Seeking Alpha
We cover over 5K calls/quarter
Profile| Send Message|
( followers)  

Saks Incorporated (NYSE:SKS)

Q3 2009 Earnings Call

November 17, 2009 10:00 am ET

Executives

Stephen I. Sadove – Chairman and Chief Executive Officer

Ronald Frasch – President and Chief Merchandising Officer

Kevin Wills – Chief Financial Officer

Julia A. Bentley – Senior Vice President of Investor Relations

Analysts

Deborah Weinswig - Citigroup

Analyst for Lorraine Hutchinson – Bank of America

Michelle Clark – Morgan Stanley

Emily Shanks – Barclays Capital

Ben Rowbotham for Adrianne Shapira - Goldman Sachs

Robert Drbul – Barclays Capital

Karru Martinson – Deutsche Bank

Todd Slater – Lazard Capital Markets

Karla [Costello] – JP Morgan

Mark Kaufman – Rafferty Capital

Dana Telsey – Telsey Advisory Group

Christine Chen - Needham & Company, LLC

Operator

Welcome everyone to the Saks Inc. third quarter earnings conference call. (Operator Instructions) I would now like to turn the call over to Mr. Steve Sadove, Chairman and CEO of Saks Inc. Sir you may begin your conference.

Stephen Sadove

Thank you very much. Good morning. This is Steve Sadove and I am joined on the call by Ron Frasch, President and Chief Merchandising Officer; Kevin Wills, our CFO and Julia Bentley, our Senior VP of IR. I would like to thank each of you for taking the time to join us.

First let me note that some of the comments on the call today as well as some of the information presented in our release related to future results or expectations are considered forward-looking information within the definition of the Federal Securities laws. The forward-looking information is premised on many factors, and actual consolidated results might differ materially from projected information, if there are any material changes in our assumptions or in the various risks related to our industry and our company. For a description of the risks and assumptions related to these projections, please refer to the release in our most recent filings with the SEC, including our most recent Form 10-K.

Today we will discuss the financial results for the third quarter and nine months ended October 31, 2009 and our outlook for the fourth quarter and update you on several other matters. At the end of the call we would be glad to respond to your questions. Before I turn the call over to Kevin to discuss the financial results let me take a couple of minutes to give you my overall assessment of the quarter.

I continue to be very pleased with how the entire organization has aggressively responded to the challenging environment. Just as our customers have changed the way they shop, we have made changes in the way we are managing our business. We have made needed adjustments to our merchandising, service and marketing strategies and carefully managed our inventories, expenses and capital spending.

In spite of our comparable store sales decline, we were able to post a modest third quarter profit. During the quarter our controlled inventory levels and disciplined promotional and clearance cadence paid off with a substantial improvement in our gross margin rate. Our continued focus on expense containment resulted in another meaningful reduction in the year-over-year SG&A expenses.

We successfully executed another $100 million common stock offering during the quarter which allowed us to eliminate outstanding borrowings on our revolving credit facility. The equity offering further strengthened our capital structure and has provided increased flexibility going forward. The environment remains very challenging. Although business appears a bit more stable and predictable than it did 12 or even 6 months ago. I am confident that luxury will rebound and we have taken and continue to take the necessary steps for Saks to emerge a stronger company when the economy returns to a more normalized state.

Let me now turn the call over to Kevin to provide more color on our operating results and balance sheet.

Kevin Wills

Thanks Steve. Good morning everyone. We posted net income of $1.9 million or $0.01 per share in the third quarter. This compares to a loss from continuing operations and before certain items of $16.9 million or $0.12 per share in last year’s third quarter. For the nine months we recorded a net loss from continuing operations of $57.4 million or $0.40 per share. This compares to a loss from continuing operations and before certain items of $27.8 million or $0.20 per share for the same period last year. There were no call out or certain items in the current year third quarter or nine month period but there were some in the prior year which were outlined in the release.

As we discuss the numbers today in comparison to the prior year, prior year numbers exclude these call out items. Comparable store sales declined 10.1% in the third quarter, generally in line with our expectations. On a two-year basis our comps are down about 20% for the third quarter although we did see modestly improving trends in each month of the quarter. For the nine months ended October 31, 2009 comparable store sales fell 18.5%. On a two-year basis our comps were down about 20% for the full nine months.

In the quarter Saks Fifth Avenue stores experienced continued weakness although towards quarter end several merchandise categories such as Women’s designer sportswear, [go range] apparel, outerwear, jewelry, women’s shoes and soft accessories have begun to show relative strength.

For the quarter sales trends in the New York City flagship store were more in line with the company’s aggregate comp store sales decline, a meaningful improvement from earlier this year. Saks’ direct revenues increased approximately 26% in the quarter and approximately 9% on a year-to-date basis. This year we further expanded our product offerings, made shopping experience enhancements to the website and enhanced our distribution center efficiency which have driven a steady improvement in sales. We remain excited about the potential in our direct business.

