SecProbe.io

CORRESP
1
filename1.htm

corresp

JONES, WALKER, WAECHTER, POITEVENT,

CARRÈRE & DENÈGRE, L.L.P.

201 St. Charles Avenue

Suite 5100

New Orleans, LA 70170

August 11, 2005

VIA EDGAR AND FEDERAL EXPRESS

Securities and Exchange Commission

100 F Street, N.E.

Washington, D.C. 20549

    Attention:

    Ms. Kathryn T. Jacobson

    RE:

    Stewart Enterprises, Inc.

    Form 10-K for the Fiscal Year Ended October 31, 2004

    Filed January 11, 2005

    Form 10-Q

    For the Quarterly Period Ended January 31, 2005

    Form 10-Q

    For the Quarterly Period Ended April 30, 2005

    Your File No. 1-15449

Ladies and Gentlemen:

     On behalf of Stewart Enterprises, Inc. (“Stewart” or the “Company”), we are submitting this
letter in response to the comments received from the Commission’s staff (the “Staff”) by facsimile
on July 28, 2005 with respect to the above-captioned periodic reports. We have numbered and
reproduced below the full text of the Staff’s comments in italics, each of which is followed by
Stewart’s response.

Form 10-K for the Fiscal Year Ended October 31, 2004

Item 1. Business, page 2

Comment 1. We note your response to our prior comment 1 under Item 2(1). Tell us in detail
what criteria you did not meet for sale and leaseback accounting and whether you accounted
for the related transaction under the deposit or the financing method. Refer to paragraphs
7 and 10 of SFAS 98.

    Response 1.

    We recorded the assets on our financial statements during the period of
construction because the Company was deemed to be

Securities and Exchange Commission

August 11, 2005

Page 2

    the owner under EITF 97-10. Upon completion of construction, we did not
qualify for sale-leaseback accounting because of our continuing
investment in the asset. Specifically, by paying for 100 percent of the
cost of project, we have provided financing to the buyer-lessor as
stated in paragraph 12(b) of SFAS 98. We account for the transaction
as a failed sale-leaseback transaction under the financing method
because of our continuing involvement.

    (24) Segment Data, page 104

    Comment 2.

    We note your response to our prior comment 7, including your analysis of SFAS
131 and certain supplemental reports provided to your CODM and the Board of Directors.
Although financial and non-financial metrics are reported for each product line
(funeral and cemetery), we note that key metrics for your funeral and cemetery
businesses are provided to the Board by geographic division. Although product
(business) objectives, standards, and metrics are set centrally, implementation is
performed at the divisional level and measurement of actual performance (against plan,
or on a year-over-year basis or competitive analysis basis) is reported to the CODM
and BOD at that level. The Company’s current segment presentation for external
reporting does not appear to be representative of how the operations are managed and
reviewed by the CODM. We therefore continue to believe that geographic divisions
constitute your operating segments. Please revise your segment presentation to comply
with the “management approach” as described in SFAS 131.

    Response 2.

     Based on our discussions with the Staff and the Staff’s position that
information included in the CODM package is determinative of management’s approach to
operating the business, we have reanalyzed our assessment of segment managers based on
the information provided to the CODM, and determined that the Company’s divisional
presidents act as segment managers as defined in paragraph 14 of SFAS 131. Further,
we have determined that review of the separate financial information of the funeral
and cemetery businesses (by division) by our CODM would result in a further division
by funeral and cemetery lines of business. Finally, because our CODM receives
information regarding the Puerto Rico operations separately along the funeral and
cemetery lines of business, the foregoing analysis would result in ten operating
segments as defined under paragraphs 10 through 15 of SFAS 131.

Securities and Exchange Commission

August 11, 2005

Page 3

    Comment 3.

    Please disclose the items required by paragraph 31 of SFAS 131.

    Response 3.

     The Company will disclose those items required by paragraph 31 of SFAS 131 in
its amended filings and future filings as it relates to its revised reportable
segments, which are discussed below in our response to Comment 4.

    Comment 4.

     We note your response to our prior comment 8. We believe that you currently
aggregate geographic operating segments based on product line (funeral and cemetery).
However, the supplemental information that you provided based on 2004 fiscal year
results indicates that geographic segments have dissimilar economic characteristics by
virtue of their disparate average gross margins. Demonstrate how you evaluated
whether the operating segments have similar economic characteristics. Your response
should include how you considered similarities, if any, in their long-term financial
performance in your decision to aggregate. Please advise or revise.

