January 9, 2020 Long: Stage Stores, Inc. Transition to Pure-Play Off-Price

January 9, 2020 Long: Stage Stores, Inc. Transition to pure-play off-price retail company 2019 converted off-price stores: 40% revenue growth and margin improvement Run-rate EBITDA potential of $150m post conversion Share price potential multiples from current level Currently trading at 0.3x EV/sales

Ticker: SSI Market cap: $238 million Price: $8.25 Net Debt: $339 million Enterprise value: $577 million

The document provides details about: • Why Q4 2019 and FY 2019 results can exceed management guidance. • Why the potential run-rate EBITDA for SSI can be $150m post conversion of 542 stores and closing of 75 underperforming department stores. • Why share price potential can be several multiples above current price.

Investment highlights • Stage Stores (SSI) is at an inflection point and transitions from department stores to a pure play off-price retailer by Q3 2020. • Off-price retail industry is growing rapidly and is highly profitable. BURL, ROST and TJX have 2015-2019E CAGRs of 9% to 11% and EBITDA margins of 13% - 15%. • SSI has 158 off-price stores, 89 of which have been converted from department stores in 2019. Of the 617 department stores, around 542 are planned to be converted in 2020 to off-price and 75 closed.

• SSI’s off-price stores generate higher revenue and higher margins than their department stores. • In Q3 2019, the recently converted 89 stores generated 40% higher sales compared to when they were department stores and significantly improved margins. • Q3 2019 had highest sales in history of company despite decreasing number of stores; first time positive adjusted EBITDA in Q3 since 2015, at $15m, up $28m compared to Q3 2018. • A lot of potential for revenue growth and margin expansion from conversion of 542 department to off-price stores in 2020. • Company’s share price is not reflecting full potential: EV/sales of 0.3x vs. peers’ range 1.8x – 2.2x. • Catalysts for further share price growth in the near term: If Q4 results meet or exceed management guidance. • Catalysts for share price in 2020: If the transition plan is successfully executed and management provides details about margin improvements for their off-price stores. SSI would then generate positive cash flows that further delever the balance sheet and report strong positive net income. During 2020, the run-rate financial performance of SSI should become increasingly tangible and make it investable for the broader universe of funds, which will further drive the share price. • If the conversion of 540 stores are executed successfully, a run-rate EBITDA of $150m is conceivable, which could result in share price valuation of $50.

What is the story? Stage Stores, Inc. (SSI) is at an inflection point to develop from a department store company to a pure-play off-price retailer. SSI currently operates 617 department stores, and 158 off-price stores. 99 of the off-price stores are through conversions from their department stores to off-price, most of which converted in 2019. Like other department stores (Macy’s, Kohl’s), SSI’s department stores did not fare well in the past, and experienced declining sales and losses. However, the off-price retail industry has been the best segment in the retail industry, with companies like T.J. Companies (TJX), Burlington Stores (BURL) and Ross Stores (ROST) achieving 10% CAGR top line growth over the last four years and achieving EBITDA margins of ~13%. SSI is in the early stages to become a significant player in the off-price segments: It acquired 58 off-price stores Gordmans for only $37m in 2017. In 2018, SSI converted 8 of its departments stores and opened 1 to test the potential of the off-price stores for SSI. Because of the successful execution and performance of the off-price stores, management converted 72 stores H1 2019, and 17 in Q3 2019.

Then, in September 2019, management announced to become a pure play off-price retailer by converting ~540 of its department stores to off-price by Q3 2020, and closing the remaining, underperforming department stores, citing the strong performance of the converted off-price stores for their accelerated plan.

“Since 2018, we have converted 98 department stores to off-price, including 17 small market conversions which are grand opening today in Michigan, Pennsylvania, Ohio, Kentucky, and Tennessee. Compared to their performance as a department store, off-price conversions have consistently delivered higher sales with less inventory, similar retail margins, and lower SG&A. Additionally, with the success of our recent tests of lower cost conversions, we are able to execute our fiscal 2020 conversion strategy while maintaining our capital spend in line with fiscal years 2018 and 2019”

Source: September 17, 2019 - Press Release. Highlight Ambra Capital Management LLC

The reason for management’s decision to convert 540 stores in 2020 and to become a pure- play off-price retail company was substantiated when they reported Q3 2019 results: SSI achieved its highest sales in Q3 in its history, despite reducing the number of stores over the last 4 years. SSI’s off-price stores achieved higher sales and margins and drove overall performance. In the chart below it becomes evident, that Q3 2019 financial performance was far above the three prior years.

Adjusted EBITDA 60,000

50,000

40,000

30,000

20,000

($k) 10,000

0 Q1 Q2 Q3 Q4 (10,000) Midpoint mgnnt. (20,000) guidance for FY'19 (30,000) less 9mos 2016 2017 2018 2019 actual

Source: Chart from Ambra Capital Management LLC. Data from SSI public filings.

