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Saks 10-Q 2011

Documents found in this filing:

  1. 10-Q
  2. Ex-31.1
  3. Ex-31.2
  4. Ex-32
  5. Ex-32
Form 10-Q
Table of Contents

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark one)

þ

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934.

For the quarterly period ended: October 29, 2011

OR

 

¨

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934.

For the transition period from              to             

Commission file number: 1-13113

SAKS INCORPORATED

(Exact name of registrant as specified in its charter)

 

Tennessee   62-0331040

(State or other jurisdiction

of incorporation or organization)

 

(I.R.S. Employer

Identification No.)

12 East 49th Street

New York, New York

  10017
(Address of principal
executive offices)
  (Zip Code)

212-940-5305

(Registrant’s telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days.    Yes  þ    No  ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Date File required to be submitted and posted pursuant to Rule-405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  þ    No  ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

 

Large accelerated filer  þ

    

Accelerated filer  ¨

Non-accelerated filer  ¨

  

Smaller Reporting Company  ¨

(Do not check if smaller reporting company)

  

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ¨    No  þ

As of November 25, 2011, the number of shares of the registrant’s common stock outstanding was 159,879,228.

 

 


Table of Contents

SAKS INCORPORATED

TABLE OF CONTENTS

 

     Page  

PART I - FINANCIAL INFORMATION

     3   

ITEM 1. FINANCIAL STATEMENTS (UNAUDITED)

     3   

Condensed Consolidated Balance Sheets as of October 29, 2011, January  29, 2011, and October 30, 2010

     3   

Condensed Consolidated Statements of Income for the three and nine months ended October  29, 2011 and October 30, 2010

     4   

Condensed Consolidated Statements of Cash Flows for the nine months ended October  29, 2011 and October 30, 2010

     5   

Notes to Condensed Consolidated Financial Statements

     6   

ITEM  2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

     23   

ITEM  3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

     31   

ITEM 4. CONTROLS AND PROCEDURES

     31   

PART II - OTHER INFORMATION

     32   

ITEM 1. LEGAL PROCEEDINGS

     32   

ITEM  2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

     32   

ITEM 6. EXHIBITS

     33   

SIGNATURE

     34   

 

2


Table of Contents

PART I - FINANCIAL INFORMATION

Item 1. Financial Statements (Unaudited).

SAKS INCORPORATED AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(Dollar amounts in thousands)

(Unaudited)

 

         October 29,
2011
    January 29,
2011
    October 30,
2010
 

ASSETS

        

Current assets

        

Cash and cash equivalents

       $ 73,710          $ 197,866          $ 109,478     

Merchandise inventories

       882,389          671,383          830,628     

Other current assets

       72,359          105,404          89,232     

Deferred income taxes, net

       58,290          86,116          42,246     
    

 

 

   

 

 

   

 

 

 

Total current assets

       1,086,748          1,060,769          1,071,584     

Property and equipment, net

       862,247          890,364          902,191     

Deferred income taxes, net

       159,401          163,408          217,542     

Other assets

       38,368          28,559          28,656     
    

 

 

   

 

 

   

 

 

 

TOTAL ASSETS

       $ 2,146,764          $ 2,143,100          $ 2,219,973     
    

 

 

   

 

 

   

 

 

 

LIABILITIES AND SHAREHOLDERS’ EQUITY

        

Current liabilities

        

Trade accounts payable

       $ 221,753          $ 88,378          $ 190,633     

Accrued expenses and other current liabilities

       243,919          246,031          238,957     

Current portion of long-term debt

       7,088          147,498          170,326     
    

 

 

   

 

 

   

 

 

 

Total current liabilities

       472,760          481,907          599,916     

Long-term debt

       365,737          359,250          357,617     

Other long-term liabilities

       134,575          138,378          160,268     
    

 

 

   

 

 

   

 

 

 

Total liabilities

       973,072          979,535          1,117,801     

Commitments and contingencies

       -            -            -       

Shareholders’ equity

       1,173,692          1,163,565          1,102,172     
    

 

 

   

 

 

   

 

 

 

TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY

       $     2,146,764          $     2,143,100          $     2,219,973     
    

 

 

   

 

 

   

 

 

 

See accompanying Notes to Condensed Consolidated Financial Statements.

 

3


Table of Contents

SAKS INCORPORATED AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF INCOME

(Dollar amounts in thousands, except per share amounts)

(Unaudited)

 

         Three Months Ended      Nine Months Ended  
         October 29,
2011
     October 30,
2010
     October 29,
2011
     October 30,
2010
 

NET SALES

       $     692,311           $     658,831           $     2,088,489           $     1,919,414     

Cost of sales (excluding depreciation and amortization)

       386,498           378,176           1,208,197           1,129,757     
    

 

 

    

 

 

    

 

 

    

 

 

 

Gross margin

       305,813           280,655           880,292           789,657     

Selling, general and administrative expenses

       190,179           175,892           551,994           509,962     

Other operating expenses:

             

Property and equipment rentals

       24,932           24,645           75,169           75,151     

Depreciation and amortization

       30,487           29,929           88,579           88,471     

Taxes other than income taxes

       19,437           18,631           63,595           59,767     

Store pre-opening costs

       811           527           1,358           827     

Impairments and dispositions

       218           (603)          3,252           22,772     
    

 

 

    

 

 

    

 

 

    

 

 

 

OPERATING INCOME

       39,749           31,634           96,345           32,707     

Interest expense

       (11,909)          (14,303)          (38,548)          (42,733)    

Loss on extinguishment of debt

       -             -             (539)          (4)    

Other income (expense), net

       564           (65)          1,560           (595)    
    

 

 

    

 

 

    

 

 

    

 

 

 

INCOME (LOSS) BEFORE INCOME TAXES

       28,404           17,266           58,818           (10,625)    

Provision (benefit) for income taxes

       10,633           (19,050)          21,007           (33,492)    
    

 

 

    

 

 

    

 

 

    

 

 

 

NET INCOME

       $ 17,771           $ 36,316           $ 37,811           $ 22,867     
    

 

 

    

 

 

    

 

 

    

 

 

 

Earnings per common share:

             

Basic

       $ 0.12           $ 0.24           $ 0.24           $ 0.15     

Diluted

       $ 0.11           $ 0.20           $ 0.24           $ 0.14     

Weighted-average common shares:

             

Basic

       154,080           153,991           155,739           153,895     

Diluted

       199,053           198,898           159,851           157,893     

See accompanying Notes to Condensed Consolidated Financial Statements.

 

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Table of Contents

SAKS INCORPORATED AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Dollar amounts in thousands)

(Unaudited)

 

         Nine Months Ended  
         October 29,
2011
     October 30,
2010
 

OPERATING ACTIVITIES

       

Net income

       $     37,811           $     22,867     

Adjustments to reconcile net income to net cash provided by operating activities:

       

Loss on extinguishment of debt

       539           4     

Depreciation and amortization

       88,579           88,471     

Stock-based compensation

       11,885           12,947     

Amortization of discount on convertible notes

       9,612           8,831     

Deferred income taxes

       21,695           (3,989)    

Impairments and dispositions

       205           (1,974)    

Excess tax benefits from stock-based compensation

       (926)          -       

Gain on sale of property and equipment

       (156)          (482)    

Change in operating assets and liabilities, net

       (50,249)          (124,573)    
    

 

 

    

 

 

 

NET CASH PROVIDED BY OPERATING ACTIVITIES

       118,995           2,102     

INVESTING ACTIVITIES

       

Purchases of property and equipment

       (52,131)          (36,127)    

Issuance of note receivable

       (11,915)          -       

Proceeds from the sale of property and equipment

       156           548     
    

 

 

    

 

 

 

NET CASH USED IN INVESTING ACTIVITIES

       (63,890)          (35,579)    

FINANCING ACTIVITIES

       

Payments of long-term debt

       (143,995)          (795)    

Payments of capital lease obligations

       (4,815)          (4,068)    

Repurchase of common stock

       (28,932)          -       

Payment of financing fees

       (2,961)          -       

Excess tax benefits from stock-based compensation

       926           -       

Cash dividends paid

       -             (102)    

Net proceeds from the issuance of common stock

       516           619     
    

 

 

    

 

 

 

NET CASH USED IN FINANCING ACTIVITIES

       (179,261)          (4,346)    

DECREASE IN CASH AND CASH EQUIVALENTS

       (124,156)          (37,823)    

CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD

       197,866           147,301     
    

 

 

    

 

 

 

CASH AND CASH EQUIVALENTS AT END OF PERIOD

       $     73,710           $     109,478     
    

 

 

    

 

 

 

See accompanying Notes to Condensed Consolidated Financial Statements.

 

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Table of Contents

SAKS INCORPORATED AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Dollar amounts in thousands, except per share amounts)

(Unaudited)

NOTE 1 – GENERAL

BASIS OF PRESENTATION

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with generally accepted accounting principles in the United States of America (“GAAP”) for interim financial information and in compliance with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair statement have been included. The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Operating results for the three and nine months ended October 29, 2011 are not necessarily indicative of the results that may be expected for the fiscal year ending January 28, 2012 (“fiscal year 2011”). The financial statements include the accounts of Saks Incorporated and its subsidiaries (collectively, the “Company”). All intercompany amounts and transactions have been eliminated.

The accompanying condensed consolidated balance sheet as of January 29, 2011 has been derived from the audited financial statements at that date but does not include all disclosures required by GAAP. These interim condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and related notes thereto included in the Company’s Annual Report on Form 10-K for the fiscal year ended January 29, 2011.

The Company’s operations consist of Saks Fifth Avenue (“SFA”), Saks Fifth Avenue OFF 5TH (“OFF 5TH”), and SFA’s e-commerce operations (“Saks Direct”).

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Net Sales

Net sales include sales of merchandise (net of returns and exclusive of sales taxes), commissions from leased departments, shipping and handling revenues related to merchandise sold and breakage income from unredeemed gift cards. Commissions from leased departments were $10,180 and $27,429 for the three and nine months ended October 29, 2011, respectively, and $6,256 and $20,443 for the three and nine months ended October 30, 2010, respectively. Leased department sales were $64,592 and $188,654 for the three and nine months ended October 29, 2011, respectively, and $45,321 and $148,566 for the three and nine months ended October 30, 2010, respectively, and were excluded from net sales in the condensed consolidated statements of income.

Cash and Cash Equivalents

Cash and cash equivalents primarily consist of cash on hand in the stores, deposits with banks, and investments with banks and financial institutions that have original maturities of three months or less. Cash equivalents are stated at cost, which approximates fair value. Cash equivalents totaled $67,654, $190,007, and $99,360 at October 29, 2011, January 29, 2011, and October 30, 2010, respectively, primarily consisting of money market funds, demand deposits, and time deposits. Income earned on cash equivalents was $331 and $1,003 for the three and nine months ended October 29, 2011, respectively, and $120 and $284 for the three and nine months ended October 30, 2010, respectively, and is included in other income in the condensed consolidated statements of income. Included in cash equivalents as of January 29, 2011 and October 30, 2010 were $10,000 of compensating balances related the Company’s purchasing card program to ensure future credit availability under that program. There were no compensating balance arrangements as of October 29, 2011.

