Scandal Clouds Saks Numbers

Saks Inc. reported a first quarter profit of $17.1 million on sales of $1.6 billion. However, as the company is in the midst of a growing scandal over improper vendor allowances, it said year-over-year comparisons were useless because its prior-year financial statements “should no longer be relied upon.”

Further, the retailer cautioned that because of the ongoing investigation into chargeback practices, the company said even the first quarter data it reported last week “is preliminary and remains subject to change.”

Using 2004 data the company provided earlier, which remains subject to change, Saks earnings during the opening quarter plunged 22.2 percent, to $17.1 million from $22 million on weak sales and thinning margins.

Hurt by weakness in the department store group, which offset a strong gain at Saks Fifth Avenue stores, overall sales were virtually flat, inching up just 0.6 percent, to $1.6 billion from $1.5 billion last year. The retailer said overall sales at department stores slipped 1.6 percent, to $844 million from $858 million last year. Sales at the upscale Saks Fifth Avenue business rose 3.5 percent, to $706 million from $682 million a year ago. But same-store sales climbed at an even faster pace, rising 5.9 percent.

Operating income at the company's department stores dropped 17.9 percent, to $22.9 million from $27.9 million — again, using 2004 figures which remain subject to change. Saks Fifth Avenue tumbled as well, falling 19.7 percent, to $39.2 million from $48.8 million.

Using 2004 figures which may change, average gross margin contracted under markdown pressure, thinning 30 basis points, or three-tenths of a percentage point, to 38.8 percent from 39.1 percent a year ago. Putting earnings under even greater pressure, costs climbed on weak sales, 60 basis points, or six-tenths of a percentage point, to 25.7 percent of sales from 25.1 percent the during the year-before period.

Taking a further bite out of profits, the company said it spent $2 million during the quarter on the ongoing investigation into improper collection of vendor allowances. Acting as a partial offset was a $1.4 million gain stemming from the disposition of closed stores.

Saks Inc.

Qtr. 4/30 (x000) 2005 2004a % change
a. Because of an ongoing investigation into Saks' improper collection of vendor markdown allowances between 1999 and the third quarter of 2004, as well as a review of its accounting practices related to the timing and the recognition of certain vendor allowances, the company did not report 2004 results, saying that past financial statements for the period under review “should no longer be relied upon.” Further, because of the continuing investigation, the retailer cautioned that all 2005 first quarter data “is preliminary and remains subject to change.”
b. First quarter results include miscellaneous operating expenses of $152.1 million; $3.2 million in impairments and dispositions; miscellaneous income of $9,000; and $2 million of expenses stemming from the ongoing investigation of vendor allowances.
Sales $1,550,059
Oper. Income (EBIT) 202,014
Net income 17,140b
Per share (diluted) 0.12
Average gross margin 38.8%
SG&A expenses 25.7%

First Quarter Segment Results

Sales 2005 2004 % change
a. Because of an ongoing investigation into improper vendor markdown allowances, the company did not report prior-year data for operating income, saying earlier financial statements “should no longer be relied upon.”
Saks Department Stores 844,000 858,000 1.6
Saks Fifth Avenue 706,000 682,000 3.5
Operating Incomea 2005 2004 % change
Saks Department Stores 22,900
Saks Fifth Avenue 39,200

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