ (13,050

Percentage of net sales

     27.1     27.7     (0.6 )% 

Gross profit as a percent of sales decreased for 2011 from 2010 primarily due to higher occupancy and buying costs and the negative leverage on lower sales.

Selling, General and Administrative Expenses. The following table compares SG&A expenses for fiscal 2011 to fiscal 2010 (dollar amounts in thousands):

 

     2011     2010     Increase  
     (Restated)     (Restated)        

Selling, general and administrative expenses

   $ 287,184      $ 277,330      $ 9,854   

Percentage of net sales

     24.4     23.1     1.3

SG&A expenses increased $9.9 million due to a $9.3 million decrease in breakage income on unused gift cards and merchandise return cards, a $2.9 million increase in advertising expenses, a $2.7 million increase in corporate expenses, a $0.7 million increase in depreciation expense and a $0.4 million decrease in other income. These increases were partially offset by a $4.5 million decrease in stores expenses, $1.0 million higher income from the credit card program and $0.8 million decrease in asset impairment and store closing charges.

In 2010 we incurred a $1.2 million charge associated with changing our physical inventory process and recorded $9.7 million of income related to breakage on gift cards, neither of which reoccurred in 2011. The increase in corporate expenses include unfavorable market value changes in the cash surrender value of insurance contracts underlying our executive split-dollar insurance plans for 2011 compared to 2010 and higher information systems expenses. Store expense reductions include $3.5 million for the elimination of operating costs from closed stores and a $1.0 million savings in credit card interchange fees. The increase in credit card income includes a $1.6 million performance-based incentive related to the final year of our prior co-brand program agreement. Asset impairment and store closing charges decreased this year due to lower lease termination fees.

 

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Income Taxes. The following table compares income tax expense for fiscal 2011 to fiscal 2010 (dollar amounts in thousands):

 

     2011     2010     Increase  
     (Restated)     (Restated)        

Income tax expense (benefit)

   $ 12,215      $ (1,688   $ 13,903   

Effective tax rate (“ETR”)

     38.0     (3.1 )%      41.1

Income tax expense for 2010 was favorably impacted by the reversal of the deferred tax asset valuation allowance established in 2008. Excluding this favorable tax adjustment, the ETR was 36.0 percent in 2010 due to favorable settlements of state income tax examinations. During 2011, there was no valuation allowance impact.

Liquidity and Capital Resources

Our primary source of liquidity is the sale of merchandise inventories. Capital requirements and working capital needs are funded through a combination of internally generated funds, available cash, credit terms from vendors and our revolving credit facility. Working capital is needed to support store inventories and capital investments for new store openings and to maintain existing stores. Historically, our working capital needs are lowest in the first quarter and highest at the end of the third quarter and beginning of the fourth quarter as we build inventories for the holiday selling season.

As of February 2, 2013, we had $67.2 million in cash and cash equivalents and $93.2 million of borrowing availability under our Credit Agreement. We believe that we will continue to generate positive cash flows from operations on a full year basis. Internally generated cash, along with our available cash and borrowing capacity under the revolving credit agreement, will provide the means needed to fund our operations.

The following table presents cash flows data for fiscal 2012, fiscal 2011 and fiscal 2010 (in thousands):

 

Cash provided by (used in):    2012     2011     2010  
           (Restated)     (Restated)  

Operating activities

   $ 71,339      $ 64,584      $ 49,093   

Investing activities

   $ (45,426   $ (38,012   $ (28,798

Financing activities

   $ (52,733   $ (12,237   $ (20,886

Cash provided by operating activities

Net cash provided by operating activities was $71.3 million for fiscal 2012 compared to net cash provided by operating activities of $64.6 million for fiscal 2011. Cash provided by operating activities results primarily from operating income and changes in working capital. Cash provided by operating activities for fiscal 2012 was positively impacted by an income tax refund of approximately $6.6 million. Cash provided by operating activities for fiscal 2011 includes a positive working capital impact from lengthening vendor payment terms implemented in early 2011 which did not reoccur in 2012.

Net cash provided by operating activities was $64.6 million for fiscal 2011 compared to net cash provided by operating activities of $49.1 million for fiscal 2010. Cash provided by operating activities results primarily from operating income and changes in working capital. Cash provided by operating activities for fiscal 2011 includes a positive working capital impact from lengthening vendor payment terms implemented in early 2011.

Cash used in investing activities

Net cash used in investing activities was solely for capital expenditures. Capital expenditures in 2012, 2011 and 2010 include approximately $20 million, $20 million and $19 million, respectively, for systems improvements, with the largest portion for our new merchandise information system. The remaining capital amounts are for opening and remodeling stores, including upgrades to fitting rooms, lighting, flooring and fixtures. We also replaced our point-of-sale system hardware during 2011, primarily with assets acquired through capital leases.

We expect to invest approximately $34 million in capital expenditures in 2013, with $14 million for continuing information systems upgrades, $5 million for distribution center equipment and software and the remainder for new and relocated stores, store remodels and new fixtures. The cost of opening a new store ranges from $550,000 to $600,000 for fixtures, equipment, leasehold improvements and pre-opening costs (primarily advertising, stocking and training). Pre-opening costs are expensed at the time of opening. Initial inventory investment for a new store is approximately $800,000.

 

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Cash used in financing activities

Financing activities in 2012 include $43.8 million for payment of a special dividend of $1.00 per share. Financing activities for 2010 also include $22.2 million for payment of a special dividend of $0.50 per share. There were no dividends paid in 2011. During 2012 we repurchased 0.6 million shares of our common stock at a cost of $3.9 million. During 2011 we repurchased 1.7 million shares of our common stock at a cost of $12.1 million compared to 0.9 million shares at a cost of $7.1 million in 2010.

Capital lease payments were $6.1 million and $3.4 million for 2012 and 2011, respectively. There were no capital lease payments in 2010.

In October 2011, we entered into an amended and restated revolving credit agreement (the “Credit Agreement”) with Wells Fargo Bank, N.A. The Credit Agreement provides for a $100 million senior secured revolving credit facility which can be increased to $150 million. The Credit Agreement matures on February 28, 2017. The amount available for borrowing was $93.2 million at February 2, 2013 and is based on 90% of eligible credit card receivables and inventories less reserves, as defined in the Credit Agreement. The amount available for borrowing represents the capped borrowing base of $100 million reduced by outstanding letters of credit of $6.8 million. We did not use our revolving credit facility in 2012 or 2011, other than for outstanding letters of credit. We had no direct borrowings at February 2, 2013.

Impact of Inflation

Although we expect that our operations will be influenced by general economic conditions, including rising food, fuel and energy prices, we do not believe that inflation has had a material effect on our results of operations. However, there can be no assurance that our business will not be affected by such factors in the future.

Contractual Obligations

The following table sets forth our contractual obligations at February 2, 2013 (in thousands):

 

     Total      Less than
1 Year
     1 – 2
Years
     3 – 5
Years
     After 5
Years
 

Operating leases

   $ 368,770       $ 75,119       $ 68,788       $ 141,790       $ 83,073   

Capital leases

     2,197         2,197         —           —           —     

Purchase obligations (a)

     112,570         112,570         —           —           —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 483,537       $ 189,886       $ 68,788       $ 141,790       $ 83,073   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

(a) Represent open purchase orders with vendors for merchandise not yet received and recorded on our Consolidated Balance Sheet.

The above table does not include long-term debt as we did not have any direct borrowings under our senior revolving credit facility at February 2, 2013. Other long-term liabilities on the balance sheet include the liability for unrecognized tax benefits, deferred compensation, deferred rent liability, postretirement benefit liability and other long-term liabilities that do not have specific due dates, so are excluded from the preceding table. Other long-term liabilities also include long-term store closing reserves, a component of which is future minimum payments under non-cancelable leases for closed stores. These future minimum lease payments for these closed stores total $1.9 million and are included in the above table.

Off-Balance Sheet Arrangements

We have outstanding standby letters of credit totaling $6.8 million securing certain insurance programs at February 2, 2013. If certain conditions were to occur under these arrangements, we would be required to satisfy the obligations in cash. Due to the nature of these arrangements and based on historical experience, we do not expect to make any payments; therefore, the letters of credit are excluded from the preceding table. There are no other off-balance sheet arrangements that could affect our financial condition.

Critical Accounting Policies and Estimates

The preparation of our consolidated financial statements requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, expenses and related disclosure of contingent assets and liabilities. Management bases its estimates and judgments on historical experience and other relevant factors, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. While we believe that the historical experience and other factors considered provide a meaningful basis for the accounting policies applied in the preparation of the financial statements, we cannot guarantee that our estimates and assumptions will be accurate, which could require adjustments of these estimates in future periods. A summary of the more significant accounting policies follows.

Retail Inventory Method and Inventory Valuation. Inventories are valued using the lower of cost or market value, determined by the retail inventory method. Under the retail inventory method (“RIM”), the valuation of inventories at cost and the resulting gross margins are calculated by applying a cost-to-retail ratio to the retail value of inventories. RIM is an averaging method that is widely used in the retail industry due to its practicality. The use of the retail inventory method results in valuing inventories at lower of cost or market as permanent markdowns are currently taken as a reduction of the retail value of inventories. Inherent in the RIM calculation are certain significant

 

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management judgments and estimates including, among others, merchandise markon, markup, markdowns and shrinkage, which significantly affect the ending inventory valuation at cost as well as the corresponding charge to cost of goods sold. In addition, failure to take appropriate permanent markdowns currently can result in an overstatement of inventory.

We perform physical inventory counts at all stores annually. Included in the carrying value of merchandise inventories is a reserve for shrinkage. Shrinkage is estimated based on historical physical inventory results as a percentage of sales for the year. The difference between actual and estimated amounts in any year may cause fluctuations in quarterly results, but is not a factor in full year results.

Vendor Allowances. We receive allowances from some of our vendors primarily related to markdown reimbursement, damaged/defective merchandise and vendor compliance issues. Vendor allowances are recorded when earned. Allowances received from vendors related to profitability of inventory recently sold are reflected as reductions to cost of merchandise sold in the later of the period that the merchandise markdown is incurred or the allowance is negotiated. Allowances received from vendors related to damaged/defective inventory are reflected as reductions to the cost of merchandise as it is received. Allowances received due to vendors’ failure to comply with our policies (primarily violations of shipping and merchandise preparation requirements) are reflected as a reduction of the cost of the merchandise when compliance issues are identified during the receiving process. Although it is unlikely that there will be a significant reduction in historical levels of vendor support, if a reduction were to occur, we could experience higher cost of merchandise sold.

Impairment of Long-Lived Assets. Long-lived assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Factors used in the review include management’s plans for future operations, recent operating results and projected cash flows. For long-lived assets held for use, an impairment loss is recognized if the sum of the future undiscounted cash flows from the use of the assets is less than the carrying value of the assets. The amount of the impairment charge is the excess of the carrying value of the asset over its fair value. Fair value, as used in our asset impairment calculations, is based on the best information available, including prices for similar assets. Impairment reviews are performed for individual stores during the fourth quarter, or more frequently should circumstances change. A significant change in cash flows could result in an increase in asset impairment charges. During 2012, 2011 and 2010, we recorded $0.5 million, $1.2 million and $1.2 million, respectively, in asset impairment charges.

