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Saks Profits Rise Sharply

Saks Inc. posted robust third-quarter earnings on strong same-store sales, with officials confident in a healthy luxury sector for the fourth quarter but, at the same time, acknowledging a "challenging macroenvironment."

Saks Inc. posted robust third-quarter earnings on strong same-store sales, with officials confident in a healthy luxury sector for the fourth quarter but, at the same time, acknowledging a “challenging macroenvironment.”

During the quarter, profits more than tripled as sales soared 14.2 percent. Results were driven by an 11.4 percent same-store sales increase in the quarter. The bottom line also was bolstered by the fact that the retailer did not record a loss from discontinued operations — as it did in the previous year. Gross margins, however, were flat due to markdowns. Management noted that its online business realized a 40 percent year-over-year gain.

For the quarter ended Nov. 3, net income rose to $21.6 million, or 14 cents a diluted share, from $6.2 million, or 5 cents, in the prior year on sales that climbed to $796.1 million from $697 million.

During a conference call with analysts, management cautioned that the aspirational — or bridge — shopper, who buys luxury goods at opening price points, is pulling back. Late last month, Coach Inc., which serves the aspirational shopper, warned of slowed retail traffic while Polo Ralph Lauren Corp. lowered its earnings outlook earlier this month for similar reasons.

Stephen I. Sadove, chairman and chief executive officer, said results indicate “that our customers are continuing to respond to our strengthened merchandise selections, service initiatives and innovative marketing.”

During the call, one analyst asked Sadove to offer specifics in regard to the challenges ahead.

“I think that the environment is getting tougher out there — I still think that the luxury sector is very healthy,” Sadove explained. “I think that the consumer is clearly seeing some impact, especially [in] what we would call our ‘good zone.’ Remember, we are always thinking in luxury terms, but we’ve looked at it from good, better, best luxury price points. And I think that you are seeing more pressure on that aspirational luxury consumer — that would be our bridge price points. Our entry price points is where you are seeing more of the pressure while the higher-end luxury price points have not seen a slowdown.”

Sadove said that overall, the company feels “quite good about where the fourth quarter is, but clearly you’ve seen some more price competition at the lower end of that spectrum.”

This story first appeared in the November 21, 2007 issue of WWD.  Subscribe Today.

The ceo said that, during the quarter, Saks “began to experience a more promotional and challenging macroeconomic environment. And this environment results in some modest downward pressure on our merchandised margins, particularly in the women’s bridge apparel area. In addition, while our key promotional events, such as Friends & Family and Electronic Gift Card events, were essentially the same year-over-year, our customers shifted more of their spending to these events, causing some additional pressure on merchandised margins.”

Management said the decline was offset by the positive impact of unredeemed gift cards, which helped keep gross margins flat year-over-year.

Sadove said the company is well positioned for the holiday selling season, and he expects an operating margin for the year to be 4 percent. “Our expectation is that we can generate high-single-digit comp-store sales growth in the fourth quarter on top of last year’s fourth-quarter comp increase of 9.9 percent, but we may experience some modest decline in gross margin rates for the period,” he added.

Saks’ online business performed well during the quarter. Sadove said the Saks Direct business “continues to substantially outpace the company average, posting another approximate 40 percent increase during the third quarter.”

For the fourth quarter, the ceo said the retailer expects to “have a record-breaking quarter in the direct business and to continue to drive outsized growth in 2008 and beyond.”

During the third quarter, Sadove said top performers in the company were handbags, women’s shoes and jewelry as well as men’s apparel, accessories and shoes. “We generated solid performance across all geographies and store sizes,” Sadove said in a statement. “Our strong sales performance was achieved in spite of disruption associated with several major remodeling projects, including our South Coast Plaza store in Los Angeles and our Palm Beach Gardens and Naples stores in Florida. Our New York City flagship location once again outperformed the company average and was the beneficiary of increased store traffic driven in part by the opening of 10022-SHOE and robust tourism [even though the eighth floor was closed for renovation part of the quarter].”