Saks Is Working Its Way Back

 | Nov 30, 2011 | 11:30 AM EST  | Comments
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Coming off the heels of what was considered a stellar Black Friday, sales on Cyber Monday were also brisk, reportedly up more than 20% from last year. While this improved mood among consumers is good to see, and I hope that it continues, I have to wonder where the money is coming from.

Of course, Cyber Monday sales are credit-card-driven, and the hope would be that consumers will actually be able to pay for all of the stuff they have been buying. Perhaps we are all a bit more willing to open our wallets this year and spend a little of the savings that have been building, as the savings rates have generally increased since the past recession started, or at least that's the hope.

While the uptick in consumer confidence from 40.9 to 56 reported yesterday by the Conference Board is a positive sign, I am much more interested in what consumers actually do, as opposed to what they say they will do. So far this holiday season, they are buying.

That being said, I have my eye on a few retailers, some of which are second-tier or third-tier names that are underfollowed or generally ignored. One that's a bit more on the radar that looks interesting is Saks (SKS). The company was all but written off during the 2008-2009 period (which is when I took a position in the name), but it used that time very wisely to shore up its balance sheet. What emerged was a much leaner company, with total debt dropping from nearly $600 million in early 2009 to $373 million as of the end of last quarter. I don't believe that Saks has been given enough credit for its efforts to right the ship. Last quarter, same-store sales rose 5.8%, and the company beat the $0.09 consensus earnings estimate by $0.02. Revenue, however, was a bit lighter than expected.

One of the intriguing things about Saks is that it is an asset-rich company. This did not mean a whole lot when the markets and economy were tanking and the company was bleeding red ink, but ultimately, assuming a recovery, it will. Saks trades for 1.13x book value per share; this would not normally be all that meaningful for retailers that are heavy on inventory but light on cash and more meaningful assets. In Saks' case, what's supporting that book value, and making it meaningful, is a high-quality portfolio of real estate, including the company's flagship Fifth Avenue location in New York.

In all, Saks owns 28 locations with a total of 3.8 million square feet of space. The question is, what is the Fifth Avenue location worth on its own? There's little doubt that it's worth a substantial portion of the company's total $1.63 billion enterprise value. But it will be worth even more if and when we see some stabilization in real estate prices.

Saks can't be valued on its real estate alone, though. That's the trap that I and other value investors sometimes fall into. The company must deliver results. We'll see about that. I'm still on the sidelines for now.

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