Estimates Coming Down on Saks

Saks, Inc. (SKS - Analyst Report) reported solid sales for the first quarter of 2008. Sales were up 8.6% with comp-store sales for 8.4%. After slowing to around 4% in January and February, monthly comps appear to be rounding. However, that is still well below the double-digit comps it produced in 2007.

More importantly, the uptick in sales growth is expected to negatively affect the company's gross margins. We are reducing our fiscal 2008 EPS estimates to reflect our view that Saks will experience weaker profit margins throughout the fiscal year.

Our target price of $14 is about 25x our 2009 EPS estimate. Saks shares are trading at 29.8x our fiscal 2008 EPS estimate and 24.3x our fiscal 2009 EPS estimate. Saks is scheduled to report first quarter results on May 21.

The company is trading at a sizable premium to our estimate of the company's long-term earnings growth rate and its competitors. Due to its pricey valuation and the challenging retail environment, we are neutral on Saks. However, we think the stock is reasonably valued. We maintain our Hold rating.

Read the full analyst report on SKS.