Standard & Poor’s said it is likely that Saks would ultimately be acquired, but put the retailer’s credit rating on its watch list Monday, anticipating that a new owner would weigh down the tony retailer with additional debt.
Just what Saks’ debt load would look like is only one of the open questions lingering around the sale process. Also up in the air is how much of a role, if any, the company’s major shareholders would play in a transaction and what would happen to chairman and chief executive officer Stephen I. Sadove if he were to close a deal.
By entering the fray, Starwood is providing a counterbalance to Hudson’s Bay Co., which has been looking at opportunities to bring its operations together with Saks. Other buyers are also believed to be considering a run at the retailer.
Some estimates have Saks worth as much as $19 a share, but others have balked at that price as much too high. The current stock price gives Saks a market capitalization of $2.17 billion and a total enterprise value, which includes debt, of $2.6 billion.
S&P analyst David Kuntz said, “The CreditWatch placement reflects our view that there is a high likelihood that the company could be acquired by either a financial or strategic sponsor. Such a transaction could add a substantial amount of debt to the company. As a result, the company’s credit metrics, which are currently commensurate with the company’s ‘intermediate’ financial risk profile, would weaken.”
S&P currently rates Saks’ debt at “BB,” a grade that indicates the issue faces “major ongoing uncertainties or exposure to adverse business, financial or economic conditions.”
Saks said in May that its funded debt — including the balance on the revolving credit facility, capitalized leases, senior notes and the debt and equity components of its convertible debenture — totaled $319.6 million.
Even though interest rates are creeping up, debt is still relatively cheap, a dynamic that could ease a takeover.
“The real estate on Fifth Avenue and other retail sites such as Beverly Hills at the very least provides downside protection,” said one hedge fund manager. “Think of it this way: If business gets worse or if it takes longer to turn around the business, the overall value of the acquisition can’t be lower than its real estate value.”
Another fund manger wasn’t quite sure if the valuations for Saks’ Fifth Avenue store should have any impact on the valuation of the retailer, given that the site can’t add much more to the bottom line because of limitations of future construction or improvements due to air rights and landmark status.
Deutsche Bank analyst Paul Trussell said a deal for Saks was plausible given the company’s valuable real estate, but also because it has room to improve its profitability and a concentrated shareholder base, with three investors holding about 40 percent of the company’s stock.
At last count, Mexican billionaire Carlos Slim Helú controlled 15.3 percent of the company, or 23.1 million shares; Tod’s chief Diego Della Valle owed 14.2 percent, or 22.7 million shares, and Southeastern Asset Management Inc. held 11.4 percent, or 17.4 million shares.
Saks owns 53 percent of its square footage, or 27 of its 42 department stores, Trussell said.
The Fifth Avenue flagship is clearly the company’s 660,000-square-foot crown jewel. The analyst said the store on its own is arguably worth more than $1 billion, pushing the value of all of the company real estate to nearly $2 billion.
“Our [leveraged buyout] model suggests a potential price range of $16 to $19,” Trussell said.
Maxim Group senior retail analyst Rick Snyder has a “buy” recommendation on Saks shares, with $18.50 as the price target — which he said was the minimum price for a deal. His reasoning was that Saks is in a “unique position to capitalize on the growing trend of omnichannel selling.”
The retailer recently extended the responsibilities of its top merchants to cover both saks.com and stores, and this fall Saks will launch off5th.com.
“We believe firmly that omnichannel and bricks-and-mortar linked to the digital is the longer-term winning strategy,” Sadove said. “The lines are blurring between channels, and it’s one of the reasons we don’t report the Internet sales anymore.”
Snyder said Saks has “a very specialized product, with a specialized clientele. Omnichannel gives them the reach into those pockets of attractive consumers that don’t necessarily support a Saks Fifth Avenue store.”
The Maxim analyst also noted that luxury brands put Saks in a unique competitive position. “While all department stores are ‘brand compilers,’ Saks is in a unique position of compiling luxury brands.…Luxury goods manufacturers are more likely to invest back into the business of what makes their brands special and exclusive [versus an investment in mass distribution directly to the end consumer]. Also, luxury goods manufacturers are typically more willing to allow Saks to act as a showroom for their brands rather than build them. It would be difficult or impossible to replace or rival the showroom that Saks operates for these manufacturers in its Fifth Avenue property.”
