Saks Inc. reported that for the fourth quarter ended Feb. 2, the company recorded net
income of $20.4 million, or $.13 per diluted share. Those results
included net after-tax charges of $8.0 million, or $.04 per share,
comprised of:
- $3.2 million of asset impairment charges,
- $1.0 million of store closing expenses,
- a $1.7 million non-cash pension settlement charge related to the payment of excess lump-sum distributions, and
- a
$2.1 million loss on debt extinguishment related to the early
retirement and conversion to equity of approximately $28.8 million (par
value) of the Companys 7.5 percent convertible debt. - Excluding these
items, the Company would have recorded net income of $28.4 million, or
$.17 per diluted share, for the fourth quarter ended February 2, 2013.
For
last years fourth quarter ended January 28, 2012, the Company recorded
net income of $37.0 million, or $.21 per diluted share. Those results
included a net after-tax gain totaling $8.0 million, or $.04 per share,
comprised of:
- $3.9 million of severance and asset impairment charges,
- $1.1 million of store closing expenses,
- a
positive retroactive adjustment (from April 15, 2011 to October 29,
2011) of $3.1 million as provided in the risk and revenue sharing
provisions of the November 2011 amendment of the Companys credit card
program agreement with HSBC, and - the reversal of approximately $9.9 million in state estimated income tax reserves deemed no longer necessary.
Excluding
this net after-tax gain, the Company would have recorded net income of
$29.0 million, or $.17 per diluted share, for the fourth quarter ended
January 28, 2012.
Comments on the Fourth Quarter
Stephen I.
Sadove, Chairman and Chief Executive Officer of the Company, noted, We
posted a 0.7 percent comparable store sales gain in the fourth quarter,
essentially in line with our expectation of relatively flat comparable
store sales. This modest gain was on top of a very solid 7.7 percent
comparable store sales increase in the fourth quarter of 2011. As
previously disclosed, our fourth quarter sales were negatively impacted
by Hurricane Sandy which caused significant disruption to our very
important Northeastern markets and to saks.com.
Several merchandise
categories showed sales strength during the fourth quarter, including
womens contemporary apparel, advanced European designer apparel, and
shoes; mens contemporary apparel, shoes, and accessories; handbags; and
fragrances. As expected, the New York City flagship store sales lagged
the Company-wide performance for the quarter, due in part to the impact
of Hurricane Sandy.
For the fourth quarter, the gross margin rate
increased 10 basis points to 37.7 percent over last years fourth
quarter rate of 37.6 percent. This performance modestly exceeded the
Companys gross margin rate expectation of flat to a 50 basis point
decline on a year-over-year basis.
As a percent of sales (excluding
certain items), SG&A expenses were 23.8 percent in the fourth
quarter this year compared to 23.7 percent in the prior year fourth
quarter. The Company experienced modest deleverage in the quarter
primarily related to incremental expenses to support its omni-channel
and Project Evolution initiatives as well as additional marketing
expenses necessary to maximize omni-channel opportunities and to drive
fourth quarter sales.
Excluding the aforementioned items, for the
fourth quarter, the Companys operating income was 5.8 percent of sales
this year compared to 6.0 percent of sales in the prior year.
Overview of Results for the Fiscal Year Ended February 2, 2013
For
the fiscal year ended February 2, 2013, the Company recorded net income
of $62.9 million, or $.41 per diluted share. Those results included net
after-tax charges of $9.5 million, or $.05 per share, comprised of:
- $5.9 million of asset impairment charges,
- $1.8 million of pre-opening costs associated with the Companys fulfillment center opened in 2012,
- $1.3 million of store closing expenses,
- $1.7 million related to the aforementioned non-cash pension settlement charge,
- a $2.1 million loss on the aforementioned debt extinguishment, and
- the reversal of approximately $3.3 million in state estimated income tax reserves deemed no longer necessary.
Excluding
these items, the Company would have recorded net income of $72.4
million, or $.46 per diluted share, for the fiscal year ended February
2, 2013.
For the prior fiscal year ended January 28, 2012, the
Company recorded net income of $74.8 million, or $.45 per diluted share.
