Fitch Ratings Affirms Saks Inc.'s IDR at 'B'; Outlook Negative.
CHICAGO -- Fitch Ratings Fitch Ratings
An international rating agency for financial institutions, insurance companies, and corporate, sovereign, and municipal debt. Fitch Ratings has headquarters in New York and London and is wholly owned by FIMALAC of Paris. has affirmed the ratings of Saks Incorporated Saks Incorporated (NYSE: SKS) is a Fortune 500 operator of department stores in the United States. While currently headquartered in Birmingham, Alabama, the company is in the process of moving to New York City. Saks Incorporated was formerly known as Proffitt's, Inc. (Saks) as follows:
-- Issuer Default Rating (IDR IDR
In currencies, this is the abbreviation for the Indonesian Rupiah.
The currency market, also known as the Foreign Exchange market, is the largest financial market in the world, with a daily average volume of over US $1 trillion. ) '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 NDSG Novell Desktop Systems Group ) in March 2006 and weak operating results at the core Saks Fifth Avenue Saks Fifth Avenue is a chain of upscale American department stores that is owned and operated by Saks Fifth Avenue Enterprises (SFAE), a subsidiary of Saks Incorporated. It competes in the elite luxury department store market with Neiman Marcus, Bergdorf Goodman and Barneys New (SFA See sales force automation.
SFA - Sales Force Automation ) 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 SDSG Space Division Switching Group
SDSG Spinal Deformity Study Group
SDSG Software Development Support Group (Nintendo) ). 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 Club Libby Lu is a chain of stores primarily targeted to preteen girls. As of 2006, the store chain operates 62 stores in 28 states in the United States.
Club Libby Lu was founded by Mary Drolet, a former executive at Claire's and Montgomery Ward, in August 2000. mall-based specialty chain, which had $46 million in sales.
SFA had a weak 2005, with its segment operating earnings Operating Earnings
Profits after subtracting expenses such as marketing, cost of goods sold, administration and general operating costs from revenue.
Tax and interest expenses are not subtracted - operating earnings are synonymous with EBIT (earnings before 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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