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Executives

Stephen I. Sadove - Executive Chairman and Chief Executive Officer

Analysts

Lorraine Maikis Hutchinson - BofA Merrill Lynch, Research Division

Saks Incorporated (SKS) 2013 Consumer & Retail Conference March 13, 2013 8:50 AM ET

Lorraine Maikis Hutchinson - BofA Merrill Lynch, Research Division

Okay, we're going to get started with Saks. Very happy to have Steve Sadove, the CEO, here to present to us today. So give a brief overview of the business and then we'll have time for questions after.

Stephen I. Sadove

Thanks, Lorraine. Good morning, everybody. This morning we'll talk little bit about what's going on at Saks, and then open it up to questions.

As we sit today, we have 43 full-line Saks Fifth Avenue stores. We have been 2 that we've announced that we'll be closing, so you ought to be thinking in terms of by the end of the year we're at the 41 type of range, 65 outlet stores and a very vibrant and growing saks.com business. If you look at the performance for 2012, I would call it a period of modest growth, comps grew in the 3.2% range, relatively flat gross margins and operating income relatively flat in the 5% range. You clearly saw a deceleration as we went into the latter part of the year. We'll talk a little bit about what's going on with the consumer. And we are in the midst of what I call, our transformation into an omni-channel environment, income relatively flat on a year-on-year basis.

Lot of accomplishments in what I considered to be a difficult luxury environment towards the end of the year. The single biggest change going on in this company, and I think in this industry is omni-channel. And we made an enormous progress in moving ourselves towards an omni-channel environment. We'll get into details about that. We launched what we call Project Evolution, which is that transformation executed against our merchandise and customer experience. Marketing strategies saw a major improvement in, for example, customer service ratings across the board. Continued to make strategic capital investments around the omni-channel, as well as in improving our store base. We rationalized our store -- have rationalized our store base. We've now closed, over the last several years, the 10 full-line stores with 2 more that have been announced, continuing to see very outsized growth in saks.com and feel quite good about the progress and the prognosis there. And continuing to expand our outlet business and have been aggressively buying back shares. Over the last 6 quarters, we've bought back somewhere in the range of $200 million worth of stock.

As we look at 2013, we think that it's a little bit of a volatile macro environment. And there's a bit of a cross current going on in the luxury environment. On a positive side, you have the Dow at 14,400. It's s very strong and we know that on a longer-term basis, there's a direct correlation between the sector, our business, and the stock market. That's a very real positive. We've had a little bit on the, what I call, the cross-current negative is the concern relative to what's going on with the luxury consumer in terms of taxation, the fiscal cliff, the sequestration. The high-end consumer's at the epicenter of this. If you looked at our -- as you went into the end of last year and the prospect of what was going to happen with taxes, the high-end consumer probably, and I look at our core consumer, probably was affected somewhere in the neighborhood of 8 to 10 percentage points on their tax rate. And that -- yet, and still dealing with the question of what's the impact of sequestration on what's called loopholes or deductions or whatever it's going to be.

You saw it affect things like high-end jewelry sales towards the end of the year. If we look at sales of jewelry in the $75,000-plus range, which were growing very rapidly through the third quarter, as we went into the November, December period, you started to see a slowdown in that high-end jewelry purchase. I'm not saying that it's a long-term effect at all, because our customer's highly resilient, but during that period of uncertainty, you'd have financial advisers telling their clients, "Hey, maybe we ought to hold off on this one until we see with more certainty what's going on." So I just think that there is a little bit of a short-term effect that you saw, and you saw it in the growth rates since we went through the latter part.