Those results included a net after-tax gain totaling $2.0 million, or
$.01 per share, comprised of:
- $5.6 million related to a pension and
related benefit charge, a third-party receivable write-down, severance,
and asset impairment charges, - $3.0 million of store closing expenses,
- a $0.3 million loss on debt extinguishment (related to the early retirement of approximately $1.9 million of senior notes), and
- the reversal of approximately $10.9 million in state estimated income tax reserves deemed no longer necessary.
Excluding
this net after-tax gain, the Company would have recorded net income of
$72.8 million, or $.44 per diluted share, for the fiscal year ended
January 28, 2012.
Management estimates that the extra week discussed
previously added $.03 to earnings per share for the current year fourth
quarter and fiscal year.
Comments on the Fiscal Year
Sadove noted, For the year, sales and
earnings were below our initial expectations as continued macroeconomic
concerns, election and fiscal cliff distractions, and Hurricane Sandy
weighed on our results, particularly in the second half of the year.
We
posted a 3.2 percent comparable store sales increase for the 52-week
period. This gain was on top of a very strong 9.5 percent comparable
store sales increase in 2011.
For the fiscal year, the gross margin
rate was 40.6 percent compared to 40.8 percent last year. Sadove added,
This decrease was due in part to our previously disclosed
underperformance in certain classic womens apparel vendors combined
with our outsized inventory investments in key high-potential growth
areas like womens shoes. We knew these investments could create some
near-term gross margin pressure but believe they were the right
long-term strategic decisions for the Company.
As a percent of sales
(excluding certain items), SG&A expenses were 25.7 percent for the
full year compared to 25.3 percent last year. The Company experienced
deleverage for the year as we incurred incremental expenses to support
our omni-channel and Project Evolution initiatives and additional
marketing expenses, Sadove added.
Excluding the aforementioned
certain items, the Companys operating income for the full fiscal year
was 5.0 percent of sales this year compared to 5.4 percent of sales in
the prior year.
2012 Accomplishments
Sadove noted, Even though
2012 was a challenging year, it was also a year of meaningful progress
and transformation for Saks. We continued to execute our core
merchandising, service, and marketing strategies while building
critically important omni-channel capabilities to position us for the
future. We made headway on several important initiatives:
We began
work on Project Evolution, our substantial multi-year transformation of
and investment in our information technology systems to facilitate an
omni-channel shopping environment for our customers.
We began
expanding the omni-channel experience for our customers by adding iPads
to our stores, testing ‘buy online, ship from store, and adding select
‘store only inventory items to our saks.com offerings.
On the
marketing front, we began using enhanced consumer analytics and insights
to drive marketing effectiveness through targeted and personalized
initiatives. In January, we relaunched our SaksFirst loyalty program,
expanding the benefits and eliminating the spending threshold to
participate in the program.
We made meaningful year-over-year
improvements in our in-store customer service scores and continued to
receive high marks for our online service.
We identified several key
Saks Fifth Avenue stores with high growth potential and supported their
growth initiatives with strategic capital investments, including the
expansion of 10022-SHOE in the New York flagship; renovations in Chevy
Chase, Troy, Bal Harbor, St. Louis, and Beverly Hills; and the addition
of over 100 vendor shops throughout the country.
At OFF 5TH, we
accelerated our growth strategy by opening five new stores and one
replacement store, and renovating two locations.
We meaningfully grew
saks.com by adding to the breadth and depth of our product offerings,
further improving our website shopping experience, enhancing our digital
marketing initiatives, and enriching our mobile experience. We improved
the efficiency of our saks.com operations with the mid-year opening of
our state-of-the-art robotic fulfillment center in Tennessee.
We
continued the rationalization of our Saks Fifth Avenue real estate,
closing three additional stores this year, bringing the total closed
since 2010 to ten. We recently announced two more planned closings-
Dallas in June 2013 and Stamford, Connecticut in early 2014. These
closings allow us to simplify the business, reduce working capital and
capital spending requirements, and more effectively focus our
resources.
