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Margin Forecast Smacks Saks

Shares slide even though the upscale retailer narrows its loss.

SAN FRANCISCO -- Saks (SKS) narrowed its losses in the second quarter, but shares of the upscale retailer fell after the company projected flat gross margins for the remainder of the year.

Shares were down $1.17, or 6.5%, to $16.77 in recent trading.

For the quarter ended Aug. 4, Saks reported a loss of $24.6 million, or 17 cents a share, including 3 cents a share in charges for the sale of its department store group and other items. That compared with a loss of $51.9 million, or 38 cents, last year in the same period.

Revenue grew 15% to $694.1 million from $603.8 million a year ago. Same-store sales, or sales at stores open at least a year, jumped 13%.

Analysts were expecting a loss of 15 cents a share on revenue of $685 million.

The company's gross margin rate in the second quarter increased 270 basis points, primarily as a result of reduced markdowns. But CEO Stephen Sadove said he doesn't expect that growth to continue, at least not in the near term.

"This fall we begin to anniversary the significant improvements we made in our gross margin rate and expense leverage over the last 12 months and consequently don't anticipate the same degree of gross margin expansion and expense leverage for the balance of the year," he said in a conference call Thursday morning.

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Due to a calendar shift this year, Sadove said he expects outsized same-store sales growth in August, September and November but below-average same-stores sales growth in October and December, as well as relatively flat gross margins.

The company anticipates same-stores sales in the high-single digits for the rest of the year.

Sadove said sales in the second quarter were particularly strong in women's sportswear, handbags, footwear and men's apparel. Online sales increased 40% over the prior year.

Analyst Todd Slater of Lazard Capital Markets says it would be hard for Saks to keep up the same gross margins as last year, especially in a tough economy with one less week on the calendar.

Slater points out that the company's gross margins rose more than 100 basis points in the third quarter of last year and more than 400 basis points in the fourth quarter of last year.

"Maintaining those levels is quite a positive result in the softer consumer environment," he says. "I personally feel it's smart to project and guide to under-promise and over-deliver."

Slater says Saks has been doing a better job of merchandising at its stores and injecting more money into its nonflagship locations.

"They're more in tune with the customer demographic," Slater says, adding that a couple of years ago, the chain tried to be too hip and young. "Now Saks as its own entity is more focused and driven and has some of the best merchandise in luxury-store retailing."