    Response 4.

     We note the Staff’s comment that the gross margins among certain of our
divisions as presented in the CODM reporting package may appear to have dissimilar
economic characteristics. However, the gross profit number on lines 49 and 50 of the
CODM reporting package do not include revenues or related direct costs associated with
our preneed sales. (All line item references are to the line items in the October 31,
2004 CODM reporting package the Company previously submitted to the Staff.) We
believe that our “adjusted gross margins” (as further explained in Item 1. below),
which include deferred preneed revenues and related costs, are a more relevant measure
for determining economic similarity given that we have significant deferred preneed
revenues generated each period for which related general and administrative (“G&A”)
costs and selling costs are expensed as incurred. Our gross profit margin reflected
in the CODM reporting package is not fully reflective of the divisions’ true economic
performance.

    As allowed by SFAS 131, the Company has assessed whether its ten
operating segments, assessed by line of business (funeral and cemetery)
are economically similar using its judgment and the facts and
circumstances applicable to each business for purposes of determining
its reportable segments. In defining whether or not the operating
segments are economically similar, we have (1) evaluated gross margin by
division and line of business while

Securities and Exchange Commission

August 11, 2005

Page 4

    adjusting for deferred revenues associated with preneed sales and
related costs which impact our ability to assess current and long-term
economic performance of our divisions, (2) evaluated the similarity of
the other metrics (“profitability metrics”) by line of business and
division in the information package that the CODM regularly reviews,
and (3) addressed the nature, types and relations of our G&A to revenues
(both preneed and at-need revenues) in assessing the performance of our
divisions given that these costs support both preneed and at-need
revenue.

    Item 1.

    Gross profit margins are included in the CODM package (lines 49 and 50
of the CODM reporting package) by division for purposes of reconciling
the GAAP financial information by division to the GAAP consolidated
results. However, when assessing the economic performance of the
divisions, the CODM does not focus on the gross profit margin percentage
in the package by division because this financial measure does not
consider the impact of the deferred “preneed” sales (line 6 for funeral
and lines 15 and 19 for cemetery in the CODM reporting package) which
are significant in assessing the performance of our divisions. The
Company will remove the gross profit metric in future reporting packages
at the divisional level as it is not a metric on which our CODM focuses.

    Revenue recognition in our industry is unique. We incur significant
selling and G&A costs that are recognized in the current period that
support both at-need and preneed funeral and cemetery merchandise and
service revenue. Revenues related to the preneed sales are deferred
until delivery occurs following the provisions of SAB 104. (Note that
effective November 1, 2004 the Company changed its accounting policy to
expense all acquisition costs as incurred but that change had no effect
on G&A costs which have always been expensed in the period incurred.)

    This accounting model results in current gross profit margins that lack
some relevance in assessing the economic similarity of the operating
segments as they do not account for preneed revenues that are deferred
for which the related costs allowing us to obtain those preneed sales
are currently expensed. Further, these preneed revenues are included
monthly in our CODM reporting package and are evaluated monthly by our
CODM and are considered in assessing the divisional performance,
evaluating

Securities and Exchange Commission

August 11, 2005

Page 5

    our long term financial performance and determining appropriate levels
of G&A by division.

    Therefore in evaluating performance by division and line of business,
our CODM also focuses on the “profitability metrics” that are discussed
in Item 2 below and the metric on line 6 of the CODM reporting package
which indicates the results of our preneed sales.

    For purposes of evaluating economic similarities among our divisions,
under a model linked to gross margin, we have prepared an analysis of
“adjusted gross margin.” See Exhibit A provided to the Staff separately
pursuant to a Freedom of Information Act confidential treatment request
illustrating the historical and budgeted funeral and cemetery adjusted
gross margin percentages for each of the ten operating segments (five
funeral operating segments and five cemetery operating segments). This
measure assumes that the revenue related to our preneed sales is
recognized currently as well as an estimate of the associated variable
direct cost of sales (primarily merchandise costs) upon the future
delivery of the preneed sales.1 The calculation also
includes current period recognition of the acquisition costs (sales
commissions) related to the preneed sales. We believe this analysis is
relevant as it reflects the economics of the operating segments by
including the impact of both our preneed and at-need revenue and related
costs and therefore is an appropriate basis for assessing economic
similarities or dissimilarities among our divisions.

