UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM10-Q

For the quarterly period ended May 5,August 4, 2018

or

For the transition period from                to                

Commission file number0-20052

STEIN MART, INC.

(Exact name of registrant as specified in its charter)

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

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 RegulationS-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 whether the registrant is a large accelerated filer, an accelerated filer, anon-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule12b-2 of the Exchange Act.

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. [  ]

Indicate by check mark whether the registrant is a shell company (as defined in Rule12b-2 of the Exchange Act). Yes [  ] No [X]

The number of shares outstanding of the Registrant’s common stock as of June 6,August 28, 2018, was 47,871,360.47,928,450.

Stein Mart, Inc.

Table of Contents

Stein Mart, Inc.

Condensed Consolidated Balance Sheets

(Unaudited)

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

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

Stein Mart, Inc.

Condensed Consolidated Statements of IncomeOperations

(Unaudited)

(In thousands, except per share data)

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

Stein Mart, Inc.

Condensed Consolidated Statements of Comprehensive (Loss) Income

(Unaudited)

(In thousands)

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

Stein Mart, Inc.

Condensed Consolidated Statements of Cash Flows

(Unaudited)

(In thousands)

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

Stein Mart, Inc.

Notes to Condensed Consolidated Financial Statements

(Unaudited)

1. Basis of Presentation

The accompanying Condensed Consolidated Financial Statements (Unaudited) have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) for interim financial information and with the instructions to Form10-Q and Article 10 of RegulationS-X. Accordingly, they do not include all of the information and footnotes required by GAAP for annual audited financial statements. In our opinion, all adjustments (consisting primarily of normal and recurring adjustments) considered necessary for a fair presentation have been included. Due to the seasonality of our business, results for any quarter are not necessarily indicative of the results that may be achieved for a full fiscal year. These Condensed Consolidated Financial Statements (Unaudited) should be read in conjunction with the audited Consolidated Financial Statements included in our Annual Report on Form10-K for the year ended February 3, 2018, filed with the Securities and Exchange Commission (“SEC”) on May 4, 2018.

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

Revenue Recognition

In May 2014, the FASBFinancial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”)No. 2014-09,Revenue from Contracts with Customers (Topic 606)(“ASUNo. 2014-09”). This update provides a single comprehensive model for entities to use in accounting for revenue arising from contracts with customers and supersedes most current revenue recognition guidance, including industry-specific guidance. ASUNo. 2014-09 requires an entity to recognize revenue when it transfers promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. We adopted this ASU on February 4, 2018, for all revenue contracts with our customers using the full retrospective approach and increased retained earnings as of January 28, 2017, by less than $0.1 million as we now recognize Ecommerce sales when orders are delivered to the carrier and no longer reserve for orders in transit. We changed the balance sheet presentation of our sales return liability. Prior to the adoption of ASUNo. 2014-09, our sales return liability was recorded as a net liability.liability on the Condensed Consolidated Balance Sheets (Unaudited). We now recognize a gross return liability for the sales amounts expected to be refunded to customers and a corresponding asset for the recoverable cost of the merchandise expected to be returned by customers.customers in other current assets and other current liabilities on the Condensed Consolidated Balance Sheets (Unaudited). Other changes relate primarily to the presentation of revenue. Revenue associated with our credit card program and breakage revenue has been retrospectively reclassedreclassified to present the revenue in other revenues, rather than as an offset to selling, general and administrative expenses on the Condensed Consolidated Statements of Income (Unaudited) for all periods presented.

Revenue from sales of our merchandise is recognized at the time of sale net of any returns, discountsand percentage-off coupons. Our Ecommerce operation records revenue as orders are fulfilled and provided to a carrier for delivery. Shipping and handling fees charged to customers are also included in total net sales with corresponding costs recorded as cost of goods sold as they are considered a fulfillment cost. 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 on the Condensed Consolidated Balance Sheets (Unaudited) until paid. Our shoe department and vintage luxury handbag department inventoryinventories are each owned by separate single suppliers under supply agreements. Our commissioncommissions from the sales in these areas isare included in net sales inon the Condensed Consolidated Statements of IncomeOperations (Unaudited).

We offer gift and merchandise return cards to our customers. Some cards are electronic and none have expiration dates. At the time gift cards are sold, the issuance is recorded as a liability to customers, and no revenue is recognized. At the time merchandise return cards are issued for returned merchandise, the sale is reversed and a liability to customers is recorded. These card liabilities are reduced and sales revenue recognized when they are redeemed for merchandise. Card liabilities are included in accrued expenses and other current liabilities in the Condensed Consolidated Balance Sheets (Unaudited).

Our gift and merchandise return cards may not ultimately be redeemed either in full or partially. We account for this “breakage” of unused amounts as revenue in proportion to the pattern of rights exercised by the customer. With the adoption of ASUNo. 2014-09,Revenue from Contracts with Customers(Topic 606), breakage revenue is recorded within other revenue in the Condensed Consolidated Statements of IncomeOperations (Unaudited). During the 13 weeks ended May 5,August 4, 2018 and AprilJuly 29, 2017, we recognized $0.6$0.3 million and $0.3$0.2 million, respectively, of breakage revenue on unused gift and merchandise return cards. During the 26 weeks ended August 4, 2018 and July 29, 2017, we recognized $0.9 million and $0.6 million, respectively, of breakage revenue on unused gift and merchandise return cards.