Set aside, we had big hit from Hurricane Sandy, we probably got hurt more than almost any other retailer because so much of our business is tied to the Northeast and even Florida people, which is a -- we have a very big business in Florida. People who weren't traveling back and forth to Florida, you saw an impact in the fourth quarter. But if I normalize it, your trend was slowing down into that 3% type of range as opposed to the higher grow that were you're seeing in the earlier part of the year. So I do think that, that environment, while the underlying GDP is probably going to be reasonably healthy and you've seen job growth and you're seeing stability in the markets, I do believe that there's going to be a little bit of a period where the high-end customer is going to adjust to the new environment. And I'd use that word, "adjusting" because they'll deal with it fine and we know that our customers' tied much more to how do they feel about their net worth. But until they resolve and understand what the tax piece of it is going to mean, it affects them.

And it's affecting New York as well. New York -- as a high-end consumer is affected directly, New York is the epicenter of the high-end consumer. And you've seen a slowdown in New York relative to other markets. And again, I think that will turn over time.

I talk about 2013 as a transformational year. It's all about all omni-channel, we're making major capital and expense investments that will allow us to truly be an omni-channel retailer. What I mean by that is having one view of the customer, one view of the inventory, moving inventory across channels, being able to ship directly from the store a customer, every store essentially becoming a distribution center. And we're now well into that process and you're starting to see the benefits already. As we sit today, we're shipping from all of our stores directly to the consumer. In terms of the strategic efforts, we're continuing to invest in the business. And we're very optimistic about the longer-term, and we remain committed to our core strategies.

The assumptions that we gave in our earnings release on the 26th of February, 3% to 5% comp growth, inventory levels up in the 3% to 5% range, 20 to 40 basis points of gross margin improvement; 30 to 50 points of basis points of SG&A deleverage. And I think that this will be the last period you'll see the deleverage, but this is all the omni-channel investment that we're making relative to for the longer term.

Our cap spending -- capital spending in the $140 million to $150 million range. That's up from what we saw last year in the $110 million to $115 million range, probably the high point that you'll see. Again, a lot of that, probably close to $50 million of that being against the omni-channel transformation. You'll probably see that come down as we go into '14. And the big areas of focus, Project Evolution, meaning the omni-channel store renovations and vendor shops, we have some major innovations going on. I'll talk about those in a minute. We continue to expand our OFF 5TH business, and then we have an underlying maintenance CapEx of this company probably in the $30 million range.

Omni-channel, as I talked about being our focus with one view of the inventory, one view of the customer, we are buying online shipping from the stores. We started that in about November timeframe testing. What would it be like, and the concept here is that, a number of our competitors are a bit ahead of us. Macy's talks about how many stores they're shipping from. We're probably, I'd say, a year behind some of the top best-in-class in doing it. We'll get there, we'll probably -- we're in the crawl stage as we went through November. We're probably in the walking stage today. And by mid-year, we'll be running. But what we're looking at is the ability to -- we had historically run separate inventories. Our Internet business would have one inventory, our store business having another inventory. When we run out of stock on items in the inventory online, it's gone. Now what we're doing is sharing the inventories so that when -- if we bought 20 of these ties online and 100 of them in the store, when we ran of the ones online, we were done. Now what we're doing is have the ability to start shipping them directly to the customer from the store. The impact of that is dramatic because what might have been a markdown sale in the store, now it can be shipped online and you have both a revenue impact and a gross margin effect of that sale. So very dramatic as they change. We're seeing it having a bigger impact than we anticipated in terms of the customer response and very optimistic about what it's doing. Now first was when -- first piece of it, was when you run out of stuff that you've already bought online; the second phase is taking items that we never had online and start putting them up online by photographing them, attributing them and shipping them directly from the store. So you can take our New York store assortment, for example, in shoes, put it up online, and start selling it directly to the consumer. That's phase 2 of this. We're starting and we're into that process and ramping it up. The limitations, we found, we had to add more people in the stores just runners to go find the product to ship it. We had to add more photo capacity to be able to shoot the products. We're now in that ramping-up phase as we speak. And we've had to make organizational changes. We've changed the roles and responsibilities of our merchants at the senior level so that they're looking across channels in terms of overseeing the growth of the business. So we feel very optimistic about what it's doing. And it really, this omni-channels, the foundations behind this are -- we've been implementing an Oracle implementation across -- full suite across our entire business systems that will include not just the merchant's planning and buying tools but new foundational HR systems, financial systems, and we're well into that implementation.