The potential for SSI becomes apparent when looking at the margins. 2018 adjusted EBITDA was close to breakeven, and for FY 2019 management guidance is around only 2%, while off-price peers achieve EBITDA margins of ~13%. After the Q3 2019 results as shown in the Adjusted EBITDA chart, it is reasonable to believe that more margin improvements will result from the conversion of the planned 540 stores to off-price in 2020. Margins significantly improved in 2019 Q3 as adjusted SGA and COGS as % of sales improved by over 7% points compared to prior year Q3. Also, cash flows improved by $60m 2019 YTD vs. prior year. The drivers for Q3 margin improvements are: 1) higher sales per store (operational leverage) 2) lower payroll 3) lower marketing costs. Partly also from higher sales in department stores due to strength in home goods. How much more will margins improve, after SSI converted 540 stores to off-price and close 75 stores post Q3 2019? There is way to go from 2019E Adjusted EBITDA margin of ~2%. Achieving only half of industry margins of 13% could significantly impact the share price.

Source: SSI - Q3 2019, investor call presentation. Highlight from Ambra Capital Management LLC.

Historical Projected 2017 H1 2018 Q3 2018 Q4 2018 H1 2019 Q3 2019 Q4 2019E Q3 2020E Department stores as o Nov 21 Start 798 777 764 754 727 645 614 578 End 777 764 754 727 645 614 578 0 Change, of which (21) (13) (10) (27) (82) (31) (36) (578) Converted 0 1 8 0 72 17 0 541 Closed 21 12 2 27 10 14 36 37 Off-price retailer (Gordmans) Start 0 58 59 68 68 141 158 159 End 58 59 68 68 141 158 159 700 Change, of which 58 1 9 0 73 17 1 541 Acquired 58 0 0 0 0 0 0 0 Converted 0 1 8 0 72 17 0 541 Opened 0 0 1 0 1 0 1 0 Source: Table from Ambra Capital Management LLC. SSI historical data from public filings. Projected data based on management guidance.

Back of the envelope assumptions for run-rate EBITDA post conversion provides an idea of EBITDA potential. A detailed analysis of the potential EBITDA is laid out later in the document.

Table: Short-Form Calculation of Pro Forma Run-Rate EBITDA ($m) Commentary Net Sales 1,780 Assumes 75 stores are closed post Q3 2019, 20% sales uplift for 540 stores converted Credit Income 36 2% of net sales Revenue 1,816 Fixed COGS 175 Lease Expenses + D&A Variable COGS 1,175 66% of sales COGS 1,350 Gross Profit 466 % margin 25.7% SG&A 375 % of revenue 20.7% In Q3 2019, prior to closing 75 stores, and converting 540, it was 24.9%. Q4 SG&A % of sales is 5-7% points lower. EBIT 91 D&A 63 EBITDA 154 % margin 8.5% Source: Table from Ambra Capital Management LLC.

Upside to current share price The upside potential is asymmetrically higher than the downside. Even under conservative assumptions, the share price seems to be significantly undervalued. To analyze the share price potential, valuation is approached from different angles.

1. What does it take for SSI’s share price to be at $20.00, or ~2x the current share price? The table below details at which EBITDA % margin and EV/EBITDA combination SSI would trade at $20.00 The sensitivity analysis assumes that after the conversions the revenue would be $1.8bn (2019E $1.7bn), net debt $200m, and diluted shares around 30m. Net debt is based on cash flow assumptions for the next 12-18 months. The conclusion from the table is that even at only 5% EBITDA margin, with a multiple of below 9x, i.e. 45% discount to peers which trade at 16x, SSI’s share price would be $20.00. If SSI achieves an EBITDA margin of 8% (vs. Peers at 13%), it only takes and EV/EBITDA multiple of 5.6x to get to a share price of $20.00.

Table: PF Run-Rate EBITDA % margin and EV/EBITDA combination - SSI’s share price at $20.00 ($m, except per share data) PF Revenue $1,800 $1,800 $1,800 $1,800 $1,800 $1,800 % PF Run-Rate EBITDA Margin 5.0% 6.0% 7.0% 8.0% 9.0% 10.0% PF EBITDA 90 108 126 144 162 180 EV/EBITDA 8.9x 7.4x 6.3x 5.6x 4.9x 4.4x EV 800 800 800 800 800 800 Less: PF Net Debt (200) (200) (200) (200) (200) (200) Market Cap 600 600 600 600 600 600 Shares Outstanding (m) 30 30 30 30 30 30 PF Share Price $20.00 $20.00 $20.00 $20.00 $20.00 $20.00 Source: Table from Ambra Capital Management LLC.

With increasing margins, valuation multiples are expected to expand. A sensitivity table that uses the same assumption as in the table above with respect to PF revenue, net debt and shares outstanding, lays out the potential for the share price at different combination of multiples and margins.

