Saks Q1 Earnings Call Transcript

123jump.com Staff
25 May, 2010
New York City

Sales rose 7% to $667.4 million & net income was $18.8 million or 11 cents a share. Gross margin rate improvement up 440 basis points to 43.1% this year from 38.7% in last year''s first quarter. The company''s operating margin expanded to 7.1% in the quarter from 0.4% in the prior-year first quarter.

Saks Incorporated ((SKS))
Q1 2010 Earnings Call Transcript
May 18, 2010 9:30 a.m. ET

Executives

Stephen I. Sadove - Chairman and Chief Executive Officer
Kevin Wills - Executive Vice President and Chief Financial Officer
Ronald L. Frasch - President and Chief Merchandising Officer

Analysts

Rick Patel – Bank of America/Merrill Lynch
Michelle Clark – Morgan Stanley
Robert Drbul – Barclays Capital
Adrianne Shapira – Goldman Sachs
Gordon McKemie – Barclays Capital
Barbara Wyckoff – Jesup & Lamont
Paul Truco – J.P. Morgan
Dana Telsey – Telsey Advisory Group
Deborah Weinswig – Citigroup
Mark Kaufman – Rafferty Capital Markets
Jennifer – Lazard Capital Markets

Presentation

Operator

Good morning. My name is Nautrus [ph] and I will be your conference operator today. At this time, I would like to welcome everyone to the First Quarter Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speaker’s remarks, there will be a question-and-answer session. If you would like to ask a question during this time, simply press star then number one on your telephone keypad. If you would like to withdraw your question, press the pound key. Thank you. I would now like to turn the call over to your host, Steve Sadove, Chairman and CEO of Saks Incorporated. Mr. Sadove, you may begin your conference.

Stephen I. Sadove

Good morning. This is Steve Sadove, Chairman and CEO of Saks Incorporated. I''m joined on the call today by Ron Frasch, President; Kevin Wills, our CFO; and Julia Bentley, our Senior VP of IR. I would like to thank each of you for taking the time to join us. Today, we will discuss financial results for the first quarter ended May 1, 2010, our outlook for the balance of the year and update you on several other business matters. At the end of the call, we will be glad to respond to your questions.

Before I turn it over to Kevin to discuss the financial results, let me note that I''m very pleased with our first-quarter performance. The results exceeded our expectations and were driven by comparable store sales growth, gross margin expansion and expense leverage. The Saks team has carefully navigated through the challenging environment, and we are now moving cautiously from defense to offense.

As we move through 2010, we know that consumers will continue to be discriminating and that expectations for service and differentiated product with value will be even higher. We will continue to be fiscally conservative. We are beginning to take some balance risks. We will talk more about these items in just a minute.

Now, let me turn the call over to Kevin to provide more color on our first-quarter operating results and balance sheet.

Kevin Wills

Thanks, Steve and good morning, everyone. First, let me note that some of the comments on the call today as well as some of the information presented in our release related to future results or expectations, are considered forward-looking information within the definition of the federal securities law. The forward-looking information is premised on many factors and actual consolidated results might differ materially from projected information if there are any material changes in our assumptions or in the various risks related to our industry and our company. For a description of the risks and assumptions related to these projections, please refer to our release and our filings with the SEC, including our most recent Form 10-K.

For the first quarter, we recorded net income of $18.8 million or $0.11 per share. Those results included after-tax charges totaling $1.1 million or $0.01 per share related to estimated store closing costs. Excluding those charges, we posted income of $19.9 million or $0.12 per share. This compares to a loss from continuing operations of $4.9 million or $0.04 per share in the prior year first quarter.

Let me note that the diluted Q1 share count of approximately $200 million included 21.7 million shares associated with the $120 million convertible debenture and 19.2 million shares associated with the $230 million convertible debenture. The $120 million converts are in the money are dilutive this quarter and therefore, included in the share count. The $230 million convert is not in the money but due to our debt rating, they are convertible and are included in the Q1 share count. All the numbers we will discuss today exclude the previously mentioned store closing costs.

As Steve noted, our first-quarter profit resulted from comparable store sales growth, gross margin rate improvement and expense leverage. Our 6.1% comparable store sales increase was generated in a period during which we strategically reduced our promotional activity. In the Saks Fifth Avenue stores, several merchandise categories showed strength during the quarter, including women''s and men''s apparel, handbags, shoes and jewelry.

For the quarter, the New York City flagship store sales performance continued to exceed the company''s aggregate comparable store sales growth. Saks Direct posted an approximately 33% comparable store sales increase for the quarter. OFF 5TH comparable store sales performance was below the company''s aggregate comparable store sales performance for the period.