Credit Card

We offerco-branded and private label credit cards under the Stein Mart brand. These cards are issued by Synchrony Bank (“Synchrony”). Synchrony extends credit directly to card holders, provides all servicing for the credit card accounts and bears all risk of credit and fraud losses.

We receive royalty revenue from Synchrony based on card usage in our stores and at other retailers for the Stein Mart Mastercard. We also receive revenues from them for new accounts and gainsharinggain share based on the profitability of the overall program. With the adoption of ASUNo. 2014-09, Revenue from Contracts with Customers (Topic 606), this creditCredit card revenue is

Stein Mart, Inc.

Notes to Condensed Consolidated Financial Statements - Continued

(Unaudited)

recorded within other revenue in the Condensed Consolidated Statements of IncomeOperations (Unaudited). Prior to the adoption of ASUNo. 2014-09, these amounts were recorded as an offset to selling, general and administrative expenses. These revenues are recorded as they are earned based on the occurrence of the various program activities and represent the majority of other revenue.

Once a card is activated, the card holders are eligible to participate in the credit card rewards program, which provides for an incentive to card holders in the form of reward points for which certificates are issued in $10 increments, which is equivalent to 1,000 points. Points are valued at the stand alonestand-alone selling price of the certificates issued. We defer a portion of our revenue for loyalty points earned by customers using theco-branded and private label cards and recognize the revenue as the certificates earned are used to purchase merchandise by our customers. This revenue is recorded within other revenue in the Condensed Consolidated Statements of Operations (Unaudited). Stein Mart card holders also receive special promotional offers and advance notice ofin-store sales events.

Stein Mart, Inc.

Notes to Condensed Consolidated Financial Statements - Continued

(Unaudited)

Adjustments to Previously Reported Financial Statements

The following tables set forth the adjustments made to our financial statements for the adoption of ASUNo. 2014-09 (in thousands):

Condensed Consolidated Balance Sheets

Condensed Consolidated Statements of Income

		February 3, 2018
		As Reported				Adjustment				As Adjusted
Prepaid expenses and other current assets			$              24,194				$             2,426				$              26,620
Accrued expenses and other current liabilities			76,058				2,395				78,453
Retained deficit			(7,949	)			31				(7,918)
		July 29, 2017
		As Reported				Adjustment				As Adjusted
Prepaid expenses and other current assets			$              32,200				$             3,515				$               35,715
Accrued expenses and other current liabilities			69,418				3,484				72,902
Retained earnings			7,040				31				7,071
Condensed Consolidated Statements of Operations
		13 Weeks Ended July 29, 2017
		As Reported				Adjustment				As Adjusted
Other revenue			$                        -				$             3,498				$                3,498
Selling, general and administrative expenses			86,201				3,498				89,699
		26 Weeks Ended July 29, 2017
		As Reported				Adjustment				As Adjusted
Other revenue			$                        -				$             7,212				$                 7,212
Selling, general and administrative expenses			171,695				7,212				178,907
Condensed Consolidated Statements of Cash Flows
		26 Weeks Ended July 29, 2017
		As Reported				Adjustment				As Adjusted
Prepaid expenses and other current assets			$            (1,951)				$              (706)				$               (2,657)
Accrued expenses and other current liabilities			(3,757)				706				(3,051)

Stein Mart, Inc.

Notes to Condensed Consolidated Financial Statements - Continued

(Unaudited)

Revenue

The following table sets forth our revenue by type of contract (in thousands):

The following table sets forth the gross up of the sales return reserve (in thousands):

The following table sets forth the contract liabilities and their relationship to revenue (in thousands):

Contract liabilities include consideration received for gift card and loyalty related performance obligations which have not been satisfied as of the dates presented above.

The following table sets forth a rollforward of the amounts included in contract liabilities for the periods presented (in thousands):

Stein Mart, Inc.

Notes to Condensed Consolidated Financial Statements - Continued

(Unaudited)

Accrued Expenses and Other Current Liabilities

The following table sets forth the major components of accrued expenses and other current liabilities (in thousands):

Recent Accounting Pronouncements

In March 2016, the Financial Accounting Standards Board (“FASB”) issued ASU No.2016-04, Liabilities-Extinguishments of Liabilities (Subtopic405-20): Recognition of Breakage for Certain Prepaid Stored-Value Products. The amendments in the ASU are designed to provide guidance and eliminate diversity in practice of accounting for derecognition of prepaid stored-value product liabilities. Typically, a prepaid stored-value product liability is to be derecognized when it is probable that a significant reversal of the recognized breakage amount will not subsequently occur. This is when the likelihood of the product holder exercising its remaining rights becomes remote. This estimate shall be updated at the end of each period. The amendments are effective for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years. We adopted this ASU on February 4, 2018, and the adoption did not have a material effect on our financial condition, results of operations or cash flows.

