Saks Pinned at Neutral

We recently reiterated our Neutral recommendation on Saks Inc. ( SKS - Analyst Report ) , which operates traditional and luxury departmental stores in the U.S., following its second quarter fiscal 2013 results.

The company reported second quarter loss of 5 cents per share, in-line with the prior-year quarter. However, it was narrower than the Zacks Consensus Estimate of a loss of 9 cents per share, due to improved revenues.

Net revenues in the quarter rose 5.1% to $704.1 million from $670.2 million in the year-ago quarter, mainly due to a 4.7% increase in same-store sales. The strong performance of women’s ‘Wear Now’ and contemporary apparel, shoes as well as men’s contemporary apparel, shoes, and accessories drove comparable store sales in the quarter.

In addition, Saks anticipates same-store sales and same-store inventory levels to progress in the mid-single digit range for the second half of 2012.

We are encouraged with Saks’ omni-channel retailing concept, which has enabled consumers to experience shopping through all available shopping channels such as mobile Internet devices, computers, television, catalog, and other.

The company has also expanded its distribution and fulfillment capacity by adding a new facility in Tennessee in July 2012, in order to support the company’s omni-channel strategy and planned sales growth in Saks Direct. These investments in omni-channel initiatives and strategies are expected to help the company achieve long-term financial targets and enhance shareholder value in the years ahead.

Moreover, Saks has invested in some operational initiatives and other strategies in calendar year 2012, such as the project evolution systems implementation, hold and flow, and other local marketing business plans, which are expected to lead to cost savings in calendar year 2013 and beyond.

The company has also encouraged private labeling rather than third-party brands. Moreover, the company has undertaken initiatives to create more online, mobile and social media marketing programs as a part of its strategy to develop integrated campaigns. The project evolution initiative is also going to be beneficial over the next few years.

However, Saks primarily focuses on its luxury retail sector, which makes it vulnerable to the incremental volatility in financial markets and the overall uncertainty in the macroeconomic environment. In addition, Saks faces the risk of reduction in the number of consumers who can afford to purchase discretionary items. The low disposable income of the consumers lead to lower consumer footfall at the stores, ultimately resulting in decline in sales and margins.

Though the company expects gross margins to expand year over year in the second quarter, rising input costs and the overall economic slowdown keep us on the sidelines.

Saks carries a Zacks #2 Rank (short-term Buy rating).