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Window Shopping At Saks


In case there was any doubt that private-equity firms are high on retailers, two deals in the past month served as reminders. On June 22 buyout shop NRDC Equity Partners announced plans to shell out $1.2 billion for Lord & Taylor, a unit of Federated Department Stores Inc. (FD) Eight days later, Bain Capital and the Blackstone Group said they would pay $6.2 billion for Michaels Stores Inc., a 30% premium over the crafts retailer's market value.

The deals heaped coals onto a question that has been burning for more than a year: What about that most iconic of retailers, Saks Inc. (SKS)?

Since early 2005 the Birmingham (Ala.) company has been rumored to be in play. Trade publication Women's Wear Daily reported in May that private-equity firm Tri-Artisan Capital Partners and real estate firm Vornado Realty Trust (VNO) are making a run at the retailer. (Vornado declined to comment; Tri-Artisan did not return phone calls seeking comment.) At an investor conference on June 14, Blake W. Nordstrom, president of Nordstrom Inc. (JWN), said he was "kicking the tires" on a deal. Bankers are fueling the speculation. "I don't see a place in the public markets for another single department-store brand," says Peter J. Solomon, chairman at boutique investment bank Peter J. Solomon Co. Adds Robert Baker, principal at NRDC: "Saks is a very interesting situation. There are a lot of opportunities in the brand, the real estate, and to improve sales."

But the more time passes, the more uncertainty hangs over Saks. It has been six months since former Chairman R. Brad Martin relinquished the CEO title to Stephen I. Sadove, then vice-chairman and chief operating officer, after the company disclosed that it would restate six years of financial results because of improper charges to suppliers.

If Saks's problems were easily fixed, a buyer would have already stepped in. The company has underperformed rivals for five years running. Sales are down 3.6% at a compounded annual rate; operating income, down 13.7%; and cash from operations, down 11.9%. Sure, that's partly because the company has sold divisions recently, but it's also because Saks has bungled basic functions such as inventory control. Management, which declined to comment for this story, has said it's fixing the problem. But inventory is hardly the only concern. Net income margin in the most recent quarter was just 1.5%, well below the industry average of 4.1%.

UNLOADING TIME

Saks tells shareholders it's too early to judge how Sadove's turnaround is coming along. But the process really began almost two years ago under former CEO Martin. The onetime Tennessee state legislator bought mid-market department-store chain Proffitt's Inc. in the mid-1980s and expanded it through an acquisition spree in the '90s, culminating in the $3 billion purchase of luxury retailer Saks Holdings in 1998. But synergies between the two never materialized, and the company began jettisoning properties last July, selling Proffitt's and McRae's to Charlotte (N.C.) chain Belk Inc. for $622 million and, in May, Northern Department Store Group to Bon-Ton Stores Inc. (BONT)in York, Pa., for $1.1 billion.

There's still more unloading to be done. Saks's other mid-market chain, Parisian, went on the block in January. Once management finds a buyer, it can focus on Saks Fifth Avenue Enterprises, the last remaining business. This fall, the division will bring back a private line aimed at its core 35- to 55-year-old customers in a bid to juice sales.

Meantime, shareholders cling to positive news. Since Sadove took over, Saks has reported results only for the quarter ended Apr. 29. Comparable-store sales fell 2.2% at SFAE, which generates 65% of total revenue. But in May comps rose 0.8%. That was enough progress to fan hopes that a knight in shining armor would swoop in and buy Saks -- but not enough to make it happen.

By Justin Hibbard


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