Saks' Sales Sad

By Greg Sushinsky | February 12, 2009 AAA

Luxury retailer Saks (NYSE:SKS) reported a dramatic decrease in comparable year-over-year January same-store sales of 23.7%. The company also said that 2009 will be an "extremely challenging year" while announcing plans for job and spending cuts. The question is whether this is merely part of the general retail downturn or if Saks' problems run deeper.

Luxury Market Hit Hard
Saks, which operates the famous Saks Fifth Avenue stores (53 of them), features an array of luxury brands of apparel, cosmetics, jewelry and other accessories for upscale shoppers. The company had sales of $141 million in January, down from $190 million last year, a 22.7% decrease adjusted to 23.7% on a same-store comparison basis. The softening of the luxury market began in the fall with the severe economic downturn, as Saks and other luxury retailers had avoided the earlier general downturn in retail. Saks' response to its sales falloff will be serious job cuts, as much as 9% of its workforce, a reduction in some compensation and pension plans and an overall reduction in capital spending by at least half for 2009. CEO Steve Sadove emphasized the difficult year ahead.

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Saks Not Alone
While Saks' business has been hit hard, others in the luxury market are feeling the pain, too. Privately held Neiman Marcus' CEO Burt Tansky decried the discounting necessary for luxury retailers. In a Reuters' piece by Martine Geller, Tansky said in strong terms, "It leads to hell." His response will also be cuts, but he plans to work hard to win back Neiman Marcus' wealthy core customers. He cited a record 31% decline in December sales for his stores.

Although not strictly considered luxury retailers, cosmetics makers Elizabeth Arden (Nasdaq:RDEN) and Estee Lauder (NYSE:EL) revised projected profits for 2009 downward 35-75%. Both have been hurt by declining traffic and sales in department stores that carry their products. Estee is known for its Clinique brand and Arden for Prevage anti-aging creams and other cosmetics, yet their strong brands were not able to fend off the slump of the weakened consumer, and the cosmetics industry as a whole plays a large role in department stores and luxury chains.

More High-End Anxiety
While overall retail sales in January were down, Saks had the largest decline of any large retailer. Others such as Nordstrom (NYSE:JWN), a retailer often compared to Saks with a somewhat similar product mix and sought-after clientele, was down 11.4% on same-store sales. Retailers such as Polo Ralph Lauren (NYSE:RL) spoke of initiatives to position themselves better when the economy recovers – not the usual retail talk. Even the high-end apparel group for the young, American Eagle Outfitters (NYSE:AEO), joined the chorus of singing the blues as its sales tanked badly.

Revival And A Slim Chance
Since so many other retailers are experiencing pain, both luxury and mid-scale, along with some discounters, why worry about Saks' fortunes? The stock price has plunged from $18 a share to just under $3 in the last year. Despite the relative health of its sales through the early part of the recession, its annual earnings per share haven't been great in the last five years, fluctuating in the 35 cents per share area, or $45 million, on revenues that ranged from $2.7 billion to $3.2 billion. This doesn't display the kind of operational savvy or strength that a Nordstrom or some of the other luxury names show heading through and, hopefully, one day out of the recession. Estimates for this year's Saks earnings and those in 2010 remain highly negative. With Saks' weak performance and relatively small size - it has a market cap just under $400 million - there has been takeover talk. (Learn how to predict where the next takeover will be in our related article, Trademarks Of A Takeover Target.)

Mexican billionaire investor Carlos Slim (full Spanish-language name Carlos Slim Helu) purchased 18% of the Saks shares last year to become the retailer's largest investor, fueling takeover speculation and prompting Saks' board to make provisions to head off any potential attempt. Slim has a colossal net worth reputed to be $60 billion, and he's put $250 million into the New York Times (NYSE:NYT) and $150 million into Citigroup (NYSE:C), so perhaps the takeover idea will be alive again in the near future. What form Slim's involvement might take in the luxury retailer is hard to know, but he has tended to be an investor rather than a business operator in his other significant stakes.

Bottom Line
Luxury recession or not, the storied Manhattan cultural icon Saks is under increased pressure to perform and get its sagging chain not only through these hard times even for the wealthy, but to be dressed up and ready to go when its upscale customers look to go shopping again.

For further reading on investing in stocks from this sector, be sure to check out Analyzing Retail Stocks.

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