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Saks Incorporated (SKS)

Q3 2012 Earnings Conference Call

November 13, 2012 9:30 am ET

Executives

Stephen I. Sadove – Chairman of the Board, Chief Executive Officer

Kevin G. Wills – Executive Vice President and Chief Financial Officer

Ronald L. Frasch – President and Chief Merchandising Officer

Analysts

Deborah Weinswig – Citigroup

Charles Grom – Deutsche Bank

Paul Swinand – Morningstar

Matthew Boss – JPMorgan

Kimberly Greenberger – Morgan Stanley

Carla Casella – JPMorgan

Lorraine Hutchinson – BofA Merrill Lynch

Barbara Wyckoff – CLSA Limited

Jennifer Davis – Lazard Capital Markets

Michael Binetti – UBS

Michael Exstein – Credit Suisse

Presentation

Operator

Greetings, and welcome to the Saks Incorporated third-quarter earnings conference call. At this time all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. (Operator instructions) As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Steve Sadove, Chairman and CEO of Saks Incorporated. Thank you, sir. You begin.

Stephen I. Sadove

Thanks, good morning. This is Steve Sadove. I'm joined on the call today by Ron Frasch, President and Chief Merchandising Officer; 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.

First, let me note that some of the comments on the call 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 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 or 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 the release and our filings with the SEC, including a most recent Form 10-KA.

Today, we will discuss the financial results for the third quarter ending October 27, 2012, our outlook for the fourth quarter, and give you a general business update. At the end of the call, we'll be glad to respond to your questions.

Before I turn the call over to Kevin to discuss the financial results, let me just make a few comments. In spite of the continued uncertain macroeconomic environment, we were pleased to post a modest year-over-year increase in our operating income and net income for the third quarter. Our 3.3% comp store sales increase was somewhat below our initial expectation but was on top of a solid 5.8% comp store sales increase in the prior-year third quarter. Our third-quarter gross margin rate deterioration ¡s partially offset by modest SG&A leverage, with our gross margin rate slightly below our expectations and our SG&A leverage modestly better than our expectations.

As the overall macroeconomic environment remains challenging, we continue to approach the future cautiously, but very strategically. We remain focused on executing our core merchandising, service and marketing strategies, and at the same time we are making critical systems and infrastructure investments to evolve our business to more fully embrace on the channel retailing. We are confident that these investments will position us for the future and will generate incremental sales and operating margin improvement over time. We remain very optimistic about the long-term outlook for luxury retailing in general and, specifically, for Saks.

Having said that, sales trends were soft for the first two weeks of November in the aftermath of Hurricane Sandy. We ordinarily don't comment on the first weeks of a quarter, but Sandy was such an extraordinary event and has had such an impact on our business so far in the fourth quarter that we thought it was appropriate to provide more color under the circumstances. Many of our stores, representing about 40% of our total Company revenues, were directly impacted by the storm and we have experienced a decline in saks.com sales generated from our customers in the Northeast.

Additionally, sales in a number of our other stores, particularly in Florida, were indirectly affected by the storm as many of our northeastern customers have ties to those markets. In aggregate, we estimate that Hurricane Sandy impacted about 55% of our total Company store revenue base. 11 Saks Fifth Avenue stores out of our 45 full-line stores were closed from 1 to 7 days, including our New York flagship, which was closed for two days. 15 of our 64 OFF 5TH stores were closed for up to five days. Additionally, we had a few stores in which operating hours were reduced. We saw an immediate loss of business during the storm and we are still generating lower sales in many of the locations.

Based on these current sales trends and the uncertainties rounding future demand, we are adjusting our outlook for the fourth quarter, which we believe represents a more realistic view of the business. I will give you more details in a few minutes about our assumptions for the balance of the year.

Fortunately, none of our stores to sustained any material damage. We reopened the stores as quickly as electricity was restored and as soon as associates could return to work. It was remarkable how so many of our associates went to such extraordinary measures to actually get to work in the days immediately following the storm. We were as prepared as we could have been for such an event. Our business continuity plans were quickly executed and we set about trying to assure that each of our associates was accounted for and safe and that we could get our stores and support locations up and running as quickly as possible. This was an effective, collaborative and inspiring effort among countless associates in our organization from asset protection to store managers to human resources and on and on. It's truly remarkable what were able to accomplish in just a few days.

Our primary concern was for our many associates, customers and vendors that live and work in the affected areas. Thankfully, none of our associates was injured but many suffered devastating personal property losses and have been displaced due to the storm. Several years ago we established an associate relief fund for aiding associates and their families that were victim to such natural disasters. Following Hurricane Sandy, we made a meaningful corporate donation to this fund and we will also match associate contributions to the fund.

All of our stores and support locations across the country are holding their own fund-raising events to contribute to the fund. We were also proud to make a donation to the American Red Cross, our national charity partner, for their relief efforts.

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