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SSI > SEC Filings for SSI > Form 10-K on 3-Apr-2013All Recent SEC Filings

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Form 10-K for STAGE STORES INC


3-Apr-2013

Annual Report


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

The results of operations for fiscal year 2012 are based on a 53-week period. The results of operations for fiscal years 2011 and 2010 are based on a 52-week period.

Executive Summary

Stage Stores, Inc. (the "Company" or "Stage Stores") is a Houston, Texas-based retailer, which operates both department stores and off-price stores. Its department stores, which operate under the Bealls, Goody's, Palais Royal, Peebles and Stage nameplates, offer moderately priced, nationally recognized brand name and private label apparel, accessories, cosmetics and footwear for the entire family. Its off-price stores, which are called Steele's, offer brand name family apparel, accessories, shoes and home décor at significant savings to department store prices. The Company also offers its merchandise direct-to-consumer through its eCommerce website and Send program. The eCommerce website features similar merchandise categories to those found in the Company's stores as well as merchandise which is available only on-line. The Send program allows customers to have merchandise shipped directly to their homes from another store if their size or color is not available in a local store.

The Company's principal focus is on consumers in small and mid-sized markets which the Company believes are under-served and less competitive. In those small town markets where it operates a department store and an off-price store, the Company targets a different customer for each store and, therefore, believes that customer overlap between the two formats is minimal. At February 2, 2013, the Company operated 864 stores located in 40 states, 66% of which are in small markets with populations of less than 50,000 people.

Fiscal 2012

The Company's strategy in 2012 was to pursue growth in sales, operating margin and earnings. Reflecting the successful implementation of its business strategies, total sales for the year increased 8.9% and comparable store sales also increased by 5.7%. The gross profit rate for the year grew by 70 basis points and diluted earnings per share increased 29.3%. Since launching its eCommerce website in December 2010, the Company has made growing its Direct-to-Consumer business a high priority. Direct-to-Consumer sales were $23.1 million in 2012, compared to $14.2 million in 2011. In early November, the Company launched a new customer loyalty program, which provides significantly enhanced benefits and incentives exclusively for its private label credit card holders. The launch was accompanied by the issuance of new credit cards to more than two million customers. The Company's goal in taking these actions was to increase both sales and the penetration rate for its private label credit card. The penetration rate for the private label credit card increased 110 basis points in 2012. In March 2012, Andy Hall, the Company's former President and Chief Executive Officer, resigned to pursue other interests. Michael Glazer, who has been on the Company's Board since 2001, was appointed President and Chief Executive Officer in April 2012. During 2012, the Company also appointed Steven Lawrence as Chief Merchandising Officer and Bill Gentner as Chief Marketing Officer and promoted Russ Lundy to Executive Vice President of Stores.

Operationally during the year, the Company opened 56 new stores, including 31 Steele's stores. The Company also added 11 Estee Lauder and 8 Clinique counters, bringing the total number of stores with cosmetic treatment counters to 231.

As a result of damaged caused by Hurricane Sandy, the Company permanently closed one store in 2012, which did not have a material impact on the Company's business. The Company's business was not otherwise affected by Hurricane Sandy.

Fiscal 2013 Outlook and Trends

The Company's strategy in 2013 will be focused on building on its 2012 achievements and pursuing further growth in sales, operating margin and earnings. In 2013, the Company plans to exploit opportunities in areas such as new store growth, merchandising, marketing, seasonal events, Direct-to-Consumer, Steele's, the in-store experience, particularly visual merchandising, and information systems. Additionally, the Company will continue its commitment to providing superior customer service and compelling merchandise assortments within existing product categories in an effort to grow the Company's share of business with its core customers and improve the in-store shopping experience while continuing to maintain strong control over inventories and expenses.


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On February 11, 2013, the Company announced its plans to consolidate its South Hill operations into its corporate headquarters (the "South Hill Consolidation"). The South Hill Consolidation is expected to increase productivity, create synergies, strengthen collaboration, enhance the Company's purchasing power, and accelerate sales growth. The consolidation is also expected to result in annual savings of approximately $5 million. The consolidation and subsequent office closure is expected to be completed by the middle of 2013.

The financial information, discussion and analysis that follow should be read in conjunction with the Company's Consolidated Financial Statements included elsewhere herein.

