WWD.com/beauty-industry-news/financial/analysts-wary-on-saks-stock-upgrade-579437/
government-trade
government-trade

Analysts Wary on Saks Stock Upgrade

Wall Street analysts were impressed by strategic initiatives put in place at Saks Fifth Avenue, but not enough to upgrade their ratings of the stock.

NEW YORK — Wall Street analysts are generally impressed by strategic initiatives put in place by the new Saks Fifth Avenue team, but not quite enough to upgrade their ratings of the stock.

Several pegged their unchanged rating to the drag on Saks Inc.’s overall performance from the still-beleaguered Saks Department Store Group as well as possible short-term bumps arising from the SFA initiatives.

SFA executives revealed the plans in a conference call on Monday and pointed out that the new focus zeroes in on upgrading customer service, a move that also changed 16 general manager positions, eliminated 35 management posts and added 430 new selling positions to the chain.

“We believe management has a solid plan in place, with a focus on personalized service, new and unique brands and merchandise and younger, more energized marketing,” wrote Robert Drbul, analyst at Lehman Brothers, in a research note on Tuesday. “As the luxury retail market continues its strong growth, we believe [SFA] should be pointed to deliver improved results in 2005 and beyond.”

Among the highlights he pointed to from the presentation and store tour of the Fifth Avenue flagship were management’s evaluation of capital projects for the flagship — including the possibility of opening up the interior of the store, utilizing the basement levels and procuring the air rights above the building in order to add new levels — and the restructuring of management teams. He also noted SFA’s shift in focus from “safe” to modern, with product that is unique and consistent across price points.

Drbul maintained the firm’s “equal weight” rating on the stock as well as its “neutral” rating on the sector. Lehman has three ratings: overweight, equal weight and underweight.

According to Drbul, there are possibilities to create “shareholder value” that would serve as downside protection to Saks’ stock at current levels. Those options include spinning off one segment to create two distinct entities or selling one or both to a strategic or financial buyer. The analyst also concluded, “We do not believe SDSG would be as attractive to a strategic buyer, mainly because many of SDSG’s markets are small and would have difficulty meeting a larger department store’s return requirements.”

Dana Cohen, analyst at Banc of America Securities, maintained her “neutral” rating on Saks’ stock, noting, “There are clear signs of improvement, but upcoming changes could have rough spots. Furthermore, the [SDSG] division faces challenges, not least of all in reducing expense levels.”

Her take on the changes is that there has been “some progress” in the strategy regarding service, marketing and presentation. However, there are also some bumps, such as the one involving excess inventory that occurred in the fourth quarter. “We think new processes and systems have longer-term benefits, but could generate choppiness near to medium term.”

The rating of shares of Saks also was kept “neutral” at Merrill Lynch. Keven Boler, Merrill’s analyst, in a note on Tuesday pointed to certain changes in the SFA strategy, such as a review on how to structure sales commissions to encourage associates to sell merchandise from more than one department, as well as the SFA focus on the 25- to 34-year-old customer with a household income of more than $200,000.

Yet the rating on Saks’ shares remained unchanged because the SDSG division was “not expected to turn around in [the] near term.” He also noted that the SEC’s informal investigation — earlier this month Saks Inc. said it would restate certain earnings periods because of accounting errors in leased departments and because it improperly collected up to $21.5 million from vendors — could act as a cloud over the stock.

Deborah Weinswig at Citigroup Global Markets reiterated her “sell” rating on the stock. While she wrote, “We were encouraged by the progress that has been made” at SFA, the analyst also pointed out that Saks Inc. has “not yet experienced improvement at SDSG. We believe the shares are fully valued at current levels and we reiterate our sell rating.”

Weinswig also wrote that the “long-term viability of the company’s strategy and initiatives remain to be seen” as SFA continues to operate in a highly competitive high-end retail environment.

Shares of Saks closed at $15.56, down 31 cents, in trading Tuesday on the New York Stock Exchange.