Saks: Browsing for a Retail Play

Jun.24.09 | About: Saks Incorporated (SKS)

I've been shopping around for more opportunities and this one caught my eye...

The Basics:

Saks, Inc. (NYSE:SKS) is a leading retailer primarily offering high-end brand-name fashion apparel, shoes, accessories, and cosmetics. The company operates 53 Saks Fifth Avenue stores and 51 Off 5th units (off-price luxury goods). Discontinued Club Libby Lu, 11/08. Sold its department stores in 2004-2006. Saks Fifth Avenue stores carry merchandise from leading fashion houses. Key brands include Armani, Chanel, Gucci, and Prada. Has about 13,000 employees. Off. & Dir. own 3.2% of common stock; Inmobiliaria Carso (Carlos Slim), 17.7%; Baugur Group, 8.5% (4/09 Proxy).

For 2008:

On a consolidated basis, total net sales and comparable store sales for the year ended January 31, 2009 decreased 6.0% and 6.1%, respectively. The Company recorded a loss from continuing operations of $122.8 million, or $0.89 per share compared to income from continuing operations of $50.7 million, or $0.33 per share, for the years ended January 31, 2009 and February 2, 2008, respectively. After recognition of the Company’s after-tax loss from discontinued operations of $32.2 million, or $0.23 per share, net loss totaled $154.9 million, or $1.12 per share for the year ended January 31, 2009. After recognition of the Company’s after-tax loss from discontinued operations of $3.2 million, or $0.02 per share, net income totaled $47.5 million, or $0.31 per share for the year ended February 2, 2008.

Saks released results for its fiscal first quarter (ended May 2nd). The company lost $0.04 a share, much better than forecast of a $0.28 share loss. Cost controls drove the upside, as the company realized about $44 million in SG&A cost reductions in the quarter. For the whole of fiscal 2009, SG&A cost savings are expected to be approximately $60 million. Sales were down 27% on a year-over-year basis. Comparable-store sales fell 27.6%. Given the April period's upside, and ongoing cost controls and inventory reductions, the company should lose about $0.50 a share this year, less than previous estimates of a $1.00 share loss.

Saks recently closed a convertible offering:

Saks granted the initial purchasers of its Notes an option to purchase up to $15 million principal amount of additional Notes, solely to cover over-allotments. The Notes will bear cash interest semiannually at an annual rate of 7.5%. The Notes will be convertible at the option of holders at an initial conversion rate of 180.5869 shares of common stock per $1,000 principal amount of Notes into, at Saks` election, cash, shares of Saks common stock or a combination thereof. The initial conversion rate is equivalent to an initial conversion price of approximately $5.54 per share of Saks common stock. The initial conversion price represents a premium of 25% relative to today's closing sale price of Saks common stock. The Notes will not be redeemable before the maturity date, December 1, 2013. The Notes will be fully and unconditionally guaranteed by all of Saks` subsidiaries that are guarantors under its existing revolving credit facility. Saks intends to use the proceeds from the offering to pay down amounts outstanding under its revolving credit facility and for general corporate purposes.

The offering is interesting both for the interest rate being paid (just over 7%) and the conversion premium (25% higher than day of offering). Neither of those give an indication of a troubled company or heightened investor fear.

The NYC flagship store accounts for 21%of sales and 30% of company wide sales take place in Q4.

Owned vs. Leased locations (click to enlarge):



Saks currently sports a book value of $6.86 which means at its current $3.80 a share it trades at 56% of its book.

Even in a worse case scenario, in Chapter 11, Saks has $2.1 billion in assets v $1.1 billion in liabilities so there is plenty left for shareholders. Because they only own 1/3 of their locations, the current CRE problems will have limited effect on the "assets" side of the equation. When you couple that with the fact the locations they do own are prime RE, then that effect is even further diminished.
If we took an extreme scenario and wrote off 50% of the value of their RE, we still have a situation where assets 50%> liabilities, a nice 11 scenario for shareholders. The good news here is that their own RE is currently all unencumbered, giving them huge flexibility there.

They have $193 million is senior notes outstanding and of that, only $45 million is due soon and that is in Dec. 2010 and they have ample liquidity under a $500 million revolver that comes due 2011. No issues here...
The point here is not that I am anticipating bankruptcy, it is just a scenario we have to run when taking into account the risk of a $3 stock. This tells me that if I risk $3, even if they go belly up, I will retain some value. Should they avoid it and stabilize operations, the scenario I presume happens, then my end value is multiples of that $3, a very nice risk/reward.


Right now "cheap is chic". It will not last. With almost 1/4 of company sales coming from its NYC flagship, a sea of change is not needed for results to change. What is simply needed is for those folks who normally shop there to feel secure in their job, home situation, tax situation etc. Once they see clarity on those issues, the cache of buying a handbag at Target (NYSE:TGT) or Wal-Mart (NYSE:WMT) vs. their normal Gucci (OTC:GUCG) will lose its luster pretty quickly.

Expanded to the rest of its operations, Saks locations in upper scale malls should see similar improvements.

The next question is "why not wait until we see things improving before buying?". This was a $1.50 stock just a few months ago. Now it is near $4 after a quarter that was not nearly as bad as expected. Waiting another quarter or two may have you buying a $6 or $7 stocks (assuming improvements trend similarly) and severely cut into potential gains. Doing it this way requires more patience and also more homework, but the potential payoff is far larger.

Market Cap:
Saks only has 144 million shares outstanding and a market cap of just over $500 million. This simply means that an activist investor or small changes in the macro environment could have a out-sized effect on the stock appreciation. While this is not a singular reason to purchase the stock, IF you decide to buy it, this helps with the "should I buy it now" decision. Because the stock could make large leaps easily, waiting for confirmation of your purchase thesis may just price you out of large gains.

Latest annual report.

Disclosure: No position