If we look at the focus areas for 2013 from a merchandising perspective, again, it's omni-channel, but we're also focusing on our core and emerging brands. What you're finding is a change going on with the consumer moving from -- those of you who've been around watching us for a while, know we created this thing called the 9-box grid. On one dimension was "Good, Better, Best," on the other was "Contemporary", we called it -- from Park Avenue, Uptown to Soho, very "Classic" to very "Contemporary". Over the recession and post-recession period, you saw a shifting from the "Good, Better, Best" down to "Good" during the recession and towards a "Better, Best" point of view in a post-recession period, and that's why you've seen the impact on AURs. What's happening now is you're seeing a little bit on the other dimension shifting from some of that "Classic" towards a little bit more of the "Contemporary" and what you're seeing in the merchandising area is a number of the emerging brands and coming really to the fore and making a lot of shifting of making the offering more relevant. So it's still the "9-box" grid but you see dimensions -- the different dimension coming into play. So that's a -- I think a very exciting area for the year.

In terms of service, we're focusing on selling. We've been put out, let's say over 1,000 iPads in the stores. We're focusing on selling, training, giving the -- giving our associates the -- not just a focus on service, but on selling, and the training that's going to allow them to be able to utilize the tools that we've got.

In terms of marketing, it's about local, it's about targeted marketing segmentation. We've just relaunched our loyalty program within the last month and feel very optimistic about what that's going to do. We have a very, I think, a very strong loyalty program that cater to the higher-end customer. If you're a Diamond, Platinum, the bigger-tier spenders, you know the program well. You're treated well. You get a lot of perks that are associated with it, but it didn't do enough, I thought, for the entry level. What we called the Premier or the least [ph] , and you needed to spend $1,000 to get into the program. The new program basically runs along the line, if you have the card, you're a member of the program. So that $0 to $1000 spender is now a part of the program, earning points right away and getting a gift card, but importantly, we, as part of omni-channel, wanted to get to a single behavior which we identified as -- and talking to a lot of consumers, the idea of free shipping is very important to our customer, especially online. And the idea of having free shipping online, but not having it in the store didn't make any sense. So that, to bring us into an omni-channel environment, we created the concept of free shipping anytime no matter where you buy. So if you're buying in the store, you're buying online and if you have a card, it's all part of the loyalty program. And that's been getting a very good response. We've expanded our digital and marketing -- local marketing and feel very good about the initiatives there. And then we went our second season on this television show, Fashion Star, went out Friday night. And it's simply an indicator of making the brand relevant to an emerging audience and making sure that we're not just focused on the core customer.

As we look at the store base, a lot of renovation, and what I would call targeted innovation. So we're making changes, investing on our designer floor in Atlanta. Bal Harbour has gone through a transformation, if you haven't been down to Miami and seen it, probably the fastest growing market in the United States right now. The store doing very well. We just finished a number of renovations in both our handbags as well as our designer floor. Beverly Hills, we just opened a new men's store, created the largest shoe floor on the West Coast for men, as well as a denim bar, what we're calling D-Bar, which is a bar, pool hall, pool tables, denim bar, a men's hair salon with John Allen, and took the entire basement of the Beverly Hills Men's Store, transformed it to great reviews. We're renovating our -- in Chevy Chase, we opened a new shoe salon, making major renovations there. Chicago, we're moving our Men's Store, which was a separate store across the street from our main store, moving it to the sixth and seventh floors of the main store, integrating the 2 together, will save us quite a bit in rent with a very attractive return. And we're making major renovations in our Troy store, all of them targeted investments. Additionally, opening up over 100 new vendor shops, And we've announced 2 new stores, one in San Juan and a replacement store in Sarasota. And I think you'll continue to see the real estate rationalization. We've closed 2 -- we've announced the closure of 2 and over time, there are probably a few more to go. We've gotten through the bulk of the heavy lifting relative to rationalization of real estate.

