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- 2012 - November - 12th -

Accounting errors affect several years of Stein Mart results

by Mark Basch, Contributing Writer

After spending the past year fixing its sales strategy, Stein Mart Inc. on Friday announced a new issue that needs repair.

The Jacksonville-based fashion retailer said it will need to restate 3 1/2 years of financial reports after identifying some accounting errors that need correcting.

Stein Mart said the errors don't affect its current cash position but it will produce changes to financial results all the way back to fiscal 2009.

The company said there were two major issues. One is the method of accounting for markdowns on merchandise, which produced errors that were both positive and negative in certain individual quarters.

The other issue is accounting for leasehold improvement costs, which caused earnings to be overstated in the first six months of the current fiscal year but understated from 2009 through 2011.

Stein Mart said management has been assessing its internal financial controls and "based on this assessment, the company expects to report multiple material weaknesses in the company's internal controls and therefore conclude that internal controls over financial reporting and disclosure controls are not effective."

The company said it has discussed these matters with its independent auditor, PricewaterhouseCoopers LLP, but it did not give details on those discussions.

Investors already had concerns about Stein Mart's financials before Friday's announcement.

Stein Mart said on Tuesday in a short Securities and Exchange Commission filing that it was postponing the announcement of its third-quarter earnings, scheduled for this Thursday, but did not give a reason at that time. This followed a September filing that said its final second-quarter report would be delayed because of accounting issues.

Credit Suisse analyst Michael Exstein downgraded his rating on Stein Mart's stock from "outperform" to "neutral" on Tuesday, saying the delay in the financial filings was "concerning."

"We still believe that there is value in the company; however, given this morning's development, we need to remain on the sidelines for now," Exstein said in a research note.

Stein Mart's stock fell from about $8.75 in September when it first announced a delay in its financial reports to close to $7 this week after indicating more delays. It fell 17 cents to $6.90 Friday after announcing the accounting errors.

FIS eases investor concerns

Fidelity National Information Services Inc.'s stock reached a 52-week high Tuesday after reporting adjusted third-quarter earnings of 63 cents a share, 1 cent above the average forecast of analysts surveyed by Thomson Financial.

However, it wasn't the third-quarter earnings beat that impressed investors. It was better prospects for future earnings for the company that is commonly called FIS.

"Third-quarter results were slightly better than expectations, but the key to the quarter was significant relief from previous fears," Robert W. Baird analyst David Koning said in a research note.

Jacksonville-based FIS, which provides technology services for banks, also announced a new five-year contract to provide services to BMO Harris Bank. Last year, BMO acquired another FIS client, Marshall & Ilsey Corp., and FIS expected to lose business as those two banks merged their operations. But FIS officials explained during their conference call with analysts last week that the new contract with BMO will basically eliminate the impact of the lost business from Marshall & Ilsey.

"We are very pleased with how our relationship with BMO Harris is progressing and we consider the new agreement, which solidifies BMO Harris as a top five revenue client, to be a great outcome for FIS and the bank," FIS President Gary Norcross said.

In the third quarter, FIS' total revenue rose 2.8 percent to $1.44 billion but organic revenue growth — growth excluding acquisitions and foreign currency fluctuations — was 5 percent.

"We are consistently delivering on our strategic commitments to maximize performance through organic revenue growth, margin expansion and returning cash to shareholders. As we move away from acquiring and integrating large companies, our results underscore that our change in strategy is working," CEO Frank Martire said in the conference call.

FIS' stock rose as much as $2.16 Tuesday to a 52-week high of $35.44.

D.A. Davidson & Co. analyst John Kraft, who maintains a "buy" rating on the stock, is expecting the shares to rise.

"Not deservingly, FIS' shares carry the lowest valuation in the group, a mispricing we expect to reverse over the coming quarters," he said in a research note.

Kraft said he was impressed with the prospect for revenue growth from the company's North American clients.

"With the new BMO contract and a rebound in North America, our two biggest concerns are nearly erased," Kraft said in a research note.

FNF earnings up in a complex report

Fidelity National Financial Inc., which spun off FIS in 2006, reported third-quarter earnings of $1.03 a share that tripled the results from the third quarter of 2011. But those earnings weren't what they seemed.

The reason FNF's earnings jumped so much was that the company began including results from its investments in restaurant company American Blue Ribbon Holdings and auto parts company Remy International Inc. FNF now has a majority stake in both those companies, so it consolidates their results into the company's overall results.

Jacksonville-based FNF's total revenue jumped from $1.2 billion in the third quarter of 2011 to $2.04 billion in this year's third quarter, but that included about $298 million in operating revenue from the restaurant business and $143 million from Remy. The company didn't record any revenue from those businesses last year.

Revenue also was increased by investment gains.

So it's difficult to evaluate FNF's overall results. However, the company's core title insurance business did show a big increase in revenue and earnings.

Title insurance revenue rose 23 percent to $1.46 billion and pre-tax earnings from the title business jumped 45 percent to $210.7 million.

"The last two quarters are evidence of the significant earnings potential we have in a stronger real estate market," Chairman Bill Foley said in FNF's conference call with analysts.

During the call, Foley also explained the plans for Remy. FNF, which now owns 51 percent of Remy, had been trying to take that company public, but Foley said "the timing was just not right for that particular asset to undertake a public offering." FNF also looked into selling its stake in Remy but didn't find a worthwhile deal.

Now, FNF has launched a plan to list Remy's stock on Nasdaq with a small stock offering to Remy employees of 40,000 shares at $17 each. Foley said getting Remy listed, without a big IPO, gives the company flexibility.

"We ended up doing or taking the best alternative that we can come up with in terms of improving our relative position with our Remy investment," Foley said.