In February 2016, the FASB issued ASUNo. 2016-02, Leases (Topic 842). This update requires organizations to recognize lease assets and lease liabilities on the balance sheet and also disclose key information about leasing arrangements. The main provisions of the new standard include: clarifications to the definitions of a lease, components of leases and criteria for determining lease classification; requiring virtually all leased assets, including operating leases and related liabilities, to be reflected on the lessee’s balance sheet; and expanding and adding to the required disclosures for lessees. This ASU is effective for annual reporting periods beginning on or after December 15, 2018, and interim periods within those annual periods. Earlier application is permitted for all entities as of the beginning of an interim or annual period. This guidance was additionally updated by ASUNo. 2018-11 in July 2018. This update, among other things, added a transition option for lessees. Under the transition option, entities can choose to continue to apply the legacy guidance and make only annual disclosures for the comparative periods or, for those who elect the transition option, can recognize a cumulative effect adjustment to the opening balance of retained earnings in the period of adoption rather than the earliest period presented. The optional practical expedient allows lessees to combinenon-lease and associated lease components if certain criteria are met. We are in the process of evaluating our lease portfolio and identifying what additional data will be needed to comply withintegrating the new standard. We have identified aportfolio into our software application suited tothat will track and account for leases under the new standard. We plan to adoptASU 2016-02 these ASUs in fiscal 2019 and are currently evaluating the transition approach and the overall effect the adoption of this ASU will have on our financial condition, results of operations and cash flows. We currently believe the adoption of this ASU will have a significant effect on our Consolidated Balance Sheets due to the addition of our applicable leased assets and related liabilities. We do not believe the adoption of this ASU will have a significant effect on our results of operations as the depreciation and interestlease expense under the new standard will approximate our rent expense as it is currently being recorded.

In August 2018, the FASB issued ASU No. 2018-15,Intangibles—Goodwill and Other— Internal-Use Software (Subtopic 350-40).This update provides additional guidance to ASU No. 2015-05,Intangibles—Goodwill and Other—Internal-Use Software (Subtopic 350-40), which was issued in April 2015. The amendments in this ASU align the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software (and hosting arrangements that include an internal use software license). This ASU is effective for annual reporting periods beginning on or after December 15, 2019, and interim periods within those annual periods. We are in the process of evaluating the effect that this ASU will have on our financial condition, results of operations and cash flows.

2. Shareholders’ Equity

Dividends

During the 1326 weeks ended May 5,August 4, 2018, there were no cash dividends declared. We paid $0.1 million in accrued dividends on restricted shares that vested during the period. During the 1326 weeks ended AprilJuly 29, 2017, we paid aone quarterly cash dividend of $0.075 per common share on April 14, 2017.

Stein Mart, Inc.

Notes to Condensed Consolidated Financial Statements - Continued

(Unaudited)

Stock Repurchase Plan

During the 13 weeks ended May 5,August 4, 2018, we repurchased 45,1033,306 shares of our common stock at a total cost of less than $0.1 million. During the 13 weeks ended AprilJuly 29, 2017, we repurchased 56,7536,733 shares of our common stock at a total cost of less than $0.1 million. During the 26 weeks ended August 4, 2018, we repurchased 48,409 shares of our common stock at a total cost of less than $0.1 million. During the 26 weeks ended July 29, 2017, we repurchased 63,486 shares of our common stock at a total cost of approximately $0.2 million. Stock repurchases were for tax withholding amounts due on employee stock awards and during 2018 and 2017, included no shares purchased on the open market under our previously authorized stock repurchase plan. As of May 5,August 4, 2018, there are 370,195366,889 shares that can be repurchased pursuant to the Board of Directors’ current authorization.

3. Earnings per Share

Our restricted stock awards granted in 2013 containnon-forfeitable rights to dividends and, as such, are considered participating securities. Participating securities are to be included in the calculation of earnings per share under thetwo-class method. In applying thetwo-class method, income is allocated to both common shares and participating securities based on their respective weighted-average shares outstanding for the period.

Stein Mart, Inc.

Notes to Condensed Consolidated Financial Statements - Continued

(Unaudited)

The following table sets forth the calculation of basic and diluted (loss) earnings per common share (in thousands, except per share data):

Diluted weighted-average shares outstanding exclude approximately 3.72.3 million and 4.4 million shares during the 13 weeks ended August 4, 2018 and July 29, 2017, respectively, which are anti-dilutive for the periods presented. Diluted weighted-average shares outstanding exclude approximately 3.0 million and 3.9 million shares during the 1326 weeks ended May 5,August 4, 2018 and AprilJuly 29, 2017, respectively, which are anti-dilutive for the periods presented. These shares are comprised of a mix of stock options, performance awards and restricted stock. Stock 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. Restricted stock and performance shares excluded were shares that were anti-dilutive as calculated using the treasury stock method.

Stein Mart, Inc.

Notes to Condensed Consolidated Financial Statements - Continued

(Unaudited)

4. Debt

The following table sets forth our debt (in thousands):

Revolving Credit Facility and Equipment Term Loan

On February 3, 2015, we entered into a $250.0 million senior secured revolving credit facility pursuant to a second amended and restated credit agreement (the “Credit Agreement”) with Wells Fargo Bank (“Wells Fargo”) that will mature in February 2020 (the “Revolving Credit Facility”) and a secured $25.0 million master loan agreement with Wells Fargo Equipment Finance, Inc. (the “Equipment Term Loan”) with an original maturity in February 2018. Borrowings under the Revolving Credit Facility were initially used for a special dividend but are subsequently being used for working capital, capital expenditures and other general corporate purposes. During 2015, debt issuance costs of $0.4 million were associated with the Revolving Credit Facility and the Equipment Term Loan were capitalized inLoan. Debt issuance costs associated with the amount of $0.4 million and have been fully amortized.

