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Published
Aug 24, 2009
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Are Saks shares in style or out of fashion?

By
Reuters
Published
Aug 24, 2009

SEATTLE (Reuters) - Saks Inc (SKS.N) shares have quadrupled from the 12-month low of $1.50 in March as investors applaud the department store operator's cost-cuts, inventory management and a push for lower-priced merchandise.


Photo: REUTERS/Mike Segar

The stock's gain has far outpaced the Dow Jones industrial index .DJI, which rose 37 percent over the same period, as well as department store peers on the S&P 1500 Department Stores Sub-Industry Index. Saks was trading around $6 on Friday 21 August.

When it reported second-quarter results on August 18, the company said it slashed costs and is putting lower-priced items in stores to lure fashion-conscious shoppers who are now also budget conscious.

After eye-popping discounts of 70 percent during last year's holiday season, Saks is still trying to coax shoppers to pay full prices.

Saks cut $33 million of selling, general and administrative costs in the second quarter, more than double its $15 million target. It is aiming to cut inventory by 20 percent this year.

But the company has indicated that it may be running out of ways to cut expenses, and that sales don't seem near a substantial improvement anytime soon.

So should investors look past Saks' near-term sales hurdles and buy its stock? Or are its problems deep enough to back out?

THERE'S VALUE IN SAKS

"We remain constructive on Saks' shares," said Deutsche Bank analyst Bill Dreher, who has a "Buy" rating on the stock.

"Historically, Saks' comps have been highly correlated with the stock market. We believe that continued improvement in the stock market should help put Saks' core consumers at greater ease and get them to increase spending again."

Comps, or same-store sales, track sales at stores open at least one year.

Saks' efforts to adjust its merchandise to emphasize lower prices and exclusive items should help same-store sales turn positive by the second quarter of 2010, Dreher said.

JP Morgan analyst Charles Grom, who upgraded Saks shares to "overweight" in April, said they had been "unfairly hit."

"Although we believe that a pullback in discretionary spending and a more pronounced promotional environment will weigh on sales and margins, we think the stock has been unfairly hit provided there is no going concern risk with the company," Grom wrote in a note to clients.

"Moreover, we believe management has taken the necessary steps to right-size its business and manage through the current difficult environment, allowing for margin recovery in the second half of 2009."

STAYING WARY

Credit Suisse analyst Michael Exstein, rates Saks' shares "underperform" and has a $2 price target on them.

"Although the company has made progress on lowering expenses and inventory, the outlook for sales in the luxury market remains downbeat," Exstein said in a note. "The company and the industry as a whole is not seeing any indication that the Fall will be materially better than the Spring."

"The company's de-leveraging (at the expense of shareholders) with little sales upside and little room for further expense cuts in our view leads us to assign this target multiple on Saks' shares," Exstein said.

Goldman Sachs analyst Adrianne Shapira was also wary about Saks' stock, despite forecasting a lower full-year loss of 70 cents a share from a prior view of 88 cents a share and having a "neutral" rating on the shares.

"The ultimate trajectory and timing of a full turnaround remains a question mark," Shapira wrote in a note.

"Cost reduction efforts have been impressive, but at some point, investors will demand top line in lieu of expense reduction to sustain current share price levels."

(Reporting by Aarthi Sivaraman; Editing by Phil Berlowitz)

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