 

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Table of Contents

SAKS INCORPORATED AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Dollar amounts in thousands, except per share amounts)

(Unaudited)

 

Inventory

Merchandise inventories are stated at the lower of cost or market and include freight, buying, and distribution costs. The Company takes markdowns related to slow moving inventory, ensuring the appropriate inventory valuation. The Company receives vendor-provided support in different forms. When vendors provide support for inventory markdowns, the Company records the support as a reduction to cost of sales. Such support is recorded in the period that the corresponding markdowns are taken. When the Company receives inventory-related support that is not designated for markdowns, the Company includes this support as a reduction in the cost of purchases.

Impairments and Dispositions

Impairment and disposition costs include costs associated with store closures, including employee severance and lease termination costs, asset impairment and disposal charges, and other costs related to store closure activities. Additionally, impairments and disposition costs include long-lived asset impairment charges related to assets held and used, and losses related to asset dispositions made during the normal course of business. The Company continuously evaluates its real estate portfolio and closes underproductive stores in the normal course of business as leases expire or as other circumstances dictate.

During the three months ended October 29, 2011, the Company incurred asset disposal charges of $218. For the nine months ended October 29, 2011, the Company incurred charges of $3,252 primarily due to a lease termination fee related to the relocation of its Hilton Head OFF 5TH store during the second quarter ending July 30, 2011. During the three months ended October 30, 2010, the Company recorded a net benefit for store closings of $603 consisting of a deferred rent benefit partially offset by asset impairment charges and other store closure activities. For the nine months ended October 30, 2010, the Company incurred store closing costs of $22,772.

Segment Reporting

SFA, OFF 5TH, and Saks Direct have been aggregated into one reportable segment based on the aggregation criteria outlined in the authoritative accounting guidance.

Fair Value of Financial Instruments

The carrying value of the Company’s financial instruments, including cash and cash equivalents, receivables, accounts payable, and accrued expenses as of October 29, 2011, January 29, 2011, and October 30, 2010 approximates their fair values due to the short-term nature of these financial instruments. See Note 5 for fair value disclosures related to the Company’s long-term debt.

NOTE 2 – RECENT ACCOUNTING PRONOUNCEMENTS

Recently Adopted Pronouncements

In January 2010, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update No. 2010-06, Improving Disclosures about Fair Value Measurements (“ASU 2010-06”), which requires reporting entities to make new disclosures about recurring or nonrecurring fair value measurements including significant transfers into and out of Level 1 and Level 2 fair value measurements and information on purchases, sales, issuances, and settlements on a gross basis in the reconciliation of Level 3 fair value measurements. ASU 2010-06 was effective for reporting periods beginning after December 15, 2009, except for Level 3 reconciliation disclosures which became effective for periods beginning after December 15, 2010. Adoption of this pronouncement did not impact the Company’s consolidated financial statements.

Recently Issued Pronouncements

In May 2011, the FASB issued Accounting Standards Update No. 2011-04, Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs (“ASU 2011-04”), which amends the existing fair value guidance to improve consistency in the application and disclosure of fair value measurements in U.S. GAAP and International Financial Reporting Standards. ASU 2011-04 provides certain clarifications to the existing guidance, changes certain fair value principles, and enhances disclosure requirements. ASU 2011-04 is effective for interim and annual periods beginning after December 15, 2011 and is to be applied prospectively. The Company does not expect the adoption of ASU 2011-04 to have a material impact on the financial statements.

 

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Table of Contents

SAKS INCORPORATED AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Dollar amounts in thousands, except per share amounts)

(Unaudited)

 

In June 2011, the FASB issued Accounting Standards Update No. 2011-05, Presentation of Comprehensive Income (“ASU 2011-05”). ASU 2011-05 requires reporting entities to present the total of comprehensive income, the components of net income, and the components of other comprehensive income either in a single continuous statement of comprehensive income or in two separate but consecutive statements. ASU 2011-05 is effective for fiscal years, and interim periods within those years, beginning after December 15, 2011 and is to be applied retrospectively. The adoption of ASU 2011-05 will not affect the consolidated financial position, results of operations, or cash flows of the Company.

In September 2011, the FASB issued Accounting Standards Update No. 2011-09, Disclosures about an Employer’s Participation in a Multiemployer Plan (“ASU 2011-09”). ASU 2011-09 requires additional disclosures about the employer’s level of participation, including contributions to significant plans in excess of five percent of total contributions made by all contributing employers and the financial health of significant plans. ASU 2011-09 is effective for annual periods ending after December 15, 2011. The adoption of ASU 2011-09 will not affect the consolidated financial position, results of operations, or cash flows of the Company.

NOTE 3 – INCOME TAXES

The effective income tax rate for the three and nine months ended October 29, 2011 was 37.4% and 35.7%, respectively, as compared to (110.3%) and 315.2% for the three and nine months ended October 30, 2010. The effective tax rate for the three and nine months ended October 29, 2011 was marginally impacted by the reversal of reserves for uncertain tax positions and a decrease in the state tax valuation allowance associated with certain state net operating loss (“NOL”) carryforwards. The effective tax rate for the three and nine months ended October 30, 2010 was primarily due to the reversal of a reserve for an uncertain tax position, as well as a decrease in the state tax valuation allowance associated with certain state net operating loss carryforwards, partially offset by an increase in the state tax rate.

Components of the Company’s income tax expense (benefit) for the three and nine months ended October 29, 2011 and October 30, 2010 were as follows:

 

     Three Months Ended     Nine Months Ended  
     October 29,
2011
    October 30,
2010
    October 29,
2011
    October 30,
2010
 

Expected federal income taxes at 35%

   $ 9,941        $         6,043      $ 20,586        $ (3,719)   

State income taxes, net of federal benefit

     1,751        2,246        3,849        (1,259)   

State NOL valuation allowance adjustment

     (575     (613     (1,431     (1,573)   

Effect of settling tax exams and other tax reserve adjustments

     (842     (26,623     (2,470     (27,247)   

Other items, net

     358        (103     473        306    
  

 

 

   

 

 

   

 

 

   

 

 

 

Provision (benefit) for income taxes

   $ 10,633        $ (19,050   $ 21,007        $         (33,492)   
  

 

 

   

 

 

   

 

 

   

 

 

 

The Company files a consolidated U.S. federal income tax return as well as state tax returns in multiple state jurisdictions. The Company has completed examinations by the Internal Revenue Service or the statute of limitations has expired for taxable years through February 2, 2008. With respect to state and local jurisdictions, the Company has completed examinations in many jurisdictions through the same period and currently has no examinations in progress.

The Company’s condensed consolidated balance sheet as of October 29, 2011 includes a gross deferred tax asset of $127,470 related to U.S. federal and state net operating loss and alternative minimum tax credit carryforwards. The majority of the net operating loss carryforward is a result of the net operating losses incurred during the fiscal years ended January 30, 2010 and January 31, 2009 due principally to difficult market and macroeconomic conditions. The Company has concluded, based on the weight of all available positive and negative evidence, that all but $28,652 of these tax benefits relating to certain state losses are more likely than not to be realized in the future. Therefore, a valuation allowance for the $28,652 has been established. The Company evaluates the realizability of its deferred tax assets on a quarterly basis. While the Company has incurred a three-year cumulative loss, after evaluating all available evidence including its past operating results, current year operating income, the macroeconomic factors contributing to the 2009 and 2008 fiscal year losses, the length of the carryforward periods available and the Company’s forecast of future taxable

 

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Table of Contents

SAKS INCORPORATED AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Dollar amounts in thousands, except per share amounts)

(Unaudited)

 

income, including the availability of prudent and feasible tax planning strategies, the Company concluded that it is more likely than not that the net deferred tax asset, net of the $28,652 valuation allowance related to state NOLs, will be realized. The Company will continue to assess the need for a valuation allowance in the future. If future results are less than or more than projected, then there could be an increase or decrease in the valuation allowance which could have a material impact on the Company’s results of operations in the period in which it is recorded.

NOTE 4 – EARNINGS PER COMMON SHARE

The computation of earnings per common share (“EPS”) for the three and nine months ended October 29, 2011 and October 30, 2010 are as follows:

 

     Three Months Ended  
     October 29, 2011     October 30, 2010  
     Net
Income
     Weighted
Average
Shares
     Per
Share
Amount
    Net
Income
     Weighted
Average
Shares
     Per
Share
Amount
 

Basic EPS

   $     17,771          154,080        $ 0.12         $ 36,316          153,991          $ 0.24    

Effect of dilutive potential common shares

     4,067          44,973          (0.01     3,905          44,907          (0.04
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

    

 

 

 

Diluted EPS

   $ 21,838          199,053        $ 0.11         $     40,221          198,898          $         0.20    
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

    

 

 

 

 

     Nine Months Ended  
     October 29, 2011      October 30, 2010  
     Net
Income
     Weighted
Average
Shares
     Per
Share
Amount
     Net
Income
     Weighted
Average
Shares
     Per
Share
Amount
 

Basic EPS

   $     37,811          155,739        $ 0.24          $     22,867          153,895          $ 0.15    

Effect of dilutive potential common shares

        4,112         -                3,998          (0.01
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Diluted EPS

   $ 37,811          159,851        $     0.24          $ 22,867          157,893          $         0.14    
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

For the three months ended October 29, 2011 and October 30, 2010, the computation of diluted EPS includes the effect of 40,889 shares that could be issued upon the conversion of the Company’s convertible notes and the related interest expense, net of tax, of $4,067 and $3,905, respectively, as the effect is dilutive. For the nine months ended October 29, 2011 and October 30, 2010, the computation of diluted EPS excludes the effect of 40,889 shares that could be issued upon the conversion of the Company’s convertible notes because the effect would be anti-dilutive. As of October 29, 2011 and October 30, 2010, there were 1,307 and 1,348 stock options, respectively, that were excluded from the computation of diluted EPS because the exercise prices of the stock options exceeded the average market price of the Company’s common stock for the period. These options represent the number of awards outstanding at the end of the period and application of the treasury stock method would reduce this amount if they had a dilutive effect and were included in the computation of diluted EPS.

 

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SAKS INCORPORATED AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Dollar amounts in thousands, except per share amounts)

(Unaudited)

 

NOTE 5 – DEBT

A summary of long-term debt and capital lease obligations is as follows:

 

    October 29, 2011     January 29, 2011     October 30, 2010  
    Carrying
Amount
   

Fair

Value

    Carrying
Amount
   

Fair

Value

    Carrying
Amount
   

Fair

Value

 
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Notes 7.50%, matured fiscal year 2010

    $ -            $ -            $ -            $ -            $ 22,859         $ 22,825    

Notes 9.875%, matured fiscal year 2011

    -            -            141,557         147,573         141,557         149,873    

Notes 7.00%, maturing fiscal year 2013

    2,125        2,210         2,125         2,168         2,125         2,274    

Notes 7.375%, maturing fiscal year 2019

    -            -            1,911         1,835         1,911         1,968    

Convertible notes 7.50%, maturing fiscal year 2013, net (1)

    108,292         253,132         104,777         265,906         103,669         261,955    

Convertible notes 2.00%, maturing fiscal year 2024, net (2)

    208,745         237,843         202,648         244,720         200,678         240,704    

Capital lease obligations (3)

    53,663         n/a          53,730         n/a          55,144         n/a     
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total debt

    372,825         493,185         506,748         662,202         527,943         679,599    

Less current portion:

           

Notes 7.50%, matured fiscal year 2010

    -            -            -            -            (22,859)        (22,825)   

Notes 9.875%, matured fiscal year 2011

    -            -            (141,557)        (147,573)        (141,557)        (149,873)   

Capital lease obligations (3)

    (7,088)        n/a          (5,941)        n/a          (5,910)        n/a     
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Current portion of long-term debt

    (7,088)        -            (147,498)        (147,573)        (170,326)        (172,698)   

Long-term debt

    $     365,737         $     493,185         $     359,250         $     514,629         $     357,617         $     506,901    
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

(1)

Amount represents the $120,000 convertible notes, net of the unamortized discount of $11,708, $15,223, and $16,331 as of October 29, 2011, January 29, 2011, and October 30, 2010, respectively.