Balance Sheet Highlights
Consolidated inventories at
February 2, 2013 totaled $822.9 million. This represents a 14.0 percent
increase over the prior year on a total basis and a 12.2 percent
increase over the prior year on a comparable stores basis. Year-end
inventory levels were distorted due to the later year end (driven by the
53rd week), with more receipts in the first week of February this year
than in the last week of January last year. Adjusting for this receipt
timing, the Companys comparable store inventories would have increased
by approximately 5.7 percent.
At fiscal year end, the Company had
approximately $80.4 million of cash on hand and no direct outstanding
borrowings on its revolving credit facility.
During the quarter, the
Company repurchased $88.3 million of common stock (approximately 8.5
million shares at an average price per share of $10.35), bringing the
year-to-date repurchases to $167.4 million (approximately 16.5 million
shares at an average price per share of $10.13).
Also during the
quarter, approximately $28.8 million of the Companys original $120
million 7.5 percent convertible notes was retired after being converted
to equity by holders. The conversion resulted in the issuance of
approximately 5.2 million shares of common stock, and the outstanding
balance was reduced to $91.2 million at fiscal year end.
In
accordance with FASB Accounting Standard Codification 470 related to
accounting for convertible debt instruments that may be settled in cash
upon conversion (including partial cash settlement) (ASC 470), issuers
of convertible debt instruments must separately account for the
liability and equity components in a manner that will reflect the
entitys nonconvertible debt borrowing rate when interest cost is
recognized in subsequent periods. The discounts (the difference between
the convertible rate and a nonconvertible borrowing rate on each
issuance) on the Companys two series of convertible notes are being
accreted to interest expense through the note maturity dates.
Accordingly, at February 2, 2013, $10.4 million of the $230 million 2.0
percent convertible notes balance and $3.9 million of the remaining
$91.2 million 7.5 percent convertible notes balance were classified in
equity.
Funded debt (including capitalized leases, senior notes, and
the debt and equity components of the convertible debentures) at
February 2, 2013 totaled approximately $373.9 million, and
debt-to-capitalization was 24.8 percent (without giving effect to cash
on hand).
Net capital spending for the fourth quarter and fiscal year
ended February 2, 2013 totaled approximately $40.5 million and $114.8
million, respectively.
Outlook for and Approach to 2013
Sadove
continued, The change that is occurring today in the retail industry is
quite extraordinary, and the rate of change seems to accelerate each
day. We have spent and are continuing to spend considerable time and
resources in evolving to an omni-channel organization and believe we
have the right strategies and personnel in place. The evolution to an
omni-channel model requires much different capabilities than we have had
in the past and increased near-term investments. Those investments
include information systems, people, and marketing, to name just a few.
We fully expect to generate increased growth and profitability in the
future, but the required omni-channel foundational investments will
place pressure on our near-term profitability. We are managing the
business for the long-term and are committed to making investments that
best position our Company and the Saks Fifth Avenue brand for the
future.
We view 2013 as another transformational year in which we
will further enhance our omni-channel capabilities while also continuing
to focus on our core strategies and improving the prospects of each of
our business channels. In 2013, specifically:
We are well on our way
to offering a seamless omni-channel shopping experience to our
customers. Project Evolution will transform our business from a people,
process, and systems perspective to provide our customers with ‘any
channel, any device, any time shopping. During 2013, we expect to begin
capitalizing on our shared inventory capabilities with the
implementation of order management and product information management
tools. By mid-year, we plan to be fully operational with our
‘buy-online, ship from store capabilities.
We will continue to
evolve our merchandise assortments, modernizing our selections and
making them more relevant to todays customers.
We will strive to
execute our differentiation strategy by offering selections from a
combination of core, established brands; new, emerging designers; and
private brands.
We expect to achieve continued outsized growth in
saks.com through
embracing our omni-channel capabilities, expanding
assortments and exploiting high-growth potential categories, making
additional shopping experience improvements through site functionality
enhancements, and further optimizing digital marketing.
We will
continue to drive marketing effectiveness by further expanding our
targeted and personalized efforts supported by our customer analytics
and insights. Our re-launched and enhanced SaksFirst program should
drive improved customer engagement and loyalty.
