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Executives

Stephen I. Sadove – Chairman, Chief Executive Officer

Ronald L. Frasch – President, Chief Merchandising Officer

Kevin Wills – Executive Vice President, Chief Financial Officer

Julie Bentley – Senior Vice President, Investor Relations

Analysts

Dana Cohen – Banc of America Securities

Christine Augustine – Bear Stearns

Deborah Weinswig – Citigroup

Michael Exstein – Credit Suisse

Todd Slater – Lazard Capital Markets

Michelle Clark – Morgan Stanley

Dana Telsey – Telsey Advisory Group

Emily Shanks – Lehman Brothers

Carla Casella – J. P. Morgan

Matthew McClintock – Lehman Brothers

Saks Incorporated (SKS) Q4 2007 Earnings Call March 5, 2008 10:00 AM ET

Operator

Good morning. My name is Ron and I will be your conference operator today. At this time I would like to welcome everyone to the fourth quarter and year-end earnings conference call. All lines have been placed on mute to prevent any background noise.

After the speakers’ remarks there will be a question and answer session. (Operator Instructions).

I would now like to turn the call over to the chairman and CEO of Saks Incorporated, Mr. Steve Sadove. Sir, you may begin your conference.

Stephen I. Sadove

Thank you very much. This is Steve Sadove, Chairman and CEO of Saks. I’m joined today by Ron Frasch, our president and chief merchandising officer, Kevin Wills, our CFO, and Julie Bentley, our senior VP of IR.

I’d like to thank each of you for taking the time to join us. Today we’ll discuss the financial results for the fourth quarter and fiscal year ended February 2nd, 2008, our outlook for 2008, and update you on several other matters. At the end of the call we’ll be glad to respond to your questions.

Let me note that some of the comments on the call today, as well as some of the information presented in our earnings 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. For a description of the meaningful risks and assumptions related to these projections please refer to the release and our most recent filings with the SEC, including our most recent Form 10K.

I’ll ask Kevin to briefly comment on the fourth quarter and full-year performance on the balance sheet.

Kevin Wills

Thanks, Steve, and good morning, everyone. Our fourth quarter net income totalled $39.5 million or $0.26 per share, which included a net gain of $10.4 million or $0.07 per share related to certain items outlined in today’s press release. This performance compares to last year’s fourth quarter income from continuing operations of $21.6 million or $0.14 per share, which included after tax charges related to certain items of $6.9 million or $0.05 per share.

For the full year our net income totalled $47.5 million or $0.31 per share, which included after-tax charges of $16.2 million or $0.11 per share. These results compared to last year’s loss from continuing operations of $7.3 million or $0.05 per share, which included after-tax charges related to certain items of $34.3 million or $0.25 per share. Keep in mind that the prior year included an extra week creating a 14-week fiscal fourth quarter and a 53-week fiscal year. We estimate that the extra week added $0.06 to earnings per share in a prior year fourth quarter and full year.

Let me now make a few comments on the balance sheet. Fiscal year end inventories totalled approximately $857 million, an approximate 9% increase from the prior year on both a total and a comparable stores basis. In looking at the risk profile of this increase approximately 3% relates to replenishment of basic and continuing product which we believe carries minimal mark-down risk. The balance of the increase is principally attributable to strategic investments in highly productive areas like handbags, footwear, men’s, and select core women’s designer resources. Due to the very recent trends in our business, we believe this inventory carries a moderate risk profile which is higher than the low to moderate profile that we assessed in previous periods. In a moment Steve will talk more about our projected inventory levels going forward.

We ended the fiscal year with approximately $101 million of cash and no direct outstanding borrowings on our $500 million revolving credit facility. Funded debt, including capital leases, totalled approximately $572.6 million and debt to capitalization was 32.8%, and this was without giving effect to cash on hand. This is down from the 38.5% one year ago.

We repurchased $106.3 million of senior notes in 2007 and we also repurchased approximately 1.7 million shares of common stock during 2007 at an average price of $15.95. We have approximately 35.7 million shares of remaining availability under a repurchase authorization program.

I will now turn it back to Steve.

Stephen I. Sadove

Thanks, Kevin. Excluding the certain items, our fourth quarter operating income totalled $56.6 million or a 5.7% operating margin, which is an improvement of approximately 140 basis points over last year’s fourth quarter excluding the extra week. This improvement was driven by comp store sales growth and expense leverage.

Our fourth quarter 9% comp stores sales growth was among the very best in the industry and was on top of a 9.9% comp increase last year. Our comp stores sales grew nearly 11% in the five-month period between August and December 2007. However, sales momentum began slowing in the later part of the fourth quarter, as evidenced by our 4.1% and 3.4% comp store sales increases reported in January and February respectively.

Sales increases in several of our previously high-growth rate businesses, such as hand bags, footwear, and men’s, have slowed somewhat. As expected, the more challenging promotional and overall macro-economic environment that we began to experience in the third quarter continued throughout the fourth quarter and put pressure on our merchandise margins, particularly the women’s Bridge apparel area.

In addition, while our key promotional events, such as our double points and our electronic gift card events, were essentially the same year over year, our customers shifted more of their spending to these events causing some additional pressure on merchandise margins. In spite of that pressure, excluding last year’s 53rd week, our fourth quarter year-over-year gross margin rate was essentially flat. Keep in mind that last year’s fourth quarter we were able to expand our gross margin rate by 380 basis points, excluding the 53rd week.

