Reading the Tea Leaves: As Saks Inc. Nears Deal, SFA Speculation Swirls

As its parent, Saks Inc., inches closer to shedding its northern department store group and Club Libby Lu division, speculation continues to swirl over the...

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The complication is that the board evidently still isn't certain it wants to sell SFA. A source close to Saks' bankers said that, as of last Friday, the board still hadn't decided one way or another. The board was supposed to have a meeting shortly after Labor Day to decide what to do, but they haven't met yet, according to the source close to the retailer's bankers.

The general view among some buy- and sell-side analysts is that firms could still bid for SFA even though it is not officially on the auction block. One sell-side analyst said bids might be coming in low for SFA because not all the financial information about the operation is available.

As reported, Saks had to restate certain financial information because of improper markdowns at its SFA operation, which spawned investigations by the U.S. Attorney's Office in Manhattan as well as the Securities and Exchange Commission. After a delay due to the investigation, Saks filed its annual report, or Form 10-K, with the SEC on Sept. 1. The retailer said in the report that it is "fully cooperating" with investigators.

The financial restatements necessitated by the improper markdowns are for the fiscal years 2001 through 2004. According to the annual report, adjustments were made to balance sheet and income statement items. On the income statement, sales for the restated periods remained unchanged, while net income adjustments varied.

In fiscal year 2004, net income was restated downward by 12.6 percent to $72.4 million. For fiscal year 2003, net income was restated to $12.1 million, down 50.1 percent from the previously stated results. For the year 2002, the restatement had no "meaningful" impact on net income, while the fiscal year 2001 showed a 2.1 percent gain in restated net income to $76.8 million.

Saks reiterated that vendor allowances of "approximately $34.1 million had been improperly collected from vendors in periods from fiscal 1996 through 2003," and that the amounts are "attributable to overcollections that resulted from falsification by merchants in one [SFA] merchandising division of information delivered to vendors."

Saks said it will pay interest of 7.25 percent a year to affected vendors, which will total $14 million. "In aggregate, the company expects to repay vendors a total of approximately $48.1 million during fiscal 2005," it said in the filing.
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