•Implementedpriceoptimizationsoftwareacrossallcategoriestoenhancemarkdown-decisionmakingand enableregionalmarkdowns.Althoughthelearningcurvefortheintegrationhasbeenlongerthanoriginally anticipated,thesystemisinplaceandwecontinuetoseeitasacontributortofuturegrossmarginprogress. •Introducedaco-brandPlatinumMasterCardtoprovidetangibleincentivestoourPreferred Customersandtocreateadditionalopportunitiestomarketdirectlytocustomers. •Opened12newstoresinamixofnewandexistingmarkets,includingentryintoPittsburghand NewYorkCity(Queens).WealsoexpandedourpresenceinseveralmarketsinTexas,Florida, CaliforniaandtheCarolinas.Sixunder-performingstoreswereclosed. •Convertedremaining104leasedshoedepartmentstoDSWInc.tocompletethechain-widetransition toonelessee.DSWprovidesanextensivevarietyoffootwearforcustomers,andshopperswillnow beabletopayforshoeswiththerestoftheirmerchandiseatthefrontofthestore. •Invested$48millionincapitaltoopennewstoresandcompletetheCompany-wideinstallationofnew transactionprocessingsystems(cashregisterhardwareandsoftware)aswellasassociatedremodeling. Selectstoresalsoreceivedadditionalremodelingtonew,upgradedpaintandflooringstandards. •Paidout$65millioninaspecialcashdividendtoshareholdersandcontinuedtopayaregularannual dividendof$0.25pershare. WeaddeddepthtoourmanagementorganizationwiththepromotionofWilliamA.Molltoexecutive vicepresidentandchiefmerchandisingofficerandD.HuntHawkinstoexecutivevicepresidentfor operations.Twonewgeneralmerchandisingmanagers,MarthaWithersforBoutiqueandLadies’apparel andJulieThomasDinklageforHome,alsojoinedourorganization. LookingAhead Withthemajorinitiativesbehindus,weanticipateasmootheryearin2007.Ourgoalwillbetotweak selectedareasofemphasis:concentratingourresourcesonthefashionassortmentinapparel,improving theHomebusiness,maximizingourrelationshipwithDSWInc.andbecomingmoreadeptwithour systemsenhancements.Marketingwillbeamajorareaofemphasisin2007asweworktoattract existingandnewcustomersintothestorewithanupdatedbrandingapproachbeingdevelopedbyour newcreativepartner.Wewillbroadenthestorenetworkwithplanstoopen15-20storesinboth existingandnewmarkets,andwewillclosetwounder-performingstoresandrelocatetwoothersto locationswithmoreopportunity. Goingforward,ourgoalistoexceedtheexpectationsofourcustomersandourstockholders.Wewill pursuetoplinegrowth,fueledbymorecompellingmerchandisetoenhancecomparablestoresales,aswell asnewstoreopeningsinmarketsthatmakesenseforourexpansion.Wewillalsocontinueourpushfor superiorgrossmargins,supportedbyourtechnologyinvestmentsandexecutedbyourmerchandising organization.Ourbalancesheetwillremainaconservativebutstrategicresourcetofundouroperations, andwewillcontinuetodeploycashtogrowourbusinessandtorewardshareholders.Wewelcome yourinterestasweworktogetherforourfuture. MichaelD.Fisher, PresidentandChiefExecutiveOfficer3SteinMart,Inc.

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