Foley also is optimistic about FNF's 55 percent stake in the restaurant company, which owns the O'Charley's, Ninety Nine Restaurant, Max & Erma's, Village Inn, Bakers Square and Stoney River Legendary Steaks chains.

"This is going to be not just a fun investment for FNF, but a very profitable one," he said.

Regency beats forecasts

Regency Centers Corp. last week reported core funds from operations of 62 cents a share in the third quarter, a penny higher than last year and 4 cents higher than the average forecast of analysts, according to Thomson.

Funds from operations, which are basically earnings plus depreciation and amortization expenses, are considered the key statistic to measure a real estate company's performance.

Jacksonville-based Regency, which owns all or part of 347 shopping centers across the country, said its properties were 93.6 percent leased at the end of the quarter.

"Fundamentals in the operating portfolio and demand from retailers remain strong, as evidenced by our results this quarter," CEO Hap Stein said in Regency's conference call with analysts.

"We enhanced the portfolio's NOI (net operating income) growth and strategic and risk profiles with the sale of lower quality assets, using the proceeds to reduce leverage, as well as acquire dominant A-quality shopping centers with superior growth prospects," he said.

The company sold a 15-property portfolio during the third quarter for $321 million to Blackstone Real Estate Partners and also sold three co-investment operating properties for $61.5 million. It acquired one shopping center in San Diego for $59.5 million.

PSS earnings miss forecasts

After agreeing last month to a buyout by McKesson Corp., PSS World Medical Inc. did not make a formal announcement of its quarterly earnings. However, the Jacksonville-based medical supply distributor did file its regular quarterly report with the SEC last week.

The report showed that sales in the second quarter ended Sept. 28 rose 7 percent to $420.8 million but earnings from continuing operations fell by 4 cents to 26 cents a share.

"As has become the norm, revenue and profit expectations were not realized," Robert W. Baird analyst Eric Coldwell said in a research note.

According to Thomson, the average analysts' forecast had been earnings of 29 cents a share and revenue of about $426 million.

PSS agreed on Oct. 25 to a buyout offer from McKesson for $29 a share. The deal is expected to be completed early next year.

RailAmerica reports lower earnings

Genesee & Wyoming Inc. completed its acquisition of Jacksonville-based RailAmerica Inc. on Oct. 1, but RailAmerica did announce its third-quarter earnings last week.

Revenue for the short-line railroad operator rose 11 percent to $155.4 million but earnings fell by 5 cents to 12 cents a share, due to several one-time costs.

That includes 26 cents a share in costs attributed to the "exploration of strategic alternatives, which resulted in the sale of RailAmerica to Genesee & Wyoming Inc.," the company said.

Although Connecticut-based Genesee now owns the company, control of RailAmerica has been placed in a voting trust until the U.S. Surface Transportation Board approves the merger. The company said it expects that decision possibly during the fourth quarter or as late as the first quarter of 2013.

FEC increases operating income

Another Jacksonville-based railroad company, Florida East Coast Holdings Corp., reported third-quarter revenue rose 21 percent to $63 million and operating income rose 49 percent to $14.9 million. However, after interest expenses and taxes, the company had a final net loss of $2.6 million in the quarter.

FEC, which operates a 351-mile railroad between Jacksonville and Miami, is owned by funds managed by Fortress Investment Group, the same company that previously owned RailAmerica.

Fortress took RailAmerica public and eventually sold the company this year. One of these days, Fortress is likely to take a similar path with FEC.

Atlantic Coast Financial records loss

Atlantic Coast Financial Corp. last week reported a net loss of $1.7 million, or 66 cents a share, in the third quarter. The Jacksonville-based banking company has lost money every year since 2008.

Atlantic Coast did say it is making progress in reducing its level of bad loans. Total non-performing assets were $34.2 million, or 4.35 percent of total assets, as of Sept. 30, down from $52.4 million, or 6.65 percent of assets, at Dec. 31, 2011.

"Our strategy to be opportunistic in dealing with problem loans has proven effective," said Chief Executive Officer G. Thomas Frankland in a news release.

Dick's Wings owner completes stock sale

The CEO of American Restaurant Concepts Inc. completed the sale of 15.53 million shares of stock to a new investor, but not the investor who originally planned to buy them.

The Jacksonville-based company, which franchises the Dick's Wings restaurant chain, said CEO Michael Rosenberger sold the shares to money manager and private investor William Leopold.

Rosenberger previously announced plans to sell those shares, which represent 41.7 percent of the company's stock, to Seenu Kasturi, but the company said in last week's announcement that contractual restrictions in certain franchising agreements restrict Kasturi from owning more than 10 percent of the shares.

American Restaurant Concepts said Kasturi and Leopold have worked together in the past and that Rosenberger, Leopold and Kasturi will continue working on the strategic plans originally contemplated to grow the company. The chain currently has 16 full-service restaurants and two express restaurants.

Kasturi does own 3.5 percent of the company's stock, which he had previously purchased, and Rosenberger retains 12.3 percent.

Washington Post benefits from political ads

While most of us are celebrating the end of the political campaign ads (or at least a brief respite from them), The Washington Post Co. is probably disappointed.

Just like Gannett Co. Inc., another media company with television stations in Jacksonville, Washington Post's third-quarter results benefited from political ad spending in the third quarter.

The company's total revenue in the quarter of $1.01 billion was basically unchanged from last year. However, revenue in the broadcasting division jumped 44 percent to $106.4 million, including a $15.6 million increase in political advertising spending.

Washington Post owns six television stations, including WJXT TV-4 in Jacksonville and other Florida stations in Miami and Orlando.

mbasch@baileypub.com

(904) 356-2466

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