We generated meaningful year-over-year gross margin rate improvement in the first quarter, up 440 basis points to 43.1% this year from 38.7% in last year''s first quarter. The improvement exceeded our expectation and resulted from carefully managed inventory levels, increased full price selling and a reduced level of promotional activity. Managing SG&A continues to be a top priority for the company and we delivered 90 basis points of expense leverage during the quarter. As a percent of sales, SG&A expenses were 24.5% this year compared to 25.4% in the prior year first quarter.

Excluding the store closing costs, the company''s operating margin expanded to 7.1% in the quarter from 0.4% in the prior-year first quarter. Inventories at May 1, 2010 totaled $702.1 million, an approximate 10% comparable store decline from last year''s first quarter.

This decrease was in line with our expectations. At quarter-end we had approximately $179 million of cash on hand and no outstanding borrowings on our $500 million revolving credit facility. Funded debt, including capital leases, senior notes and the debt and equity components of our convertible debentures at May 1, 2010 totaled approximately $577.2 million and debt to capitalization was 35.7% without giving effect to cash on hand. Only $22.9 million of senior notes were scheduled to mature within the next 12 months.

Due to the actions we took in 2009, we remain very comfortable with our capital structure and a go forward financial flexibility. Let me now turn the call over to Ron. Ron?

Ronald L. Frasch

Thank you, Kevin. We are more focused than ever on offering our customers differentiated merchandise, a great service experience and innovative and effective marketing. We have made a lot of progress on each of these initiatives so far and we intend to build on this progress going forward.

As we have discussed, our goal is to gain market share by focusing on value in each of our good, better and best tiers of merchandise. For our customers, value is clearly not just about price, value also encompasses the workmanship, quality and uniqueness of the products we sell. Having said that, we are optimizing our good and better product zones.

We continued to collaborate with many of our existing designers to create products at more accessible price points and we have been very pleased with the response and results to date. I want to be clear that while we have expanded our good and better price zones, we still offer a wide variety of products in the best category and our designer selection remains a real differentiator for Saks Fifth Avenue.

We are also very focused on meaningfully expanding our assortment of exclusive and women''s distribution products. We''re extremely pleased with the progress we have made on building product exclusivity. And customers will see even more evidence of this in our stores throughout the rest of the year and beyond.

Currently, our exclusive product accounts for less than 10% of sales. We expect this number to approach 20% over time. Let me make a comment about our inventory level. As we planned this Spring 2010 season in mid-2009, the environment was much more challenging and unpredictable than it is today. As a result, we approach Spring 2010 inventory purchasing and planning very conservatively.

First quarter sales were a bit more robust than we expected and it is true that with more inventory, we probably could have generated an even higher sales number. Conversely, the upside to tighter inventory controls is often improved gross margin rates, which we delivered in the first quarter.

We are now running low on inventory levels in certain categories, but have seen a resurgence such as shoes and handbags. But in the aggregate, we are pleased with our overall inventory position. But, as you know, leadtimes in the luxury business are very long, six to nine months. So our ability to replenish stocks quickly is very limited.

As we have said, we are cautiously moving from defense to offense and we will carefully be dealing with inventory levels in some key merchandise areas in the fall. We remain very focused on gross margin expansion over time and have several initiatives in place to drive this improvement.

Having the right product at the right store at the right time should continue to increase sell-through and gross margin. We continue to invest in process and technology enhancements to allow our merchants to more efficiently buy and allocate product and to achieve this right product, right place, right time goal.

An important example is our hold and flow system, which we will be implementing in a phased approach beginning this summer. And it will drive allocation effectiveness by holding back a portion of certain merchandise orders at our distribution center employing the product through the stores as demand dictates.

Another driver of gross margin improvement is scaling back on promotional activity. We made some headway on this in 2009 and in the first quarter of this year. We expect to continue this strength throughout the rest of 2010.

During the first quarter, we were able to selectively reduce the duration of certain promotions and eliminate others altogether, reduce the discount percent offered at our Friends and Family promotion, and pare back the participation of certain vendors in key price promotion events.

We are continually striving to elevate our service and selling organization, making it more special, differentiated and professional through enhanced trading and improved processes and technology. And we will continue to reinforce clienteling to strengthen existing relationships through the improved utilization of our point of sale clienteling systems, which allows for tailored clienteling.

We know how critical it is not only to retain customers but to develop new relationships. Once the customer develops a personal relationship with a sales associate or personal shopper, they are more likely to increase their spending with and loyalty to Saks. One of our most critical initiatives at Saks Fifth Avenue is local marketing and local business development.

We have shifted a portion of our budget and focused away from national marketing efforts and towards this bi-store focus. Each store has developed its own local business development and marketing plan and is taking ownership of expanding market share.

Nearly every store now has a dedicated marketing manager to spearhead and support these efforts. We are sharing successes and developing best practices and believe these efforts are continuing -- are contributing to our sales increases. Through our differentiated merchandise, our clienteling service initiatives and our evolving marketing efforts, we expect to drive more full-price selling over time, which should generate continued topline growth and gross margin improvement. Steve?

