Saks Incorporated Management Discusses Q2 2012 Results - Earnings Call Transcript

Saks Incorporated (SKS)

Q2 2012 Earnings Call

August 14, 2012 9:30 am ET

Executives

Stephen I. Sadove - Executive Chairman and Chief Executive Officer

Kevin G. Wills - Chief Financial Officer, Principal Accounting Officer and Executive Vice President

Ronald L. Frasch - President and Chief Merchandising Officer

Analysts

Charles X. Grom - Deutsche Bank AG, Research Division

Barbara Wyckoff - CLSA Asia-Pacific Markets, Research Division

Deborah L. Weinswig - Citigroup Inc, Research Division

Lorraine Maikis Hutchinson - BofA Merrill Lynch, Research Division

Paul Swinand - Morningstar Inc., Research Division

Matthew R. Boss - JP Morgan Chase & Co, Research Division

Kimberly C. Greenberger - Morgan Stanley, Research Division

Jennifer M. Davis - Lazard Capital Markets LLC, Research Division

Dana Lauren Telsey - Telsey Advisory Group LLC

Lizabeth Dunn - Macquarie Research

Michael Binetti - UBS Investment Bank, Research Division

Michael B. Exstein - Crédit Suisse AG, Research Division

Presentation

Operator

Greetings, and welcome to the Saks Incorporated Second Quarter Earnings Conference Call. [Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Steve Sadove, Chairman and CEO of Saks Incorporated. Thank you, sir. You may begin.

Stephen I. Sadove

Thanks. Good morning. This is Steve Sadove, Chairman and CEO of Saks. I'm joined on the call today by Ron Frasch, our President; Kevin Wills, our CFO; and Julia Bentley, our SVP of Investor Relations. I'd like to thank each of you for taking the time to join us.

First, let me note that some of the comments on the call today, as well as some of the information presented in our release, related to future results or expectations, are considered forward-looking information within the definition of the federal securities laws. The forward-looking information is premised on many factors, and actual consolidated results might differ materially from projected information if there are any material changes in our assumptions or in the various risks related to our industry and our company. For a description of the risks and assumptions related to these projections, please refer to the release and our filings with the SEC, including our most recent Form 10-K/A.

Today, we'll discuss the financial results for the second quarter ended July 28, 2012, our outlook for the balance of the year, and give you a general business update. At the end of the call, we'll be glad to respond to your questions.

Before I turn the call over to Kevin to discuss the financial results, let me just make a couple of comments. While our second quarter results, excluding certain items, were approximately flat with the prior year, we were able to post a modest increase in year-over-year net income, excluding certain items, for the 6 months in spite of a challenging economic environment.

Our comp store sales increases of 4.7% in both the second quarter and 6 months were on top of very strong 15.5% and 12.7% increases in the second quarter and first 6 months of last year, respectively. As expected, we experienced gross margin rate deterioration and modest SG&A deleverage, excluding certain items, during the quarter and first half, which Kevin will discuss in more detail in a few minutes.

While the overall near-term macroeconomic environment remains uncertain, we continue to be optimistic and excited about the future of Saks and our ability to generate continued growth. We remain focused day in and day out on executing our core merchandising service and marketing strategies. We're also taking a long-term view by strategically and prudently evolving our business to fully embrace omni-channel retailing through a series of infrastructure and systems enhancements over the next several years. This is a transitional time for retail and for our company, and we believe these investments will position us for the future and allow us to deliver incremental sales and improve operating margins over time.

I'll talk more about the outlook for the balance of the year at the end of the call, but I will note that we are reaffirming our assumptions for the fall season.

I'll now ask Kevin to make a few comments about the results for the quarter and 6 months and also give some balance sheet highlights. Kevin?

Kevin G. Wills

Thanks, Steve, and good morning, everyone. For the second quarter, we posted a net loss of $12.3 million, or $0.08 per diluted share. The results included after-tax charges totaling $4.3 million related to preopening costs associated with the company's new fulfillment center in Tennessee, asset impairments and store closing cost. Excluding these items, we would've reported a net loss of $8 million, or $0.05 per share, for the quarter. This compares to last year's second quarter net loss, before certain items, of $7.6 million or $0.05 per share.

For the 6 months ended July 28, 2012, we recorded net income of $19.8 million, or $0.13 per diluted share. The results included after-tax charges totaling $4.8 million related to our new fulfillment center, asset impairment and store closing cost. Excluding these items, we would've reported net income of $24.6 million or $0.16 per share for the 6-month period. This compares to last year's net income, before certain items, of $22.9 million or $0.14 per share for the same period.

Let me note that for both the current and prior year second quarters and 6 month periods, the company's 2 convertible debt instruments were not dilutive. Therefore, the applicable shares and after-tax interest expense were not considered in the fully diluted earnings per share calculation. Also, all the numbers we will discuss today exclude the previously mentioned call-out items detailed in today's release.

As Steve noted, we had solid comp store sales performance for the quarter and 6 months on top of very strong prior year numbers. Several merchandise categories showed strength during the quarter, including women's and men's contemporary apparel, women's and men's shoes, fashion and fine jewelry, and cosmetics and fragrances. The New York City flagship store sales performance was positive but modestly below the comparable store sales performance of the company's Saks Fifth Avenue stores in the aggregate during the quarter.

For the second quarter, our gross margin rate declined 80 basis points to 37.2% compared to 38% last year. For the 6 months, our gross margin rate was 40.9% compared to 41.1% in the first 6 months of last year. As you might recall, on our first quarter earnings call, we outlined an anticipated 100- to 125-basis-point decline in our second quarter gross margin rate, so our actual results were a bit better than those expectations. Year-over-year gross margin rate deterioration was primarily attributable to incremental second quarter markdowns of certain merchandise categories needed to sell through inventory and move through the normal clearance cycle. Ron will discuss the specifics in a minute.

As a percent of sales, SG&A expense, excluding certain items, were 27.1% in the second quarter this year compared to 26.9% in the prior year second quarter and 26.1% for the current 6 months compared to 25.7% in the same period last year. As expected, we incurred modest deleverage during the quarter due to incremental SG&A expenses to support our omni-channel strategies and our information technology systems enhancements initiatives, which we're calling Project Evolution.

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