Store Closing Costs. We record costs associated with store closing activities when they are incurred, generally the cease-use date. Lease termination costs are recorded net of estimated sublease income that could reasonably be obtained for the properties. In the event we are not successful in subleasing closed store locations, additional store closing costs may be recorded. During 2012, 2011 and 2010, we recorded $1.0 million, $1.2 million and $1.9 million, respectively, in store closing charges.

Insurance Reserves. We use a combination of insurance and self-insurance for various risks including workers’ compensation, general liability and associate-related health care benefits. We are responsible for paying the claims that are less than the insured limits. The reserves recorded for these claims are actuarially estimated based on claims filed and claims incurred but not reported. These reserve estimates are adjusted based upon actual claims filed and settled. The estimated accruals for these reserves could be significantly affected if future claims differ from historical trends and other actuarial assumptions. As of February 2, 2013 and January 28, 2012, insurance reserves of $16.8 million and $16.5 million, respectively, were included in Accrued expenses and other current liabilities and Other liabilities. Historically, our actuarial estimates have not been materially different from actual results.

Valuation Allowance for Deferred Tax Assets. Income tax accounting guidance requires that companies assess whether valuation allowances should be established against deferred tax assets based on consideration of all available evidence using a “more likely than not” standard. In making such assessments, significant weight is to be given to evidence that can be objectively verified. A company’s current or previous losses are given more weight than its future outlook.

We perform a quarterly assessment of our net deferred tax assets to determine realization. There was no valuation allowance required as of February 2, 2013 or January 28, 2012. As of January 30, 2010, the Company had a valuation allowance on its net deferred tax asset which was released in 2010.

Income Tax Reserves. We record liabilities for uncertain tax positions related to federal and state income taxes. These liabilities reflect our best estimate of our ultimate income tax liability based on the tax code, regulations, and pronouncements of the jurisdictions in which we do business. Estimating our ultimate tax liability involves significant judgments regarding the application of complex tax regulations across many jurisdictions. If actual results differ from estimated results, our effective tax rate and tax balances could be affected. As such, these estimates may require adjustment in the future as additional facts become known or as circumstances change.

For a complete listing of our significant accounting policies, see Note 1 of the Notes to Consolidated Financial Statements.

 

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Recent Accounting Pronouncements

In June 2011, the Financial Accounting Standards Board (“FASB”) amended Accounting Standards Codification (“ASC”) Topic 220, Comprehensive Income. The amended guidance requires most entities to present changes in net income and other comprehensive income in either a single statement of comprehensive income or two separate, but consecutive, statements. The objective of these amendments is to improve the comparability, consistency, and transparency of financial reporting and to increase the prominence of items reported in other comprehensive income. We adopted this guidance in fiscal 2012 and have included the addition of the Consolidated Statements of Comprehensive Income in our financial statements.

 

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

We are exposed to interest rate risk primarily through borrowings under our revolving credit facility which are at variable rates. The facility permits debt commitments up to $100 million, which can be increased to $150 million, has a February 2017 maturity date and bears interest at spreads over the prime rate and LIBOR. We had no borrowings under our revolving credit facility during 2012, other than fees charged by the lender and outstanding letters of credit.

 

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

The consolidated financial statements and the Report of Independent Registered Certified Public Accounting Firm thereon are filed pursuant to this Item 8 and are included in this report beginning on page F-1.

 

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

None.

 

ITEM 9A.

Evaluation of Disclosure Controls and Procedures

Under the supervision and with the participation of our management, including the Chief Executive Officer and Chief Financial Officer, we have evaluated the effectiveness of the design and operation of our disclosure controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), as of the end of the period covered by this report. In light of the material weaknesses described below, our Chief Executive Officer and Chief Financial Officer have concluded that our disclosure controls and procedures were not effective as of the date of that evaluation.

Management’s Report on Internal Control Over Financial Reporting

Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in the Exchange Act Rules 13a-15(f) and 15d-15(f). Our internal control over financial reporting is designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

Management assessed the effectiveness of our internal control over financial reporting as of February 2, 2013. In making this assessment, management used the criteria set forth in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on that assessment, management concluded that our internal control over financial reporting was not effective as of February 2, 2013 due to the identification of the material weaknesses discussed below.

A material weakness is a deficiency, or combination of deficiencies, in internal control over financial reporting such that there is a reasonable possibility that a material misstatement of the Company’s annual or interim financial statements will not be prevented or detected on a timely basis. Based on this definition, management has concluded that the material weaknesses noted below existed in the Company’s internal control over financial reporting.

The following material weaknesses were identified in 2012. These led to errors which resulted in the need to restate our 2010 and 2011 financial statements and our interim financial statements for the first quarter of 2012 and each interim period in 2011. The resulting misstatements are more fully described in Note 2 Restatement of Previously Issued Financial Statements in the financial statements included in this Form 10-K.

Inventory Markdowns: We did not maintain effective internal controls over inventory markdowns that impacted the valuation and accuracy of the accounting for and disclosures of Inventory and Cost of merchandise sold. Specifically, we did not design effective controls for the finance department to monitor and evaluate the appropriate accounting for markdowns. Additionally, our finance and merchandising departments did not communicate effectively so that the finance department could develop appropriate accounting policies relative to markdowns. Because the Company values inventories at the lower of average cost or market on a first-in, first-out basis using the retail

 

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inventory method of accounting, the characterization of markdowns as either permanent or promotional has a direct impact on the calculation of ending inventory value and thus cost of merchandise sold. More specifically, inventory is reduced by permanent markdowns for all on-hand units at the time the markdown is taken but is not reduced by promotional markdowns until the units are sold. These material weaknesses resulted in the misstatement of our Inventory and Cost of merchandise sold.

Leasehold improvement costs: We did not maintain effective internal controls over leasehold improvements that impacted the presentation and disclosure and accuracy of the accounting for and disclosures of Prepaid expenses and other current assets, Property and equipment, net, Other assets, Other liabilities, Cost of merchandise sold and Selling, general & administrative expenses. Specifically, we did not design effective controls for financial management to adequately validate the assertions made by real estate operations management regarding the future value of leasehold improvements made by the Company and consequently did not record tenant improvement allowances (“TIA”) provided by landlords for our stores in accordance with accounting standards. TIA provided as leasehold incentives to us was thus improperly netted against property and equipment instead of being accounted for as a deferred rent credit. This material weakness resulted in the misstatement of our Prepaid expenses and other current assets, Property and equipment, net, Other assets, Other liabilities, Cost of merchandise sold and Selling, general & administrative expenses.

Compensated absences (paid vacation): We did not maintain effective internal controls over the establishment of compensated absences (paid vacation) accruals that impacted accuracy, completeness and valuation of the accounting for and disclosures of Accrued expenses and other current liabilities and Selling, general and administrative expenses. Specifically, we did not design effective controls for financial management to effectively communicate with human resources personnel to fully understand the Company’s vacation policy. The Company’s vacation policy is an “earn in one year, take in the next” policy whereby at the end of any year, the policy leaves associates with a full year of earned, but untaken vacation. In the past, the policy was incorrectly interpreted by financial management to be an “earn and take in the same year” policy; thus the Company has historically not recorded a vacation accrual. This material weakness resulted in the misstatement of our Accrued expenses and other current liabilities and Selling, general and administrative expenses.

Indirect overhead cost capitalization: We did not maintain effective internal controls over indirect overhead cost capitalization that impacted the valuation and accuracy of the accounting for and disclosures of Inventory and Cost of merchandise sold. Specifically, we did not design effective controls to calculate the indirect cost capitalization adjustment in interim periods. Although we have a control in place to evaluate the key assumptions and the resulting calculation of the indirect cost capitalization adjustment on an annual basis, we did not conduct an analysis at interim period ends. This material weakness resulted in the misstatement of our Inventory and Cost of merchandise sold in interim periods.

Software assets amortization periods and retirements: We did not maintain effective internal controls over the appropriate amortization periods and the timing of retirements of software assets that impact the accuracy, completeness, presentation and disclosure of the accounting for and disclosures of Prepaid expenses and other current assets, Property and equipment, net, and Selling, general and administrative expenses. Specifically, we did not design effective controls for information technology personnel to effectively communicate the nature of certain software expenditures to the finance department resulting in the amortization of software costs over an improper period. Additionally, we did not design effective controls for financial management to effectively communicate with information technology personnel to timely identify and remove retired software assets from the accounting records. These material weaknesses resulted in the misstatement of our Prepaid expenses and other current assets, Property and equipment, net, and Selling, general and administrative expenses.

The material weaknesses set forth above have caused us to conclude that we had a material weakness in our control environment related to the level of information and communication between the finance department and other departmental functions being insufficient in preventing and detecting material misstatements to the Company’s financial statements. This material weakness contributed to the above material weaknesses.

The following additional material weakness was identified in the third quarter of 2011 and still existed as of February 2, 2013:

Information technology communication: We did not maintain effective internal controls over information technology communication that impacted the accuracy and valuation of the accounting for and disclosures of cost of merchandise sold and inventory. Specifically, we did not design effective controls for our IT department to effectively communicate system incidents to the appropriate personnel. We determined that IT operations personnel followed protocols for issue resolution; however, because of the uniqueness and potential impacts of certain incidents, further escalation to the finance organization should have occurred. IT personnel did not notify the finance organization that historical records had been removed to free up system capacity and that certain transactions had been reprocessed. This prevented accounting personnel from identifying an error in the Perpetual System unit balances and analyzing the potential impact related to permanent markdowns on a timely basis. This material weakness resulted in an adjustment in the third quarter of 2011 to cost of merchandise sold and inventory by not recording all permanent markdowns actually taken.

 

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The above material weaknesses could result in further misstatement of the financial statements or disclosures that would result in a material misstatement to the annual or interim consolidated financial statements that would not be prevented or detected.

The effectiveness of the Company’s internal control over financial reporting as of February 2, 2013 has been audited by PricewaterhouseCoopers LLP, an independent registered certified public accounting firm, as stated in their report which is included on page F-1 herein.

Remediation Efforts to Address Material Weaknesses

In November 2012, our Board of Directors created an Accounting Review Committee to review the accounting errors that led to our financial statement restatement. The Accounting Review Committee focused its attention on the issue of inventory markdowns. The Accounting Review Committee retained a national law firm, which engaged a national consulting firm that specializes in accounting services, to commence a full review of the Company’s past practices for inventory markdowns. Based upon its review, the Accounting Review Committee found no misconduct or intention to misstate financial results by current or former employees or directors.

Our management has discussed the material weaknesses described above with our Audit Committee and external auditors. To remediate the material weaknesses we have implemented, are implementing and/or plan to implement a number of measures, including those listed below.

Identified in 2012:

Inventory Markdowns: We are implementing the following activities in 2013 to remediate the markdown material weaknesses noted above: 1) Merchandising and financial management will update the existing policies and procedures to reflect the agreed upon characteristics of markdowns as promotional or permanent; 2) At quarter end, financial management will review markdown activity to determine if all items have been recorded in accordance with markdown policies; 3) At quarter end financial management will meet with merchandising management to review the seasonal inventory levels. Based on this analysis they will assess comparability and appropriateness of permanent markdowns and related markdown levels; 4) Financial management will review promotional markdowns in detail to determine whether pricing actions before and after quarter end indicate situations where markdowns should be more appropriately identified as permanent; and 5) Financial management will approve changes, if any, in seasonal merchandise mark out-of-stock dates.

