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

Forward-Looking Statements

This report contains forward-looking statements which are subject to certain risks, uncertainties or assumptions and may be affected by certain factors, including but not limited to changes in consumer spending due to general economic conditions including uncertainty in the financial and credit markets, the effectiveness of advertising, marketing and promotional strategies, ongoing competition from other retailers, changing preferences in apparel, unanticipated weather conditions and unseasonable weather, adequate sources of merchandise at acceptable prices, the Company’s ability to attract and retain qualified employees, the ability to successfully implement strategies to exit or improve under-performing stores, disruption of the Company’s distribution system, acts of terrorism and failure to adequately protect our trademark Stein Mart® and other marks we use. Readers are urged to review and consider the matters discussed in “Item 1A. Risk Factors” of our Form 10-K for 2007.

Should one or more of these risks, uncertainties or other factors materialize, or should underlying assumptions prove incorrect, actual results, performance or achievements of the Company 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 the Company’s management and on information currently available to such management. Forward-looking statements speak only as of the date they are made, and the Company undertakes no obligation to publicly update or revise its 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 no guarantees of performance.

Overview

Stein Mart is a retailer offering the fashion merchandise, service and presentation of a better department or specialty store at prices up to 60 percent off department and specialty store original prices, every day. Our focused assortment of merchandise features current-season moderate to better fashion apparel for women and men, as well as accessories, gifts, linens and shoes. Management believes that Stein Mart differentiates itself from typical off-price retailers by offering: (i) primarily current-season merchandise carried by better department and specialty stores, (ii) at moderate to better price levels, (iii) a stronger merchandising “statement,” consistently offering more depth of color and size in individual stock-keeping units, and (iv) merchandise presentation and customer service more comparable to other upscale retailers. As of November 1, 2008, we operated 279 stores.

For the 13 weeks ended November 1, 2008, the Company incurred a net loss of $(14.1) million or $(0.34) per share compared to a net loss of $(2.7) million or $(0.06) per share for the same 2007 period. For the 39 weeks ended November 1, 2008, the Company incurred a net loss of $(15.1) million or $(0.37) per share compared to net income of $7.6 million or $0.18 per share for the same 2007 period. The 2008 net loss was driven by negative comparable store sales. Comparable store sales decreased 12.6 percent and 10.5 percent, respectively, for the 13 weeks and 39 weeks ended November 1, 2008 from the same 2007 periods. Gross profit decreased for both 2008 periods due to lower merchandise margins resulting from higher markdowns taken to keep inventory levels in line with current sales trends.

Our third quarter was the most challenging in the Company’s history as the economic developments and aggressive promotional activities by the Company’s competitors severely curbed our customer’s normal shopping habits. Despite more aggressive promotion by the Company, reducing average store inventories 12.2 percent year over year, and accelerating our efforts to control costs, the magnitude of the sales shortfall could not be overcome. Although we planned conservatively for the holiday season, current sales trends and the amount and scale of competitive promotion already underway suggest that we will have to be especially aggressive to reduce seasonal inventory in a timely manner resulting in increased markdowns.

We are focused on cash and liquidity and, to that end, we continue to do everything possible to maximize our financial flexibility. In addition to cutting operating expenses, we have expanded our credit facility, scaled back our opening plans to one store, planned significantly reduced capital expenditures in 2009, and suspended the cash dividend and the stock buyback.

Initiatives and Outlook

In light of the severity of the current economic environment, management has accelerated various initiatives begun earlier this year to increase sales, motivate existing customers and attract new ones, reduce expenses and maximize cash flow.

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Although we have been persistently re-forecasting our inventory plan as the economic climate worsens, it appears we will need even more aggressive markdowns in the fourth quarter to end the year with season-appropriate inventories at the proper level. Looking ahead, we are buying very conservatively for the spring season, not only to keep inventories in line, but also to be able to take advantage of many better brand opportunities that have opened up in this environment.

On December 2, 2008, the Company’s Board of Directors appointed David H. Stovall, Jr. as President and Chief Executive Officer (“CEO”) of the Company. Mr. Stovall assumed his new responsibilities on December 5, 2008. Mr. Stovall succeeds Linda McFarland Farthing, longtime Stein Mart board member who has held the president and CEO position since September 2007, but announced earlier this fall that a search for her successor had begun. Ms. Farthing’s responsibilities as CEO will conclude on December 10, 2008, at which time she will continue to serve on the Company’s Board of Directors.