 

(2)

Amount represents the $230,000 convertible notes, net of the unamortized discount of $21,255, $27,352, and $29,322 as of October 29, 2011, January 29, 2011, and October 30, 2010, respectively.

 

(3)

Disclosure regarding fair value of capital leases is not required.

The fair value of long-term debt instruments was determined based on quoted market prices or quotes obtained from financial institutions for similar instruments.

REVOLVING CREDIT FACILITY

The Company has a $500,000 revolving credit facility, subject to a borrowing base equal to a specified percentage of eligible inventory and certain credit card receivables.

In March 2011, the Company entered into an amendment to its existing revolving credit agreement. The amendment extended the maturity date of this facility from November 23, 2013 to March 29, 2016 and revised certain terms of the existing revolving credit facility. The maximum committed borrowing capacity of the amended facility remains at $500,000. Fees incurred associated with the amendment to the revolving credit agreement were $2,961. As of October 29, 2011, the Company had no direct outstanding borrowings under the facility and had letters of credit outstanding of $5,906.

The obligations under the facility are guaranteed by certain of the Company’s existing and future domestic subsidiaries, and the obligations are secured by the Company’s and the guarantors’ merchandise inventories and certain third party accounts receivable. Borrowings under the facility bear interest at a per annum rate of either: (i) LIBOR plus a percentage ranging from 2.00% to 2.50%, or

 

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SAKS INCORPORATED AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Dollar amounts in thousands, except per share amounts)

(Unaudited)

 

(ii) the higher of the prime rate or the federal funds rate plus a percentage ranging from 1.00% to 1.50%. Letters of credit are charged a per annum fee equal to the then applicable LIBOR borrowing spread (for standby letters of credit) or the applicable LIBOR spread minus 0.5% (for documentary or commercial letters of credit). The Company also pays an unused line fee ranging from 0.38% to 0.50% per annum on the average daily unused revolver.

During periods in which availability under the agreement is $62,500 or more, the Company is not subject to financial covenants. If and when availability under the agreement decreases to less than $62,500, the Company will be subject to a minimum fixed charge coverage ratio of 1.0 to 1.0. There is no debt rating trigger. As of October 29, 2011, the Company was not subject to the minimum fixed charge coverage ratio.

The revolving credit agreement permits additional debt in specific categories including the following (each category being subject to limitations as described in the revolving credit agreement): (i) debt arising from permitted sale/leaseback transactions; (ii) debt to finance purchases of machinery, equipment, real estate and other fixed assets; (iii) debt in connection with permitted acquisitions; and (iv) unsecured debt. The revolving credit agreement also permits other debt (including permitted sale/leaseback transactions) in an aggregate amount not to exceed $500,000 at any time, including secured debt, so long as it is a permitted lien as defined by the revolving credit agreement. The revolving credit agreement also places certain restrictions on, among other things, asset sales, the ability to make acquisitions and investments, and to pay dividends.

SENIOR NOTES

As of October 29, 2011, the Company had $2,125 of unsecured senior notes outstanding that mature in 2013 with an interest rate of 7.0%. The senior notes are guaranteed by all of the subsidiaries that guarantee the Company’s revolving credit facility. The notes permit certain sale/leaseback transactions but place certain restrictions around the use of proceeds generated from a sale/leaseback transaction. The terms of the senior notes require all principal to be repaid at maturity. There are no financial covenants associated with these notes, and there are no debt-rating triggers.

During April 2011, the Company redeemed $1,911 of its 7.375% senior notes that mature in 2019. The redemption of these notes resulted in a loss on extinguishment of approximately $539.

During May 2010, the Company repurchased $797 of its 7.0% senior notes that mature in 2013. The repurchase of these notes resulted in a loss on extinguishment of approximately $4.

CONVERTIBLE NOTES

7.5% Convertible Notes

The Company issued $120,000 of 7.5% convertible notes in May 2009 (the “7.5% Convertible Notes”). The 7.5% Convertible Notes mature in December 2013 and are convertible, at the option of the holders at any time, into shares of the Company’s common stock at a conversion rate of $5.54 per share of common stock (21,670 shares of common stock to be issued upon conversion). The Company can settle a conversion of the notes with shares, cash, or a combination thereof at its discretion. Authoritative accounting literature requires the allocation of convertible debt proceeds between the liability component and the embedded conversion option (i.e., the equity component). The liability component of the debt instrument is accreted to par value using the effective interest method over the remaining life of the debt. This amortization is reported as a component of interest expense. The equity component is not subsequently revalued as long as it continues to qualify for equity treatment.

Upon issuance, the Company estimated the fair value of the liability component of the 7.5% Convertible Notes, assuming a 13% non-convertible borrowing rate, to be $97,994. The difference between the fair value and the principal amount of the 7.5% Convertible Notes was $22,006. This amount was recorded as a debt discount and as an increase to additional paid-in capital as of the issuance date. The discount is being amortized to interest expense over a 4.5 year period from the date of issuance to the maturity date of the notes in December 2013, resulting in an increase in non-cash interest expense in future periods.

2.0% Convertible Senior Notes

The Company issued $230,000 of 2.0% convertible senior notes in March 2004 (the “2.0% Convertible Notes”). The 2.0% Convertible Notes mature in 2024 and, in certain circumstances, allow the holders to convert the notes to shares of the Company’s

 

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SAKS INCORPORATED AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Dollar amounts in thousands, except per share amounts)

(Unaudited)

 

common stock at a conversion rate of $11.97 per share of common stock (19,219 shares of common stock to be issued upon conversion) subject to an anti-dilution adjustment. The holders may put the debt back to the Company in 2014 or 2019 and the debt became callable at the Company’s option beginning on March 21, 2011. The Company can settle a conversion of the notes with shares, cash or a combination thereof at its discretion. The holders may convert the notes at the following times, among others: (i) if the Company’s share price is greater than 120% of the applicable conversion price for a certain trading period; (ii) if the credit ratings of the notes are below a certain threshold; or (iii) upon the occurrence of certain consolidations, mergers or share exchange transactions involving the Company. As of October 29, 2011, none of the conversion criteria were met.

In connection with the issuance of the 2.0% Convertible Notes, the Company entered into a convertible note hedge and written call options on its common stock to reduce the Company’s exposure to dilution from the conversion of the 2.0% Convertible Notes. These transactions were accounted for as a net reduction of stockholders’ equity of approximately $25,000 in 2004. As of October 29, 2011, both the convertible note hedge and written call options had expired. The estimated net fair value of the convertible note hedge and written call option was $4,901 and $7,593 as of January 29, 2011 and October 30, 2010, respectively.

The Company estimated the fair value of the liability component of the 2.0% Convertible Notes at the date of issuance, assuming a 6.25% non-convertible borrowing rate, to be $158,148. The difference between the fair value and the principal amount of the 2.0% Convertible Notes was $71,852. This amount was recorded as a debt discount and as an increase to additional paid-in capital as of the issuance date. In accordance with the authoritative accounting literature, the debt discount should be amortized over the expected life of a similar liability that does not have an associated equity component (considering the effects of embedded features other than the conversion option). Since the holders of the notes have put options in 2014 and 2019, the debt instrument is accreted to par value using the effective interest method from the date of issuance until the first put date in 2014 resulting in an increase in non-cash interest expense.

NOTE 6 – EMPLOYEE BENEFIT PLANS

The Company sponsors a funded defined-benefit cash balance pension plan (“Pension Plan”) and an unfunded supplemental executive retirement plan (“SERP”) for certain employees of the Company. The Company amended the Pension Plan during 2006, freezing benefit accruals for all participants except those considered to be non-highly compensated employees who had attained age 55 and completed 10 years of credited service as of January 1, 2007. In January 2009, the Company amended the Pension Plan to suspend future benefit accruals for all remaining participants effective March 13, 2009. The Company generally funds pension costs currently, subject to regulatory funding requirements. The components of net periodic pension expense related to the Company’s Pension Plan and SERP for the three and nine months ended October 29, 2011 and October 30, 2010 were as follows:

 

     Three Months Ended     Nine Months Ended  
     October 29,     October 30,     October 29,     October 30,  
     2011     2010     2011     2010  
  

 

 

   

 

 

   

 

 

   

 

 

 

Interest cost

     $         1,630        $         1,829        $         4,890        $         5,487   

Expected return on plan assets

     (2,002     (1,730     (6,008     (5,190

Net amortization of losses and prior service costs

     564        656        1,691        1,968   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net periodic pension expense

     $ 192        $ 755        $ 573        $ 2,265   
  

 

 

   

 

 

   

 

 

   

 

 

 

The Company contributed $808 and $2,424 to the Pension Plan during the three and nine months ended October 29, 2011 and expects additional funding requirements of $808 for the remainder of fiscal year 2011.

 

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SAKS INCORPORATED AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Dollar amounts in thousands, except per share amounts)

(Unaudited)

 

NOTE 7 – SHAREHOLDERS’ EQUITY

The following table summarizes the changes in shareholders’ equity for the nine months ended October 29, 2011:

 

                                Accumulated        
           

Additional

Paid-In

           Other     Total  
     Common Stock         Accumulated
Deficit
    Comprehensive
Loss
    Shareholders’
Equity
 
     Shares      Amount      Capital         

Balance at January 29, 2011

     162,899         $ 16,290         $ 1,318,862          $ (125,496     $ (46,091     $ 1,163,565    

Net income

              37,811           37,811    

Issuance of common stock

     183          18          498              516    

Net activity under stock compensation plans

     723          72          (72)             -      

Shares withheld for employee taxes

     (384)         (38)         (4,266)             (4,304)   

Income tax effect of stock compensation plans

           (63)             (63)   

Stock-based compensation

           11,885              11,885    

Repurchase of common stock

     (3,537)          (354)         (28,578)             (28,932)   

Deferred tax adjustment related to convertible notes

           (6,786)             (6,786)   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

Balance at October 29, 2011

     159,884          $ 15,988          $ 1,291,480          $ (87,685     $ (46,091     $ 1,173,692    
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

The Company has a share repurchase program that authorizes it to purchase shares of the Company’s common stock. During August 2011, the Company repurchased and retired an aggregate of 3,537 shares of common stock at an average price of $8.18 per share and a total cost of $28,932. During the three and nine months ended October 30, 2010, no shares of common stock were repurchased. As of October 29, 2011, there were 29,172 shares remaining available for repurchase under the Company’s share repurchase program.