Leasehold improvement costs: We are implementing the following activities in 2013 to remediate the leasehold accounting material weakness noted above: 1) The existing policy and procedures related to leases will be updated to reflect the proper accounting treatment of lease terms and financial management will review the terms of all new leases that contain TIA in accordance with the new policy to determine that leasehold improvements and deferred rent credits are correctly recorded; 2) The finance department will meet with real estate management annually to review the lease accounting policy and validate the underlying assertions made by the real estate department upon which the policy is predicated; and 3) We will be purchasing a software application that in addition to streamlining our processes for tracking and recording leases will facilitate communication between finance and our real estate department.

Compensated absences (paid vacation): We are implementing the following activities in 2013 to remediate the compensated absences (paid vacation) material weakness noted above: The accounting policy for recording accrued vacation will be updated by the finance department to reflect the proper accounting treatment of compensated absences (paid vacation) in accordance with the Company’s vacation policy and changes to the Company’s vacation policy will require approval by the finance department. Additionally, financial management will review and approve the vacation accrual on a quarterly basis and determine that the accrual calculation is consistent with the Company’s vacation policy.

Indirect overhead cost capitalization: We are implementing the following activities in 2013 to remediate the indirect cost capitalization material weakness noted above: The accounting policy for recording the indirect cost capitalization adjustment will be changed to include quarterly review of the indirect overhead rate assumptions and preparation of the resulting inventory adjustment on a quarterly basis. Additionally, financial management will review and approve the indirect cost capitalization adjustment on a quarterly basis.

Software assets amortization periods and retirements: In the fourth quarter of 2012, we implemented the following activities to remediate the software assets amortization periods and retirements material weaknesses noted above: Financial management reviews software asset additions with IT personnel and approves the software asset amortization period and capitalization prior to recording in the fixed asset subledger. For retirements, we added procedures for IT personnel and financial management to review the software assets listing to identify assets no longer in use on an annual basis.

 

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Identified in the third quarter of 2011:

Information technology communication: We implemented the following activities to remediate the information technology material weakness noted above: 1) In the first quarter of 2012, we added procedures to regularly review systematic schedule changes that have been temporarily placed on hold; 2) In the first quarter of 2012, we monitored the capacity issue on our legacy inventory system on a daily basis until we replaced the system in May 2012; and 3) In the fourth quarter of 2012, we implemented procedures to ensure formal communication and documentation with finance and other department heads related to issue resolution.

In addition to the remediation efforts set forth above, beginning in the fourth quarter of 2012 we re-evaluated the composition and structure of our finance organization and made several changes including replacing associates in several key positions, modifying associate responsibilities, adding resources and realigning reporting assignments to strengthen the skills and capabilities of the organization to improve the level of information and communication between departmental functions. Additionally, we are implementing a quarterly sub-certification process whereby all members of upper management and certain other management will review our filings and confirm their responsibility for, among other things, the effectiveness of key controls in their functional areas and that they are unaware of inaccuracies or omissions in our financial statements.

Changes in Internal Control Over Financial Reporting

As discussed above, there were changes in the Company’s internal control over financial reporting (as that term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the most recent fiscal quarter that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

 

ITEM 9B. OTHER INFORMATION

None.

PART III

 

ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE

The information required by this item is incorporated herein by reference to the disclosure found in the Proxy Statement for our June 18, 2013 Annual Meeting of Stockholders.

We have adopted a code of conduct applicable to all of our officers, directors and employees, including the principal executive officer, principal financial officer, principal accounting officer and persons performing similar functions. The text of this code of conduct may be found on our web site at www.steinmart.com. We intend to post notice of any waiver from, or amendment to, any provision of our code of conduct on our web site.

 

ITEM 11. EXECUTIVE COMPENSATION

The information required by this item is incorporated herein by reference to the disclosure found in the Proxy Statement for our June 18, 2013 Annual Meeting of Stockholders.

 

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS

The information required by this item is incorporated herein by reference to the disclosure found in the Proxy Statement for our June 18, 2013 Annual Meeting of Stockholders.

 

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE

The information required by this item is incorporated herein by reference to the disclosure found in the Proxy Statement for our June 18, 2013 Annual Meeting of Stockholders.

 

ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES

The information required by this item is incorporated herein by reference to the disclosure found in the Proxy Statement for our June 18, 2013 Annual Meeting of Stockholders.

 

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PART IV

 

ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES

(a) The following financial statements and exhibits are filed as part of this report or are incorporated herein as indicated.

 

1. List of Financial Statements

 

     Page  

Report of Independent Registered Certified Public Accounting Firm

     F–1   

Consolidated Balance Sheets

     F–3   

Consolidated Statements of Income

     F–4   

Consolidated Statements of Comprehensive Income

     F–5   

Consolidated Statements of Shareholders’ Equity

     F–6   

Consolidated Statements of Cash Flows

     F–7   

Notes to Consolidated Financial Statements

     F–8   

 

2. List of 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.

 

3. List of Exhibits

See “Exhibit Index”, which is incorporated herein by reference.

In reviewing the agreements included as exhibits to this report, please remember they are included to provide you with information regarding their terms and are not intended to provide any other factual or disclosure information about the Company, its subsidiaries or other parties to the agreements. The agreements contain representations and warranties by each of the parties to the applicable agreement. These representations and warranties have been made solely for the benefit of the other parties to the applicable agreement and:

 

   

should not in all instances be treated as categorical statements of fact, but rather as a way of allocating the risk to one of the parties if those statements prove to be inaccurate;

 

   

have been qualified by disclosures that were made to the other party in connection with the negotiation of the applicable agreement, which disclosures are not necessarily reflected in the agreement;

 

   

may apply standards of materiality in a way that is different from what may be viewed as material to you or other investors; and

 

   

were made only as of the date of the applicable agreement or such other date or dates as may be specified in the agreement and are subject to more recent developments.

Accordingly, these representations and warranties may not describe the actual state of affairs as of the date they were made or at any other time. We acknowledge that, notwithstanding the inclusion of the foregoing cautionary statements, we are responsible for considering whether additional specific disclosures of material information regarding material contractual provisions are required to make the statements in this report not misleading. Additional information about the Company may be found elsewhere in this report and the Company’s other public files, which are available without charge through the SEC’s website at http://www.sec.gov.

Unless otherwise indicated below, the Commission file number to the exhibit is No. 0-20052.

 

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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: May 3, 2013     By:  

/s/ Jay Stein

      Jay Stein
      Chairman of the Board and Interim 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 3rd day of May, 2013.

 

/s/ Jay Stein

   

/s/ Susan Falk

Jay Stein     Susan Falk
Chairman of the Board and Interim Chief Executive Officer     Director
(Principal Executive Officer)    

/s/ John H. Williams, Jr.

   

/s/ Linda M. Farthing

John H. Williams, Jr.     Linda M. Farthing
Vice Chairman of the Board     Director

/s/ Gregory W. Kleffner

   

/s/ Mitchell W. Legler

Gregory W. Kleffner     Mitchell W. Legler
Executive Vice President and Chief Financial Officer     Director
(Principal Financial Officer)    

/s/ Randy Pianin

   

/s/ Robert L. Mettler

Randy Pianin     Robert L. Mettler
Senior Vice President and Controller     Director
(Principal Accounting Officer)    

/s/ Ralph Alexander

   

/s/ Richard L. Sisisky

Ralph Alexander     Richard L. Sisisky
Director     Director

/s/ Alvin R. Carpenter

   

/s/ Martin E. Stein, Jr.

Alvin R. Carpenter     Martin E. Stein, Jr.
Director     Director

/s/ Irwin Cohen

   
Irwin Cohen    
Director    

 

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Table of Contents

Report of Independent Registered Certified Public Accounting Firm

To the Board of Directors

and Shareholders of Stein Mart, Inc.

In our opinion, the accompanying consolidated balance sheets and the related consolidated statements of income, comprehensive income, shareholders’ equity, and cash flows, present fairly, in all material respects, the financial position of Stein Mart, Inc. and its subsidiaries at February 2, 2013 and January 28, 2012, and the results of their operations and their cash flows for each of the three fiscal years in the period ended February 2, 2013 in conformity with accounting principles generally accepted in the United States of America. Also in our opinion, the Company did not maintain, in all material respects, effective internal control over financial reporting as of February 2, 2013, based on criteria established in Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) because material weaknesses in internal control over financial reporting related to the following existed as of that date:

 

   

Control environment related to the level of information and communication between the finance department and other departmental functions being insufficient in preventing and detecting material misstatements to the Company’s financial statements.

 

   

Inventory markdowns: The Company did not design effective controls for (i) the finance department to monitor and evaluate the appropriate accounting for markdowns, and (ii) the finance and merchandising departments to effectively communicate so that the finance department could develop appropriate accounting policies relative to markdowns.

 

   

Leasehold improvement costs: The Company did not design effective controls for financial management to adequately validate the assertions made by real estate operations management regarding the future value of leasehold improvements made by the Company, and consequently did not record tenant improvement allowances provided by landlords for the stores in accordance with accounting standards.

 

   

Compensated absences (paid vacation): The Company did not design effective controls for financial management to effectively communicate with human resources personnel to fully understand the Company’s vacation policy.

 

   

Indirect overhead cost capitalization: The Company did not design effective controls to calculate the indirect cost capitalization adjustment in interim periods.

 

   

Software assets amortization periods and retirements: The Company did not design effective controls for (i) information technology personnel to effectively communicate the nature of certain software expenditures to the finance department resulting in the amortization of software costs over an improper period and (ii) financial management to effectively communicate with information technology personnel to timely identify and remove retired software assets from the accounting records.

 

   

Information technology communication: The Company did not design effective controls for the IT department to effectively communicate system incidents to the appropriate personnel.

A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of the annual or interim financial statements will not be prevented or detected on a timely basis. The material weaknesses referred to above are described in Management’s Report on Internal Control Over Financial Reporting appearing under Item 9A. We considered these material weaknesses in determining the nature, timing, and extent of audit tests applied in our audit of the February 2, 2013 consolidated financial statements, and our opinion regarding the effectiveness of the Company’s internal control over financial reporting does not affect our opinion on those consolidated financial statements. The Company’s management is responsible for these financial statements, for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting included in management’s report referred to above. Our responsibility is to express opinions on these financial statements and on the Company’s internal control over financial reporting based on our integrated audits. We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement and whether effective internal control over financial reporting was maintained in all material respects. Our audits of the financial statements included examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the

 

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overall financial statement presentation. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.

As discussed in Note 2 to the consolidated financial statements, the Company has restated its January 28, 2012 and January 29, 2011 financial statements to correct for errors.

A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

 

/s/ PricewaterhouseCoopers LLP

Jacksonville, Florida
May 3, 2013

 

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Stein Mart, Inc.