Results of Operations

The results of operations for fiscal year 2012 are based on a 53-week period. The results of operations for fiscal years 2011 and 2010 are based on a 52-week period.

The following table sets forth the results of operations as a percent of sales for the periods indicated:

                                                                Fiscal Year (1)
                                                       2012          2011          2010

Net sales                                                100.0 %       100.0 %       100.0 %
Cost of sales and related buying, occupancy and
distribution expenses                                     72.1          72.8          71.7

Gross profit                                              27.9          27.2          28.3

Selling, general and administrative expenses              23.9          23.4          23.9
Store opening costs                                        0.2           0.4           0.2
Interest expense, net                                      0.2           0.3           0.3

Income before income tax                                   3.7           3.1           4.0
Income tax expense                                         1.3           1.1           1.4

Net income                                                 2.3 %         2.0 %         2.6 %

(1) Percentages may not foot due to rounding.

2012 Compared to 2011

Sales for 2012 increased 8.9% to $1,645.8 million from $1,511.9 million for 2011. The sales increase was driven by the strength of the Company's comparable stores and new stores. Comparable store sales, which are sales in stores that are open for at least 14 full months prior to the reporting period, including eCommerce sales, increased by 5.7% in the current year. This compares to a 0.5% increase in comparable store sales in the prior year. Excluding eCommerce sales, comparable store sales increased 5.2% in the current year as compared to flat sales in the prior year. In 2012, comparable stores sales increased $84.6 million, while non-comparable store sales increased $33.0 million, driven by the net increase of 51 additional stores. Sales during the 53rd week of 2012 accounted for $16.3 million of the increase, or 1.1%. The 5.7% increase in comparable store sales for 2012 reflects a combination of a 1.1% increase in the number of transactions, an increase of 3.1% in average unit retail and an increase of 1.4% in units per transaction.


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Comparable store sales increase (decrease) by quarter is presented below:

                                            Fiscal Year
                                          2012       2011
                            1st Quarter     2.5 %      0.2 %
                            2nd Quarter     5.4        0.9
                            3rd Quarter     8.1       (0.6 )
                            4th Quarter     6.6        1.3
                            Total Year      5.7        0.5

On a merchandise category basis, the Company experienced comparable store sales increases in almost every merchandise category during the current year, with home & gifts, footwear, cosmetics, missy sportswear, junior sportswear, and special sizes exceeding the Company average. The Company continues to grow its cosmetics line of business through the installation of Estee Lauder and Clinique counters, as 11 new Estee Lauder and 8 new Clinique counters were opened during the fiscal year, which raised the total number of stores with cosmetic treatment counters to 231. Home & gifts, which had the largest comparable increase, is benefitting from an expanded assortment and will continue to be an area of emphasis in 2013. Sales also benefited from increased offerings across all merchandise categories of national brand name merchandise as new brand names were added and sought-after existing brands were expanded. Lastly, the Company made strategic investments in inventory in certain areas to take advantage of macro trends, such as the energy boom in west Texas and Pennsylvania, competitive situations, such as J.C. Penney stores, and brand enhancements in regions such as border stores, and invested in basic items such as socks, underwear and jeans to improve in-stock status.

On a market population basis, utilizing a ten-mile radius from each store, all market areas experienced an increase in comparable store sales in the current year. The Company's small market stores (populations less than 50,000) achieved a comparable store sales increase of 4.7%, while the Company's mid-sized (populations of 50,000 to 150,000) and large markets (populations greater than 150,000) achieved comparable store sales increases of 7.4% and 7.5%, respectively. Geographically, all regions except for the Southeast experienced comparable store sales increases in 2012. The Southeast region, which was the Company's best performing region in 2011 due to the rebranded Goody's stores, was negatively impacted by the anniversary of the Goody's rebrands. The Company has also benefited from additional market share gains in the rural markets where it competes directly with J.C. Penney stores.

