As used herein, the terms "we", "our", "us", "Stein Mart" and the "Company" refer to Stein Mart, Inc. and its wholly-owned subsidiaries.

Forward-Looking Statements

This report contains forward-looking statements which are subject to certain risks, uncertainties or assumptions. The words "plan," "expect," "anticipate," "believe," "estimate," and similar expressions identify forward-looking statements. Forward-looking statements may be affected by certain factors, including but not limited to the matters discussed in "Item A. Risk Factors" of our Form 10-K for the fiscal year ended January 31, 2009. 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 our management and on information currently available to such management. Forward-looking statements speak only as of the date they are made, and we undertake no obligation to publicly update or revise our 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 guarantee of performance.

Overview

Stein Mart is a national retailer offering the fashion merchandise, service and presentation of a better department or specialty store at prices competitive with 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, gifts, linens and shoes, all offered at prices competitive with off-price retail chains. Management believes that Stein Mart differentiates itself from typical off-price retail chains by offering: (i) primarily current-season merchandise carried by better department or specialty stores,
(ii) at moderate to better price levels, (iii) a stronger merchandising "statement," consistently offering more depth of color and size in individual stock-keeping units, and (iv) merchandise presentation and customer service more comparable to other upscale retailers. As of August 1, 2009, we operated 270 stores.

For the second quarter of 2009, we had net income of $1.5 million or $0.04 per diluted share as compared to a net loss $(8.0) million or $(0.19) per diluted share for the same 2008 period. For the first half of 2009, the Company had net income of $17.6 million or $0.41 per diluted share compared to a net loss of $(1.0) million or $(0.02) per diluted share for the same 2008 period. While net sales decreased $24.1 million and $56.7 million, respectively, for the second quarter and first half of 2009, gross margin increased slightly for both periods. Selling, general and administrative ("SG&A") expenses were $18.3 million lower during the second quarter and $30.0 million lower during the first half of 2009 compared to the same 2008 periods, primarily from significant reductions in payroll expense in the stores and corporate office, reduced advertising and lower depreciation expense.

Our average store inventories were down more than 22 percent at the end of the second quarter compared to the end of the second quarter last year. Reducing our inventories has had multiple benefits, including far less clearance merchandise, better sell-through at regular prices and improved turn. By keeping inventory and expenses tightly controlled, we were able to improve margins and profitability for both the second quarter and the first half of 2009, despite negative comparable store sales trends. These efforts further strengthened our balance sheet, with no borrowings in the second quarter and $45 million in cash and cash equivalents at quarter end.

We must continue to make progress against a protracted negative sales trend with limited visibility for the foreseeable future. Although the customer is still very cautious, response to our updated merchandise offering and new marketing strategy is encouraging. We plan to build on these efforts this fall, while maintaining rigorous control over expenses and inventory levels.

We were pleased with the impact our stronger marketing efforts had on the second quarter. We continue to focus on our marketing strategies to keep our existing customers, attract a new and younger customer making sure we're consistently on her radar screen, and move into the digital age. Our promotional calendar for the Fall season will be aggressive, although we plan to keep the marketing spend flat to Fall 2008. We will have more days of television commercials than we had last Fall, with a fresh round of commercials featuring real Stein Mart shoppers. As was the case in Spring 2009, we will strategically reduce our direct mail quantities as well as our newspaper distribution. We also plan to use Facebook and Twitter to engage and communicate with our loyal Stein Mart shoppers using our newly updated Steinmart.com website as the hub for much of this digital activity. Finally, we will continue to focus on our best customers through our Preferred Customer program and the Elite level of this program, introduced in March.

Our transition from vendors drop shipping merchandise directly to our stores, to using a third party logistics network to deliver merchandise ("supply chain") continues on track. Product is flowing through the New Jersey, Dallas and California consolidation centers to our Atlanta and Dallas store distribution centers ("SDCs") which are now fully operational. Approximately 88% of our stores are now receiving merchandise through the SDCs and we plan to activate the West Coast distribution facility after the holidays. Because we have been able to make this transition in a timely manner, we have already begun to realize some benefits of the new supply chain methodology earlier than expected. Some headcount reductions in store receiving areas have already begun, and we will see additional benefit in the second half of the year - ahead of our original timeline which called for the cost savings to begin in 2010.

Stores

There were 270 stores open as of August 1, 2009 and 283 stores open as of
August 2, 2008. We plan to open one store and close four more stores during the
third quarter, resulting in 267 stores at the end of fiscal year 2009.



