Saks refutes Moody's downgrade

Don Hogsett, Staff Staff, January 28, 2002

Citing sluggish same-store sales and the persistent weakness of the department store channel, Moody's Investors Service, a major credit rating agency, has downgraded Saks Inc., prompting a sharp rebuttal from Saks management.

Moody's took down Saks to a senior implied "B1" rating from a previous "Ba2," a move affecting roughly $3.2 billion in debt.

Moody's said it based the downgrade "on the impact on debt protection measures of the company's sluggish comparable-store sales over the past two years, the success of other retail formats in growing at the expense of traditional department stores, and the weaker recent performance at Saks Fifth Avenue Enterprises, exacerbated by the attacks on the United States on Sept. 11."

The retailer's outlook is "stable," said Moody's, reflecting "the expectation that the company's operating performance will stabilize or improve over the intermediate term and Moody's belief that existing bank facilities are sufficient to fund working capital needs.

"While Saks Inc. has consistently realized projected synergies in the past, steady growth in comparable-store sales and margins has been more elusive," said Moody's. "Monthly comparable-store sales have been negative or flat since spring 2000, with few exceptions," and operating margin — operating profits measured as a percentage of sales — has fallen since 1999."

Profitability last year suffered, Moody's noted, "from markdowns to spur sales against the backdrop of a slower economy and sated consumer apparel demand. Despite promotions, comparable-store sales in both businesses were negative during the recent holiday season." Moreover, said Moody's, "a rebound in the short term is unlikely, now that customers need not spend for a major holiday."

Doug Coltharp, executive vp and cfo of Saks, commented, "We are surprised and disappointed in the downgrade initiated by Moody's and believe that the action fails to understand and reflect the operating results of our business and the overall strength of our financial position."

Coltharp took specific exception to Moody's dour view of Saks. "Sales at both of our operating segments, Saks Department Store Group and Sakes Fifth Avenue Enterprises have recovered significantly since the events of Sept. 11. Our comparable-store sales during the November and December period compared very favorably to our peer department store group."

As for earnings, Coltharp said he expects Saks to match Wall Street estimates for the fourth quarter and year. "We will begin fiscal year 2002 with our inventories lean, current and well-assorted and with a more efficient cost structure."

Moreover, Coltharp pointed out, in a difficult economy, "we generated free cash flow from operations, augmented by the proceeds from non-core asset sales, sufficient to reduce our long-term debt by approximately $500 million. This represents an approximate 30 percent reduction in debt."

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