Earlier this week, the New York Post reported that high-end retailer Saks (UNKNOWN:UNKNOWN) had brought in Goldman Sachs to explore a possible sale. The company also reported its first-quarter results, and is looking fairly strong. Comparable sales grew, and earnings per share hit analyst expectations. The combination of quarterly results and sale rumors conspired to push the stock up 11% yesterday, and overnight it rose another 18%. Is this the right time for Saks to sell, and if so, what should investors be on the lookout for?
Saks on the auction block?
There are a few reasons that a firm would want to go private, but Saks' biggest motivating factor has to be its behind-the-scenes operation. Last quarter, operating margin dropped down to 7% from 8.6% the year before. Almost all of that fall came from an increase in selling, general, and administrative costs.
A prospective sale would likely involve a private equity firm looking to capitalize on Saks' strong name and solid fundamentals. That firm would likely cut back on employees and other costs, generating a quick increase in profit. Studies have shown that when private equity is involved in a public company takeover, employment drops by 10% within two years.
Saks is a great opportunity for private equity because it combines a strong brand with weak backroom operations. Compare that to a brand like recently acquired denim retailer True Religion (NASDAQOTCBB:TRLG.DL), which has had trouble driving traffic through the door. Last quarter, comparable sales only rose 0.7%, and earnings per share plummeted.
TowerBrook Capital, which bought True Religion, is going to have to bring the brand back to life. It's in a position where that's a manageable feat, though, as the company has dealt with retail brands before. Saks' strength as a brand means that it would be easier for a non-retail-focused private equity firm to jump in, maybe to test the retail waters.
What it means for investors
From my perspective, a Saks sale is an interesting mixed bag for investors. On one hand, it could mean a quick return for those who are just getting in on the stock, assuming the final sale price is high enough. On the other hand, Saks is a strong brand, and the long-term return could be higher than the quick-shot buyout.
Last quarter, comparable sales grew by 5.9%, which puts Saks ahead of many of its competitors. That kind of brand strength is hard to come by, and to see it get pulled away into the black hole of private equity would be a shame.
But there's no doubt that the stock has been dragging. Not counting the recent jump, Saks has been trailing the S&P 500 for the last 12 months, which means investors are losing out. Either way -- sale or no sale -- now is a good time to be holding Saks. We'll just have to wait and see if the same is true three months from now.
Fool contributor Andrew Marder has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.