I can't say enough about saks.com and the growth. We're seeing very outsized growth there. We're not reporting the sales anymore of .com because there's so much integration between the 2. You just can't report the numbers. They make no sense because you're moving inventory around from one channel to another. We've just launched our new site design, larger photography, easier navigation, more editorial. We feel very good about the shopping experience on the web. We're doing more in the way of digital marketing and personalization, as well as enhancing the mobile experience. We're shipping to over 100 countries right now and continuing to see very rapid growth, both on the international and then the domestic. Clearly, it's a core growth vehicle of the company.

Additionally, we're expanding our OFF 5TH business, opening more stores. We opened 7 new stores last year. We'll be opening 8 stores in 2013, 4 remodels of -- we have a new format, what we call "luxury-in-a-loft," as we ended last year, at 27 of them of the 65. We will have opened 8 new ones in the new format, renovated 4 more, and continue to build on our own brand. About 10% of the product there is leftover, about -- 25% to 30% will be our own brand, and the remainder largely cut us by the market. We have about a very, very robust loyalty program within our OFF 5TH business, and as I mentioned, the real estate strategy is core to the growth as well.

So in summary, '13, we believe is a transformational year to our peak year of investment relative to omni-channel. We'll be over the hump as we get through this year. It's an enormous stretch on the organization. We've had to add more resources to get into this to make sure that we implement it with excellence. Omni-channel is our key focus. We are making near-term strategic investments that we believe are paying off. We're committed to our core strategies. We think there are a lot of growth opportunities in the company and we feel very good about the core luxury customer, long term. I think we'll get through this period of adjusting to whatever that new environment's going to be from either a taxation level or how they feel about their situation. I think that in aggregate, they're feeling fine. The guidance of 3% to 5%, I think, is consistent with that. And we are managing the business for the longer term, and we feel very good about that longer term. So with that, why don't we open it up, Lorraine, for questions.

Question-and-Answer Session

Lorraine Maikis Hutchinson - BofA Merrill Lynch, Research Division

Thanks, Steve. Let me just start out just asking about the tourist, how traffic has trended in from different geographies. And anything you're doing specifically to attract those customers to the stores?

Stephen I. Sadove

Yes, tourism, an important part of our business. I think what you've found is that it's still a positive contributor to growth, but not as positive as you saw in the past. What you're finding is that as you've seen a little bit of a slowdown overall, tourism has slowed a bit as well. What you see is a European tourist business that's not as healthy, probably declining, in the mid-single digits. I was with one of the European major vendors yesterday. In fact their comment was to Europe; for Europeans, the U.S. is reasonably expensive right now. But the European, given the state of the European economy, you've seen a slowdown in Europe, but it's been more than offset by the Russian, the Chinese, the Brazilian, the Latin. Overall, you've seen an increase there. So the net of it is positive, but it's a shift in the dynamics of where it's come from. China, off of a relatively low base, growing very rapidly. I think some of the visa reforms has helped. The administration was very helpful in reducing the wait times. On visas, you still have to get a visa, but it's easier than it was in the past. So over time, I think it will be a positive -- continue to be a positive contributor. It varies by city. Miami, getting a big influx of the Latin and the Russian tourism, which is very positive. New York, being a little bit -- having had, even though it's positive, it's still at a slower rate of growth than you saw before.

Lorraine Maikis Hutchinson - BofA Merrill Lynch, Research Division

Okay, and then in the industry generally, and Saks in particular, in a couple of years of investment cycle on this omni-channel business, do you feel comfortable that 2013 will be the last SG&A deleverage year and then you'll start reaping the benefits in '14 in '15 with higher margins?

