Byline: Vicki M. Young / Thomas J. Ryan

NEW YORK — Shares of Saks Holdings Inc. lost 32.8 percent of their value Wednesday, a day after the company said first-quarter earnings will fall sharply below estimates.
The value of Saks shares fell $620 million, plummeting 9 5/8 points to close at 19 3/4 — a new low for the issue — on the New York Stock Exchange. The stock was worth $1.27 billion at Wednesday’s close, compared with $1.89 billion 24 hours earlier. It had traded as high as 41 1/4.
The stock was the second-most-active issue traded on the Big Board, with 8.2 million shares changing hands.
The loss potentially complicates the Saks-Isetan bid to buy Barneys.
According to sources in the investment community, with its lower stock price, Saks — which declined to comment on the stock plunge — would have to either raise the cash portion of the $290 million offer, announced Tuesday, or issue more shares, thereby diluting the earning power of the stock for shareholders. If more cash is needed, say analysts, Saks may have to borrow more money and negotiate new lending limits with its banks.
Meanwhile, Barneys’ unsecured bank claims were being offered Wednesday at prices in the low 40s, down from trading levels in the low 60s previously. This drop, however, was triggered by the Saks proposal, which called for unsecured creditors to get only 20 cents on the dollar.
Tuesday’s disappointing earnings projection caused a slew of brokerage firms to cut their estimates and ratings on the firm.
Saks said it expected earnings of about 20 cents a share in the period ended May 3, well below Wall Street’s mean estimate of 33 cents a share. Saks blamed the decline on continued softness at the Folio catalog, a slowdown in sales at the Off 5th outlets and weakness in casual bridge apparel at the full-line stores.
Saks told analysts in a conference call that same-store sales in the quarter at the core full-line division rose about 4.5 percent in the quarter, but would have been up 7 percent if not for sluggish bridge sales.
Same-store sales at the Off-Fifth chain were down in the low single digits, while sales at the Folio catalog were down in the high teens.
“While the earnings shortfall is in itself disappointing, the bigger issue raised is the break it creates in momentum,” said Dana Eisman Cohen, an analyst at Donaldson Lufkin & Jenrette in a research note.
DLJ slashed its estimates for the year by 23 cents to $1.52 a share. Saks earned 73 cents a share a year earlier.
Buckingham Research slashed its full-year estimate on Saks by 23 cents a share to $1.46 this year, and cut its estimate for 1998 by 24 cents to $2.13 a share.
Walter Loeb of Loeb Associates, who cut his estimate on Saks this year by a dime to $1.55, blamed Saks’ disappointing results on an early Easter, a cold April that hurt spring apparel sales, and some softness in spending in the higher-end ranges, partly tied to the recent drops in the stock market.
Loeb said investors may have been “overaggressive” in bidding Saks up so high, but he said he believes “over the longer term, this a strong company with outstanding potential.”
Saks, he added, has still has some deep financial pockets in Investcorp, which controls 65 percent of the retailer.
Some observers said the market overreacted Wednesday.
“I think the reaction was way overdone,” said Stacy Pak at First Boston, who reiterated her “strong buy” rating. “The underlying business at Saks is just fine, and Saks should get back on track in the second quarter.”
Pak cut her full-year estimate by 17 cents a share to $1.56 and kept her estimate for 1998 at $2.36.
Isaac Lagnado, publisher of Tactical Retail Monitor, said, “This is a classic Wall Street knee-jerk response to short-term results. The fundamental position of the company is better than ever. A Barneys acquisition would be a coup for them. Strategically, the company is very well run and very well poised.”
Lagnado said Saks would enhance Barneys’ performance since it has stronger point-of-sale systems for reporting data, distribution centers and could beef up Barney’s advertising and marketing, which has been sporadic lately.
Meanwhile, the crash in the prices of unsecured bank claims to the lower 40s from the 60s reflects the Saks-Isetan proposal that promised unsecured creditors only 20 cents on the dollar.
Unsecured bank claims had been trading in the lower 80s in early February, when investors hoped a bidding war for Barneys would raise the prices of claims.
However, claims started to slide after what was largely regarded as a low-ball $240 million offer by Dickson Poon on Feb. 28, with no quick follow-up bids from Saks or other interested parties such as Neiman Marcus Group.
The latest drop in Barneys’ trade claims caps a seesaw ride. The claims had bottomed out at prices in the 30s in the few months after Barneys filed for bankruptcy in January 1996.
Such claims, which tend to trade about 10 to 15 percent below unsecured bank claims, would now likely be trading in the mid-30s.
Although a few smaller vendors are holding onto their claims, most of the larger ones — such as Donna Karan, Hugo Boss and Marzotto — and most factors sold off their claims months ago.
According to papers on file in Manhattan bankruptcy court, the Saks-Isetan bid of $290 million will be paid in cash, Saks common stock and Saks warrants on the assumption that the price of Saks stock is $30.
The $290 million includes a valuation of $43 million for furniture, fixtures and equipment (FF&E) leases, leaving $247 million for unsecured creditors. The purchase price also includes a $50 million payment to Isetan in consideration of new leases on the Barneys stores in Beverly Hills, Chicago and on Madison Avenue, rent reductions from the current $23 million, and settlement of Barneys-Isetan litigation.
The bid does not include a total of $15 million in annual rent payments for the three stores.
The purchase price, however, is subject to adjustments. It could be increased or decreased by the amount that the working capital on a certain date is greater or less than the amount Saks and Isetan have targeted in their agreement. Depending on the value of those adjustments, and adding the incremental value of the rent payments, the total amount of the purchase price could reach the neighborhood of $350 million.
As expected, the creditors’ committee rejected the Saks-Isetan bid Wednesday, just as it turned down the $240 million cash bid made by Dickson Concepts.
Terms of the Dickson bid have never been made public, not even the valuation placed on the FF&E leases. When comparing the $240 million Dickson bid with the $247 million Saks-Isetan bid — after deducting the FF&E valuation — Isetan clearly comes out ahead in the Saks-Isetan bid.
The “term sheet” — court papers that set out the terms of the bid — also includes information about the leases between Saks and Isetan for the three Barneys flagships.
For the Madison Avenue store, Saks and Isetan agreed to an initial term lease of 25 years, with four 10-year renewal options. Annual rent is $11 million.
The Chicago store lease has an initial term of 10 years, with two 10-year renewal options. Annual rent is $1 million.
The Beverly Hills store lease has an initial term of 20 years, with three 10-year renewal options. Rent is set at $3 million annually.
All three leases are subject to rental adjustments.
In each of the three leases, Saks has the option to purchase the property during the first two years, if Isetan decides to sell.
Barneys and the creditors’ committee square off with Isetan today in court. On the agenda is Barneys’ request for a $10 million payout to an approved purchaser that is outbid, and its request to extend the time where only Barneys can file a plan of reorganization.
Isetan has opposed both requests. It is seeking to break exclusivity so it can file a joint plan of reorganization with Saks.
In its opposition papers to exclusivity, Isetan raised issues concerning Barneys’ financial picture, as well as a chart detailing operating losses from 1987 through the present.
The creditors’ committee has filed papers supporting Barneys’ requests.
One observer wondered whether Isetan had the right to object to Barneys’ request now that it has resigned from the creditors’ committee, but David LeMay, Isetan’s counsel at Hughes Hubbard & Reed, said the Bankruptcy Code allows a creditor to be heard on any issue in a bankruptcy case.

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