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Luxury, Private Labels Offer Hope but Can’t Stem Saks’ Red Ink

Despite its second-quarter net loss of $11.3 million, Saks Inc. thinks luxury might be set to rebound and private labels can lift its department stores.

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R Brad Martin

R. Brad Martin

Photo By WWD Staff

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NEW YORK — Luxury’s improvement and private label’s growth gave Saks Inc. a glimmer of hope despite wider losses in its second quarter.

A better outlook for luxury may have helped the firm turn a corner in its efforts to resuscitate its Saks Fifth Avenue operation, and growth in private label is enabling Saks to begin to differentiate its struggling department stores.

“Luxury feels better in the major markets,” said R. Brad Martin, chairman and chief executive of the Birmingham, Ala.-based retail firm. “Sales at Saks Fifth Avenue in New York, Beverly Hills, San Francisco, Chicago and Boston were all strong.

“And overall, the luxury market feels marginally better,” he continued during a conference call with analysts. “We saw good growth in the quarter in jewelry and will continue our focus on shoes, handbags, contemporary women’s and designer apparel where we are generating solid sales growth and improved returns on investments in these categories.”

Although signs of improvement abound, for now the retailer will have to live with a deeper second-quarter loss.

Staggered by a battery of punches, including flat net and negative comparable-store sales, promotional pressures, higher costs and the loss of credit card revenue, the owner of nameplates such as Saks Fifth Avenue, Proffitt’s and McRae’s, among others, recorded a net loss of $25.8 million, or 18 cents a diluted share, for the three months ended Aug. 2. By comparison, last year the firm had a loss of $20.4 million, or 14 cents.

Earnings benefited from an aftertax gain of $2.7 million, or 2 cents, from the sale of closed stores. Excluding that gain, earnings per share matched the Wall Street consensus estimate.

Sales for the period stood pat at $1.24 billion, but same-store sales dipped fractionally, or 0.6 percent.

Saks’ results were no surprise, however. Not only was EPS in line with estimates, but trading in the firm’s shares was slightly lighter than normal. The company’s stock closed down 1 percent, or 12 cents, to settle at $12.13 in Tuesday’s New York Stock Exchange session.

In addition to the flat sales and weak comps, other slings and arrows included an 80 basis-point expansion of selling, general and administrative costs to 26.5 percent of sales. Saks said the higher cost resulted primarily from the sale of the firm’s credit card accounts and receivables to Household Bank, which would have reduced those expenses by $16 million. The sale of the portfolio depleted earnings before interest and taxes by $10 million at the Saks Department Store Group and by $6 million at Saks Fifth Avenue Enterprises.
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In a research note, J.P. Morgan Securities analyst Shari Schwartzman Eberts pointed out that, without credit revenues, Saks’ divisional operating margins relative to its peers were “quite disappointing.”

This season’s merchandising menace of markdown pressure also depleted the bottom line, as gross margin retracted 20 basis points to 36.5 percent of sales.

“Saks’ operational performance has been generally solid,” wrote Merrill Lynch analyst Daniel Barry in a research report. “Until the first quarter, earnings had been up for the previous four quarters (but against easy comparisons).”

He noted while improving, comps remain soft and, excluding the reduction in credit card contribution, the expense ratio has been down in five of the past six quarters while gross margin has improved in four of the past six.

By business segment, SDSG saw sales and comps decline, but still produced an operating profit, albeit a smaller one by almost a third. Conversely, SFAE had a fractional uptick in net and same-store sales, but its operating loss continued to widen. For the quarter, SDSG reported a 30.5 percent drop in operating income to $12.5 million on a 0.6 percent dip in net sales to $750.8 million. Comps decreased 1.7 percent. At SFAE, the operating loss ballooned to $22.1 million from $13.8 million as sales ticked up 0.9 percent to $486.3 million and same-store sales grew 1 percent.

Attempts to differentiate the department stores, however, are bearing fruit.

“Our private brands produced approximately 13 percent of our revenues at the department store group in the quarter versus 11 percent last year,” Martin said. “Overall, private brand sales improved by nearly 30 percent. Sales that we will generate from differentiated products will be over 25 percent of our revenues this year, up significantly from 17 percent just two years ago.”

The Jane Seymour private label and Ruff Hewn exclusive brand introduced last month have “terrific to-date sales,” the ceo noted.

His feelings about SFAE and the luxury market were similarly positive.

Whether Saks can properly exploit these moves with the personnel on hand is another matter, noted one observer.

“Saks is in the fairly unique position of potentially benefiting from both better-priced brand introductions in spring 2004 and emerging strength in luxury goods business,” wrote UBS analyst Linda Kristiansen. “A key question is Saks’ ability to take full advantage of these trends, as there have been several departures among merchandise managers.”
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Overall, for the first half of the fiscal year, Saks narrowed its net loss to $11.3 million, or 8 cents a diluted share, from $45.8 million, or 32 cents, a year ago. Saks said this year’s results included aftertax gains of $4.5 million, or 3 cents, from the sale of the credit card business and the gain from store closures and real estate sales. Last year’s bottom line was essentially neutralized by aftertax charges for an accounting change of $47.3 million, or 32 cents.

Consolidated sales for the six months ticked down 1.2 percent to $2.62 billion from $2.66 billion a year ago, and same-store sales fell 2.1 percent.