Saks Coming Back Down to Earth

We are downgrading Saks, Inc. (SKS) from Buy to Hold. While the stock is up about 8% from our July 16 upgrade, we don’t believe it will outperform the market over the next six months. We were disappointed by the company’s second quarter results and the management’s outlook for the second half of the year. We were not alone. The stock sold off over 8% on the news.

The company’s results demonstrate that higher-end retail is now deteriorating along with the rest of the retail sector. For Saks, that points to weak sales trends and lower profit margins in the back half of the year. As a result, we are taking down our estimates for 2008 and 2009. We also expect consensus estimates to decline, and that will further pressure the shares in the months ahead.

Saks shares are trading at 73.5x our fiscal 2008 EPS estimate and 42.9x our fiscal 2009 EPS estimate. This is 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 deteriorating trends in the luxury retail space, we are neutral on Saks.

Our target price of $11 is about 49x our 2009 depressed earnings estimate. Longer term, Saks could achieve normalized earnings of $0.77 per share, which is based on sales of $3.5 billion and operating margin of 6%. Our target price is a reasonable 14x normalized earnings.

Read the full analyst report on SKS

Read the full analyst report on SKS