The following is a summary of the changes in the components of cost of sales between 2012 and 2011, expressed as a percent of sales:

                                                                     Decrease in the
                                                                      Components of
                                                                      Cost of Sales

Merchandise cost of sales rate                                                  (0.2) %
Buying, occupancy and distribution expenses rate                                (0.5)
Cost of sales rate                                                              (0.7) %

Gross profit in the current year was $459.8 million, an increase of 12.0% from $410.6 million in the prior year. Gross profit, as a percent of sales, increased to 27.9% in the current year from 27.2% in the prior year. The 0.7% improvement in the gross profit rate reflects a 0.2% decrease in the merchandise cost of sales rate and a 0.5% decrease in the buying, occupancy and distribution expenses rate. The decrease in merchandise cost of sales rate is primarily a result of lower markdowns in the current year compared to the prior year. The decrease in buying, occupancy and distribution expenses rate was mainly due to improved leverage from higher sales in the current year as compared to the prior year. Cost of sales for 2012 includes $1.6 million in expenses and approximately $1.0 million in inventory markdowns related to the South Hill Consolidation.

Selling, general and administrative ("SG&A") expenses in the current year increased $38.9 million to $392.7 million from $353.8 million in the prior year.
As a percent of sales, SG&A expenses increased to 23.9% in the current year from 23.4% in the prior year. SG&A expenses in 2012 include one-time charges of approximately $3.3 million incurred in the current year associated with the resignation of the Company's former Chief Executive Officer and $1.1 million in expense


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related to the South Hill Consolidation. The increase in the current year also reflects incremental costs to operate 51 net additional stores, higher expenses related to the eCommerce and Steele's initiatives and higher incentive compensation costs of $17.1 million due to the Company's better results during the current year. These higher costs were partially offset by higher credit income of $12.2 million associated with the Company's private label credit card portfolio.

Store opening costs in 2012 were $3.7 million, which included costs related to the opening of 56 new stores and the relocation of 6 stores. In 2011, the Company incurred $5.7 million, which included costs related to the opening of 37 new stores, the relocation of 3 stores and the rebranding of 148 stores. Store opening costs are expensed as incurred and include costs of stores opening in future quarters.

Net interest expense was $3.0 million in the current year and $3.8 million the prior year. Interest expense is primarily comprised of interest on borrowings under the Revolving Credit Facility (see "Liquidity and Capital Resources"), related letters of credit and commitment fees, amortization of debt issuance costs, interest on finance lease obligations and equipment financing notes. The decrease in interest expense is primarily due to the reduced amount of long-term debt obligations, as the Company paid off its equipment financing notes in the current year second quarter.

The Company's effective tax rate in 2012 was 36.8%, resulting in tax expense of $22.2 million. This compares to income tax expense of $16.3 million in 2011 at an effective rate of 34.5%. The prior year benefited from discreet tax benefit items which were principally related to prior years' domestic production activities and employment tax credits.

As a result of the foregoing, the Company had net income of $38.2 million for 2012 as compared to net income of $31.0 million for 2011. The inclusion of the 53rd week in 2012 did not have a material impact on the results of operations.

2011 Compared to 2010

Sales for 2011 increased 2.8% to $1,511.9 million from $1,470.6 million for 2010. The sales increase was driven primarily by the strength of the Company's new stores. Comparable store sales, which are sales in stores that are open for at least 14 full months prior to the reporting period including eCommerce sales, increased by 0.5% in the current year. This compares to a 0.2% increase in comparable store sales in the prior year. Excluding eCommerce sales, comparable store sales were flat with the prior year. In 2011, comparable stores sales increased $7.4 million, while non-comparable store sales increased $23.1 million, driven primarily by the net increase of 27 additional stores. The 0.5% increase in comparable store sales for 2011 reflects a combination of a 1.7% increase in the number of transactions, a decrease of 1.3% in average unit retail and an increase of 0.1% in units per transaction.

Comparable store sales increase (decrease) by quarter is presented below:

                                            Fiscal Year
                                          2011       2010
                           1st Quarter      0.2 %     (0.6 )%
                           2nd Quarter      0.9       (1.6 )
                           3rd Quarter     (0.6 )     (0.3 )
                           4th Quarter      1.3        2.5
                           Total Year       0.5        0.2

On a merchandise category basis, the Company experienced comparable store sales increases in a number of key merchandise categories (i.e., those categories comprising greater than 5% of sales). Footwear, children's, cosmetics and junior sportswear all had comparable store sales gains in 2011. The Company continues to grow its cosmetics line of business through the installation of Estee Lauder and Clinique counters, as 10 new Estee Lauder and 10 new Clinique counters were opened during the fiscal year, which raised the total number of counters to 186 and 179, respectively.

