By and  on March 30, 2005

NEW YORK — A breakup of Saks Inc. appears to be in the works.

Sources said Tuesday that Saks Inc., which is based in Birmingham, Ala., is attempting to line up buyers for its 235-unit department store group, with Belk Inc. as a primary suitor.

There are other parties said to be interested in the Saks department stores, including two private equity firms, Blackstone Group and Apollo Advisors. These same equity firms also are said to be interested in the Neiman Marcus Group. While Neiman’s is officially up for sale, Saks Inc. has quietly been shopping its department stores and has never disclosed plans to sell them.

Dillard’s and Bon Ton are also likely to eye Saks Inc. units. So would J.C. Penney and Sears Holding, but their interest would be narrower, considering their growth strategies are based on expansion to off-mall locations.

Belk, a competitor based in Charlotte, N.C., has sat on the sidelines in the retail acquisition craze — up to now. Belk is said to be interested in the McRae’s and Proffitt’s divisions of Saks Inc., and possibly Parisian as well.

“They’re looking at two divisions fairly seriously,” said a financial source.

“The whole thing would be too big for Belk,” said another financial executive familiar with the situation. “They’re after pieces.”

Officials at Saks Inc. declined comment. Belk officials could not be reached for comment.

Saks Inc. is a $6.4 billion company, with $3.7 billion generated by its department stores and about $2.7 billion by its Saks Fifth Avenue Enterprises division.

Retail sources said Friday that Belk is poised to be aggressive in the acquisitions arena via store openings and acquisitions. The company began a restructuring process in the late Nineties that centralized what was once a confederation of 112 separate companies running Belk stores in 14 Southeast and mid-Atlantic states into a single entity with a stronger capital structure and a single balance sheet. The strategy, orchestrated by Goldman Sachs, has created a more nimble, leaner organization.

In addition, a younger generation of the Belk family stepped up in March 2004 to run the company. The team includes Tim Belk Jr., chairman and chief executive officer; John Belk, co-president and chief operating officer, and McKay Belk, co-president and chief merchandising officer.Tim, McKay and John are the sons of the late Thomas Belk, who was president. They are also the nephews of the former ceo, John Belk. Their grandfather, William Henry Belk, founded the company in 1888 in Monroe, N.C.

“For years, they stood by and watched Proffitt’s grow. Tim’s generation wants to be more aggressive.” said the financial source.

Buying Proffitt’s would enable Belk to move into some bigger markets. Generally, Belk stores are situated in secondary markets. They anchor malls and command a lot of loyalty. The Belks are said to be anxious to expand in Florida.

Belk Inc. is considered the largest privately owned department store in the country, with over 220 units and sales last year of $2.27 billion. It had a very strong Christmas season, and last year’s income was $111.5 million.

Four years ago, Saks Inc. had a plan to spin off its Saks Fifth Avenue and department store divisions into two separate public entities, but this plan was aborted because of concerns about the recession and bondholder opposition on how to split the debt.

Now, with deal-making fever spreading through retailing — from Federated Department Stores buying May Department Stores to Neiman Marcus Group putting itself up for sale — the time seems right for Saks Inc. to try to restructure again. Furthermore, selling department stores, or at least some of them, would help the corporation fund the revitalization of its Saks Fifth Avenue division, where ambitious plans for store renovations and a massive overhaul of the Fifth Avenue flagship are in the works. Saks Fifth Avenue is also spending more on merchandising, marketing and advertising to reenergize its image and improve results.

For Saks Inc. management, there’s also pressure to create shareholder value, considering that its stock price has been wallowing for years. Shares traded at close to $40 in July 1998, when Saks Inc. (then called Proffitt’s) bought Saks Fifth Avenue. They closed at $15.37, down 2.4 percent, on the NYSE on Tuesday.

Selling off the department stores would unravel chairman and ceo R. Brad Martin’s strategy of combining the more moderate regional chains with the upscale Saks Fifth Avenue under the same corporate umbrella.The department store group has lately been a drag on Saks Inc.’s profits. Aside from the 22-unit Proffitt’s, 38-unit Parisian and 29-unit McRae’s, the group operates Carson Pirie Scott, Younkers, Herberger’s, Bergner’s and Boston Store. Stores are in the Southeast, Midwest and Great Plains states.

Steve Sadove, Saks Inc. vice chairman and chief operating officer, at a Merrill Lynch Retailing Leaders and Household Products & Cosmetics Conference here last week, said, “We’ve played in that [mergers and acquisitions] environment. We’re well aware of the environment and we’re going to look carefully in terms of what’s the best shareholder value creation and opportunities for us. We think that we have a very, very clear story. We’re executing against that story and we’ll monitor the external environment.”

The strategic direction and priorities for the department store business are on executing the vision of being the “best department stores in your hometown,” he said. He added that in its top 10 markets, it is growing share in nine. Sadove boasted that the business is the number-one player in cities such as Jackson, Miss.; Knoxville, Tenn., and Des Moines, Iowa.

“About 35 percent of the product that we sell in our stores is differentiated from what you will find in other stores,” he said.

Sadove also noted the business is focused on refining the profitability of its proprietary brands, which is about 17 percent of sales. “Over the course of the last couple of years, we have dramatically grown that business, well into double-digits. We are talking 25 percent, 30 percent growth on an annual basis.”

The operations added some new brands and brand extensions in 2004, including Breckenridge, Laura Ashley and Jane Seymour, but Sadove added that the department store group “probably launched a little bit too many...too quickly and that is what caused us some of the learning-curve problems.” 

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