My latest column is up at RealMoney. Here’s a quick preview:
At a presentation Tuesday, Saks (SKS) CEO Steve Sadove outlined the plans for long-term operating improvement, which includes growing operating margins to 8%. The plan requires:
- Outsized comparable store sales growth;
- Gross margin rate improvement; and
- Cost effective infrastructure.
However, according to a recent 8k filing, same store sales are down 0.1% for the two months ending April 5, and 2.9% for the five weeks ended April 7. In other words, the decline is accelerating.
Furthermore, Sadove said that luxury consumers were responding to promotional events and added that “you’re going to see more promotions over the course of the first part of this year” as retailers look to clear excess inventory. That likely means shrinking gross margins going forward, thus knocking the second leg out from under management’s plan.
Its price/book ratio, at 1.6 times, is double the department store industry average despite Saks’ below-average return on equity and average net margin. Macy’s (M) is already showing the performance levels Saks is only striving towards, and its price/book ratio is just 1.12 times.
If over the next five years Saks were to improve operations to Macy’s level, and get Macy’s valuation as a result, it would merit a $14.00 price target at the end of five years. To get a 10% annual return over that time, you’d need to start from a price of $8.75 - 33% below the current value.
Disclosure: At time of publication, William Trent holds no financial position in the companies mentioned in this article.