Stephen I. Sadove

Thanks, Ron. Let me touch on a couple of topics, which I''m frequently questioned about, the sustainability of our cost reductions and real estate rationalization. As you know, we have aggressively managed our expense structure over the last two years, reducing SG&A expenses excluding certain items by approximately $150 million from mid-2008 to the end of fiscal 2009. These reductions were well in excess of our original expectations.

The entire organization embraced diligent expense control and literally challenged every expenditure across the organization while being protective of areas that directly impact our customer. We are a leaner organization today and I believe that the expense culture at Saks has changed. Approximately, a third of our expenses are variable with the remaining two-thirds fixed. We believe that the vast majority of our fixed reductions will remain permanent reductions as we move forward.

Having said that, as we move from defense to offense, we are making some very targeted investment spending this year to support Saks Direct and OFF 5TH growth and are selling in local marketing business plan initiatives. We expect about 50 basis points of SG&A deleverage from the full year due to these investments, along with the previously disclosed reduction in our net credit card revenue related to the HSBC term changes.

The deleverage is expected to occur over the remainder of the year as we begin to anniversary a number of the prior year expense reductions in the second quarter and given that certain of our investment spending will begin to ramp up over the balance of the year. In the ordinary course of business, we evaluate the productivity, profitability and potential for each of our stores and may determine it is appropriate to close a store from time to time.

We recently announced plans to close three Saks Fifth Avenue stores in July of this year, Portland, Oregon; San Diego, California; and Charleston, South Carolina. In the aggregate these three stores represent approximately $35 million to $40 million in annual revenue and about 200,000 square feet of space.

Closing these stores will have a modestly positive impact on our overall operating margin. Most importantly, the closings will free up critical working capital and other company resources, allowing us to focus on more important productive locations. We have a very limited number of additional stores that may meet our closing criteria.

We are working with the landlords on these properties and we may or may not be able to successfully negotiate the closing of these stores. We do not expect a large number of Saks Fifth Avenue store closings by any means.

Let me now take a minute to give an update on OFF 5TH and Saks Direct. A couple of years ago, we developed our new prototype OFF 5TH store and embarked on a steady growth plan for the business. Over the last two years, we have opened seven new and three replacement OFF 5TH stores. We expect to add three to five new stores annually for the foreseeable future.

We have already announced the planned opening of four new OFF 5TH stores this year in the metro areas of Pittsburgh, Houston, Portland and Raleigh/Greensboro. With our steady improvements in merchandise, service and store design, OFF 5TH will continue to be a future growth opportunity.

Growth in Saks Direct continues to exceed our expectations and we are more convinced than ever in its growth potential. We have continually strengthened our online merchandise assortment, adding new vendors and expanding our selection of goods. We''ve continually upgraded the functionality and service elements of the site and made enhancements to our call-in distribution centers and we intend to make even more investments in these areas this year.

Saks Direct is our second largest store behind our New York City flagship. We outlined our assumptions for the balance of 2010 in this morning''s press release. While our first-quarter results exceeded expectations, we still believe the overall environment remains somewhat uncertain and we are approaching the remainder of 2010 with continued caution.

However, our assumptions for the balance of the year reflect a somewhat stronger forecast than we had at the beginning of the year. Keep in mind that variation from the sales trends up or down could materially impact the other assumptions listed. Let me go over a few of the highlights.

Comp stores sales growth in the mid-single digit range for the full year. Based on the first-quarter sales performance and current inventory levels, we expect low to mid single-digit growth in the second quarter. We still expect mid-single-digit growth comparable store sales growth in the second half of the year. Comp store inventory levels are expected to be relatively flat at the end of the second quarter of 2010 and up modestly throughout the second half of the year.

Based upon current inventory levels in our promotional calendar and permanent markdown cadence, we expect gross margins to approximate 39% for the full fiscal year with second-quarter gross margin in the 35.5% to 36% range and second half of 2010 gross margins in the 38.2% to 38.7% range. Expense containment will remain a top priority but as I have previously mentioned, we expect SG&A to leverage for the balance of the year and that year over year net SG&A dollars, excluding certain items will increase approximately 50 basis points for the full fiscal year.

SG&A dollar increases are expected to rise from incremental variable costs associated with planned sales growth, primarily sales associate commissions, a reduction in proprietary credit card income primarily related to the HSBC term changes, and the targeted investment spending that I discussed earlier. Net capital expenditures should total approximately $55 million for the year. This will include some vendor shops and visual improvements in select SFAs and office stores, information technology and logistics enhancements and maintenance capital.

