Thu 06/18/2020 18:56 PM
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Relevant Documents:
10-K
8-K

Stein Mart Inc., a Jacksonville, Fla.-based off-price retailer of designer and name-brand apparel, home decor, accessories and shoes, is exploring sources of financing for liquidity alongside other strategic alternatives, including a sale, following the termination of its previously announced acquisition by Kingswood Capital Management in April and a qualified audit for fiscal 2019 that resulted in an waiver as part of a credit agreement amendment restricting borrowing capacity under its ABL revolver.

Stein Mart in January entered into an agreement to be acquired by Kingswood Capital. The company and Kingswood in April agreed to terminate the deal “in response to the unpredictable economic conditions resulting from the global health crisis caused by the coronavirus (COVID-19) pandemic, uncertainty regarding Stein Mart’s ability to satisfy the conditions to closing, and the substantial expense to Stein Mart of soliciting shareholder approval for a transaction which is unlikely to close.”

The company is working with PJ Solomon as financial advisor, according to sources. The company is also working with Clear Thinking Group as financial advisor “with respect to budgets, projections, financial information and other information” as well as “the financial condition or operations” of Stein Mart, according to its amended credit agreement. Foley & Lardner is corporate counsel, according to a Foley spokesperson. PJ Solomon and Foley advised a special committee of Stein Mart independent directors on the take-private transaction by Kingswood.

Stein Mart operates 283 stores across 30 states. A representative operational footprint is shown below:
 
(Click HERE to enlarge.)

On March 18, Stein Mart temporarily closed all of its stores in response to the pandemic. The company began reopening stores on April 23 and as of June 15, had opened “substantially all” of its stores with limited operating hours.

The company received a going-concern qualification from its independent registered public accounting firm in its audited financial statements for the year ended Feb. 1 and on June 11 entered into a fifth amendment to its credit agreement that, among other things, waived the technical default on the reporting requirement covenant.

The amendment added a financial maintenance covenant that requires the company to ensure that availability under the $240 million ABL facility is never less than the greater of 5% of the “Combined Loan Cap,” defined as the lesser of the borrowing base and the revolving commitments, plus outstanding amounts under the company’s term loan, and $10 million. After the amendment’s “Accommodation Period” expires on Oct. 3, the required availability increases to the greater of 10% of the combined loan cap and $20 million.

In its 10-K filed June 15, the company disclosed that availability was $54 million as of Feb. 1, implying that the company’s borrowing base is likely around $170 million, given $107 million of outstanding revolving borrowings and $7 million of outstanding letters of credit, according to Covenants by Reorg.

As such, although availability under the ABL facility was $54 million as of Feb. 1, given the availability covenant, the company likely has access to about $44 million of revolving commitments. Following the accommodation period, availability would be reduced to about $34 million.

As of Feb. 1, the company had $9.5 million in cash and cash equivalents.

On March 23, the company executed a promissory note due Sept. 30 under which it borrowed $9.9 million on the cash surrender value of its life insurance policies at a rate of 3.56% per annum, which it said it would use to pay down borrowings under the existing credit agreement.

An illustrative capital structure is shown below:
 

In an effort to prevent mitigate the pandemic’s impact on its cash flow, the company said in its June 15 10-K that it took a variety of actions, including:
 
  • Targeting reductions in discretionary operating expenses such as advertising and payroll expenses, including furloughing a significant number of its employees and temporarily reducing the payroll of remaining employees;
     
  • Reducing capital expenditures;
     
  • Reducing merchandise receipts;
     
  • Working with vendors and landlords to negotiate temporary terms; and
     
  • Utilizing funds available under its revolver and third promissory note.

The company leases all of its retail store locations, support facilities and certain equipment under operating leases. The store leases have varying terms and are generally for 10 years with the option to extend the lease for at least two more years.

The maturity of the company’s lease liabilities, as of Feb. 1, is shown below:
 
(Click HERE to enlarge.)

In fiscal year 2019, adjusted EBITDA fell 29% year over year to $28 million on a 3% year-over-year decline to $1.22 billion, largely due to fewer stores operating during the year and a 1.4% decrease in comparable sales. The company closed four stores in 2019 and two more stores in February 2020.

On June 3, the company released sales and preliminary operating results for the 2020 first quarter ended May 2, reporting a 57.3% year-over-year decline in net sales. The company plans to report full results no later than June 30.

Founded in 1908, as a single store in Greenville, Miss., Stein Mart was organized in Mississippi before merging into a Florida corporation in 1992. The company also has an online retail selling site, consolidation centers for its logistics network and store distribution centers. As of May 30, the company had about 8,400 employees, of which roughly 5,200 were furloughed.

Stein Mart did not immediately respond to a request for comment. PJ Solomon declined to comment.

--Millie Dent
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