Luxury department stores did well in December with both Saks (NYSE:SKS) and Nordstrom (NYSE:JWN) beating analyst same-store sales estimates. Unity Marketing's Pam Danziger suggests that, "Luxury consumers are the heavy lifters in the economy, so it makes sense that businesses like Nordstrom and Saks will benefit from their excess spending." While true to a point, Saks has more going for it then just wild spending by its customers. Savvy investors will see this and get on board while the price is right. (For related reading, see Analyzing Retail Stocks.)

Investopedia Markets: Explore the best one-stop source for financial news, quotes and insights.

Same-Store Sales

In the key holiday period of November and December, Saks delivered an increase of 7.1% on top of a 9.4% increase in the holiday season in 2010. These are strong numbers. In fact, if you combine this year's holiday numbers with last year's, Saks averaged 8.3% compared to 7.4% for Nordstrom. Its above-average performance has been carrying on for some time. The last negative month for same-store sales growth is November, 2009. That's 25 consecutive monthly increases year-over-year, through the end of 2011. In terms of same-store sales growth, 2011 was its best year of sales increases since 2007. Despite this picture of business health, its stock is down around 22% in the past 52 weeks through Jan. 13. Thankfully, not everyone's ignoring the disconnect between how the company is performing and its share price.

Mason Hawkins

The founder of Longleaf Partners is one of the biggest value investors anywhere. His firm's been managing money since 1975, with the singular goal of buying well-managed companies when their stock price is cheap and selling when it's dear. In the third quarter, Longleaf's Small Cap Fund acquired roughly 13.2 million shares of the luxury retailer. In its third quarter report it said this about Saks: "The company has a unique mix of assets including the owned New York City flagship store which represents approximately 20% of sales and is a square block of premium real estate." In an interview Jan. 10, CEO Stephen Sadove suggested it's actually 22%. In the trailing twelve months (TTM) ended Jan. 29, 2011, its revenues were about $2.78 billion. This means the Fifth Avenue store's contribution was approximately $611 million or around $927 a square foot.

It's not quite Lululemon (Nasdaq:LULU) territory at $1,880 a square foot, but considering the size of the store, it's more than fine. Obviously impressed by Saks business affairs, Longleaf picked up additional shares in the final quarter of the year and now owns 11.1% of Saks, making it the top mutual fund holder, according to Yahoo! Finance. Considering the Longleaf Small Cap Fund's annual turnover is just 17%, expect Hawkins to hang on to the shares for some time. (To learn more about this investing strategy, check out Value Investing: Introduction.)

Third Quarter

Let's look at a couple of things from its third quarter report in 2011, compared to its third quarter in 2007. Although revenues were 13% lower at about $692 million in 2011, from just over $796 million in 2007, Saks closing stock price in 2007 was $20.76, around 129% higher than its Jan. 13 closing price of $9.06. On a price-to-sales ratio, if you annualize the third quarter in both 2007 and 2011, you'll see that its ratio today is 35% lower at 0.65. Put another way, a Saks investor back in 2007 was willing to pay more for the same dollar in revenue. It appears to me that either investors were overpaying back then, or underpaying today. While I don't pretend to be able to read minds, how much do you want to bet Longleaf's exit point is somewhere around the $20 mark? Any takers?

The other point I'd like to address is operating cash flow (OCF). For the first nine months of 2007, Saks operating cash flow was negative $35.3 million. Flash forward four years and it was $119.0 million. Saks has been focusing on operating profitable stores and closing the rest, therefore, its capital expenditures today are about half what they were in 2007, the net result being higher free cash flow (FCF). In fiscal 2007, Saks finished the year with operating cash flow of $71.5 million, capital expenditures of $141 million and negative free cash flow of $70 million. No matter its market cap at the time, its cash return (free cash flow plus interest expense divided into enterprise value) would be negative. In 2011, it's currently around 9.7% and likely to go higher. Financially, Saks appears stronger than it's ever been. (For addtional reading, see how to Analyze Cash Flow The Easy Way.)

The Bottom Line

I can remember going to the Fashion Valley Mall with my family during a vacation in San Diego in 2009. I couldn't believe how many department stores there were: JC Penney (NYSE:JCP), Macy's (NYSE:M), Nordstrom, Bloomingdales and Neiman Marcus. It's an incredible mall, but that was overkill. In July 2010, Saks closed its store there to focus on better performing locations, only to be replaced by Forever 21. It was, in hindsight, a great move. Saks should only be where it's not an after thought. Management's hit upon a great plan and if they keep working it, the stock price won't be cheap much longer. (For related reading, see The 4 R's Of Investing In Retail.)