NOTE 8 – STOCK-BASED COMPENSATION

The Company maintains an equity incentive plan, which allows for the granting of stock options, stock appreciation rights, restricted stock, performance share awards, and other forms of equity awards to employees, directors, and officers. Stock options generally vest over a four-year period from the grant date and have contractual terms ranging from seven to ten years from the grant date. Restricted stock and performance share awards generally vest over periods ranging from three to five years from the grant date, although the equity incentive plan permits accelerated vesting in certain circumstances at the discretion of the Human Resources and Compensation Committee of the Board of Directors. The Company does not use cash to settle any of its stock-based awards and issues new shares of common stock upon the exercise of stock options and the granting of restricted stock and performance shares.

The Company recognizes compensation expense for stock options with graded-vesting on a straight-line basis over the requisite service period. Compensation expense for restricted stock and performance share awards that cliff-vest is recognized on a straight-line basis over the requisite service period. Restricted stock with graded-vesting are treated as multiple awards based upon the vesting date. The Company recognizes compensation expense for these awards on a straight-line basis over the requisite service period for each separately vesting portion of the award.

Total pre-tax stock-based compensation expense was $3,733 and $11,885 for the three and nine months ended October 29, 2011, respectively, and $4,008 and $12,947 for the three and nine months ended October 30, 2010, respectively.

 

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SAKS INCORPORATED AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Dollar amounts in thousands, except per share amounts)

(Unaudited)

 

NOTE 9 – CONTINGENCIES

LEGAL CONTINGENCIES

On February 2, 2011, the plaintiffs in Dawn Till and Mary Josephs v. Saks Incorporated et al, filed a complaint, with which the Company was served on March 10, 2011, in a purported class and collective action in the U.S. District Court for the Northern District of California. The complaint alleges that the plaintiffs were improperly classified as exempt from the overtime pay requirements of the Fair Labor Standards Act (“FLSA”) and the California Labor Code and that the Company failed to pay overtime, provide itemized wage statements and provide meal and rest periods. On March 8, 2011, the plaintiffs filed an amended complaint adding a claim for penalties under the California Private Attorneys General Act of 2004. The plaintiffs seek to proceed collectively under the FLSA and as a class under the California statutes on behalf of individuals who have been employed by OFF 5TH as Selling and Service Managers, Merchandise Team Managers, or Department Managers. The Company believes that its managers at OFF 5TH have been properly classified as exempt under both federal and state law and intends to defend the lawsuit vigorously. It is not possible to predict whether the court will permit this action to proceed collectively or as a class.

In addition to the litigation described in the preceding paragraph, the Company is involved in legal proceedings arising from its normal business activities and has accruals for losses where appropriate. Management believes that none of these legal proceedings will have a material adverse effect on the Company’s consolidated financial position, results of operations, or liquidity.

INCOME TAXES

The Company is routinely under examination by federal, state or local taxing authorities in the areas of income taxes and the remittance of sales and use taxes. These examinations include questioning the timing and amount of deductions, the allocation of income among various tax jurisdictions, and compliance with federal, state and local tax laws. As of October 29, 2011, certain state sales and use tax examinations were ongoing. Based on current evaluations of tax filing positions, the Company believes it has adequately accrued for its income tax exposures. To the extent the Company were to prevail in matters for which accruals have been established or be required to pay amounts in excess of reserves, the Company’s effective tax rate in a given financial statement period may be materially impacted.

OTHER MATTERS

From time to time the Company has issued guarantees to landlords under leases of stores operated by its subsidiaries. Certain of these stores were sold in connection with the Saks Department Store Group and Northern Department Store Group transactions which occurred in July 2005 and March 2006, respectively. If the purchasers fail to perform certain obligations under the lease agreements guaranteed by the Company, the Company could have obligations to landlords under such guarantees. Based on the information currently available, management does not believe that its potential obligations under these lease guarantees would be material.

NOTE 10 – SUBSEQUENT EVENT

In November 2011, the Company entered into a sixth amendment (“Sixth Amendment”) to its existing proprietary credit card program agreement (“Program Agreement”) with HSBC Bank Nevada, N.A. (“HSBC”). The Sixth Amendment provides for an extension of the term of the Program Agreement to April 15, 2018, subject to certain termination rights set forth in the Program Agreement, as well as an amendment of the risk and revenue sharing provisions, certain of which will apply retroactively from April 15, 2011. The Sixth Amendment also amends, among other provisions, certain of the early termination provisions of the Program Agreement otherwise applicable in respect of HSBC’s sale of its credit card business to Capital One Financial Corporation.

 

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SAKS INCORPORATED AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Dollar amounts in thousands, except per share amounts)

(Unaudited)

 

NOTE 11 – CONDENSED CONSOLIDATING FINANCIAL INFORMATION

The following tables present condensed consolidating financial information for: (1) Saks Incorporated, and (2) on a combined basis, the guarantors of Saks Incorporated’s senior notes and revolving credit facility (which include all of the 100%-owned subsidiaries of Saks Incorporated).

The condensed consolidating financial statements presented as of and for the three- and nine-month periods ended October 29, 2011 and October 30, 2010 and as of January 29, 2011 reflect the legal entity compositions at the respective dates. Additionally, certain reclassifications were made to prior period amounts to conform to the current year presentation.

Separate financial statements of the guarantor subsidiaries are not presented because the guarantors are jointly, severally, fully and unconditionally liable under the guarantees. Borrowings and the related interest expense under the Company’s revolving credit agreement are allocated to Saks Incorporated and the guarantor subsidiaries under an intercompany revolving credit arrangement. There is also a management fee arrangement among Saks Incorporated and its subsidiaries. As of October 29, 2011, Saks Incorporated was the sole obligor for a majority of the Company’s long-term debt.

 

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SAKS INCORPORATED

CONDENSED CONSOLIDATING BALANCE SHEET

AS OF OCTOBER 29, 2011

(Dollar amounts in thousands)

(Unaudited)

 

     Saks      Guarantor                
         Incorporated              Subsidiaries              Eliminations              Consolidated      

ASSETS

           

Current Assets

           

Cash and cash equivalents

   $ 67,654         $ 6,056            $ 73,710     

Merchandise inventories

        882,389              882,389     

Other current assets

        72,359              72,359     

Deferred income taxes, net

        58,290              58,290     
  

 

 

    

 

 

    

 

 

    

 

 

 

Total current assets

     67,654           1,019,094           -           1,086,748     

Property and equipment, net

        862,247              862,247     

Deferred income taxes, net

     102,163           57,238              159,401     

Other assets

     12,171           26,197              38,368     

Investment in and advances to subsidiaries

     1,316,037            $ (1,316,037)         -     
  

 

 

    

 

 

    

 

 

    

 

 

 

TOTAL ASSETS

   $ 1,498,025         $ 1,964,776         $ (1,316,037)       $ 2,146,764     
  

 

 

    

 

 

    

 

 

    

 

 

 

LIABILITIES AND SHAREHOLDERS’ EQUITY

           

Current liabilities

           

Trade accounts payable

      $ 221,753            $ 221,753     

Accrued expenses and other current liabilities

   $ 5,171           238,748              243,919     

Current portion of long-term debt

        7,088              7,088     
  

 

 

    

 

 

    

 

 

    

 

 

 

Total current liabilities

     5,171           467,589           -           472,760     

Long-term debt

     319,162           46,575              365,737     

Other long-term liabilities

        134,575              134,575     

Investment by and advances from parent

        1,316,037         $ (1,316,037)         -     

Shareholders’ equity

     1,173,692                 1,173,692     
  

 

 

    

 

 

    

 

 

    

 

 

 

TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY

   $ 1,498,025         $ 1,964,776         $ (1,316,037)       $ 2,146,764     
  

 

 

    

 

 

    

 

 

    

 

 

 

 

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SAKS INCORPORATED

CONDENSED CONSOLIDATING STATEMENTS OF INCOME

(Dollar amounts in thousands)

(Unaudited)

 

     Three Months Ended October 29, 2011  
     Saks
Incorporated
     Guarantor
Subsidiaries
     Eliminations      Consolidated  

NET SALES

      $ 692,311           $ 692,311    

Cost of sales (excluding depreciation and amortization)

        386,498             386,498    
  

 

 

    

 

 

    

 

 

    

 

 

 

Gross margin

     -            305,813          -            305,813    

Selling, general and administrative expenses

   $ 485          189,694             190,179    

Other operating expenses

             74,850             74,856    

Store pre-opening costs

        811             811    

Impairments and dispositions

        218             218    
  

 

 

    

 

 

    

 

 

    

 

 

 

Operating income (loss)

     (491)         40,240          -            39,749    

Equity in earnings of subsidiaries

     24,718           $ (24,718)         -      

Interest expense

     (11,850)         (59)            (11,909)   

Other income, net

     564                564    
  

 

 

    

 

 

    

 

 

    

 

 

 

INCOME BEFORE INCOME TAXES

     12,941          40,181          (24,718)         28,404    

Provision (benefit) for income taxes

     (4,830)         15,463             10,633    
  

 

 

    

 

 

    

 

 

    

 

 

 

NET INCOME

   $ 17,771        $ 24,718        $ (24,718)       $ 17,771    
  

 

 

    

 

 

    

 

 

    

 

 

 
     Nine Months Ended October 29, 2011  
     Saks
Incorporated
     Guarantor
Subsidiaries
     Eliminations      Consolidated  

NET SALES

      $ 2,088,489           $ 2,088,489    

Cost of sales (excluding depreciation and amortization)

        1,208,197             1,208,197    
  

 

 

    

 

 

    

 

 

    

 

 

 

Gross margin

     -            880,292          -            880,292    

Selling, general and administrative expenses

   $ 1,342          550,652             551,994    

Other operating expenses

     17          227,326             227,343    

Store pre-opening costs

        1,358             1,358    

Impairments and dispositions

        3,252             3,252    
  

 

 

    

 

 

    

 

 

    

 

 

 

Operating income (loss)

     (1,359)         97,704          -            96,345    

Equity in earnings of subsidiaries

     58,041          -          $ (58,041)         -      

Interest expense

     (33,876)         (4,672)            (38,548)   

Loss on extinguishment of debt

     (539)               (539)   

Other income, net

     1,560                1,560   
  

 

 

    

 

 

    

 

 

    

 

 

 

INCOME BEFORE INCOME TAXES

     23,827          93,032          (58,041)         58,818    

Provision (benefit) for income taxes

     (13,984)         34,991             21,007    
  

 

 

    

 

 

    

 

 

    

 

 

 

NET INCOME

   $ 37,811        $ 58,041        $ (58,041)       $ 37,811    
  

 

 

    

 

 

    

 

 

    

 

 

 

 

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Table of Contents

SAKS INCORPORATED

CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS

FOR THE NINE MONTHS ENDED OCTOBER 29, 2011

(Dollar amounts in thousands)

(Unaudited)

 

     Saks
Incorporated
     Guarantor
Subsidiaries
     Eliminations      Consolidated  

OPERATING ACTIVITIES

           

Net income

   $ 37,811        $ 58,041        $ (58,041)       $ 37,811    

Adjustments to reconcile net income to net cash provided by (used in) operating activities:

           

Equity in earnings of subsidiaries

     (58,041)            58,041          -       

Loss on extinguishment of debt

     539                539    

Depreciation and amortization

        88,579             88,579    

Stock-based compensation

        11,885             11,885    

Amortization of discount on convertible notes

     9,612                9,612    

Deferred income taxes

     (1,946)         23,641             21,695    

Impairments and dispositions

        205             205    

Excess tax benefit from stock-based compensation

        (926)            (926)   