In connection with Mr. Stovall’s appointment, the Company and Mr. Stovall executed an employment agreement which, among other things, provides for: (i) a term of three years which will be extended for successive one-year periods unless either the executive or the Company cancels the automatic extension by providing at least 120 days advance written notice, (ii) a base salary of $826,000 per year, (iii) severance compensation equal to 100% of annual base salary and continuation of insurance benefits for one year if terminated without cause by the Company or with good reason by the executive, (iv) restrictive covenants against competing with the Company or recruiting any Company personnel for two years following termination, and (v) vesting of all unvested options and interests in incentive compensation plans upon death or disability. The executive remains eligible for other benefit plans and incentive plans in effect from time to time.

On December 5, 2008, Mr. Stovall was granted an option to purchase one million shares of the Company’s common stock, at an exercise price of $1.25, under the Company’s 2001 Omnibus Plan. The option is valued at $570,000. One-third of the option vests on the first, second and third anniversary dates of grant. The vested portion of the option may be exercised two years after the grant date and no vested portion of the option may be exercised on or after December 5, 2015. Shares acquired on exercise of the option may not be sold until the earlier of (1) one year from date of exercise, or (2) a change of control of the Company. In January 2009, Mr. Stovall will be granted a second option to purchase 200,000 shares of common stock, which has terms similar to the initial option, but will have an exercise price based on the market value of the Company’s common stock on the date of grant.

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Stores

There were 279 stores open as of November 1, 2008 and 276 stores open as of November 3, 2007. We completed our 2008 store-opening program during the third quarter. We plan to close three more stores by the end of fiscal year 2008, which will bring to ten the number of stores closed this year, and the total number of stores in operation to 276 at the end of fiscal year 2008. For 2009, we have not actively sought new real estate, although we will open one new store next year based on a previously signed lease. We anticipate closing ten stores in 2009.

For the 13 weeks ended November 1, 2008 compared to the 13 weeks ended November 3, 2007

Net sales for the third quarter of 2008 were $298.8 million, down 10.4% from $333.3 million in last year’s third quarter. The $34.5 million decrease reflects a $40.3 million decrease in the comparable store group and a $3.8 million decrease in the closing/closed store group, offset by a $9.6 million increase in the non-comparable store group due to the inclusion of sales for the 14 stores opened in 2007 and the 6 stores opened in 2008. The closing/closed store group includes the ten stores we plan to close in 2008 and the two stores closed in 2007. Comparable stores sales for the third quarter of 2008 decreased 12.6% compared to third quarter of 2007.

Gross profit for the third quarter of 2008 was $67.5 million or 22.6 percent of net sales compared to $86.2 million or 25.9 percent of net sales for the third quarter of 2007. The $18.7 million decrease in gross profit reflects a $17.7 million decrease in the comparable store group and a $1.5 million decrease in the closing/closed store group, partially offset by a $0.5 million increase in the non-comparable store group due to the inclusion of operating results for the 14 stores opened in 2007 and six stores opened in 2008. Gross profit as a percent of sales decreased during the third quarter of 2008 primarily from a 1.9 percentage point increase in occupancy costs due to a lack of leverage on lower sales and a 1.0 percentage point decrease in merchandise margin due to increased markdowns slightly offset by an increase in markup.

Selling, general and administrative (“SG&A”) expenses were $93.5 million or 31.3 percent of net sales for the third quarter of 2008 as compared to $97.2 million or 29.2 percent of net sales for the third quarter of 2007. The $3.7 million decrease primarily reflects reductions in advertising and store operating expenses, somewhat offset by increased store closing expenses. Advertising expense decreased $5.2 million this quarter primarily due to reduced broadcast media. Store operating expenses decreased $2.0 million for the comparable store group due to cost saving initiatives, but were offset by a $1.0 million increase for the non-comparable store group due to the inclusion of operating results for the 14 stores opened in 2007 and the six stores opened in 2008. Store closing costs increased $2.6 million due to more planned store closings in 2008. SG&A expenses for the third quarter of 2008 also included $2.3 million for professional fees related to ongoing expense reduction initiatives and higher benefits costs, while last year’s third quarter included $1.8 million of separation costs for the resignation of the former President/Chief Executive Officer. SG&A expenses as a percentage of net sales was higher for the third quarter of 2008 due to a lack of leverage on lower sales.

Interest expense, net increased only slightly for the third quarter of 2008 over the third quarter of 2007 due to higher borrowings at lower interest rates this quarter compared to last year.

