There were smiles all around at Saks (NYSE: SKS ) this week as management reported fourth-quarter results. And why not? The luxury retailer left its competition in the dust by posting 9% comp sales growth on top of 10% the previous year. When it comes to satisfying the upscale crowd, Saks has it nailed.
The New York flagship store led the way, capturing a healthy chunk of a brisk tourist trade and showing the world how shoes are really sold at its new eighth-floor destination shop. Talk about well-heeled, this single floor has its own zip code (10022-SHOE), U.S. postal stamp, and designer coffee shop.
Saks delivered flagship earnings to match. Earnings per share of $0.19 were a 36% increase, excluding one-time items. Reported EPS rose 86%. Gross margins expanded by 50 basis points, with expense leverage contributing another 70 basis points. The Street was expecting a little more, but what's one penny among well-to-do friends?
Saks' management isn't expecting results to be as flush for 2008, following the cautious lead of Macy's (NYSE: M ) , Nordstrom (NYSE: JWN ) , and more mainstream department stores like J.C. Penney (NYSE: JCP ) .
Comparable sales growth was up just 3.4% in February, and management expects this slower rate to continue for a while. Business remains brisk among the high-end clientele, but traffic is slowing among "aspirational" shoppers.
Inventories ended the year up 9%, a bit on the heavy side. About two-thirds of this merchandise stock is in strategic items like handbags and footwear that carry a moderate risk profile. Management noted that with recent sales trends, it will need vigilance to get inventories back in line by the summer.
Although Saks led apparel retailers of all stripes in sales growth for 2007, I'm cautious about the stock, which trades at a more than stylish 68 times the trailing-12-month earnings ratio. With fellow high-end rivals like Nordstrom and Nieman Marcus recently reporting negative comp sales for February, this type of blue-blooded valuation doesn't appear to have much upside.
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