By  on November 15, 2006

NEW YORK — The mood continues to brighten at Saks Fifth Avenue.

On Tuesday, parent Saks Inc. posted $12.5 million in income from continuing operations for the third quarter ended Oct. 28, versus a $13.5 million loss in the year-ago quarter, providing tangible signs of progress with turnaround efforts. That translated to a 9-cent-per-share gain, versus a 10-cent-per-share loss a year ago.

Saks' sales in the third quarter increased 8 percent, to $697 million, versus $645.2 million a year ago, with an 8.8 percent rise in comp-store sales.

Before charges and gains mostly related to asset sales, management downsizing and legal costs from government investigations, operating income totaled $26.5 million in the third quarter, compared with a loss of $9.9 million in the prior year. Net income — including a loss of $6.3 million related to the sale of Parisian to Belk — totaled $6.2 million, or 5 cents, versus $225,000 a year ago.

The numbers had Saks chief executive officer Steve Sadove in an upbeat mood. "I certainly like the growth prospects and competitive dynamics in the luxury sector," Sadove said during a conference call. He also said, "We believe we are on track to achieve our three- to four-year operating margin goal of 8 percent," which would be quadruple the rate of recent years. Saks Fifth Avenue should have sales of $3 billion this fiscal year.

According to Sadove, "substantial progress" is being made at Saks Fifth Avenue. "We are increasing our understanding of core customers by market. Our customer service, clienteling and marketing efforts have never been stronger. We are undergoing a cultural transformation. We have a more inclusive culture with a focus on collaboration and a renewed sense of teamwork throughout the organization."

He is looking forward to the fourth quarter, projecting a mid-single-digit comparable-store sales increase, improved gross margin rate and modest sales, general and administrative expenses leverage.

Since completing sell-offs of its department store group over the past year, executives have been able to focus on fixing the core Saks Fifth Avenue business. Under Sadove's regime, there have been sweeping changes in how Saks stores are merchandised, with a particular focus on tailoring individual store assortments, broadening the target audience and getting staff from buying, planning and store operations to work closer.In addition, certain categories, notably petites and private label, are being brought back into the stores, there is deeper buying of key items and renovation activity is on the upswing. Two important units, in Boston and Beverly Hills, will complete renovations next year, and renovations are ongoing at the Fifth Avenue flagship. Three to five stores are being earmarked for renovations each year.

Sadove said assortments are more balanced across the chain, and highlighted performances at the flagship locations, including Fifth Avenue and Beverly Hills, as well as in certain secondary markets such as Birmingham, Ala.; Richmond, Va.; Columbus, Ohio; Tulsa, Okla., and Mission Viejo, Calif.

Petites were recently reintroduced to 32 locations, Sadove added, noting that Saks' research shows that petite-sized customers are responsible for about 10 percent of the chain's overall volume.

The outlook has also been brightened by achieving better sales results despite reduced inventories, and the ability to pay special cash dividends to shareholders, including $4 per share this quarter, due to the excess cash the company generated through sales of regional department stores and Parisian. Since July 2005, the company has generated approximately $2 billion in cash from these divestitures.

The gross margin rate rose 110 basis points over last year due to improved sell-throughs of full-priced merchandise. Year-over-year SG&A expenses declined by about $26 million, or 13 percent. About one-half of the reduction is due to leveraging costs at SFA and the corporate downsizing. The corporate office in Birmingham is being eliminated and a smaller corporate staff is being established at Saks Fifth Avenue offices in New York. By the end of the second quarter, all duplicative functions will have been eliminated, according to Sadove.

Last quarter, there were fewer and less costly one-time items related to investigation expenses, severance/retentions and insurance deductibles from the New Orleans store, which was rebuilt after Hurricane Katrina and is reopening on Thursday. The government was investigating Saks for certain markdown and chargeback practices, but those issues with vendors have been resolved and some suppliers have been compensated.

Saks Inc. operates 54 Saks Fifth Avenue stores [including New Orleans], 50 Off 5th outlet stores, saks.com and 62 Club Libby Lu specialty shops.Aside from New Orleans, no new store openings in the U.S. are slated, though licensed units are planned for Shanghai and Mexico City. Saks already has two licensed units in the Middle East.

"We feel pretty good about the store base where we are today," Sadove said, though he suggested it's possible that openings will occur in future. "There are a couple of markets where there is potential," Sadove said. For the moment, though, SFA has "a reasonable-sized store base....We are very focused on improving productivity at our existing stores."

While there has been speculation that Saks Fifth Avenue could one day be sold, Sadove said, "We are not going to comment on anything relative to M&A [mergers and acquisitions] activity."

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