Table: Stock Price - Sensitivity analysis PF Run-Rate EBITDA Margin Peers 5.0% 6.0% 7.0% 8.0% 9.0% 13.0% 6.0x 11.33 14.93 18.53 22.13 25.73 7.0x 14.33 18.53 22.73 26.93 31.13 8.0x 17.33 22.13 26.93 31.73 36.53

EV/EBITDA 9.0x 20.33 25.73 31.13 36.53 41.93 Peers 16.0x 118.13 Source: Chart from Ambra Capital Management LLC.

2. EV/2019E revenue for SSI is 0.3x. This compares to 2.2x for its peers. While it is an inferior metric to EV/EBITDA, it is useful as we enter 2020 a year with significant noise around the financial performance of SSI overall, as the company converts 540 stores. And with margin improvements there is reason to assume that the multiple has potential to expand.

Table: Trading Comparables ($m, except per share data) Revenue EBITDA, Adjusted EPS - Diluted, Adjusted EV/Revenue EV/EBITDA P/E LTM 2019E 2020E LTM 2019E 2020E LTM 2019E 2020E LTM 2019E 2020E LTM 2019E 2020E LTM 2019E 2020E BURL $7,066 $7,277 $7,930 $844 $865 $952 $7.00 $6.94 $7.98 2.3x 2.3x 2.1x 19.6x 19.1x 17.4x 33.4x 33.7x 29.3x ROST 15,733 15,998 16,984 2,440 2,504 2,693 4.52 4.57 5.01 2.6x 2.6x 2.4x 17.0x 16.6x 15.4x 26.1x 25.8x 23.6x TJX 40,638 41,333 43,883 5,156 5,230 5,554 2.45 2.62 2.85 1.9x 1.8x 1.7x 14.6x 14.4x 13.6x 25.1x 23.4x 21.6x

Mean 21,146 21,536 22,932 2,813 2,866 3,066 4.66 4.71 5.28 2.3x 2.2x 2.1x 17.1x 16.7x 15.5x 28.2x 27.7x 24.8x Median 15,733 15,998 16,984 2,440 2,504 2,693 4.52 4.57 5.01 2.3x 2.3x 2.1x 17.0x 16.6x 15.4x 26.1x 25.8x 23.6x Source: Table from Ambra Capital Management LLC. Financials from public filings.

Table: Trading Comparables CAGR and EBITDA Margin ($m, except per share data) Revenue CAGR EBITDA % Margin EV '15-'19E '18-'19E LTM 2019E 2020E BURL $16,540 10.8% 9.3% 11.9% 11.9% 12.0% ROST 41,596 9.7% 6.8% 15.5% 15.7% 15.9% TJX 75,371 9.2% 6.1% 12.7% 12.7% 12.7%

Mean 44,503 9.9% 7.4% 13.4% 13.4% 13.5% Median 41,596 9.7% 6.8% 12.7% 12.7% 12.7% Source: Table from Ambra Capital Management LLC. Financials from public filings.

3. From a bottom-up approach, as laid out in the table above and in more detail later in the document, the post conversion, pro forma run-rate EBITDA could be $150m. Assuming a trading discount of 30% to current peers, the share price could be around $50, or ~5x current levels. Table: Share Price based on Pro Forma Run-Rate EBITDA ($m, except per share data) PF Run-Rate EBITDA 110 130 150 170 190 Peers' EV/EBITDA FY+1 15.5x 15.5x 15.5x 15.5x 15.5x 30% Discount to Peers 10.9x 10.9x 10.9x 10.9x 10.9x EV 1,196 1,413 1,631 1,848 2,066 Less: PF Net Debt (200) (200) (200) (200) (200) Market Cap 996 1,213 1,431 1,648 1,866 Shares Outstanding (m) 30 30 30 30 30 PF Share Price $33.20 $40.45 $47.70 $54.94 $62.19 Source: Table from Ambra Capital Management LLC.

Table: Stock Price - Sensitivity analysis PF Run-Rate EBITDA 110 130 150 170 190 8.8x 25.69 31.57 37.46 43.34 49.22 9.8x 29.36 35.91 42.46 49.01 55.56 10.8x 33.02 40.24 47.46 54.67 61.89 11.8x 36.69 44.57 52.46 60.34 68.22

EV/EBITDA 12.8x 40.36 48.91 57.46 66.01 74.56 Source: Table from Ambra Capital Management LLC.

Positive developments indicate a strong outlook for SSI 1. The comparable sales growth for SSI has been off the charts. SSI achieved the highest Q3 sales in the history of the company. And that despite having reduced the number of stores (from 832 in 2015 to 772 in Q3 2019). SSI booked 17% growth of comparable sales in Q3 2019, and growth each month of the quarter. More importantly, the 89 new off-price stores achieved 40% comparable sales growth in Q3, which compares to sales that the stores achieved a year earlier when they were still department stores. This bodes well for the top line for the upcoming 540 conversions. The top line growth will contribute to margin expansion due to the operational leverage in the stores. And the operational leverage will be higher with lower SG&A.

