In the fall of 2003, Saks (NYSE:SKS), one of America's premier department stores, opened a store in Richmond, Va. We'd previously lacked high-end retail clothing stores in my hometown. And since its arrival, I've found myself, and my credit card, being magnetically drawn to her doors. I've mostly lost my desperate fight to resist the urges to buy immense amounts of clothing, shoes, cosmetics, and accessories. The shiny marble floors, the sparkling mirrors, the welcoming staff... ahhhh.
To fend off the addiction, I've decided to investigate the business, rather than patronize it. At least temporarily. Peter Lynch said to look through your consumer addictions for investment opportunities. So be it.
The business
Since 1924, Saks has worked hard to lure shoppers like me into their stores. And it's succeeded in delivering high-end, unique, and fashionable luxury merchandise to a growing base of buyers. But the company brand took on a new dimension when, in 1998, a Southern department-store chain named Proffitt's bought out Saks. The combined entity decided to take on the glitz of Saks as its corporate name and to expand these stores across the nation.
Today, the parent company has two subsidiaries: Saks Fifth Avenue Enterprises, which manages and operates stores like the one opened in Richmond, and the Saks Department Store Group, which runs a 243-location array of upper-end department stores across the Southeast and Midwest. Its names include Proffitt's, Parisian, McRae's, Younkers, Herberger's, Bergner's, Carson Pirie Scott, Off 5th, and Club Libby Lu.
The management
When researching stocks, I always like to look through the executive ranks first. Saks' CEO is Brad Martin, a man who bought out the Proffitt's chain in 1984, taking it public just a few short months before the stock-market crash of 1987. Under Martin's reign, Proffitt's and Saks have made major acquisitions, and with the exception of the last four years, the company has grown immensely. Today, Martin personally owns more than $40 million of company stock. That suggests he has significant incentives to help the shares rise from their spot at $17 today.
As a side note, Martin has had a run in politics, too. He's served on Tennessee's House of Representatives and was elected to the state's General Assembly two days after his 21st birthday. I like ambitious leaders.
Company and stock performance
Since he brought the business public in 1987, Martin has helped the stock to a marginal outperformance of the market's average return. Over the past two years, the shares have tripled. Yet, since mid-1998, Saks stock has traded down more than 55% from its high in the low $40s.
Why all this volatility? It starts with the simple fact that, during the bear market and economic recession, people like me were doing less luxury shopping at stores like Tiffany (NYSE:TIF), Gucci (NYSE:GUC), and Polo Ralph Lauren (NYSE:RL). In fiscal 2002, Saks' sales fell 8%. Sales declined further in 2003. In fact, the company is just now rebounding to its level of sales back in 1999.
But here's the key. When the rate of sales decline slows and then flattens out, you can often find a great investment (like Saks below $10 a year ago). This is one of the key traits Tom Gardner looks for in his Motley Fool Hidden Gems newsletter. And as sales were flattening out, Saks' gross and operating margins were improving. That's doubly good.
Finally, to further satisfy its shareholders (Martin among the largest of them), Saks focused back on its core business by selling off its private-label credit card to Household International. It raised around $250 million from the purchase, and used that money to pay down debt and buy back stock (five million shares over the past year). Management is doing a convincing job of revitalizing this business. Sales are outgrowing inventory. Cash positions are up. And that Saks store in Richmond sure does look great.
Future Prospects
So, we've missed the great run of the past two years. But what now?
I believe that even given the great credentials, and with the stock tripling in the past two years, Saks is not a very attractive value today. While the sales growth has turned, it isn't rapidly accelerating. The company has been benefiting from tax-loss carryforwards that will run out. And margins have been slightly weaker over the past year. I'm sure there are more efficiencies to be squeezed out. But off its earnings, cash flows, and sales growth, the stock just can't get me as excited about the store's merchandise. I'd look for a better bargain below $15. I think the gains have been too much, too fast, and I'd prefer to bargain shop for a better price on this stock.
Saks' released fiscal year-end results and February sales recently, providing evidence that the turnaround is indeed continuing. However, I'm not confident enough to jump in at this price. I fear that some of the gains today reflect investor over-enthusiasm for the economic turnaround and its turnaround effect on retail sales. Of course, I may be proven wrong in the year ahead.
Regardless, I'll be doing my part to help the company here in Richmond. Now that I'm done with the research, it's time to return to my favorite store in town.
Liz Pratt doesn't own any of the companies mentioned in this article.