Gain on sale of property and equipment

        (156)            (156)   

Changes in operating assets and liabilities, net

     (3,107)         (47,142)            (50,249)   
  

 

 

    

 

 

    

 

 

    

 

 

 

NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES

     (15,132)         134,127          -             118,995    

INVESTING ACTIVITIES

           

Purchases of property and equipment

        (52,131)            (52,131)   

Issuance of note receivable

        (11,915)            (11,915)   

Proceeds from the sale of property and equipment

        156             156    
  

 

 

    

 

 

    

 

 

    

 

 

 

NET CASH USED IN INVESTING ACTIVITIES

     -             (63,890)         -             (63,890)   

FINANCING ACTIVITIES

           

Intercompany borrowings, contributions and distributions

     68,151          (68,151)            -       

Payments of long-term debt

     (143,995)               (143,995)   

Payments of capital lease obligations

        (4,815)            (4,815)   

Payment of financing fees

     (2,961)               (2,961)   

Repurchase of common stock

     (28,932)               (28,932)   

Excess tax benefit from stock-based compensation

        926             926    

Net proceeds from the issuance of common stock

     516                516    
  

 

 

    

 

 

    

 

 

    

 

 

 

NET CASH USED IN FINANCING ACTIVITIES

     (107,221)         (72,040)         -             (179,261)   

DECREASE IN CASH AND CASH EQUIVALENTS

     (122,353)         (1,803)            (124,156)   

CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD

     190,007          7,859             197,866    
  

 

 

    

 

 

    

 

 

    

 

 

 

CASH AND CASH EQUIVALENTS AT END OF PERIOD

   $ 67,654        $ 6,056        $ -           $ 73,710    
  

 

 

    

 

 

    

 

 

    

 

 

 

 

18


Table of Contents

SAKS INCORPORATED

CONDENSED CONSOLIDATING BALANCE SHEET

AS OF OCTOBER 30, 2010

(Dollar amounts in thousands)

(Unaudited)

 

    Saks
    Incorporated    
    Guarantor
    Subsidiaries    
        Eliminations             Consolidated      

ASSETS

       

Current Assets

       

Cash and cash equivalents

    $ 99,360          $ 10,118            $ 109,478     

Merchandise inventories

      830,628            830,628     

Other current assets

      89,232            89,232     

Deferred income taxes, net

      42,246            42,246     
 

 

 

   

 

 

   

 

 

   

 

 

 

Total current assets

    99,360          972,224          -              1,071,584     

Property and equipment, net

      902,191            902,191     

Deferred income taxes, net

    86,809          130,733            217,542     

Other assets

    11,062          17,594            28,656     

Investment in and advances to subsidiaries

    1,385,409            $ (1,385,409)         -         
 

 

 

   

 

 

   

 

 

   

 

 

 

TOTAL ASSETS

    $ 1,582,640          $ 2,022,742          $ (1,385,409)         $ 2,219,973     
 

 

 

   

 

 

   

 

 

   

 

 

 

LIABILITIES AND SHAREHOLDERS’ EQUITY

       

Current liabilities

       

Trade accounts payable

      $ 190,633            $ 190,633     

Accrued expenses and other current liabilities

    $ 7,667          231,290            238,957     

Current portion of long-term debt

    164,416          5,910            170,326     
 

 

 

   

 

 

   

 

 

   

 

 

 

Total current liabilities

    172,083          427,833          -              599,916     

Long-term debt

    308,385          49,232            357,617     

Other long-term liabilities

      160,268            160,268     

Investment by and advances from parent

      1,385,409          $ (1,385,409)         -         

Shareholders’ equity

    1,102,172              1,102,172     
 

 

 

   

 

 

   

 

 

   

 

 

 

TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY

    $ 1,582,640          $ 2,022,742          $ (1,385,409)         $ 2,219,973     
 

 

 

   

 

 

   

 

 

   

 

 

 

 

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Table of Contents

SAKS INCORPORATED

CONDENSED CONSOLIDATING STATEMENTS OF INCOME

(Dollar amounts in thousands)

(Unaudited)

 

     Three Months Ended October 30, 2010  
     Saks
Incorporated
     Guarantor
Subsidiaries
     Eliminations      Consolidated  

NET SALES

        $ 658,831              $ 658,831     

Cost of sales (excluding depreciation and amortization)

        378,176              378,176     
  

 

 

    

 

 

    

 

 

    

 

 

 

Gross margin

     -             280,655           -             280,655     

Selling, general and administrative expenses

     $ 393           175,499              175,892     

Other operating expenses

     1           73,204              73,205     

Store pre-opening costs

        527              527     

Impairments and dispositions

        (603)             (603)    
  

 

 

    

 

 

    

 

 

    

 

 

 

Operating income (loss)

     (394)         32,028           -             31,634     

Equity in earnings of subsidiaries

     44,314              $ (44,314)          -       

Interest expense

     (12,656)          (1,647)             (14,303)    

Other expense, net

     (65)                (65)    
  

 

 

    

 

 

    

 

 

    

 

 

 

INCOME BEFORE INCOME TAXES

     31,199           30,381           (44,314)          17,266     

Benefit for income taxes

     (5,117)          (13,933)             (19,050)    
  

 

 

    

 

 

    

 

 

    

 

 

 

NET INCOME

     $ 36,316           $ 44,314           $ (44,314)          $ 36,316     
  

 

 

    

 

 

    

 

 

    

 

 

 
     Nine Months Ended October 30, 2010  
     Saks
Incorporated
     Guarantor
Subsidiaries
     Eliminations      Consolidated  

NET SALES

        $ 1,919,414              $ 1,919,414     

Cost of sales (excluding depreciation and amortization)

        1,129,757              1,129,757     
  

 

 

    

 

 

    

 

 

    

 

 

 

Gross margin

     -             789,657           -             789,657     

Selling, general and administrative expenses

     $ 1,369           508,593              509,962     

Other operating expenses

     2           223,387              223,389     

Store pre-opening costs

        827              827     

Impairments and dispositions

        22,772              22,772     
  

 

 

    

 

 

    

 

 

    

 

 

 

Operating income (loss)

     (1,371)          34,078           -             32,707     

Equity in earnings of subsidiaries

     47,136              $ (47,136)          -       

Interest expense

     (37,823)          (4,910)             (42,733)    

Loss on extinguishment of debt

     (4)                (4)    

Other expense, net

     (595)                (595)    
  

 

 

    

 

 

    

 

 

    

 

 

 

INCOME (LOSS) BEFORE INCOME TAXES

     7,343           29,168           (47,136)          (10,625)    

Benefit for income taxes

     (15,524)          (17,968)             (33,492)    
  

 

 

    

 

 

    

 

 

    

 

 

 

NET INCOME

     $ 22,867           $ 47,136           $ (47,136)          $ 22,867     
  

 

 

    

 

 

    

 

 

    

 

 

 

 

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Table of Contents

SAKS INCORPORATED

CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS

FOR THE NINE MONTHS ENDED OCTOBER 30, 2010

(Dollar amounts in thousands)

(Unaudited)

 

     Saks
Incorporated
     Guarantor
Subsidiaries
     Eliminations      Consolidated  

OPERATING ACTIVITIES

           

Net income

   $ 22,867          $ 47,136          $ (47,136)         $ 22,867    

Adjustments to reconcile net income to net cash provided by (used in)operating activities:

           

Equity in earnings of subsidiaries

     (47,136)            47,136          -       

Depreciation and amortization

        88,471             88,471    

Impairments and dispositions

        (1,974)            (1,974)   

Loss on extinguishment of debt

                     

Equity compensation

        12,947             12,947    

Amortization of discount on convertible notes

     8,831                8,831    

Deferred income taxes

     1,603          (5,592)            (3,989)   

Gain on sale of property and equipment

        (482)            (482)   

Changes in operating assets and liabilities, net

     3,541          (128,114)            (124,573)   
  

 

 

    

 

 

    

 

 

    

 

 

 

NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES

     (10,290)         12,392          -             2,102    

INVESTING ACTIVITIES

           

Purchases of property and equipment

        (36,127)            (36,127)   

Proceeds from the sale of property and equipment

        548             548    
  

 

 

    

 

 

    

 

 

    

 

 

 

NET CASH USED IN INVESTING ACTIVITIES

     -             (35,579)         -             (35,579)   

FINANCING ACTIVITIES

           

Intercompany borrowings, contributions and distributions

     (26,419)         26,419             -       

Payments of long-term debt

     (795)               (795)   

Payments of capital lease obligations

        (4,068)            (4,068)   

Cash dividends paid

     (102)               (102)   

Net proceeds from the issuance of common stock

     619                619    
  

 

 

    

 

 

    

 

 

    

 

 

 

NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES

     (26,697)         22,351          -             (4,346)   

DECREASE IN CASH AND CASH EQUIVALENTS

     (36,987)         (836)            (37,823)   

CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD

     136,347          10,954             147,301    
  

 

 

    

 

 

    

 

 

    

 

 

 

CASH AND CASH EQUIVALENTS AT END OF PERIOD

   $ 99,360          $ 10,118          $ -             $ 109,478    
  

 

 

    

 

 

    

 

 

    

 

 

 

 

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Table of Contents

SAKS INCORPORATED

CONDENSED CONSOLIDATING BALANCE SHEET

AS OF JANUARY 29, 2011

(Dollar amounts in thousands)

(Unaudited)

 

     Saks
    Incorporated    
     Guarantor
    Subsidiaries    
         Eliminations              Consolidated      

ASSETS

           

Current Assets

           

Cash and cash equivalents

     $ 190,007           $ 7,859              $ 197,866     

Merchandise inventories

        671,383              671,383     

Other current assets

        105,404              105,404     

Deferred income taxes, net

        86,116              86,116     
  

 

 

    

 

 

    

 

 

    

 

 

 

Total current assets

     190,007           870,762           -               1,060,769     

Property and equipment, net

        890,364              890,364     

Deferred income taxes, net

     93,562           69,846              163,408     

Other assets

     10,127           18,432              28,559     

Investment in and advances to subsidiaries

     1,332,009              $ (1,332,009)          -         
  

 

 

    

 

 

    

 

 

    

 

 

 

TOTAL ASSETS

     $ 1,625,705           $ 1,849,404           $ (1,332,009)          $ 2,143,100     
  

 

 

    

 

 

    

 

 

    

 

 

 

LIABILITIES AND SHAREHOLDERS’ EQUITY

           

Current liabilities

           

Trade accounts payable

        $ 88,378              $ 88,378     

Accrued expenses and other current liabilities

     $ 9,121           236,910              246,031     

Current portion of long-term debt

     141,557           5,941              147,498     
  

 

 

    

 

 

    

 

 

    

 

 

 

Total current liabilities

     150,678           331,229           -               481,907     

Long-term debt

     311,462           47,788              359,250     

Other long-term liabilities

        138,378              138,378     

Investment by and advances from parent

        1,332,009           $ (1,332,009)          -         

Shareholders’ equity

     1,163,565                 1,163,565     
  

 

 

    

 

 

    

 

 

    

 

 

 

TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY

     $ 1,625,705           $ 1,849,404           $ (1,332,009)          $ 2,143,100     
  

 

 

    

 

 

    

 

 

    

 

 

 

 

22


Table of Contents

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

Management’s Discussion and Analysis (“MD&A”) is intended to provide an analytical view of the business from management’s perspective and has the following components:

 

   

Management’s Overview

   

Results of Operations

   

Liquidity and Capital Resources

   

Contractual Obligations and Off-Balance Sheet Arrangements

   

Critical Accounting Policies and Estimates

MD&A should be read in conjunction with the condensed consolidated financial statements and related notes thereto contained elsewhere in this report.

