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Saks, Inc. (SKS)

Q4 2008 Earnings Call

February 25, 2009 10:00 AM 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

Michelle Clark - Morgan Stanley

Deborah Weinswig - Citigroup

Lorraine Maikis - Bank Of America

Karru Martinson - Deutsche Bank

Adrianne Shapira - Goldman Sachs & Co.

Emily Shanks - Barclays Capital

Dana Telsey - Telsey Advisory Group

Robert Drbul - Barclays Capital

Todd Slater - Lazard Freres

Christine Chen - Needham & Company

Michael Exstein - Credit Suisse

Presentation

Operator

Good morning, my name is Latika and I will be your conference operator today. At this time I would like to welcome everyone to the Fourth Quarter and Fiscal Year-End Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks there will be a question-and-answer session. (Operator Instructions). Thank you.

Mr. Steve Sadove, Chairman and CEO of Saks Incorporated, you may begin your conference.

Stephen I. Sadove

Thank you. Good morning, this is Steve Sadove, Chairman and CEO of Saks Incorporated. I'm joined today by Ron Frasch, President and Chief Merchandising Officer; Kevin Wills, our CFO; and Julia Bentley, our Senior VP of Investor Relations.

I'd like to thank each of you for taking the time to join us. Today, we'll discuss the financial results for the fourth quarter and fiscal year ended January 31, 2009; our outlook for 2009, and update you on several other matters. At the end of the call we'll be glad to respond to your questions.

Let me ask Kevin to briefly comment on the fourth quarter and year-end results and the 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 federal securities laws. 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.

For a description of the meaningful risk and assumptions related to these projections, please refer to the release and our most recent filings with the SEC, including our most recent Form 10-K.

As you are aware, the fourth quarter was very challenging for the retail industry as a whole and specifically for Saks. Our financial results were well below our initial expectations due in part to the actions we initiated to address the increasing imbalance between inventory supply and consumer demand in the luxury channel.

Primarily due to weak sales and gross margin performance, Sacks recorded a fourth quarter net loss from continuing operations of $82.9 million or $0.60 per share. The quarter included after-tax items totaling $11.2 million or $0.08 per share primarily related to asset impairment and severance charges. The company's fourth quarter operating loss excluding certain items totaled a $102.2 million this year compared to operating income excluding certain items of $56.5 million last year.

For the full year, the company posted a loss from continuing operations of a $122.8 million or $0.89 per share which included $26.2 million or $0.19 per share of certain items. Our operating loss excluding certain items for the full year totaled $113.8 million compared to operating income excluding certain items of $143.5 million last year.

We began the fourth quarter with year-over-year comparable store inventories up 4.4% and the expectation that we would end the fiscal year with a low single-digit comparable store inventory increase, through aggressive and targeted promotional activities, and by closely partnering with our vendors to return product and cancel orders, we made significant progress in reducing our inventory levels during the quarter.

Our consolidated inventories at year-end totaled $728.8 million, a 15% year-over-year decline on a total basis, and a 14.6% decrease on a comparable store basis. Additionally, we ended the year with clearance inventory approximately 45% lower than last year. Although we've made substantial progress improving our inventory position, we still face a disconnect between inventory levels and expected consumption trends in the first half of 2009.

At year-end, we had approximately $10 million of cash on hand and approximately $157 million of direct outstanding borrowing on our $500 million revolving credit facility. Recall that $84.1 million of senior notes matured in mid-November, and we retired the notes for drawing on the revolving credit facility.

Year-end funded debt including cap leases and borrowings on the revolving credit facility totaled approximately $640 million and debt to capitalization was 39.9. I'll make some additional comments regarding our capital structure and liquidity in a few moments. Steve?

Stephen I. Sadove

Thanks Kevin. The fourth quarter of 2008 was the combination of an incredibly difficult year and our operating performance reflected the rapidly deteriorating macroeconomic conditions.

The comp store sales declined 15.3% in the fourth quarter which compares to a 9% comp stores sales gain reported in the same period last year. We continue to experience weakness across all geographies, merchandise categories, and channels of distribution.

Soft performance continued in the New York City flagship store which represents approximately 20% of our company sales. Women's apparel continue to be the most challenging merchandise category. On a year-over-year basis, the number of transactions increased while the average dollars per transactions declined from last year's fourth quarter.

Saks Direct posted a 1.3 comp store sales decline in the quarter versus an increase of over 40% in last year's fourth quarter. Saks Direct's comps grew by approximately 16% for the full year on top of a 40% growth for 2007. OFF 5TH's comp store sales performance continued to show relative strength, although sales trends slowed over the last few quarters.

We posted a 20.8% gross margin rate in the fourth quarter compared to a 37.1% in the prior year. This substantial rate decline was driven by incremental markdowns as we reacted to the rapidly deteriorating economic conditions and aggressively worked to clear high inventory levels.

The year-over-year decline in gross margin rate was the principal reason for our operating profit decline. So let me give you some additional color on the gross margin performance. As we entered the fourth quarter, Saks had excess inventory based on most recent sales trend.

Simply stated, there was material imbalance between supply and demand. This imbalance existed not only at Saks, but throughout the luxury channel at both vendors and retailers. Our sales trends during early November continued to deteriorate further from weak October trends which were down 16.6%, and the inventory imbalance worsened.

At that time, we developed a contingency plan to implement a much more aggressive promotional program if consumer demand continued to decelerate. When our customers did not respond to our annual private night sale in early November which offered 40% discounts on certain merchandise, we made the decision to execute the contingency plan and accelerate our post Thanksgiving Day sale activity by one week, in effect taking already reduced product to 70% off and to advance the sale break of our designer product by one week to meet competition.

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