Stephen I. Sadove

My guess is, my sense and belief is that '13 will be the peak year on the SG&A with a deleverage, that '14 will be leveraged on the go forward and clearly, I think you'll start to see the benefits on the gross margin. You'll already start to see them as you go into this year. And the SG&A, you're going to start to see it even as you go into the latter part of the year, because you'll start to anniversary some of the investments. So it's going to be more of a front part of the year deleverage as opposed to the back part of the year. And as you go into '14, I think you will see -- you'll start to see deleverage.

Lorraine Maikis Hutchinson - BofA Merrill Lynch, Research Division

And we talked a lot about Hold & Flow and the opportunity for gross margin. Has that been now just rolled into the omni-channel strategy?

Stephen I. Sadove

Yes, I think it's all -- the Hold & Flow is a part -- I mean, it's a difference -- it's a little bit different but it's all tied together in terms of how do you start utilizing the inventory in a much better way. Hold & Flow doesn't affect as much of the total company inventory. I think that the one view of the inventory cutting across channels, actually, has more of an impact than the Hold & Flow. I've just been amazed at what we didn't know relative to how much, because when you run out of stock on an item, you just don't know what the missed demand is, and it's more than we thought it was.

Lorraine Maikis Hutchinson - BofA Merrill Lynch, Research Division

Great. And we'll look to the audience for questions.

Unknown Analyst

In terms of the shifts of where the tourists are coming from, does that impact what there -- what's being bought in Saks Fifth Avenue in New York and some of the other stores [indiscernible] .

Stephen I. Sadove

Not dramatically. They tend...

Unknown Analyst

Or was it book of the transaction, is it higher, [indiscernible] or lower or...

Stephen I. Sadove

No I don't think -- I mean, they tend to be very much focused on the brands. The tourists want the brands. They tend to be very driven by the handbags and the shoes and the major designer brands. So the good thing is that what the tourists want are the high-end luxury brands, which is what we carry. But I don't see a big mix difference between one country and another. Yes?

Unknown Analyst

Ryan Steve [ph] . Two quick questions. One on -- was on tourism. You chatted about how things from Europe are slower, et cetera. That was a story, I think, that's well known. One thing that surprised me in the last weeks or 2 weeks ago's Beige Book, where they talked about an improving tourist trend from Europe. So is that more of an older view, or are you actually -- or is there no change in your view?

Stephen I. Sadove

I haven't seen -- they may have bettered it -- I'm looking at it through the fourth quarter. I'm only commenting through January. And I haven't seen a big shift in the European numbers. Let's say, between the end of the fourth quarter and the third quarter's about the same.

Unknown Analyst

And then on the China and the China visas, you are obviously part of that movement, part of the facilitating that was to enhance the infrastructure, if you will, and ease the process of getting visas in China. That still is an inhibiting status right now. Is that -- do you see that materially improving this year? Or it's kind of Steady Eddy?

Stephen I. Sadove

No, I think you're in steady state, right? The reality was, there was a period of time 2, 3 -- 2 years ago where it took over 100 days to get a visa. You have to wait 100 days to get an appointment for an in-person interview to get your visa. The administration issued an executive order requiring that wait time to come down under 3 weeks. They did it. I mean, they staffed around-the-clock. They all had longer hours. They made it easier within the current infrastructure. The problem that you face is that it's not so easy to -- there are only 5 visa offices in all China. There are 5 in Brazil. At -- for that -- for 1 billion people. It's very difficult, unless you open up a visa office and make it easier. The problem is you can't just open one up. There's security, there's a long construction lead time, these things just aren't going to happen overnight. So I think that, that's going to take time. Technology could play a big role in it, and you have senators like Schumer who are very supportive of technology-driven initiatives. But it's all tied up in a post 9/11 security environment and it's not so easy to bring about the change quickly. It will happen. The U.S. share of worldwide tourism was 17% pre-9/11, now it's 12%. It's not because the U.S. is less attractive, a place to travel to, it's because of all the concerns and it's worth tens and tens of thousands of jobs and billions of dollars of revenue in whether it's hospitality, restaurants, retail. So it will -- we'll get there. And the administration's supportive, and congress is supportive. It's a question of weaving our way through and it will take time.