We have also worked hard to improve the merchandise assortments in Off Fifth and customers have been receptive to the changes. Off Fifth comparable store sales performance continued to show relative strength through the quarter. We believe there is a less than 10% overlap between the Saks Fifth Avenue and Off Fifth customers so we are essentially reaching an entirely different customer base in these stores. Growing Off Fifth makes even more sense in this environment as customers focus on value. Since spring of last year we have opened seven new Off Fifth stores, two replacement stores with the most recent opening in Dallas last month.

As Steve mentioned, our controlled inventory levels and disciplined promotional and clearance cadence led to our third quarter gross margin rate expansion. This year gross margin increased 460 basis points to 40.3% from 35.7% in last year’s third quarter. In the quarter gross margin improvement was driven by two main factors. First, we essentially returned to our historical, pre-2008 clearance schedule. As disclosed in last year’s third quarter release, due to declining sales and rising inventory levels, we accelerated certain mark downs into the third quarter from the fourth quarter.

This year these mark downs will be taken in a normal course of business in the fourth quarter. The prior year mark down acceleration negatively impacted the prior year third quarter gross margin rate by approximately 190 basis points and positively impacted the prior year fourth quarter gross margin rate by approximately 130 basis points.

Secondly, during the quarter we continued to offer our traditional promotional events such as Friends and Family and our Electronic Gift Card event. However, we made a concerted effort to exclude a greater number of vendors participating in these events. What we have found is that these events tend to drive a disproportionate amount of our sales volume to customers not only buy brands and items that are included in the promotions but also brand and items that are excluded, leading to more full-price selling. Actions like these are enabling us to improve our gross margin rates.

For the nine month period our gross margin rate was 36.6% in the current year versus 36.4% in the prior year. Managing SG&A expenses continues to be of high importance. As demonstrated by our reductions, the entire organization has embraced diligent expense control and is challenging nearly every expenditure. We were able to reduce year-over-year SG&A by approximately $18 million in the third quarter which was more than we expected. Consequently, we were able to leverage SG&A in the quarter even though comp store sales declined 10.1%. As a percent of sales SG&A was 25.7% in the current third quarter compared to 26.2% in the same period last year.

Through our aggressive expense management we have been able to reduce SG&A by over $96 million on a year-to-date basis and by over $145 million over the last five quarters. These reductions reflect an approximate 17% reduction in force over the last year and cuts in nearly every area of our business while still being very protective of areas that directly impact our customers.

Even though sales declined, our operating margin expanded 2.5% in the quarter from a 2.1% operating loss in the same period last year. Inventory at the end of the third quarter totaled $799.1 million, a 22.2% comparable store decline from last year’s third quarter. This decrease was modestly higher than expected due in part to the timing of some merchandise receipts.

During the quarter we took advantage of the shelf registration statement that was in place in August of this year and accessed the public equity markets in October. We completed a $100 million common stock offering priced at $6.70 per share and used the net proceeds of approximately $95 million to pay down the revolving credit facility. At quarter end the company had approximately $7.1 million of cash on hand and no direct outstanding borrowings on its revolving credit facility. As a reminder, the revolving credit facility is secured by the inventory receivables and does not mature until September 2011.

We ended the third quarter with total capacity of the full $500 million on the revolver. We believe our existing debt facilities provide ample flexibility with no short-term maturities of senior debt. Funded debt including capital leases and the equity components of our convertible debenture at quarter end totaled approximately $576.8 million and debt to total cap was 36.4%.

Net capital spending for the nine months totaled approximately $52 million. Net capital spending should approximate $65 million for the full year which is about half of the 2008 spending levels. This estimate is modestly higher than our prior estimate as we decided to make certain additional distributions center enhancements, store expenditures at fiscal year end. The net capital expenditures are net of general allowances and represent our net cash outlay. For financial reporting purposes, the gross outlay which will be shown on the statement of cash flow the tenant allowance is reflected as a change in working capital.

Let me now turn the call over to Ronald Frasch to give you an update on the merchandising, service and marketing initiatives. Ron?

Ronald Frasch

Thank you Kevin. As you may know we view our business from a four-legged store perspective; merchandising, selling, marketing and expense management. To thrive in this environment it is more important than ever that we offer differentiated merchandise, a great service experience enabled through a professional selling organization and innovative and effective marketing.

Starting with merchandising our non-box grid model continues to guide us as we deliver the appropriate assortment of good/better/best merchandise by store for the new normal. Our customers are telling us they want distinctive and differentiated product but they are also seeking value. We are responding by shifting an appropriate amount of inventory investment from the best category into the better and good categories. Also, within the best category the price points in a percentage of the assortment have decreased modestly. However, I want to be clear that we will still offer a wide array of products in the best category and we will continue to offer our customers the brands they desire.

In addition to working closely with many of our existing designers and brands to create products at more accessible price points, we are also working to differentiate our product assortment in three ways. First, we launched in the second quarter the comprehensive Saks Fifth Avenue Men’s Collection which is a new line of high quality men’s wear and a great example of standout merchandise at a great value. The initial customer response has really been terrific.

