Saks Stock Spikes on Goldman Rumor

Retailer's shares jumped 18.1 percent in after-hours trading on Tuesday on speculation that it had hired a banker to explore strategic alternatives.

Saks Fifth Avenue

Shares of Saks Inc. jumped 18.1 percent in after-hours trading Tuesday on speculation that it had hired a banker to explore strategic alternatives, including a possible sale of the company.

This story first appeared in the May 22, 2013 issue of WWD.  Subscribe Today.

The retailer’s shares already had climbed 11.3 percent to close at $13.67 Tuesday after Saks, which also posted first-quarter results, said it is speeding up the launch of its outlet e-commerce site. They rose to $16.18 in after-market trading on the banker rumors.

Nearly 7.5 million shares changed hands in Tuesday’s regular trading session, compared with a three-month average trading volume of nearly 2.1 million shares. Saks currently has a market capitalization of $2 billion.

This isn’t the first time Saks has surfaced as an acquisition target. The last time was in 2005, when the retailer put up for sale its department store nameplates such as Proffitt’s, McRae’s and Carson Pirie Scott. Saks completed those sales and kept for itself what was then the SFA division, consisting of Saks Fifth Avenue stores and the Off 5th outlet business. Saks also owns the real estate on which its Manhattan flagship sits.

Ironically, back then Saks’ luxury competitor Neiman Marcus was also up for sale. The Dallas-based retailer was ultimately sold in 2005 for $5.1 billion to private equity firms TPG and Warburg Pincus.

Fast-forward eight years and Neiman’s owners are said to be exploring a possible initial public offering. Now there are the rumblings about a Saks sale. Stock market observers said there was speculation that Saks had hired Goldman Sachs as its investment banker. Goldman has traditionally been the banker for Saks.

A spokeswoman for Saks declined comment, as did a spokesman for Goldman.

As of last month, Saks’ top three investors include Southeastern Asset Management at 29.6 million shares, or 19.3 percent of the outstanding shares; Mexican billionaire and telecom honcho Carlos Slim Helú at 23.1 million shares, or 15.4 percent, and Tod’s SpA chairman and chief executive officer Diego Della Valle at 22.7 million shares, or 15.1 percent. The three together control 49.8 percent of the outstanding shares of Saks’ stock.

Some have speculated that Saks can’t operate very profitably as a stand-alone company and would do better by buying another retailer or getting bought by one.

“The stock usually trades at about $11. It’s been doing that for 10 years. It’s got to do something,” said one retail source.

The stock did jump significantly Tuesday on the Goldman rumors, and if the stock continues to go up, the chances of a sale would diminish. “Everybody who bought the stock overpaid,” said one source.

Financial sources said Tuesday that Saks comes up periodically as an acquisition target whenever there are buyers in search for a acquisition. Saks, with its ties to the luxury market and its iconic Fifth Avenue flagship, which it owns, fits that “trophy” definition.

One banker said, “Neiman is asking for about 11 times EBITDA, and Saks would be a more attractive target trading at seven times or eight times that.”

Potential buyers could range from equity funds to sovereign wealth funds. The Qatari royal family has been active in the fashion and retail space over the last 10 months. The family controls Mayhoola for Investments, which last year acquired Valentino Fashion Group SpA. It’s making a big investment in the Valentino brand, with the largest flagship for the brand set to open in New York at 693 Fifth Avenue at the old Takashimaya Building next summer.

It since has been on a major spending spree, with particular interest in real estate. The most prominent properties in its portfolio include Harrods, One Hyde Park and The Shard in London, as well as Place Vendôme and Printemps in Paris. It supposedly has also intensified its quest to make investments in the U.S.

Saks, said one source, would be an intriguing possibility because of its real estate and the name factor, since luxury consumers in the Middle East are familiar with the brand here and in the United Arab Emirates, where Saks has stores under license in Dubai and in Bahrain in Manama.

Stephen I. Sadove, chairman and ceo of Saks, said in the conference call following the earnings report that international tourism in “New York is a little bit weaker, primarily because the European tourism is down a bit. You’re still seeing growth in the Chinese tourism, the Russian, and Middle Eastern business is actually growing right now.”

In addition to the Fifth Avenue real estate, Saks also owns 26 of its 43 department stores.

The value of the company’s real estate should help attract buyers, financial sources said.

“It’s eminently sellable,” said one banker. “And it’s eminently financeable, so you could have a large number of [private equity firms] and strategics taking a hard look at this. I imagine you could put a pretty decent debt multiple on it.”

One private equity contact said the company has a great name and that the real estate market was booming. Even so, some would-be buyers have concerns about the sector. He said the question “Do you believe in department stores?” becomes very important to a sale process.

While first-quarter profits at Saks were impacted by after-tax items, sales and comps both rose in the period, which bested Wall Street’s expectations given the steeper promotions at the luxury retailer versus a year ago.

For the three months ended May 4, net income dropped 37.8 percent to $20 million, or 13 cents a diluted share, from $32.1 million, or 18 cents, a year ago. Excluding $10.1 million in after-tax items for store closing costs and a noncash loss on the extinguishment of debt in connection to the retailer’s redemption of its $230 million convertible senior notes, the company would have posted net income of $30.1 million. That translates to 19 cents in earnings per share for the quarter, which matched analysts’ expectations. Net sales rose 5.3 percent to $793.2 million from $753.6 million, with comparable-store sales up 5.9 percent on top of the 4.8 percent increase in the year-ago quarter. Wall Street analysts were expecting $778.5 million in revenues.

Sadove said on the call, “Trends improved throughout the quarter as the weather got better and it appeared the concerns over the fiscal cliff and increased tax rates subsided somewhat.”

He noted the company maintained a “44.4 percent gross margin rate, which was flat with last year, in an increasingly promotional environment.”

Merchandise categories that showed sales strength during the first quarter included women’s contemporary and advanced designer apparel; dresses; women’s shoes; handbags; children’s apparel, and men’s accessories, shoes and contemporary apparel.

Sadove also said that the company’s investments in infrastructure and technology, known as Project Evolution, to enhance its omnichannel capabilities will “put pressure on our near-term profitability,” as the company is positioned for “future revenue and earnings growth.”

The company also will accelerate the launch of off5th.com, its e-commerce site for its Off 5th outlet business, to the fall of 2013 from the prior time frame of 2014, which will result in an additional $5 million to $6 million of start-up costs. The total capital expenditure for its technology initiatives remains at $85 million to $90 million.

“We expect that our dot-com business will continue to grow, especially as we further embrace omnichannel….During the first quarter, we launched our redesigned saks.com site to include a longer, more fluid layout that more prominently highlights seasonal trends and most-wanted designers,” Sadove said.

The ceo and chairman added that the Project Evolution initiatives are being phased in through 2016.

The company is forecasting comps growth in the 4 to 6 percent range for the balance of the year, with comp-store inventory levels in the 4 percent to 5 percent range for the same period. Sadove said, “Based on current inventory levels and composition of our promotional calendar and permanent markdown cadence, we expected our year-over-year gross margin rate to be relatively flat for the balance of the year.

Ron Frasch, president and chief merchandising officer, told analysts on the call, “I can assure you that omnichannel is top of mind for our team and has become integral in how we strategize, manage and execute the business. A prime example is how differently and collaboratively our Saks Fifth Avenue full line and online merchandise and marketing teams are working with each other and with our vendors and an omnichannel retailer.”

He also noted that the team is “staying the course with our overall merchandising strategies, focusing on differentiation and building our powerful signature businesses like shoes, handbags and women’s and men’s contemporary apparel, both online and in our stores.”