Comparable sales growth 20.0% Management reported that the 15.0% 89 stores converted to off- 10.0% price stores in 2019 had yoy sales 5.0% increase of 40% in Q3 2019.

0.0% Q1 Q2 Q3 Q4

(5.0%)

(10.0%)

(15.0%) 2016 2017 2018 2019

Source: Chart from Ambra Capital Management LLC. Data from SSI public filings.

Department stores sales development. Q3 2019 department stores revenue grew from $275m to $307m, or 12%, while the number of stores went down from 754 to 617. I.e. revenue per store went up by 34%. The growth is due to the comparable sales increase of 180% for their home business, which SSI has invested in, expanded and upgraded. In addition, management has implemented in Q3 2019 in its 700 stores Amazon Counter, which increased foot traffic, including from new customers. Customers can pick up ordered items from Amazon Counter at SSI’s stores.

“During the third quarter, many of our loyal guests took advantage of the Amazon Counter Service. But we also welcomed many new faces into our stores. Amazon Counter is now available in approximately 700 of our stores. Just in time for the holiday season.”

Source: November 21, 2019 – Earnings Call. Highlight Ambra Capital Management LLC.

Department Stores - Sales Growth 500,000 900

450,000 800

400,000 -18% 700 350,000 +12% 600 300,000 500 250,000 400

200,000 Revenue Revenue ($k)

300 Number of stores 150,000 200 100,000

50,000 100

0 0 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 2017 2018 2019

Department Store Revenue Department Stores (end of period) Source: Chart from Ambra Capital Management LLC. Data from SSI public filings.

The sales growth per store is further driven due to the closing of 48 department stores (not converted), which were likely the poor performing stores.

Off-price stores sales developments. The size of the 58 stores acquired in 2017 is around 50k sqft, more than 2.5x the average of SSI’s department store size of 18k sqft. The additional 10 stores from 2018 have an average size of 27k sqft. Because the 2019 converted 89 stores are much smaller than the pre 2019 off-price stores, a revenue/store analysis over all Gordmans stores is not meaningful for Q3 2019 vs. Q3 2018. It seems, that the sales growth from the legacy Gordmans stores acquired in 2017 is mixed to negative. The reason is likely that they are not located in low competition, but rather in urban areas. The huge size makes it more challenging to fill the stores with attractive merchandise. Notwithstanding the performance of the legacy stores, relevant is the performance of the new stores, which is outstanding with the growth of 40% compared to when they used to be department stores. They are indicative of the sales potential of the other 540 stores that

are up for conversion. Even if they don’t achieve the same growth of 40%, it is fair to assume that they will significantly drive top line growth. And with top line growth margins will expand, due to operating leverage, beside lower SG&A costs per store.

Source: SSI - Q3 2019, investor call presentation. Highlight from Ambra Capital Management LLC.

2. Q3 2019 also reported strongest margins for years. Adjusted EBITDA was the first time positive since 2015, at $15m, up $28m from negative $13m in Q3 2018, as shown in the Adjusted EBITDA chart above. These huge margin improvements are the results of a combination of drivers: impact of sales growth due to operating leverage; closing of underperforming stores; lower SG&A for off-price stores. Relevant for the analysis of future performance would be details of the off-price stores margins and drivers, which management will likely break out during the course of 2020.

Concerns 1. Concern: The 40% growth from 89 off-price stores are not apples to apples because they compare to what had been department stores a year earlier. It still means that off-price stores achieve much higher sales, which in turn will increase margins due to operational leverage. And sales increase from the conversion of 540 department stores to the post-conversion off-price store will improve margins for SSI. 2. Concern: Performance of the 58 legacy off-price stores acquired in 2017 seem to underperform the recently converted off-price stores It would require more information from management how they fared and the reason for their performance. From what we know, is that they are located more in urban areas and have with ~50k sqft 2.5x the size of the other SSI stores. This makes is likely more difficult to fill it up with attractive merchandise and to compete with other off-price retailers in the region. There is reason to believe that the drivers for the legacy stores performance won’t apply to the 540 stores that are up for conversion this year. 86% of SSI’s stores are in scarcely populated markets, and most of the stores have less than 25k sqft.

Source: SSI - Q3 2019, investor call presentation.