We remain committed to executing all necessary maintenance capital for our store base and to keeping our physical plant in excellent condition. We remain optimistic about the luxury sector as a whole and for our company. Saks Fifth Avenue has great potential. While approaching the future carefully and cautiously, we are focused on driving additional revenue growth, gross margin expansion and a return to annual profitability.

Our entire team is committed to the collaboration, innovation and superb execution needed to realize our long-term financial and operating goals and to enhance shareholder value. At this time, I would be open to questions. Operator?

Question-and-Answer Session

Operator

At this time, if you would like to ask a question, please press star then the number one on your telephone keypad. Your first question comes from the line of Lorraine Hutchinson.

Rick Patel – Bank of America/Merrill Lynch

Hi. Good morning. This is Rick Patel pinch-hitting for Lorraine. Do you feel like your mix of good, better, best products is at an appropriate level today or should we expect you to augment that mix as we go through the year?

Stephen I. Sadove

I''m feeling very good about where we are. If we had been -- and again, this is not a precise number -- but if we had been at about a third, a third, a third good, better, best, over the last year and a half, we have probably taken somewhere in the neighborhood of 8 to 10 points out of the best area and redeployed it into the good, better zone. Now much of that is the brands that we exist that we currently have shifting some of their product offerings. So we certainly had a strategy which said we are going to keep with the brands, stay with the brands that we believed in, and had a wider range in offerings from them. So I feel very good about the evolution of the mix. Ron, do you want to make any comments on that?

Ronald L. Frasch

I think you hit it well, Stephen. Even within the best category, what we see in, say, a very positive movement with our brands developing the good level of their offer within the best range. So we think we are in pretty good position right now.

Rick Patel – Bank of America/Merrill Lynch

And have you noticed any changes in tourist spending in your flagship or your other tour stores since the euro weakened over the past several weeks?

Stephen I. Sadove

I haven’t seen any impact yet. I think it is much too early to be seeing that impact. People book their trips well in advance. You might have had some impact from the volcanic ash. I think you have probably more impact from that with flights not flying during that short period of time than you would have in a euro impact. Remember the euro impact potentially works both ways because longer-term a very weak euro could affect the tourism. It also could positively affect pricing from some of the European products. I think time will tell relative to how that plays out.

Rick Patel – Bank of America/Merrill Lynch

Great. Thank you very much.

Operator

Your next question comes from the line of Michelle Clark.

Michelle Clark – Morgan Stanley

Yes. Good morning and thank you. Obviously, you closed out three stores during the reporter. Can you tell us what caused you to close those stores, i.e. what metrics did you look at specifically? And then I know that you said that it will not be a significant amount of closures go forward, but what the potential number could be?

Stephen I. Sadove

Well, as we said in the statement, we constantly look at a store, the profitability today, what we think the longer-term profitability of the store could be, its competitive position. Whether we believe that there is a growth potential in the store are all factors that we look at. We also look at what is the length of the term of the lease that we have on a given store. What are the operating covenants? Each store has a unique situation and we will look at whether or not there is -- whether or not there is a lease coming due. Portland is an example -- had an expiring lease. So that was one that we made that decision.

San Diego had a very short period of time left on its lease. Charleston was a different situation. Wonderful city but I think that it was quite a small store. It only had 33,000 square feet. Forever 21 we believe they wanted this site. It was a much better utilization for the space. We did not see any of the kind of growth potential in that market for us. So we decided it was a good decision to go at. Another variable we look at, not just growth potential is, as we look at the financials, is what kind of capital is going to be required to invest in the store for us to be able to maintain or attract some of the vendor matrix that we think appropriate. So those are all variables that come into play and again, we will continually look at every store in the mix of what we have and take appropriate decisions.

But I do want to emphasize that the number of stores that we would consider closing is very small, and there was a lot of press running around I don''t know a month or so ago where I think I was misquoted relative to store closings and it is not going to be a large number of stores. And you can see that the total volume on the stores that we talked about was in the $35 million to $40 million range, and it was a couple of hundred thousand square feet.

Michelle Clark – Morgan Stanley

Great. Thank you.

Operator

Your next question comes from the line of Bob Drbul with Barclays Capital.

Robert Drbul – Barclays Capital

Good morning.

Stephen I. Sadove

Good morning.

Robert Drbul – Barclays Capital

Steve, the first question that I have is, when you look at the gross margin, how much of it is essentially lower points of distribution, like I thought you had talked about 1000 points of distribution being removed from the store. Is there an update on that benefit to the gross margin? I guess is it a fair way to look at the private label and exclusive brand penetration this quarter as well year over year, how to think about that?

