Reasons to Sell Saks
Ashish is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
The recent volatility in the stock market has been proving to be a headwind for high-end retailers. As a result, the sales trend across luxury brands have been on a decline. Though Saks (NYSE: SKS) has outperformed thus far despite the macro headwinds, we believe the company is headed for tough times ahead. The growth is expected to gradually slow due to fiscal tightening, economic slowdown in Europe and a policy uncertainty shock prior to the election. The company also embarked on a 5-year technology investment program, called Project Evolution, which requires significant investment by the company this year. Hence, we believe the company is likely to post FY12 EPS below the consensus estimates of $0.47.
We believe it is a good time to sell SKS stocks as there is a risk to tourist traffic and a possibility of a further deterioration of the domestic high end consumer in 2H12. Saks’ SSS have been decelerating since Jan’12 due to difficult comparisons, weak trends in women’s designer apparel and tweaks to the company’s semi-annual promotions and we believe that the deceleration is likely to continue in 2H. Moreover, Saks will be affected adversely by declining high-end domestic spending as the company has a greater exposure to domestic high-end spending with respect to Tiffany’s (NYSE: TIF) and Coach’s (NYSE: COH) which generate 50% and 30% of their sales overseas respectively. The following are some other concerns that make us bearish on this stock.
Margin pressures in the near-term
We believe company’s near-term margins are under pressure. Gross margins will be negatively impacted by incremental markdown pressure as SKS clears out some slower-selling products during its end of season clearance period. Additionally, huge investments in the fashion components of categories generating incremental traffic/sales such as shoes and handbags will lead to modest gross margin declines. Strategic investments in technology and other system enhancements like Omnichannel initiatives and Project Evolution might result in better margins long term but will restrict upside in the near future.
Designer apparel weakness is an early sign of slowing trends
The company attributed below expectation sales of women’s designer apparel in 1Q12 to fashion issues, but the weakening trends at Neiman Marcus, Bloomingdales and Tiffany suggest that it could be an early sign of slowing trends. We expect this trend to become more difficult to maintain in the latter half of the year.
Relaxing Visa norms will not benefit near-term
President Obama recently implemented an initiative to accelerate and ease the process of obtaining a tourist visa from China and Brazil to the US. Though Saks’ management is hopeful that a slowdown in sales trends from European tourists will be offset by Chinese and Brazilian tourists, we believe the benefit will come over the longer term, rather than immediately.
A disproportionate amount of sales from the Saks Fifth Avenue flagship store in NYC (~22% of the total sales), which is also susceptible to fluctuations in tourism (tourism accounts for ~20-25% of NYC flagship sales) poses another risk. We believe this is a right time to sell SKS stocks as the market volatility will impact spending of the high-income consumers in U.S and European slowdown will impact tourist traffic. The company is trading at a forward PE of 19.63. We believe it is a good time to sell the stock.
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