SAKS INC. PUTS END TO PLANNED SPINOFF
Byline: David Moin
NEW YORK — With the luxury business deteriorating in the fourth quarter, Saks Inc. has decided to cancel its proposed stock spinoff of Saks Fifth Avenue, which would have created separate shares of SFA and its sister department store group.
Saks Inc. also announced preliminary results for the fourth quarter and year ended Feb. 3, 2001 which reflect improvements at the department store group, disappointment at the Saks Fifth Avenue specialty chain and costs from saks.com launched in September.
Also, the company beefed up the responsibilities of Christina Johnson. Formerly, she was president and chief executive of Saks Fifth Avenue. Now she holds those ranks over the entire Saks Fifth Avenue Enterprises, which include the Saks Fifth Avenue stores, Off-5th outlets, catalog and Internet operation.
“Since the board’s decision in July, market conditions have materially changed,” Brad Martin, Saks Inc. chairman and chief executive officer, said in a statement on Thursday.
“As a result, equity investors have narrowed the valuations between the traditional department stores and luxury retail sectors, with the department store multiples improving and the luxury sector multiples deteriorating. Accordingly, the Saks Inc. board of directors no longer believes that the company’s shareholders would be served by owning separate shares of Saks Fifth Avenue Enterprises. The board has determined it is now in the best interests of our shareholders to terminate the proposed spinoff of the SFA related businesses.”
In an interview, Martin said that in September, the company decided to postpone the spinoff and after the board met this week and considered the results for the year, the decision was made.
Even without the spinoff, Martin said investors will be able to measure each of the segments — Saks Fifth Avenue and the Saks Inc. department store group, based on new reporting procedures the company will implement.
Asked if a spinoff could be reconsidered in the future, Martin said, “This is the right decision at this time, but we won’t rule out any value-creating options in the future.”
Martin also disclosed that the upscale Saks specialty chain and the department store group are benefiting by the shared operations of the Saks Support Group, officially announced Thursday but under formation last year. It includes such back office functions as sales support, technology, credit and logistics.
Martin said Johnson’s promotion is geared to “integrate the customer experience over all three channels” and provide more cohesive leadership and merchandising.
Despite the downturn at Saks Fifth Avenue, Martin said, “I have a very bullish long-term view of the luxury sector. I love the positioning which we have in the sector. Clearly, you’ve got cycles and it’s been soft for luxury over the last several months. I think it will recover in the second half, hopefully we’ll have the benefit of lower interest rates and comparable results become easier year over year.”
With the luxury sector in a slump, questions about how stores approach next week’s New York designer shows and shop the lines are being raised. However, Johnson said, “Our strategic plan is set very cohesively and we will continue to view collections as we always have, based on customer needs and response and terrific content.”
Martin also reiterated that the company has no intentions to sell off the department stores. Last week’s announcement that nine department stores are being sold to May Co. was “an unsolicited offer at an attractive price,” he said. “It was not core to our strategy. That transaction is not part of our strategy. We’re excited about the future of the department store segment. We are committed to it and I am very confident that it has a bright future. It’s not for sale.”
Saks Inc. reported that fourth-quarter sales rose 4 percent to $2.12 billion; annual sales rose 2.2 percent to $6.59 billion. Consolidated comp-store sales declined 0.5 percent for the quarter and increased 0.2 percent for the year.
For the fourth quarter, comp sales rose 1.3 percent at the department stores, reflecting improvements in merchandising, marketing, customer service, and personnel to reverse negative trends in the first three quarters of 2000, the company said. Comparable store sales for the department store group declined 1.9 percent for the year.
For the fourth quarter, comp-store sales declined 3.4 percent at Saks Fifth Avenue Enterprises, while comp-store sales rose 3.4 percent for the full year.
Fourth-quarter income prior to certain items and before e-commerce losses is expected to total approximately $112 million, or $.78 per share, compared to $142.3 million, or $.99 per share, last year. Annual income prior to certain items and before e-commerce losses is expected to total approximately $154 million, or $1.08 per share, compared to $241.7 million, or $1.66 per share, last year.
Fourth-quarter income before certain items but including e-commerce losses is expected to total approximately $104 million, or $.73 per share, compared to $141 million, or $.98 per share, last year. Annual income before certain items but including e-commerce losses is expected to total approximately $133 million, or $.93 per share, compared to $239.1 million, or $1.64 per share, last year.
Citing improvements at the department store group, Martin stated, “During the period since the July announcement, we have taken the decisive merchandising, marketing, customer service, and personnel actions needed to regain operating momentum at the department store group.”
Martin continued, “SFAE experienced substantial sales growth and improved operating performance during the first three quarters of 2000. However, consistent with the general slowdown in luxury retail in the fourth quarter of 2000, our SFA business was adversely affected. This led to a modest decline in our year-over-year fourth-quarter operating contribution for the core SFA business. In addition, the operating contribution of both Off-5th and the catalog business declined during the fourth quarter.”
Philip Miller continues to serve as chairman of Saks Fifth Avenue, but no longer has Off-5th reporting to him. Martin previously had Saks Direct reporting to him.
In the first quarter of 2001, the company starts reporting the operating performance of the two business segments to, as Martin said, “permit the investment community to receive information on each business in order to measure performance and to appropriately value the combined entity.”
Martin said in his statement, “During the first three quarters, operating performance at [the department store group] declined over last year due to a general weakness in the traditional department store sector and extraordinary markdowns taken to clear excess spring and summer apparel inventories. For this time period, SFAE met our performance targets and meaningfully improved profitability over the prior year.
“For the fourth quarter, we generated a comparable store sales increase of 1.3 percent and improved gross margins at [the department store group], resulting from the execution of the initiatives previously outlined. However, comparable store sales and gross margins declined at the core SFA stores, Off-5th, and Folio during the fourth quarter. The performance at [the department store group] was not sufficient to offset the weakness at SFAE, and as a result, we anticipate gross margins will decline for the fourth quarter on a consolidated basis.”