Lorraine Maikis Hutchinson - BofA Merrill Lynch, Research Division

Maybe you can touch on the designer business a little bit. I know you mentioned that jewelry slowed down over the holiday season. But last year, there were some bumps with deliveries and maybe demand. And what are you seeing from that customer?

Stephen I. Sadove

I think that what you're seeing is a shift in the customer a little bit and it's not about -- what I was saying, it's not about "Good, Better, Best." I think you've seen a shift towards the higher-price points towards the more special, and people are mixing and matching goods. But you're moving away from, what I would call, some of the classic brands. People want something new, they want something different than what's in their wardrobe. They -- some of the emerging brands have become core brands. And people want fashion, they want sexy, they want things that will complement them. They want something complement what they have. They want something that they can wear day to evening. So that's affecting what they're buying in the apparel side. You've seen a consistency. Handbags and shoes have been growing and they're continuing to grow. But what you're finding in certain pockets of women's apparel, for example, "Contemporary", very strong, but certain areas of "Classic" apparel, not so strong. So that tends to be what we're seeing and that trend is not abating.

Unknown Analyst

So my question is...

Stephen I. Sadove

Here wait. Microphone coming.

Unknown Analyst

Would you characterize Prada as a "Classic" or a "Contemporary" emerging brand?

Stephen I. Sadove

I don't comment -- I'm not going to comment on any individual brand.

Unknown Analyst

And could I could use some examples of what "Classic" brands are. People who are new to the industry?

Stephen I. Sadove

I really don't want to comment on individual brands, it's just not right in terms of commenting. You can what the floors and get a sense of what are some of the brands that are emerging and -- but it's just not fair to comment on individual brands. Yes?

Unknown Analyst

You have a lot of owned real estate. Is there a way to optimize the value of that real estate?

Stephen I. Sadove

It's a good question, it's one that we continually look at. So I think that we do. We own about 2/3 of our square footage of our full-line stores. We looked at things -- when you're in the depths of the recession, we look to sale leaseback. And as tough as things were then, all it was, was another form -- an expensive form of debt. And didn't think that it made any sense for us then and still, as of now, don't think that it makes any sense for us now. The question of whether or not there's any other types of ways of monetizing or gaining value from real estate, we continue to look at it. Not going to give you a definitive answer that says no, there's not. If someone has a creative way that makes some sense, we're very shareholder-value focused, and we'll continue to look at ways. We haven't found anything that we think makes sense yet. If somebody -- again, if a great idea comes our way, then we'll consider it. But as of now we -- simple sale, leaseback, I haven't seen as making a lot of sense. There's a lot of tax leakage that you'd have to deal with. It's an expensive form of debt and we don't have any real need. We feel very good about our balance sheet, and certainly no reason to have to lever it any more than that.

Lorraine Maikis Hutchinson - BofA Merrill Lynch, Research Division

And can you talk a little bit about the OFF 5TH business? Clearly, by the piece of the roll out, it seems that the trend has been quite strong there. Any comments on that consumer and the health of that consumer? And then also initiatives like the remodels or any other product?

Stephen I. Sadove

I feel really good about the direction. The OFF 5TH customer, the outlet customers, you see some of the trends. We don't report the numbers per se for OFF 5TH. No, I do think that customer in the outlet center, is a little bit more affected by the things like payroll tax increase. That's a little bit lower income level than you're seeing at that very high end. The new format stores are significantly outperforming the, what we would call the legacy stores. The dilemma that we have is that, and I said, we had 27 of them today that are in the new format. When we open a new store, we have developer contribution . Largely, we're not paying the real estate, the CapEx for the new stores, it's funded by the developers. And it's easy when you have some of the stores that we've redone, let's say, the Sawgrasses in the Mill, we're redoing this year, Woodbury Commons. You look at Elizabeth, Bergen with Riverhead out in Long Island, big volume in stores, we're paying for these ourselves. And you're able to get a good return on the investment. The problem is you have profitable, smaller stores that I'm not so sure that the CapEx investment gets the level of return. So you have these B and C level stores that are not that big, but they're profitable. And I'm not so sure that you're going to be able to make those -- because you're having fund them yourselves, whether it make sense from a use of capital.