Stein Mart, Inc.

Notes to Condensed Consolidated Financial Statements - Continued

(Unaudited)

Revolving Credit Facility are being amortized over its respective term. We repaid the Equipment Term Loan in full on January 22, 2018.2018, at which time the associated debt issuance costs were fully amortized.

On February 19, 2018, we entered into Amendment No. 1 (the “Credit Agreement Amendment”) to the Credit Agreement with Wells Fargo. The Credit Agreement Amendment provides for, among other things, an Accommodation Period (as defined in the Credit Agreement Amendment) during which we were not required to meet the Fixed Charge Coverage Ratio (as defined in the Credit Agreement). This change permitted us to borrow the full amount of the then applicable borrowing base until we delivered our financial statements for the Measurement Period (as defined in the Credit Agreement) ended February 28, 2018. Pursuant to the Credit Agreement Amendment, a Cash Dominion Event (as defined in the Credit Agreement Amendment) has occurred as of the effective date of the Credit Agreement Amendment and at all times thereafter.

As a result of the Cash Dominion Event, all of our cash receipts are swept daily to repay outstanding borrowings under the Credit Agreement. We manage our cash on a daily basis and borrow against the Credit Agreement based on our daily cash disbursement needs. As long as we remain within the terms of the Credit Agreement, the bank is obligated to allow us to draw up to our borrowing availability. The Credit Agreement matures in February 2020; however, as a result of the Cash Dominion Event, the amount outstanding under the Credit Agreement has been classified as a short-term obligation.

On March 14, 2018, we entered into Amendment No. 2 (the “Second Credit Agreement Amendment”) to the Credit Agreement with Wells Fargo. The Second Credit Agreement Amendment provides for, among other things, the following: (1) the $25.0 million TrancheA-1 Revolving Loans (as defined in the Second Credit Agreement Amendment) shall have been repaid in full with the proceeds of the Term Loan (as defined below); (2) the entry into the Intercreditor Agreement (as defined below); and (3) certain other modifications and updates to coordinate the Revolving Credit Facility with the Term Loan.

The total amount available for borrowings under the Credit Agreement is the lesser of $225.0 million or 100 percent of eligible credit card receivables and the net recovery percentage of inventories less reserves. On May 5,August 4, 2018, in addition to outstanding borrowings under the Credit Agreement, we had $7.9 million of outstanding letters of credit and our unused availability under the Credit Agreement was $40.0$43.3 million.

The Credit Agreement contains customary representations and warranties, affirmative and negative covenants (including the requirement of a 1.0 to 1.0 consolidated Fixed Charge Coverage Ratio upon the occurrence and during the continuance of any Covenant Compliance Event, as defined in the Credit Agreement), and events of default for facilities of this type and is cross-collateralized and cross-defaulted. Collateral for the Revolving Credit Facility and the Equipment Term Loan consists of substantially all of our personal property. Wells Fargo

Stein Mart, Inc.

Notes to Condensed Consolidated Financial Statements - Continued

(Unaudited)

has a first lien on all collateral other than equipment. Wells Fargo Equipment Finance had a first lien on equipment through January 22, 2018, when we repaid the Equipment Term Loan in full.

Borrowings under the Credit Agreement are either Base Rate Loans or London Interbank Offered Rate (“LIBOR”) loans. LIBOR Loans bear interest equal to the adjusted LIBOR plus the applicable margin (125 to 175 basis points) depending on the quarterly average excess availability. Base Rate Loans bear interest equal to the highest of (a) the Federal Funds Rate plus 0.50 percent, (b) the adjusted LIBOR plus 1.00 percent, or (c) the Wells Fargo “prime rate,” plus the Applicable Margin (25 to 75 basis points).

The weighted average interest rate for the amount outstanding under the Credit Agreement was 3.474.00 percent as of May 5,August 4, 2018.

Promissory Note

On February 2, 2018, we executed a promissory note under which we borrowed approximately $13.7 million (the “Promissory Note”) from SunTrust Bank (the “Trustee”) in its capacity as the trustee under a trust agreement (the “Trust Agreement”) dated September 1, 1999. The trust established by the Trust Agreement (the “Trust”) holds certain whole life insurance policies related to our executive deferred compensation plans. The Trustee obtained loans from the insurance policies held in the Trust in an amount not less than the amount of the Promissory Note. The Promissory Note is a short-term obligation and the proceeds were used to pay down borrowings under the existing Credit Agreement which provided additional availability under that agreement.

The Promissory Note hashad a fixed interest rate of 3.58 percent per annum and an original maturity date of April 1, 2018. On March 7, 2018, we executed an amendment to the Promissory Note under which the Trustee extended the maturity date of the note from April 1, 2018, to July 1, 2018 (the “Maturity Date”). The amendment did not alter the short-term nature of the Promissory Note. The Promissory Note maycould be prepaid in whole or in part at any time. All unpaid principal and accrued interest on the Promissory Note willwould have become due and payable on the

Stein Mart, Inc.

