Saks Incorporated (SKS)
Q1 2010 Earnings Call Transcript
May 18, 2010 9:30 a.m. ET

Executives

Stephen I. Sadove - Chairman and Chief Executive Officer
Kevin Wills - Executive Vice President and Chief Financial Officer
Ronald L. Frasch - President and Chief Merchandising Officer

Analysts

Rick Patel – Bank of America/Merrill Lynch
Michelle Clark – Morgan Stanley
Robert Drbul – Barclays Capital
Adrianne Shapira – Goldman Sachs
Gordon McKemie – Barclays Capital
Barbara Wyckoff – Jesup & Lamont
Paul Truco – J.P. Morgan
Dana Telsey – Telsey Advisory Group
Deborah Weinswig – Citigroup
Mark Kaufman – Rafferty Capital Markets
Jennifer – Lazard Capital Markets

Presentation

Operator

Good morning. My name is Nautrus [ph] and I will be your conference operator today. At this time, I would like to welcome everyone to the First Quarter Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speaker’s remarks, there will be a question-and-answer session. If you would like to ask a question during this time, simply press star then number one on your telephone keypad. If you would like to withdraw your question, press the pound key. Thank you. I would now like to turn the call over to your host, Steve Sadove, Chairman and CEO of Saks Incorporated. Mr. Sadove, you may begin your conference.

Stephen I. Sadove

Good morning. This is Steve Sadove, Chairman and CEO of Saks Incorporated. I''m joined on the call today by Ron Frasch, President; Kevin Wills, our CFO; and Julia Bentley, our Senior VP of IR. I would like to thank each of you for taking the time to join us. Today, we will discuss financial results for the first quarter ended May 1, 2010, our outlook for the balance of the year and update you on several other business matters. At the end of the call, we will be glad to respond to your questions.

Before I turn it over to Kevin to discuss the financial results, let me note that I''m very pleased with our first-quarter performance. The results exceeded our expectations and were driven by comparable store sales growth, gross margin expansion and expense leverage. The Saks team has carefully navigated through the challenging environment, and we are now moving cautiously from defense to offense.

As we move through 2010, we know that consumers will continue to be discriminating and that expectations for service and differentiated product with value will be even higher. We will continue to be fiscally conservative. We are beginning to take some balance risks. We will talk more about these items in just a minute.

Now, let me turn the call over to Kevin to provide more color on our first-quarter operating results and balance sheet.

Kevin Wills

Thanks, Steve and good morning, everyone. First, let me note that some of the comments on the call today as well as some of the information presented in our release related to future results or expectations, are considered forward-looking information within the definition of the federal securities law. The forward-looking information is premised on many factors and actual consolidated results might differ materially from projected information if there are any material changes in our assumptions or in the various risks related to our industry and our company. For a description of the risks and assumptions related to these projections, please refer to our release and our filings with the SEC, including our most recent Form 10-K.

For the first quarter, we recorded net income of $18.8 million or $0.11 per share. Those results included after-tax charges totaling $1.1 million or $0.01 per share related to estimated store closing costs. Excluding those charges, we posted income of $19.9 million or $0.12 per share. This compares to a loss from continuing operations of $4.9 million or $0.04 per share in the prior year first quarter.

Let me note that the diluted Q1 share count of approximately $200 million included 21.7 million shares associated with the $120 million convertible debenture and 19.2 million shares associated with the $230 million convertible debenture. The $120 million converts are in the money are dilutive this quarter and therefore, included in the share count. The $230 million convert is not in the money but due to our debt rating, they are convertible and are included in the Q1 share count. All the numbers we will discuss today exclude the previously mentioned store closing costs.

As Steve noted, our first-quarter profit resulted from comparable store sales growth, gross margin rate improvement and expense leverage. Our 6.1% comparable store sales increase was generated in a period during which we strategically reduced our promotional activity. In the Saks Fifth Avenue stores, several merchandise categories showed strength during the quarter, including women''s and men''s apparel, handbags, shoes and jewelry.

For the quarter, the New York City flagship store sales performance continued to exceed the company''s aggregate comparable store sales growth. Saks Direct posted an approximately 33% comparable store sales increase for the quarter. OFF 5TH comparable store sales performance was below the company''s aggregate comparable store sales performance for the period.

We generated meaningful year-over-year gross margin rate improvement in the first quarter, up 440 basis points to 43.1% this year from 38.7% in last year''s first quarter. The improvement exceeded our expectation and resulted from carefully managed inventory levels, increased full price selling and a reduced level of promotional activity. Managing SG&A continues to be a top priority for the company and we delivered 90 basis points of expense leverage during the quarter. As a percent of sales, SG&A expenses were 24.5% this year compared to 25.4% in the prior year first quarter.