3. Concern: The execution of the conversion of 540 stores in three quarters 2020 is ambitious. While this seems a large undertaking, management has experience with converting ~100 stores and we should believe that they have the ability to judge the feasibility of the plan and put measures in place to achieve it. Worst case, management may need additional months and face some challenges on the way. This would just impact the timing, but not the overall investment thesis. Potentially also additional one-time costs of conversions. 4. Concern: SSI booked losses based on actual GAAP financials reported for YTD 2019. The actual GAAP financials include non-recurring, non-operating and non-cash events. Such as impairment of technology that SSI won’t use in the future (non-cash, non-recurring) of $7.8m and store impairments of $2.1m YTD 2019. Pre-opening expenses and store closing

expenses of $5.6m and severance of $2.9m YTD 2019. All of which would not recur once SSI has executed the conversions. 5. Concern: Sales per square foot is ~$100 for SSI compared to $300-$400 for peers. This is, though, backward looking and a reason for converting the department stores to off- price. As management reported, the 89 converted off-price stores had 40% higher sales than a year ago when they were department stores. And since it is early in the process of becoming a pure-play off-price retailer, there is more room to improve the merchandise and systems to further grow sale per square foot. Management may provide more details about sales per sqft for the recently opened off-price stores. In the similar vein, the inventory turnover has been low for SSI with 2x per year approximately, which is below the peer’s inventory turnover of 5x for the peers. With higher sales, the inventory turnover will increase. The historic performance is not indicative of how SSI will fare as off-price retailer after conversion of 540 stores. Once the conversion is executed, inventory turnover should be revisited. The relevance of sales per square foot and inventory turnover is that they are providing a measure of operating performance, which in turn drives the financial profitability. However, SSI’s historical performance is backward looking, doesn’t relate to the potential performance as off-price retailer. Its strong Q3 indicates the potential of the transition.

How 2020 will play out SSI’s financial reporting will be in an unusual situation in which there is more noise than base data to rely on. The reason for so much noise is the conversion of 540 stores, closing of ~40 stores, while SSI currently operates 617 department stores, 58 legacy Gordmans stores, and 100 new Gordmans stores. The noise will include the costs of the conversion and opening, and lost revenue of the conversion period (10 days). Management’s focus on conversion may distract them from improving the off-price stores. Analysts and investors will look for information that allow them to improve their assumptions about how SSI will fare once all conversions are executed.

Outlook for Q4 and FY 2019 – estimates and management guidance There is a good chance that Q4 and FY 2019 results will be better than management guidance, providing a catalyst for the share price. Adjusted EBITDA for Q4 2019 could come in at $55m, above management guidance of $45m - $50m. For FY 2019, adjusted EBITDA of $45m, above management guidance of $35m - $40m, is conceivable. It could be also $10m above the estimate, as explained below. The balance sheet can improve to a healthy level of net debt / LTM EBITDA of below 5x.

Changes in financial model to prior analysis: Prior analysis allocated the adjustments provided in the press release to SGA. Now with the 10Q, $2.4m of the impairments were recorded in COGS. This information wasn’t provided in the Q3 press release. Adjusted COGS % of net sales is 78.4% (prior model 79.0%), and adjusted SGA % of total revenue 24.5% (prior model 24.0%). I.e. the impact of change in the model is modest.

Q4 2019 model assumptions: Net sales: $560m, calculated based on FY 2019 management guidance midpoint of $1.655bn less Q1-Q3 actual net sales. Note that net sales in Q4 is much higher every year than each of Q1-Q3 because of the holiday sales. Prior quarter sales were $399m. Q4 sales has been always around 33-34% of full year sales, while the other quarters are around 20%-24% of full year sales. As a result of higher sales in Q4, the operational leverage of fixed costs drives the % margin up. More about it below. Important to note is that $560m of Q4E sales is only 8% higher than Q4 2018. While Q3 2019, partly driven by the conversions and partly by the home décor business, grew 15% year over year. Credit income: $19.6m, or 3.5% of net sales, below 3.9% of net sales in Q3 and similar to Q4 2017 and Q4 2018 % of net sales. COGS % of net sales: improvement of 3% vs Q3, similar to prior years’ % points improvements, due to operational leverage from higher Q4 sales. SGA % of net sales: In 2018 and 2017 SGA as % of net sales improved 7% from Q3 to Q4. The model assumes improvement of only 5% in Q4 vs. Q3. i.e. the model is more conservative (2% * $560m in net sales = $11m of potential additional income). Different way to view it: Around $14m of additional SGA in Q4 compared to Q3, while in 2018 the additional SGA was $15m. I.e. overall margin improvement of only 8% from Q3 to Q4 in 2019 assumed, while the Q3 to Q4 margin improvement in 2018 and 2017 was more 10% in both years.

Q4 2019 and FY 2019 estimates beat management guidance Estimates for Q4 2019 adjusted EBITDA are $55m (vs. management guidance range of $45m-$50m). The main driver for the profitability is the margin improvement in Q4 over Q3. We estimate 8% points margin improvement (adjusted COGS + SGA % of sales), while in 2018 and 2017 the margin improvement was more than 10%.