Notes to Condensed Consolidated Financial Statements - Continued

(Unaudited)

Maturity Date. The Trustee maycould offset payments due under the Promissory Note against amounts we arewould otherwise be entitled to withdraw from the Trust under the terms of the Trust Agreement. On June 29, 2018, we repaid the outstanding balance of the Promissory Note.

On July 31, 2018, we executed a second promissory note from SunTrust Bank for $13.0 million which carries a fixed interest rate of 3.58 percent per annum and an original maturity date of September 10, 2018. This note is under the same terms as the Promissory Note executed on February 2, 2018.

Term Loan

On March 14, 2018, we entered into a Term Loan Credit Agreement with Gordon Brothers Finance Company, as administrative agent (in such capacity, the “Term Loan Agent”), and Gordon Brothers Finance Company, LLC, as lender (the “Term Loan Agreement”). The Term Loan Agreement provided for a term loan in the amount of $50.0 million (the “Term Loan”) and paid in full the existing $25.0 million TrancheA-1 Revolving Loan (as defined in the Credit Agreement) under the Credit Agreement. Debt issuance costs associated with the Term Loan were capitalized in the amount of $0.8$0.9 million and will be amortized over the term of the loan.Term Loan. The net proceeds of $49.2$49.1 million from the Term Loan were used to permanently pay off the TrancheA-1 Revolving Loan (as defined in the Credit Agreement) and to pay down the Credit Agreement. After utilizing proceeds from the Term Loan Agreement for repayment of amounts outstanding under the existing TrancheA-1 Revolving Loans, the Term Loan resulted in an increase in our Excess Availability of approximately $25.0 million under the Credit Agreement.

The Term Loan will mature on the earlier of (1) the termination date specified in our Credit Agreement, as such date may be extended with the consent of the Term Loan Agent or in accordance with the Intercreditor Agreement (defined below), and (2) March 14, 2020.

The Term Loan Agreement contains customary representations and warranties, affirmative and negative covenants including the retention of the existing minimum 1.0 to 1.0 consolidated fixed charge coverage ratio under the Credit Agreement, which limits borrowing availability if not met during periods where Revolving Excess Availability (as defined in the Term Loan Agreement) is less than the greater of $20.0 million or 10.0 percent of Combined Loan Cap (as defined in the Term Loan Agreement) for four consecutive business days, and events of default for a facility of this type. The Term Loan is secured by a second lien security interest (subordinate only to the liens securing the Credit Agreement) on all assets securing the Credit Agreement (which consist of substantially all of our personal property), except furniture, fixtures and equipment and intellectual property, upon which the Term Loan lenders will have a first lien security interest. If at any time prior to the first anniversary date of the Term Loan, the Revolving Excess Availability is less than $20.0 million, if requested by the Term Loan Agent, the Term Loan will also be secured by a first lien on leasehold interests in real property with an aggregate value of not less than $10.0 million, and the Credit Agreement will be secured by a second lien on such leasehold interests.

The Term Loan is subject to certain mandatory prepayments if an Event of Default (as defined in the Term Loan Agreement) exists. If no such Event of Default exists, proceeds of the Term Loan priority collateral are to be applied to amounts outstanding under the Credit Agreement.

Stein Mart, Inc.

Notes to Condensed Consolidated Financial Statements - Continued

(Unaudited)

The Term Loan Agent and Wells Fargo have entered into an Intercreditor Agreement dated as of March 14, 2018 (the “Intercreditor Agreement”), acknowledged by us under the Term Loan and the Credit Agreement.

Thenon-default interest rate applicable to the Term Loan under the Term Loan Agreement is a fluctuating rate of interest equal to three-month LIBOR (with a floor of 1.5 percent) plus 8.5 percent per annum.

The weighted average interest rate for the amount outstanding under the Term Loan was 10.8110.84 percent as of May 5,August 4, 2018.

Stein Mart, Inc.

Notes to Condensed Consolidated Financial Statements - Continued

(Unaudited)

The following table sets forth the aggregate maturities of our long-term debt at May 5,August 4, 2018, for the following fiscal years (in thousands):

5. Commitments and Contingencies

We are involved in various routine legal proceedings incidental to the conduct of our business. During both the 13 and 26 weeks ended May 5,August 4, 2018 and AprilJuly 29, 2017, we did not accrue for any actual or anticipated loss contingencies. While some of these matters could be material to our results of operations or cash flows for any particular period if an unfavorable outcome results, we do not believe that the ultimate resolution of currently pending legal proceedings, either individually or in the aggregate, will have a material adverse effect on our overall financial condition.

6. Income Taxes

Our income tax expense for the 13 and 26 weeks ended May 5,August 4, 2018, reflects our net operating loss carryforward position along with the valuation allowance established against deferred tax assets during the fourth quarter of 2017. The first quarterhalf of 2018 expense represents certain state income tax expense. We expect the effective tax rate to be close to zero percent for all of 2018.