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Other income, net decreased $0.8 million in the third quarter of 2008 compared to the third quarter of 2007 due to decreases in both credit card income and leased shoe department income resulting from the decreased net sales.

The effective income tax benefit, including certain book/tax differences and the recording of unrecognized tax benefits, is 34.7 percent for the third quarter of 2008 and 34.5 percent for the first 39 weeks of 2008. We expect the effective tax rate to be approximately 35 percent for the 2008 year. The income tax benefit was decreased in the third quarter of 2007 due to lower estimated annual taxable income, certain federal and state tax credits, and other state tax benefits.

For the 39 weeks ended November 1, 2008 compared to the 39 weeks ended November 1, 2007

Net sales for the first 39 weeks of 2008 were $962.6 million, down 7.5% from $1,040.2 million for the first 39 weeks of 2007. The $77.6 million decrease reflects a $105.3 million decrease in the comparable store group and an $8.1 million decrease in the closing/closed store group, offset by a $35.8 million increase in the non-comparable store group due to the inclusion of sales for the 14 stores opened in 2007 and the six stores opened in 2008. Comparable stores sales for the first 39 weeks of 2008 decreased 10.5% compared to the first 39 weeks of 2007.

Gross profit for first 39 weeks of 2008 was $239.3 million or 24.9 percent of net sales compared to $277.3 million or 26.7 percent of net sales for the first 39 weeks of 2007. The $38.0 million decrease in gross profit reflects a $39.7 million decrease in the comparable store group and a $3.2 million decrease in the closing/closed store group, partially offset by a $4.9 million increase in the non-comparable store group due to the inclusion of operating results for the 14 stores opened in 2007 and the six stores opened in 2008. Gross profit as a percent of sales decreased during the first 39 weeks of 2008 primarily from a 1.6 percentage point increase in occupancy costs due to a lack of leverage on lower sales and relatively flat merchandise margin due to increased markdowns mostly offset by an increase in markup.

SG&A expenses were $277.6 million or 28.8 percent of net sales for first 39 weeks of 2008 as compared to $282.3 million or 27.1 percent of net sales for the first 39 weeks of 2007. The $4.8 million decrease in SG&A expenses primarily reflects significant reductions in advertising expenses and share-based compensation, somewhat offset by increased store closing expenses, professional fees and benefits costs. Advertising expenses decreased $10.3 million this year due primarily to reduced broadcast media. Share-based compensation expense decreased $3.7 million ($2.4 million in cost of merchandise sold and $1.3 million in SG&A expenses) primarily due to compensation expense for performance shares issued in 2006 being fully amortized through the first quarter of 2008. Store closing costs increased $3.8 million due to more planned store closings in 2008. SG&A expenses for 2008 also include $4.9 million for professional fees related to ongoing expense reduction initiatives and higher benefits costs, while last year included $1.8 million of separation costs for the resignation of the former President/Chief Executive Officer. SG&A expenses as a percentage of net sales was higher this year due to a lack of leverage on lower sales.

Interest expense, net increased $0.7 million during the first 39 weeks of 2008 compared to the first 39 weeks of 2007 due to higher borrowings at lower interest rates this year compared to last year.

Liquidity and Capital Resources

The Company’s primary source of liquidity is the sale of its merchandise inventories. Capital requirements and working capital needs are funded through a combination of internally generated funds, a revolving credit facility and credit terms from vendors. Working capital is needed to support store inventories and capital investments for new store openings and to maintain existing stores. Historically, the Company’s working capital needs are lowest in the first quarter and highest in either the third or fourth quarter in anticipation of the fourth quarter peak selling season. As of November 1, 2008, the Company had $64.8 million in cash and cash equivalents.

Net cash used in operating activities was $9.8 million for the first 39 weeks of 2008 compared to $12.2 million for the first 39 weeks of 2007. The $2.4 million decrease in cash used in operating activities for the first 39 weeks of 2008 compared to 2007 is primarily due to $22.5 million less cash provided by net income (loss) plus non-cash charges and $8.6 million more cash used for inventories and accounts payable, offset by a $22.0 million decrease in cash used for income taxes receivable/payable and $11.5 million more cash provided by other operating activities, primarily collection of construction receivables. Less cash was needed for income taxes in 2008 due to a significant income tax receivable recorded at February 2, 2008. While both inventories and accounts payable decreased during the first 39 weeks of each year, the decrease in inventories was greater during the first 39 weeks of 2008 due to timing of merchandise receipts and vendor payments.

