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Younkers owner Saks seems to be struggling


Dear Mr. Berko:

Saks department stores now sells at $15.10, which is way down from its previous high price of $44 when it was taken over by R. Brad Martin’s group in 1998. Do you think it’s ready for a turnaround? The company has huge real estate interests that no one seems to consider, especially its Fifth Avenue store in Manhattan. Should I buy the stock? Its book value is $16.25 a share, which is one point over the stock’s trading price. Please give me your opinion of the company and what you think the stock could do in the next two to three years.

H.W., Springfield, Ill.

Dear H.W.:

In the early 1900s, Horace “Harry” Saks operated a retail store at 34th Street and Herald Square in New York City. With Bernard Gimble, Harry purchased today’s site on Fifth Avenue between 49th and 50th streets. They offered the most exclusive and classy fashions (men’s and women’s), and the name Saks quickly became synonymous with taste and elegance. Adam Gimble, Bernie’s cousin, became Harry Saks’ right-hand man.

When Saks died in 1926, young Adam (he was 32) became president of Saks Fifth Avenue. He was truly a marketing genius and redecorated the Fifth Avenue store in the opulent art moderne style from the 1925 Paris Exposition. He created a series of unique and high-priced shops within the exclusive opulence of Saks Fifth Avenue.

He traveled all over the world seeking uncommon items that would stand Saks well above all others, and he did it with grace, aplomb and exemplary taste. Adam Gimble passed away in 1970.

Today, Saks Inc. (SKS-$15.10) operates two business segments: Saks Department Store Group, consisting of 238 department stores with names like Proffitt’s, Carson Pirie Scott, Bergner’s, McRae’s, Younkers and Boston Store and 38 Club Libby Lu specialty stores; and Saks Fifth Avenue Enterprises, which operates 58 Saks Fifth Avenue Stores and 52 Saks Off 5th Avenue stores.

SKS employs 55,000 people in its 386 stores and these folks increased the company’s revenues from $6.2 billion in 1998 (when SKS was part of a merger headed by Martin that added the Proffitt’s, Younkers, Parisian, etc. names) to an expected $6.4 billion today. In those seven years under Martin, SKS’s revenues grew a total of 3.3 percent, or 0.45 percent a year. Unimpressive, that. Certainly May Department Stores, Neiman Marcus and Nordstrom have shown significantly superior revenue growth.

Saks has a good balance sheet, but its net profit margins are as weak as feeble tea, and those margins have been falling like lead leaves from 4.1 percent in 1998 to an expected 1.7 percent in 2004. Neiman Marcus, Nordstrom, May and even J.C. Penney have better net profit margins than Saks. As many professionals will tell you, one of the best measurements of management skills is the net profit margin. Certainly and sadly, Martin and his crew need an enormous amount of help.

This is a terribly cyclical business and SKS’s regional stores (Parisian, McRae’s, etc.) are having trouble competing. The company certainly needs to refurbish many of its older stores. This will be costly, and while the work is in progress, those stores will certainly suffer a revenue decline.

Meanwhile, the Saks Fifth Avenue division (which accounts for 40 percent of revenues) seems to be losing its glamour, panache and cachet. As if that weren’t bad enough, the Fifth Avenue stores (often a high profit center) have also become increasingly less profitable over the past few years.

Martin seems to sense this, as he recently closed eight Saks Fifth Avenue stores and three Off 5th outlet stores. But he will have to do much more than that to improve his embarrassingly low 4.1 percent return on capital and a measly 3.9 percent return on shareholders’ equity. The word “quit” comes to mind.

I think that any interest in SKS will not come from investors who believe its retail business will zoom. Far from it. Investors in SKS are more likely being attracted to its real estate values. And the consensus, according to several real estate mavens, is that SKS’s properties might be worth about $23 a share, net of debt. However, what would one do with that property today, when we may be on the periphery of a real estate bubble?

Stay away from SKS. It could move higher by a few points, but I’m not sanguine about Martin’s ability to manage this company into the future, and I’m not enthusiastic about the department store business as a whole. I think the market for stores like Saks, Macy’s, Nordstrom, etc. is saturated and future growth looks anemic at best.

It seems that more shoppers prefer specialty stores (high-end specialty stores, too), which are now located in shopping plazas rather than malls. Saks has a great name and a great past, but I can’t truthfully say the same about its future. The stock is a non-event.

Please address your financial questions to Malcolm Berko, P.O. Box 1416, Boca Raton, Fla. 33429 or e-mail him at malber@adelphia.net.

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