Overall, I feel that there is continued growth in the sector. Basically, what's interesting is you now have 2 venues of growth. One is the traditional outlet center, the Simon, the Chelseas, or The Mills, or the Tanger Centers. But you also have this emerging neighborhood center, which is, what I'd call a strip center. An example would be in Westbury, Long Island, where you have us and Nordstrom Rack, a Bloomingdale's outlet, a Container Store and a Trader Joe. And Trader Joe's is a destination neighborhood center getting very, very good performance. So I think you have 2 different avenues for growth. What's interesting is you have -- it's no longer, because it's not just a leftover strategy anymore, it's a -- you have the leftovers, but you still have -- you're having your own brand, you're having the brands cutting for you. You're able to assort the stores the way that you want, so I do think you have room to run. I don't know what the right number is long term, but you do have an opportunity for continued expansion.

Lorraine Maikis Hutchinson - BofA Merrill Lynch, Research Division

And what's the private label strategy for both the outlet and the full-line stores?

Stephen I. Sadove

Well, in the outlets, as I indicated, it's 25% to 30%. So it's a core part of the business and we do very well in things like tailored clothing under our own brand, men's sportswear, shirtings, things like that. And on our women's business, we're doing quite well with our own brand, shoes and women's apparel. So it's an important presence within the outlet. Within our full-line stores, much less important, it's still in a single-digit type of number. I do think it's a very, we've talked over time, differentiated product is core in the full-line stores. It can be our own brand, it can be exclusive brands, it can be brand made for us. Our own brand has done very well in the men's side. It -- I continue to believe that it has a lot of growth. We hired a designer from Zegna, Kim Herring. We have Richard Cohen, he used to be the head of Zegna, overseeing the development. Right now, I think, I feel very good about the product development side and I think there's growth. Longer term, I'm not going to commit to any kind of, but I think there's opportunity whether it's for our own stores, for international, for wholesale, things like that within the men's side of the business, creates opportunities. It's not built into any numbers or anything like that, but we have a vision that could be for a much bigger presence of our own brand within men's. Women's is tougher. It's much more fashion driven, it's harder to crack. I don't think we've been as successful in the fashion side of it. We're very good in classification businesses like sweaters, et cetera. But the fashion side of it, we've gotten -- we have some mixed performance, some doing very well, some not as well. And I think we're learning our way on the women's side.

Lorraine Maikis Hutchinson - BofA Merrill Lynch, Research Division

Moving on to the balance sheet, by year end, the balance sheet's looking maybe a little under leveraged. How do you view the core, sort of your ideal capital structure and is there an opportunity to return some cash to shareholders?

Stephen I. Sadove

Look, the reality is we've been returning cash to shareholders with close to $200 million of share repurchases over the last 6 quarters. I think that we'll continue to focus on how do we return value to the shareholders. I think what Kevin Wills, our CFO's often talk about our -- how much leverage we want in terms of net debt, in terms of debt ratio to EBITDAR. We're-- I think we're appropriately levered in terms of how we think about it today. We have -- we've repurchased shares, we've paid down debt. We have, I'd think, a pretty good balance sheet. I also want to be careful because it's not that many years from where we were in the recession and everyone was looking at it and saying, "Oh my gosh, is Saks going to survive this whole thing?" So while we're clearly comfortable about taking on debt, I don't want us to get too far ahead of us. And we've identified a 2.5:1 debt ratio that we feel comfortable with. And I think that we'll probably aspire to that kind of a level. And we're looking at debt to EBITDAR. We're looking at incorporating our lease leverage as well. So you got to look at leases as well as just the -- on the balance sheet debt.

