Saks Q1 Net Income $16.2 Million

Retailer Saks Incorporated filed its first quarter report ended April 30. The company had to adjust its financial results after it was revealed that it improperly collected markdown allowances at a Saks Fifth Avenue merchandising division.

Saks registered net income of $16.2 million for the first quarter, nearly $1 million less than the $17.1 million first announced in May. The company said the reductions from the preliminary numbers mostly relate to a legal reserve established for a September 23, 2005 court ruling on a severance-related lawsuit.

It recorded a net income of $20.2 million during the first quarter of 2004.

In August Saks said an investigation into the financial activities of Saks Fifth Avenue merchandising divisions found that it overcharged vendors by $34.2 million. It further found that the unit improperly accounted for some markdowns in its 2003 and 2004 fiscal years, which caused profit margins to appear exaggerated in some quarters and low in others.

Saks operates two business segments, Saks Department Store Group (SDSG) and Saks Fifth Avenue Enterprises (SFAE). SDSG consists of the department stores Parisian, Younkers, Herberger's, Carson Pirie Scott, Bergner's, and Boston Store and Club Libby Lu specialty stores. SFAE is comprised of Saks Fifth Avenue luxury department stores, Saks Off 5th outlet stores, and saks.com.

The current year first quarter net income included a net gain of $1.4 million, generated by the disposition of closed stores. The quarter also included approximately $2.2 million of expenses associated with the investigation of improperly collected markdown allowances.

SDSG operating income fell 30 percent to $20.1 million for the quarter. The decrease from the prior year was principally due to lower gross margin dollars associated with the 0.9 percent comparable store sales decline and increased SG&A expenses which included the previously noted legal reserve. SDSG's year-over-year gross margin rate improved slightly.

SFAE operating income declined 10 percent for the period to $40.8 million. While SFAE's comparable store sales grew 5.5 percent, the gross margin rate fell slightly and SG&A expenses increased.

Inventories at the end of the quarter totaled $1.55 billion, a slight increase over the prior year first quarter. Excluding Proffitt's/McRae's, consolidated comparable store inventories were essentially flat with last year, with levels at SDSG below last year and at SFAE above last year.

The Company ended the quarter with approximately $290 million of cash on hand and no borrowings on its $800 million revolving credit facility. Total debt at April 30, 2005 was approximately $1.35 billion, and debt-to-capitalization was 38.9%.

Saks intends to file its second quarter report ended July 30, by mid-October.