Consolidated Balance Sheets

(In thousands, except for share and per share data)

 

     February 2,
2013
    January 28,
2012
 
           (Restated) (1)  

ASSETS

    

Current assets:

    

Cash and cash equivalents

   $ 67,233      $ 94,053   

Inventories

     243,345        218,832   

Prepaid expenses and other current assets

     22,855        34,139   
  

 

 

   

 

 

 

Total current assets

     333,433        347,024   

Property and equipment, net

     131,570        109,990   

Other assets

     26,706        22,569   
  

 

 

   

 

 

 

Total assets

   $ 491,709      $ 479,583   
  

 

 

   

 

 

 

LIABILITIES AND SHAREHOLDERS’ EQUITY

    

Current liabilities:

    

Accounts payable

   $ 130,972      $ 106,063   

Accrued expenses and other current liabilities

     66,109        68,063   
  

 

 

   

 

 

 

Total current liabilities

     197,081        174,126   

Other liabilities

     60,594        55,786   
  

 

 

   

 

 

 

Total liabilities

     257,675        229,912   
  

 

 

   

 

 

 

COMMITMENTS AND CONTINGENCIES (Notes 6 and 10)

    

Shareholders’ equity:

    

Preferred stock – $.01 par value; 1,000,000 sharesauthorized; no shares issued or outstanding

    

Common stock – $.01 par value; 100,000,000 sharesauthorized; 43,808,485 and 43,588,821 shares issued and outstanding, respectively

     438        436   

Additional paid-in capital

     17,491        15,268   

Retained earnings

     216,574        235,386   

Accumulated other comprehensive loss

     (469     (1,419
  

 

 

   

 

 

 

Total shareholders’ equity

     234,034        249,671   
  

 

 

   

 

 

 

Total liabilities and shareholders’ equity

   $ 491,709      $ 479,583   
  

 

 

   

 

 

 

 

(1) As described in Note 2 to these Consolidated Financial Statements, we have restated the Consolidated Financial Statements.

The accompanying notes are an integral part of these consolidated financial statements.

 

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Stein Mart, Inc.

Consolidated Statements of Income

(In thousands, except for per share amounts)

 

     Year Ended      Year Ended      Year Ended  
     February 2,
2013
     January 28,
2012
     January 29,
2011
 
            (Restated) (1)      (Restated) (1)  

Net sales

   $ 1,232,366       $ 1,177,951       $ 1,201,081   

Cost of merchandise sold

     889,736         858,335         868,415   
  

 

 

    

 

 

    

 

 

 

Gross profit

     342,630         319,616         332,666   

Selling, general and administrative expenses

     306,407         287,184         277,330   
  

 

 

    

 

 

    

 

 

 

Operating income

     36,223         32,432         55,336   

Interest expense, net

     225         286         338   
  

 

 

    

 

 

    

 

 

 

Income before income taxes

     35,998         32,146         54,998   

Income tax expense (benefit)

     10,971         12,215         (1,688
  

 

 

    

 

 

    

 

 

 

Net income

   $ 25,027       $ 19,931       $ 56,686   
  

 

 

    

 

 

    

 

 

 

Net income per share:

        

Basic

   $ 0.57       $ 0.45       $ 1.28   
  

 

 

    

 

 

    

 

 

 

Diluted

   $ 0.57       $ 0.44       $ 1.26   
  

 

 

    

 

 

    

 

 

 

Weighted-average shares outstanding:

        

Basic

     42,639         43,482         42,780   
  

 

 

    

 

 

    

 

 

 

Diluted

     42,828         43,721         43,592   
  

 

 

    

 

 

    

 

 

 

 

(1) As described in Note 2 to these Consolidated Financial Statements, we have restated the Consolidated Financial Statements.

The accompanying notes are an integral part of these consolidated financial statements.

 

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Stein Mart, Inc.

Consolidated Statements of Comprehensive Income

(In thousands)

 

     Year Ended      Year Ended     Year Ended  
     February 2,
2013
     January 28,
2012
    January 29,
2011
 
            (Restated) (1)     (Restated) (1)  

Net income

   $ 25,027       $ 19,931      $ 56,686   

Other comprehensive income (loss), net of tax:

       

Change in post-retirement benefit obligations

     950         (1,875     (122
  

 

 

    

 

 

   

 

 

 

Comprehensive income

   $ 25,977       $ 18,056      $ 56,564   
  

 

 

    

 

 

   

 

 

 

 

(1) As described in Note 2 to these Consolidated Financial Statements, we have restated the Consolidated Financial Statements.

The accompanying notes are an integral part of these consolidated financial statements.

 

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Stein Mart, Inc.

Consolidated Statements of Shareholders’ Equity

(In thousands)

 

                             Accumulated        
                 Additional           Other     Total  
     Common Stock     Paid-in     Retained     Comprehensive     Shareholders’  
     Shares     Amount     Capital     Earnings     Income (Loss)     Equity  

Balance at January 30, 2010

            

As previously reported

     42,872      $ 429      $ 15,977      $ 198,705      $ 578      $ 215,689   

Adjustments (1)

     —          —          —          (17,703     —          (17,703
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

As restated

     42,872        429        15,977        181,002        578        197,986   

Net income

           56,686          56,686   

Other comprehensive loss, net of tax

             (122     (122

Common shares issued under stock option plan

     912        9        737            746   

Common shares issued under employee stock purchase plan

     145        1        765            766   

Reacquired shares

     (871     (8     (7,094         (7,102

Issuance of restricted stock, net

     1,339        13        (13         —     

Share-based compensation

         3,759            3,759   

Tax benefit from equity issuances

         6,995            6,995   

Cash dividends paid ($0.50 per share)

           (22,233       (22,233
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance at January 29, 2011 (Restated) (1)

     44,397        444        21,126        215,455        456        237,481   

Net income

           19,931          19,931   

Other comprehensive loss, net of tax

             (1,875     (1,875

Common shares issued under stock option plan

     270        3        2,147            2,150   

Common shares issued under employee stock purchase plan

     112        1        740            741   

Reacquired shares

     (1,654     (17     (12,124         (12,141

Issuance of restricted stock, net

     464        5        (5         —     

Share-based compensation

         3,821            3,821   

Tax deficiency from equity issuances

         (437         (437
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance at January 28, 2012 (Restated) (1)

     43,589        436        15,268        235,386        (1,419     249,671   

Net income

           25,027          25,027   

Other comprehensive income, net of tax

             950        950   

Common shares issued under stock option plan

     24        —          100            100   

Common shares issued under employee stock purchase plan

     64        1        370            371   

Reacquired shares

     (575     (6     (3,933         (3,939

Issuance of restricted stock, net

     706        7        (7         —     

Share-based compensation

         6,203            6,203   

Tax deficiency from equity issuances

         (510         (510

Cash dividends paid ($1.00 per share)

           (43,839       (43,839
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance at February 2, 2013

     43,808      $ 438      $ 17,491      $ 216,574      $ (469   $ 234,034   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

(1) As described in Note 2 to these Consolidated Financial Statements, we have restated the Consolidated Financial Statements.

The accompanying notes are an integral part of these consolidated financial statements.

 

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Stein Mart, Inc.

Consolidated Statements of Cash Flows

(In thousands)

 

     Year Ended     Year Ended     Year Ended  
     February 2,
2013
    January 28,
2012
    January 29,
2011
 
           (Restated) (1)     (Restated) (1)  

Cash flows from operating activities:

      

Net income

   $ 25,027      $ 19,931      $ 56,686   

Adjustments to reconcile net income to net cashprovided by operating activities:

      

Depreciation and amortization

     23,911        18,614        17,779   

Share-based compensation

     6,203        3,821        3,759   

Store closing charges

     996        793        3,128   

Impairment of property and other assets

     523        1,166        1,150   

Loss on disposal of property and equipment

     1,324        77        117   

Deferred income taxes

     2,916        12,247        11,146   

Change in valuation allowance for deferred tax assets

     —          —          (23,509

Tax (deficiency) benefit from equity issuances

     (510     (437     6,995   

Excess tax benefits from share-based compensation

     (640     (375     (6,937

Changes in assets and liabilities:

      

Inventories

     (24,513     10,864        (13,463

Prepaid expenses and other current assets

     11,836        (12,986     (3,291

Other assets

     (4,137     (3,515     (1,467

Accounts payable

     24,909        10,518        15,227   

Accrued expenses and other current liabilities

     450        (3,518     (12,342

Other liabilities

     3,044        7,384        (5,885
  

 

 

   

 

 

   

 

 

 

Net cash provided by operating activities

     71,339        64,584        49,093   
  

 

 

   

 

 

   

 

 

 

Cash flows from investing activities:

      

Capital expenditures

     (45,426     (38,012     (28,798
  

 

 

   

 

 

   

 

 

 

Net cash used in investing activities

     (45,426     (38,012     (28,798
  

 

 

   

 

 

   

 

 

 

Cash flows from financing activities:

      

Cash dividends paid

     (43,839     —          (22,233

Capital lease payments

     (6,066     (3,362     —     

Excess tax benefits from share-based compensation

     640        375        6,937   

Proceeds from exercise of stock options and other

     471        2,891        1,512   

Repurchase of common stock

     (3,939     (12,141     (7,102
  

 

 

   

 

 

   

 

 

 

Net cash used in financing activities

     (52,733     (12,237     (20,886
  

 

 

   

 

 

   

 

 

 

Net (decrease) increase in cash and cash equivalents

     (26,820     14,335        (591

Cash and cash equivalents at beginning of year

     94,053        79,718        80,309   
  

 

 

   

 

 

   

 

 

 

Cash and cash equivalents at end of year

   $ 67,233      $ 94,053      $ 79,718   
  

 

 

   

 

 

   

 

 

 

Supplemental disclosures of cash flow information:

      

Income taxes paid

   $ 9,891      $ 12,374      $ 9,580   

Property and equipment acquired through capital lease

     1,912        9,713        —     

Interest paid

     323        337        388   

 

(1) As described in Note 2 to these Consolidated Financial Statements, we have restated the Consolidated Financial Statements.

The accompanying notes are an integral part of these consolidated financial statements.

 

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STEIN MART, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Dollars in tables in thousands, except per share amounts)

 

1. Summary of Significant Accounting Policies and Other Information

As of February 2, 2013 we operated a chain of 263 retail stores in 29 states that offers the fashion merchandise, service and presentation of a better department or specialty store at prices competitive with off-price retail chains.

As used herein, the terms “we”, “our”, “us”, “Stein Mart” and the “Company” refer to Stein Mart, Inc. and its wholly-owned subsidiaries, Stein Mart Buying Corp. and Stein Mart Holding Corp.

Consolidation. The Consolidated Financial Statements include the accounts of the Company and its wholly-owned subsidiaries. All inter-company accounts have been eliminated in consolidation.

Fiscal Year End. Our fiscal year ends on the Saturday closest to January 31. Fiscal years 2012, 2011 and 2010 ended on February 2, 2013, January 28, 2012 and January 29, 2011, respectively. Fiscal 2012 included 53 weeks. Fiscal 2011 and 2010 included 52 weeks. References to years in the Consolidated Financial Statements relate to fiscal years rather than calendar years.

Use of Estimates. The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

Cash and Cash Equivalents. Cash and cash equivalents include primarily investments in money market funds. The money market fund investments are Level 1 assets because fair value is based on readily available market prices. The fair value of these assets was $55.2 million at February 2, 2013 and $83.1 million at January 28, 2012.

