On Friday, Moody's pulled the retailer's senior implied debt rating down two notches to B1. That's eight levels from the bottom of Moody's 21-degree ratings scale and four steps into sub-prime or "junk" territory.
Then on Monday, Saks responded. "We are surprised and disappointed in the downgrade initiated by Moody's and believe that the action fails to understand and reflect the operating results of our business and the overall strength of our financial position," stated Doug Coltharp, executive vice president and chief financial officer of Saks Inc. Moody's analyst Elaine Francolino did say the ratings outlook is stable, that the operating performance will stabilize or improve over the intermediate term and "existing bank facilities are sufficient to fund working capital needs." Yet overall, she was not favorable. The Saks Inc. expansion, most notably the acquisitions of Saks Fifth Avenue and Carson Pirie Scott in 1998, "may have stretched the consolidated company's lean infrastructure."
She added: "profitability in 2001 suffered especially from markdowns to spur sales" due to a slower economy and sated consumer apparel demand." Same-store sales were negative in 18 of the last 24 months, while earnings before interest, taxes, depreciation and amortization margins have fallen since 1999.
Another Moody's analyst, Marie Menendez, said the rating had some "cushion" and allows sufficient flexibility for operations to stabilize and take a little longer to turn around. "This is not a company that we see under immediate pressure or as having the risk of a quick meltdown. Saks, like other retailers, has been facing some challenges of its own making as well as a very challenging economic situation." For the nine months ended Nov. 3, losses mounted to $53.6 million, or 38 cents a share, against earnings of $19.9 million or 14 cents in the 2000 period. Sales slid 6.7 percent to $4.16 billion.
While earnings have been hurt more by SFA, the department stores also face challenges, as A.G. Edwards & Sons equity analyst Robert Buchanan observed. "It is important to differentiate the merchandise offering. The way out of this mess is to better edit their branded offerings and develop a kick-butt private label brand," he said. As for SFA, "With more than 60 stores, they tend to lose some of the aura that surrounds the nameplate and in a business that is all about exclusivity, it may or may not make sense to have 60 stores when your best competitor in Neiman Marcus has 30."