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Saks Sizzles in May

The high-end retailer posted a whopping 37% same-store sales gain for the month as it reeled in affluent consumers

Apparel retailers reported May sales figures for stores open more than one year on June 7, and the numbers were pretty much a mixed bag. But Saks Inc. (SKS) managed to post an eye-popping 37.5% jump on the month.

The upscale chain, which operates Saks Fifth Avenue, credited the gains to moving up its seasonal promotional sales from June to May. But Saks admitted it will pay for the May growth, saying it expects June comparable store sales to be negative.

The shares climbed 6.2% in late afternoon trading June 7 to $20.19, still below their 52-week high of $23.25 reached May 10.

Saks reported total sales of $248.9 million for the four weeks ended June 2, 2007, up 39.4% from $178.5 million for the four weeks ended May 27, 2006. The company still expects comparable store sales to increase 10% to 15% for the second fiscal quarter.

Ultimately, Saks' stellar performance reflects much more going on than just shifting its promotional sales up a month, said Melissa Otto, an analyst who covers Saks for WR Hambrecht & Co.

"The inventory in the stores and the renovations are having an impact and bringing customers in," she said. "It was coming from such weak position that there was great potential for upside, and that's what we're seeing."

Where previously Saks' stores were under-stocked and didn't have the right inventory for specific regions of the country, it's now clearly focused on getting better merchandise, she said.

In May, the strongest categories at Saks Fifth Avenue stores were women's designer sportswear and premium-priced apparel, handbags, women's shoes, and men's shoes, while the sales were weakest in designer evening clothes, children's apparel, and fashion jewelry, the company said.

Otto says she's even seen Saks flagship store in New York carrying some niche European brands of accessories that can't be found in its competitors' stores. "They're really getting a buzz in their stores, and really getting customers excited about brands and designers."

And as the stores' profile improves, so do its relationships with vendors, she added.

Saks' sales gains eclipsed those of high-end competitors like Nordstrom Inc. (JWN) – which saw a rise of 6.3% in May -- mainly because Nordstrom's is a more established chain whose more advanced technologies, website, and ways of communicating with clients didn't leave as much room for improvement, according to Otto.

Standard & Poor's sales-weighted index of 15 retailers reported posted a 0.96% gain for May sales at stores open at least one year. That was lower than expected due to ongoing slippage in mall traffic that hurt youth retailers and chains targeting women older than 35.

Many retailers made up for weaker traffic with mid to high double-digit gains in e-commerce sales, Standard & Poor's said in a research note.

Standard & Poor's, which like Businessweek is owned by McGraw-Hill Companies [MHP], predicted June same-store sales will be hurt by the fact that Memorial Day holiday sales fell in May this year versus June last year.

In a May 21 research note, Bear Stearns & Co. described 2007 as a transition year for Saks and warned it could face more bumps as management continues to carry out its turnaround plan. The note said gross margins were disappointing in view of "anticipated benefits from recently enhanced inventory planning systems" and viewed the shares as fully valued at 30.3 times Bear Stearns' fiscal year 2008 earnings estimate.

Still, Otto at WR Hambrecht says the place to be investing right now is in stocks of higher-end retailers rather than chains that cater to the mass consumer such as Macy's (M) and J.C. Penney (JCP).

Saks' sales in May demonstrate the resilience of affluent consumers in the face of escalating oil and gasoline prices, she said. "[The prospect of four-dollar-a-gallon] gas is not an issue for someone who makes $150,000 a year, but it is an issue for someone who makes $40,000 a year."

J.C. Penney posted a 2% drop in comparable department store sales in May, versus its initial projection for sales to be flat, and also said that total department store sales were flat from a year ago. The company affirmed its outlook for growth of zero to 5% in same-store sales for the second quarter.

Macy's, which is having trouble rebranding the May Department Stores it bought in 2005, reported a 3.3% decline in same-store sales, missing a 1% lower forecast among Wall Street analysts.

The ongoing fallout from weaker home sales –- and consumers' reduced ability to cash out by refinancing mortgages amid tight lending standards – and higher energy prices is expected to continue to hamper spending by budget consumers.

Otto doesn't own Saks stock and WR Hambrecht doesn't do investment banking with the company. Bear Stearns does and seeks to do investment banking with the companies it covers.

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