Speculation emerged in recent weeks about a bid from private equity for Saks (SKS) as well as a possible merger with Neiman Marcus. Reports now state that Neiman's private equity owners rejected a bid to merge Saks and Neiman's for complexity reasons. Saks stock ran up close to 40% on this speculation as the Street jumped on the opportunity to now come up with true fair value targets for Saks.
The analysis behind the new "true" values missed several important value impairment issues with Saks.
As a sell-side analyst I followed Saks for many years thus I am keenly aware of the challenges any acquirer would have to undertake in order to be successful with it.
The problems with a Saks takeover are:
- Its brand has aged considerably relative to Neiman's;
- Its systems were never adequately upgraded during the years where it was adding small stores and layering on tertiary department store chains in the South such as McRae's;
- It has basically a few profitable and highly cash generative stores predominantly the 5th Avenue store, which is a golden goose. But the other legacy store issues and new stores (Off 5th and its small market stores) are a problem for any acquirer and impair the value of Saks; and
- High-end retail equates to high cost. The operating leverage (flow through to operating profit from incremental sales) is low relative to other retailers. Sales people on commission, demo personnel, fixturing are all very costly and rise as sales rise. Neiman's is more up-to-date, has a younger customer and is more efficient. It wanted nothing to do with Saks.
- The final issue with high-end retail is that it is a narrow market segment. There just are not that many customers as Saks discovered when it started opening small stores in a failed attempt to broaden customer reach.
Saks is a Short With A $8-10 Price Objective. There is a reason Saks is being shopped at this point in time when many high-end retailers have indicated some deceleration in momentum, Asia and Europe luxe has moderated as well with the exception of the "true" luxe companies.