Saks Inc reported that it earned $1.9 million, or 1 cent per share, in the third quarter. The upscale chain recorded a net loss of $43.7 million, or 32 cents per share, for the prior year third quarter ended November 1, 2008.
Excluding the after-tax loss from discontinued operations of $12.9 million, or 10 cents per share, the Company recorded a net loss from continuing operations of $30.8 million, or 22 cents per share, for that quarter. Those results included the following after-tax items totaling $13.9 million, or 10 cents per share:
* a gain of $0.7 million related to the sale of a vacant real estate parcel and
* the write-off and adjustment of $14.6 million of certain deferred tax assets primarily associated with Federal Net Operating Loss tax credits that were subject to expiration at the end of fiscal 2008.
For the nine months ended October 31, 2009, the Company posted a net loss of $57.7 million, or $.40 per share. Excluding an after-tax loss from discontinued operations of $0.3 million, the Company recorded a loss from continuing operations of $57.4 million, or $.40 per share.
For the prior year nine months ended November 1, 2008, Saks recorded a net loss of $59.1 million, or $.43 per share. Excluding the after-tax loss from discontinued operations of $16.3 million, or $.12 per share, the Company recorded a net loss from continuing operations of $42.7 million, or $.31 per share, for that period. Those results included the following after-tax items totaling $14.9 million, or $0.11 per share:
* expenses of approximately $0.8 million related to asset impairments (primarily related to the Saks Fifth Avenue Ft. Lauderdale store closing),
* expenses of approximately $0.2 million for severance costs related to the Ft. Lauderdale store closing,
* a gain of $0.7 million related to the sale of a vacant real estate parcel, and
* the write-off and adjustment of $14.6 million of certain deferred tax assets previously mentioned.
Comments on the Third Quarter and Nine Months Ended October 31, 2009
Stephen I. Sadove, Chairman and Chief Executive Officer of the Company, noted, “We were able to post a modest third quarter profit due to our improved gross margin performance and diligent expense control, in spite of our comparable store sales decline.”
Sadove commented, “I continue to be very pleased with how the entire organization has aggressively responded to the challenging environment. Just as our customers have changed the way they shop, we have made changes in the way we are managing our business. We have made needed adjustments to our operating strategies, and carefully managing inventories, expenses, and capital spending are critical priorities.”
Comparable store sales declined 10.1% in the third quarter, in line with the Company’s expectations. For the nine months ended October 31, 2009, comparable store sales fell 18.5%.
Saks Fifth Avenue stores experienced continued weakness, although toward quarter end, several merchandise categories, such as women’s designer sportswear and “gold range” apparel, outerwear, jewelry, and soft accessories, began to show relative strength. For the quarter, sales trends in the New York City flagship store were more in line with the Company’s aggregate comparable store sales decline, a meaningful improvement from earlier this year.
Saks Direct posted an approximate 26% comparable store sales increase in the quarter and an approximate 9% increase on a year-to-date basis. OFF 5TH’s comparable store sales performance continued to show relative strength during the quarter.
The Company’s third quarter gross margin rate was 40.3% compared to 35.7% in last year’s third quarter. The improvement resulted from controlled inventory levels and a disciplined promotional and clearance cadence. For the nine month period, the gross margin rate was 36.6% in the current year versus 36.4% in the prior year.
Sadove commented, “Managing Selling, General, and Administrative expenses (“SG&A”) continues to be of utmost importance. We were able to reduce year-over-year SG&A by approximately $18 million in the third quarter, which was more than we expected. Consequently, we were able to leverage SG&A during the quarter, even though comparable store sales declined 10.1%.” As a percent of sales, SG&A was 25.7% in the current third quarter compared to 26.2% in the same period last year. The Company has reduced SG&A by over $96 million (excluding certain items) on a year-to-date basis and by over $145 million (excluding certain items) over the last five quarters.
Even though sales declined, the Company’s operating margin expanded to 2.5% in the quarter from a 2.1% operating loss in the same period last year.
Balance Sheet Highlights
Consolidated inventories at October 31, 2009 totaled $799.1 million, a 21.4% decrease over the prior year. Inventories decreased 22.2% on a comparable stores basis.
At quarter end, the Company had approximately $7.1 million of cash on hand and no direct outstanding borrowings on its revolving credit facility.