Second, we are working with designers to create products exclusive to Saks. Ralph Lauren Blue Label is a great example. This line is carried only by Saks outside of the Ralph Lauren boutiques. Customer response has been great. If you haven’t seen it, I encourage you to drop by our fourth floor of our New York store and visit our new shop or any of the other 28 stores around the country that feature the merchandise.

Lastly, we are working with designers to develop exclusive brands such as La Via 18 which can also be found in our wear area on the fourth floor of the flagship store and in many of our other locations. We are excited about the progress we have made on building product exclusivity and customers will see even more evidence of this in 2010.

Furthermore, another differentiator for Saks is our designer selection. During the quarter we unveiled our completely renovated Women’s Designer Area on the third floor of the New York Store, showcasing over 29 designer shops and the most comprehensive assortment of Women’s Designer apparel on one floor in the country. This project took us several years to plan and execute and is a critical long-term strategic initiative for us. Customer response and vendor support have been great.

On gross margin we are intent on enhancing this over time through several initiatives. I have already addressed the price point initiative to our non-box grid to provide customers with designer price point selections appropriate for this environment which should increase sell through and gross margin. We continue to invest in process and technology enhancements that allow our merchants to more efficiently buy and allocate product which should lead to improved inventory productivity.

Yet another driver of gross margin is our intent to scale back on some promotions which precludes full-price selling to a more controlled promotional calendar as evidenced by our significant third quarter gross margin improvement. We also plan to continue the evaluation of the participation of certain vendors in price promotion events and will carry these back as possible.

Lastly, we are working to refocus Saks’ catalogs as a better selling vehicle. A distinctive service experience goes hand in hand with our distinctive product offering. We are working to build a differentiated and professional service and selling organization enabled to improve processes and technology. We are laser focused in not only retaining existing customers but on acquiring and developing relationships with new ones in several ways.

First, we will continue to reinforce clienteling to strengthen the existing relationships through the improved utilization of our point of sale and clienteling systems which allows tailored clienteling. We know that once a customer develops a personal relationship with a sales associate or personal shopper, they are more likely to increase their dollar spend and loyalty to Saks. We are also using our clienteling technology to isolate those customers we haven’t seen in awhile to reach out to them directly.

Second, we are emphasizing the training and team oriented selling and cross-selling. To support this effort we are mining our data to determine which of our customers may be strong shoppers in certain departments that have not shopped in others. For example, we know which customers shop in the Designer Floor in the New York store but did not purchase anything in 10022 Shoe this past year. Our goal in mining this data is to develop strategies to increase the rate of cross-shopping throughout the store to drive additional share quality.

Third, every store has taken ownership of expanding their market share by developing comprehensive local business plans that guide the stores and identify and focusing on under-penetrated customer segments. Every sales associate has been tasked to develop targeted outreach events by tapping into their customer base which often leads to the acquisition of new clients. We are creating excitement through these new store event and generally over 1/3 of the customers who come in are new to us during these outreach events.

As we look out to the holidays we are excited about our merchandise selection. There are many unique products which offer great style but also exceptional value. Of course many items are in limited quantities. We have a clear direction for merchandising, marketing and service and selling and are intently executing our strategies. I am confident we are positioned to win over the long-term. Steve?

Stephen Sadove

Thanks Ron. Although sales trends are undoubtedly more stable than they were last fall and early spring, the current economic and retail landscape is still somewhat uncertain. We know that predicting future sales and gross margin performance with any sureness remains very difficult. Variation from our expected sales trends up or down could materially impact our future results.

As we enter the fourth quarter we have been able to tighten the ranges of our sales and gross margin rate expectations for the balance of the year. For the fourth quarter we believe that comp store sales will fall at the lower end of our previous guidance and that our gross margin rate will fall at the high end of our previous guidance.

We outlined our detailed assumptions for the fourth quarter 2009 in this morning’s press release. Let me go over a few of the highlights.

We expect comp store sales in the fourth quarter to decline by high single digits, resulting in a decline of high single digits for the second half of the fiscal year and of mid double digits for the full fiscal year. Due to prior-year comparisons and promotional activity, November 2009 is expected to generate the weakest monthly comp store sales performance in the fourth quarter, a decline in excess of 20%. Our comp store inventory levels are expected to decline in the low to mid-teen percentage range at fiscal year end. This is on top of a 14.6% comp store inventory decline at the end of the last fiscal year.

Based on current inventory levels, planned merchandise receipt flow approximately 20% lower than prior year, and our promotional calendar and permanent mark down cadence, we expect a substantial year-over-year gross margin recovery in the fourth quarter of 2009 with gross margins in the 33-34% range. This would result in a gross margin rate in the 36-37% range for the second half of the fiscal year and in the 35-36% range for the full fiscal year.

Year-over-year net SG&A dollars are expected to be relatively flat in the fourth quarter as we will experience lower variable expense flexibility, increased incentive compensation accruals, increased expenses associated with several new Off Fifth stores and the anniversarying of our prior year expense reductions. For the full year SG&A reductions will approximate $100 million.

As we look to next year we remain cautious about the environment and are planning accordingly. We expect out-sized growth in our direct business and continued relative strength in our Off Fifth business. The sales growth in our Saks Fifth Avenue stores will remain challenging. We continue to focus on what we can control; inventory, expenses and capital spending. For the fiscal spring 2010 we have planned inventory receipts down modestly and expense containment will remain a priority.