Our goal remains to
provide a distinctive shopping experience to all of our customers, no
matter what channel they choose to shop. We will place particular
emphasis on our top and highest-potential customers by providing them
with personally-tailored luxury experiences.
For our Saks Fifth
Avenue store base, we will continue to focus on improving the
productivity of our most productive stores such as our New York City,
Beverly Hills, Chicago, Bal Harbour, Atlanta, Boston, and Troy flagships
through targeted capital and inventory investments. We will also
continue to look for opportunities to further rationalize our store base
where it makes sense, closing underperforming stores.
We will
continue to focus on outsized growth in the outlet channel with our
aggressive OFF 5TH real estate expansion and renovation strategy. We
have plans to add seven new stores and one replacement store and to
renovate four others in 2013.
Sadove further noted, As we look
ahead to 2013, we expect the external environment to remain somewhat
volatile. There are several macro factors, such as higher tax rates on
the more affluent and the unknown resolution of pending fiscal matters
that could create additional uncertainty, particularly in the first half
of the year.
The Companys assumptions for 2013 are outlined below.
Variation from the sales trends, up or down, could materially impact
the other assumptions listed.
Comparable store sales are expected to grow in the 3 percent to 5
percent range for the full year.
Comparable store inventory levels are expected to be up in the 3 percent to 5 percent range throughout the year.
Based
upon current inventory levels and composition and the Companys
promotional calendar and permanent markdown cadence, the Company expects
the gross margin rate for the full fiscal year to be 20 to 40 basis
points above the 40.6 percent rate achieved in 2012.
The Company expects
year-over-year gross margin rate improvement to be realized in the both
the first and second halves of the fiscal year.
As a percent of
sales, year-over-year SG&A expenses (excluding certain items) are
expected to increase by approximately 30 to 50 basis points for the full
fiscal year. Management expects that the deleverage will be
concentrated in the first half of the fiscal year, with more deleverage
expected in the first quarter than in the second quarter due to the
timing of expenditures. SG&A dollar increases are expected to arise
primarily from incremental variable costs associated with planned sales
growth (primarily sales associates commissions); increased marketing;
and investment spending to support the Companys saks.com growth and its
omni-channel initiatives.
Other Operating Expenses (rent,
depreciation, and taxes other than income taxes) are expected to total
approximately $336 million to $340 million for the full fiscal year. The
increase over the prior year primarily will be driven by higher
depreciation on incremental capital spending, increased rent expense
related to Project Evolution and new OFF 5TH stores, and higher taxes
other than income taxes (primarily payroll, sales and use taxes, and
property taxes). Approximately $5 million of the year-over-year increase
relates to Project Evolution. Depreciation and amortization, which is
included in the above amount, should approximate $132 million for the
full year.
Based on existing debt arrangements and interest rates,
interest expense should approximate $34 million to $35 million for the
full fiscal year.
An effective tax rate of approximately 40.0 percent for the year.
A
basic common share count of approximately 148 million and a diluted
common share count of approximately 185 million for the full fiscal
year. Share counts used in earnings per share calculations will
fluctuate by quarter during the year based on income levels, convertible
debt, and equity awards.
Net capital expenditures of approximately
$140 million to $150 million for the full year. Approximately $75
million relates to Saks Fifth Avenue store renovations and new vendor
shops, and approximately $55 million relates to Project Evolution and
other information technology enhancements. The balance primarily relates
to OFF 5TH and maintenance capital. The planned increase over the 2012
spending level of $115 million primarily relates to incremental Saks
Fifth Avenue and OFF 5TH store renovations and information technology
spending.
Other Information
Excluding the aforementioned items,
for the current year fourth quarter and year ended February 2, 2013 and
the prior year fourth quarter and fiscal year ended January 28, 2012,
the Companys two convertible debt instruments were dilutive; therefore,
the applicable shares (approximately 38.6 million for the current year
fourth quarter and approximately 40.3 million for the current fiscal
year) were added to the weighted average shares outstanding and the
applicable after-tax interest expense (approximately $4.0 million for
the current year fourth quarter and approximately $16.6 million for the
current fiscal year) was added to net income for the fully diluted
earnings per share calculation.