                               13 Weeks Ended          13 Weeks Ended          26 Weeks Ended          26 Weeks Ended
                               August 1, 2009          August 2, 2008          August 1, 2009          August 2, 2008
Stores at beginning of
period                                    275                     284                     276                     280
Stores opened during the
period                                     -                       -                        1                       5
Stores closed during the
period                                     (5 )                    (1 )                    (7 )                    (2 )

Stores at the end of
period                                    270                     283                     270                     283

Results of Operations

The following table sets forth each line item of the Consolidated Statements of
Operations expressed as a percentage of our net sales (numbers may not add due
to rounding):



                                 13 Weeks Ended          13 Weeks Ended           26 Weeks Ended          26 Weeks Ended
                                 August 1, 2009          August 2, 2008           August 1, 2009          August 2, 2008
Net sales                                 100.0 %                 100.0 %                  100.0 %                 100.0 %
Cost of merchandise sold                   73.8                    76.2                     71.6                    74.1

Gross profit                               26.2                    23.8                     28.4                    25.9
Selling, general and
administrative expenses                    25.8                    29.7                     25.4                    27.7
Other income, net                           1.5                     1.7                      1.5                     1.7

Income (loss) from
operations                                  1.9                    (4.2 )                    4.5                    (0.1 )
Interest income (expense),
net                                          -                     (0.1 )                     -                     (0.1 )

Income (loss) before
income taxes                                1.9                    (4.2 )                    4.5                    (0.2 )
Income tax (provision)
benefit                                    (1.4 )                   1.7                     (1.6 )                   0.1

Net income (loss)                           0.5 %                  (2.6 )%                   2.9 %                  (0.2 )%

For the 13 weeks ended August 1, 2009 compared to the 13 weeks ended August 2, 2008

Net sales for the second quarter of 2009 were $287.5 million, down 7.7% from $311.6 million in last year's second quarter. The $24.1 million decrease reflects a $13.0 million decrease in the comparable store group and a $12.8 million decrease in the closing/closed store group, offset by a $1.7 million increase in the non-comparable store group due to the inclusion of sales for one store opened in 2009 and six stores opened in 2008. The closing/closed store group includes the 11 stores we plan to close in 2009 and the ten stores closed in 2008. Comparable stores sales for the second quarter of 2009 decreased 4.5% compared to the second quarter of 2008.

Gross profit for the second quarter of 2009 was $75.4 million or 26.2 percent of net sales compared to $74.1 million or 23.8 percent of net sales for the second quarter of 2008. The $1.3 million increase in gross profit reflects a $3.6 million increase in the comparable store group and a $0.3 million increase in the non-comparable store group, offset by a $2.6 million decrease in the closing/closed store group. Gross profit as a percent of sales increased 2.4 percentage points during the second quarter of 2009 primarily due to a 1.4 percentage point increase in markup and a 1.3 percentage point decrease in markdowns, offset by a 0.6 percent increase in occupancy costs due to a lack of leverage on lower sales.

SG&A expenses were $74.2 million or 25.8 percent of net sales for the second quarter of 2009 as compared to $92.5 million or 29.7 percent of net sales for the same 2008 period. The $18.3 million decrease in SG&A expenses reflects a $9.5 million reduction in store operating expenses, a $4.7 million decrease in non-buying expenses in the corporate office, a $2.8 million decrease in advertising expenses, and a $1.3 million decrease in depreciation expense. Store operating expenses decreased $7.1 million for the comparable store group due to headcount reductions and other cost saving initiatives and decreased $2.4 million for the closing/closed store group. Corporate office expenses decreased from 2008 primarily due to compensation and benefit reductions, lower legal expenses and lower professional fees related to expense reduction initiatives. Advertising expense was lower this period primarily due to reduced spending on direct mail marketing and newspaper advertising. Depreciation expense decreased as a result of asset impairment charges taken during the fourth quarter of 2008.

Other income, net decreased $1.1 million for the second quarter of 2009 compared to the second quarter of 2008 due to a decrease in the number of credit cards issued through our co-brand credit card program.

The effective tax rate ("ETR") of 72.6 percent for the second quarter of 2009 is a result of changing from the discrete period method used in the first quarter of 2009 when the ETR was 25.8%. The higher second quarter ETR was required to adjust the ETR for the first half of 2009 to the estimated annual ETR.

For the 26 weeks ended August 1, 2009 compared to the 26 weeks ended August 2, 2008

Net sales for the first half of 2009 were $607.1 million, down 8.5% from $663.8 million for the first half of 2008. The $56.7 million decrease reflects a $39.2 million decrease in the comparable store group and a $22.6 million decrease in the closing/closed store group, offset by a $5.1 million increase in the non-comparable store group due to the inclusion of sales for one store opened in 2009 and six stores opened in 2008. Comparable stores sales for the first half of 2009 decreased 6.3% compared to the first half of 2008.

Gross profit for first half 2009 was $172.3 million or 28.4 percent of net sales compared to $171.9 million or 25.9 percent of net sales for the first half of 2008. The $0.4 million increase in gross profit reflects a $4.2 million increase in the comparable store group and a $0.8 million increase in the non-comparable store group due to the inclusion of operating results for one store opened in 2009 and six stores opened in 2008, offset by a $4.6 million decrease in the closing/closed store group. Gross profit as a percent of sales increased 2.5 percentage points during the first half of 2009 primarily due to a 1.2 percentage point increase in markup and a 2.0 percentage point decrease in markdowns, offset by a 0.8 percent increase in occupancy costs due to a lack of leverage on lower sales.