Our capital plan for 2010 has not yet been finalized but we expect net capital spending will approximate $40-45 million next year which primarily is our maintenance capital level and includes no new Saks Fifth Avenue stores or major renovations. We are committed to executing all necessary maintenance capital spending. Our [physical plan] is in excellent condition and we are committed to keeping it that way.

Even though we remain cautious in our near-term outlook we are positive about the future of our business and luxury retailing. We believe the actions we have taken and are currently taking in merchandising, service, marketing and cost containment will position us to significantly improve our performance in the long run.

Thanks for your interest. What I would like to do now is open it up to questions. Operator?

Question-and-Answer Session

Operator

(Operator Instructions) The first question comes from the line of Deborah Weinswig – Citigroup.

Deborah Weinswig - Citigroup

You talked about the idea of team selling or team oriented selling. Is there any change in terms of the commission structure and is there any additional training behind this?

Ronald Frasch

There is no change in the commission structure. I think as we have noted about 90% of our organization is on commission. There is a change in the training and development of our folks. We are going through a very significant process of retraining them so they are able to be sophisticated enough to be able to sell throughout the store. So it is a pretty engaged program.

Deborah Weinswig - Citigroup

Can you talk about the CapEx side the DC enhancements and the additional store expenditures that will be made by the end of the fiscal year?

Stephen Sadove

We have talked about it in the past and we are investing in some hold and flow capabilities that will allow us to better flow product into the stores. We are also making some investments and enhancements in the DC that will allow us to support our direct business bet6ter. These will play out in terms of the demand we are seeing on the direct side is very substantial. We needed to make some investments to support a much higher volume base. These will play itself out over the next year or so.

Deborah Weinswig - Citigroup

Along those lines is the direct business performing as you had expected or better?

Stephen Sadove

It is actually performing a bit better than I thought it would. The 26% growth we saw in the third quarter was very substantial. We saw good demand across categories. We piloted one of our first what we call Fashion Fixes, which was one of these limited time sales. That did well. I am very encouraged by the growth in the direct business.

Deborah Weinswig - Citigroup

Should we expect more of these fashion fixes going forward?

Stephen Sadove

We have a second test that is out there as we speak right now. We ran one yesterday. So it finished up. I think over time assuming they perform you will continue to see us play.

Deborah Weinswig - Citigroup

Can you talk about private label penetration where we stand and performance?

Stephen Sadove

I think from private label, again there are three different ways of thinking about private label. What I would call is more exclusive product than I would private label. True private label like the Saks Fifth Avenue Men’s Collection and closed reel. Those would be examples of private label. In the aggregate they are a relatively small percentage of the total. They are growing and we have had a very good response and performance on the part, for example, in the Men’s Collection so far. Terrific product and we feel very good about it.

The second kind of exclusive product is the example that Ron used in the Ralph Lauren Blue collection and it is only available in the Ralph stores and our stores and it is a very limited…that is not private label but it is very limited availability type of product. The third type of private label or exclusive product is the La Via where we have a well known Italian designer making product exclusively for us. That product might become available in Europe or some other place over time. But those are three different kinds of exclusive products. Over time we believe the aggregate of all three of those could be a substantial number. It is clearly a growing number of the piece of the pie. It will vary from category to category.

Deborah Weinswig - Citigroup

Along those lines is there anything being done differently in the Saks organization to continue to grow that exclusive business? How are things changing to make that a larger portion of your sales?

Stephen Sadove

Let me ask Ron to talk about it because it really is a fundamental change in the way we…

Ronald Frasch

What we have had to do was we had to adapt the organization clearly. We created a product development, private label, private brand office within our Men’s group and actually have just in the last week enhanced the structure of that group by making other decisions in terms of where we want to spend our money. We have a product development group in Ready to Wear which we are probably going to look to expand some time in this quarter.

We are looking at initiatives we can play in our accessory group. Clearly it is a different skill set than what our buyers typically do. We find we are going to need people pushing against our brands to keep the ball in front of their eyes so they are prepared to service our needs. But it is a fundamental shift in our business. Absolutely.

Operator

The next question comes from the line of Analyst for Lorraine Hutchinson – Bank of America.

Analyst for Lorraine Hutchinson – Bank of America

Can you just provide some more color on the timing of the SG&A cuts this year? How much of the third quarter reduction was pulled forward from the fourth quarter? I know it is early but how should we think about SG&A dollars in 2010? Do you expect incentive comp increases and bonuses will pressure that line to increase next year and if so how much of a change should we expect?

Kevin Wills

We did not pull forward, if you will, any SG&A saves from Q4 into Q3. We have a component inside of SG&A and sometimes they vary from quarter to quarter but there were no savings necessarily pulled forward. As it relates to next year, we have not given guidance for next year. We are still in the process of putting our plan together.

Stephen Sadove

The only comment I would make is that as I said in my comments, we remain very, very focused on expense management and that is not going to stop as we go into next year. So expect us to be laser focused on it then as well.

