Saks Incorporated (SKS) delivered better-than-expected third-quarter 2011 earnings of 11 cents per share, surpassing the Zacks Consensus Estimate by 2 cents. The results also exceeded the earnings of 6 cents per share in the year-ago quarter, driven by robust operating performance, strong same-store sales growth and gross margin expansion.
Including one-time items of 14 cents per share, Saks generated earnings of 20 cents a share in the prior-year quarter.
Revenue and Margins
Net sales for the quarter grew 5.1% to $692.3 million from $658.8 million in the year-ago quarter, mainly due to robust 5.8% growth in same-store sales. However, the sales missed the Zacks Consensus Revenue Estimate of $697.0 million.
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, shoes and accessories. The New York City flagship store sales were in line with the company’s total comparable store sales. Saks Direct reported an approximately 24% increase in comparable same stores during the quarter. However, the Saks Fifth Avenue OFF 5Th underperformed against the total comparable store sales.
Saks' gross margin shot up 160 basis points to 44.2% in the quarter, compared with 42.6% in the prior-year quarter, reflecting increased full-price selling and decreasing promotional expenses. This also led to a rise in the operating margins to 5.7% of sales in the third quarter from 4.8% of sales in the prior-year quarter.
Other Financial Updates
Saks ended the quarter with cash in hand of approximately $73.7 million and no direct outstanding borrowings on its revolving credit agreement. At the end of the quarter, inventories totaled $882.4 million, an increase of 6.0% year over year, on a comparable stores basis.
During the reported quarter, Saks bought back approximately 3.5 million shares at a price of $8.18 per share, totaling $28.9 million.
At the end of October 29, 2011, funded debt – including capitalized leases, senior notes, and the debt and equity components of convertible debentures – was $405.8 million, and debt-to-capitalization was 26.2% at the end of the quarter.
During the quarter, Saks' net capital spending was $17.0 million.
Guidance Update
Saks anticipates same-store sales to progress in the mid-to-high single digit range in the fourth quarter of 2011.
The company projects same store inventory levels to be up in the mid-single digit range at fiscal year end.
Though the company forecasts a gross margin rate decline of about 50 bps in the fourth quarter of the fiscal year, it expects its second half and full year 2011 to improve.
With respect to the current capital structure, Saks expects an interest expense of $9 million for the fourth quarter of fiscal year 2011. The company's effective tax rate is expected to be approximately 36.0% to 37.0% for the fiscal 2011.
Saks anticipates capital expenditures to be about $70 million for the year.
Management is optimistic about its performance in fiscal 2011, 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, thus maintaining a long-term Outperform recommendation on the stock.
However, Saks remains concerned with the recent increased volatility and downturn in the financial markets and the overall uncertainty in the macroeconomic environment. Saks, which competes with Macy’s Inc. (M), thus maintains a Zacks #3 Rank, which translates into a short-term Hold recommendation.
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