Fitch Ratings Affirms Saks Inc.'s IDR at 'B'; Outlook Negative.

CHICAGO -- Fitch Ratings has affirmed the ratings of Saks Incorporated (Saks) as follows:

-- Issuer Default Rating (IDR) 'B';

-- Secured bank facility 'BB/RR1'

-- Senior unsecured notes 'B/RR4'.

The Rating Outlook is Negative. Saks had $613 million of senior unsecured notes and no bank debt outstanding as of Jan. 28, 2006.

The affirmation of the IDR considers the company's more narrow business focus following the sale of its Northern Department Store Group (NDSG) in March 2006 and weak operating results at the core Saks Fifth Avenue (SFA) division. These factors are balanced against SFA's internationally recognized luxury franchise and debt reduction following the sale of the Southern Department Store Group (SDSG). The Negative Outlook considers the possibility that efforts to turn around SFA's operating results will take longer than anticipated.

The ratings of the $500 million secured bank facility and senior unsecured notes reflect their respective recovery prospects. Fitch's recovery analysis assumes an enterprise value in a distressed scenario of $973 million. Applying this value across the capital structure results in outstanding recovery prospects (over 90%) for the bank facility, which is secured by inventories and certain receivables. On the other hand, the recovery prospects for the senior unsecured notes are average (30%-50%).

With the divestitures of the NDSG and SDSG, Saks has sold businesses that represent slightly less than half of its total revenues, reducing the company's diversity and leaving it more narrowly focused within the cyclical luxury segment. Saks is currently considering strategic alternatives for its Parisian division, a higher end department store chain located primarily in the southeast. An eventual sale of this business would leave Saks with SFA, which had $2.7 billion in sales in 2005, and the smaller Club Libby Lu mall-based specialty chain, which had $46 million in sales.

SFA had a weak 2005, with its segment operating earnings dropping to $22 million from $119 million in 2004. This reflected a significant decline in the gross margin due to heavy clearance markdowns and reduced support from vendors. There was also $33 million in one-time costs related to the accounting investigation and the loss of the New Orleans store. SFA's management is focused on refining its merchandising assortments and improving its inventory management. However, negative comparable store sales in the first two months of 2006 create some uncertainty as to the company's ability to rebound in 2006.

Financial leverage, measured by adjusted debt/EBITDAR, was flat in 2005 at 4.5 times (x), as $623 million of debt reduction (with proceeds from the sale of the SDSG) was offset by lower cash flow due to weaker results at SFA and the sale of the SDSG (completed in July 2005). At the same time, EBITDAR/interest plus rents declined to 1.8x from 2.1x in 2004.

Further debt repayment is expected to be modest as the $1.05 billion of proceeds from the sale of the NDSG is expected to be used primarily for shareholder distributions, including a special dividend of $550 million to be paid on May 1, 2006. As a result, Saks' credit measures are expected to remain relatively steady over the near term, with any improvement dependent on stronger operating performance at SFA.

Fitch's Recovery Ratings (RR), introduced in 2005, are a relative indicator of creditor recovery on a given obligation in the event of a default. A broad overview of Fitch's RR methodology as it relates to specific sectors, including a Case Study webcast, can be found at www.fitchratings.com/recovery.

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