Effective at the beginning of the fiscal year (February 1, 2009), the Company adopted 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”), which requires that issuers of convertible debt instruments separately account for the liability and equity components in a manner that will reflect the entity’s 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 Company’s two series of convertible notes are being accreted to interest expense through the note maturity dates. Accordingly, at October 31, 2009, $36.9 million of the $230 million 2.0% convertible notes balance and $20.4 million of the $120 million 7.5% convertible notes were classified in equity. The new accounting pronouncement required retroactive application; consequently, the prior year amounts have been revised.
On October 6, 2009, the Company completed its $100 million common stock offering, priced at $6.70 per share. Net proceeds of approximately $95 million were used to pay down the balance on the revolving credit facility.
Funded debt (including capitalized leases, borrowings on the revolving credit facility, and the equity component of the convertible debentures) at October 31, 2009 totaled approximately $576.8 million, and debt-to-capitalization was 36.4% (without giving effect to cash on hand).
The Company has flexibility under its debt facilities, with no short-term maturities of senior debt. The revolving credit facility terminates in September 2011, and the Company is subject to no financial covenants unless the availability falls below $60 million. At that point, the Company is subject to a fixed charge coverage ratio of at least 1:1. Based on the Company’s operating plans and cash management actions, it expects to have ample future availability under its revolving credit facility and does not expect to be subject to the fixed charge coverage ratio.
Net capital spending for the nine months ended October 31, 2009 totaled approximately $52 million.
Outlook for the Fourth Quarter of 2009
The Company’s assumptions for the fourth quarter, second half, and full year of fiscal 2009 (excluding the impact of certain items) are outlined below. Variation from the sales trends, up or down, could materially impact the other assumptions listed.
* Comparable store sales decline for the fourth quarter of high single digits, resulting in a decline of high single digits for the second half of the fiscal year and of mid-double digits for the full fiscal year. Due to prior year comparisons, November 2009 is expected to generate the weakest monthly comparable store sales performance in the fourth quarter.
* Comparable store inventory levels are expected to decline in the low- to mid-teen percentage range at fiscal year end.
* Based upon current inventory levels, planned merchandise receipt flow approximately 20% lower than prior year, and the Company’s promotional calendar and permanent markdown cadence, the Company expects a substantial year-over-year gross margin recovery in the fourth quarter of 2009, with gross margins in the 33% to 34% range. This would result in a gross margin rate in the 36% to 37% range for the second half of the fiscal year and in the 35% to 36% range for the full fiscal year.
* Year-over-year net SG&A dollars (excluding certain items) are expected to be relatively flat in the fourth quarter. The net SG&A reduction will approach $100 million for the full fiscal year.
* Other Operating Expenses (rentals, depreciation, and taxes other than income taxes) are expected to total approximately $81 million in the fourth quarter of 2009, bringing the total to approximately $157 million for the second half of the fiscal year and to approximately $320 million for the full fiscal year. Depreciation and amortization, which is included in the above amounts, should total approximately $35 million for the fourth quarter, approximately $68 million for the second half, and approximately $137 million for the full year.
* Based on existing debt arrangements and interest rates, interest expense should approximate $12 million for the fourth quarter of 2009, bringing the total to approximately $25 million for the second half of the fiscal year and to approximately $48 million for the full fiscal year.
* An effective tax rate of approximately 38.0% for the fourth quarter.
* A basic common share count and a diluted common share count of approximately 153 to 155 million each for the fourth quarter and of approximately 143 million to 145 million for the full fiscal year, reflecting the October 2009 common stock offering.
* Net capital expenditures of approximately $10 million to $13 million for the fourth quarter, bringing the full year total to approximately $65 million, a reduction of approximately $65 million from 2008. The annual net capital spending estimate of $65 million for the full year is modestly higher than previous estimates, as management decided to make certain additional distribution center enhancements and store expenditures by fiscal year end.
* The Company expects to be free cash flow positive for 2009.
Comments on 2010
Sadove concluded, “We believe there is more stability and predictability in our business compared to twelve or even six months ago; however, the overall environment remains challenging.
“As we look to next year, we remain cautious about the environment and are planning accordingly. We continue to focus on what we can control inventory, expenses, and capital spending. For fiscal spring 2010, we have planned inventory receipts down modestly, and expense containment will remain a priority. Our capital plan for 2010 has not yet been finalized, but we expect net capital spending will approximate $40 million to $45 million next year, which primarily is our maintenance capital level and includes no new Saks Fifth Avenue stores or major renovations.”
Sadove added, “Even though we remain cautious in our near-term outlook, we are positive about the future of our business and luxury retailing. We believe the actions we have taken and our current merchandising, service, marketing, and cost containment initiatives will position us to significantly improve our performance in the long term.”