(The following statement was released by the rating agency)
NEW YORK, March 22 (Fitch) Fitch Ratings has affirmed its Issuer
(IDR) on Saks Incorporated (Saks) at 'BB'. The Rating Outlook is
Stable. A full
list of rating actions appears at the end of this release.
KEY RATING DRIVERS
The affirmations reflect Fitch's expectation that Saks' credit
remain fairly stable over the next 12-24 months. Fitch expects
debt/EBITDAR to be within 2.9x-3.1x, as debt reduction will help
decline in profitability in the near term. This assumes
comparable store sales
(comps) growth in the 3%-4% range, which will result in expense
Saks intensifies its capital and technology investments in 2013.
Saks' comps grew by 3.2% in 2012, following strong growth in the
high-single digits in 2010 and 2011 that was driven by the
overall recovery in
luxury spending. The deceleration of comps in second-half 2012
was mainly due
to the adverse impact of Hurricane Sandy and fiscal uncertainty.
EBITDA for 2012
of $287 million (Fitch-defined EBITDA adds back stock-based
modestly lower than the 2011 level of $293 million as a result
of the slowdown
in top-line growth combined with investments in the
merchandising systems and IT
primarily to support the company's omni-channel (both physical
Fitch expects comps growth for luxury department stores could
3%-5% in 2013, after averaging 6%-8% in the past three years.
and a slowdown in international tourist traffic could
potentially dampen luxury
spending. Within this context, Fitch expects Saks to generate
comps growth in
the 3%-4% range and SG&A expense to grow in the mid-single
digits. As a result,
EBITDA could drop to the $260 million level in 2013.
Given the heavy investments in its systems and IT primarily to
company's omni-channel strategy, Saks will need to drive mid- to
high-single-digit comps growth and sustain gross margin at
current levels of
around 41% to be able to deleverage SG&A expenses and drive
improvement. Fitch does not expect significant margin
improvement over the next
two years unless there is significant pick-up in demand for
Incorporated in the ratings is the lower sales productivity and
Saks stores relative to its two closest peers. Saks' average
sales per square
foot excluding its New York flagship store which roughly
constitutes 20% of
overall sales (but including OFF 5TH and online sales) was
approximately $380 in
2012 versus roughly $465 at Neiman Marcus full-line stores
Goodman and online sales). As a result of lower sales
productivity and higher
cost structure, Saks' EBITDA margin of 9.1% as of Feb. 2, 2013
trails the 13.6%
at Neiman Marcus (calendarized) and 15% at Nordstrom. Fitch does
not expect Saks
to close the gap with Neiman Marcus, given the latter has
superior real estate
locations and brand matrix within its markets.
Adjusted debt/EBITDAR remained flat at 3.1x in 2012, while
rents came in at 2.8x. Fitch expects leverage metrics to sustain
2.9x-3.1x range over the next two years, as debt reduction will
modest decline in profitability in the near term. The company is
in the process
of redeeming the $230 million of 2% convertible senior notes due
expects the company will use cash on hand and tap the ABL
revolver to fund the
redemption and is currently assuming that all notes get redeemed
converted as the conversion price of the 2024 notes at $11.97 is
the market price. In addition, the remaining balance of $91
million in 7.5%
convertible notes due December 2013 is expected to be converted
(given a conversion price of $5.54).
Saks' liquidity position remains strong with approximately $80
million in cash
and $494 million available under its credit facility as of Feb.
2, 2013. Fitch
expects Saks to generate FCF in the $60 million-$90 million
range over the next
two years, even as the company ramps up net capex to $140
million in 2013 from
$110 million in 2012. The further step-up in capex in 2013
versus 2012 reflects
increasing investments in full-line store remodeling and
in the omni-channel strategy. Fitch expects Saks will direct
free cash flow
towards paying down revolver borrowings and share buybacks.
The $500 million secured bank facility is rated two notches
above the IDR at
'BBB-' as the facility is secured by merchandise inventories and
party accounts receivables. There were no borrowings under the
facility as of
the end of 2012 and Fitch assumes borrowings of approximately
$175 million at
the end of 2013 as the company draws on the facility to fund the
the 2024 notes.
The unsecured notes are currently rated 'BB'. Fitch expects to
withdraw the 'BB'
issue ratings after Saks completes the expected redemption or
conversion of the
convertible notes. Post the transactions, Saks will not have any
on its balance sheet. Saks owns 67% of its full-line square
its Fifth Avenue New York City store, which remains
A positive rating action could result in the event of sustained
single-digit growth in the top line and operating profitability
For Saks to hit its leverage target of 2.5x, Fitch estimates it
would need to
improve EBITDA to the $325 million level.
A negative rating action could result in the event of
significant pressure on
same-store sales trends and reduced profitability, financial
liquidity, and adjusted leverage deteriorating to above 4x.
Fitch has affirmed the following ratings on Saks:
--Long-term IDR at 'BB';
--$500 million secured credit facility at 'BBB-';
--Senior unsecured notes at 'BB'.
The Rating Outlook is Stable.
Isabel Hu, CFA
Fitch Ratings, Inc.
One State Street Plaza
New York, NY 10004
Monica Aggarwal, CFA
Media Relations: Brian Bertsch, New York, Tel: +1 212-908-0549,
Additional information is available at 'www.fitchratings.com'.
above were solicited by, or on behalf of, the issuer, and
therefore, Fitch has
been compensated for the provision of the ratings
Applicable Criteria and Related Research:
--'Corporate Rating Methodology' (Aug. 8, 2012);
--'Evaluating Corporate Governance' (Dec. 12, 2012).
Applicable Criteria and Related Research
Corporate Rating Methodology
Evaluating Corporate Governance
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