Quick Win By the Algorithm: SMRT Outlook Improves, Stock Rallies Past $1 Point

Quick Win by the Algorithm: SMRT

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“We are encouraged by the sales trend we saw in February and early March driven by very strong regular-priced selling, particularly in our warm weather and resort markets where spring selling begins. These leading indicators give us confidence that comparable sales trends will dramatically improve in the first quarter as spring regular-price selling builds in other markets. With improved first quarter comparable sales, our gross profit expansion and continued expense control, we expect first-half operating income in excess of $8 million, most of which will occur in the first quarter.”

–Hunt Hawkins, CEO

On Wednesday, March 14th, 2018, Stein Mart (SMRT) announced their financial results for the fourth quarter and fiscal year ended February 3, 2018. Following their Earnings Announcement held on Wednesday, SMRT’s stock jumped from $0.79 to $2.15 per share, outperforming the market by more than 110.16%. Upon examining the drivers behind this impressive growth that occurred within the past two weeks, the most recent financial earnings report published by Stein Mart provides the following highlights and updates that shed light on the stock event:

  • A week ago, Stein Mart had one foot in the grave with the stock trading at $0.65 or 3% of sales and increasing losses.
  • Earnings announced Wednesday night showed a huge improvement in every aspect of the business and Stein Mart is now running at a $26 million free cash flow rate.
  • Q4 operating income of $4.1 million compared to operating loss of $8.1 million in 2016
  • Q4 adjusted operating income of $7.3 million grew $14.3 million over 2016 and gross profit expanding 380 basis points
  • Year-end borrowings $26 million lower than last year

Stein Mart announced their operating income for the fourth quarter of 2017 was $4.1 million compared to an operating loss of $8.1 million in Q4 of 2016. Fourth quarter results include non-cash pretax asset impairment charges of $3.2 million in 2017 compared to $1.2 million in 2016. Excluding these charges, adjusted operating income for the fourth quarter was $7.3 million, up $14.3 million from the adjusted operating loss of $7.0 million in 2016. Net loss for the fourth quarter was $0.4 million or $0.01 per diluted share compared to a net loss of $4.9 million or $0.11 per diluted share in 2016. In addition to the asset impairment charges mentioned  above, fourth quarter 2017 results also include $2.2 million higher income tax expense related to the Tax Act. Excluding these expenses, fourth quarter adjusted net income was $3.7 million or $0.08 per diluted share in 2017 compared to adjusted net loss of $4.2 million or $0.09 diluted loss per share in 2016. Adjusted earnings before interest, income taxes, depreciation and amortization (“EBITDA”) for the fourth quarter was $15.4 million compared to $2.1 million in 2016.

2017 was a year of transition that positions us for the future. We have updated our assortment and improved inventory productivity through reduced inventory levels, changes to receipt flow and better markdown practices. We also launched a new advertising campaign, cut expenses and capital spending, and expanded e-Commerce by adding ship-from-store fulfillment,” said Hunt Hawkins, CEO. “These changes allowed us to achieve meaningful fourth quarter adjusted operating income that grew $14.3 million from last year driven by gross profit expansion and even greater growth in our merchandise margins.”

Total sales for the fourth quarter of 2017 decreased 0.2 percent to $384.9 million, while comparable store sales decreased 5.4 percent. Total sales for the year decreased 3.1% to $1.32 billion for 2017, while comparable store sales decreased 6.2%. Gross profit for the fourth quarter of 2017 was $102.4 million or 26.6% of sales compared to $87.9 million or 22.8% of sales in 2016. The 380 basis point improvement in the gross profit rate was primarily due to a higher merchandise margin rate from reduced markdowns and better inventory productivity. Selling, general and administrative (“SG&A”) expenses for the fourth quarter of 2017 were $98.3 million compared to $96.1 million in 2016, increasing $2.9 million for the quarter.

First Half 2018 Outlook for SMRT:

SMRT expects the following factors to influence their business in the first half of 2018 compared to the first half of 2017:

  • We anticipate flat to low single-digit increases in comparable sales driven by much higher regular-price selling
  • We expect gross profit expansion of approximately 200 basis points
  • SG&A expenses are expected to be slightly lower, inclusive of higher ecommerce and advertising expenses
  • Interest expense is estimated to be $2 million higher

Thus, based on the above factors, we can expect operating income in the first-half of 2018 to be in excess of $8 million compared to an operating loss of $11.5 million in 2016. The growth factors mentioned above is enough for investors to realize the magnitude of such a turnaround. It seemingly feels like change occurring so fast for a firm so rooted in the ground, practically in the grave. In a typical turnaround, the upside is quite large due to to low expectations. Expectations then rise as upgrades come in, especially when they beat expectations (or lack thereof, in the case with Stein Mart investors, who had low standards for the firm), as it had beat investors’ expectations this time around. As noted above, SMRT showed an operating loss of $8.1 million in Q4 2o16, and immediately rebounded one year later demonstrating immense growth, boasting operating income in Q4 of 2017 totaling $4.1 million. However things to watch out for: a highly leveraged balance sheet, as a result of an ill-advised large special dividend a few years ago. Additionally, liabilities were 8.96 times tangible net worth on February 3, 2018.

As such, it can be noted that due the, SMRT’s stock increase of 110.16% as compared to the S&P500 fell in accordance with the algorithms predictions which had accurately predicted the said rise using artificial intelligence and machine learning prior to the earnings report announcements given on Wednesday. Such an impressive stock hike outperformed the market by more than 110% on average over the past week.

On March 18th, 2018. I Know First issued a bullish 14-day forecast for SMRT stock. The forecast illustrated a signal of 23.75 and a predictability of 0.32. In accordance with the forecast, SMRT’s stock returned 110.16% over this two week period, highlighting the accuracy of the prediction produced by the I Know First algorithm.

Current I Know First subscribers received this bullish SMRT forecast on March 18th, 2018.

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How to interpret this diagram

Stein Mart, Inc. (NASDAQ: SMRT), incorporated on October 14, 1983, is a national retailer offering the fashion merchandise, service and presentation of a department or specialty store. The Company offers apparel for women and men, as well as accessories, shoes and home fashions. The Company’s target customers are women over 45 years old. The Company operates approximately 280 stores in over 30 states and an Internet store. Its stores are located in the Northeast, Midwest, Southeast, Texas and the Southwest. It is concentrated in the Southeast and Texas where over 180 of its stores are located. The Company’s stores offer a range of services, such as merchandise locator service, a Preferred Customer program, co-branded and private label credit card programs and electronic gift cards. The Company’s merchants purchase products from approximately 1,200 vendors. Its shoe department inventory is supplied and owned by DSW, Inc. The Company leases all of its store locations, generally for approximately 10 years with options to extend the lease term for over two or five year periods.

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