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Saks Retained at Neutral

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On May 3, 2013, we maintained our Neutral recommendation on Saks Inc. , a traditional and luxury departmental chain. This was in view of the strong same-store sales reported by the company consecutively for two years as well as the fourth-quarter 2013 earnings, which surpassed estimates. However, net sales rose only 1% year over year and operating margin shrank due to higher administrative expenses.

Ongoing macroeconomic challenges and reduction of discretionary spending by consumers under a higher tax burden following sequestration in anticipation of fiscal cliff are matters of concern.

Why the Reiteration?

Saks reported 2013-fourth quarter earnings of 17 cents per share (excluding after-tax charges of 4 cents per share), which was flat compared with the year-ago level. However, earnings beat the Zacks Consensus Estimate by 2 cents. Efficient cost management was offset by lower sales during the quarter.

Net sales for the quarter rose 5.6% year over year to $976.6 million. However, quarterly revenues lagged the Zacks Consensus Estimate of $969 million. Excluding the effect of extra week during the quarter, net sales rose only 1.0% year over year.

Following the release of 2013-fourth quarter earnings, the Zacks Consensus Estimate for fiscal 2014 went up by 2.3% to 44 cents. For fiscal 2015, the estimate went down by 1.92% to 52 cents. Due to limited estimate revisions, Saks currently holds a Zacks Rank #3 (Hold).

Sales were negatively affected by the closure of many New York flagship stores in the North Eastern markets of the company due to Hurricane Sandy during the quarter. Operating margin shrank 20 basis points to 5.8% due to higher selling, general and administrative expenses.

The company has been reporting positive comparable store sales for more than two years consecutively. While comparable store sales went up 11.0% in fiscal 2011, it rose 9.5% in fiscal 2012. Strong comparable store sales resulted in top-line growth. The company has been regularly witnessing strong sales in the women’s and men’s contemporary apparel, women’s and men’s shoes, fashion and fine jewelry, and cosmetics and fragrances categories at Saks Fifth Avenue stores.

Saks primarily focuses on the luxury retail sector and has relationships with leading American and European fashion houses. However, with a growing concern about increased volatility in the financial markets and the overall uncertainty in the macroeconomic environment, Saks is expected to face decline in sales and margins due to lower consumer footfall in its stores.

Moreover, approximately 8%-10% higher tax burden due to sequestration following concerns of a fiscal cliff is creating a pressure on the pockets of the high-end consumers, as a result of which, they have reduced their discretionary spending. This has started affecting the company’s high-end jewelry sales.

Saks currently holds a Zacks Rank #3 (Hold). Other favorable stocks in the retail and wholesale sector that are worth considering include Flower Foods (FLO - Free Report) , Sears Holding Corporation , and Green Mountain Coffee Roasters Inc. all holding a Zacks Rank #1 (Strong Buy).

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