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

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

Forward-Looking Statements

This Quarterly Report on Form10-Q contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, which are subject to certain risks, uncertainties or assumptions and may be affected by certain factors including, but not limited to, the matters discussed in “Item 1A. Risk Factors” of our Annual Report on Form10-K for the fiscal year ended February 3, 2018, filed with the Securities and Exchange Commission (“SEC”) on May 4, 2018. Wherever used, the words “plan,” “expect,” “anticipate,” “believe,” “estimate” and similar expressions identify 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 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 not guarantees of performance.

The following discussion and analysis should be read in conjunction with the audited Consolidated Financial Statements included in our Annual Report on Form10-K for the year ended February 3, 2018, filed with the SEC on May 4, 2018.

Overview

We are a nationalspecialty off-price retailer offering designer and name-brand fashion apparel, home décor, accessories and shoes at everyday discount prices. Stein Mart provides real value that customers love every day both in stores and online. We currently operate 289 stores across 30 states.

Financial Overview for the 13 and 26 Weeks Ended May 5,August 4, 2018

Stores

The following table sets forth the stores activity for the 13 and 26 weeks ended May 5,August 4, 2018 and AprilJuly 29, 2017:

Inventories

Inventory levels were $297.0$240.8 million as of May 5,August 4, 2018, compared to $270.2 million as of February 3, 2018, and $322.0$246.2 million as of AprilJuly 29, 2017. Average inventories per store as of May 5,August 4, 2018 decreased 9.75.0 percent from AprilJuly 29, 2017. We have intentionally operated with lower inventory levels during 2018, mainly by purchasing merchandiseplanning to turn faster and leaving a percentage of receipt dollars open to spend closer to the time of sales during the selling season.actual delivery dates.

Results of Operations

The following table sets forth each line item of our Condensed Consolidated Statements of IncomeOperations (Unaudited) expressed as a percentage of net sales (1):

Important Information RegardingNon-GAAP Financial Measures

We report our financial results in accordance with accounting principles generally accepted in the United States of America (“GAAP”). However, we believe that certainnon-GAAP financial measures provide users of our financial information with additional useful information in evaluating operating performance.Non-GAAP financial measures should be viewed as supplementing, and not as an alternative or substitute for, financial results prepared in accordance with GAAP. Items excluded from or included innon-GAAP financial measures may be significant and should be considered in assessing our financial condition and performance. The methods we used to calculate thesenon-GAAP financial measures may differ significantly from methods used by other companies to compute similar measures. As a result, thenon-GAAP financial measures presented herein may not be comparable to similar measures provided by other companies.

We believe that providing calculations of changes in comparable sales, both including and excluding sales from leased departments, assists in evaluating our ability to generate sales growth, whether through owned businesses or departments leased to third parties. The following table sets forth these calculations.

13 and 26 Weeks Ended May 5,August 4, 2018, Compared to the 13 and 26 Weeks Ended AprilJuly 29, 2017 (tables presented in thousands):

Net Sales

The 3.2 percent decrease in netNet sales includes the effect of closing four stores infor the 13 weeks ended May 5,August 4, 2018 and three stores inwere flat compared to the 13 weeks ended AprilJuly 29, 2017. The 0.7 percent decreaseincrease in comparable stores sales on an owned plus licensed basis for the 13 weeks ended May 5,August 4, 2018, was primarily driven by decreases inhigher regular-priced selling compared to last year’s higher clearance selling. Higher regular-priced selling for the 13 weeks ended August 4, 2018 increased the average unit retail price, which was partially offset by lowered units per transaction and number of transactions, driven by lower clearance selling and lower units per transaction, primarily due to the lower clearance selling, partially offset by increased average unit retail driven by improved regular-priced selling. Comparable store sales reflect stores open throughout the period and prior fiscal year and include Ecommerce. Ecommerce sales were up 84.9128.2 percent in the 13 weeks ended August 4, 2018, which include online orders shipped from our stores, and contributed approximately a 180 basis point increase to comparable sales in the same period. Comparable sales on an owned plus licensed basis for the 26 weeks ended August 4, 2018 were flat compared to the 26 weeks ended July 29, 2017. The 1.7 percent decrease in net sales is due to closing unproductive stores. Ecommerce sales were up 105.6 percent and contributed approximately a 1.2 percent160 basis point increase to comparable store sales for the 1326 weeks ended May 5,August 4, 2018.

Other Revenue

The increase in other revenue for the 13 weeks ended May 5, 2018, is the result of higher penetration from our growing credit card program.

Gross Profit

Gross profit is determined as follows:

The gross profit rate increase for the 13 and 26 weeks ended May 5,August 4, 2018, was primarily due to a higher merchandise margin rate, partially offset by occupancy costs which were flat for the quarter but higher as a percentage of net sales.rate. The higher merchandise margin rate was driven by lower markdowns, that more thanpartially offset by higher Ecommerce fulfillment and shipping costs which were higher due to an increase in online orders.

Selling, General and Administrative Expenses (“SG&A”)

The SG&A increasedecrease for the 13 weeks ended May 5,August 4, 2018, was primarily the result of planned higher advertisingcost savings initiatives, including closing underperforming stores. The SG&A decrease for the 26 weeks ended August 4, 2018, was primarily the result of $2.8 million andcost savings, including closing underperforming stores, partially offset by increased Ecommerce expenses of $1.7 million that were mostly offset by cost savings. Advertising expenses were higher due to the rollout of our newTV-focused campaign this spring.$2.8 million. Ecommerce expenses were higher to support the additional sales volume.