Stephen I. Sadove

I think there are a lot of variables that go into the gross margin expansion. One of the ones that Bob is referring to is that we have been very disciplined over the last year and a half or two in looking at points of distribution and a point of distribution is a product in the store. And we have taken out of distribution well over 1000 points of distribution, meaning a brand in a store. It does not mean we have discontinued the brand necessarily. It means that that brand does not work in a given store. If you look at that, you look at some of the promotional changes that we have made in terms of going after more full-priced selling, reducing the amount of promotion. That has had a substantial impact on the gross margin improvement.

I think that having the right product in the right store at the right time, which is some of the hold and flow work, is just starting to have an impact on the gross margin. We see bigger opportunities for that over time, but that will have a, we believe, substantive effect longer-term. I think that the private-label exclusive we talked about moving much more towards exclusive differentiated product. I think that that can be a meaningful positive contributor to gross margin longer-term. I don''t think that in the very near term as you''re looking at the quarter''s numbers, they had a material effect in terms of contributing to the improved performance. I think the improved performance, the biggest drivers of that were a combination of the reduced promotion and more full priced selling than anything else. But all of these are working synergistically for a longer-term what we believe to be a very positive impact on gross margin.

Robert Drbul – Barclays Capital

Great. And I guess one question on the second-half outlook for the gross margin, is it reasonable to assume you can have gross margin increases in both the third and fourth quarter versus your comparisons for last year?

Stephen I. Sadove

Yeah. I think that you can assume that you can have improvement in gross margin in both the third and fourth quarter. Remember we always have first and third quarters tend to be our better performing gross margin quarters because you have -- that''s when the full priced selling season occurs. But we think that there is opportunity for improvement in both the third and fourth quarter. It does not necessarily -- I think there might be more improvement in the third quarter than you are going to be seeing in the fourth quarter.

Robert Drbul – Barclays Capital

Thank you very much. Good luck

Operator

Your next question comes from the line of Adrianne Shapira with Goldman Sachs.

Adrianne Shapira – Goldman Sachs

Thank you. Just following up on Bob''s questions on the margins, could we just -- as you have been pulling back on the promotional activity, what sort of assumptions do you have, especially as you anniversary that pullback on promotions last year? What are you thinking in terms of the backup promotions? Flat, continued pullback to get to that flat to up 30 basis points in the back half?

Stephen I. Sadove

Well, again, competitive environment is going to dictate what we ultimately end up doing. But we think that we can be somewhat less promotional in the fall -- in the second half of this year than we were in the second half of last year.

Adrianne Shapira – Goldman Sachs

Could you give us more specifics in terms of …?

Stephen I. Sadove

I don''t want to give you specifics because for competitive reasons, but I think that it is going to be the same kind of things that we have looked at -- that we were able to accomplish in the first quarter and we are in the first half of the year, which is looking at length of promotions, brands in and out, varying types of -- you know, varying types -- every kind of promotion that we run in terms of whether you are going to run -- Friends and Family this spring went from 25% to 20%.

You will continue to look at things like that in the fall season, but I don''t think it''s going to be different in kind. It is going to be weaning yourself off of and you look at every promotional event saying, can it be tweaked because there is a positive impact on promotions. You cannot go and eliminate all promotions overnight. So what you are going to do is look at and can we go with two of these instead of three or one of them instead of two. All of this is a long-term process and it takes time. It is very measured. We are looking at the impact of every reduction that we do in terms of promotion. We do believe they will contribute to a long-term improvement in gross margin, but we''re not going to try and pull the needle out immediately.

Adrianne Shapira – Goldman Sachs

That makes sense. And then just shifting gears on the leverage, I appreciate there are some issues swinging back and variable coming back in the back half, but when you think about the business and given some of the appropriate adjustments you have made to your cost structure, what sort of comp level do you need to strike to see leverage on a go forward basis?

Stephen I. Sadove

Kevin, do you want to take it?

Kevin Wills

Sure. We still believe that we should see SG&A leverage in the low to mid-single digit comps. If you look at this year, we had good leverage in the first quarter but we began to anniversary some of the second-quarter reductions. This combined with some of the target investment spending, as Steve mentioned earlier, is what is driving some of the deleverage this year. I would also note that as we previously disclosed we are expecting about a $10 million to $12 million year-over-year decrease this year in our credit income associated with the HSBC agreement changes last fall. And that is the single largest driver of the anticipated SG&A deleverage this year of the HSBC terms change.

Stephen I. Sadove

Which you would not expect to see that degree of cost impact in a sense over time. So I think Kevin is right and that low singles you are going to be able to see some leverage.

Adrianne Shapira – Goldman Sachs

Okay. Great. Just lastly on OFF 5TH, as you call it a growth vehicle, we saw that sales were below average for the division. Could you help us think about what drove that? Is it an inventory situation? Is it just people are starting to trade up more to the full price? What is going on there? At what point would it be concerning, especially as you have highlighted as a future growth opportunity?

