Saks Looks Priced for a Perfect Turnaround

Looking at its stock performance, you'd never guess that fiscal year 2008 (which ended in February) was a banner year for Saks (SKS - commentary - Cramer's Take).

Management crowed on its year-end conference call that "our operating margin's 4.2% doubled the 2.1% generated in 2006. This performance exceeded our targeted performance for 2007 and was driven by our comp-store sales increase of 11.7%, 50 basis points of gross margin expansion, 70 basis points of SG&A leverage and 100 basis points of leverage on other operating expenses."

The Best-Laid Plans ...

At a presentation on Tuesday, Saks CEO Steve Sadove outlined the company's plans for long-term operating improvement; its goals include increasing operating margins to 8%. The plan requires:

• outsized comparable-store sales growth;
• gross margin rate improvement; and
• cost-effective infrastructure.

That strong comp-store performance came to a screeching halt. According to a recent 8-K filing, same-store sales are down 0.1% for the two months ending April 5, and 2.9% for the five weeks ended April 7. In other words, the decline is accelerating. With analysts currently estimating 4.4% sales growth for the 2009 fiscal year, the fabled second-half recovery is going to have to be rather strong to keep those estimates intact.

At the presentation, Sadove said that luxury consumers were responding to promotions and added that "you're going to see more promotions over the course of the first part of this year" as retailers look to clear excess inventory. That likely means shrinking gross margins going forward, thus knocking the second leg out from under management's plan.

Indeed, the 2008 plan is now forecasting flat operating margins, mid-single-digit comp growth, modest gross margin declines and modest SG&A leverage. As I noted earlier, positive comps are looking like a stretch goal so far. At this point, I expect earnings to be closer to the 42 cents in fiscal 2008 than the 46 cents currently predicted by analysts.

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At the time of publication, Trent had no positions in stocks mentioned, although positions may change at any time.

William A. Trent, CFA, is a freelance equity analyst based in the New York metro area. He has been an equity analyst since 1996 and is co-author of Understanding and Evaluating Prospectuses, Offering Documents, and Proxy Statements. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. Trent appreciates your feedback; click here to send him an email.