Friday, June 12, 2009

Saks (NYSE:SKS): Upgrade to Buy, $7 target, EPS to Street high - Deutsche Bank

Deutsche Bank is upgrading their rating on Saks (NYSE:SKS) shares to BUY, from HOLD (with $7 tgt), as they now have conviction that SKS has solid initiatives & strategies currently in place that will drive FY12 EBIT margins toward FY07 levels (+4.39%). There appears to be more drivers to achieve this goal than previously anticipated, though it is clear that sales acceleration, which is highly correlated with the stock market, will be the key driver in achieving sustained long-term improvement. Mgmt’s initiatives to rationalize the business will create a substantial margin benefit to the upside.

Market Stabilization to Drive Sales; Substantial Expense Leverage to Follow
Saks’ comps are highly correlated to the stock market (0.83 since the start of the recession). Therefore the firm believes it is highly likely that sales will improve substantially as the Dow recovers to levels that assure luxury consumers. Saks has done an impressive job of managing expenses in this environment, and they believe coming out of this slowdown, they will be able to leverage a flat comp. Gross margin will also benefit from better aligned inventory levels, and other op. initiatives. There also remains substantial value in the company’s real estate (NAV $6.76) and SKS recently accessed the capital markets, proving liquidity & solvency.

Increasing EPS Estimates
The nature of Saks has changed – management is no longer spending like a luxury customer. The SG&A cuts that Saks has achieved are permanent, and Deutsche would not expect these expenses to return. Even though sales may never accelerate to the level of 2002 – 2006, sales should recover with the stock market. They are adjusting their EPS estimates further above Consensus and to new highs on the Street. Deutsche's new FY09 EPS estimate goes to -$0.71 (-1.2% y/y) from -$0.73 previously, FY10 EPS becomes -$0.37 (+47.5% y/y), from -$0.64 previously, and FY11 EPS estimate becomes $0.02, up from -$0.18 previously.

Notablecalls: Certainly an interesting call from Deutsche:

- As the firm notes their estimates are the new Street high.

- The $7 target offers close to 100% upside. Not something you see every day in the space.

- There's a 20%+ short interest in the name. Looks like a squeeze in the making.

All in all, I think there's a 10-15% move in store for SKS today.

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