Stephen I. Sadove

The OpEx was a little bit lower. It was not a huge differential. We don''t do segment reporting on it, but it was not a huge differential from the average. The other thing to bear in mind is that it was coming off of a very different year ago base. So on a year ago where as the full-line stores had seen some very substantial comp decreases, we did not have that on OFF 5TH. So on a two-year run-rate, it actually is quite a bit stronger than the full-line stores. So I would weigh that. I feel very good about where OFF 5TH is positioned. Their inventory levels are in line. I''m very encouraged with the overall performance of that business both in terms of top line, as well as profitability. So the fact that it was a little bit lower than the average for the quarter does not concern me at all.

Adrianne Shapira – Goldman Sachs

Just a comment, as other people are looking at channels similarly as an opportunity as they are ramping up growth and with the Bloomingdale''s trying to penetrate those as well, just give us a sense of the flow of inventory, what is the optimal in terms of how much comes from Saks and again, as you are light on inventory in Saks, does that have an impact on OFF 5TH?

Stephen I. Sadove

Not really. About 15%, maybe 20% of the product that we sell in the outlet is the leftovers from the stores and that has been a pretty constant number. Probably 20%, 25% of the product is now under our own label that we are making for us and performing very nicely and this is both in the men''s and women''s businesses, and I expect to see that continue and to accelerate and growth. And then the remainder, let''s call it 55%, 60%, is cut for us by the vendor community using their excess capacity. It is not leftover product, and we have not seen an issue relative to flow of supply of that product. Maybe just as an aside, I also think that having clearly it''s an area of interest to a lot of the retailers at this point. Having a co-existence of a number of these brands, co-existing, for example, with rack -- a Nordstrom rack and getting critical mass of several of these brands together because they are very differentiated experiences, I view as a positive.

Operator

Your next question comes from the line of Emily Shanks with Barclays Capital.

Gordon McKemie – Barclays Capital

This is actually Gordon McKemie in for Emily. Just a few questions from us this morning. The after-tax charges of $1.1 million and the text of the press release and that Kevin pulled out, were those the same as the one slot 815 million impairments and dispositions, or was some of that rolled into the SG&A line?

Kevin Wills

In the impairments and dispositions.

Gordon McKemie – Barclays Capital

Okay. Great. Thanks for that clarification. Second, just on the store closures, can you tell us how many of the leases are rolling off this year, what the outlook is?

Kevin Wills

We have not disclosed individual store lease terminations. You know, dates or anything. But it would not be a substantial number at all if any.

Gordon McKemie – Barclays Capital

Okay. Great. And finally, just on the $55 million CapEx guidance for fiscal year 2010, could you tell us how much of that is maintenance CapEx?

Stephen I. Sadove

Well, probably about a third of it is what I would call information technology and distribution center related. About a third of it is in our shops and visual within our stores, and about a third of it is going towards office and maintenance capital. So maintenance capital is a little bit less -- let''s call it somewhere less than a third -- 25%, 30%, somewhere in that range. 20%, 25%, somewhere in that range.

Gordon McKemie – Barclays Capital

Great. Thanks for taking the questions. Best of luck.

Operator

Your next question comes from Barbara Wyckoff with Jesup & Lamont.

Barbara Wyckoff – Jesup & Lamont

Hi everyone. Good job on all fronts. I have a couple of questions for Ron. Could you update us on private label initiatives, what is working, what is not working, what are the opportunities for future growth? And just is the development on the dedicated area, is there a dedicated private label area, or is it in the core merchandise division? And then the second question is, as business improves, you see continued support from the second and third floor vendors to keep balancing the mix to add value and have you seen more support in apparel versus other areas in the store?

Ronald L. Frasch

Hi Barbara. Thank you. The private label area is really divided into a couple of segments. One is men''s and one is women''s. And yes, we have begun to do some reorganization and more dedicated resources working both with the brands and with manufacturers. Because we are looking at our exclusive initiative both branded and Saks branded. So it depends on the area. We are doing initiatives, quite frankly, throughout all divisions. So a couple of areas we have begun to provide dedicated manpower in support of that. We see it expanding. We see probably the men''s collection area has been really a terrific vehicle and very successful and actually we are leveraging our support staff there for OFF 5TH.

So the team is having both OFF 5TH private label development is where -- full-line development, and we are very pleased so far with the effort. We see big continued growth and a big margin opportunity there. Our primary women''s private label initiatives right now are commodity-driven. But we are not -- because we have the organization beginning to look at adding on other classifications, you know, cashmere sweaters and (inaudible) cashmere programs, et cetera and actually are doing research to understand how our clients would react to an expanded private label initiative. Relative to the second and third floor vendors, I''m not totally sure I understood your question.

Barbara Wyckoff – Jesup & Lamont

Well, you have them back add-in goods at lower price points to rebalance their mix. Do you see them continuing to do that just to add a little bit more of a value component?