Also as expected, we achieved leverage on SG&A expenses for the quarter. Excluding the certain items in last year’s 53rd week, we realized approximately 70 basis points of leverage for the quarter. In order to drive comp store sales growth we continued to make targeted investments in such areas as selling, payroll and marketing, but we remained focussed on our expense structure and will continue to seek operating efficiencies while also investing for the longer term.

I’m very pleased with the progress we made during 2007 and our performance for the year. Excluding certain items, our operating income totalled $139.2 million compared to $62.8 million last year. Our operating margin’s 4.2% doubled the 2.1% generated in 2006. This performance exceeded our targeted performance for 2007 and was driven by our comp store sales increase of 11.7%, 50 basis points of gross margin expansion, 70 basis points of SG&A leverage, and 100 basis points of leverage on other operating expenses.

Our outside comp store sales growth indicates that we significantly approved our competitive positioning by market driven by our merchandise, service, marketing and capital investments. We outpaced our competitors in sales growth and made real progress in reinforcing our position as a premier luxury retailer.

Many of our merchandise categories performed very well this year and we experienced outsized growth in hand bags, women’s shoes, jewellery, and men’s apparel, accessories, and shoes.

We generated solid performance across all geographies and store sizes and our robust sales performance was achieved despite a disruption related to several major remodelling projects.

Our New York City flagship location had an outstanding year, outperforming the company average and benefitting from increased store traffic driven in part by the opening of 10022-SHOE and tourism. The number of transactions in the average dollar per transaction rose for the year.

Throughout 2007 we developed and executed strategies that not only improved our operating performance for the year, but laid the groundwork for continued improvement for the business over time. Allow me to highlight some of the most important accomplishments.

We completed the consolidation and integration of all corporate functions so that our organizational structure has been streamlined and more appropriately sized. We have assembled a team that is talented, experienced, focused, and collaborative. Our by-store merchandise assortments were substantially improved through the implementation of our parallel planning and 9-box grid assortment matrix processes, an increased focus on key items and offering more exclusive and unique products.

We improved merchandise planning and allocation, including organizational enhancements, better disciplines and processes, and implementation of an upgraded merchandise planning system. We’re systematically rolling out these changes to each of our merchandising areas.

We’ve meaningfully improved the customer experience this year through both implementation of our new point-of-sale/clienteling system and the continued roll out of our commission programs. Our one-of-a-kind clienteling system is fully operational in 23 stores and provides very detailed customer data at the point of sale and allows our associates to communicate with and service their clients more frequently and effectively. The system will be implemented in the balance of the store base in 2008. Our performance-based commission programs have been expanded to nearly 90% of our sales force.

On the marketing front, such original campaigns as 10022-SHOE, reflected the innovation and collaboration of our teams and compelled customers to shop with us. Generating wide-spread press and industry buzz, 10022-SHOE opened in August 2007 boasting its own zip code, postage stamp, and other marketing initiatives that were industry first.

Our targeted capital investments, largely in high-impact Denver shops and first core selling space, improved the productivity of our existing stores. Two-thousand-seven projects included the Phoenix Palm Beach Gardens, Chicago, Boston, South Coast Plaza in L.A., Naples and San Francisco stores, and the introduction of our designer shoe floor in New York City. Through these and other projects we added over 90 vendor shops across the chain. Our capital spending totalled approximately $141 million for the year.

We continued to grow the Saks Direct business by substantially increasing the breadth and depth of our product offerings. In mid-year we completed our total redesign and upgrade of the site, adding more features and making it more interactive and easier to use. Our customers are responding by buying more products and more frequently on line, and consequently year-over-year direct revenues were up nearly 40%.

We successfully repositioned the Off 5th business to emphasize our 48 stores as a channel of distributions that includes not only clearance merchandise, but also direct-from-vendor product and more private brands. We’ve developed a new prototype store design and we’re formalizing expansion plans for 2008.

Let me also mention that 2007 was an award-winning year for Saks 5th Avenue as we received external recognition for several of the initiatives. We were named Women’s Footwear Retailer of the Year in Footwear News, which recognized us for our groundbreaking innovation with the introduction of 10022-SHOE. Our company was recognized in 2007 for being one of the industry’s most impressive turn-around stories and was named Retailer of the Year by Daily News Record, the leading men’s publication in the retail industry. And we won gold and silver RACies, the Retail Advertising and Marketing Association retail awards, for creativity, innovation and excellence for both the Wanted and 10022-SHOE campaigns. The RACie awards competition is the industry’s most prestigious grade of contests for retail advertising.

I remain very positive about the long-term prospects for the luxury sector and specifically for Saks 5th Avenue. We’ve made much progress over the last two years improving the competitive position of the business. Notwithstanding our improved performance in the future prospects for the luxury channel, we expect to continue to face an increasingly challenging macro-economic and promotional environment in 2008 and are taking a more conservative approach to planning the business for the year.

Our financial expectations for 2008 are built on the assumptions outlined in more detail in our earnings release. Let me highlight a few of these assumptions. We expect comp store sales growth in mid-single digits for the full year with the assumption of low to mid-single-digit comps in the first half and mid-single-digit comps in the second half. Our sales assumptions for the store base are relatively conservative with somewhat higher growth expected from our New York City flagship store, recently renovated locations, and Saks Direct. Our objective is for inventory levels to be more in line with our sales growth projections by the beginning of the third quarter.