On a market population basis, utilizing a ten-mile radius from each store, the Company's small market stores (those in market areas with populations of less than 50,000) outperformed stores in its mid-sized (those in market areas with populations of 50,000 to 150,000) and large markets (those in market areas with populations greater than 150,000) in 2011. Comparable store sales increased 1.1% in its small market stores, were flat in its mid-sized market stores and decreased 1.6%


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in its large market stores. The small markets continue to be the focus of the Company's new store expansion plans, as stores in these markets have consistently outperformed stores in mid-sized and large markets.

The following is a summary of the changes in the components of cost of sales between 2011 and 2010, expressed as a percent of sales:

                                                                       Increase
                                                                    (Decrease) in
                                                                    the Components
                                                                   of Cost of Sales

 Merchandise cost of sales rate                                                1.4  %
 Buying, occupancy and distribution expenses rate                             (0.3)
 Cost of sales rate                                                            1.1  %

Gross profit in 2011 was $410.6 million, a decrease of 1.5% from $416.8 million in 2010. Gross profit, as a percent of sales, was 27.2% in 2011 and 28.3% in 2010. The increase in the merchandise cost of sales rate is reflective of higher product costs in the fall, increased markdowns due to the continuing promotional environment and the Company's efforts to drive business and manage its inventory levels. The decrease in buying, occupancy and distribution expenses rate was mainly due to leverage from higher sales in the current year and lower impairment charges in the current year, partially offset by higher buying expenses in the current year, which includes the Steele's buying expenses, and higher distribution expenses.

SG&A expenses in 2011 increased by $3.0 million, or 0.8%, to $353.8 million from $350.8 million in 2010. As a percent of sales, SG&A expenses decreased to 23.4% in 2011 from 23.9% in 2010. The increase in SG&A expenses in 2011 was primary due to increases in expenses related to eCommerce and Steele's, while operating 27 net additional stores. The SG&A rate decreased 50 basis points, which was primarily due to improved leveraging of store expenses and higher yield on the private label credit card.

Store opening costs in 2011 were $5.7 million, which included costs related to the opening of 37 new stores, the relocation of 3 stores and the rebranding of 148 stores. In 2010, the Company incurred $3.2 million in store opening costs related to 33 new stores, the relocation of 2 stores and the rebranding of 26 stores. Store opening costs are expensed as incurred and include costs of stores opening in future quarters.

Net interest expense was $3.8 million in 2011 as compared to $3.9 million in 2010. Interest expense is primarily comprised of interest on borrowings under the Company's Revolving Credit Facility, related letters of credit and commitment fees, amortization of debt issue costs and interest on financing lease obligations and equipment financing notes. The decrease in interest expense is primarily due to a lower average amount outstanding on equipment financing notes, partially offset by higher borrowings under the Company's Revolving Credit Facility (see "Liquidity and Capital Resources"). The weighted average balance on the Company's equipment financing notes outstanding was $23.9 million in 2011 as compared to $37.1 million in 2010.

The Company's effective tax rate in 2011 was 34.5%, resulting in tax expense of $16.3 million. This compares to income tax expense of $21.3 million in 2010 at an effective rate of 36.1%. The current year benefited from domestic production activities and additional employment tax credits.

As a result of the foregoing, the Company had net income of $31.0 million for 2011 as compared to net income of $37.6 million for 2010.

Seasonality and Inflation

Historically, the Company's business is seasonal and sales are traditionally lower during the first three quarters of the fiscal year (February through October) and higher during the last quarter of the fiscal year (November through January). The fourth quarter usually accounts for slightly more than 30% of the Company's annual sales, with the other quarters accounting for approximately 22% to 24% each. Working capital requirements fluctuate during the year and generally reach their highest


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levels during the third and fourth quarters. The Company does not believe that inflation has had a material effect on its results of operations. However, there can be no assurance that the Company's business will not be affected by inflation in the future.

