Saks' Proffitt's to be Herbergered (Fool Plate Special) August 18, 1999

An Investment Opinion

Saks' Proffitt's to be Herbergered

By Warren Gump (TMF Gump)
August 18, 1999

Department store company Saks (NYSE: SKS) announced results that met estimates for Q2, but warned that earnings for the rest of the year would fall short of previously issued company guidance. The company now expects earnings for fiscal 2000, which ends in January, to hit $1.80 per share before nonrecurring items, lower than its most recent guidance of $2.10-$2.25. At the beginning of the year, the company had stated it expected earnings to be $2.20-$2.25 per share. Fiscal 1999 earnings were $1.63 per share.

Saks, which was called Proffitt's before its acquisition of Saks Holdings last year, operates stores under the Saks Fifth Avenue, Proffitt's, McRae's, Younkers, Parisian, Herberger's, Carson Pirie Scott, Bergner's, Boston Store, and Off 5th banners.

The reasons given for the reduced earnings estimates for the rest of the year are lengthy:

(1) The merchandise mix at Saks Fifth Avenue is too skewed toward lower-margin products. The company is trying to address this problem through new merchandising efforts, but not enough improvement is expected before year-end.

(2) Companywide same-store sales projections are being reduced from 5%-7% to 4%. This reduction is blamed on simply being too aggressive in assumptions.

(3) Sales at 15 former Mercantile stores acquired from Dillard's Department Stores (NYSE: DDS) last fall are running at about 80% of expectations and are costing more than expected to operate.

(4) Credit card receivables are being paid off faster than expected. In addition, this unit will suffer from lower overall sales and lower usage of the company's credit card relative to other payment options.

(5) The company is gearing up to offer e-commerce initiatives focused on the Saks Fifth Avenue brand name. Costs of these efforts will crimp earnings this year.

Chairman and CEO R. Brad Martin, who has melded Saks together from an operation that consisted of just a few stores in Knoxville, TN less than two decades ago, summed up the announcement: "Great progress is being made on each front, but simply not fast enough to achieve the aggressive earnings growth rate targets [laid out by management] in one year."

This refrain is being told by quite a few management teams after they swoop in and buy up major assets. Shareholders of Starwood Hotels (NYSE: HOT) were burned after its acquisition of ITT; McKesson-HBOC (NYSE: MCK) become embroiled in a tremendous mess after it learned that HBOC had been cooking its books; and both Newell Rubbermaid (NYSE: NWL) and Clorox (NYSE: CLX) have been struggling under the weight of their respective Rubbermaid and First Brands acquisitions. These problems raise the question of how much due diligence is being done prior to the completion of such deals.

Saks has powerful name brands that intuitively seem to hold quite a bit of value. At the same time, an upscale retailer should be experiencing its most favorable results during periods of extreme economic prosperity. The fact that Saks is struggling indicates that the problems are probably so severe that they can't be quickly corrected. After two downward revisions to this year's estimates, investors will probably be better served waiting for signs that the difficulties don't worsen yet again.