Saks Narrows Loss in Q2

| About: Saks Incorporated (SKS)

Saks Incorporated (NYSE:SKS) delivered a second-quarter 2010 net loss (excluding one-time items) of 13 cents per share, compared with a net loss of 39 cents in the year-ago quarter. The Zacks Consensus Estimate was for a net loss of 17 cents per share. The year-over-year improvement in the quarter reflects same-store sales growth and gross margin expansion.

On a reported basis, the company posted net loss of 21 cents per share, compared with net loss of 39 cents in the year-ago quarter.

Revenue and Margins

Net sales grew 5.1% to $593.1 million from $564.5 million in the year-ago quarter, mainly due to 4.6% growth in same-store sales.

Saks' gross margin shot up 700 basis points to 37.3% in the quarter, compared with 30.3% in the prior-year quarter, portraying tight inventory management, increased full-price selling and a lesser promotional activities.

Quarterly operating loss improved to 3.8% of sales from 12.0% in the prior-year quarter.

Other Financial Updates

Saks exited the quarter with cash on hand of $161.4 million and no direct outstanding borrowings on its $500 million revolving credit agreement.

Saks ended the quarter with $670.9 million of total inventories, essentially flat compared with the prior year period. On the same store basis, inventories grew 1.7% at the end of the quarter.

At the end of the quarter, $31.3 million of the $230 million 2.0% convertible notes balance and $17.4 million of the $120 million 7.5% convertible notes balance were classified in equity.

Funded debt – including capitalized leases, senior notes, and the debt and equity components of the convertible debentures – was $575.0 million, and debt-to-capitalization was 36.2% at the end of the quarter.

During the quarter, Saks' net capital spending was $12.7 million.

Guidance Update

Saks anticipates same-store sales to progress at the mid-single digit rate in the second half and the fiscal 2010.

The company projects inventories on the basis of same-store sales to increase at a low-to-mid single digit rate in the second half of fiscal 2010.

The company forecasts a gross margin of 39.0% in the second half of 2010 and 39.5% in fiscal 2010, based upon the current inventory status and promotional calendar and permanent mark-down momentum.

With respect to the current capital structure, Saks expects an interest expense of $57.5–$58.5 million in fiscal 2010. The company's effective tax rate is expected to be 40.0% at the end of fiscal 2010.

Saks anticipates net capital expenditures of $55 million in fiscal 2010. The company expects to end fiscal 2010 with diluted common share count of 158–160 million.

Saks shares maintain a Zacks #3 Rank, which translates into a short-term 'Hold' recommendation. Our long-term recommendation for the stock remains Neutral.