Lorraine Maikis Hutchinson - BofA Merrill Lynch, Research Division

And then Steve, could you maybe spend the last couple of minutes talking about your longer-term operating margin targets and some of the drivers that you'll use to get there?

Stephen I. Sadove

We've talked over time about an 8% operating margin target. I still believe that, that's the appropriate number for us to be aspiring to. For us to get there, we have to see top line growth. Now 3% to 5% is fine this year, but that's not our longer-term aspiration. We think that you need to be at a higher level than that, and if we get to a mid-single digit -- when we're back to a mid-single digit, fundamentally believe we can leverage SG&A at that kind of a level. To get to the mid-single -- to get to the 8%, it's going to require top line growth, I think, in the mid-single-digit type of level. You'll leverage the SG&A, and then gross margins, as we talk about, whether it's the omni-channel initiatives, the editing of product, the own brand, all of those lead you to the gross margin improvements that we talk about, and you do the math and you get to the 8%. And we think it's in the cards. I'm not going to say it's this year or next year or whatever.

Specific timeframe, I think that I feel better today, especially given omni-channel, than I have in the past relative to visualizing and seeing it -- us getting to that level. I mean, I felt good about it before. I feel even better now. I think that the top line growth is critical as we go in that direction. But I don't -- I can't underestimate or over emphasize how important a change omni-channel is in retail. As I put on a hat of looking at it at the industry, it is just changing. How do you buy? How you organize? You can't have silos. How do you move product around? How do you market products from across the channels? And it's changing the way we fundamentally think about a retail operation. And I feel real good about -- very good about how this organization has responded and is being very proactive in looking at what's the right organization in terms of how you operate against it. It used to be, I'd ask my team, "How are our handbag sales?" And you'd get an answer, "Well, our store sales are x. Maybe our Internet sales are y, and we do concession sales are z." But the consumer's looking at it as a handbag. And how do you look at holistically and how do you manage the entire business system on an omni-channel basis, that's what I think is going to transform us and I think that's what gets you to the 8%.

Lorraine Maikis Hutchinson - BofA Merrill Lynch, Research Division

Great. Well, I think that's -- we have one more in here? Time for one more.

Unknown Analyst

Steve, your [indiscernible] value relative to [indiscernible] revenue issues around the channel [indiscernible] helped it out towards [indiscernible] . What area or what geography where your brand awareness is quite high but you have little business is Europe. So have you looked at expanding your omni-channel into European e-commerce business with maybe a couple of flagships to show how good you a curate or something of that nature?

Stephen I. Sadove

It's a complicated one, because I'm not convinced that -- I think that Internet growth, international shipping of Internet, perhaps over time, setting a presence in some of the markets through the web, clearly, can make some sense. Opening up flagships in Europe, and if I go to Paris, make it up, use that as an example, I can go to Printemps, Gallery Lafayette, Bon Marché, the brands, the -- Paris isn't looking for a Saks Fifth Avenue to open up and you're not going to get the brands. And if you don't have the brands, you don't have a Saks Fifth Avenue. The concept sounds great. Why don't you open up a few flagships in all these cities, and complement with an Internet business, but the market's not going to bear a flagship Saks Fifth Avenue store in some of those. Can you do it in an emerging market? Possibly. But it's -- you got to be real careful there. We've just opened a licensed store in Kazakhstan in Almaty. It's doing very well. So it's possible in certain markets that you could play that strategy, but you got to be real careful and the road is littered with retailers who have tried to cross geographies and opened up in different markets. And we think right now, we have so much room to run in the U.S. that I just want to be careful before we divert our attention. And I've got an organization that -- we could talk about new formats in the U.S.; we could talk about different ways that we could be growing and leveraging our brand, but be real careful about how quickly you expand into some of those, especially the European markets.

Unknown Analyst

Great. And with that, we're out of time. Thanks, Steve.

Stephen I. Sadove

Thank you very much.

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