Mary Epner, a principal at Mary Epner Retail Analysis, said, “Saks has the Fifth Avenue location and a strong e-commerce business, but the downside is that it has many problems maintaining a strong branch business.”
According to Epner, who has a merchandising background and did two tours of duty at Saks, “When one leaves New York City and heads to [Walt Whitman Mall on Long Island] as an example, Saks’ assortment isn’t as good as its competitors, such as a freestanding Gucci or Tory Burch store. And there’s the nearby [Americana Manhasset], which has the better options for the high-end merchandise.”
Maxim’s Snyder said Saks could close another six to seven stores, adding too that if consumers are buying online, Saks’ merchandising issues with its branch stores become “less of a problem.”
Breaking News: @louisvuitton's men's artistic director @mrkimjones is leaving the French fashion house after nearly 7 years. Jones joined Louis Vuitton in 2011, following a three year tenure as creative director of British luxury goods brand Alfred Dunhill. Jones is to exit Louis Vuitton after showing his fall 2018 collection for the brand in Paris on Thursday. Read the full exclusive story on WWD.com. Link in bio. #wwdnews #wwdfashion
For men’s fall 2018, @giuseppezanotti drew on elements from streetwear, sport, biker, combat and rock ‘n’ roll. Pictured here are a pair of shoes from the collection, featuring zippers, rhinestones, and silver hardware. Head to WWD.com to see a roundup of the accessories from Milan’s men’s fall 2018 shows. #wwdfashion (📷: Andrea Delb)
To celebrate the 25th anniversary of @ralphlauren’s snowboarding collection, the brand is mining its archives. The iconic brand is reintroducing vintage styles and dropping new designs for a color capsule that will be available in Ralph Lauren stores and @openingceremony on January 25. The capsule will consist of 10 pieces, including the Snow Beach Pullover, pictured here, which is a collector’s item that rapper Raekwon wore in Wu-Tang Clan’s “Can It Be All So Simple” video. #wwdfashion (📷: Tom Gould)
For @rochasofficial’s pre-fall 2018 collection, creative director Alessandro Dell’Acqua channeled the sophisticated and intriguing Catherine Denevue in the film “Belle de Jour.” Polished collarless coats, midi skirts, suits and ’60s graphic motifs were all featured in the collection, adding a sense of discreet luxury. See the rest of the photos on WWD.com #wwdfashion
“We tried to produce clothing of that couture quality, but the most daunting part was that we only had a matter of days [to do it],” said costume designer Lou Eyrich, who recreated Gianni Versace’s iconic looks for @americancrimestoryfx. Eyrich searched online retailers and vintage shops for original pieces from the design house and for @penelopecruzoficial, who plays Donatella Versace. Head to WWD.com to read how she created the Versace world. #wwdfashion
Only three months after her stellar debut catwalk season, @kaiagerber has inked her first big design collaboration –– with @karllagerfeld. The collection blends Lagerfeld’s Parisian chic aesthetic and the model’s signature West Coast casual style via RTW, accessories, footwear and more. The #KarlLagerfeldxKaia collection will launch in September with a series of events. Get all the details on WWD.com. #wwdnews #wwdfashion
Harrods plans to remove the famous statue of Princess Diana and Dodi Al Fayed from the bottom of the Egyptian escalators and hand it back to Mohamed Al-Fayed. “We are very proud to have played our role in celebrating the lives of Diana, Princess of Wales and Dodi Al Fayed at Harrods and to have welcomed people from around the world to visit the memorial for the past 20 years,” said Michael Ward, Harrods managing director. “With the announcement of the new official memorial statue to Diana, Princess of Wales at Kensington Palace, we feel that the time is right to return this memorial to Mr. Al Fayed and for the public to be invited to pay their respects at the palace.” More on the news, with reporting by @loreleimarfil, at WWD.com. #wwdnews