The following table shows quarterly information (unaudited) for the Company (in thousands, except per share amounts):

                                                            Fiscal Year 2012
                                               Q1            Q2            Q3            Q4
Net sales                                  $ 365,694     $ 381,624     $ 370,583     $ 527,899
Gross profit                                  93,839       115,174        79,864       170,898
Net (loss) income                               (418 )      11,662        (8,858 )      35,793
  Adjusted net income (loss) (non-GAAP)
(1)                                            1,479        11,662        (7,992 )      37,410

Basic (loss) earnings per common share     $   (0.01 )   $    0.37     $   (0.28 )   $    1.10
Diluted (loss) earnings per common share       (0.01 )        0.37         (0.28 )        1.09
  Adjusted diluted earnings (loss) per
common share (1)                                0.05          0.37         (0.25 )        1.14

Basic weighted average shares                 30,536        31,010        31,558        31,957
Diluted weighted average shares               30,536        31,225        31,558        32,376

                                                            Fiscal Year 2011
                                               Q1            Q2            Q3            Q4
Net sales                                  $ 346,483     $ 352,832     $ 333,508     $ 479,096
Gross profit                                  85,220       103,857        71,163       150,360
Net (loss) income                               (461 )      10,013       (11,306 )      32,714

Basic (loss) earnings per common share     $   (0.01 )   $    0.29     $   (0.36 )   $    1.06
Diluted (loss) earnings per common share       (0.01 )        0.29         (0.36 )        1.05

Basic weighted average shares                 36,279        34,236        31,139        30,432
Diluted weighted average shares               36,279        34,635        31,139        30,603

(1) See Item 6, Selected Financial Data, for discussion of this non-GAAP financial measure and reconciliation to the most directly comparable U.S. GAAP financial measure.

Liquidity and Capital Resources

The Company's liquidity is currently provided by (i) existing cash balances,
(ii) operating cash flows, (iii) normal trade credit terms from the vendor and factor community, and (iv) its Revolving Credit Facility. The Company's primary cash requirements are for capital expenditures related to new stores, store relocations and remodeling and seasonal and new store inventory purchases.

Key components of the Company's cash flows are summarized below (in thousands):

                                               Fiscal Year
                                    2012           2011          2010
Net cash provided by (used in):
Operating activities              $  75,981     $   78,055     $  77,875
Investing activities                (49,439 )      (45,318 )     (36,459 )
Financing activities                (27,226 )     (103,465 )     (45,781 )

Operating Activities

During 2012, the Company generated $76.0 million in cash from operating activities. Net income, adjusted for non-cash expenses, provided cash of approximately $106.3 million. Changes in operating assets and liabilities used net cash of


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approximately $34.5 million, which included a $66.0 million increase in merchandise inventories primarily to support the higher number of stores open and strategic investments in the current year to support various sales initiatives previously discussed above and an increase in other assets of $4.8 million partially offset by an increase in accounts payable and other liabilities of $36.2 million. Additionally, cash flows from operating activities included construction allowances from landlords of $4.2 million, which funded a portion of the capital expenditures related to store leasehold improvements in new and relocated stores.

During 2011, the Company generated $78.1 million in cash from operating activities. Net income, adjusted for non-cash expenses, provided cash of approximately $107.5 million. Changes in operating assets and liabilities used net cash of approximately $33.9 million, which included a $22.4 million increase in merchandise inventories, an increase in other assets of $4.4 million and a $7.1 million decrease in accounts payable and other liabilities. Additionally, cash flows from operating activities also included construction allowances from landlords amounting to $4.5 million, which funded a portion of the capital expenditures related to store leasehold improvements in new and relocated stores.

During 2010, the Company generated $77.9 million in cash from operating activities. Net income, adjusted for non-cash expenses, provided cash of approximately $110.3 million. Changes in operating assets and liabilities used net cash of approximately $37.9 million, which included a $19.1 million increase in merchandise inventories due to a net increase of 28 stores and a more aggressive approach in stocking inventory in 2010, an increase in other assets of $8.2 million mainly due to an increase in vendor allowances and a $10.6 million decrease in accounts payable and other liabilities, which included a decrease in merchandise payables and a decrease in pension liability.
Additionally, cash flows from operating activities also included construction allowances from landlords amounting to $5.5 million, which funded a portion of the capital expenditures related to store leasehold improvements in new and relocated stores.

Investing Activities

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