Ronald L. Frasch

Definitely. This is a very significant area of focus for us. That is why we need to put more resources working with the brands directly. We have had great reception and response from our partners and see this growing I think pretty significantly in the near-term.

Barbara Wyckoff – Jesup & Lamont

Okay. Thank you.

Operator

Your next question comes from the line of Charles Grom with J.P. Morgan.

Paul Truco – J.P. Morgan

Hi. It is Paul Truco [ph] on for Charles. Just turning to the top line, could you update us on the comp trends in terms of traffic, what you''re seeing in ticket and AUR?

Kevin Wills

I think that what you are starting to see -- and again, we don''t monitor traffic in every store but I think you have turned to a slight, somewhat positive trend in terms of traffic. So we feel encourage by that. Obviously, you are off of a pretty substantial reduction that you took during the recession but we are seeing improvements in our overall traffic. I think in terms of our purchase -- in terms of, let''s call it, the amount that people are paying at each transaction, you are seeing an increase in the average transaction. Now, you have got to be careful because -- and that is largely driven because a year ago when you had more promotions going on, you had more individual light units being sold but at a lower price. So what is happening is you now have somewhat less units being sold but on a higher ticket price. So the traffic people are coming in the door. They are buying a little bit less number of units because we have less units, but they are buying them at a higher average ticket price.

Paul Truco – J.P. Morgan

Thank you. That is helpful. And then could you quantify, give an estimate, of what you think the impact was to your top line in the first quarter from your reduced promotional cadence as well as the tighter inventory levels?

Stephen I. Sadove

It is hard for me -- it is very hard to quantify that number. If you had asked me, could we have had -- if we had bought it more promotion, couldn''t we have had a higher comp? Probably, because that is one of the problems in looking just at comps is that you really want to look at a combination of comps and profitability in terms of gross margins. We consciously managed down the inventory a bit. We consciously managed down the promotions not to -- we felt good about the 6% comp. It was obviously higher than our expectations going in, but it was not in the nature of trying to maximize the comp level because we wanted to maximize the profitability as well. I don''t know, it would have been higher. I could not guess exactly what the number would have been.

Paul Truco – J.P. Morgan

Okay. Thank you. That’s all.

Operator

Your next question comes from Dana Telsey with Telsey Advisory Group.

Dana Telsey – Telsey Advisory Group

Good morning everyone.

Stephen I. Sadove

Hi, Dana.

Dana Telsey – Telsey Advisory Group

Hi. As you look at the landscape out there and you talk a little bit more -- you talked a little bit more about the exclusives, how are you thinking about the proportion? Where should that go? Should it be in any specific categories? And then as you think about inventory levels, OFF 5TH direct and the full-line stores, any color around OFF 5th and performance there in terms of what is being put there from what had been put there in the past? Thank you.

Stephen I. Sadove

Sure. Ron, do you want to --?

Ronald L. Frasch

Our exclusive penetration today is under 10% and over time our goal is to move that to in the 20% range. So that is our objective that we are working towards.

Stephen I. Sadove

And I think it''s a terrific opportunity. It is going to take time. It is a focus of the entire organization. And remember, the differentiated product is not just private label. It is brands that are being created for us. It is exclusive brands that are like Ralph Lauren, Polo, Blue collection, the Ralph Lauren Blue collection that is in his stores and ours. So there is a whole number of combinations as to what is causing that differentiate a product but we are very optimistic about it over time. As it relates to the OFF 5TH, I think that what you are finding is that the consumer is responding to our own brand.

I am very encouraged by that. They are responding -- it is very similar to what you find in full-line that they want fashion. We are seeing very good trends in more of the fashion forward modern zones of business. In terms of inventory investments, we are managing the inventories carefully both in full-line and in OFF 5TH. I don''t see a huge differential between the amount of inventory we are placing between the two segments. We are putting more of an investment in our Internet side. So one of the problems, if you want to call it that, that we faced going into this year is we were somewhat capacity constrained because we only had a certain capability of photo shoots of editorials to be able to put items up online.

And now that we are making -- and some of these targeted investments that we talk about are specifically aimed at allowing us to be able to support a higher level of growth in the Internet business. As good as I feel about 33% growth, I know that it could be even higher. So we are putting more inventory. And it would be against the -- I''m not going to go specifics, but it is against the categories you would expect where we are seeing out-sized growth.

Dana Telsey – Telsey Advisory Group

Thank you.

Operator

Your next question comes from the line of Deborah Weinswig with Citigroup.

Deborah Weinswig – Citigroup

Good morning. Ron, can you maybe go through some of the steps in terms of the collaboration with vendors on exclusive dress [ph] distribution and maybe how you are securing some of these relationships?

Stephen I. Sadove

Ron, do you want to talk a little bit about it?