Interest Expense, Net

The increase in interest expense for the 13 and 26 weeks ended May 5,August 4, 2018, is due to higher borrowing levels and higher interest rates, primarily on our new Term Loan.Loan (as defined in Note 4 “Debt” to the Notes to Condensed Consolidated Financial Statements (Unaudited)).

Income Taxes

Our effective tax rate represents the applicable combined federal and state statutory rates reduced by the federal benefit of state taxes deductible on federal returns, adjusted for the effect of permanent differences. The decrease in the effective tax rate for the 13 and 26 weeks ended May 5,August 4, 2018, was primarily driven by our net operating loss carryforward position and our valuation allowance against all net deferred tax assets established during the fourth quarter of 2017. For the 13 weeks ended April 29, 2017, excluding the effect of adopting ASU2016-09, which added an additional $1.1 million in tax expense for the quarter as amounts previously recorded in equity related to the tax effects associated with the exercise of stock options and vesting of restricted stock are now rerecorded within income tax expense, our effective tax rate would have been 46.7 percent. We expect that our effective tax rate will remain near zero percent for the rest of fiscal 2018.

Liquidity and Capital Resources

Capital requirements and working capital needs are funded through a combination of internally generated funds, available cash, credit terms from vendors, our $225.0 million senior secured revolving credit facility pursuant to a second amended and restated credit agreement with Wells Fargo Bank (“Credit Agreement”) and our $50.0 million Term Loan (as defined in Note 4 “Debt” to the Notes to Condensed Consolidated Financial Statements (Unaudited))discussed below).

On February 19, 2018, we entered into Amendment No. 1 (the “Credit Agreement Amendment”) to the Credit Agreement. The Credit Agreement Amendment provided for, among other things, an Accommodation Period (as defined in the Credit Agreement Amendment) during which we were not required to meet the Fixed Charge Coverage Ratio (as defined in the Credit Agreement). This change permitted us to borrow the full amount of the then applicable borrowing base until we delivered our financial statements for the Measurement Period (as defined in the Credit Agreement) ended February 28, 2018. Pursuant to the Credit Agreement Amendment, a Cash Dominion Event (as defined in the Credit Agreement Amendment) occurred as of the effective date of the Credit Agreement Amendment and at all times thereafter. The Credit Agreement Amendment also changed the frequency of our delivery of Borrowing Base Certificates (as defined in the Credit Agreement) from monthly to weekly.

As a result of the Cash Dominion Event, all of our cash receipts are swept daily to repay borrowings under the Credit Agreement. We manage our cash on a daily basis and borrow against the Credit Agreement based on our daily cash disbursement needs. As long as we remain within the terms of the Credit Agreement, the bank is obligated to allow us to draw up to our borrowing availability. The Credit Agreement

matures in February 2020; however, as a result of the Cash Dominion Event, the amount outstanding under the Credit Agreement is classified as a short-term obligation on the Condensed Consolidated Balance Sheets (Unaudited).

On March 14, 2018, we entered into the Term Loan Agreement (as defined in Note 4 “Debt” in the Notes to Condensed Consolidated Financial Statements (Unaudited)), which provided for a term loan in the amount of $50.0 million. At the same time, we entered into Amendment No. 2 (the “Second Credit Agreement Amendment”) to the Credit Agreement with Wells Fargo. The Second Credit Agreement Amendment provided for, among other things, the following: (1) the permanent repayment in full of $25.0 million of TrancheA-1 Revolving Loans (as defined in the Second Credit Agreement Amendment) with the proceeds of the Term Loan (as defined below), thereby reducing the maximum amount of the revolving credit facility under the Credit Agreement to $225.0 million; (2) the entry into the Intercreditor Agreement between Wells Fargo Bank and Gordon Brothers Finance Company, LLC (as defined in Note 4 “Debt” in the Notes to Condensed Consolidated Financial Statements (Unaudited); and (3) certain other modifications and updates to coordinate the Credit Agreement with the Term Loan. The net proceeds of $49.2$49.1 million from the Term Loan were used to permanently pay off the $25.0

million TrancheA-1 Revolving Loan Commitment (as defined in Note 4 “Debt” in the Notes to Condensed Consolidated Financial Statements (Unaudited)) and to pay down the outstanding TrancheA-1 Revolving Loans (as defined in the Credit Agreement). After utilizing proceeds from the Term Loan Agreement for repayment of amounts outstanding under the Credit Agreement, the Term Loan increased our total borrowing availability under the combination of the Credit Agreement and Term Loan to $275 million and increased our Excess Availability by approximately $25.0 million. See Note 4 “Debt” of the Notes to Condensed Consolidated Financial Statements (Unaudited) for further discussion.