Analyst for Lorraine Hutchinson – Bank of America

Can you provide some color on what you are seeing in terms of tourist spending? What you saw in the third quarter and are you seeing any pickup there and what is your outlook for that?

Stephen Sadove

I think you are starting to see a bit of a pickup in tourist spending. As we mentioned the New York performance as an example which is a good barometer of the tourism was a substantial underperformer to the store base through much of the early part of the year. As we came into the third quarter you saw that stabilize in rate relative to the rest of the store base. The Euro at 150 has certainly helped tourism and if you just look through the streets of New York you are seeing more and more in the way of tourism. I would expect you will probably have a better tourism impact as you go into the holidays relative to the number of tourists in some of the gateway cities.

Operator

The next question comes from the line of Michelle Clark – Morgan Stanley.

Michelle Clark – Morgan Stanley

I just wanted to follow-up on the prior SG&A question and ask it a different way which is you are going to realize about $100 million in SG&A save this year. How much of that is sustainable and how much of that roughly do you think has to come back? If you could break that into buckets for us.

Kevin Wills

We have not broken out the fixed and variable component. Obviously you have both inside of that savings. We have talked about obviously things like commission payroll sales go up and down. You see the commissions change. To Steve’s earlier point, we have been very aggressive we believe on the expenses. We think a significant portion of those SG&A saves will stick around on a permanent basis. Having said that, inside of the SG&A there are certain things that we will probably see maybe come back over time. An example was we did no 401K this year. Over time that may be something that comes back. Notwithstanding that one example, we are very aggressive on our SG&A and will continue to be so as we move into 2010.

Michelle Clark – Morgan Stanley

A question on the comp guidance. Your comp outlook for fourth quarter of down high single digits that would imply deceleration in the two-year trend. Just to be clear, that is due to reduced promotional activity or is there something else going on in the business that you see that is driving that more conservative outlook?

Stephen Sadove

I think fourth quarter is going to be a little bit difficult to read November for example because last year you had all of that very heavy promotion going on during the November right around that Thanksgiving period. That is reading too much into those specific numbers right around that period is very tough. We are seeing from an underlying trend basis I wouldn’t read into it that you are seeing a change in the underlying trend of the business.

Operator

The next question comes from the line of Emily Shanks – Barclays Capital.

Emily Shanks – Barclays Capital

I just wanted to follow-up on the comment that was in your prepared remarks around inventory receipt timing. How much did that benefit inventory being down 22% year-over-year?

Stephen Sadove

Very little. You are talking within a couple of points of that number. I think you ought to be assuming that was a true decline in the 20% range.

Emily Shanks – Barclays Capital

In terms of your comment that you plan to be free cash flow positive for this year, what are you looking at for a source of cash from working capital and/or are you assuming the source of the cash from working capital?

Kevin Wills

We have not broken out the components but we have commented previously we do expect to have a meaningful benefit in working capital this year as we are pulling our inventories down to align with consumption trends. So there is a benefit.

Stephen Sadove

It clearly benefited the CapEx spending came down quite substantially as well.

Emily Shanks – Barclays Capital

Can you help me with the magnitude of benefit? Is it going to be back where we have seen it historically or taking like a $50-100 million benefit in working cap? Or are those numbers too big?

Kevin Wills

Look, we gave the guidance and expectation for comp inventories to be down in the low to mid teens at the end of the year. So you can probably do your own math on that and go back and look at where inventory levels were at the end of last year.

Emily Shanks – Barclays Capital

I just wanted to confirm, did you make any bond repurchases during the third quarter?

Kevin Wills

We did not.

Operator

The next question comes from the line of Ben Rowbotham for Adrianne Shapira - Goldman Sachs.

Ben Rowbotham for Adrianne Shapira - Goldman Sachs

I was hoping you could talk a little about the traffic trends in the current quarter. Maybe break down the comp between traffic and tick and talk about how that shifted and what is implied in the 4Q guidance across those distributions?

Stephen Sadove

I think you are seeing an improvement in traffic trends whereas we were down in the teens earlier in the year. You are down, traffic I would say is down let’s call it in the low single digits type of numbers as we went through the quarter. I would hate to say things are great. I would say it is a lot less bad is the way I would have described it. From a number of transactions, your transactions are down. Your average transaction is up a little bit. Flat to up a little bit.

Ben Rowbotham for Adrianne Shapira - Goldman Sachs

In terms of the order outlook from an inventory perspective, down mid single digits for the first half of next year, is there anything we can imply from that in terms of what comps could look like if you are continuing to order down mid single digits?

Stephen Sadove

We haven’t given guidance for comps for next year yet. I think we certainly have enough inventory in the store. Clearly there are going to be instances where we are chasing inventory on a couple of items here and there. Overall we believe we have enough inventory to support the business. So I wouldn’t make an assumption that because inventory purchases or we are purchasing down mid singles that is an appropriate assumption relative to a comp number.

Ben Rowbotham for Adrianne Shapira - Goldman Sachs

How effectively can you chase inventory? Are you talking about a couple of hundred basis points? How does that work?