As expected, our fiscal year-end comp inventory increase of 9% was significantly below the inventory growth trends for the prior four quarters, which had ranged from increases of 17% to 23%. The 9% increase was in line with our fourth quarter comp sales trend, however, it’s marginally higher than we would have liked as it exceeds our most recent January and February sales trends, which were substantially below 2007 levels.

Given the recent sales trends and our more conservative 2008 outlook, we’re proactively and aggressively working to reduce our inventory levels and are targeting to have inventory in line with sales growth by the start of the fall season. We also anticipate a modest increase in the year-over-year gross margin rate with more pressure concentrated in the first half of the year in light of the current macro-economic and competitive environment. And we believe we can achieve modest SG&A expense leverage excluding the impact of certain items, with more leverage expected in the second half of the year.

Based on these assumptions, our belief is that the year-over-year operating margin excluding certain items will remain relatively flat in 2008. Importantly, our outlook reflects a continuation of the strategies that have delivered sales and operating margin growth over the last six quarters as we believe these are the right actions for the longer term.

Let me now ask Ron to make a few comments about our ongoing merchandising, marketing, and store end issues for 2008.

Ronald L. Frasch

Thank you, Steve, and good morning. On the merchandising front we will continue to drive differentiation by remaining focused on the 9-box grid process and localizing our assortment through the ongoing parallel planning process.

The key strategy new to ’08 necessary to execute our 9-box balance is what we’re calling a re-invention of Bridge. Women’s Bridge are a good range of products and remains an important component of our balanced assortments. We began to see the decline of this business over the back half of ’07. Some of this weakness was related to the economy and, I also believe, a weakness related to a lack of fashion and to the uncertainty of the vendor matrix related in part to the Liz Claiborne (inaudible) process.

We look forward to sharing our specific initiatives around the invention of Bridge, but broad strokes includes more robust and interest in vendor offering, increased emphasis on design and sensibility, new store design concepts, and a new marketing approach. Another element of the Bridge reinvention will be the reintroduction of Real Clothes, one of our very popular and successful private brands that was discontinued several years ago.

Additionally, we will continue to distort our growth businesses in footwear, handbags, and men’s, with an added emphasis on our cosmetics and beauty areas business. We believe there is great growth potential with our beauty business that can be exploited by improving store designs, improving our product differentiations, developing innovative marketing (inaudible) programs, and a better utilization of our own CRN (sic) capabilities to maximize market share.

We also continue our work with Kurt Salmon and Associates, KSA, to further enhance our assortment allocation effectiveness. We have established better buying and pre-market processes supported by improved assortment and allocation systems and a strengthened planning organization with more clarity around roles and responsibilities. We’ve rolled out the KSA process changes in our men’s and accessory divisions, which represent about 40% of our volume. The men’s area as diversified under the new systems and processes for spring ’08 and accessories will be making their buys this spring for fall ’08.

We plan to complete the roll out of women’s ready to wear, another 40% of our volume, in the first half of this year. We believe these changes will lead to gross margin expansion over time.

Consistent with last year, our marketing efforts in ’08 will be focused on attracting new customers and retaining and driving frequency with our existing base. This will be executed through a more local approach shored up with strong national campaigns and even stronger catalogue offers.

We believe that the success we’ve had in merchandising with the 9-box grid and parallel planning processes are applicable to marketing. The marketing plan that we’ve developed for ’08 is tailored to meet the 9-box lifestyle of our individual stores and was developed through a collaborative process similar to our parallel planning process that was executed with our merchants last year.

On a national basis you will see an even more powerful Wanted campaign. Another national focus for Saks is the positioning of the beauty business. We are currently in the early phases of developing a new marketing area for this category, but our objective is to make it 10022-SHOE for 2008.

As it relates to our catalogues, we are repurposing our catalogues to be more shoppable, as well as serving as more of an educational vehicle for our customers on the trends being seen.

As we look at our stores for 2008 our attention will primarily be on selling. Late last year we engaged KSA to work with our stores and identify opportunities to sharpen our focus on selling. In order to focus our selling force on driving the product out the door full price we not only needed to make changes with how we operate on the selling floor, but we needed to modify several other processes from how our support organization in New York is aligned to how we pack and ship goods out of our distribution centre.

We piloted process changes in four stores in the fourth quarter and plan to expand the participating stores by 20 throughout this year. Some initiatives include enhancing our in-store training, strengthening our on boarding, and streamlining our back of house processes in order to free up our selling management. We are updating our hiring profile, placing more weight on service and fashions and less on retail or category experience. We look forward to sharing more specifics about this project as we progress throughout this year.

Additionally, we will complete the roll out of our web-based point-of-sale/clienteling systems to the rest of our store base. As the associates become more adept at using the system we expect strengthened customer relationships and improved sales trends. We are finding that the associates have mastered the mechanics of ringing the transaction and other basic skills quite well, however, it will take more time and training to maximize the clientele enhancements of the system. Over time the potential for cultivating relationships and driving sales with this system are quite extraordinary.

Steve?

Stephen I. Sadove

Thanks, Ron. We’ll continue to make additional appropriate strategic capital investments in 2008. Our estimated capital spending plan is approximately $125 million with about 70% allocated to stores and a significant portion of the balance allocated to continued technology investments associated with our merchandising and clienteling initiatives.

Similar to 2007, we’re focusing our capital spend on highly productive stores and categories, opening or remodelling over 100 vendor shops, and focusing on seven major store projects. We will complete the expansion of our Naples, Florida, and Boston stores and complete a remodel of our South Coast Plaza store in L.A. We’ll renovate and expand key main-floor businesses in our Bell Harbour and Miami stores in Florida and in our Houston flagships. These remodels are largely targeted towards our highly productive handbag, footwear, and fine jewellery businesses.

