By  on May 17, 2006

NEW YORK — Saks Inc.'s first-quarter profits skyrocketed thanks to a one-time gain from the sale of its Northern Department Store Group, while its Saks Fifth Avenue unit's turnaround is under the spotlight.

Meanwhile, the sale of Saks' Parisian business is under way and the process is expected to take several months, said Stephen Sadove, chief executive officer, during a conference call to Wall Street analysts. He added the Parisian stores reported a low single-digit comp-store sales increase for the quarter.

As for the SFA business, Sadove said, "We implemented several merchandising and marketing changes too quickly, such as discontinuing private brand without an effective replacement strategy and moving away from our core customer base and focusing too heavily on attracting newer, younger customers. We had a disproportionate focus on the New York flagship and not enough focus on the right product and marketing for the other stores."

Sadove explained his team of merchants and managers is collaborating on a plan based on a nine-box grid that lists lifestyles of classic, modern and contemporary along the top three columns and price sensitivity of good, better, best along the three rows. Good represents the contemporary market. Each store will have its own profile of the core customer and the types of products and designers that should be represented, he said.

"We are relaunching private brand product this fall under the Saks Fifth Avenue Classic, Saks Fifth Avenue Signature and Sports names, and we expect this business to generate gross margin over time," Sadove told analysts.

The move toward focusing on SFA's core customer is to restore comp-sales performance, while hoping to attract new customers and younger shoppers, Sadove said.

For the three months ended April 29, income was $81.5 million, or 60 cents a diluted share, compared with $16.2 million, or 11 cents, a year ago. The one-time gain from the Northern Department Store Group, consisting mostly of Carson Pirie Scott business, was 54 cents a share. Excluding the gain and a 2-cent per share charge, the company's earnings per share were 10 cents, or 1 cent better than Wall Street consensus estimates.

Sales for the quarter, however, declined by 32.9 percent to $1.04 billion from $1.55 billion, while total comps decreased by 1.9 percent. The decline in sales reflected the March sale of the Carson Pirie Scott operation to Bon-Ton Stores. The company last year sold the Proffitt's and McRae's store chains to Belk Inc.On an operating basis, the department store group posted an operating loss of $1.8 million versus operating income of $20.1 million a year ago, impacted in part by the sale of the Proffitt's, McRae's and Carson Pirie Scott units. The group still consists of 38 Parisian stores and 60 Club Libby Lu specialty stores. SFA posted operating income of $39.7 million, representing a slight dip from $40.8 million a year ago.

Sadove told analysts that the first-quarter comp-store sales decline of 2.2 percent at SFA was "disappointing and below our expectations," but said the sales shortfall was offset by "gross margin rate improvement resulting from lower levels of clearance merchandise."

One bright note at SFA is its direct business, which grew nearly 15 percent.

Sadove said second-quarter results may be adversely affected if first-quarter sales trends continue, which could lead to "excess, markdown gross margin exposure." But the company is trying to improve operations. "We're clarifying our market positioning so that all of our constituents, inside and outside the company, understand who we are."

The ceo added that he'd like to think of SFA as offering high-end and accessible luxury with meaningful overlap with Neiman Marcus at the high end and Nordstom's and Bloomingdale's at more accessible price points.

"We're making progress at Saks Fifth Avenue on attacking these and other issues. We're implementing process changes I believe will substantially improve the future operating performance of the business. This is a work in progress and we expect to see improved operating results in the fall of 2006 and even more improvement in 2007," Sadove said.

"We continue to maintain our neutral [rating] driven by our belief that over time, Saks will drive margins higher through new technology changes, better inventory management and expense control," wrote Merrill Lynch analyst Stacy Turnof in a research note Tuesday.

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