Stephen Sadove

There is a limited amount of inventory chasing you can do in the very near-term. On the margin, you can go and get some product. But it is not going to majorly change it. If I had to pull a number out of the air maybe it is in the 5-10% range but it is not going to be a major piece of the business you can chase in the near-term.

Operator

The next question comes from the line of Robert Drbul – Barclays Capital.

Robert Drbul – Barclays Capital

I guess the question I have is on the good/better/best mix. Can you talk about it for the third quarter in terms of how it sort of trended year-over-year and what the expectations are for the fourth quarter and even into next year in terms of exactly how much you are bringing down in terms of price points, etc.?

Stephen Sadove

It is an important question and the answer on it, there are a number of components to the good/better/best. If you think in terms of if we were at let’s say 1/3, 1/3, 1/3 of good/better/best, I think we probably shifted in a range of 5-10 points out of the best into good/better but that is not necessarily…you have to be very careful in terms of what that means. There are two kinds of shifts going on in the shift from best.

One kind of shift is you are buying more brands that may be in the good/better type of price zone. The other shift that is going on is you are buying, let’s say a Prada or a Gucci with a little bit more orientation towards the more entry price points within those brands. The combination of the two is what is shifting the mix of your good/better/best. You may still have as much emphasis on some of the what you would call “designer best” brands but you are shifting the mix of those brands into a good/better price zone. I think you saw that going on in the third quarter. It will continue, I am sure, going into the fourth quarter and I would anticipate it would go on into next year.

You see it exemplified by a handbag from one of the designers that was selling at a $1,500 price point to having one at a $1,000 price point. Those are the ways it is going to be evident. Ron do you want to make any comment on it?

Ronald Frasch

The enormous amount of effort by both the brands and the merchants here a Saks to both reallocate our inventory dollars as Steve mentioned but also try to move more of that allocation into exclusive product. So there are a number of moving balls we are manipulating but all in all I think everybody is pretty open and pretty focused on the same result. We fell pretty pleased with how we have moved so far.

Stephen Sadove

What is encouraging to me and I think the team has done a terrific job of it, if we had talked about the year and a quarter ago about this concept you would have had an enormous amount of skepticism and resistance to this kind of thinking. I will tell you the vendor community has embraced working with us on it. The partnership is terrific. There is an enormous amount of creativity being placed against it.

Ronald Frasch

This is an evolving initiative which it takes time. Everybody is moving 100 miles an hour to deliver the objectives and we are learning as we go through this. We made some mistakes. The brands have made some mistakes. We are correcting the mistakes. We are accenting the positive moves. But it is an evolving, significant change in how we do business.

Operator

The next question comes from the line of Karru Martinson – Deutsche Bank.

Karru Martinson – Deutsche Bank

Just to follow-up on the good/better/best question from before. Are we actually seeing the price points move down or are we just seeing more of a spectrum at that good/more entry price levels?

Stephen Sadove

I think you are seeing both going on. In some cases you are seeing prices come down. You are seeing a mix change in terms of some of the product being more of it being sold at the price points. You have some vendors who have actually taken some price declines. You have another…it is tough because you have the Euro going the other way which doesn’t make it easy to go at that. In this business from one season to another you are usually not looking at the identical product. It is going to change in terms of fashion taste. It is going to have different embellishment. The fabrications may be different. You have a little bit of, a lot of pieces moving to get to the right or get you to the price point.

Karru Martinson – Deutsche Bank

In terms of that vendor community if we go back a year ago we were seeing some strain there. Do you feel that shakeout has taken place? Who is left here are the stronger ones that will go forward with you?

Stephen Sadove

I feel and Ron spends much of his day with it, I feel first of all the relationships we have with our vendors are as good as they have ever been. The partnership is absolutely terrific. Has there been some shake out within the vendor industry? Just as you have had across all sectors in the economy you have had some shakeout and some vendors going by the wayside. I anticipate you are probably going to continue to see some shake out occurring over the next period of time. We are still in a very fragile economy. Ron?

Ronald Frasch

It is a fragile period for everybody in this industry.

Karru Martinson – Deutsche Bank

As you have improved your capital structure what thoughts are you giving to those future maturities that are on the more distant horizon?

Kevin Wills

We have made no comments as to future capital changes but obviously we have a $23 million senior note coming due in December of 2010 and $142 million coming due in the following October. As we get nearer time we will provide more clarity on what we will do there. Overall I would suggest to you the changes we have made in the capital structure this year put us in a position today that we feel very comfortable with our overall capital position and our ability to address the maturities over the next couple of years.

Operator

The next question comes from the line of Todd Slater – Lazard Capital Markets.

Analyst for Todd Slater – Lazard Capital Markets

First, circling back to the comps, let me ask it a different way. For your second half guidance it is now for down high single digit comp. Did third quarter come in where you expected it to be or are you taking down the fourth quarter a little bit?

Stephen Sadove

No I think the third quarter came in about where we expected it to be. Within a small margin of error, I thought it was about where we thought it would be. I think we are seeing a little bit of trade off in terms of the fourth quarter comp versus gross margin but it is not a huge difference versus where we thought it would be.

