Saks Net Dips on Special Items

by MR Magazine Staff

NEW YORK – Saks Inc. saw its first quarter profits dip dramatically on a series of special items related to the sale of its department stores, but it managed big increases in operating and gross profit as well as sales.

For the three months ended May 5, net income fell 85.8% to $11 million, or $0.07 a diluted share, from $77.9 million, or $0.57, in last year’s quarter.

Adding back $0.12 in one-time items, including divestiture-related severance and expenses from the probe into its chargeback practices, EPS for the more recent quarter was $0.19, on par with analysts’ expectations.

Taking out income from discontinued operations, EPS in last year’s quarter was reduced to $0.09.

Other metrics also tracked positively for Saks. Operating income skyrocketed to $32.6 million from $12.2 million, and gross profit was up 16.1% to $328.3 million from $282.9 million, translating into growth in gross margin to 41.4% of sales from 41.3% a year ago.

Sales were up 15.9% to $792.7 million from $684.1 million.

“Our first quarter comparable-store sales increase of 14.4% indicates that we have made significant progress in refining and strengthening our merchandise assortments by store and that our selling culture and marketing efforts continue to improve,” said Steve Sadove, chairman and chief executive officer. “The trends in the number of transactions and the average dollars per transaction improved for the first quarter, and we experienced growth in nearly all merchandise categories. Sales performance was solid across all geographies.”

He added that the New York flagship of Saks Fifth Avenue and other principal locations performed well. “We also experienced strength in several of our secondary market stores where we have intensified our focus and substantially enhanced the merchandise assortments,” Sadove said, adding that Saks Direct enjoyed a sales increase on about 50% while Off 5th registered “modest sales growth.”

He reported that the “right-sizing” of the company following the disposal of its department store properties was nearing its final stages, with the reduction in its work force “substantially complete” and the final stages of integration and consolidation expected to be done by the end of the second quarter.

“We do not expect to achieve the same degree of SG&A (selling, general and administrative) expense leverage that we delivered over the past three quarters as we anniversary the significant leverage that began last year,” he said.

Saks, he pointed out, had made significant “strategic investments” in key items and vendor intensifications in men’s, footwear and handbags, moves that he said will carry “low to moderate risk.” It’s also committed capital to “certain core designer ready-to-wear brands that we believe carry normalized risk,” the CEO remarked. “We are experiencing above-average growth in all of these areas of the business.”

Sadove also reiterated his goal of achieving an operating margin of 8% of sales in “the next three years or so.”

In this year’s quarter, operating margin grew to 4.1% of sales from 1.8% a year ago.

Saks currently operates 54 Saks Fifth Avenue stores and 49 Saks Off 5th units in addition to the e-commerce site and Club Libby Lu specialty stores.