Wanna know why so many longtime investors are skeptical of buyouts?
Back in September 1998, a company called Proffitt's bought Saks Fifth Avenue for $2.82 billion and created what is now Saks Incorporated
The combined company's market cap at 11 a.m. today? $2.1 billion.
While Saks has had some bright spots and even paid a special one-time dividend earlier in 2004, the stock's price has swung violently over the past five years in the process of going pretty much nowhere at all.
A large part of the problem has been the company's profitability, or rather lack thereof. The company's operating margins are pretty anemic, among the worst of its comparable group, and they fell further to 3% in 2004 -- from 3.7% in 2003.
Results for the fourth quarter weren't exactly great either. Total sales climbed about 5% and same-stores were up 4% for the quarter as a whole. While that's not so bad, consolidated gross margins fell by 1.2%, as the result of heavy markdowns, and operating margins fell from last year as well.
More bad news: The company has announced that it is investigating improperly collected vendor allowances from 1999 to 2003 (the SEC has also launched an informal inquiry) and that it must restate prior earnings (going back to 1999, too) as a result of lease-related accounting errors. Though I don't feel either issue is particularly worrisome, the last thing this company needs is more bad news.
The question now is whether the company can turn its business around and grow the bottom line. Retailing turnarounds can certainly happen. JC Penny
The good news here is that the stock isn't very expensive. Trading at a valuation of only about one-third times sales, Saks is well below peer valuation for its group. What's more, the company's ownership of numerous stores gives it a real estate value that is probably somewhere in the neighborhood of $13 a share.
As turnarounds go, Saks look to me like a middle-of-the-road candidate. The company has a "real" business, manageable debt, and is actually still growing. On the flip side, the company is in an intensely competitive business, it has had some obvious management control issues, and its Saks Fifth Avenue chain doesn't hold quite the cache that it once did. Still, the risk/benefit scale seems to be tipping more toward "benefit" at this point.
Fools considering these shares need to keep a careful eye on both the top side of the business (same-store sales trends) and the bottom line (the company's operating profitability). There is certainly potential for a turnaround here and patient investors may well be rewarded, but none of that will come to be if margins don't pick up.
Fool contributor Stephen Simpson has no ownership interest in any stocks mentioned