Kevin Wills

On the guidance all we have really done is tighten the range. We are still consistent with the band we had given previously. Now that the third quarter is over we are in a position now to tighten the guidance a bit.

Analyst for Todd Slater – Lazard Capital Markets

Could you talk a little bit about margins in terms of good/better/best? Are margins similar across categories?

Stephen Sadove

The gross margin you generate from a good/better/best in theory can be the same or better or worse from one to another. There is nothing about being good/better or best that is going to drive higher or lower margin. It is more going to be have we picked the item right. Are we getting full price selling? What kind of mark downs are required to clear the item? That could be high or low either in the good or the best price points.

Analyst for Todd Slater – Lazard Capital Markets

Could you talk a little bit about the luxury customer more philosophically? We have seen a change kind of more purchasing around promotional events and a shift down maybe to good and better from best. How do you see that in the next couple of years playing out?

Stephen Sadove

I think there have been some changes in the luxury consumer. This recession has been a shock to the system of the luxury consumer. I was watching on CNBC this morning you had a couple of the, I think Ken Chenault was on talking about their consumer. Somebody who is in the high end who took a 50% hit to their net worth, even though it is up substantially this year and I feel a lot better with the DOW at 10,300 or so than I did at 6,500, that individual is still a little bit shell shocked and still watching their expenditures very carefully. I believe there are going to be some long-term implications in that. People are very much focused on value.

Value is not just price although it can be price. It is about quality. It is about design. They want to feel good about whatever they are purchasing and they are going to be discriminating in their purchases. I do believe that is going to continue. I think it has been a little bit of a wakeup call to the industry and the industry is responding I believe extremely well to the changes and focusing on quality and value. So you have some consumers that are purchasing a higher proportion of their purchases on event days? Absolutely.

You have an increase of people who are responding to the events. I would expect for a period of time that is going to continue. Remember, as Ron said we have pulled down on the number of brands that are included in some of the events. That will continue. You also are going to, luxury is a little bit about limited distribution and exclusivity and availability and I would expect in the next couple of years that will be a trend that will continue in the industry. I think the nature of luxury will go back a little bit to the roots of what it was over time and that is not necessarily all bad.

Operator

The next question comes from the line of Karla [Costello] – JP Morgan.

Karla [Costello] – JP Morgan

I was wondering if you could give a sense for what you see as the ultimate opportunity for Off Fifth?

Stephen Sadove

Sure. I feel very good about the Off Fifth business. We don’t break out the specific comp trends but it was substantially better than the full line trends and we feel very good about the business model. About let’s call it somewhere in 15-20% of the product we sell in the outlet is a sell off from our full line stores. Another 20% or so is being made under our brand in the outlets and the remainder is cut for us largely by the vendors that you would expect to see in a Saks Fifth Avenue outlet store. I feel we are opening 6-7 of them this year. I think over time you have the opportunity to probably open 3-5 or maybe a little bit more than that annually if we get the right real estate.

We are finding we are not limited just to the high end outlet malls, the Chelsea’s of the world or the Tanger’s although we love them and will expand with them but there is a limited number of those that are being opened. We can perform well in high-end, what I would call strip malls, especially when we are with a couple of other players that are appropriate in the mix with us. All of that says, as Kevin mentioned, there is a very low overlapping customer between the full line stores and the outlet. All of those together point to the fact we think there is an opportunity for continued growth in the segment.

Karla [Costello] – JP Morgan

Do you think it is something that could be twice the number of the Saks stores at some point?

Stephen Sadove

I don’t have a specific number. We are at 55 of them today. Over the next foreseeable future could we be opening five a year? Yes, I could see that. I don’t know that I see quickly ramping up to over 100 but I think over time you can see more. If you look at some of the other outlets, the Player, the Coach, there is a Ralph Lauren, they certainly have more than the kind of numbers we have right now.

Karla [Costello] – JP Morgan

You talked about SG&A for the fourth quarter being flat. I am assuming you mean with the year-ago SG&A?

Kevin Wills

Flat on a dollar basis year-over-year.

Karla [Costello] – JP Morgan

Last year, was that number re-stated or was that 204?

Kevin Wills

Last year’s number may have had some call out items in last year’s fourth quarter so on a GAAP basis I believe last year the SG&A actually was about $199 million excluding certain items and about $209 million on a GAAP basis. Again, we are looking at it without certain items in the prior year.

Operator

The next question comes from the line of Mark Kaufman – Rafferty Capital.

Mark Kaufman – Rafferty Capital

I guess I will ask for a little more, if possible, granularity about the mix of the decline in the inventory. Is it the mix of merchandise? Is it price points or unit volume?

Stephen Sadove

A decline in unit volume. That is the preponderance of it is a unit volume decline. On the units it is primarily unit volume but as you shift the price points down a little bit then the units aren’t going to go down quite as much as the dollars are going down.

Operator

The next question comes from the line of Dana Telsey – Telsey Advisory Group.

