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Saks Surprise Sparks Stock

NEW YORK — While hardly bullish about the new year, Saks Inc. ended 2002 with a bottom-line rush that surprised Wall Street into driving up its stock.<br><br>Fourth-quarter net income rose 26.2 percent to $68.1 million, or 47 cents a diluted...

Saks Fifth Avenue’s operating profits quintupled in the fourth quarter.

Saks Fifth Avenue’s operating profits quintupled in the fourth quarter.

WWD Staff

NEW YORK — While hardly bullish about the new year, Saks Inc. ended 2002 with a bottom-line rush that surprised Wall Street into driving up its stock.

Fourth-quarter net income rose 26.2 percent to $68.1 million, or 47 cents a diluted share, from $54 million, or 37 cents, a year ago. Without special items, income advanced 16.9 percent to $84.4 million, or 58 cents a share, from $72.2 million, or 50 cents, a year ago.

Adjusted results came in 8 cents ahead of Wall Street’s 50 cent target. Investors approved and pumped up the firm’s shares 55 cents, or 7.9 percent, leaving the stock at $7.50 on the New York Stock Exchange Wednesday.

Dampening net results were aftertax charges of $16.3 million, or 11 cents a share, for the consolidation of Younkers’ headquarters into Carson Pirie Scott’s and impairment charges for five underperforming stores. Special items in the fourth quarter of 2001 amounted to $18.3 million, or 13 cents, on an aftertax basis.

Sales for the three months dipped 3.7 percent to $1.84 billion from $1.91 billion a year ago. Comparable-store sales receded 3.7 percent.

From the luxury flagship to the department stores, the focus is on merchandise and store experience, said chairman and chief executive R. Brad Martin on a conference call. That hasn’t pulled him away from financial considerations, though. “Profitable comp-store sales growth is the priority of this management,” he said during the call.

Still, comps for 2003 are expected to drop in both divisions.

On an operating basis, it was the Saks Fifth Avenue luxury unit that shone. Before special items, the division’s profits increased fivefold to $53.1 million during the quarter. Sales, however, decreased 5.9 percent, to $682 million, on a 4.1 percent comp decline. Private label represented between 5 percent and 5.5 percent of the luxury division’s overall sales last year.

SFA has been building up merchandise in the “gold range,” including such brands as Peter Cohen, Max Mara and Piazza Sempione. The division has undergone several initiatives recently, including the integration of Saks direct into the full-line organization, a corporate gift program, strategic partnerships and the addition of new elements to its stores. In the fourth quarter, the Fifth Avenue store, for the first time, offered a bridal registry.

In the department store division, operating profits, before special items, waned 19 percent to $118.2 million. Sales were off 2.3 percent at $1.16 billion on a 3.4 percent comp drop.

At the division, sales of differentiated product climbed to 23 percent of the overall take, from 17 percent a year ago. The department stores’ proprietary brands made up 12 percent of the division sales last year, up just slightly from the year before. Differentiated includes both proprietary and exclusive offerings.

Last month, the firm said it would take a minority stake in the bankrupt FAO Inc., which in turn would open up licensed shops inside its department stores with merchandise from the toy retailer’s FAO Schwarz, The Right Start and Zany Brainy nameplates.

“This is one more example of us focusing on potential category expansions within our boxes to drive more productivity and customer satisfaction,” said Martin, who added FAO was “clearly the brand name leader in the toy category.”

Gregg Clark, vice president of consumer goods and retail at Cap Gemini Ernst & Young Management Consulting, noted, “Saks has done a very good job of making sure they have the products the customers are looking for, the top-quality goods at a fair price.”

That’s not the lowest price, he noted, but they make up for that with store panache that’s bolstered by advertising and marketing efforts. “You know that you’re going to get the product that you want wrapped up in an experience that’s very appealing,” he said. “Their experience package is a little bit broader than just what you get when you walk into the physical confines of the store.”

For fiscal 2002, net income shot up to $24.2 million, or 17 cents a share. This compared with year-ago earnings of $322,000, which was break even on a per-share basis. Prior to special items, income for the year climbed to $90.4 million, or 62 cents a share, from $23.9 million, or 17 cents, in the previous year.

Sales last year dipped under the $6 billion mark, falling 2.6 percent to $5.91 billion from $6.07 billion in 2001. Comps slid 1.4 percent.

This year, Saks is looking for its earnings per share, before special items, to rise in the mid-single-digit range. In the first quarter, the firm expects to sell the majority of its private label credit card accounts and balances to Household International, a transaction that is excluded from the firm’s assumptions for 2003.

Comp-store sales next year are expected to continue their decline in the low-single digits at both divisions, with an improving trend in the second half. Also the gross margin rate should improve through enhanced merchandise mix, inventory control, benefits from the Younkers consolidation and systems investments. Selling, general and administrative expenses should increase year-over-year, due to rising health care costs and property insurance premiums.

On the call, Martin stood his ground on the firm’s expenditures. “We could go cut $50 million out of the selling expense of the company tomorrow morning and just compound the problems that the department store industry has had over the years of not delivering on the service proposition of that format,” he said.

“We are very intent on managing every penny in the business, but continuing to invest in the right level of services, the right level of marketing and the right level of product presentation in the physical facilities so that we can generate some top-line sustainable growth when this economic environment is better.”