Saks Incorporated identifies incremental SG&A reductions

26 May '09

5 min read

The Company realized a year-over-year 40 basis point improvement in gross margin rate for the quarter. Management estimates that the previously mentioned clearance event shift negatively impacted the prior year first quarter gross margin rate by approximately 175 basis points, so on an adjusted basis, management estimates that the gross margin rate would have decreased by approximately 135 basis points for the current year first quarter. This adjusted gross margin rate decrease principally was due to increased markdowns as a percent of sales as well as deleverage on the buying and distribution components of cost of sales.

The clearance event shift will positively impact sales and negatively impact the gross margin rate for the second quarter.

Sadove commented, “The Saks team did an excellent job of managing Selling, General, and Administrative expenses (“SG&A”) during the quarter.” The Company reduced first quarter SG&A expenses by approximately $44 million, a 22% decline from the prior year. SG&A as a percent of sales was 25.0% in the current first quarter compared to 23.5% in the prior year first quarter.

Primarily due to the sales decline, the Company's operating income decreased to $2.2 million in the current year first quarter from $42.6 million of operating income for the same period last year.

Balance Sheet Highlights
Consolidated inventories at May 2, 2009 totaled $779.5 million, a 7.3% decrease over the prior year. Inventories decreased 7.4% on a comparable stores basis. Sadove stated, “We remain on track to more closely align our inventories with consumption trends by the beginning of the third quarter.” The previously mentioned clearance event shift distorted quarter-end comparable store inventories. Excluding the shift, comparable store inventories would have declined approximately 11%.

At quarter end, the Company had approximately $10.3 million of cash on hand and $195 million of direct outstanding borrowings on its revolving credit facility.

Effective at the beginning of the fiscal year (February 1, 2009), the Company adopted a new accounting pronouncement (FASB Staff Position APB No. 14-1, “Accounting for Convertible Debt Instruments that may be Settled in Cash upon Conversion”), which requires that issuers of such instruments separately account for the liability and equity components in a manner that will reflect the entity's nonconvertible debt borrowing rate when interest cost is recognized in subsequent periods.

A portion of the carrying value of the $230 million 2.0% convertible debenture (approximately $71.9 million) was reclassified to equity as of the March 2004 issuance date, representing the equity component of the proceeds from the notes calculated assuming a 6.25% non-convertible borrowing rate. The discount is being accreted to interest expense over the 10-year period to the first put date of the notes. Accordingly, at May 2, 2009, $40.5 million of the convertible debenture balance was classified in equity. The new accounting pronouncement required retroactive application; consequently, the prior year amounts have been revised.

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