    The adjusted gross margin percentages by division and line of business
generally do not vary by more than approximately 4 to 5 percentage
points for the funeral operating segments and approximately 3 percentage
points for the cemetery operating segments (excluding the Puerto Rico
cemetery segment) for any period in the last three fiscal years, the six
months actual results or the budgeted 2005 results. We believe that the
Western Division cemetery operating segment has economic similarity to
the other cemetery operating segments as evidenced by the results for
2004 and YTD 2005 in the adjusted gross margins. As described in the
third paragraph of Table B in Exhibit A, the Puerto Rico cemetery
operating segment does not generate the

    1

    In estimating the variable direct costs by
division and year, the Company determined the variable direct costs expensed in
each period for at-need sales and applied that variable direct cost percentage
by division to preneed sales in that period. The calculation was consistently
performed by year and by division for all divisions.

Securities and Exchange Commission

August 11, 2005

Page 6

    level of sales that supports the fixed cost nature of the cemetery
business to the extent of our other cemetery operating segments.

    Item 2.

    When reviewing the CODM package, the CODM focuses on five percentage
calculations to ascertain how the segments are performing and to measure
their profitability. The percentage calculations divide the cost item
on the corresponding line by the associated revenue item above in the
revenue section of the CODM package. For ease in discussion, we will
call these percentage calculations “profitability metrics.” Please see
Exhibit B in the reports provided to the Staff separately pursuant to a
Freedom of Information Act confidential treatment request illustrating
the historical and budgeted (a) five divisional profitability metrics,
and (b) G&A as a percentage of adjusted revenue for each of the ten
operating segments (five funeral operating segments and five cemetery
operating segments).

    In the funeral segment, the CODM focuses on the following profitability metric:

    •

    Direct funeral costs percentage — line 29 in the CODM
reporting package. The primary components of direct funeral
costs are funeral director salaries, wages and benefits and
funeral merchandise costs.

    In the cemetery segment, the CODM focuses on the following profitability metrics:

    •

    Property costs percentage — line 34 in the CODM reporting
package

    •

    Property selling costs percentage — line 36 in the CODM
reporting package

    •

    Direct costs of merchandise delivered percentage — line 41
in the CODM reporting package

    •

    Selling costs of merchandise delivered percentage — line 42
in the CODM reporting package. Note that this is an allocated
cost and thus the percentage is equal for all divisions.

    As the CODM focuses on these profitability metrics in managing and
assessing the business, the Company believes these profitability metrics
are relevant in determining whether its operating segments are
economically similar or dissimilar.

    We believe that the profitability metrics, which generally do not vary
by more than approximately 5 percentage points,

Securities and Exchange Commission

August 11, 2005

Page 7

    demonstrate that the operating segments by line of business are
economically similar, excluding the Puerto Rico cemetery operating
segment.

    Item 3.

    G&A is managed on a consolidated and divisional basis in gross dollars.
When assessing how the divisions are managing their direct and allocated
G&A costs, the CODM compares the actual expenses to the budgeted
expenses in gross dollars, not as a percent of revenue. These costs are
budgeted based upon growth over the prior year utilizing an inflation
factor and are managed such that they cannot grow faster than revenue is
expected to grow. These guidelines are the same for every division.

    The nature and types of the cost components of the G&A expense line
items are similar across all divisions and consist of expenses such as
depreciation, rent, utilities, building maintenance, property taxes,
allocated management fees, administrative salary, wages and benefits,
and advertising. As previously discussed, these costs support not only
current revenue but also various preneed sales which are not recorded as
current revenue.

    Given the significance of these costs, the Company has also provided the
Staff with an analysis of these costs as a percentage of total revenue,
which includes deferred preneed revenue (“adjusted revenue”). These G&A
costs are embedded in the adjusted gross margin analysis previously
discussed and included in Exhibit A. This metric is more sensitive than
the other metrics due to the level of fixed costs and the potential for
one-time period costs such as unanticipated environmental costs, legal
claims and employee compensation charges. However, we believe the
results of this analysis would indicate that the operating segments by
line of business are economically similar.

    Please see Tables B and G in Exhibit B in the reports provided to the
Staff separately pursuant to a Freedom of Information Act confidential