Also included in cash and cash equivalents are cash on hand in the stores, deposits with banks and amounts due from credit card transactions with settlement terms of five days or less. Credit and debit card receivables included within cash were $8.9 million and $8.5 million at February 2, 2013 and January 28, 2012, respectively.

Retail Inventory Method and Inventory Valuation. Inventories are valued using the lower of cost or market value, determined by the retail inventory method. Under the retail inventory method (“RIM”), the valuation of inventories at cost and the resulting gross margins are calculated by applying a cost-to-retail ratio to the retail value of inventories. RIM is an averaging method that is widely used in the retail industry due to its practicality. The use of the retail inventory method results in valuing inventories at lower of cost or market as permanent markdowns are currently taken as a reduction of the retail value of inventories. Inherent in the RIM calculation are certain significant management judgments and estimates including, among others, merchandise markon, markup, markdowns and shrinkage, which significantly affect the ending inventory valuation at cost as well as the corresponding charge to cost of goods sold. In addition, failure to take appropriate permanent markdowns currently can result in an overstatement of inventory.

Vendor Allowances. We receive allowances from some of our vendors primarily related to markdown reimbursement, damaged/defective merchandise and vendor compliance issues. Vendor allowances are recorded when earned in accordance with Accounting Standards Codification (“ASC”) Topic 605-50, Revenue Recognition, Customer Payments and Incentives. Allowances received from vendors related to profitability of inventory recently sold are reflected as reductions to cost of merchandise sold in the later of the period that the merchandise markdown is incurred or the allowance is negotiated. Allowances received from vendors related to damaged/defective inventory are reflected as reductions to the cost of merchandise as it is received. Allowances received due to compliance issues (primarily violations of shipping and merchandise preparation requirements) are reflected as a reduction to the cost of the merchandise when negotiated.

Property and Equipment. Property and equipment are stated at cost, less accumulated depreciation and amortization. Depreciation is computed using the straight-line method over estimated useful lives of 3-10 years for fixtures, equipment and software and 5-10 years for leasehold improvements. Leasehold improvements are amortized over the shorter of the estimated useful lives of the improvements or the term of the lease. We capitalize costs associated with the acquisition or development of software for internal use. We only capitalize subsequent additions, modifications or upgrades to internal-use software to the extent that such changes increase functionality. We expense software maintenance and training costs as incurred.

Impairment of Long-Lived Assets. We follow the guidance in ASC Topic 360, Property, Plant and Equipment, which requires impairment losses to be recorded on long-lived assets used in operations whenever events or changes in circumstances indicate that the net carrying amounts may not be recoverable. For long-lived assets held for use, an impairment loss is recognized if the sum of the future

 

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Table of Contents

STEIN MART, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Dollars in tables in thousands, except per share amounts)

 

undiscounted cash flows from the use of the assets is less than the carrying value of the assets. The amount of the impairment is the excess of the carrying value of the asset over its fair value. Fair value is based on the best information available, including prices for similar assets. Impairment reviews are performed for individual stores during the fourth quarter, or more frequently should circumstances change. Factors used in the review include management’s plans for future operations, recent operating results and projected cash flows. See Note 3 for further discussion.

Fair Value Measurements. We follow the guidance of ASC Topic 820, Fair Value Measurements and Disclosures, which defines fair value, establishes a framework for measuring fair value and expands disclosures about fair value measurements. This guidance also establishes the following three-level hierarchy based upon the transparency of inputs to the valuation of an asset or liability on the measurement date:

 

Level 1:    Observable inputs that reflect unadjusted quoted prices for identical assets or liabilities traded in active markets.
Level 2:    Inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly.
Level 3:    Unobservable inputs that reflect assumptions about what market participants would use in pricing assets or liabilities based on the best information available.

Assets and liabilities measured at fair value on a recurring basis include cash and cash equivalents. Assets and liabilities measured on a non-recurring basis include store related assets as used in our impairment calculations. See Note 3 for further discussion.

Store Closing Costs. We follow the guidance in ASC Topic 420, Exit or Disposal Cost Obligations, to record store closing costs. ASC Topic 420 requires the recognition of costs associated with exit or disposal activities when they are incurred, generally the cease-use date. Lease termination costs are recorded net of estimated sublease income that could reasonably be obtained for the properties.

Insurance Reserves. We use a combination of insurance and self-insurance for various risks including workers’ compensation, general liability and associate-related health care benefits, a portion of which is paid by the covered employees. We are responsible for paying the claims that are less than the insured limits. The reserves recorded for these claims are estimated actuarially, based on claims filed and claims incurred but not reported. These reserve estimates are adjusted based upon actual claims filed and settled.

Store Pre-Opening Costs. Costs incurred prior to the date that new stores open are expensed as incurred.

Comprehensive Income. Comprehensive income consists of two components, net income and other comprehensive income. Other comprehensive income refers to gains and losses that, under generally accepted accounting principles, are recorded as an element of shareholders’ equity but are excluded from net income. Accumulated other comprehensive (loss) income in 2012, 2011, and 2010 includes changes in postretirement benefits. See Note 8 for further discussion.

Revenue Recognition. Revenue from sales of our merchandise is recognized at the time of sale, net of any returns, discounts and percentage-off coupons. Future merchandise returns are estimated based on historical experience. Sales tax collected from customers is not recognized as revenue and is included in Accrued expenses and other current liabilities until paid. Shoe department inventory is owned by a single supplier under a supply agreement. Our percentage of net revenue per the supply agreement is included in Net sales in the Consolidated Statements of Income.

We offer electronic gift cards and electronic merchandise return cards to our customers. These cards do not have expiration dates. No revenue is recognized at the time gift cards are sold; rather, the issuance is recorded as a liability to customers. At the time merchandise return cards are issued for returned merchandise, the sale is reversed and the issuance is recorded as a liability to customers. These card liabilities are reduced and sales revenue is recognized when cards are redeemed for merchandise. Card liabilities are included within Accrued expenses and other current liabilities in the Consolidated Balance Sheets.

 

F-9


Table of Contents

STEIN MART, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Dollars in tables in thousands, except per share amounts)

 

During the second quarter of 2012, we updated certain assumptions on our obligations for unused gift and merchandise return card balances. In 2012, 2011 and 2010, we recognized $3.0 million, $1.0 million and $10.3 million, respectively, of breakage income on unused gift and merchandise return cards. Breakage income is recognized when the likelihood of the card being redeemed by the customer is remote and we have determined that there is no legal obligation to remit card balances to relevant jurisdictions. We follow the Redemption Recognition Method to account for breakage of unused cards where breakage is recognized as cards are redeemed for the purchase of merchandise based upon a historical breakage rate over an estimated redemption period. Breakage income is recorded within Selling, general and administrative expenses (“SG&A”) in the Consolidated Statements of Income.

Co-Brand and Private Label Credit Card Programs. We offer a co-branded credit card and a private label credit card under the Stein Mart brand. These cards are issued by a third-party bank, GE Capital Retail Bank (“GE”). GE extends credit directly to cardholders and provides all servicing for the credit card accounts and bears all credit and fraud losses. Once a card is activated, the co-branded credit card customers are eligible to participate in the credit card rewards program, which provides for an incentive to cardholders in the form of reward certificates upon the cumulative purchase of an established amount. Stein Mart cardholders also receive special promotional offers and advance notice of in-store sales events. In 2012, 2011 and 2010, we recognized $2.3 million, $6.5 million and $5.5 million, respectively, of income from these programs which are recorded within SG&A in the Consolidated Statements of Income.

Operating Leases. We lease all of our retail stores under operating leases. Certain lease agreements contain rent holidays, and/or rent escalation clauses. Except for contingent rent, we recognize rent expense on a straight-line basis over the lease term and record the difference between the amount charged to expense and the rent paid as a deferred rent liability. Contingent rent, determined based on a percentage of sales in excess of specified levels, is recognized as rent expense when achievement of the specified sales that triggers the contingent rent is probable. Construction allowances and other such lease incentives are recorded as a deferred rent liability and are amortized on a straight-line basis as a reduction of rent expense.

Advertising Expense. Advertising costs are expensed as incurred. Advertising expenses of $52.4 million, $56.6 million and $53.8 million are reflected in SG&A expenses in the Consolidated Statements of Income for 2012, 2011 and 2010, respectively.

Income Taxes. We follow the guidance in ASC Topic 740, Income Taxes, which requires recognition of deferred tax assets and liabilities for the expected future income tax consequences of events that have been included in the consolidated financial statements or tax returns. Under this method, deferred tax assets and liabilities are determined based on the differences between the financial statement carrying amounts and the tax basis of assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to reverse. Deferred tax assets are reduced by a valuation allowance for amounts that do not satisfy required realization criteria. See Note 7 for further discussion.

Share-Based Compensation. We follow the guidance in ASC Topic 718, Stock Compensation, to record share-based compensation. Pursuant to the guidance, we recognize expense in the financial statements for the fair values of all share-based payments to employees over the employees’ requisite service periods.

Earnings Per Share (“EPS”). We follow the guidance of ASC Topic 260, Earnings Per Share, which clarifies that unvested share-based payment awards that contain non-forfeitable rights to dividends or dividend equivalents (whether paid or unpaid) are participating securities and are to be included in the computation of EPS under the two-class method. Our restricted stock awards are considered “participating securities” because they contain non-forfeitable rights to dividends. Under the two-class method, EPS is computed by dividing earnings allocated to common shareholders by the weighted-average number of common shares outstanding for the period. In applying the two-class method, earnings are allocated to both common stock shares and participating securities based on their respective weighted-average shares outstanding for the period.

 

F-10


Table of Contents

STEIN MART, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Dollars in tables in thousands, except per share amounts)

 

The following table presents the calculation of basic and diluted EPS (shares in thousands):

 

     2012      2011      2010  
            (Restated)      (Restated)  

Basic Earnings Per Common Share:

        

Net income

   $ 25,027       $ 19,931       $ 56,686   

Income allocated to participating securities

     781         536         1,741   
  

 

 

    

 

 

    

 

 

 

Net income available to common shareholders

   $ 24,246       $ 19,395       $ 54,945   
  

 

 

    

 

 

    

 

 

 

Basic weighted-average shares outstanding

     42,639         43,482         42,780   
  

 

 

    

 

 

    

 

 

 

Basic earnings per share

   $ 0.57       $ 0.45       $ 1.28   
  

 

 

    

 

 

    

 

 

 

Diluted Earnings Per Common Share:

        

Net income

   $ 25,027       $ 19,931       $ 56,686   

Income allocated to participating securities

     783         533         1,722   
  

 

 

    

 

 

    

 

 

 

Net income available to common shareholders

   $ 24,244       $ 19,398       $ 54,964   
  

 

 

    

 

 

    

 

 

 

Basic weighted-average shares outstanding

     42,639         43,482         42,780   

Incremental shares from share-based compensation plans

     189         239         812   
  

 

 

    

 

 

    

 

 

 

Diluted weighted-average shares outstanding

     42,828         43,721         43,592   
  

 

 

    

 

 

    

 

 

 

Diluted earnings per share

   $ 0.57       $ 0.44       $ 1.26   
  

 

 

    

 

 

    

 

 

 

Options to acquire shares and performance share awards totaling approximately 1.2 million, 1.1 million and 1.2 million shares of common stock that were outstanding during 2012, 2011 and 2010, respectively, were not included in the computation of diluted net income per share. Options excluded were those that had exercise prices greater than the average market price of the common shares such that inclusion would have been anti-dilutive. Performance share awards were not included based on level of performance.