Use the Investopedia Stock Simulator to trade the stocks mentioned in this stock analysis, risk free!

At the time of writing, Will Ashworth did not own shares in any of the companies mentioned in this article.
Related Articles
  1. Stock Analysis

    Net Neutrality: Pros and Cons

    The fight over net neutrality has become an amazing spectacle. But at its core, it's yet another skirmish in cable television's war to remain relevant.
  2. Personal Finance

    A Day in the Life of an Equity Research Analyst

    What does an equity research analyst do on an everyday basis?
  3. Mutual Funds & ETFs

    ETF Analysis: PowerShares S&P 500 Downside Hedged

    Find out about the PowerShares S&P 500 Downside Hedged ETF, and learn detailed information about characteristics, suitability and recommendations of it.
  4. Mutual Funds & ETFs

    ETF Analysis: ProShares Large Cap Core Plus

    Learn information about the ProShares Large Cap Core Plus ETF, and explore detailed analysis of its characteristics, suitability and recommendations.
  5. Mutual Funds & ETFs

    ETF Analysis: iShares Core Growth Allocation

    Find out about the iShares Core Growth Allocation Fund, and learn detailed information about its characteristics, suitability and recommendations.
  6. Mutual Funds & ETFs

    ETF Analysis: iShares MSCI USA Minimum Volatility

    Learn about the iShares MSCI USA Minimum Volatility exchange-traded fund, which invests in low-volatility equities traded on the U.S. stock market.
  7. Stock Analysis

    Should You Follow Millionaires into This Sector?

    Millionaire investors—and those who follow them—should take another look at the current economic situation before making any more investment decisions.
  8. Professionals

    What to do During a Market Correction

    The market has corrected...now what? Here's what you should consider rather than panicking.
  9. Mutual Funds & ETFs

    ETF Analysis: Vanguard Mid-Cap Value

    Take an in-depth look at the Vanguard Mid-Cap Value ETF, one of the largest and most popular mid-cap funds in the U.S. equity space.
  10. Mutual Funds & ETFs

    ETF Analysis: Schwab US Broad Market

    Take an in-depth look at the Schwab U.S. Broad Market ETF, an incredibly low-cost fund based on a wide selection of the U.S. equity market.
RELATED TERMS
  1. Equity

    The value of an asset less the value of all liabilities on that ...
  2. Fast Fashion

    Definition of "fast fashion."
  3. Hard-To-Sell Asset

    An asset that is extremely difficult to dispose of either due ...
  4. Sucker Yield

    When an investor has essentially risked all of his capital for ...
  5. PT (Perseroan Terbatas)

    An acronym for Perseroan Terbatas, which is Limited Liability ...
  6. Ltd. (Limited)

    An abbreviation of "limited," Ltd. is a suffix that ...
RELATED FAQS
  1. What is the difference between called-up share capital and paid-up share capital?

    The difference between called-up share capital and paid-up share capital is investors have already paid in full for paid-up ... Read Full Answer >>
  2. Why would a corporation issue convertible bonds?

    A convertible bond represents a hybrid security that has bond and equity features; this type of bond allows the conversion ... Read Full Answer >>
  3. How does additional paid in capital affect retained earnings?

    Both additional paid-in capital and retained earnings are entries under the shareholders' equity section of a company's balance ... Read Full Answer >>
  4. What types of capital are not considered share capital?

    The money a business uses to fund operations or growth is called capital, and there are a number of capital sources available. ... Read Full Answer >>
  5. What is the difference between issued share capital and subscribed share capital?

    The difference between subscribed share capital and issued share capital is the former relates to the amount of stock for ... Read Full Answer >>
  6. What happens to the shares of stock purchased in a tender offer?

    The shares of stock purchased in a tender offer become the property of the purchaser. From that point forward, the purchaser, ... Read Full Answer >>

You May Also Like

COMPANIES IN THIS ARTICLE
Trading Center
×

You are using adblocking software

Want access to all of Investopedia? Add us to your “whitelist”
so you'll never miss a feature!