On February 2, 2018, we executed a short-term promissory note under which we borrowed approximately $13.7 million (the “Promissory Note”) from SunTrust Bank in its capacity as trustee under a trust agreement dated September 1, 1999. The proceeds from the Promissory Note were used to pay down borrowings under the Credit Agreement to provide additional availability under the Credit Agreement to assist us during our February low working capital period following the holiday selling season. In March 2018, we extended the due date of the Promissory Note to July 1, 2018. On June 29, 2018, we repaid the outstanding balance of the Promissory Note. On July 31, 2018, we borrowed $13.0 million under a new promissory note from SunTrust Bank. The proceeds were used to provide additional availability as we begin to purchase inventory for the second half of 2018. See Note 4 “Debt” of the Notes to Condensed Consolidated Financial Statements (Unaudited) for further discussion.

Cash flows from operations are driven by sales as well as the credit terms available to us from our vendors and their factors. Our sales generate cash almost immediately and are affected by customer traffic intoto our stores and the desirability of our merchandise tofor those customers. Customer traffic is in turn affected by our marketing and advertising, general economic and business conditions, and weather. Changes in these factors could have a material effect on our ability to generate sales and thus cash inflows to operate our business.

Our cash outflows can be materially affected by changes in credit terms and availability from our vendors and their factors. During the first quarter of 2018, our vendors and factors constricted our credit terms and limits significantly. This was a reaction to our 2017 third quarterthird-quarter results, as well as concern about the general retail environment at the time, which included multiple bankruptcies and restructurings.restructurings by other retailers in the same business. This constriction caused us to make payments to our vendors and factors more quickly than in prior periods thus increasing our debt levels during that period. The added availability from the Term Loan Agreement was a key part of our ability to fund the accelerated payments. During this time, we successfully managed our vendor and factor relationships to maintain the flow of our merchandise during the key early spring selling period. Throughout all periods, we made our payments to vendors and their factors on a timely basis in accordance with our negotiated terms.

When we announced our fourth quarter results and outlook for spring 2018 in March our terms with the vendors and their factors began to be less constricted. At that same time, we also announced our Term Loan Agreement. We havenon-disclosure agreements with the major factors, credit insurers and several of our largest vendors which allow us to communicate our operating results and cash flows to them on a regular basis. Additionally, we made presentations to larger groups of our vendors just after our fourth quarter results were announced, in March 2018. We continue to communicate our operating results and cash flows to our large vendors and factors with whom we have non-disclosure agreements in place. These steps have contributed to the positive movement in thetheir credit arrangements we have with our vendors and their factors.arrangements.

Our working capital fluctuates with seasonal variations which affectsaffect our borrowings and availability. Our availability is highest just after our strong seasonal spring and holiday selling seasons and is lowest just before those seasons as we build inventory levels. Working capital is also used to support capital investments for maintenance of our existing stores, system improvements and new store openings. We have reduced our capital investments to enhance our cash flows. These reduced levels of investment can be sustained for the foreseeable future as prior to this our store base and systems have been well maintained. Positive operating results and cash flows will help us preserve satisfactory credit terms and allow us to operate within the borrowing availability under our Credit Agreement and Term Loan Agreement. Based on our current expectations regarding our operating results we consider our resources adequate to satisfy our cash needs for at least the next 12 months.

In January 2018, we announced that we hired PJ Solomon to help us evaluate strategic and capital alternatives. We hired Alvarez & Marsal as advisors in 2017 to assist in evaluating our forecasting and strategic communications with our vendors and their factors. Alvarez & Marsal also advised us on cost savings and cash flow initiatives and assisted with evaluating capital alternatives which resulted in the Term Loan Agreement. It is possible that additional strategic alternatives will arise from these efforts.

As of May 5,August 4, 2018, we had cash and cash equivalents of $16.2$10.0 million and $146.1$112.3 million in borrowings under our Credit Agreement, $50.0 million in borrowings under the Term Loan and $13.3$13.0 million in borrowings under the Promissory Note, for a total of $209.4$175.3 million in outstanding borrowings. As of February 3, 2018, we had cash and cash equivalents of $10.4, and borrowings under our credit facilities of $142.4 million and $13.7 million in borrowings under the Promissory Note, for a total of $156.1 million in outstanding borrowings. As of AprilJuly 29, 2017, we had cash and cash equivalents of $15.6$10.6 million and borrowings under our credit facilities were $157.5$170.6 million. The total amount available for borrowings and letters of credit under our Credit Agreement is the lesser of $225.0 million or 100 percent of eligible credit card receivables and the net recovery percentage value of inventories less reserves. On May 5,August 4, 2018, in addition to outstanding

borrowings under the Credit Agreement, Term Loan and Promissory Note, we had $7.9 million of outstanding letters of credit. Our Excess Availability (as defined in the Credit Agreement) was $40.0$43.3 million on May 5,August 4, 2018.

Cash Flows

Net cash used in operating activities was $47.2$16.9 million for the 1326 weeks ended May 5,August 4, 2018, compared to net cash provided by operating activities of $40.1$24.9 million for the 1326 weeks ended AprilJuly 29, 2017. The decrease in cash provided by operating activities was mainly due to borrowings to fund the acceleration of vendor payments during the 1326 weeks ended May 5,August 4, 2018, which significantly reduced our accounts payable balance compared to the 1326 weeks ended AprilJuly 29, 2017. Also contributing to the decrease was a smaller decrease in inventory this year due to improved management of our beginning inventory levels and an increase in prepaid rent due to the timing of the end of the firstsecond quarter this year.