($ '000, except per share data) Ambra Capital estimate 2019E Assumptions Q4E FY Est. Net sales 560,112 1,655,000 FY: based on management guidance. Q4= FY-9mos Credit income 19,604 62,378 Q4: Product of % of net sales * net sales % of net sales 3.5% 3.8% Similar to prior Q4 years % of net sales Total revenues 579,716 1,717,378

Adjusted cost of sales 420,278 1,304,075 Q4: COGS % of net sales decreases 3% points vs Q3, which compares to decrease of 3% in 2018, and 5% in 2017 % of net sales (excl. credit inc.) 75.0% 78.8% …due to operational leverage from higher Q4 sales

Adjusted SGA 117,004 425,674 Q4: % of revenue declined ~7% from Q3 to Q4 in 2017 and 2018. Conservatively, assumes for Q4 2019 decline of 5% points % of net sales (excl. credit inc.) 20.2% 24.8% ... i.e. less than last years, adding an increase of $15m in Q4 over Q3 2019, i.e. similar SGA increase as in last year.

Interest expense 3,813 16,000 FY: based on management guidance. Q4= FY-9mos. Q4 ties to average debt (modeled) * interest rate Income tax expense 550 1,000 FY: based on management guidance. Q4= FY-9mos. Net income - adjusted 38,071 (29,371) It is adjusted income, because the one time costs of impairments, store closures and conversion have not been included

D&A 12,856 58,000 FY: based on management guidance. Q4= FY-9mos. EBITDA - adjusted 55,290 45,629 % Margin 9.5% 2.7% Source: Table from Ambra Capital Management LLC.

Each % point of margin improvement would result in additional $5.5m of EBITDA. I.e. if we assume just 6% points improvement of adjusted COGS and SGA % of sales in Q4 over Q3, then Q4 2019 net income would be $27m and EBITDA $44m, which is at the bottom end of the management’s guidance range. However, a 10% point margin improvement in Q4 over Q3 2019, similar to 2017 and 2018 improvements, would result in net income of $49m and EBITDA of $66m. The table below shows that with assumptions for Q3-Q4 margin improvements in 2019, modest compared to 2018 and 2017 Q3- Q4 improvements, 2019 Q4 results and FY results can beat management guidance. And the analysis does not include that SSI could outperform management’s revenue guidance.

Table: 2019 Q4 and FY Adj. Net Income and Adj EBITDA – Sensitivity analysis Q3 to Q4 % points improvement of Adj. COGS + SGA as % of net sales: 2017 12.2% 2018 10.6% Resulting Metrics Q4 ’19 ($m) FY 2019 ($m) Assumptions: Adj. Net Inc. Adj. EBITDA Adj. Net Inc. Adj. EBITDA 2019 6% $27 44 ($41) $34 7% 32 50 (35) 40 8% - Model 38 55 (29) 46 assumptions 9% 44 61 (24) 51 10% - close, but 49 66 (18) 57 below 2018

Management Guidance ($40) – $27 - $32 $45 - $50 $35 - $40 ($35) Source: Table from Ambra Capital Management LLC.

Impact of higher sales growth on Q4 and FY 2019 results More earnings potential for Q4 2019 can come from top line growth that is higher than management assumptions. Assuming that Q4 2019 net sales also grows at 15% year-over-year, like it did in Q3 2019, driven by the conversions and the home business (instead of 8% growth from management guidance); that COGS increases as we keep the % of sales at 75%, the same as in the model (although, some of COGS like rent is fixed); that SGA is mostly fixed costs, keeping it at $117m for Q4; then EBITDA would be another $10m higher, i.e. at $65m.

Q4 2019 and FY 2019 estimated cash flows will delever SSI significantly Management estimates positive cash flows of more than $35m for FY 2019 (Q3 press release). This would mean $112m of free cash flow in Q4 2019. Note that YTD 2019 had operating cash flows that were $60m higher than YTD 2018. Q4 2019 assumptions: Inventory reduced by $160m in Q4 2019 (vs. reduction of $178m in Q4 2018, $138m in Q4 2017). Bringing accounts payables as % of inventory to same level as Q4 2018, and

decrease other liabilities by $15m, Q4 2019 result in $85m of cash outflow in accounts payables + other liabilities (vs. cash outflow of $100m in Q4 2018 and $77m in Q4 2017). As a result, SSI could generate operating cash flows of $127m in Q4 and $50m in FY 2019. Net debt / EBITDA will be at healthy levels: After capex of $5m, net debt could be reduced by $122m, while keeping a cash balance of $27m. Net debt would be $217m at year end, or 4.8x EBITDA. With EBITDA/interest of 2.9x The cash flows may be negatively impacted by closing costs of around $4m om Q4 2019.

Drivers for additional margin improvements Q4 2019: There could be more margin improvement from the closure of ~38 more underperforming department stores in Q4 2019, although they are mostly closed in January. 2020: The conversion of 540 stores and closure of ~40 underperforming department stores.

