Saks profit undercut by weak sales, costs

Don Hogsett, May 26, 2003

Shucking off one-time accounting charges that dogged the bottom line a year ago, pushing the company into a loss, Saks Inc. recorded a first-quarter profit of $14.4 million, compared with a year-ago loss of $25.4 million.

But the gain was entirely on paper, and excluding last year's non-cash accounting charge, earnings actually fell by 28.5 percent, hurt by weaker sales and margins and rising costs.

Sales at Saks slipped by 3.1 percent, to $1.38 billion from $1.43 billion last year. Weakest was the upstairs Saks Fifth Avenue nameplate, where sales declined by 4.2 percent, to $582.7 million from $608.0 million. Same-store sales slipped by 4.1 percent. Sales in main-line department stores fell off at a somewhat slower pace, declining by 2.3 percent, to $799.2 million from $818.2 million last year. Same-store sales there fell at a slower pace of 2.9 percent.

But it was harder to make money in the department store business, with its relatively low margins, and operating profits there fell by 39.4 percent, to $24.5 million. Faring better was the tony Saks Fifth Avenue division, with its higher prices and margins, where operating profits slipped at a far slower pace of 6.5 percent, to $33.0 million from $35.3 million.

Underscoring the importance of the Saks Fifth Ave. franchise with its much stronger margins, the trade-up nameplate generated 42.2 percent of company sales during the period, but a disproportionate 70.9 percent of profits.

Average gross margin held steady despite the disappointing sales, slipping by just 20 basis points, or two-tenths of a percentage point, to 37.8 percent from 38.0 percent a year ago. Operating costs were pared by 0.7 percent, to $335.1 million from $337.4 million last year, generating a cash savings of $2.3 million. But when measured as a percentage of sales, costs climbed somewhat higher, edging up by 50 basis points, or half a percentage point, to 24.2 percent from 23.7 percent last year, reflecting the downturn in sales.

Commenting on results in his division, George Jones, president of the department store group, said, "We faced a challenging operating environment characterized by weak year-over-year demand and adverse weather conditions in many of our markets, resulting in a comparable-store sales decline of 2.9 percent. The level of promotional activity was increased, which put significant pressure on the gross margin line."

Saks Inc.

Qtr. 5/3 (x000) 2003 2002 % change
Sales $1,381,860 $1,426,227 -3.1
Oper. income (EBIT) 49,275 63,229 -22.1
Net income 14,437a (25,392)a
Per share (diluted) 0.10 (0.17)
Average gross margin 37.8% 38.0%
SG&A expenses 24.2% 23.7%
a-First-quarter results include $465,000 in integration costs; a $2.3 million loss from long-lived assets, compared with a $926,000 loss in the same period a year ago; and miscellaneous income of $5.1 million, compared with $385,000 a year ago. Prior-year results include a $709,000 gain on the early retirement of debt; and a $45.6 million charge stemming from a change in accounting.
Qtr. 5/3 (x000) 2003 2002 % change
Saks Department Stores
Sales $799,151 $818,195 -2.3
Same-store sales -2.9 +1.0
Operating income 24,512 40,458 -39.4
Saks Fifth Avenue
Sales 582,709 608,032 -4.2
Same-store sales -4.1 -0.1
Operating profits 32,982 35,257 -6.5

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