Consolidated Statements of Income Classifications. Cost of merchandise sold includes merchandise costs, net of vendor discounts and allowances; freight; inventory shrinkage; store occupancy costs (including rent, common area maintenance, real estate taxes, utilities and maintenance); payroll, benefits and travel costs directly associated with buying inventory; and costs related to the consolidation centers and distribution warehouses.

SG&A expenses include store operating expenses, such as payroll and benefit costs, advertising, store supplies, depreciation and other direct selling costs, and costs associated with our corporate functions.

Recent Accounting Pronouncements

In June 2011, the Financial Accounting Standards Board (“FASB”) amended ASC Topic 220, Comprehensive Income. The amended guidance requires most entities to present changes in net income and other comprehensive income in either a single statement of comprehensive income or two separate, but consecutive, statements. The objective of these amendments is to improve the comparability, consistency, and transparency of financial reporting and to increase the prominence of items reported in other comprehensive income. We adopted this guidance in fiscal 2012 and have included the addition of the Consolidated Statements of Comprehensive Income in our financial statements.

 

2. Restatement of Previously Issued Financial Statements

Our Consolidated Balance Sheet as of January 28, 2012, and our Consolidated Statements of Income, Consolidated Statements of Comprehensive Income, Consolidated Statements of Shareholders’ Equity and our Consolidated Statements of Cash Flows for the fiscal years ended January 28, 2012, and January 29, 2011, have been restated for errors made with regard to inventory markdowns, leasehold improvement costs, compensated absences (paid vacation) and other matters further described below. The restated financial statements also reflect the correction of certain previously identified errors and out of period adjustments that were deemed immaterial to the annual or interim period in which they were recorded and have now been restated to properly reflect the corrections in the appropriate periods.

Reclassifications

We have made certain reclassifications in the Consolidated Statements of Income related to breakage income on unused gift and merchandise return cards and credit card income related to our co-branded and private label credit card agreement which were presented in Other income, net and have been reclassified to SG&A. There were no reclassifications made to the Consolidated Balance Sheets, Consolidated Statements of Comprehensive Income or Consolidated Statements of Cash Flows.

 

F-11


Table of Contents

STEIN MART, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Dollars in tables in thousands, except per share amounts)

 

Adjustments

The following is a description of the areas in which the errors were identified and for which we made correcting adjustments to our Consolidated Financial Statements. The associated income tax expense or benefit and related deferred tax asset or liability for each error has also been corrected, including the impact of valuation allowance releases in 2010.

(1) Inventory markdowns - We identified and corrected errors related to the incorrect treatment of certain inventory markdowns as promotional (temporary). Based on analysis of various factors, these inventory markdowns should have been accounted for as permanent markdowns. Under the retail inventory method of accounting used by us, promotional markdowns do not impact the value of unsold inventory and thus do not impact cost of sales until the merchandise is sold. Conversely, permanent markdowns reduce the value of unsold inventory and impact cost of sales at the time the markdowns are taken.

(2) Leasehold improvement costs - We identified and corrected errors to report fixed assets related to leasehold improvements at their gross amount with lessor reimbursements for the related construction recorded as deferred rent credits. Landlord (lessor) reimbursements to us (lessee) for store interior construction had been incorrectly accounted for as reductions in the fixed assets related to leasehold improvements. This practice was based on the prior belief that our leasehold improvements increased the fair value of the lessor’s property. Management now believes that there was no significant increase in the fair value of the lessor’s leased assets and therefore these leasehold improvements should have been recorded, depreciated over and subject to impairment exclusive of lessor reimbursements in the respective periods. Cost of merchandise sold decreased by $3.0 million and $3.2 million for 2011 and 2010, respectively, and Selling, general and administrative expenses increased by $1.1 million and $1.2 million for 2011 and 2010, respectively as a result of this adjustment.

(3) Compensated absences (paid vacation) - We identified and corrected errors to record liabilities for compensated absences (paid vacation) which were not previously recorded.

(4) Leased department commissions - We corrected the presentation of leased department commissions in the Consolidated Statements of Income. Leased department commissions were presented in Other income, net of related expenses and have been corrected to report Net sales (increase of $19.1 million and $18.2 million for 2011 and 2010, respectively) and Selling, general and administrative expenses (increase of $6.4 million and $6.1 million for 2011 and 2010, respectively) on a gross basis. There was no impact to Net income related to this change.

(5) Sales returns - We corrected the presentation of estimated sales returns in the Consolidated Statements of Income. Estimated sales returns were previously incorrectly presented on a net basis and have been presented on a gross basis in Net sales and Cost of merchandise sold (adjustment of $1.5 million and $1.4 million for 2011 and 2010, respectively). There was no impact to Net income related to this change.

(6) Insurance-related assets and liabilities - We corrected the presentation of insurance-related assets and liabilities in the Consolidated Balance Sheets. The long-term portion of insurance assets ($7.1 million) was previously incorrectly reported as Prepaid expenses and other current assets and is now reported as Other assets. The long-term portion of insurance liabilities ($11.5 million) was previously incorrectly reported as Accrued expenses and other current liabilities and is now reported as Other liabilities. There was no impact on Total assets or Total liabilities related to this change.

(7) Other - We corrected certain previously identified errors and out of period adjustments that were deemed immaterial to the annual or interim period in which they were recorded and restated prior periods to reflect these corrections in the appropriate periods. The amounts relate to credit card reward income breakage, credit card receivables, software costs, and assets no longer in use.

 

F-12


Table of Contents

STEIN MART, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Dollars in tables in thousands, except per share amounts)

 

The net effect of the adjustments on the Consolidated Statements of Income was to increase Net income by $0.1 million and $7.9 million for the years ended January 28, 2012 and January 29, 2011, respectively.

 

Increase (decrease) in Net income:    2011     2010  

Inventory markdowns

   $ 655      $ (707

Leasehold improvement costs

     1,937        2,037   

Compensated absences

     (134     429   

Other

     (2,283     47   
  

 

 

   

 

 

 

Total adjustments before tax

     175        1,806   

Income tax expense (benefit) from adjustments

     72        (6,127
  

 

 

   

 

 

 

Increase in Net income

   $ 103      $ 7,933   
  

 

 

   

 

 

 

The adjustments in “Other” in 2011 relate primarily to the correction of a previously recorded out of period adjustment related to credit card reward income breakage of $2.0 million. The tax benefit in 2010 is related to the reversal of the valuation allowance attributable to the increase in prior period deferred tax assets due to the cumulative impact of the restatement adjustments noted above. These deferred tax assets had a full valuation allowance in 2008 and 2009.

The decrease to retained earnings from the adjustments as of January 30, 2010, is as follows:

 

Inventory markdowns

   $ (1,891

Leasehold improvement costs

     (8,982

Compensated absences

     (6,737

Other

     (81

Income tax effect of adjustments

     (12
  

 

 

 

Decrease to retained earnings

   $ (17,703
  

 

 

 

 

F-13


Table of Contents

STEIN MART, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Dollars in tables in thousands, except per share amounts)

 

The following table presents the effect of the aforementioned adjustments on our Consolidated Balance Sheet as of January 28, 2012 and indicates the category of the adjustments by reference to the above descriptions of the errors for which we made corrections:

 

     As of January 28, 2012  
     As Previously
Reported
    Adjustments     Description of
Adjustments
    As Restated  

ASSETS

        

Current assets:

        

Cash and cash equivalents

   $ 94,053      $ —          $ 94,053   

Inventories

     220,775        (1,943     (1     218,832   

Prepaid expenses and other current assets

     36,838        (2,699     (2)(6)(7     34,139   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total current assets

     351,666        (4,642       347,024   

Property and equipment, net

     104,141        5,849        (2)(7     109,990   

Other assets

     17,409        5,160        (2)(6     22,569   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total assets

   $ 473,216      $ 6,367        $ 479,583   
  

 

 

   

 

 

   

 

 

   

 

 

 

LIABILITIES AND SHAREHOLDERS’ EQUITY

        

Current liabilities:

        

Accounts payable

   $ 106,063      $ —          $ 106,063   

Accrued expenses and other current liabilities

     72,731        (4,668     (3)(6     68,063   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total current liabilities

     178,794        (4,668       174,126   

Other liabilities

     35,084        20,702        (2)(6     55,786   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total liabilities

     213,878        16,034          229,912   
  

 

 

   

 

 

   

 

 

   

 

 

 

Shareholders’ equity:

        

Preferred stock – $.01 par value; 1,000,000 shares authorized; no shares issued or outstanding

        

Common stock – $.01 par value; 100,000,000 shares authorized; 43,588,821 shares issued and outstanding

     436        —            436   

Additional paid-in capital

     15,268        —            15,268   

Retained earnings

     245,053        (9,667     (1)(2)(3)(7     235,386   

Accumulated other comprehensive loss

     (1,419     —            (1,419
  

 

 

   

 

 

   

 

 

   

 

 

 

Total shareholders’ equity

     259,338        (9,667       249,671   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total liabilities and shareholders’ equity

   $ 473,216      $ 6,367        $ 479,583   
  

 

 

   

 

 

   

 

 

   

 

 

 

 

F-14


Table of Contents

STEIN MART, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Dollars in tables in thousands, except per share amounts)

 

The following tables present the effect of the aforementioned reclassifications and adjustments on our Consolidated Statements of Income for the fiscal years ended January 28, 2012 and January 29, 2011 and indicate the category of the adjustments by reference to the above descriptions of the errors for which we made corrections:

 

     Year Ended January 28, 2012  
     As Previously
Reported
     Reclassifications     Adjustments     Description of
Adjustments
    As Restated  

Net sales

   $ 1,160,367       $ —        $ 17,584        (4)(5   $ 1,177,951   

Cost of merchandise sold

     863,003         —          (4,668     (1)(2)(5     858,335   
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Gross profit

     297,364         —          22,252          319,616   

Selling, general and administrative expenses

     289,114         (11,273     9,343        (2)(3)(4)(7     287,184   

Other income, net

     24,007         (11,273     (12,734     (4     —     
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Operating income

     32,257         —          175          32,432   

Interest expense, net

     286         —          —            286   
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Income before income taxes

     31,971         —          175          32,146   

Income tax expense

     12,143         —          72        (1)(2)(3)(7     12,215   
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Net income

   $ 19,828       $ —        $ 103        $ 19,931   
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Net income per share:

           

Basic

   $ 0.44       $ —        $ 0.01        $ 0.45   
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Diluted

   $ 0.44       $ —        $ —          $ 0.44   
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

 

     Year Ended January 29, 2011  
     As Previously
Reported
     Reclassifications     Adjustments     Description of
Adjustments
    As Restated  

Net sales

   $ 1,181,510       $ —        $ 19,571        (4)(5   $ 1,201,081   

Cost of merchandise sold

     869,202         —          (787     (1)(2)(5     868,415   
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Gross profit

     312,308         —          20,358          332,666   

Selling, general and administrative expenses

     288,208         (17,306     6,428        (2)(3)(4)(7     277,330   

Other income, net

     29,430         (17,306     (12,124     (4     —     
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Operating income