A very exciting aspect of our 2000 capital program is the extension of certain key earnings from our 10022-SHOE concept in our New York flagship into six additional markets. After seeing the success in New York we’ve determined that elements of this remodel are portable and can resonate in other large markets. by the end of 2008 we expect to expand this concept into our Beverly Hills, Houston, Phoenix, South Coast Plaza, San Francisco, and Miami locations.

We’ll continue to make investments in our highly productive New York store. During 2008 we will touch six of the 10 floors by adding select vendors, expanding existing, highly productive businesses like handbags and women’s designer apparel, and introducing several new concepts and resources in our cosmetics and fragrance area.

We believe we can continue to grow and improve the profitability of the Off 5th business through further expansions of Saks 5th Avenue private brand merchandise and direct purchases from vendors. We’ll open our prototype store in Orlando, Florida, in April and open additional select new stores later in the year. We believe we can continue to produce outsized growth in the Saks Direct business through further merchandise assortment expansion and continued service and site functionality enhancements.

I continue to be optimistic regarding our long-term strategic plans and believe we can deliver additional operating expansion in the future as we benefit from our ongoing strategic initiatives. Additional gross margin expansions anticipated in future years as the recent and further scheduled refinements to the planning and allocation systems processes and organizations positively impact the company’s performance.

We also remain very focused on our expense structure and expect to see future operating efficiencies while also investing in the long term. I remain confident that we can close the gap in operating margins with our peer group over time, expanding the operating margin to 8% and beyond in the future.

At this time we’ll be pleased to entertain questions.

Question-and-Answer Session

Operator

(Operator Instructions). And your first question comes from the line of Michelle Clark with Morgan Stanley.

Michelle Clark – Morgan Stanley

Yeah, good morning. You experienced a sales slowdown in the latter part of the fourth quarter, a trend that has continued in February. Can you give us some colour here? Is it happening across all price points as well as geographies?

Stephen I. Sadove

Morning, Michelle. Yeah, I think, clearly we’re seeing a slow-down in the economic environment. If you were to look, our November-December growth was in the 10% range, January was just a 4%, February was in a 3% range. I think I’ve categorized it as it was across the board categories as well as geographies. You still see outsized performance in New York relative to the remainder of the chain, but I think that you’re seeing a macro-economic slowdown that’s relatively widespread.

Michelle Clark – Morgan Stanley

Okay. The second question is, you still expect to achieve an operating margin rate of 8% longer term. Is it still feasible that we see that happen in 2009?

Stephen I. Sadove

You know, I don’t really want to get to specifics that it’s going to happen on this date. There’s so much uncertain in the environment that I think it can be achieved over time. I’d rather not tell you that it’s going to happen, it’s not happening in ’08 and it’s going to jump to that level in ’09. I think that the fundamentals are there. We’ve got the strategies in place. We feel as good today as we did before relative to the direction that the company is going, but there’s so much uncertainty that I just wouldn’t want to tell you that it’s going to happen this specific date.

Michelle Clark – Morgan Stanley

Okay. And then last question, for fiscal year ’08 your leverage point for both SG&A expense as well as buying and occupancy costs.

Stephen I. Sadove

Let me turn to Kevin to answer that.

Kevin Wills

Good morning, Michelle. We would expect to be able to get SG&A leverage to the mid-single-digit comp range.

Michelle Clark – Morgan Stanley

And buying and occupancy costs?

Kevin Wills

Probably at the mid-single-digit comp range as well.

Michelle Clark – Morgan Stanley

Okay. Great. Thanks, guys.

Operator

And your next question is from the line of Dana Cohen with Banc of America.

Dana Cohen – Banc of America Securities

Okay, guys. Following up on the last question in terms of what you’ve seen here in the last month or two, is it really just things that were outperforming slowing down or is it everything moving down sort of together? And sort of tied to that, is it traffic or AUR that you’re seeing in terms of the last two months versus, say, prior months.

Stephen I. Sadove

I think that clearly you’re seeing slow down across the board. I think that the good, if you were to look at the, you know, we had talked the last time we were on the line we were talking about the asperational customer taking more of a hit than the high-end customer. I still believe that you’re seeing that. The good zone of business has been weaker for longer than the higher end of business. If you were to look at the profile of our customer base, it’s more of that lower end of our loyalty customer, for example, where we’re seeing more weakness than at the higher end. But I would say that you’re probably seeing across all zones of business a slowing trend. But more pronounced at the lower end of the business.

Dana Cohen – Banc of America Securities

Okay. So when you look at it then it’s both traffic and AUR in terms of –

Stephen I. Sadove

Well, if we were to look at the performance, for example, over the fourth quarter, we’ve got transactions were relatively flat and you saw tickets up substantially. So I think you are seeing that. In terms of as we’re looking at it right now, you’re probably, you know, I’m not going to give you specifics for January and February, but I think you’re seeing pressure on traffic overall across the industry.

Dana Cohen – Banc of America Securities

Okay. Perfect. Thanks so much.

Operator

And your next question comes from the line of Emily Shanks with Lehman Brothers.

