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Saks Incorporated delivered better-than-expected fourth-quarter 2011 earnings of 17 cents per share, surpassing the Zacks Consensus Estimate by 3 cents. The results also exceeded the earnings of 13 cents per share in the year-ago quarter.

The fiscal 2011 earnings of 44 cents also surpassed the prior-year earnings of 19 cents per share and the Zacks Consensus Estimate of 38 cents.

The results were driven by robust operating performance, strong same-store sales growth and gross margin expansion. In addition, Saks continued its focus on expense control, leveraging SG&A while making targeted investments in areas such as Saks Direct, its omni-channel initiatives, and marketing.

Including one-time items of 4 cents per share in the current quarter and 1 cent in the last quarter, Saks generated earnings of 21 cents a share in the fourth quarter 2011 versus 14 cents per share in the prior-year quarter. Including 1 cent of one-time item in fiscal 2011 and 11 cents in the fiscal year 2010, Saks generated earnings of 45 cents a share in the fiscal quarter 2011 versus 30 cents per share in the prior-year period.

Revenue and Margins

Net sales for the quarter grew 6.8% to $925.1 million from $866.3 million in the year-ago quarter, mainly due to a robust 7.7% growth in same-store sales. Sales exceeded the Zacks Consensus Revenue Estimate of $923.0 million. In fiscal 2011, net sales grew 8.2% to $3.014 billion, owing to a 9.5% growth in same-store sales. Sales slightly exceeded the Zacks Consensus Revenue Estimate of $3.009 billion.

The company’s stores and operations comprise Saks Fifth Avenue (these are principally free-standing stores in exclusive shopping destinations or anchor stores in upscale regional malls), Saks Fifth Avenue OFF 5Th  (these stores primarily target the value-conscious customers) and Saks Fifth Avenue e-commerce operations known as Saks Direct.

During the quarter, the company’s Saks Fifth Avenue stores saw strong sales growth, particularly in women’s and men’s apparel, handbags, fine jewelry, fragrances, and men’s accessories. The New York City flagship store sales were in line with the company’s total comparable store sales.

Saks Direct reported an approximately 21% and 28% increase in comparable same stores during the quarter and year, respectively. Though Saks Fifth Avenue OFF 5Th’s comparable store sales were positive, it was below the company’s aggregate comparable store sales performance for both the fourth quarter and the year.

Saks' gross margin declined 20 basis points to 37.6% in the quarter, compared with 37.8% in the prior-year quarter. However, gross margin increased 70 basis points to 40.8% in fiscal 2011, reflecting full-priced selling and reduced promotional activity. This also led to a rise in the operating margins to 6.0% of sales in the fourth quarter and 5.4% in the fiscal 2011 from 5.9% of sales in the prior-year quarter and 3.9% in the prior-year period.

Other Financial Updates

Saks ended the year with cash in hand of approximately $200.2 million and no direct outstanding borrowings on its revolving credit agreement. At the end of January 28, 2012, inventories totaled $721.9 million, an increase of 7.5% year over year, and a 7.2% increase on a comparable stores basis.

During the year, Saks retired $143.5 million of senior notes and repurchased $28.9 million of shares.

At the end of January 28, 2012, funded debt – including capitalized leases, senior notes, and the debt and equity components of convertible debentures – was $405.0 million, and debt-to-capitalization was 25.6%.

During the quarter, Saks' net capital spending was $27.1 million, while it was $67.5 million at the year-end.

Guidance Update

Saks anticipates same-store sales to progress in the 5% to 7% range for the full year 2012.

The company projects the same store inventory levels to be up in the mid-single digit range throughout the fiscal year end.

The company expects the gross margin rate for fiscal year 2012 to be modestly above the 40.8% rate achieved in 2011. The company further expects a relatively flat gross margin rate in the first half of the fiscal year and gross margin rate improvement in the second half of the fiscal year.

With respect to the current capital structure, Saks expects an interest expense in the range of $38 to $39 million for the fiscal year 2012. The company's effective tax rate is expected to be approximately 40.0% for the fiscal 2012.

Saks anticipates capital expenditures to be in the range of $110 to $120 million for the year.

Management is optimistic about its performance in fiscal 2012, as it has seen strong growth in sales across store formats, thanks to its merchandising, service and marketing initiatives. Further, the company intends to be very strategic in its SG&A spending, inventory management and capital expenditures.

However, Saks remains concerned about the increased volatility in the financial markets and the overall uncertainty in the macroeconomic environment. Saks, which competes with Macy’s Inc. (M - Analyst Report), thus maintains a Zacks #3 Rank, which translates into a short-term Hold recommendation. Over the long term, we provide a Neutral rating on the stock.

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