We maintain a Neutral rating on Saks Incorporated (SKS) following appraisal of the results of the fourth quarter and fiscal year ending January 28, 2012.
Saks posted better-than-expected earnings of 17 cents per share in the fourth-quarter ending January 28, 2012, which surpassed the Zacks Consensus Estimate by 3 cents and the prior-year earnings by 4 cents. The results were driven by a robust operating performance and strong focus on making targeted investments in areas such as Saks Direct, its omni-channel initiatives, and marketing.
Saks also delivered solid top-line growth of 6.8% and strong same-store sales growth of 7.7% in the quarter ending January 28, 2012, particularly in women’s and men’s apparel, handbags, fine jewelry, fragrances, and men’s accessories. Comparable store sales also increased 9.5% for the year ending January 28, 2012 as compared to an increase of 6.4% achieved last year. Saks has been delivering positive comparable store sales since the past 26 months consecutively. Saks also anticipates same-store sales to progress in the 5% to 7% range for fiscal year ending January 2013.
Further, Saks has plans to invest in some operational initiatives and other strategies in the calendar year 2012 such as the project evolution systems implementation, hold and flow, and other local marketing business plans, in order to analyze the facts of each market and then build the Saks brand locally.
The company’s project evolution initiative will involve investment of approximately $85 to $95 million over the next four to five years and will roll out new merchandising, finance and HR systems over the next few years. Saks’ hold and flow initiative will impact Saks’ inventory management strategy. Further, the company will also encourage private labeling rather than the third-party brands.
Saks has also implemented important systems and process enhancements to strengthen its omni-channel approach to the business. The approach has enabled consumers to now experience shopping through all available shopping channels such as mobile internet devices, computers, television, catalog, etc. In order to facilitate the company’s omni-channel strategy, Saks has made plans to expand its distribution and fulfillment capacity by adding a new facility in Tennessee by August 2012. 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.
However, omni-channel retailing requires Saks to maintain adequate inventory for its stores and for its online sales so that the company is able to sell its apparels at any point of time and through any channel, which thereby increases the cost of maintaining them. Further, Saks purchases these inventories from foreign suppliers and remains exposed to unfavorable foreign currency translations. Accordingly, these currency fluctuations may increase the company’s cost of goods sold, thereby resulting in decreased consumption, gross margins and ultimately earnings.
Further, with unemployment on the rise, Saks also faces the risk of reduction in the number of consumers who can afford to purchase discretionary items of Saks, focusing mainly on its luxury retail sector and having relationships with the leading American and European fashion houses, including Giorgio Armani, Dolce and Gabbana, Chanel, Gucci, etc.
Saks may also face a decline in its sales and margins due to lower consumer foot-fall in its stores, as there has been a growing concern of increased volatility and overall uncertainty in the macroeconomic environment. The scenario may thus induce Saks to increase the duration or frequency of its promotional events and offer larger discounts to attract customers which in turn will hurt profitability. We thus prefer to remain on the sidelines.
SAKS INC (SKS): Free Stock Analysis Report
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