By  on August 16, 2006

NEW YORK — Saks Inc. swallowed a big loss in its second quarter, although the Saks Fifth Avenue division saw a small sales gain as well as operational improvements.

Saks Inc. on Tuesday reported a net loss of $51.9 million, or 38 cents per share for the quarter ended July 29, with roughly a third of the loss attributed to various special charges. The charges included $12.8 million, or 9 cents a share, from accounting and options changes related to a $4 per share special dividend; $1.1 million from asset impairments and dispositions; nearly $1 million in legal costs from the previously disclosed government investigations into Saks' markdown and accounting practices, and $3.6 million from severances and retention bonuses.

Last year's second-quarter net income of $8.2 million, or 6 cents a share, is not directly comparable, because the company was boosted by a $77.8 million gain on discontinued operations involving the sale of the Proffitt's and McRae's chains to Belk Inc., a gain that was partially offset by a $18.8 million loss from debt reduction.

Stripping away the various special charges and gains, Saks Inc. reduced its operating loss to $38 million in the second quarter, from $50.8 million in the year-ago period, and executives cited progress in the Saks Fifth Avenue turnaround effort as a contributor.

SFA's operating loss narrowed to $33.3 million from $42.8 million in the year-ago period. There was a 3.4 percent comp-store gain at SFA in the second quarter, though gross margins were flat against last year. SFA's total sales in the quarter, including those at the 50 Off 5th outlets and, came to $591.6 million versus $589.6 million a year ago.

Total Saks Inc. sales — including Parisian, which is being sold to Belk for $285 million, and Club Libby Lu — came to $760.7 million versus $1.21 billion last year, reducing the bottom line. The year-ago figure included revenues from the Northern Department Store Group, which was sold to Bon-Ton in March.

Some proceeds from the department store sales have been used to pay the $4 dividend, for a total of $547 million; to buy back nearly $225 million in common stock, and to cut debt by more than $600 million.The corporation has been able to intensify remerchandising and cost-cutting efforts at SFA, following the sell-offs over the past year of its regional department stores, most recently Parisian.

"We are making definite progress at SFAE," said Saks Inc. chief executive Steve Sadove, in a statement. "I am pleased with the sales performance and expense control demonstrated during the quarter. We expect to see improved operating results at SFAE in fall 2006 and even more improvement in 2007. We are working to ensure that our merchandise assortments are appropriate by market, and sales of early fall merchandise receipts are encouraging. We are also focused on improving our gross margin rate performance through improved inventory management, further reducing our operating expenses, and spending capital in a disciplined manner with a focus on return on investment."

Later, during a conference call, Sadove said vendor support for the 54-unit SFA was growing. "It's not about allowances," he said. "It's about having the right product that the consumer wants and getting the sell-throughs. Allowances are something you'd look at if you're not successful."

Aside from working with vendors better, he said, buyers are collaborating more effectively with store personnel and planners. "I think there has been a cultural evolution within Saks Fifth Avenue," Sadove said. "And so I'm seeing every day indications of moving in the right direction, but it's always two steps forward and one step back. Are we on our own 30-yard line? Probably something like that."

Sadove also upped the outlook on SFA's comp-store gains in the second half to mid-single digits, from low-to-mid-single digits, and said inventories are currently up 4 percent, reversing a pattern of trimming inventories over the last four quarters. The inventory buildup, which Sadove described as being at an "appropriate level," is largely in basics, accessories, core designer businesses such as Gucci, Prada and Chanel, footwear, particularly Stuart Weitzman and Christian Louboutin, private label and petites. The remerchandising, geared to appeal to a broader audience while fine-tuning assortments at each store to better meet local demands, should be in shape by next spring, Sadove said.

In other positive signs, SG&A expenses declined approximately 9 percent, with better payroll management and less legal expense, Sadove noted.In the second quarter, Parisian, along with the Club Libby Lu specialty chain, generated an operating loss of $1 million compared with an operating loss of $900,000 last year. Comp sales rose 1 percent.

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