     53,530         —          1,806          55,336   

Interest expense, net

     338         —          —            338   
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Income before income taxes

     53,192         —          1,806          54,998   

Income tax expense (benefit)

     4,439         —          (6,127     (1)(2)(3)(7     (1,688
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Net income

   $ 48,753       $ —        $ 7,933        $ 56,686   
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Net income per share:

           

Basic

   $ 1.10       $ —        $ 0.18        $ 1.28   
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Diluted

   $ 1.08       $ —        $ 0.18        $ 1.26   
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

 

F-15


Table of Contents

STEIN MART, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Dollars in tables in thousands, except per share amounts)

 

The following tables present the effect of the aforementioned adjustments on our Consolidated Statements of Comprehensive Income for the fiscal years ended January 28, 2012 and January 29, 2011 and indicate the category of the adjustments by reference to the above descriptions of the errors for which we made corrections:

 

     Year Ended January 28, 2012  
     As Previously
Reported
    Adjustments      Description of
Adjustments
    As
Restated
 

Net income

   $ 19,828      $ 103         (1)(2)(3)(7   $ 19,931   

Other comprehensive loss, net of tax:

         

Change in post-retirement benefit obligations

     (1,875     —             (1,875
  

 

 

   

 

 

    

 

 

   

 

 

 

Comprehensive income

   $ 17,953      $ 103         $ 18,056   
  

 

 

   

 

 

    

 

 

   

 

 

 

 

     Year Ended January 29, 2011  
     As Previously
Reported
    Adjustments      Description of
Adjustments
    As
Restated
 

Net income

   $ 48,753      $ 7,933         (1)(2)(3)(7   $ 56,686   

Other comprehensive loss, net of tax:

         

Change in post-retirement benefit obligations

     (122     —             (122
  

 

 

   

 

 

    

 

 

   

 

 

 

Comprehensive income

   $ 48,631      $ 7,933         $ 56,564   
  

 

 

   

 

 

    

 

 

   

 

 

 

 

F-16


Table of Contents

STEIN MART, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Dollars in tables in thousands, except per share amounts)

 

The following tables present the effect of the aforementioned adjustments on our Consolidated Statements of Cash Flows for the fiscal years ended January 28, 2012 and January 29, 2011 and indicate the category of the adjustments by reference to the above descriptions of the errors for which we made corrections:

 

     Year Ended January 28, 2012  
     As Previously
Reported
    Adjustments     Description of
Adjustments
    As Restated  

Cash flows from operating activities:

        

Net income

   $ 19,828      $ 103        (1)(2)(3)(7   $ 19,931   

Adjustments to reconcile net income to net cash provided by operating activities:

        

Depreciation and amortization

     18,937        (323     (2)(7     18,614   

Share-based compensation

     3,821        —            3,821   

Store closing charges

     793        —            793   

Impairment of property and other assets

     1,166        —            1,166   

Loss on disposal of property and equipment

     —          77        (7     77   

Deferred income taxes

     12,766        (519     (1)(2)(3)(7     12,247   

Tax deficiency from equity issuances

     (437     —            (437

Excess tax benefits from share-based compensation

     (375     —            (375

Changes in assets and liabilities:

        

Inventories

     11,520        (656     (1     10,864   

Prepaid expenses and other current assets

     (12,173     (813     (2)(6)(7     (12,986

Other assets

     (3,796     281        (2)(7     (3,515

Accounts payable

     10,518        —            10,518   

Accrued expenses and other current liabilities

     (4,857     1,339        (3)(6     (3,518

Other liabilities

     1,857        5,527        (2)(6     7,384   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net cash provided by operating activities

     59,568        5,016          64,584   
  

 

 

   

 

 

   

 

 

   

 

 

 

Cash flows from investing activities:

        

Acquisition of property and equipment

     (33,449     (4,563     (2)(7     (38,012
  

 

 

   

 

 

   

 

 

   

 

 

 

Net cash used in investing activities

     (33,449     (4,563       (38,012
  

 

 

   

 

 

   

 

 

   

 

 

 

Cash flows from financing activities:

        

Capital lease payments

     (3,362     —            (3,362

Excess tax benefits from share-based compensation

     375        —            375   

Proceeds from exercise of stock options and other

     2,891        —            2,891   

Repurchase of common stock

     (12,141     —            (12,141
  

 

 

   

 

 

   

 

 

   

 

 

 

Net cash used in financing activities

     (12,237     —            (12,237
  

 

 

   

 

 

   

 

 

   

 

 

 

Net increase in cash and cash equivalents

     13,882        453        (7     14,335   

Cash and cash equivalents at beginning of year

     80,171        (453     (7     79,718   
  

 

 

   

 

 

   

 

 

   

 

 

 

Cash and cash equivalents at end of year

   $ 94,053      $ —          $ 94,053   
  

 

 

   

 

 

   

 

 

   

 

 

 

 

F-17


Table of Contents

STEIN MART, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Dollars in tables in thousands, except per share amounts)

 

     Year Ended January 29, 2011  
     As Previously
Reported
    Adjustments     Description of
Adjustments
    As Restated  

Cash flows from operating activities:

        

Net income

   $ 48,753      $ 7,933        (1)(2)(3)(7   $ 56,686   

Adjustments to reconcile net income to net cash provided by operating activities:

        

Depreciation and amortization

     17,328        451        (2)(7     17,779   

Share-based compensation

     3,759        —            3,759   

Store closing charges

     3,128        —            3,128   

Impairment of property and other assets

     1,150        —            1,150   

Loss on disposal of property and equipment

     —          117        (7     117   

Deferred income taxes

     10,679        467        (1)(2)(3)(7     11,146   

Change in valuation allowance for deferred tax assets

     (16,686     (6,823     (1)(2)(3)(7     (23,509

Tax benefit from equity issuances

     6,995        —            6,995   

Excess tax benefits from share-based compensation

     (6,937     —            (6,937

Changes in assets and liabilities:

        

Inventories

     (14,170     707        (1     (13,463

Prepaid expenses and other current assets

     (2,675     (616     (2)(6)(7     (3,291

Other assets

     (1,743     276        (2)(6     (1,467

Accounts payable

     15,227        —            15,227   

Accrued expenses and other current liabilities

     (12,373     31        (3)(6     (12,342

Other liabilities

     (2,803     (3,082     (2)(6     (5,885
  

 

 

   

 

 

   

 

 

   

 

 

 

Net cash provided by operating activities

     49,632        (539       49,093   
  

 

 

   

 

 

   

 

 

   

 

 

 

Cash flows from investing activities:

        

Acquisition of property and equipment

     (29,550     752        (2)(7     (28,798
  

 

 

   

 

 

   

 

 

   

 

 

 

Net cash used in investing activities

     (29,550     752          (28,798
  

 

 

   

 

 

   

 

 

   

 

 

 

Cash flows from financing activities:

        

Cash dividends paid

     (22,233     —            (22,233

Excess tax benefits from share-based compensation

     6,937        —            6,937   

Proceeds from exercise of stock options and other

     1,512        —            1,512   

Repurchase of common stock

     (7,102     —            (7,102
  

 

 

   

 

 

   

 

 

   

 

 

 

Net cash used in financing activities

     (20,886     —            (20,886
  

 

 

   

 

 

   

 

 

   

 

 

 

Net decrease in cash and cash equivalents

     (804     213        (7     (591

Cash and cash equivalents at end of year

     80,975        (666     (7     80,309   
  

 

 

   

 

 

   

 

 

   

 

 

 

Cash and cash equivalents at end of year

   $ 80,171      $ (453       79,718   
  

 

 

   

 

 

   

 

 

   

 

 

 

 

F-18


Table of Contents

STEIN MART, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Dollars in tables in thousands, except per share amounts)

 

3. Property and Equipment, Net

Property and equipment, net consists of the following:

 

     February 2,
2013
    January 28,
2012
 
           (Restated)  

Fixtures, equipment and software

   $ 161,315      $ 214,216   

Leasehold improvements

     90,947        72,164   
  

 

 

   

 

 

 
     252,262        286,380   

Accumulated depreciation and amortization

     (130,200     (186,103
  

 

 

   

 

 

 
     122,062        100,277   

Assets under capital leases, net of accumulated amortization of $2,117 and $416, respectively

     9,508        9,713   
  

 

 

   

 

 

 
   $ 131,570      $ 109,990   
  

 

 

   

 

 

 

Assets under capital leases are primarily point-of-sale and related store equipment. Depreciation and amortization expense for property and equipment totaled $23.9 million, $18.6 million and $17.8 million for 2012, 2011 and 2010, respectively.

During 2012, 2011 and 2010, we recorded net pre-tax asset impairment charges of $0.5 million, $1.2 million and $1.2 million, respectively, to reduce the carrying value of fixtures, equipment and leasehold improvements held for use and certain other assets in under-performing or closing stores to their respective estimated fair value.

Store assets are considered Level 3 assets in the fair value hierarchy as the inputs for calculating the fair value of these assets are based on the best information available, including prices for similar assets. In 2012, 2011 and 2010, store assets with a carrying value of $0.5 million, $1.8 million and $1.2 million were written down to their fair value of $0, $0.6 million and $0, respectively.

See Note 2 for further information regarding the impact of correcting adjustments made to previously issued Financial Statements.

 

4. Accrued Expenses and Other Current Liabilities

The major components of accrued expenses and other current liabilities are as follows:

 

     February 2,
2013
     January 28,
2012
 
            (Restated)  

Compensation and employee benefits

   $ 12,487       $ 10,006   

Unredeemed gift and merchandise return cards

     9,163         11,277   

Property taxes

     11,357         11,845   

Accrued vacation

     6,553         6,443   

Other

     26,549         28,492   
  

 

 

    

 

 

 
   $ 66,109       $ 68,063   
  

 

 

    

 

 

 

See Note 2 for further information regarding the impact of correcting adjustments made to previously issued Financial Statements.

 

5. Revolving Credit Agreement

In October 2011, we entered into an amended and restated revolving credit agreement (the “Credit Agreement”) with Wells Fargo Bank, N.A. The Credit Agreement provides for a $100 million senior secured revolving credit facility which can be increased to $150 million. The Credit Agreement matures on February 28, 2017 and replaces our existing $150 million revolving credit facility which was to mature in early 2012. Borrowings under the Credit Agreement are based on and collateralized by eligible credit card receivables and inventory. Proceeds may be used for general corporate purposes, including issuing standby and commercial letters of credit.

Borrowings under the Credit Agreement shall be either Base Rate Loans or LIBO Rate Loans (all terms as defined in the Credit Agreement). Base Rate Loans bear interest equal to the highest of (a) the Federal Funds Rate plus one-half of one percent (0.50%), (b) the Adjusted LIBO Rate plus one percent (1.00%), or (c) the rate of interest in effect for such day as publicly announced from time to time by Wells Fargo as its “prime rate”, plus the Applicable Margin. LIBO Rate Loans shall bear interest equal to the Adjusted LIBO Rate plus

 

F-19


Table of Contents

STEIN MART, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Dollars in tables in thousands, except per share amounts)

 

the Applicable Margin. The Adjusted LIBO Rate with respect to any LIBO Rate Loan is the interest rate per annum equal to the LIBO Rate for such Interest Period multiplied by the Statutory Reserve Rate. The Adjusted LIBO Rate with respect to any Base Rate Loan is the interest rate per annum equal to the LIBO Rate for an Interest Period commencing on the date of such calculation and ending on the date that is thirty (30) days thereafter multiplied by the Statutory Reserve Rate. The Applicable Margin is based upon a pricing grid depending on the Average Daily Availability.