Outlook for pro forma run-rate performance and valuation FY 2020 will be a year with a lot of noise from converting 540 department stores to off- price stores. The reported financial performance will include the impact of 10 day blackout periods for each of the stores, the pre-opening expenses, and the closing costs of ~40 stores, besides the operational challenges of ramping up the business for all the off-price stores, implementing systems, improving the supply chain. Forecasting the actual or even adjusted 2020E financial performance is less relevant for valuation, because even the adjusted 2020E is not reflecting the potential of having all stores operational for the full year. Most relevant for valuation purpose is the potential run-rate earnings power of SSI after becoming a pure-play off-price retailer. Below is an analysis of the potential pro forma run-rate of SSI pro forma for the conversion of the 540 stores, closing of 40 stores.

1. Sales: Through investment in home goods and Amazon Counter sales have improved in Q3. For this reason 2019 Q3 and management guidance for Q4E 2019 would become the starting point. Historically, each of Q1-Q3 represented ~22% of the annual sales, and Q4 34% of the annual sales. Because there has been recent growth in sales from initiatives, we annualized

Q3 and Q4E (management guidance) to derive pro forma post conversion revenue. Based on management guidance, it seems they plan to close 75 department stores, half of which end of Q4. We assume that the department stores converted to off-price will experience a 20% growth bump (which compares of 40% that management reported for the 89 stores converted in 2019).

Table: Sales assumptions - Pro Forma for conversion of all stores / Run-Rate ($m) Commentary Q3-Q4E 2019 Sales Department Stores 738 Q3 and Q4E include recent growth from initiatives, e.g. Off-Price Stores 222 Home Goods and Amazon Counter Total 959

Annualized Sales Q3 and Q4E represents 22% and 34% of annual sales Department Stores 1,317 =738/0.56 Off-Price Stores 396 =222/0.56 Total 1,713 compares to 2018: 1,580 and 2019E management: 1,665

Annualized Post Conversion Of the 617 department stores open at beginning of Q4 Closing of 75 of 617 department stores 0 2019, 75 expected to be closed, and 542 to be converted Pre-conversion 542 of 617 stores 1,157 =542/617*1,317 Post-conversion 542 stores 1,389 Assuming 20% growth = 1,157 * 1.2

Pro forma run-rate sales Net Sales 1,785 Assuming no growth of off-price stores = 1,389 + 396 Pro forma credit income at 2% of sales 36 Assuming to be lower for off-price than it was for department stores Total pro forma run-rate revenue 1,820 Source: Table from Ambra Capital Management LLC. Historical financials from SSI public filings.

2. COGS: To determine run-rate COGS, we split out fixed and variable COGS to determine the % of sales that is variable and apply it to run-rate sales.

Table: COGS assumptions - Pro Forma for conversion of all stores / Run-Rate ($m) Commentary Q3 2019 Net sales 399 Total Adjusted COGS 312 % of net sales 78.0%

Lease expenses in COGS 35 Adjusted D&A in COGS 12 16m of D&A less 4m from impairments Total fixed COGS 47 % of net sales 11.7%

Variable COGS 265 % of net sales 66.3%

Pro forma run-rate COGS Leases expenses after closing 75 stores 31 =35* 700/775 end of Q3 2019 stores Annualized lease expenses 125 =31*4 Annualized D&A 49 Assuming conservatively that none of D&A in COGS is tied to stores Variable COGS 1,183 =66.3% * 1,785 Total COGS 1,357 Gross Profit 463 Total pro forma run-rate revenue - COGS % margin 25.4% Source: Table from Ambra Capital Management LLC. Historical financials from SSI public filings.

3. SG&A: Adjusted SG&A was 26% of net sales in Q3 2019, or 5% points lower than 31% of net sales in Q3 2018. The improvement came from “lower store expenses due to the closure of underperforming stores, lower marketing costs associated with operating our off-price stores, planned reductions in department store marketing and sales leverage on fixed costs,” (Q3 10Q, Stage Stores). I.e. 5% points margin improvement came from the conversion of 89 stores and closing of 21 underperforming department stores. Partly also from higher sales from home goods. How much more will SG&A improve, when SSI converts 540 stores and close 75 stores post Q3 2019? Let’s assume the additional margin improvement is only another 3%. And for Q4, it improves only by another 5% (vs. 7% Q3 to Q4 improvement in 2018 and 2019). Because Q1-Q3 sales represent ~66% of annual sales and Q4 sales are ~34% of annual sales historically, to determine full year, we need to calculate the weighted average: 23% * 66% and (23%-5%) * 34%.

Additional SG&A improvements are conceivable. Each 1% point will add $18m in EBITDA.

Table: SG&A assumptions - Pro Forma for conversion of all stores / Run-Rate ($m) Commentary Q3 2019 Adjusted SG&A 103 % of net sales 25.9% 5% lower than Q3 2018, from closing of 21 stores and 89 conversions Adjusted D&A in SG&A 3 =9m of D&A less 6m of impairment % of net sales 0.8%

Pro forma run-rate SG&A Run-rate SG&A % of net sales for Closure of underperforming stores, lower payroll, lower marketing costs, leverage of higher sales each of Q1 to Q3 22.9% Assumes 3% margin improvement, from closing 75 stores and 542 conversions Q4 17.9% Assumes 5% below Q1-Q3 due to holiday busines, similar to 2018 and 2017 Annualized SG&A % of sales 21.2% =66%*22.9% + 34% *17.9% SG&A 378 =21.2%*1,785 Source: Table from Ambra Capital Management LLC. Historical financials from SSI public filings.