MANAGEMENT’S OVERVIEW

General

The operations of Saks Incorporated and its subsidiaries (together, the “Company”) consist of Saks Fifth Avenue (“SFA”), Saks Fifth Avenue OFF 5TH (“OFF 5TH”), and SFA’s e-commerce operations (“Saks Direct”). The Company is primarily a fashion retail organization offering a wide assortment of distinctive luxury fashion apparel, shoes, accessories, jewelry, cosmetics and gifts. SFA stores are principally free-standing stores in exclusive shopping destinations or anchor stores in upscale regional malls. Customers may also purchase SFA products by catalog or online at www.saks.com. OFF 5TH is intended to be the premier luxury off-price retailer in the United States. OFF 5TH stores are primarily located in upscale mixed-use and off-price centers and offer luxury fashion apparel, shoes, and accessories, targeting the value-conscious customer. As of October 29, 2011, Saks operated 46 SFA stores with 5.5 million square feet and 60 OFF 5TH stores with 1.7 million square feet.

Financial Performance Summary

For the third quarter ended October 29, 2011, the Company recorded net income of $17.8 million, or $0.11 per diluted share. For the third quarter ended October 30, 2010, the Company recorded net income of $36.3 million, or $0.20 per share. Those results included a $26.7 million, or $0.14 per share, gain related to the reversal of certain estimated income tax reserves deemed no longer necessary.

The Company believes that an understanding of its reported financial condition and results of operations is not complete without considering the effect of all other components of MD&A included herein.

 

23


Table of Contents

RESULTS OF OPERATIONS

The following table shows, for the periods presented, items from the Company’s condensed consolidated statements of income expressed as percentages of net sales. (numbers may not total due to rounding)

 

     Three Months Ended      Nine Months Ended  
     October 29,
2011
     October 30,
2010
     October 29,
2011
     October 30,
2010
 

Net sales

     100.0%         100.0%         100.0%         100.0%   

Cost of sales

     55.8%         57.4%         57.9%         58.9%   
  

 

 

    

 

 

    

 

 

    

 

 

 

Gross margin

     44.2%         42.6%         42.1%         41.1%   

Selling, general & administrative expenses

     27.5%         26.7%         26.4%         26.6%   

Other operating expenses

     10.8%         11.1%         10.9%         11.6%   

Store pre-opening costs

     0.1%         0.1%         0.1%         0.0%   

Impairments and dispositions

     0.0%         -0.1%         0.2%         1.2%   
  

 

 

    

 

 

    

 

 

    

 

 

 

Operating income

     5.7%         4.8%         4.6%         1.7%   

Interest expense

     -1.7%         -2.2%         -1.8%         -2.2%   

Loss on extinguishment of debt

     0.0%         0.0%         0.0%         0.0%   

Other income (loss), net

     0.1%         0.0%         0.1%         0.0%   
  

 

 

    

 

 

    

 

 

    

 

 

 

Income (loss) before income taxes

     4.1%         2.6%         2.8%         -0.6%   

Provision (benefit) for income taxes

     1.5%         -2.9%         1.0%         -1.7%   
  

 

 

    

 

 

    

 

 

    

 

 

 

Net income

     2.6%         5.5%         1.8%         1.2%   
  

 

 

    

 

 

    

 

 

    

 

 

 

DISCUSSION OF OPERATING INCOME – THREE MONTHS ENDED OCTOBER 29, 2011 COMPARED TO THREE MONTHS ENDED OCTOBER 30, 2010

The following table shows the changes in operating income for the three-month period ended October 30, 2010 compared to the three-month period ended October 29, 2011:

 

(In millions)    Total
Company
 

For the three months ended October 30, 2010

     $         31.6    

Store sales and margin

     25.2    

Operating expenses

     (16.3)   

Impairments and dispositions

     (0.8)   
  

 

 

 

Increase

     8.1   
  

 

 

 

For the three months ended October 29, 2011

     $ 39.7   
  

 

 

 

For the three months ended October 29, 2011, operating income was $39.7 million compared to operating income of $31.6 million for the same period last year. The $8.1 million improvement in operating income for the quarter was primarily driven by a 5.8% increase in comparable store sales as well as a 160 basis point increase in the period-over-period gross margin rate resulting from increased full-price selling compared to the same period last year.

Net Sales

For the three months ended October 29, 2011, total net sales increased 5.1% to $692.3 million from $658.8 million for the three months ended October 30, 2010. Comparable store sales increased $36.5 million, or 5.8%, from $631.1 million for the three months ended October 30, 2010 to $667.6 million for the three months ended October 29, 2011.

 

24


Table of Contents

Comparable store sales are determined on a rolling 13-month basis. Thus, to be included in the comparison, a store must be open for 13 months. The additional month is used to transition the first month impact of a new store opening. Correspondingly, closed stores are removed from the comparable store sales comparison when they begin liquidating merchandise. Expanded or remodeled stores are included in the comparable store sales comparison, except for the periods in which they are closed for remodeling and renovation.

Gross Margin

For the three months ended October 29, 2011, gross margin was $305.8 million, or 44.2% of net sales, compared to $280.7 million, or 42.6% of net sales, for the three months ended October 30, 2010. The Company’s gross margin rate increased 160 basis points in the quarter primarily as a result of increased full-price selling compared to the same period last year.

Selling, General and Administrative Expenses (“SG&A”)

For the three months ended October 29, 2011, SG&A was $190.2 million, or 27.5% of net sales, compared to $175.9 million or 26.7% of net sales for the three-month period ended October 30, 2010. The period-over-period increase was primarily the result of higher variable costs associated with the $33.5 million sales increase for the period and targeted incremental spending to support growth areas such as Saks Direct.

Other Operating Expenses

For the three months ended October 29, 2011, other operating expenses, including property and equipment rentals, depreciation and amortization, taxes other than income taxes and store pre-opening costs, were $75.7 million, or 10.9% of net sales, compared to $73.7 million, or 11.2% of net sales, for the three months ended October 30, 2010. As a percent of sales, other operating expenses improved by 30 basis points year-over year. The increase in other operating expenses of $2.0 million was principally driven by increases in taxes other than income taxes of $0.8 million and depreciation and amortization expense of $0.6 million.

Impairments and Dispositions

For the three months ended October 29, 2011, impairments and disposition costs were $0.2 million compared to a $0.6 million benefit for the three months ended October 30, 2010. The current period charge was due to asset dispositions in the normal course of business. The prior year net benefit was related to store closure activities.

Interest Expense

For the three months ended October 29, 2011, interest expense was $11.9 million, or 1.7% of net sales, compared to $14.3 million, or 2.2% of net sales, for the three months ended October 30, 2010. The decrease in interest expense was primarily due the extinguishment of $22.9 million of the 7.5% senior notes that matured in December 2010 and extinguishment of $141.6 million of the 9.875% senior notes that matured in October 2011. Non-cash interest expense associated with the amortization of the debt discount on the Company’s convertible notes was $3.3 million and $3.0 million for the three months ended October 29, 2011 and October 30, 2010, respectively.

Income Taxes

The effective income tax rate for the three-month periods ended October 29, 2011 and October 30, 2010 was 37.4% and (110.3%), respectively. The effective tax rate for the three months ended October 29, 2011 was marginally impacted by the reversal of reserves for uncertain tax positions and a decrease in the state tax valuation allowance associated with certain state net operating loss (“NOL”) carryforwards. The effective tax rate for the three months ended October 30, 2010 was primarily due to the reversal of a reserve for an uncertain tax position, as well as a decrease in the state tax valuation allowance associated with certain state net operating loss carryforwards, partially offset by an increase in the state tax rate.

The Company’s condensed consolidated balance sheet as of October 29, 2011 includes a gross deferred tax asset of $127.5 million related to U.S. federal and state NOLs and alternative minimum tax credit carryforwards. The majority of the net operating loss carryforward is a result of the net operating losses incurred during the fiscal years ended January 30, 2010 and January 31, 2009 due principally to difficult market and macroeconomic conditions. The Company has concluded, based on the weight of all available positive and negative evidence, that all but $28.7 million of these tax benefits relating to certain state losses are more likely than not to be realized in the future. Therefore, a valuation allowance for the $28.7 million has been established. The Company evaluates the realizability of its deferred tax assets on a quarterly basis. While the Company has incurred a three-year cumulative loss, after evaluating all available evidence including its past operating results, current year operating income, the macroeconomic factors contributing to the 2009 and 2008 fiscal year losses, the length of the carryforward periods available and the Company’s forecast of future taxable income, including the availability of prudent and feasible tax planning strategies, the Company concluded that it is more likely than not that the net deferred tax asset, net of the $28.7 million valuation allowance related to state NOLs, will be

 

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realized. The Company will continue to assess the need for a valuation allowance in the future. If future results are less than or more than projected, then there could be an increase or decrease in the valuation allowance which could have a material impact on the Company’s results of operations in the period in which it is recorded.

DISCUSSION OF OPERATING INCOME – NINE MONTHS ENDED OCTOBER 29, 2011 COMPARED TO NINE MONTHS ENDED OCTOBER 30, 2010

The following table shows the changes in operating income for the nine-month periods ended October 30, 2010 compared to nine-month periods ended October 29, 2011:

 

(In millions)    Total
Company
 

For the nine months ended October 30, 2010

     $         32.7    

Store sales and margin

     90.6    

Operating expenses

     (46.5)   

Impairments and dispositions

     19.5    
  

 

 

 

Increase

     63.6    
  

 

 

 

For the nine months ended October 29, 2011

     $ 96.3    
  

 

 

 

For the nine months ended October 29, 2011, operating income was $96.3 million compared to operating income of $32.7 million for the same period last year. The $63.6 million improvement in operating income for the period was primarily driven by a 10.3% increase in comparable store sales as well as a 100 basis point increase in the year-over-year gross margin rate resulting from increased full-price selling. Additionally, the nine-month period ended October 30, 2010 included $22.8 million of impairments and dispositions related to store closing costs, compared to $3.3 million of similar charges in the current period.

Net Sales

For the nine months ended October 29, 2011, total net sales increased 8.8% to $2,088.5 million from $1,919.4 million for the nine months ended October 30, 2010. Comparable store sales increased $188.7 million, or 10.3%, from $1,829.3 million for the nine months ended October 30, 2010 to $2,018.0 million for the nine months ended October 29, 2011.

Gross Margin

For the nine months ended October 29, 2011, gross margin was $880.3 million, or 42.1% of net sales, compared to $789.7 million, or 41.1% of net sales, for the nine months ended October 30, 2010. The Company’s gross margin rate increased 100 basis points during the period as a result of increased full-price selling during the nine months ended October 29, 2011.