SG&A expenses were $154.1 million or 25.4 percent of sales for the first half of 2009 compared to $184.1 million or 27.7 percent of sales for the same 2008 period. The $30.0 million decrease in SG&A reflects a $19.1 million reduction in store operating expenses, a $5.8 million decrease in non-buying expenses in the corporate office, a $2.6 million decrease in depreciation expense, and a $2.5 million decrease in advertising expenses. Store operating expenses decreased $14.9 million for the comparable store group due to headcount reductions and other cost saving initiatives and decreased $4.4 million for the closing/closed store group. Corporate office expenses decreased from 2008 primarily due to compensation and benefit reductions, lower legal expenses and lower professional fees related to expense reduction initiatives. Depreciation expense decreased as a result of asset impairment charges taken during the fourth quarter of 2008. Advertising expense was lower this period primarily due to reduced spending on direct mail marketing and newspaper advertising.

Other income, net decreased $2.0 million for the first half of 2009 compared the first half of 2008 due to a decrease in the number of credit cards issued through our co-brand credit card program.

The ETR of 31.3 percent for the 26 weeks ended August 2, 2008 was lower than the ETR of 35.4 percent for the 26 weeks ended August 1, 2009, and lower than the federal statutory rate of 35.0%, primarily due to the small taxable loss in 2008, the effect of certain book/tax differences and the recording of unrecognized tax benefits.

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, a revolving credit facility and credit terms from vendors. 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 in either the third or fourth quarter in anticipation of the fourth quarter peak selling season. As of August 1, 2009, we had $45 million in cash and cash equivalents.

Net cash provided by operating activities was $58.8 million for the first half of 2009 compared to $8.7 million for the first half of 2008. The increase in cash provided by operating activities during the first half of 2009 compared to the first half of 2008 is due to $34.3 million less cash used for inventories and to reduce accounts payable, $16.4 million more cash provided by net income plus non-cash charges and a $12.8 million increase in cash provided by income taxes receivable, offset by $13.3 million more cash used by other operating activities. Inventories decreased in the first half of 2009 compared to the first half of 2008 due to less inventory being purchased in response to lower sales and a strategy to maintain lower average store inventory levels.

Net cash used in investing activities was $2.9 million for the first half of 2009 compared to $9.9 million for the first half of 2008 due to less capital expenditures for fewer new store openings. We expect to invest approximately $7 to 8 million in capital expenditures in 2009 to open two new stores and continue updating systems and existing stores.

Net cash used in financing activities was $99.8 million for the first half of 2009 compared to $4.4 million cash provided by financing activities for the first half of 2008. More cash was used in financing activities during the first half of 2009 due to the repayment of all direct borrowings under our revolving credit agreement.

We have a $150 million senior revolving secured credit agreement (the "Agreement") with a group of lenders which extends through January 2011. As of August 1, 2009, availability under the Agreement was $126.8 million and is based on eligible inventory less other reserves as defined in the Agreement. Standby letters of credit of $11.4 million reduced availability for borrowings to $115.4 million at August 1, 2009. We are in compliance with the terms of the Agreement.

During the period from August 2, 2009 through September 9, 2009, the Company received $20 million of tax refunds primarily related to the carry-back of fiscal year 2008 federal net operating losses to prior years.

We believe that we will continue to generate positive cash flow from operations, which, along with our available cash and borrowing capacity under the revolving credit agreement, will provide the means needed to fund our operations for the foreseeable future. While we have available borrowing capacity under our revolving credit agreement, tightening of the credit markets could make it more difficult for us to enter into agreements for new indebtedness or obtain funding through public or private equity or debt financing. The effects of these changes could also require us to make additional changes to our current plans and strategies.

Recent Accounting Pronouncements

Effective February 1, 2009, the Company adopted Statement of Financial Accounting Standards ("SFAS") No. 157, Fair Value Measurements, for nonfinancial assets and liabilities in accordance with Financial Accounting Standards Board Staff Position ("FSP") No. FAS 157-2, Effective Date of FASB Statement No. 157, that deferred the effective date of SFAS No. 157 for nonfinancial assets and liabilities that are recognized or disclosed at fair value in the financial statements on a non-recurring basis, to fiscal years beginning after November 15, 2008. The adoption of SFAS No. 157 for nonfinancial assets and liabilities had no impact on our consolidated financial statements.

In May 2009, the Financial Accounting Standards Board ("FASB") issued SFAS No. 165, Subsequent Events, which establishes general standards of accounting for and disclosure of events that occur after the balance sheet date but before financial statements are issued. SFAS No. 165 also requires disclosure of the date through which the entity has evaluated subsequent events and the basis for that date. We adopted the provisions of SFAS No. 165 for the quarter ended August 1, 2009 and adoption did not have a material effect on our consolidated financial statements.