Marcial: Is Saks a Takeover Target?

With most retailers on the ropes because of the economic downturn and financial meltdown, luxury department store operator Saks (SKS) isn't looking so upscale these days. Wall Street has been particularly downbeat on companies catering to the wealthy.

Even so, several investment pros are turning upbeat on Saks, whose stock has edged higher, to 3.75 on June 5 from a dismaying low of 1.50 on Feb. 20. True, the recent price rise still leaves the stock well below its 52-week high of 13.11 on June 4, 2008, but some unfazed bulls predict the stock could rebound to 10-11 a share in 3 years based on a nascent economic recovery.

Furthermore, the stock may fetch an even higher value, they argue, because of the possibility that Saks could end up a takeover target.

"It is very possible that Saks could attract buyout interest from larger companies not only because of its underpriced stock but also because of the hidden value of its real estate assets," says Mark Boyar, president of Boyar Asset Management, which has accumulated shares.

On that basis, he says, lots of companies should covet Saks, which owns outright 29 of the 53 Saks stores it operates, including its flagship Fifth Avenue store in New York and the one in Beverly Hills. Boyar figures the real estate properties it owns are worth about $1.3 billion. Given its property holdings and widely recognized brand, "we think Saks has value substantially above current levels," says Boyar.

Moreover, he adds, Saks' long underperformance should eventually attract other companies in the industry that may feel they could do a better job of managing and extracting handsome profits from the beleaguered chain.

Slim's Pickings

Right now, some big investors who are aware of Saks' potential value in an economic recovery, enhanced by the value of its real estate assets, have already bought into Saks, notes Boyar.

Saks' biggest stakeholder is Inmobiliaria Carso, a company owned by Mexican billionaire Carlos Slim Helú, who now owns a 17% stake. Boyar believes Slim may have something up his sleeve regarding Saks. Another significant holder is Diego Della Valle, chairman of Tod's Group, an Italian maker of luxury merchandise, including shoes and handbags, which may also be interested in Saks, says Boyar, On May 28, Tod's Group's CEO told Bloomberg that its stake in Saks "is a strategic holding for the Della Valle family."

Meanwhile, Fidelity Investments bought more than 3 million Saks shares as of Apr. 30, raising its total holdings to more than 2.5%, according to Bloomberg.

There was some takeover buzz surrounding Saks in October 2007 when Icelandic investment firm Baugur Group disclosed in an SEC filing that it had the right to acquire 8.5% of Saks stock, and that it would like to explore the possibility of making a joint bid for the company with Dubai-based Landmark Group, which owned a 1.2% stake. But the global financial crisis apparently put a damper on such a move. A Saks spokesperson told BusinessWeek no such bid has happened. She declined to comment further about speculation on the subject of buyouts or takeovers.

"We are unsure whether Saks would be interested in selling, and think a global credit crunch has reduced near-term potential for any Baugur-Saks deal," says analyst Jason Asaeda of Standard & Poor's. (S&P, like BusinessWeek, is a unit of the McGraw-Hill Companies (MHP)). He rates Saks a hold, in part because of the soft sales environment. He thinks investor concerns over an uncertain outlook for consumer spending will pressure Saks' shares over the near term.

However, he is encouraged by Saks' focus on managing its cash and expenses, including targeting a 20% decline in inventory receipts and reducing its capital spending by more than 50% from its fiscal 2009 levels.

Proxy Fight

Recently, Saks has had to deal with interest from some of its shareholders. Activist investor Peter Schoenfeld, who heads Schoenfeld Asset Management, owner of a 1.5% stake in Saks, has launched a proxy fight. At the company's annual meeting in early June, shareholders approved Schoenfeld's proposal to eliminate a staggered election of board members. So if Chairman and CEO Stephen Sadove and the current board agree to implement the proposal, directors henceforth will stand for re-election every year, rather than for staggered periods of two- to five-year terms.

Saks, which offers high-end apparel, shoes, accessories, and cosmetics from such brand fashion houses as Armani, Channel, Gucci, and Prada, got punched by the recession. Management concedes that the outlook for next year isn't looking any brighter.

Operating 53 Saks Fifth Ave stores and 51 OFF FIFTH AVE. units that sell off-price luxury goods, Saks lost $5.1 million in the first quarter ended May 2, vs. a profit of $17.3 million a year earlier. Revenues during the quarter tumbled 27%. In fiscal 2009 ended Jan. 20, Saks posted a net loss of $154.94 million, or a loss of 70¢ a share, vs. net profits of $47.47 million in fiscal 2008, or 44¢ a share.

Little wonder only three of 13 Wall Street analysts who track the company rate the stock a buy. Three other analysts recommend selling the stock and six rate it a hold.

One of the staunch bulls is Charles Grom of JPMorgan Securities, who rates the stock overweight, with a 12-month price target of 6. (Saks was a JPMorgan client.) Even with a projected loss this year, Grom says Saks remains poised to "rise significantly as signs of restored stability continue to emerge." Despite the pullback in discretionary spending and a promotional retail environment that is weighing on sales and margins, "we think the stock has been unfairly hit," he says.

Loyal Customer Base

Analyst Robert Drbul of Barclays Capital (BCS) has a higher price target of 8, although he rates Saks neutral based on the company's better-than-expected results in the recent quarter which, he says, showed "strong expense control and better aligned inventories." So Drbul revised his fiscal 2009 estimates to a loss of 80¢ a share from an earlier loss forecast of $1.05, and his 2010 number to a loss of 55¢ from a loss 70¢. In 2008, Saks posted a loss of 82¢ a share.

While demand for luxury goods remains soft, says Drbul, Saks has responded by effectively cutting expenses and tightly managing inventories, which have fallen 7.3%, to $779.5 million in the first quarter. He argues that Saks continues to maintain a "very strong position and loyal customer base within the high-end department store segment."

Also noteworthy, Saks' balance sheet and cash flow profile remain stable, says Drbul. The company has about $10.3 million cash on hand and about $135 million of direct outstanding borrowings on its $600 million revolving credit facility.

While the retailing environment remains nasty, things clearly aren't quite that gloomy at Saks. And while the stock is consigned to the clearance-sales bin, resolute value investors could rack up tidy profits by snapping up the marked-down shares.Unless otherwise noted, neither the sources cited in Gene Marcial's Stock Picks nor their firms hold positions in the stocks under discussion. Similarly, they have no investment banking or other financial relationships with them.

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