NEW YORK — Saks Inc. reduced its losses in the second quarter as its department stores generated higher profits and its Saks Fifth Avenue stores trimmed losses.

Saks has also joined the pack of retailers that will begin to expense options at the onset of the next fiscal year. The firm is projecting that the move will create expenses of 2 cents a share in fiscal 2003, which will grow to approximately 5 cents in 2006.

Net losses for the quarter narrowed to $20.4 million, or 14 cents a share, from $58.4 million, or 41 cents, a year ago. Losses were 4 cents less than Wall Street’s best guess of an 18 cent loss. Last year’s second quarter was pulled down somewhat by $16 million, or 11 cents, worth of special items.

Sales for the period ending Aug. 3 faded 2.6 percent to $1.24 billion from $1.27 billion a year ago. Comparable-store revenues retreated 1.7 percent.

Gross margins during the quarter improved by 320 basis points, to 36.4 percent of sales. Contributing to this upswing were tighter inventories, which, at the end of the quarter, stood 10 percent below a year ago on a comparable-store basis. Also helping was decreased spending on selling, general and administrative expenses, which dropped by 70 basis points to 25.3 percent of sales.

Midwest Research analyst Jeff Stinson noted, "The gross margin improvement was outstanding, which has pretty much been par for the course when you look at the department stores in the second quarter."

J.P. Morgan Securities analyst Shari Schwartzman Eberts added, "It’s a testament to the inventory control, and they also had pretty easy gross-margin comparisons." The leaner inventories, she noted, "positioned them well for the third quarter in terms of gross-margin improvement. What it really comes down to is how good sales are going to be."

Operating profits at the department store group charged ahead 8.8 percent during the quarter to $18 million while sales pressed on 1 percent to $755.4 million. Comps rose 0.4percent for the division, which includes doors under the nameplates of Parisian, Proffitt’s and McRae’s.

Brad Martin, chairman and chief executive, in a statement, noted the division’s comps "exceeded those of our traditional department store peers, reflecting implementation of our customer-focused strategies and confirmation that we are executing to [the unit’s] position to be ‘the best place to shop in your hometown.’"Eberts said of the division, which primarily operates in smaller markets, "To some extent, they had their recession in 2000 before the other department stores started seeing a decline. Their markets are doing better right now."

The more urban-centered Saks Fifth Avenue unit reduced its operating losses to $13.8 million from $45.3 million a year earlier. Sales retrenched 7.8 percent at $481.9 million while comps were down 4.7 percent.

Stinson noted, "The luxury unit has been hardest hit post-9/11." Its customers have also been hit harder by a Wall Street depressed by scandal and uncertainty, he noted. Saks Fifth Avenue "should enjoy some type of rebound as they anniversary the events of 9/11."

Saks released results after the close of the markets Tuesday, but its shares rose 15 cents, or 1.7 percent, to close at $8.90 in New York Stock Exchange trading. Their price has ranged as low as $4.60 and as high as $15.75 in the past 52 weeks.

In the first half, net losses widened to $45.8 million, or 32 cents a share, from losses of $31.9 million, or 22 cents, a year ago.

Excluding special items that pulled down the half by $47.3 million, or 32 cents, and the year-ago period by $7 million, or 4 cents, Saks would have earned $1.5 million, or 1 cent, compared with a loss of $24.9 million, or 18 cents, a year ago.

Sales for the six months decreased 2.6 percent to $2.66 billion from $2.74 billion a year ago. Total comps slid 0.5 percent.

In the back half, Saks is expecting comps to rise in the low- to mid-single-digit range, with the biggest chance for improvement in its Saks Fifth Avenue division. Gross margins are slated to continue their expansion, with the majority of the improvement expected in the current third quarter.

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