Net cash used in investing activities was $13.9 million for the first 39 weeks of 2008 and $9.2 million for the first 39 weeks of 2007. Less cash was used in investing activities last year primarily due to the $10.8 million net liquidation of short-term investments partially offsetting higher capital expenditures from more stores being opened last year. The Company expects to spend a total of $17-19 million in capital expenditures in 2008 to open new stores and continue updating systems and existing stores and anticipates that 2009 capital expenditures will be significantly less than in 2008.

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Net cash provided by financing activities was $73.4 million for the first 39 weeks of 2008 compared to $24.4 million of cash used in financing activities for the first 39 weeks of 2007. More cash was provided by financing activities during 2008 primarily due to higher net borrowings, no cash dividends paid and fewer shares of common stock repurchased this year. In February 2008 the Board of Directors suspended the payment of a quarterly dividend in order to conserve cash until improvements occur in the Company’s business and in the current difficult economic conditions.

The Company has a senior revolving secured credit agreement (the “Agreement”) with a group of lenders which extends through January 2011. Effective September 10, 2008, the Company exercised an option to increase the facility from $100 million to $150 million. On September 29, 2008, the Company borrowed $75 million under the Agreement as a proactive step to increase its cash position to preserve its financial flexibility in light of the current uncertainty in the credit markets. The funds are being used to support seasonal working capital needs. The proceeds from this borrowing were invested on a short-term basis in AAA-rated United States Treasury money market funds. As of November 1, 2008, the Company had $100 million in direct borrowings, $8.0 million of outstanding standby letters of credit, and cash and cash equivalents of $64.8 million. Approximately $42 million was available under the Agreement and no event of default existed under the terms of the Agreement at November 1, 2008.

The Company believes that expected net cash provided by operating activities and unused borrowing capacity under the revolving credit agreement will be sufficient to fund anticipated current and long-term capital expenditures and working capital requirements. Should current operating conditions change, management can borrow on the revolving credit agreement or adjust operating plans, including new store rollout.

Recent Accounting Pronouncements

In June 2008, the Financial Accounting Standards Board (“FASB”) issued FASB Staff Position (“FSP”) Emerging Issues Task Force (“EITF”) No. 03-6-1, Determining Whether Instruments Granted in Share-Based Payment Transactions Are Participating Securities . FSP EITF No. 03-6-1 addresses whether instruments granted in share-based payment transactions are participating securities prior to vesting, and therefore need to be included in the earnings allocation in computing earnings per share under the two-class method as described in Statement of Financial Accounting Standards (“SFAS”) No. 128, Earnings per Share . Under the guidance of FSP EITF No. 03-6-1, unvested share-based payment awards that contain non-forfeitable rights to dividends or dividend equivalents (whether paid or unpaid) are participating securities and shall be included in the computation of earnings-per-share pursuant to the two-class method. The Company’s restricted stock awards are considered “participating securities” because they contain non-forfeitable rights to dividends. FSP EITF No. 03-6-1 is effective for financial statements issued for fiscal years beginning after December 15, 2008 and all prior-period earnings per share data presented shall be adjusted retrospectively. Early application is not permitted. The adoption of FSP EITF No. 03-6-1 will not have a material impact on our consolidated financial statements.

In February 2007, the FASB issued SFAS No. 159, The Fair Value Option for Financial Assets and Financial Liabilities, which permits entities to choose to measure many financial instruments and certain other items at fair value that are not currently required to be measured at fair value. SFAS No. 159 was effective for the Company on February 3, 2008 and had no effect on the Company’s financial position or results of operations.

In September 2006, the EITF issued EITF No. 06-4, Accounting for Deferred Compensation and Postretirement Benefit Aspects of Endorsement Split-Dollar Life Insurance Arrangements . EITF No. 06-4 states that an employer accounting for endorsement split-dollar life insurance arrangements that provide a benefit to an employee that extends to postretirement periods should recognize a liability for future benefits in accordance with SFAS No. 106, Employers’ Accounting for Postretirement Benefits Other Than Pensions, or Accounting Principles Board Opinion No. 12, Omnibus Opinion-1967 . The Company adopted EITF 06-4 on February 3, 2008 and recognized a liability of $4.5 million (included in other liabilities) and recorded a corresponding reduction to retained earnings representing the cumulative effect of the change in accounting principle. Subsequent changes in this liability are recorded through expense.

In September 2006, the FASB issued SFAS No. 157, Fair Value Measurements , which defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles, and expands disclosures about fair value measurements. SFAS No. 157 was effective for the Company on February 3, 2008 and had no effect on the Company’s financial position or results of operations.