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Saks Divides The Retail Space

Posted: Nov 23, 2009 11:29 AM by Sham Gad

Tickers in this Article: PSUN, GPS, WMT, JWN, SKS

Luxury retailer Saks (NYSE:SKS) delivered third-quarter earnings indicative of the dichotomy that is taking place in today's economy. While the wealth destruction Mr. Market imposed last year has affected nearly everyone in some way, those folks on upper end of the economic ladder appear to be recovering more significantly than the average joe.

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A Tale of Two Segments
Saks reported a net profit $1.9 million versus a loss of $43 million a year ago. However, two million in profit is hardly anything to get excited about for a billion dollar company like Saks. What is striking is the $45 million swing quarter over quarter.

Make no mistake, times are tough for Saks, but they cater to a consumer that clearly has more disposable assets than folks who are shopping at Old Navy, a subsidiary of retail giant Gap (NYSE:GPS).

Look at fellow luxury retailer Nordstrom (NYSE:JWN), who reported results that were better than the company had planned for. Sales were up 3.5% and the company even boosted full-year earnings guidance, an unheard of possibility for nearly all retailers.

Tastes Change Quickly
Store comp sales for Saks were down 10% versus 18.5% last year and gross margin was 40% versus 35.7%. Like all businesses, Saks has improved its numbers mainly through cost reductions rather than a sales increase. And going forward Saks is cautious but seeing signs of stabilization.

Compare that with teen-clothing retailer Pacific Sunwear (Nasdaq:PSUN) that reported an 18% decline in third-quarter sales along with a terrible holiday forecast that implied a same store decline in excess of 20% and a loss of 28 cents a share. That news sent shares down by over 20%. Catering to teens can be rewarding since they often have more disposable income, but it's also brutal due to rapidly changing tastes and wide swings in disposable income for that age group.

The Bottom Line
Warren Buffett's partner Charlie Munger used to ask people to the name the product whereby an increase in sales price led to greater demand. The answer: luxury goods. When it comes to retailing, I would only consider investing at the extreme ends of the industry. Anything in the middle falls prey to Wal-Mart (NYSE:WMT) and the thousands of others retailers that operate in the space. (For related reading, see Where Luxury And Fun Come To Make Money.)

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By Sham Gad

Sham Gad is the Managing Partner of Gad Partners Fund's, value inspired investment partnerships modeled after the Buffett Partnerships of the 1950's. Previously, Gad ran the Gad Investment Group and delivered annualized returns of 22% from 2002 to 2005. Gad is also the author of "The Business of Value Investing" which will be out in the fall of 2009. Gad earned his MBA at the University of Georgia in May of 2007. Gad runs a value investing blog. He can also be reached by visiting the Gad Partners Funds site. When not writing or analyzing businesses, Gad enjoys hanging out with his wife Maggie, reading, golf, and yoga

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