Taking a Very Close Look at Saks

Been looking around for more opportunities and this one caught my eye…

The Basics:
Saks, Inc. (SKS) is a leading retailer primarily offering high-end brand-name fashion apparel, shoes, accessories, and cosmetics. The company operates 53 Saks Fifth Avenue stores and 51 Off 5th units (off-price luxury goods). Discontinued Club Libby Lu, 11/08. Sold its department stores in 2004-2006. Saks Fifth Avenue stores carry merchandise from leading fashion houses. Key brands include Armani, Chanel, Gucci, and Prada. Has about 13,000 employees. Off. & Dir. own 3.2% of common stock; Inmobiliaria Carso (Carlos Slim), 17.7%; Baugur Group, 8.5% (4/09 Proxy).

For 2008:

On a consolidated basis, total net sales and comparable store sales for the year ended January 31, 2009 decreased 6.0% and 6.1%, respectively. The Company recorded a loss from continuing operations of $122.8 million, or $0.89 per share compared to income from continuing operations of $50.7 million, or $0.33 per share, for the years ended January 31, 2009 and February 2, 2008, respectively. After recognition of the Company’s after-tax loss from discontinued operations of $32.2 million, or $0.23 per share, net loss totaled $154.9 million, or $1.12 per share for the year ended January 31, 2009. After recognition of the Company’s after-tax loss from discontinued operations of $3.2 million, or $0.02 per share, net income totaled $47.5 million, or $0.31 per share for the year ended February 2, 2008.

Saks released results for its fiscal first quarter (ended May 2nd). The company lost $0.04 a share, much better than forecast of a $0.28 share loss. Cost controls drove the upside, as the company realized about $44 million in SG&A cost reductions in the quarter. For the whole of fiscal 2009, SG&A cost savings are expected to be approximately $60 million. Sales were down 27% on a year-over-year basis. Comparable-store sales fell 27.6%. Given the April period’s upside, and ongoing cost controls and inventory reductions, the company should lose about $0.50 a share this year, less than previous estimates of a $1.00 share loss.

Saks recently closed a convertible offering:

Saks granted the initial purchasers of its Notes an option to purchase up to $15 million principal amount of additional Notes, solely to cover over-allotments. The Notes will bear cash interest semiannually at an annual rate of 7.5%. The Notes will be convertible at the option of holders at an initial conversion rate of 180.5869 shares of common stock per $1,000 principal amount of Notes into, at Saks` election, cash, shares of Saks common stock or a combination thereof. The initial conversion rate is equivalent to an initial conversion price of approximately $5.54 per share of Saks common stock. The initial conversion price represents a premium of 25% relative to today’s closing sale price of Saks common stock. The Notes will not be redeemable before the maturity date, December 1, 2013. The Notes will be fully and unconditionally guaranteed by all of Saks` subsidiaries that are guarantors under its existing revolving credit facility. Saks intends to use the proceeds from the offering to pay down amounts outstanding under its revolving credit facility and for general corporate purposes.

The offering is interesting both for the interest rate being paid (just over 7%) and the conversion premium (25% higher than day of offering). Neither of those give an indication of a troubled company or heightened investor fear.

The NYC flagship store accounts for 21%of sales and 30% of company wide sales take place in Q4.

Owned v Leased locations (click to enlarge):

Catalysts:

Valuation
Saks currently sports a book value of $6.86 which means at its current $3.80 a share it trades at 56% of its book.

Even in a worse case scenario, in Chapter 11, Saks has $2.1 billion in assets v $1.1 billion in liabilities so there is plenty left for shareholders. Because they only own 1/3 of their locations, the current CRE problems will have limited effect on the “assets” side of the equation. When you couple that with the fact the locations they do own are prime RE, then that effect is even further diminished.