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Saks' Price Tag Too High

05/21/07 - 02:21 PM EDT

Marc Lichtenfeld

I love a good turnaround play.

For instance, I'm champing at the bit waiting for evidence that things are improving at Gap (GPS - Cramer's Take - Stockpickr). Wal-Mart (WMT - Cramer's Take - Stockpickr) is dirt cheap for a reason, but investors could be rewarded if its enormous house gets in order. And McDonald's (MCD - Cramer's Take - Stockpickr) has shown remarkable success in shifting its image from an artery-clogging fast-food joint to a healthier restaurant with a great cup of joe in addition to Big Macs.

Now another well-known brand, Saks (SKS - Cramer's Take - Stockpickr), has found its footing. The luxury retailer reported better-than-expected first-quarter numbers Monday, confirming that its improvement is progressing.

But I don't love this turnaround play. The fix is already priced into Saks' stock -- and then some.

Margin Miscues

In the first quarter, Saks earned $11 million, or 7 cents a share, down from $77.9 million, or 57 cents a share, a year earlier, because of the divestiture of its department-store division. Excluding one-time items, Saks earned 19 cents a share in the quarter, topping Wall Street's estimate of 16 cents.

Sales rose 16% to $793 million, beating analysts' average estimate of $787 million. Same-store sales for the quarter jumped a sizzling 14.4%, coming off an easy comparison of a 1.9% decline last year.

However, a 6-basis-point improvement in gross margin to 41.4% was viewed as something of a disappointment. Morgan Stanley's Michelle Clark, for one, expected gross margin to come in at 42.1%.

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In keeping with TSC's editorial policy, Lichtenfeld doesn't own or short individual stocks. He also doesn't invest in hedge funds or other private investment partnerships.

Marc Lichtenfeld was previously an analyst at Avalon Research Group and The Weiss Group and a trader at Carlin Equities. He holds NASD 86, 87, 7 and 63 licenses. His prior journalism experience includes being a reporter/anchor for On24 in San Francisco and a managing editor of InvestorsObserver, a personal finance Web site. He is a graduate of the State University of New York at Albany. He appreciates your feedback; click here to send him an email.


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