Emily Shanks – Lehman Brothers

Hi. Good morning. Thank you for taking the question. I had just first a housekeeping one. As we look at the two gains that are going through as they relate to the insurance settlement proceeds and the closing of the office store and the sale of the unused support facility, where are those flowing through in the P&L? Is that above EBIDT or is it in the other income line?

Stephen I. Sadove

It’s in other income.

Emily Shanks – Lehman Brothers

Great. And then my second question is, around, I’m sure you’ve seen a lot of good news coming out across the rags around Bangor and potential interest in Saks. Can you comment at all if you’ve had any further discussions with them or what the status of that is?

Stephen I. Sadove

I really can’t make any comment on any kind of M&A activity. I think that Bangor’s made some comments on its own in terms of their interest levels, but I really can’t make any specific comments on M&A.

Emily Shanks – Lehman Brothers

Okay. Understood. And then if I could, just a final comment, or question, rather. Could you speak at all to what you’re seeing in terms of shrink and trends and that?

Stephen I. Sadove

Shrink. I’ll make a comment and then turn it to Kevin. I think we have a very, very good record relative to shrink. I think one of the elements and the nature of a high-end luxury business, because we have a lot of, whether it’s loss prevention support and a large number of associates on the floor, our shrink level tends to be relatively low compared to a lot of other businesses that you might be looking at. But our trends have been favourable in that area, actually. Kevin, anything you want to add?

Kevin Wills

I would echo Steve’s comments. I think we have a very robust and active loss prevention program. When trends develop we generally try to take action. This past year there were some break-ins in certain regions of the country that were affecting us as mothers. We responded by making some additional investments there and to Steve’s point we feel very comfortable with our historical trend in shrink percentages.

Emily Shanks – Lehman Brothers

Okay. So no specific up-ticks particularly in the fourth quarter or through February?

Kevin Wills

No.

Emily Shanks – Lehman Brothers

Great. Thank you very much.

Operator

Your next question is from the line of Deborah Weinswig with Citi.

Deborah Weinswig – Citigroup

Good morning. Can you talk about what you’re seeing in the stores where you do have the clienteling system and any kind of differences for the stores where you don’t?

Stephen I. Sadove

Deb, could you repeat that? It’s hard to hear.

Deborah Weinswig – Citigroup

Yes. In the stores where you, I think you stated 23 stores have the clienteling system. Can you talk about any kind of difference in trends there versus the stores that don’t have the clienteling system?

Stephen I. Sadove

You know, there’s so many ins and outs in terms of the performance in each of the stores. Clearly, for example, New York has the clienteling system and is seeing exceptionally strong performance, and we’re seeing very strong performance in a number of the other stores too. So I’m not so sure I would be able to say, hey, the ones that have versus the ones that don’t. The way we’ve been looking at it has been through the client, through what the associates have been doing in the form of clienteling, how they’ve been using it, how they’ve been building their customer base, how they’ve been doing E-mail capture, and all the indicators have been, there’s so many success stories I could talk to in terms of cross sell and building of relationships so that we feel very, very good about the direction that the thing is heading.

Deborah Weinswig – Citigroup

Okay. And I don’t know if you guys can disclose the size of the Saks Direct business.

Stephen I. Sadove

We don’t talk specifically to the numbers in terms of the sales. What we have said is it’s our second largest store. But it’s obviously nowhere close to where the New York store is. But we have disclosed that it’s seeing very robust growth in the quarter, it was in the 40% range.

Deborah Weinswig – Citigroup

And what do you see with regards to customers who shop both on line and in store?

Stephen I. Sadove

What you see is the customers that shop on both channels have a disproportionately high consumption pattern, probably in the 30% above the norm. They use it for both in terms of, they obviously buy, they may return it in the store, they look at it to scout out. We’re getting a lot more than just purchases. We’re getting, for example, when we ran videos of the runway shows we’re getting an enormous uptake on that. And then when we’re running on line video about brands we’re seeing uptake on the brands, too. So there’s a lot of interaction between store and direct.

Deborah Weinswig – Citigroup

And a last question. Since you are seeing more business being done around events is there any kind of thought process in terms of changing the promotional calendar, special events calendar as it relates to 2008?

Stephen I. Sadove

That’s an important question and it’s one that we’re obviously looking at every week in terms of how do we monitor it. We clearly would love to move given the people have been gravitating towards the more promotional days towards backing away from it. I think what we have to counter or balance that with is the facts of the economic environment that we’re in and also what our competitors are doing. We have some competitors out there that are very active in the promotional environment. So we have to be very careful with that. But we’re looking at every event in terms of how we can manage it.

I think that local marketing is having an important effect on this, so it’s not just national programs. Actually, let me have Ron just talk a little bit about what they’re doing in the area of local marketing special events just to highlight and give you a sense of how that affects the promotional.

Ronald L. Frasch

You know, I think as we’ve noted over the past few calls that we’re moving more of our marketing investment into local markets. We’re trying to ensure that our stores have an opportunity to connect with their customers and their markets. We’ve moved a lot of it into special events of individual stores. It could be trunk shoes, it could be luncheons with customers, and we’re seeing very, very positive results. And we’re very encouraged by it and will continue to move more of our investment into that type of a strategy.

Deborah Weinswig – Citigroup

Okay. That was very helpful. Thanks so much. Best of luck in 2008.

Operator

And your next question is from the line of Christine Augustine with Bear Stearns.

Christine Augustine – Bear Stearns

Morning. I have a few questions. The first is, with the transactions being up substantially in the fourth quarter, was it driven by units or was it more of a balance between average retailing units?