Selling, General and Administrative Expenses

For the nine months ended October 29, 2011, SG&A was $552.0 million, or 26.4% of net sales, compared to $510.0 million, or 26.6% of net sales, for the nine months ended October 30, 2010. The year-over-year increase was primarily the result of higher variable costs associated with the $169.1 million sales increase for the period and incremental expenses to support the growth in Saks Direct.

Other Operating Expenses

For the nine months ended October 29, 2011, other operating expenses were $228.7 million, or 11.0% of net sales, compared to $224.2 million, or 11.7% of net sales, for the nine months ended October 30, 2010. As a percent of sales, other operating expenses improved by 70 basis points year-over year. The increase in other operating expenses of $4.5 million was principally driven by an increase in taxes other than income taxes of $3.8 million.

Impairments and Dispositions

For the nine months ended October 29, 2011, impairments and dispositions were $3.3 million compared to $22.8 million for the nine months ended October 30, 2010. The current period charges were primarily driven by a lease termination charge incurred in connection with the relocation of the Hilton Head OFF 5TH store. The prior year charges included $22.8 million of store closing costs.

Interest Expense

For the nine months ended October 29, 2011, interest expense was $38.5 million, or 1.8% of net sales, compared to $42.7 million, or 2.2% of net sales, for the nine months ended October 30, 2010. The decrease in interest expense was primarily due the

 

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extinguishment of $22.9 million of the 7.5% senior notes that matured in December 2010 and extinguishment of $141.6 million of the 9.875% senior notes that matured in October 2011. Non-cash interest expense associated with the amortization of the debt discount on the Company’s convertible notes was $9.6 million and $8.8 million for the nine months ended October 29, 2011 and October 30, 2010, respectively.

Loss on Extinguishment of Debt

During the nine months ended October 29, 2011, the Company extinguished $1.9 million of its 7.375% senior notes resulting in a loss on extinguishment of debt of $0.5 million.

Income Taxes

The effective income tax rate for the nine-month periods ended October 29, 2011 and October 30, 2010 was 35.7% and 315.2%, respectively. The effective tax rate for the nine months ended October 29, 2011 was marginally impacted by the reversal of reserves for uncertain tax positions and a decrease in the state tax valuation allowance associated with certain state net operating loss carryforwards. The effective tax rate for the nine months ended October 30, 2010 was primarily due to the reversal of a $26.7 million reserve for an uncertain tax position, as well as a decrease in the state tax valuation allowance associated with certain state net operating loss carryforwards, partially offset by an increase in the state tax rate.

LIQUIDITY AND CAPITAL RESOURCES

CASH FLOW

Net cash provided by operating activities was $119.0 million for the nine months ended October 29, 2011 and $2.1 million for the nine months ended October 30, 2010. Cash provided by operating activities primarily represents income before depreciation and non-cash charges and after changes in working capital. Working capital is significantly impacted by changes in inventory and accounts payable. Inventory levels typically increase or decrease to support expected sales levels and accounts payable fluctuations are generally determined by the timing of merchandise purchases and payments. The $116.9 million increase is primarily due to changes in working capital and net income of $37.8 million for the nine months ended October 29, 2011 compared to net income of $22.9 million for the nine months ended October 30, 2010.

Net cash used in investing activities was $63.9 million for the nine months ended October 29, 2011 and $35.6 million for the nine months ended October 30, 2010. Cash used in investing activities primarily consists of capital expenditures related to construction of new stores, renovation and expansion of existing stores, and investments in support areas (e.g., technology and distribution centers). The $28.3 million increase in cash used in investing activities is primarily due to an increase of $16.0 million in capital expenditures in the current year and the issuance of a note receivable in the amount of $11.9 million due from Natixis Funding Corporation, the provider of letters of credit required in connection with the Company’s workers’ compensation and general liability insurance plans. Interest earned on the note receivable effectively reduces the cost of issuing letters of credit to insurance providers.

Net cash used in financing activities was $179.3 million for the nine months ended October 29, 2011 and $4.3 million for the nine months ended October 30, 2010. The $175.0 million increase is primarily due to an increase in debt payments resulting from the maturity of $141.6 million of the Company’s 9.875% senior notes and the redemption of $1.9 million of the Company’s 7.375% senior notes. Also contributing to the increase is $28.9 million of share repurchases made during the period and $3.0 million of debt financing costs incurred in connection with the amendment of the Company’s revolving credit facility.

CASH BALANCES AND LIQUIDITY

The Company’s primary sources of short-term liquidity are cash on hand and availability under its $500 million revolving credit facility. As of October 29, 2011, the Company had no direct borrowings under its revolving credit facility, and had $5.9 million in unfunded letters of credit. As of October 29, 2011 and October 30, 2010, the Company maintained cash and cash equivalent balances of $73.7 million and $109.5 million, respectively. Exclusive of approximately $6.1 million and $10.1 million of store operating cash at October 29, 2011 and October 30, 2010, respectively, cash was invested principally in money market funds, demand deposits, and time deposits.

The primary needs for cash are to fund operations, acquire or construct new stores, renovate and expand existing stores, provide working capital for new and existing stores, invest in technology and distribution centers, and service debt. The Company anticipates that cash on hand, cash generated from operating activities, and availability under its revolving credit facility will be sufficient to sustain its current level of operations.

 

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There are numerous general business and economic factors affecting the retail industry. These factors include consumer confidence levels, intense competition, global economic conditions and financial market stability. Significant changes in one or more of these factors could potentially have a material adverse impact on the Company’s ability to generate sufficient cash flows to operate its business. The Company expects to be able to manage its working capital and capital expenditure amounts so as to maintain sufficient levels of liquidity. Depending on its actual and anticipated sources and uses of liquidity, conditions in the capital markets, and other factors, the Company may from time to time consider the issuance of debt or other securities or other possible capital market transactions for the purpose of raising capital which could be used to refinance current indebtedness or for other corporate purposes.

CAPITAL STRUCTURE

The Company continuously evaluates its debt-to-capitalization ratio in light of the business and economic trends, interest rate levels, and the terms, conditions, and availability of capital in the capital markets. As of October 29, 2011, the Company’s capital and financing structure consisted of a revolving credit agreement, senior unsecured notes, unsecured convertible notes, and capital and operating leases. As of October 29, 2011, total funded debt (including the unamortized discount on the convertible notes) was $405.8 million, representing a decrease of $167.8 million from a balance of $573.6 million as of October 30, 2010. This decrease was primarily due to the repayment of $164.4 million of senior notes that matured. The debt-to-capitalization ratio decreased to 26.2% from 35.2% in the same period of the prior year.

During the nine months ended October 29, 2011, the Company repurchased and retired an aggregate of 3.5 million shares of common stock at an average price of $8.18 per share and a total cost of $28.9 million. As of October 29, 2011, approximately 29.2 million shares remained available for repurchase under the Company’s share repurchase program. There were no repurchases or retirements of common stock during the nine months ended October 30, 2010.

Revolving Credit Facility

As of October 29, 2011, the Company maintained a $500 million revolving credit facility, which is subject to a borrowing base equal to a specified percentage of eligible inventory and certain credit card receivables. In March 2011, the Company entered into an amendment to its existing revolving credit facility. The amendment extended the maturity date of the facility from November 2013 to March 2016 and favorably revised certain terms of the facility, including, among other things, lower interest rates and fees. As the Company’s inventory levels fluctuate these changes will, at times, cause the borrowing capacity to fall below the stated $500 million facility. There are no debt-ratings-based provisions in the revolving credit facility. The facility includes a fixed-charge coverage ratio requirement of 1.0 to 1.0 that the Company is subject to only if availability under the facility becomes less than $62.5 million. As of October 29, 2011, the Company was not subject to the fixed charge coverage ratio as its availability under the facility exceeded $62.5 million. Based on the inventory and credit card receivable balances as of October 29, 2011, the Company had unutilized availability under the facility of $494.1 million after deducting outstanding letters of credit of $5.9 million. The facility contains default provisions that are typical for this type of financing, including a provision that would trigger a default under the facility if a default were to occur in another debt instrument resulting in the acceleration of principal of more than $20.0 million in that other instrument. As of October 29, 2011, the Company had no direct outstanding borrowings under the revolving credit facility.

Senior Notes

As of October 29, 2011, the Company had $2.1 million of unsecured senior notes outstanding that mature in 2013 with an interest rate of 7.0%. The terms of the senior notes require all principal to be repaid at maturity and place limitations on the amount of secured indebtedness the Company may incur. There are no financial covenants or debt-rating triggers associated with the senior notes. The Company believes it will have sufficient cash on hand, availability under its revolving credit facility, and access to various capital markets to repay the senior notes at maturity.

7.5% Convertible Notes

As of October 29, 2011, the Company had $120.0 million of convertible notes outstanding that bear interest at an annual rate of 7.5% and mature in 2013. The provisions of the convertible notes allow the holders to convert the notes at any time to shares of the Company’s common stock at a conversion rate of 180.5869 shares per one thousand dollars in principal amount of notes. The Company can settle a conversion with shares, cash, or a combination thereof at its discretion. In May 2009, the Company received net proceeds from the convertible notes of approximately $115.3 million after deducting initial purchasers’ discounts and offering expenses. The Company used the net proceeds to pay down amounts outstanding under its revolving credit facility and for general corporate purposes.

Upon issuance of the convertible notes, the Company estimated the fair value of the liability component of the 7.5% convertible notes, assuming a 13% non-convertible borrowing rate, to be $98.0 million. The difference between the fair value and the principal amount of the 7.5% convertible notes was $22.0 million. This amount was recorded as a debt discount and as an increase to additional

 

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paid-in capital as of the issuance date. The current unamortized discount of $11.7 million is being amortized to interest expense over the remaining 2.1 year period to the maturity date of the notes in December 2013 resulting in an increase in non-cash interest expense.

2.0% Convertible Senior Notes

As of October 29, 2011, the Company had $230.0 million of convertible senior notes outstanding that bear interest at an annual rate of 2.0% and mature in 2024. The provisions of the convertible notes allow the holder to convert the notes to shares of the Company’s common stock at a conversion rate of 83.5609 shares per one thousand dollars in principal amount of notes (subject to an anti-dilution adjustment). The holders may put the debt back to the Company in 2014 or 2019 and the debt became callable at the option of the Company beginning on March 21, 2011. The Company can settle a conversion of the notes with shares, cash, or a combination thereof at its discretion. The holders may convert the notes at the following times, among others: (i) if the Company’s share price is greater than 120% of the applicable conversion price for a certain trading period; (ii) if the credit ratings of the convertible notes are below a certain threshold; or (iii) upon the occurrence of certain consolidations, mergers, or share exchange transactions involving the Company. As of October 29, 2011, none of the conversion criteria were met.

The Company used approximately $25.0 million of the proceeds from the issuance of these convertible notes to enter into a convertible note hedge and written call options on its common stock to reduce the Company’s exposure to dilution from the conversion of the notes. As of October 29, 2011, both the convertible note hedge and written call options had expired.

Upon the February 1, 2009 adoption of the accounting pronouncement related to accounting for convertible debt instruments that may be settled in cash upon conversion (including partial cash settlement), the Company estimated the fair value of the liability component, as of the date of issuance, of its 2.0% convertible senior notes assuming a 6.25% non-convertible borrowing rate to be $158.1 million. The difference between the fair value and the principal amount of the notes was $71.9 million. This amount was retrospectively recorded as a debt discount and as an increase to additional paid-in capital as of the issuance date. The discount is being amortized over the expected life of a similar liability that does not have an associated equity component (considering the effects of embedded features other than the conversion option). Since the holders of the convertible notes have put options in 2014 and 2019, the debt instrument is being accreted to par value using the effective interest method from issuance until the first put date in 2014 resulting in an increase in non-cash interest expense. The current unamortized discount of $21.3 million will be recognized over the remaining 2.4 year period.

