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fashion-features

Firing On All Pistons: Strong Fashion Sales Drive Saks, Penney’s

Saks Inc. and J.C. Penney put out strong performances in the first quarter, but concerns persist over high gas prices and economic uncertainty.

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Steve Sadove

Steve Sadove

Photo By WWD Staff

NEW YORK — Torrid sales at the top and major strides in the middle shot Saks Inc. and J.C. Penney out of the gate.

But analysts remain concerned over the impact of higher oil prices and other economic uncertainties, which could muddy the track.

Outstanding demand for luxury goods at Saks Fifth Avenue Enterprises drove the parent company to a 52.6 percent gain in first-quarter profits.

Meanwhile, results from Saks Inc.’s department stores revealed strength in the moderate channel, a condition that was echoed by robust business at mainstream competitor J.C. Penney Co. Inc.

One quarter, however, does not a fiscal year make, and factors such as the looming interest rate hike and, especially, historically high oil prices leave prospects for the current and future quarters in question.

“Higher energy costs, while demand driven, will divert consumer incomes from other retail outlays,” said Steven Wieting, Smith Barney’s director of economic and market analysis, on a conference call. Also of concern, said Wieting, is that, while forecasts of consumers’ retrenching are “overstated and lack reasonable historical and fundamental perspectives, [the] extreme consumer stability through the recent downturn does not suggest a material acceleration in a business cycle recovery.”

Although no economist can predict with absolute certainty where consumers are headed, it is clear where consumers have been: at the mall.

For the quarter ended May 1, Birmingham, Ala.-based Saks said net income grew by more than half to $22 million, or 15 cents a diluted share, from $14.4 million, or 10 cents, last year. Excluding an aftertax charge of 2 cents for the write-off of some assets, Saks’ earnings matched the Wall Street estimate of 17 cents.

Net sales for the quarter increased 11.5 percent to $1.54 billion from $1.38 billion a year ago, and comparable-store sales grew 10.2 percent. Additionally, much lower promotional activity, especially in the luxury segment, allowed company-wide gross margin to expand 130 basis points, which magnified the top line’s effect on bottom-line results.

Saks Inc. vice chairman Steve Sadove noted that the overall earnings growth of 50 percent was earned despite having to absorb a 2 cent-a-share write-off of long-lived assets, as well as absorbing a $10 million charge for not having the credit card contribution. But, he added, “apples to apples, there was almost a doubling of earnings. We have very strong momentum in the franchise. Clearly, there is a positive fashion environment. Better brands are selling and the luxury sector continues to be extremely strong.
“Since last August, we’ve seen a turning of both our department stores and the luxury stores,” Sadove explained. “We see this positive momentum continuing as we go into the middle of the year. The company is coming off a weaker first quarter of a year ago, when the economy had not really turned, so comparisons are easier, but in the later part of the year, we go up against tougher comps, so we will not see such outsized growth trends, though we will still see significant growth.”

While both businesses showed marked improvement in the first quarter, Saks Fifth Avenue was the standout, as operating income vaulted 48.1 percent to $48.8 million and sales jumped 17.1 percent to $682.4 million. Moreover, in an impressive run of comps, Saks Fifth Avenue’s same-store sales rose 15.3 percent, notching its fourth consecutive quarter of growth by that all-important measure.

Asked what he attributes the quarter’s success to, Saks Fifth Avenue Enterprises’ chairman and ceo Fred Wilson replied: “We systematically and substantially reduced promotional activity over the quarter. We were able to get deliveries earlier than before, and we certainly beefed up our merchandising and marketing team. We are going to continue to get earlier deliveries, and we will react to trends as quickly as possible.”

However, on a more ominous note, A.G. Edwards & Sons analyst Robert Buchanan said the company needs to rein in costs.

“Although Saks is posting big earnings gains these days against the backdrop of robust upscale sales, earnings will ‘head south,’ in our view, once the environment deteriorates, unless Saks attacks its costs,” Buchanan wrote in a report following the company’s earnings release.

As for Penney’s, like Saks, private brands were a key factor in driving above-plan sales, margin growth and earnings in the first quarter. And, although charges from the sale of the Eckerd drugstore business caused profits to plunge almost a third, income from continuing operations soared 490 percent, leading Penney’s to surpass Wall Street’s estimate by 4 cents.

For three months ended May 1, the Plano, Tex.-based retailer reported net earnings decreased 32.8 percent to $41 million, or 13 cents, versus year-ago earnings of $61 million, or 20 cents. Excluding Eckerd’s operations in both periods, earnings skyrocketed to $118 million, or 38 cents, from $20 million, or 5 cents, last year.
Penney’s focus on fashionable merchandise assortments at moderate prices led to an 8.7 percent increase in sales to $4.03 billion from $3.71 billion last year. Comps, likewise, were a pleasant surprise, rising 9.5 percent at the department stores and 6.5 percent in the catalogue and Internet division.

While Penney’s said it enjoyed strong selling across almost all merchandise categories, private brands accounted disproportionately for the 90-basis-point increase in gross margin.

“On our private brands, the gross margin is higher than our company average,” said Vanessa Castagna, ceo for stores, catalogue and Internet, on a conference call.
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