4. EBITDA: Table: EBITDA - Pro Forma for conversion of all stores / Run-Rate ($m) Commentary Revenue 1,820 COGS 1,357 Gross Profit 463 % margin 25.4% SG&A 378 EBIT 85 % margin 4.7% D&A 63 Annualizing Q3 D&A of 15.3m, excluding impairments EBITDA 148 % margin 8.1% Source: Table from Ambra Capital Management LLC.

The EBITDA potential is around $150m on a run-rate basis. This assumes SG&A improvement of only 3% of net sales vs. Q3 2019. Each additional % margin improvement will add another $18m in EBITDA.

Valuation Relevant for the long-term valuation is how SSI will perform as a pure-play off-price retailer. The starting point for the analysis are assumptions for the top line, gross margins and SGA. If management provides details about how the converted off-price stores perform throughout their 2020 reporting, the assumptions can be refined. With increasing clarity about margins and growth, not only the profitability, but also potential multiple expansion will drive the share price. During 2020, the run-rate financial performance of SSI should become increasingly tangible and make it investable for the broader universe of funds, which will further drive the share price. Until then SSI will be an investment opportunity at low entry price. The opportunity is a multiple of the current share price.

Table: Share Price based on Pro Forma Run-Rate EBITDA ($m, except per share data) PF Run-Rate EBITDA 110 130 150 170 190 Peers' EV/EBITDA FY+1 15.5x 15.5x 15.5x 15.5x 15.5x 30% Discount to Peers 10.8x 10.8x 10.8x 10.8x 10.8x EV 1,191 1,407 1,624 1,840 2,057 Less: Net Debt (200) (200) (200) (200) (200) Market Cap 991 1,207 1,424 1,640 1,857 Shares Outstanding (m) 30 30 30 30 30 PF Share Price $33.02 $40.24 $47.46 $54.67 $61.89 Source: Table from Ambra Capital Management LLC.

EV/EBITDA 12.8x 40.36 48.91 57.46 66.01 74.56 Source: Table from Ambra Capital Management LLC.

Appendix A: Costs of converting the stores Capex With increasing experience of converting stores, management downward revised the capex per conversion from $125k to $80k and then to $40k. 541 conversions would require a capex of $21.6m. Taking this into account, management projects total capex of only $30m for 2020. Maintenance capex post conversion hasn’t been provided by management, and would be helpful to know for further analysis, but if the guidance is accurate, then $8.4m of capex is maintenance for the other stores, though the conversion of stores also likely saves some maintenance which would be due otherwise. However, it would not be surprising if the run-rate maintenance capex for the 700 stores would be significant less than $30m, at around $20m, which would provide additional $10m of cash flow on a run-rate basis. Expenses Other costs for the transition include the pre-opening expenses, which averaged to be $38k per opened and converted store ($3.5m reported pre-opening costs for YTD 2019, and 89 converted and one opened), and would translate to $20.8m of one-time costs for the conversion of 541 stores in 2020. The closing of department stores cost $2.2m YTD 2019, for 24 stores, or $92k per store. Closing of 36 stores in Q4 and 37 in 2020, will result in one-time costs of $6.7m. Total one-time costs could be around $27m for the next 12 months, of which $3m would occur in Q4 2019.

Disclaimer As of the publication of this report, Ambra Capital Management LLC (“Ambra Capital”) and the authors of the report have long positions in equity securities of Stage Stores Inc. (“Company”). Ambra Capital and the authors stand to realize gains in the event that the prices of the securities increase. Following publication, Ambra Capital and the authors may transact in the securities of the Company. All expressions of opinion are subject to change without notice, and Ambra Capital does not undertake to update this report or any information herein. All content in this report represent the opinions of Ambra Capital. The authors have obtained all information herein from sources they believe to be accurate and reliable. However, such information is presented “as is,” without warranty of any kind – whether express or implied. The authors make no representation, express or implied, as to the accuracy, timeliness, or completeness of any such information or with regard to the results obtained from its use. All expressions of opinion are subject to change without notice, and the authors do not undertake to update or supplement this report or any information contained herein. This report is not a recommendation to purchase the securities of any company, including Stage Stores Inc., and is only a discussion of why Ambra Capital is long equity. The information contained in this document may include, or incorporate by reference, forward-looking statements, which would include any statements that are not statements of historical fact. Any or all of the forward-looking assumptions, expectations, projections, intentions or beliefs about future events may turn out to be wrong.