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Saks Incorporated (SKS)

2013 Consumer & Retail Conference

March 13, 2013 8:50 am ET

Executives

Stephen I. Sadove - Executive Chairman and Chief Executive Officer

Analysts

Lorraine Maikis Hutchinson - BofA Merrill Lynch, Research Division

Presentation

Lorraine Maikis Hutchinson - BofA Merrill Lynch, Research Division

Okay, we're going to get started with Saks. Very happy to have Steve Sadove, the CEO, here to present to us today. So give a brief overview of the business and then we'll have time for questions after.

Stephen I. Sadove

Thanks, Lorraine. Good morning, everybody. This morning we'll talk little bit about what's going on at Saks, and then open it up to questions.

As we sit today, we have 43 full-line Saks Fifth Avenue stores. We have been 2 that we've announced that we'll be closing, so you ought to be thinking in terms of by the end of the year we're at the 41 type of range, 65 outlet stores and a very vibrant and growing saks.com business. If you look at the performance for 2012, I would call it a period of modest growth, comps grew in the 3.2% range, relatively flat gross margins and operating income relatively flat in the 5% range. You clearly saw a deceleration as we went into the latter part of the year. We'll talk a little bit about what's going on with the consumer. And we are in the midst of what I call, our transformation into an omni-channel environment, income relatively flat on a year-on-year basis.

Lot of accomplishments in what I considered to be a difficult luxury environment towards the end of the year. The single biggest change going on in this company, and I think in this industry is omni-channel. And we made an enormous progress in moving ourselves towards an omni-channel environment. We'll get into details about that. We launched what we call Project Evolution, which is that transformation executed against our merchandise and customer experience. Marketing strategies saw a major improvement in, for example, customer service ratings across the board. Continued to make strategic capital investments around the omni-channel, as well as in improving our store base. We rationalized our store -- have rationalized our store base. We've now closed, over the last several years, the 10 full-line stores with 2 more that have been announced, continuing to see very outsized growth in saks.com and feel quite good about the progress and the prognosis there. And continuing to expand our outlet business and have been aggressively buying back shares. Over the last 6 quarters, we've bought back somewhere in the range of $200 million worth of stock.

As we look at 2013, we think that it's a little bit of a volatile macro environment. And there's a bit of a cross current going on in the luxury environment. On a positive side, you have the Dow at 14,400. It's s very strong and we know that on a longer-term basis, there's a direct correlation between the sector, our business, and the stock market. That's a very real positive. We've had a little bit on the, what I call, the cross-current negative is the concern relative to what's going on with the luxury consumer in terms of taxation, the fiscal cliff, the sequestration. The high-end consumer's at the epicenter of this. If you looked at our -- as you went into the end of last year and the prospect of what was going to happen with taxes, the high-end consumer probably, and I look at our core consumer, probably was affected somewhere in the neighborhood of 8 to 10 percentage points on their tax rate. And that -- yet, and still dealing with the question of what's the impact of sequestration on what's called loopholes or deductions or whatever it's going to be.

You saw it affect things like high-end jewelry sales towards the end of the year. If we look at sales of jewelry in the $75,000-plus range, which were growing very rapidly through the third quarter, as we went into the November, December period, you started to see a slowdown in that high-end jewelry purchase. I'm not saying that it's a long-term effect at all, because our customer's highly resilient, but during that period of uncertainty, you'd have financial advisers telling their clients, "Hey, maybe we ought to hold off on this one until we see with more certainty what's going on." So I just think that there is a little bit of a short-term effect that you saw, and you saw it in the growth rates since we went through the latter part.

Set aside, we had big hit from Hurricane Sandy, we probably got hurt more than almost any other retailer because so much of our business is tied to the Northeast and even Florida people, which is a -- we have a very big business in Florida. People who weren't traveling back and forth to Florida, you saw an impact in the fourth quarter. But if I normalize it, your trend was slowing down into that 3% type of range as opposed to the higher grow that were you're seeing in the earlier part of the year. So I do think that, that environment, while the underlying GDP is probably going to be reasonably healthy and you've seen job growth and you're seeing stability in the markets, I do believe that there's going to be a little bit of a period where the high-end customer is going to adjust to the new environment. And I'd use that word, "adjusting" because they'll deal with it fine and we know that our customers' tied much more to how do they feel about their net worth. But until they resolve and understand what the tax piece of it is going to mean, it affects them.

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