Dana Telsey – Telsey Advisory Group

Can you talk a little bit about your charge card customer? What are you seeing from them versus regular customers? Then when I think about the changes you made to the store, whether it was 10022 Shoe department two years ago or the third floor this year, what should we be looking at next year as you continue to advance the store?

Stephen Sadove

Great questions. There are a number of pieces to that. From a credit card customer base about 45% or so of our sales are on our proprietary card. As you know, we have a partnership and the credit portfolio is owned by HSBC so they have to comment on specific. I would echo the comments I have said in the past this is one of the better performing and probably the best portfolios within the industry.

I would also characterize, I was listening to Chenault and American Express this morning, I am not going to say exactly what our trends are but I feel pretty good we have seen stabilization in terms of the environment relative to the credit portfolio. We feel good about our portfolio.

First of all I am so thrilled with what we have done with the 10022 Shoe and we have expanded it to other stores. I was just down in Miami Dade this past week and saw it down there. Having a dominant shoe position in luxury is something that is very important to us. The third floor launch we had in New York on the designer floor is performing very well, better than the store base in New York and we feel really good about it.

There are two areas we have been focusing on for next year. One of them is what we would call the reinvention of bridge clothing, which is wear. WEAR is what we call it but it really is thinking differently about bringing women who love fashion, fashionable looks, it is not going to be the contemporary zone, it is a little bit more flattering of a fit for them than what a contemporary styling would be. It is a whole avenue of growth. The La Via would be an example of that. The Ralph Lauren Blue and Ron has a whole series of initiatives that we are going to be rolling out over the course of the next year or so that I think will transform what we would call the new bridge.

I also think there is a lot of opportunity in the beauty arena. Over the course of the next year we are going to revamp our entire first floor. We will complete the renovation of our first floor beauty environment. We have a concept that supports beauty that we feel very good about. So I think that is an area that is going to continue to get emphasis as well. Ron, any comments you want to make on any other areas? How do you feel about those?

Ronald Frasch

I am a little paranoid and insecure so I never want to talk about what is up our sleeve. I think Steve hit them well. The other thing we are so focused on in the company is the service in our stores. The one thing we believe will put us over the top it is going to be to have an outstanding service model. So there are just enormous initiatives being taken by our stores organization. We are seeing pretty good results early. We have a redefinition of roles and responsibilities. Getting people in the stores and focused on what we want to get them focused on which is servicing our clients and developing them. Over the course of the next year we will continue to try and hopefully that will be our new 10022 Shoe. That would be my vision.

Operator

The next question comes from the line of Christine Chen - Needham & Company, LLC.

Christine Chen - Needham & Company, LLC

I was wondering if you could talk a little bit about Women’s Contemporary? Has business there gotten any better? What is happening there? Specifically if you could also comment on how you are feeling about the premium denim space.

Ronald Frasch

Actually we feel pretty good about Women’s and Men’s Contemporary and have a number of initiatives. We have tried to evolve our contemporary business model to be a little more sophisticated perhaps than it was before. So if you go on our fifth floor in New York you will see we have done quite a bit of renovation to the floor. We have created environments that look a little more contemporary than they were before. It is a process we are kind of rolling through our stores right now as best we can but more emphasis on more design intensive contemporary products.

What is interesting for us is we are seeing for the first time ever, since I have been with the company, our customers from our designer floor actually shopping contemporary for certain categories. Yes, we still have the girlie clothes but we also have improved the fashion sophistication on the floor. That is a big positive. We are actually doing the same program in Men’s Wear. So in both cases we feel pretty good.

Denim has really had ups and downs. We like to not talk about individual categories of business but from a fashion perspective we see great response all season to narrow leg denim and it is a staple in a woman’s wardrobe. We are seeing lots of new innovation. Some of it is hitting our floor right now. I encourage you to come in and see it. We think it is a core, staple part of our contemporary business that is adding the level of fashion credibility that I think maybe it could use.

Christine Chen - Needham & Company, LLC

As you refocus your energy on bridge do you worry that maybe that could cannibalize some business from the contemporary space as there has been the thought that some bridge customers actually started shopping contemporary because there was more fashion?

Ronald Frasch

I think probably there is always some degree. Hopefully we are going to have a lot of overlap. That is all of our strategy, to cross-sell throughout the store. Ideally the contemporary is a different fit. It is a little more youthful. What we are trying to do is develop our areas for a woman who is perhaps in a little bit more of a serious lifestyle. She may have a career. She may be at a point in her life where contemporary clothes are not appropriate for her or they don’t fit. We see Wear as the original bridge 25 or so years ago, filling that void between underneath designer. What we are trying to do is fill it with clothes that have great fashion savviness. You will see more things coming out in the coming months and actually coming days that will talk more on some of these initiatives that we are working on here.

Operator

There are no further questions in queue at this time. Are there any further remarks?

Stephen Sadove

I want to thank everybody for joining us. We look forward to speaking with you after the fourth quarter. Everybody have a happy holiday season.

Operator

This concludes today’s conference call. You may now disconnect.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!

Source: Saks Incorporated Q3 2009 (Qtr End 10/31/09) Earnings Call Transcript
This Transcript
All Transcripts