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Settling Up at Saks Inc.: Retailer to Repay $48M To Overcharged Vendors

Saks Inc. owes vendors more than $48 million, stemming from the improper collection of markdown allowances.

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NEW YORK — Saks Inc., completing an internal investigation, said Wednesday that it will reimburse vendors for more than $48 million in improperly collected markdown allowances from 1996 to 2003.

The company, which made the disclosure after the stock market closed, said that it also expected to restate financial results for 1999 through 2004 because Saks improperly timed the recording of the overcharges.

The conclusion of the inquiry by the firm’s audit committee and board and the restating of financials might help expedite the Birmingham, Ala.-based retailer’s plan to sell off its department stores and possibly its Saks Fifth Avenue division for which it received bids this week. Saks still faces investigations by the U.S. Attorney for the Southern District of New York and the Securities and Exchange Commission.

The company said its Saks Fifth Avenue division owes vendors $26 million for markdown allowances during the 1999-2003 fiscal years, and another $8.2 million during the 1996-1998 fiscal years. In addition, vendors will be paid interest at the rate of 7.25 percent annually, totaling about $14 million for the improperly collected markdown allowances.

Saks previously said that it owed $20 million to 12 vendors, including three owned by the same corporation. The three are believed to be Dana Buchman, Ellen Tracy and Juicy Couture, which are owned by Liz Claiborne Inc.

Important bridge labels include Elie Tahari, Eileen Fisher and Lafayette 148. Tahari and Fisher executives could not be reached for comment. Deirdre Quinn, president of Lafayette 148, said the company is not anticipating any payment from Saks.

Sources speculated that contemporary sportswear also has been affected. Key contemporary vendors at Saks include Theory, Marc by Marc Jacobs, Cynthia Steffe, Diane von Furstenberg, Earl Jean, Seven For All Mankind, Juicy Couture and DKNY.

The scandal resulted in the ouster of three senior executives on May 9: Donald Watros, chief administrative officer of Saks Fifth Avenue Enterprises; Brian Martin, a senior vice president of Saks Inc., and Donald Wright, chief accounting officer of Saks Inc. Martin is the brother of Saks Inc. chairman and chief executive officer R. Brad Martin.

In addition, the audit committee said the bonuses of several executives, including R. Brad Martin and the chief financial officer, Douglas Coltharp, “should be reduced or eliminated.”

The fallout hit the merchandising team on May 13, when eight buyers in the bridge department, possibly up to the general merchandise level, were escorted out of the Saks’ Fifth Avenue flagship.

Saks has been accused of improper vendor charges in two lawsuits this year. Onward Kashiyama filed a suit in Manhattan federal court against Saks Inc. and its Saks Fifth Avenue unit, alleging more than $9 million in deductions and credits not agreed upon. International Design Concepts sued Saks alleging breach of contract and fraud stemming from chargeback and vendor allowance practices.

An advanced round of bidding for the department stores was conducted this week. Speculation has focused on several private equity firms being interested in purchasing both the stores and Saks Fifth Avenue, including Cerberus Capital Management and Texas Pacific Group, which this year purchased the Neiman Marcus Group. In addition, it is believed that Bon-Ton, the York, Pa.-based regional department store chain, wants to partner with an equity player on a bid. Bon-Ton would operate the department stores. Other private equity firms, such as Blackstone Group and Bain Capital Partners, could be interested.

Saks Inc. in July sold off its southern group of department stores (Proffitt’s and McRae’s) to Belk Inc. for more than $620 million, leaving it with the northern group, consisting of Carson Pirie Scott, Bergner’s, Younker’s and The Boston Store.

The internal investigation was first disclosed by Saks in March. In May, the company said that, during the 1999-2003 fiscal years, one of six Saks Fifth Avenue merchandising divisions improperly collected markdown allowances from vendors totaling about $20 million. Although the company never disclosed which division, it is believed to be the bridge area. The company said that the overcollections resulted from “falsification, by merchants in the one SFAE division, of information delivered to vendors.”

The supplemental inquiry disclosed last June involved investigating the timing of recording of inventory markdowns and vendor markdown allowances at Saks Fifth Avenue.

It also involved whether there had been any overcollections of markdown allowances in any Saks Fifth Avenue merchandising divisions that were not the subject of the initial probe, and whether there had been any inappropriate billing, logistics or transportation chargebacks. The inquiry did not find overcollections in either respect.

Saks also examined loyalty programs and other promotional activities and determined these activities did not result in improper collections.

But the audit committee’s supplemental inquiry did find evidence at Saks Fifth Avenue of improper timing of recording of inventory markdowns during the fiscal years 1999 and 2001, leading to overstatements of gross margin and operating income for the second quarter of fiscal year 1999. In addition, for the third quarter of fiscal year 1999 there was an understatement of $14.5 million. For the second quarter of fiscal year 2001 there were overstatements, and for the third quarter of fiscal year 2001 there were understatements of approximately $11 million.

Saks said it will take disciplinary action against one current SFAE associate concerning this activity. The associate was not identified. So far, a handful of upper and middle management executives at Saks Inc. and Saks Fifth Avenue have been either fired or financially penalized.

Management’s supplemental inquiry identified evidence at SFAE of incorrect timing of recording of vendor markdown allowances that affected the quarterly reporting periods for fiscal years 2003 and 2004. Consequently, gross margin and operating income for the first quarter of fiscal year 2003 were overstated, and for the second quarter of fiscal year 2003 were understated by about $3.3 million.

Gross margin and operating income for the third quarter of fiscal year 2003 were overstated, and for the fourth quarter of fiscal year 2003 were understated by an estimated $4.4 million

Gross margin and operating income for the first quarter of fiscal year 2004 were overstated, and for the second quarter of fiscal year 2004 were understated, by approximately $4 million. Gross margin and operating income for the third quarter of fiscal year 2004 were overstated, and for the fourth quarter of fiscal year 2004 were understated, by approximately $6 million.

Saks will post these quarterly overstated and understated amounts in restated quarterly reports for fiscal years 2003 and 2004 to be included in the footnotes to the financial statements in the annual report on Form 10-K for the fiscal year ended Jan. 29, 2005.

Saks said it believes the incorrect timing of recording of markdown allowances did not affect annual results for fiscal years 2003 or 2004.

The company expects that its restatement work will be completed, and the 2004 Form 10-K will be filed, on or shortly after Sept. 1. The company also expects that its quarterly reports on Form 10-Q for the fiscal quarters ended April 30, 2005, and July 30, 2005, will be filed on or shortly after Sept. 30.

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