Saks Beats Expectations; Outlook Positive

| About: Saks Incorporated (SKS)

Saks Incorporated (NYSE:SKS) delivered a first-quarter 2011 net income (excluding one-time items) of 17 cents a share, compared with a net income of 11 cents in the year-ago quarter. The year-over-year improvement in the quarter reflects strong same-store sales growth and gross margin expansion.

Further, the rebound in financial markets has spurred sales of luxury goods. Quarterly adjusted earnings were a penny above the Zacks Consensus Estimate of 16 cents, reflecting a 6.3% increase.

On a reported basis, the company generated earnings of 16 cents a share which were in line with the Zacks Consensus Estimate, but up 33.3% year-over-year.

Revenue and Margins

Net sales for the quarter grew 8.8% to $726 million from $667 million in the year-ago quarter, mainly due to robust 10.2% growth in same-store sales. The Zacks Consensus Estimate was $706 million.

The company’s stores and operations comprise Saks Fifth Avenue (these are principally free-standing stores in exclusive shopping destinations or anchor stores in upscale regional malls), Saks Fifth Avenue OFF 5Th (these stores primarily target the value-conscious customers) and Saks Fifth Avenue e-commerce operations known as Saks Direct.

During the quarter, the company’s Saks Fifth Avenue stores saw strong sales growth, particularly in women’s and men’s apparel, handbags and shoes. Saks Direct reported an approximately 25% increase in comparable same stores during the quarter. However, the performance of the Saks Fifth Avenue OFF 5Th was not as expected.

Saks' gross margin shot up 100 basis points to 44.1% in the quarter, compared with 43.1% in the prior-year quarter, reflecting tight inventory management, increased full-price selling and lesser promotional activities.

Quarterly operating income improved to 8.7% of sales from 7.1% in the prior-year quarter.

Other Financial Updates

Saks ended the fiscal year with cash on hand of $202.0 million and no direct outstanding borrowings on its revolving credit agreement.

At the end of the quarter, inventories increased 4.3% year over year to $732.2 million and on a comparable store basis inventories increased 6.2%.

At the end of the quarter, $25.4 million of the $230 million 2.0% convertible notes balance and $14.0 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 $550.6 million, and debt-to-capitalization was 32.5% at the end of the quarter.

During the quarter, Saks' net capital spending was $11.5 million

Guidance Update

Saks anticipates same-store sales to progress at the high-single digit rate for the second quarter and mid to high single digit range during the second half of fiscal 2011.

The company projects inventories on the basis of same-store sales to go up at a mid single digit range throughout the year.

The company forecasts a gross margin increase in the range of 30 to 50 bp both for the second quarter and second half of fiscal year 2011. The company’s gross margin is typically higher in the first half than in the second half of the fiscal year.

With respect to the current capital structure, Saks expects an interest expense of $13 million for the second quarter and approximately $21 million for the second half of fiscal year 2011. The company's effective tax rate is expected to be 40.0% at the end of fiscal 2011.

Saks anticipates net capital expenditures to be in the range of $70 million to 75 million for the full year. The company expects diluted common share count of 157 million for the full year.

Management is optimistic about its performance in fiscal 2011, as it has seen strong growth in sales across store formats, thanks to its merchandising, service and marketing initiatives. Further, the company intends to be very strategic in its SG&A spending, inventory management and capital expenditure investments.

Saks shares maintain a Zacks #2 Rank, which translates into a short-term Buy recommendation. Our long-term recommendation for the stock remains Neutral.