Saks: Making Hard Choices in a Tough Economy

| About: Saks Incorporated (SKS)
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Our financial performance is increasingly being challenged by some of the most difficult economic conditions our Company has faced in its 84-year history. It is our expectation that the economic environment will remain extremely challenging through 2009, if not beyond. The sustained downturn in the economy and the decline in luxury consumer demand necessitates that we take appropriate and decisive measures to position the Company for this new operating environment.

- Steve Sadove, Chairman and CEO, Saks Inc.

On Wednesday morning, Saks (NYSE:SKS) reported a really tough fourth quarter that ended Jan 31, 2009 (SKS Earnings Release). Same store sales were down 15.3%. Continuing operations lost $83 million ($0.60 a share on a $2 stock), and gross margins dropped to 21% from 37% in last year’s fourth quarter.

However, I like what SKS is doing. The company has been ahead of the curve in understanding the new operating environment and it is re-sizing its business to match it. Last month, the company announced a 9% (1100 person) reduction in its workforce, eliminated merit based wage increases for the entire workforce for 2009 and suspended the company’s 401K matching for 2009. The company also announced plans to cut Selling, General and Administrative expenses by $50-$60 million for the year (SGA expenses were $771 million in 2008) and capital expenditures by 50% to $60 million. These are necessary actions to cut costs to align the business with the new environment.

The company doesn’t have any debt due until December 2010 and it is taking the steps it needs to take in order to survive. At $2 a share, the market cap is $277 million, which is about 30% of book value. The stock at this point is essentially a bet on its survival, and management seems to be doing what is required.

As a broader economic point, this is a concrete example of how the free market naturally adjusts to economic reality. Saks is cutting employment, holding steady wages and benefits and cutting back spending. The company is right sizing its business to fit the new environment and releasing resources to other parts of the economy where the company can be more efficiently utilized.

When politicians say, “we can’t do nothing,” they ignore the fact that the individuals and companies all across the private sector are situated and motivated to adjust their own economic decisions to the emerging environment. That’s a great way - the best way really - for the economy to right itself. Big stimulus packages, bailouts and new laws are not necessarily required.

Disclosure: Top Gun has no position in Saks shares.