The Company believes it will have sufficient cash on hand, availability under its revolving credit facility, and access to various capital markets to repay both of the convertible notes at maturity.

Capital Leases

As of October 29, 2011, the Company had $53.7 million in capital leases covering various properties and equipment. The terms of the capital leases provide the lessor with a security interest in the asset being leased and require the Company to make periodic lease payments (including interest), aggregating between $10.0 million and $13.0 million per year.

Pension Plan

The Company is obligated to fund a defined-benefit cash balance pension plan. The Company’s current policy is to maintain at least the minimum funding requirements specified by the Employee Retirement Income Security Act of 1974. The Company amended the Saks Fifth Avenue Pension Plan (“Pension Plan”) during 2006, freezing benefit accruals for all participants except those who have attained age 55 and completed 10 years of credited service as of January 1, 2007, who are considered to be non-highly compensated employees. In January 2009, the Company suspended future benefit accruals for all remaining participants in the plan, effective March 13, 2009. During November 2010, the Company voluntarily contributed 1.8 million shares of the Company’s common stock with a total value of $20.0 million to the Pension Plan. The purpose of the voluntary contribution was to strengthen the funded status of the Pension Plan and reduce the amount of future funding requirements. The Company contributed $2.4 million to the Pension Plan during the nine months ended October 29, 2011 and expects additional funding requirements of approximately $0.8 million for the remainder of fiscal year 2011.

 

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CONTRACTUAL OBLIGATIONS AND OFF-BALANCE SHEET ARRANGEMENTS

The Company has not entered into any off-balance sheet arrangements which would be reasonably likely to have a current or future material effect, such as obligations under certain guarantees or contracts, retained or contingent interests in assets transferred to an unconsolidated entity or similar arrangements, obligations under certain derivative arrangements, or obligations under material variable interests.

There were no other material changes in the Company’s contractual obligations specified in Item 303(a)(5) of Regulation S-K during the nine months ended October 29, 2011. For additional information regarding the Company’s contractual obligations as of January 29, 2011, see the Management’s Discussion and Analysis section of the Company’s Annual Report on Form 10-K for the year ended January 29, 2011.

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

A summary of the Company’s critical accounting policies and estimates is included in the Management Discussion and Analysis section of the Company’s Annual Report on Form 10-K for the year ended January 29, 2011.

NEW ACCOUNTING PRONOUNCEMENTS

Recently Adopted Pronouncements

In January 2010, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update No. 2010-06, Improving Disclosures about Fair Value Measurements (“ASU 2010-06”), which requires reporting entities to make new disclosures about recurring or nonrecurring fair value measurements including significant transfers into and out of Level 1 and Level 2 fair value measurements and information on purchases, sales, issuances, and settlements on a gross basis in the reconciliation of Level 3 fair value measurements. ASU 2010-06 was effective for reporting periods beginning after December 15, 2009, except for Level 3 reconciliation disclosures which became effective for periods beginning after December 15, 2010. Adoption of this pronouncement did not impact the Company’s consolidated financial statements.

Recently Issued Pronouncements

In May 2011, the FASB issued Accounting Standards Update No. 2011-04, Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs (“ASU 2011-04”), which amends the existing fair value guidance to improve consistency in the application and disclosure of fair value measurements in U.S. GAAP and International Financial Reporting Standards. ASU 2011-04 provides certain clarifications to the existing guidance, changes certain fair value principles, and enhances disclosure requirements. ASU 2011-04 is effective for interim and annual periods beginning after December 15, 2011 and is to be applied prospectively. The Company does not expect the adoption of ASU 2011-04 to have a material impact on the financial statements.

In June 2011, the FASB issued Accounting Standards Update No. 2011-05, Presentation of Comprehensive Income (“ASU 2011-05”). ASU 2011-05 requires reporting entities to present the total of comprehensive income, the components of net income, and the components of other comprehensive income either in a single continuous statement of comprehensive income or in two separate but consecutive statements. ASU 2011-05 is effective for fiscal years, and interim periods within those years, beginning after December 15, 2011 and is to be applied retrospectively. The adoption of ASU 2011-05 will not affect the consolidated financial position, results of operations, or cash flows of the Company.

In September 2011, the FASB issued Accounting Standards Update No. 2011-09, Disclosures about an Employer’s Participation in a Multiemployer Plan (“ASU 2011-09”). ASU 2011-09 requires additional disclosures about the employer’s level of participation, including contributions to significant plans in excess of five percent of total contributions made by all contributing employers, and the financial health of significant plans. ASU 2011-09 is effective for annual periods ending after December 15, 2011. The adoption of ASU 2011-09 will not affect the consolidated financial position, results of operations, or cash flows of the Company.

 

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FORWARD-LOOKING INFORMATION

The information contained in this Form 10-Q that addresses future results or expectations is considered “forward-looking” information within the definition of the Federal securities laws. Forward-looking information in this document can be identified through the use of words such as “may,” “will,” “intend,” “plan,” “project,” “expect,” “anticipate,” “should,” “would,” “believe,” “estimate,” “contemplate,” “possible,” and “point.” Actual consolidated results may differ materially from those set forth in forward-looking information.

The forward-looking information and statements are or may be based on a series of projections and estimates and involve risks and uncertainties. These risks and uncertainties include such factors as: the level of consumer spending for luxury apparel and other merchandise carried by the Company and its ability to respond quickly to consumer trends; macroeconomic conditions and their effect on consumer spending; the Company’s ability to secure adequate financing; adequate and stable sources of merchandise; the competitive pricing environment within the retail sector; the effectiveness of planned advertising, marketing, and promotional campaigns; favorable customer response to relationship marketing efforts of proprietary credit card loyalty programs; appropriate inventory management; effective expense control; successful operation of the Company’s proprietary credit card strategic alliance with HSBC Bank Nevada, N.A.; geo-political risks; the performance of the financial markets; changes in interest rates; and fluctuations in foreign currency. For additional information regarding these and other risk factors, please refer to the Company’s Annual Report on Form 10-K for the fiscal year ended January 29, 2011 filed with the SEC, which may be accessed through the Internet at www.sec.gov.

The Company undertakes no obligation to correct or update any forward-looking statements, whether as a result of new information, future events, or otherwise.

Item 3. Quantitative and Qualitative Disclosures About Market Risk.

The Company’s exposure to market risk primarily arises from changes in interest rates and the U.S. equity and bond markets. The effects of changes in interest rates on earnings generally have been small relative to other factors that also affect earnings, such as sales and operating margins. The Company seeks to manage exposure to adverse interest rate changes through its normal operating and financing activities, and if appropriate, through the use of derivative financial instruments. Such derivative instruments can be used as part of an overall risk management program in order to manage the costs and risks associated with various financial exposures. The Company does not enter into derivative instruments for trading purposes, as clearly set forth in its risk management policies. The Company is exposed to interest rate risk primarily through its borrowings and derivative financial instrument activities.

Based on the Company’s market risk sensitive instruments outstanding as of October 29, 2011, the Company has determined that there was no material market risk exposure to the Company’s consolidated financial position, results of operations, or cash flows as of such date.

Item 4. Controls and Procedures.

DISCLOSURE CONTROLS AND PROCEDURES

Under the supervision and with the participation of the Company’s management, including the Chief Executive Officer and Chief Financial Officer, the Company conducted an evaluation of the effectiveness of its disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)), as of the end of the period covered by this report. Based upon this evaluation, the Company’s Chief Executive Officer and Chief Financial Officer concluded that the Company’s disclosure controls and procedures were effective as of such date. The Company’s disclosure controls and procedures are designed to ensure that information required to be disclosed by the Company in the reports it files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms and that such information is accumulated and communicated to the Company’s management, including the Chief Executive Officer and Chief Financial Officer, to allow timely discussions regarding required disclosures.

CHANGES IN INTERNAL CONTROL OVER FINANCIAL REPORTING

There were no changes in the Company’s internal controls over financial reporting that occurred during the three months ended October 29, 2011 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

 

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PART II - OTHER INFORMATION

Item 1. Legal Proceedings.

The information in “Part I – Financial Information, Note 9 – Contingencies - Legal Contingencies,” is incorporated into this Item by reference.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.

ISSUER PURCHASES OF EQUITY SECURITIES

The following table provides information about the Company’s purchases of equity securities registered by the Company pursuant to Section 12 of the Exchange Act during the quarter ended October 29, 2011.

 

(in thousands, except per share amounts)

Period

   Total
Number
of Shares
Purchased
     Average
Price Paid
per Share
     Total Number
of Shares
Purchased as
Part of Publicly
Announced
Program
     Number of
Shares that
May Yet Be
Purchased
Under the
Program (1)
 

August 2011

     3,537         $ 8.18         3,537         29,172   

(July 31, 2011 to August 27, 2011)

           

September 2011

     -             $ -             -             29,172   

(August 28, 2011 to October 1, 2011)

           

October 2011

     -             $ -             -             29,172   

(October 2, 2011 to October 29, 2011)

           
  

 

 

       

 

 

    

Total

     3,537         $ 8.18         3,537      
  

 

 

       

 

 

    

 

(1)

On December 8, 2005, the Company announced that its Board of Directors authorized an increase of 35,000 shares, for a total authorization of 70,025 shares, to its existing share repurchase program. There is no expiration date under the share repurchase program.

 

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Item 6. Exhibits.

 

10   

Sixth Amendment to the Program Agreement, dated as of November 11, 2011, among Saks Incorporated, Saks Fifth Avenue, Inc., and HSBC Bank Nevada, N.A. (incorporated by reference to Exhibit 99.1 to the Company’s Current Report on Form 8-K filed on November 14, 2011)

31.1   

Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

31.2   

Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

32   

Certifications of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

101   

The following materials from Saks Incorporated’s Quarterly Report on Form 10-Q for the quarterly period ended October 29, 2011, formatted in XBRL (eXtensible Business Reporting Language): (i) Condensed Consolidated Balance Sheets as of October 29, 2011, January 29, 2011, and October 30, 2010, (ii) Condensed Consolidated Statements of Income for the three and nine months ended October 29, 2011 and October 30, 2010, (iii) Condensed Consolidated Statements of Cash Flows for the nine months ended October 29, 2011 and October 30, 2010, and (iv) Notes to Condensed Consolidated Financial Statements*

 

*

Pursuant to Rule 406T of Regulation S-T, the Interactive Data Files on Exhibit 101 hereto are deemed not filed or part of a registration statement or prospectus for purposes of Sections 11 or 12 of the Securities Act of 1933, as amended, are deemed not filed for purposes of Section 18 of the Securities and Exchange Act of 1934, as amended, and otherwise are not subject to liability under those sections.

 

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SIGNATURE

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

  SAKS INCORPORATED
  Registrant

Date: December 1, 2011

 

/S/    KEVIN G. WILLS

 

Kevin G. Wills

On behalf of registrant and as Executive

Vice President and Chief Financial Officer (Principal Financial Officer)

 

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