The Retail Small Cap Spotlight will highlight small retailing stocks with upside potential that are flying under the radar of the analyst community.

Today, we are looking at small cap retailer Stein Mart (SMRT). We think Stein Mart could be good way to play the consumer trading down, which we expect to last much longer than most market observers.

Stein Mart operations combine the traditional department or specialty store with an off-priced business. We think this strategy to offer higher quality goods at lower prices is ideal for the current economic environment.

Despite being well-positioned for off-priced retail sales, Stein Mart’s results suffered along with more retailers. There were also fears of the company going out of business. As a result, SMRT shares collapsed to about $1 per share on March 2, 2009.

Apparently, news of the company’s demise was a bit premature. The stock has rebounded about 700% off its March 2 lows.

Even after that huge run, the stock is still well below its 2007 highs of around $15, and has room to move higher. Some of the reasons the stock can move higher include a strong balance sheet, improved inventory and expense management, and an enhanced merchandising strategy.

The company ended the first quarter with $19.4 million in cash and no debt. Also, Stein Mart reduced its inventories by about 25%, compared to its 9% drop in sales. The leaner inventory levels should help Stein Mart avoid having to markdown merchandise and hurt its profit margins.

Along with leaner inventories, Stein Mart should continue to operate with an eye on expenses. Lastly, Stein Mart has enhanced its merchandising strategy. This strategy includes new marketing initiatives that attract a younger, more fashion-conscious buyer into its stores and merchandise that its customers want to buy at prices they can afford.

Stein Mart is a Zacks Rank #2 (”Buy”) stock, currently.

Read the full analyst report on “SMRT”
Zacks Investment Research

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