Saks Incorporated (SKS) delivered a second-quarter 2011 adjusted loss per share of 5 cents, better than the Zacks Consensus Loss Estimate of 8 cents. Saks reported a loss of 13 cents per share in the year-ago quarter. The year-over-year improvement in the quarter reflects strong same-store sales growth and gross margin expansion.
The adjusted losses in the reported quarter excludes the after-tax charges of $0.8 million related to pension and related benefit charge, a write-down of a third party receivable, and an asset impairment charge, offset by the reversal of state income tax reserves.
The adjusted loss in the second-quarter 2010 excludes the after-tax charges totaling $11.7 million, or 8 cents per share, comprising net lease termination costs and severance and other store closing costs.
On a reported basis, Saks generated a loss of 5 cents a share, better than the prior-year loss of 21 cents per share.
Revenue and Margins
Net sales for the quarter grew 13.0% to $670.2 million from $593.1 million in the year-ago quarter, mainly due to robust 15.5% growth in same-store sales. The sales also outpaced the Zacks Consensus Revenue Estimate of $669 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. Saks Direct reported an approximately 50% increase in comparable same stores during the quarter. However, the performance of Saks Fifth Avenue OFF 5Th was below the company’s aggregate comparable store sales performance.
Saks' gross margin shot up 70 basis points to 38.0% in the quarter, compared with 37.3% in the prior-year quarter, reflecting increased full-price selling.
Further, the company lowered its operating loss to 0.1% of sales in the second quarter from a loss of 3.8% of sales in the prior-year quarter.
Other Financial Updates
Saks ended the quarter with cash on hand of approximately $294.0 million and no direct outstanding borrowings on its revolving credit agreement.
At the end of the quarter, inventories totaled $689.2 million, an increase of 2.7% year over year on both total and comparable stores bases.
At the end of July 30, 2011, $23.3 million of $230 million 2.0% convertible notes and $12.9 million of $120 million 7.5% convertible notes were classified as equity.
Funded debt – including capitalized leases, senior notes, and the debt and equity components of convertible debentures – was $548.8 million, and debt-to-capitalization was 32.4% at the end of the quarter.
During the quarter, Saks' net capital spending was $11.9 million.
Guidance Update
Saks anticipates same-store sales to progress in the mid-to-high single digit range in the second half of the fiscal year.
The company projects inventories on the basis of same-store sales to go up by mid single digit throughout the rest of the year.
The company forecasts a gross margin rate increase in the range of 40 to 70 bps in the second half of the fiscal year, with more year-over-year improvement expected in the third quarter than in the fourth quarter.
With respect to the current capital structure, Saks expects an interest expense of $20 million for the second half of fiscal year 2011. The company's effective tax rate is expected to be 40.0% at the end of fiscal 2011.
Saks anticipates net capital expenditures to be in the range of $70 million to $75 million for the full year. The company expects diluted common share count of 202 million for the full 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 expenditure investments.
However, Saks remains concerned with the recent increased volatility and downturn in the financial markets and the overall uncertainty in the macroeconomic environment. The company is therefore expected to strategize with its expense, capital, and inventory spending, making investments in areas with the most potential for profitable growth.
Saks shares maintain a Zacks #2 Rank, which translates into a short-term Buy recommendation. Our long-term recommendation for the stock remains Neutral.
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