Stephen I. Sadove

I think what you’re seeing was more flat transactions. It was not so much the increase in transactions. The transactions were relatively fully flat. What you found was the dollar per transaction was up substantially.

Christine Augustine – Bear Stearns

Right. So what drove –

Stephen I. Sadove

Oh, part of it’s being driven by AUR, obviously.

Christine Augustine – Bear Stearns

Okay. So it’s a mix between units and AUR.

Stephen I. Sadove

Exactly.

Christine Augustine – Bear Stearns

Okay. Thank you. Also, I actually thought your 3.4% in February, considering your comparison, was not so bad. So I just wanted to double check and see, did you switch anything around from the promotional calendar?

Stephen I. Sadove

No. Essentially it was, I mean, there was a little bit of in and out, but essentially it was the same. So we were coming off of 16% or so on a comparable basis to that on a year-ago basis.

Christine Augustine – Bear Stearns

Okay. How many new Off 5th stores are in your plan for ’08 based on what you’ve guided today?

Stephen I. Sadove

Well, we have one replacement store that is opening in April in Orlando and that’s a good one to look at because it really is the prototype in terms of the new look of Off 5th. There’ll probably be three to four in that range additional office stores that will open during the course of the year.

Christine Augustine – Bear Stearns

Okay. And then my final question is around credit and realizing that you do not own your credit card, but have you seen any change in delinquencies and write-offs, increases there, deterioration of the portfolio? Maybe 4Q versus the trend you’ve seen for the first three quarters of the year? However you want to talk about it.

Stephen I. Sadove

I’ll turn it over to Kevin in a second. I’ll reinforce that we don’t own the, HSBC owns the portfolio. We have not seen major changes or shifts in the credit portfolio. We have one of the best in the industry in terms of the quality of the portfolio and within normal downs have not seen any material changes. Kevin, do you want to just comment?

Kevin Wills

I think Steve’s right. Good morning, Christine. (Inaudible) the portfolio so I cannot give specifics, but overall we believe, and working with HSBC that our portfolio continues to perform very well for them. We believe that the credit (inaudible) of this portfolio remains very strong. As it relates to recent trends I would suggest that they appear to be within the range of historical norms.

Christine Augustine – Bear Stearns

Okay. Can you share with us any information on approvals? Are you seeing any reductions in approval rates?

Kevin Wills

I can’t get into specifics, Christine, because HSBC owns the portfolio. At this point in time we are not seeing what I would consider any large aberrations relative to approval rates. HSBC certainly does the credit scoring and sets the metrics, so we work with them through that process and we are not aware of any significant or material changes that they’re contemplating inside of our portfolio.

Stephen I. Sadove

Yeah, I’d add that we have a very good working relationship with HSBC and I know there’s been some press in terms of with some our competitors, relatives, and relationships and legal issues with HSBC. That’s not the situation that we’re sitting on and we feel very good about a collaborative work that we do with them. We feel very good relative to whether it’s scoring or the availability of credit for our customers.

Christine Augustine – Bear Stearns

Great. Thanks for taking my questions.

Operator

Your next question comes from the line of Michelle Tan with UBS.

Michelle Tan – UBS

Thanks. I actually had a follow up to Christine’s question to the credit portfolio. HSBC owns it, but are you still getting some income from them on the portfolio and how does that income relate to the performance of the portfolio? Does it flex with things like that?

Kevin Wills

Good morning, Michelle. This is Kevin. We still receive a revenue sharing agreement with HSBC as it relates to basically their yield and income on the portfolio. We also continue to manage our call centre ourselves, so when our customers call they’re speaking to Saks associates and we receive a reimbursement from HSBC on that. But we do have some economic sharing in the arrangement.

Michelle Tan – UBS

Any sense of how significant it is relative to your operating income?

Kevin Wills

We disclosed that in the footnotes of the 10K.

Michelle Tan – UBS

Okay.

Kevin Wills

I’ll direct you to last year’s. This year’s obviously will be less than last year because we maintained the (inaudible) for a little over a month in ’06 as well as the Parisian portfolio for the majority of 2006. So you will see a decrease this year, but consequently we see great success with this as well.

Michelle Tan – UBS

Okay. Great. And then just to clarify, as far as the performance of the portfolio, did you say that there’s a tie in just to the revenue, the net interest income or is it also tied in to bad debt as well?

Kevin Wills

It’s tied into all components.

Michelle Tan – UBS

Great. Thank you very much for the help.

Operator

And your next question comes from the line of Dana Telsey with Tesley Advisors.

Dana Telsey – Telsey Advisory Group

Good morning, everyone. Can you tough a little bit more on the gross margin in terms of as you see the opportunities for the timing and magnitude of improvements from private label to the Kurt Salmon initiatives, how you see that playing out? And will the new reinvention of Bridge, does that include Private Label and is that an opportunity in that regard, too? Thank you.

Stephen I. Sadove

Dana, I think that longer term there are a lot of opportunities. I feel really good about the work that Ron and the team have been doing with KSA in all of those areas. Let me ask Ron to comment on each of them because there are a number of components.

Ronald L. Frasch

All right. Let me take each piece. Let me start first with Private Label. We engaged in about three seasons ago and it’s still in the mid- to low-single-digits part of our business. We are reintroducing Real Clothes, which is more of a casual lifestyle approach to serving that Bridge customer. So that we’ll introduce probably in the fourth quarter is our target date right now. But over the long term we are a branded store and we don’t think that the Private Label component will reach a meaningful penetration.

