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The luxury retail chains are showing no signs of weakness. Same-store sales for August were 5% higher than the prior-year period for Saks (NYSE:SKS) chain, and 7.1% higher for Nordstrom (NYSE:JWN).

But Saks has had to close more stores than it has opened in recent years, a sign that the brand oversaturated the market. It operates out of two divisions: the Saks Fifth Avenue Enterprises, consisting of more than fifty Saks Fifth Avenue stores and nearly fifty Off 5th stores, and The Saks Department Store Group that consists of forty Parisian stores. It also operates over fifty Club Libby Lu specialty stores for girls.

The Saks Fifth Avenue division barely posted an operating profit in 2005, and competing with Neiman Marcus is a tough challenge. On the other side of the coin, the lower priced retailers like Kohls (NYSE:KSS) and JC Penney (NYSE:JCP) continue to eat into the market share.

While management changes were made in the beginning of 2006, there is much they will need to do to turn around the Saks brand to make it a stand-out luxury store. Sales have declined at a compound annual rate of 0.5% over the past five years, placing Saks near the bottom of the industry. Saks' operating margins are poor as well and don’t show signs of improvement. At this point, Saks Fifth Avenue’s best bet might be acquisition, but that is expensive and takes management attention.

Type of stock: A slow growth luxury department store, Saks has oversaturated the market and faces stiff competition in a market that will be hurt by the economic downturns.

Price target: Trading at $18.50, Saks is significantly overvalued.

SKS 1-yr chart:

saks chart

Source: Saks Can't Compete In This Environment