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Moody's smiles on Saks Inc.

Heath E. Combs, Don Hogsett -- Home Textiles Today, January 26, 2004

Moody's Investors Service, one of the three big corporate credit-rating agencies, has boosted its ratings on department store retailer Saks Inc., citing stabilization of market share and improving margins.

Moody's lifted its ratings on about $1.2 billion in Saks debt securities to Ba3 from a prior rating of B1.

Further supporting the stronger rating, Moody's cited reduction in leverage from "sustained improvements in store operating profitability" and debt reduction from cash flow. Moody's also applauded the sale of the company's credit-card-receivables portfolio and its ability to fund its growth and working capital needs from internally generated cash flow and cash balances.

The ratings agency said it liked fixed charge coverage levels, which are strong for the rating category, and "highly satisfactory liquidity; modest upcoming debt maturities; and the company's unencumbered real estate."

On the downside, Moody's pointed to "uneven top line and operating performance relative to its peers," and competition from alternative-retailing formats popular with consumers who are shopping for moderately priced goods.

Also capping out the ratings, said Moody's, was "relatively low return on assets, which is caused in part by the value of owned real estate and thin margins relative to other department store chains." Moody's noted "expectation that a large portion of cash balances will be used to return value to shareholders," most likely in the form of a cash dividend.

Constraining further ratings improvements is Moody's concern that the Saks Fifth Avenue franchise is concentrated "in a small amount of urban and tourist attractions," resulting in "high sensitivity to slowdowns in tourism and to downturns in certain local economies."

The ratings outlook for Saks is stable, said Moody's, "reflecting the expectation that Saks will maintain improvements to operating performance and continue to finance its business strategies through internally generated funds." Moody's said it expects that "further improvements to operating margins may be constrained in the near term by initiatives to grow the top line and to grow or maintain market share."

Holding out the possibility of another upgrade, Moody's said, "The ratings could respond positively if Saks can successfully grow the top line without negatively impacting operating margins and can continue to reduce leverage."

On the other hand, Moody's cautioned, the ratings could be clipped "if the company begins to increase leverage to fund growth strategies or shareholder transactions; or if it is unable to maintain operating improvements or top line relative to other department stores."

An upgrade such as Saks received is of more than cosmetic value since the amount of interest a company is charged on its debt is usually tied to its credit rating, and an upgrade can potentially result in a savings of millions of dollars in interest expense.

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