In terms of the gross margins, we’ve been working now with KSA for about a year and a half and are very encouraged by the early results of our project with our new planning and buying organizational structure. We initiated the program in men’s wear that made their spring buys other than in the program with the new organizational model and it’s really early in the game to say whether we’re going to get the level that we got in season one. However, men’s 60-day trend is among our best performing businesses, so we think the two components are linked. As well, we believe our inventories in the stores at men’s work a lot better.

We’re beginning now with accessories, as we’ve noted, that will effectively (inaudible) and we are in the training phase with all of our ready to wear team, which is 40% of our fiscals.

Stephen I. Sadove

Yeah, I think, Dana, in terms of the private brand, over time we do believe that we can, obviously it’s not going to be a huge portion of the company. We’re talking in the mid-single-digit type of numbers, but it can be accretive to gross margin. I may ask Ron to just elaborate a little bit more on some of the reinvention of Bridge because that’s been, you know, in terms of some of the changes that are going on, and I think that there’s a lot of opportunity to transform that whole area.

Ronald L. Frasch

Yeah, it’s interesting. Over the past couple of years we’ve been working to try to re-invent the area, but we’ve been struggling against some of the existing vendor structure challenges. Clearly the concern with the divestiture of brands and Liz, with (inaudible) have put some headwinds on our initiative. So we have our team fully engaged in both working with existing brands and working with programs with the new programs that we believe can make the area a much more kinder area to shop. We think it’s lost some of its fashion appeal. We’re going to be doing some things in New York this year and try to create a more exciting visual environment and stronger brand statements and we hope that will be the beginnings of getting this business back to where it needs to be.

Quite frankly, just to add in, it’s good zone that’s been the tough zone. This is where we’re seeing the most challenging business for the past six months and where we have been reacting to both trying to control the inventories as well as putting up very realistic sales expectations so that we can come up with a new model.

Dana Telsey – Telsey Advisory Group

Thank you.

Operator

And your next question is from the line of Carla Casella with J. P. Morgan.

Carla Casella – J. P. Morgan

Hi. One financial question on the debt structure. Did you repurchase any of the elite for 2010 or 2008? I note that you have some stub pieces left outstanding on.

Kevin Wills

This is Kevin. We did not repurchase anything in the fourth quarter. We purchased about $106 million of some of our senior debt in the first quarter of ’07, but none in the fourth quarter.

Carla Casella – J. P. Morgan

Okay. And then rent expense came down in the quarter from last quarter. I’m wondering if there’s some explanation for that. Should we look at a lower run rate going forward?

Kevin Wills

Carla, this is Kevin again. Really two factors. We were down about $5 million year over year. For the last couple of quarters we’ve seen about a $2.5 million reduction in equipment rentals and certain of their information technology areas as we were able to downsize some of those areas close to TSA process and we also had a favourability at the quarter end adjustment in some of our common area maintenance and a couple of our property rent accounts. Those are the two drivers this quarter with the change.

Carla Casella – J. P. Morgan

Okay. And your same-store sales has outpaced your peers and I’m wondering if you believe you’re taking share or is this driven purely by your merchandising efforts or is some of it related to were you under-inventoried a year ago?

Stephen I. Sadove

Well, I think it’s a complex answer. I think we feel very good about the same-store sales performance. We were under-inventoried and that was why we made the conscious decision to put inventories back into the stores a little more than a year ago, a year and a half ago now. And we feel that was the right decision and has paid off. We’re now getting our inventories in line with sales growth and we think that’s the right thing to be doing.

In terms of gaining share, when the numbers are the numbers in terms of our growth versus others, the problem in looking at it that way is that the consumer shops much more broadly than just a couple of stores. And they’re interacting with all kinds of, their mixing and matching and shopping in different formats. So I don’t necessarily think that it’s just a win or lose share versus a given store. We feel very, very gratified by the consumer response to the, whether it’s the 9-box or the merchandising initiatives or the inventory approach that we’ve taken, and we feel good about the comp trends that we’ve had.

Carla Casella – J. P. Morgan

Okay. Great. And then you gave some guidance for the comps for the year, but I might have missed it. Did you comment on March specifically? How does your promotional cadence look for March relative to last year? What’s the impact that you expect with the earlier Easter?

Stephen I. Sadove

Yeah, we have not commented on March specifically. We commented on the first half of the year and the year in aggregate.

Carla Casella – J. P. Morgan

Okay. I think that’s all I have. Thank you.

Operator

And your next question from the line of Bob Dirbul with Lehman Brothers.

Matthew McClintock – Lehman Brothers

This is actually Matt McClintock filling in for Bob. Good morning. Just a quick follow up on gross margin. Are you looking for any significant positive improvement in 2008 implicit in your guidance from some of the margin initiatives that you’ve outlined? Some of the merchandise initiatives?

Kevin Wills

Good morning, Matt. I think that, yes, some of the initiatives that we’ve put in place during 2007 and we’ve talked about a number of times on these calls we would expect to start seeing some benefits of those as we move through 2008. Having said that, as Steve has commented, we certainly see a much more challenging macro-economic factor and promotional environment probably on an immediate term basis. So some of the improvements that we would expect to see from some of our initiatives arguably will get masked by the overall more challenging environment.

Matthew McClintock – Lehman Brothers

All right. Perfect. Thanks, guys.

Operator

And your next question comes from the line of Todd Slater with Lazard Capital.

