By  on November 16, 2010

NEW YORK — Saks Inc., boosted by affluent consumers spending more amid Wall Street gains, posted a strong third quarter and sees the trend continuing in the fourth quarter.

“I don’t think people are euphoric, but luxury has substantially improved, coming off a lower base,” Saks chairman and chief executive officer Stephen I. Sadove told WWD on Tuesday. “We are seeing more full-price selling. There have been less promotions. People are feeling OK. It’s a much more stable environment.”

The retailer’s profit of 6 cents a share for the third quarter ended Oct. 30, excluding an extraordinary gain from certain income tax reserves, readily beat analyst estimates of 3 cents. The company also posted a 5.7 percent comparable-store sales increase and gross margins of 42.6 percent from 40.3 percent in the year-ago quarter, representing a 230 basis-point expansion.

Saks expects fourth-quarter comps and inventories up in the midsingle digits, and “outsized” growth in the direct channel.

“There were good performances in all zones of business,” Sadove said, though he singled out the bridge department, called Wear, as up in the high-single digits. He also cited designer sportswear, men’s wear (especially private brand), shoes, dresses and fashion jewelry. The Fifth Avenue flagship performed in line with the rest of the chain, while the direct channel was up 21 percent. The Off 5th outlet division fell below the comp-store average, but improved in October.

Sadove described traffic and unit transactions in the Saks Fifth Avenue stores as “flattish” and “relatively flat,” respectively, but cited an uptick in the average dollar transaction due to reduced promotions and markdowns. For example, the “friends and family” discount shifted to 20 percent off from 25 percent a year ago, and involved fewer designers.

“We generated another good quarter of full-price selling,” said Saks president and chief merchant Ron Frasch, during a conference call. “We ended the third quarter with comparable inventories in line with sales growth.… Because we are keeping our inventories lean and being very focused on full-price events, associates are training customers on that and customers are responding.”

“With improvement with the financial markets, I feel much better about the overall tone of the business,” Sadove added. “But a number of challenges remain. A complete recovery will take more time.’’

Among the challenges, Saks needs to elevate profitability, eventually return to prerecession volume levels and further prune the store base. Sadove said he expects “at most very few” additional Saks Fifth Avenue closings. “We have worked aggressively with landlords to address most underperforming locations,” he said. The six stores closed this year represent in total $55 million in annual revenue and 425,000 square feet of space. “The closings are freeing up critical working capital” to enhance stronger stores and further technology improvements.

Another goal is to boost exclusive offerings from designers and private label, to around 20 percent from the current 10 percent, and advance the Off 5th rollout. The plan is for three to five outlets annually in the foreseeable future.

In the quarter, net income came to $36.3 million, or 20 cents a diluted share, including a $26.7 million, or 14 cent a share, gain from the reversal of certain income tax reserves deemed no longer necessary. In last year’s third quarter, Saks posted net income of $6.3 million, or 4 cents a share, including a $4.4 million, or 3 cents a share, gain related to a similar tax reserve. Total sales in the latest quarter came to $658.8 million, up 4.3 percent from last year’s $631.4 million.

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