The amount available for borrowing was $93.2 million at February 2, 2013 and is based on 90% of eligible credit card receivables and inventories less reserves, as defined in the Credit Agreement. The amount available for borrowing represents the capped borrowing base of $100 million reduced by outstanding letters of credit of $6.8 million. The Credit Agreement contains customary affirmative and negative covenants, including limitations on granting of liens, certain investments, additional indebtedness, prepayments on indebtedness and disposition of inventory. We had no direct borrowings at February 2, 2013.

 

6. Leases and Commitments

We lease all of our retail stores, support facilities and certain equipment under operating leases. Our store leases are generally for 10 years with options to extend the lease term for two or more 5-year periods. Annual store rent is generally comprised of a fixed minimum amount plus a contingent amount based on a percentage of sales in excess of specified levels. Most store leases also require additional payments covering real estate taxes, common area costs and insurance.

Rent expense is as follows:

 

     2012      2011      2010  
            (Restated)      (Restated)  

Minimum rentals

   $ 71,260       $ 72,581       $ 73,627   

Contingent rentals

     981         1,014         1,015   
  

 

 

    

 

 

    

 

 

 
   $ 72,241       $ 73,595       $ 74,642   
  

 

 

    

 

 

    

 

 

 

At February 2, 2013, future contractual minimum lease payments under both operating and capital leases are:

 

     Operating      Capital      Total  

2013

   $ 75,119       $ 2,197       $ 77,316   

2014

     68,788         —           68,788   

2015

     59,447         —           59,447   

2016

     47,807         —           47,807   

2017

     34,536         —           34,536   

Thereafter

     83,073         —           83,073   
  

 

 

    

 

 

    

 

 

 

Total

   $ 368,770       $ 2,197       $ 370,967   
  

 

 

    

 

 

    

 

 

 

Obligations under capital leases as of February 2, 2013 are recorded in Accrued expenses and other current liabilities. Interest rates on our capital leases are less than 0.1 percent.

See Note 2 for further information regarding the impact of correcting adjustments made to previously issued Financial Statements.

 

F-20


Table of Contents

STEIN MART, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Dollars in tables in thousands, except per share amounts)

 

7. Income Taxes

Temporary differences, which give rise to deferred tax assets and liabilities, are as follows:

 

     February 2,
2013
    January 28,
2012
 
           (Restated)  

Gross deferred tax assets:

    

Unredeemed gift and return card liabilities

   $ 277      $ 1,023   

Deferred rent liability

     9,862        8,910   

Deferred compensation liability

     4,985        1,557   

Insurance reserves

     2,359        2,550   

Share-based compensation

     3,915        3,950   

Store closing reserves

     806        1,191   

Accrued vacation

     2,523        2,480   

Other accrued liabilities

     3,803        2,123   

Unredeemed credit card awards

     726        758   

NOL and credit carry forwards

     554        1,043   

Other

     158        214   
  

 

 

   

 

 

 

Gross deferred tax assets

     29,968        25,799   
  

 

 

   

 

 

 

Gross deferred tax liabilities:

    

Inventory

     4,580        3,210   

Property and equipment

     28,789        22,141   

Prepaid items

     1,411        1,123   

Other assets

     86        135   
  

 

 

   

 

 

 

Gross deferred tax liabilities

     34,866        26,609   
  

 

 

   

 

 

 

Net deferred tax liability

   $ (4,898   $ (810
  

 

 

   

 

 

 

As of February 2, 2013, the Company had net operating losses (“NOL”) carryforwards for state income tax purposes of $12.5 million that will begin to expire in 2013.

Deferred tax assets (liabilities) are reflected on the Consolidated Balance Sheets as follows:

 

     February 2,
2013
    January 28,
2012
 
           (Restated)  

Current deferred tax assets (included in Other current assets)

   $ 2,602      $ 2,049   

Non-current deferred tax liabilities (included in Other liabilities)

     (7,500     (2,859
  

 

 

   

 

 

 

Net deferred tax liability

   $ (4,898   $ (810
  

 

 

   

 

 

 

 

F-21


Table of Contents

STEIN MART, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Dollars in tables in thousands, except per share amounts)

 

The components of income tax expense (benefit) are as follows:

 

     2012      2011     2010  
            (Restated)     (Restated)  

Current:

       

Federal

   $ 7,358       $ (837   $ 10,980   

State

     697         805        (305
  

 

 

    

 

 

   

 

 

 
     8,055         (32     10,675   
  

 

 

    

 

 

   

 

 

 

Deferred:

       

Federal

     2,512         11,989        (10,505

State

     404         258        (1,858
  

 

 

    

 

 

   

 

 

 
     2,916         12,247        (12,363
  

 

 

    

 

 

   

 

 

 

Income tax expense (benefit)

   $ 10,971       $ 12,215      $ (1,688
  

 

 

    

 

 

   

 

 

 

During 2012, 2011 and 2010, we realized tax (deficiencies) benefits of $(0.5) million, $(0.4) million and $7.0 million, respectively, related to share-based compensation plans that were recorded to additional paid-in-capital. The income tax provision differs from the amount of income tax determined by applying the statutory U.S. corporate tax rate to pre-tax amounts due to the following items:

 

     2012     2011     2010  
           (Restated)     (Restated)  

Federal tax at the statutory rate

     35.0     35.0     35.0

State income taxes, net of federal benefit

     2.1     4.5     1.1

Valuation allowance

     0.0     0.0     (39.1 )% 

Permanent differences and other

     (6.6 )%      (1.5 )%      (0.1 )% 
  

 

 

   

 

 

   

 

 

 

Effective tax rate

     30.5     38.0     (3.1 )% 
  

 

 

   

 

 

   

 

 

 

As of January 30, 2010, we had a valuation allowance on substantially all of our net deferred tax assets, established in 2008. During 2010, the reversal of the remaining valuation allowance, based on changes in forecasts of future earnings and a return to profitability on a three-year historical basis, favorably impacted the effective tax rate. For 2012, the effective tax rate was positively impacted by the impact of favorable permanent differences which related primarily to the non-taxable income recognized related to a settlement gain from post-retirement life insurance benefits described in Note 8.

The following is a reconciliation of the change in the amount of unrecognized tax benefits from January 31, 2010 to February 2, 2013:

 

     2012     2011     2010  
           (Restated)     (Restated)  

Beginning balance

   $ 1,476      $ 3,062      $ 5,163   

Increases due to:

      

Tax positions taken in prior years

     —          587        526   

Settlements with taxing authorities

     —          —          12   

Decreases due to:

      

Tax positions taken in prior years

     (765     —          (2,553

Settlements with taxing authorities

     —          (2,101     —     

Lapse of statute of limitations

     (80     (72     (86
  

 

 

   

 

 

   

 

 

 

Ending balance

   $ 631      $ 1,476      $ 3,062   
  

 

 

   

 

 

   

 

 

 

As of February 2, 2013, there were no unrecognized tax benefits (“UTBs”) that, if recognized, would affect the effective tax rate. We recognize interest and penalties related to UTBs in income tax expense. During the fiscal years ended February 2, 2013, January 28, 2012 and January 29, 2011, the amount of interest and penalties related to UTBs was insignificant. The total amount of accrued interest and accrued penalties related to UTBs as of February 2, 2013 and January 28, 2012 was also insignificant.

 

F-22


Table of Contents

STEIN MART, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Dollars in tables in thousands, except per share amounts)

 

UTBs decreased in 2012 due to tax positions taken and lapse of statute of limitations. UTBs decreased in 2011 primarily due to settlements related to the completion of federal examinations for 2007 and 2008. UTBs decreased $2.5 million in 2010 related primarily to favorable settlements of state tax examinations and the resolution of protective federal credit claims filed for prior tax years.

We are currently open to audit under the statute of limitations by the Internal Revenue Service for the tax years 2010 through 2012. The Company’s state tax returns are open to audit under similar statute of limitations for the tax years 2008 through 2012.

See Note 2 for further information regarding the correcting adjustments made to previously reported Financial Statements.

 

8. Employee Benefit Plans

We have a defined contribution retirement plan (a 401(k) plan) covering employees who are at least 21 years of age, have completed at least one year of service and who work at least 1,000 hours annually. Under the profit sharing portion of the plan, we can make discretionary contributions which vest at a rate of 20 percent per year after two years of service. During 2012, 2011 and 2010, we matched 50 percent of an employee’s voluntary pre-tax contributions up to a maximum of four percent of an employee’s compensation. Our matching portion vests in accordance with the plan’s vesting schedule. Total Company contributions to the retirement plan, net of forfeitures, were $1.2 million for each of 2012, 2011 and 2010.

We have an executive deferral plan providing officers, key executives and director-level employees with the opportunity to defer receipt of salary, bonus and other compensation. The plan allows for company discretionary contributions. During 2012, we matched contributions up to 10 percent of salary and bonuses deferred at a rate of 100 percent for officers and key executives and a rate of 50 percent for directors. In addition, during 2012, we made an additional discretionary contribution totaling $6.7 million related to the curtailment and settlement of the split dollar retirement benefit described below. During 2011, we matched contributions up to 10 percent of salary and bonus at a rate of 50 percent for officers and key executives and a rate of 25 percent for directors. There was no match for 2010.

Matching contributions for 2011 and 2012 and related investment earnings vest at 20% per year in each of years four through eight, at which time a participant is fully vested. The additional discretionary contribution made in 2012 and related investment earnings cliff vest at age 62. The executive deferral plan liability was $10.7 million and $2.9 million at February 2, 2013 and January 28, 2012, respectively, and is included in Other liabilities in the Consolidated Balance Sheets. The expense for this plan, net of forfeitures, was $6.9 million, $0.4 million and $0.2 million in 2012, 2011 and 2010, respectively.

We provide an executive split-dollar life insurance benefit which provides officers, key executives and director-level employees with pre-retirement life insurance benefits based upon three to five times base salary and post-retirement life insurance benefits based upon one and one-half to two and one-half times final base salary. Effective December 31, 2012, active employees and substantially all retirees were no longer eligible for the post-retirement life insurance benefit through an agreement between the company and the insureds resulting in a curtailment and settlement of plan benefits as detailed below. In addition to the discretionary contribution to the executive deferral plan described above, we made cash payments to retirees totaling $1.6 million as a result of this change. The gain due to settlement of the post-retirement benefit of $7.7 million was more than offset by the cost of payments to retirees and executive deferral plan contributions.

The curtailment and settlement resulted in a remeasurement of the benefit obligation on December 31, 2012 using a discount rate of 3.8%. The following reflects the change in the post-retirement benefit obligation included in Other liabilities in the Consolidated Balance Sheets:

 

     February 2,
2013
    January 28,
2012
 

Benefit obligation at beginning of year

   $ 9,212      $ 6,307   

Service cost

     790        655   

Interest cost

     404        366   

Actuarial losses

     1,979