Todd Slater – Lazard Capital Markets

Thanks very much. Just quickly, I was wondering if you could talk further about the trends in the Off 5th segment relative to your full-price stores. Maybe talk a little bit about traffic relative to the rest of the chain. And maybe also talking about your merchandising initiatives, what’s the product availability look like out there? What’s the strategy to, I think, go more direct versus transfers from the stores? Although with your inventory perhaps being a little higher than you like perhaps you’ll have more of the transfers. So maybe you could just talk a little bit more about that. Thanks.

Stephen I. Sadove

Sure, Todd. Good morning. Yeah, I feel very excited about what’s going on at Off 5th. The strategic shift of it moving from being a sell-off channel to a distribution channel is clearly having an impact and I feel very good that it’s working. We don’t break out the comp sales performance for Off 5th specifically. I would tell you that it’s very healthy and we feel good about the trends and the business. We feel especially good about the trends in our direct purchases, which is the product that is being cut for us directly and made for Off 5th by the vendors. We’re seeing very good response to that. We’ve also been performing well with the private brand products that we’ve been making for Off 5th. So it leads you to, because we’re no longer as dependent upon the sell-off product, although sell-off is clearly an important piece of that business, it allows us to think more about the growth opportunities for Off 5th as evidenced by what we talked about the renovated, the replacement stores as well as the new stores for Off 5th that we’re going to be launching.

In terms of the, we’ve been also improving the marketing. We’ve been adding to our E-mail capture. We’ve been seeing good, positive growth trends in traffic on the store. The marketing and branding has improved. In fact, you know, it used to be that you called it Off 5th and apologize. You really didn’t even mention Saks 5th and now it’s Saks 5th Avenue Off 5th. Even the label of it is enhanced. So we feel very optimistic and excited about the growth for that piece of business.

Todd Slater – Lazard Capital Markets

Okay. And Steve, maybe just as a follow up, if you can talk about what are the margin implications for increasing the mix from the direct side? Is it similar and also is there much more room for that product direct from suppliers as a percent of the total?

Stephen I. Sadove

I mean, the answer, in terms of the margin, we don’t break out the gross margin, but the margin of that business. It wouldn’t be a material difference so it’s not going to, I don’t think we’ll be moving the needle that much one way or the other. In terms of the product coming from the vendors, we see very real, substantial opportunity over time and that’s going to translate into the ability to open up more stores. Over time we’re seeing more and more vendors participating and wanting to play with us.

Todd Slater – Lazard Capital Markets

Great. Thanks a lot.

Operator

And your next question is from the line of Michael Exstein with Credit Suisse.

Michael Exstein – Credit Suisse

Good morning, everyone. Following up on Todd’s questions about Off 5th. How important is it to grow Off 5th in terms of your overall goal of an 8% operating margin long term?

Stephen I. Sadove

I think having reinforced that Off 5th I think has very, very good opportunity for growth, I don’t think that that’s the primary driver of getting ourselves to the 8% operating margin. I think that the 8% is going to be much more driven by outsized comp performance longer term with the full line and the direct business Off 5th contributing to growth, of course, and then the gross margin improvements that we’re going to be able to see a lot of it through some of the initiatives. The selling culture initiatives as well as the planning and allocation initiatives. And then holding the line on cost while we grow the business.

Michael Exstein – Credit Suisse

Great. Thanks a lot, Steve.

Operator

And your next question comes from the line of Carla Casella with J. P. Morgan.

Carla Casella – J. P. Morgan

I’m sorry. I forgot to ask the question. Did you say how much of your sales are generated from the New York store?

Stephen I. Sadove

It’s somewhere, we’ve always said it’s in the 20% type of range, give or take a couple percentage points. It varies a little bit. But it’s in that kind of range.

Carla Casella – J. P. Morgan

Okay. Great. Thanks.

Operator

(Operator Instructions). And we have another question from the line of Christine Augustine with Bear Stearns.

Christine Augustine – Bear Stearns

Thanks. You know, I wanted to ask Ron or Steve, I guess, is there anything positive to say about spring or kind of identification of early trends? Are there things that the merchants are excited about?

Ronald L. Frasch

Christine, I’ll take that one. It’s been a very interesting season, so far, if I may say. We have found a product that is exciting and unique and regardless of price is performing. We’ve got some really surprising items selling at very high price points. We’ve also seen kind of an inconsistent performance of fashion versus continue to hit across brands. We’re trying to dig into this a little further, trying to better understand. We have a lot of colour on the floor and we’re actually awaiting for colour to sell. It’s across the board. But other than that we haven’t really found a great trend yet that we’re digging into. So we’ve, in contemporary we’ve opened up trend shops in all of our stores that are highlighting trends each month. But it’s a little more challenging this season.

The big component that we have is coming out in a couple of weeks, which is Wanted, which when you see our catalogue I think you’ll see a much more exciting catalogue presentation of trend items.

So we’re merchants, we’re enthusiastic about what we’ve got. We also know that we have to be realistic and be very targeted. So that’s about as much as I can give you at this point, Christine.

Carla Casella – J. P. Morgan

Thank you.

Operator

(Operator Instructions). And we have no further questions at this time, Sir.

Stephen I. Sadove

Thank you very much and thank you all for joining us on this earnings call. We look forward to reporting on progress of ’08. Thank you very much.

Operator

Ladies and gentlemen, this does conclude today’s conference call. You may now disconnect.

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Source: Saks Incorporated Q4 2007 Earnings Call Transcript
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