Ronald L. Frasch

Yeah. I really don''t want to go into the specifics of this endeavor because it is -- but we have some that are ready to be communicated, I guess. Z by Zac Posen is one of the projects that we have done, which is we have had to redevelop the old bridge area, which has been a high priority for us because it''s a very important segment of our business and at one time was a very significant segment of our business. So we put an enormous amount of initiatives in that area either with exclusives or co-branded development. We have Ralph Lauren Blue, which is we are his exclusive partner. We have done Z by Zac Posen. We have a collection that we have done through another partner who I prefer not to name called -- (inaudible) I''m sorry I''m sitting here drawing a blank. We have worked on some programs with a couple of other designers that are in that zone of business. So they are all developing. Quite frankly, we are very pleased with the bridge business. We have renamed and rebranded it where, but we are beginning to get some traction and some very, very positive performance embracement by clients, most importantly.

We have done a number of programs throughout our designer area that could either be segments of the business that we have developed exclusively at more commercial prices with more commercial, perhaps less formal design, clothes that are a little more practical. We have a number of those throughout the designer area, as well as doing a number of just exclusive deliveries. We are working with quite a few of our designers on deliveries that for times of particular product needs that we have. So they are pretty vast and broad throughout all of our areas. We have worked with some designers. We have matched up with manufacturers of great collections for us.

So there are all different mannerisms on how we approach this. But I have to say that we''ve really had amazing support from our branded partners. It has been -- they are enjoying it, they are learning. In some cases they actually -- we are keeping goods exclusively in the states because they need production. They are shipping those goods to retail partners throughout the rest of the world. So it is so far, so good.

Stephen I. Sadove

I would echo what Ron is saying in terms of enormous amount of receptivity. In fact, two years ago when we worked on some of this, there was obviously a little new ground and took a step at a time very slowly. Now, in some cases you have a number of vendors proactively coming to us. You have a receptivity. You have a very collaborative environment, so we are quite encouraged by the opportunity.

Deborah Weinswig – Citigroup

And then Steve, on the local marketing initiatives, how many of your stores now how a dedicated individual? And can you maybe give some examples in terms of what those individuals have done?

Stephen I. Sadove

Sure. I find this to be one of the most important initiatives that we have undertaken. I mean both this as well as the merchandising being transformative. We are probably -- I cannot give you the exact numbers -- probably in the mid-40s in terms of the stores that have them. Only a few of the very small stores don''t have a marketing manager and the role of the marketing manager is not just an event coordinator. It is really to work with and it is collaborative role between the corporate headquarters and the store-based team in defining. We will provide templates, but each of the stores defining the marketing strategy that is going to drive growth both from an acquisition of new customers, as well as retention and cross-shop of their current customer base.

It is going to be larger programs they are developing but also small ones. It is going to be -- I have been traveling -- Ron and I have been traveling to a large number of the stores over the last few months and we are sitting down and talking with them. In your store who is the target audience that we want to attract that we have not been able to get at? What are the kinds of vehicles or programs utilizing associates, engaging the associates in the store to go after them? So I will get a specific -- for example, I was in Boston a few weeks ago and talking about some of the initiatives that they had.

One of their targets was to increase the penetration of Saks within the Back Bay community. And we looked at a number of the programs that they had initiated and you could see the numbers in terms of the penetration that we had in Back Bay as a result of some of the programs. So this is very much a store by store, who the target audience is very different. I used the example in Atlanta, which about 50% of our market is African-American, it has a very large gay population, and the tactics that we are utilizing in Atlanta are very different than the ones we are utilizing in Boston.

Deborah Weinswig – Citigroup

And then last question, in terms of as we think out for the rest of the year and then obviously with a lot of your merchandise, you have very long lead times. So maybe thinking into 2011, how do you think about inventory growth versus sales growth going forward?

Stephen I. Sadove

Well, I think that we have said that that the inventory going into the fall season will be relatively flat. We are looking at -- the guidance we are giving is to get to the mid-single digit comp in the second half of the year. So obviously growth in comps will be a little bit higher than inventory as we look at the fall season. We feel very good about the absolute levels of inventory that we have though, so we feel very good about how it played out in the first half of the year, and we feel pretty confident about the right mix of inventory and the amount of inventory in the fall. I would anticipate as you go forward in time that hopefully you will get a little bit of a turn improvement, and your sales will be a bit higher than your inventory growth, and that would be what we would target for.

Deborah Weinswig – Citigroup

Great. Thanks so much and best of luck.

Stephen I. Sadove

Thanks.

Operator

Your next question comes from the line of Mark Kaufman with Rafferty Capital Markets.

Mark Kaufman – Rafferty Capital Markets

Hi. Good morning. I just wondered if you put little clarity, do you think that throughout your stores, the regular Saks stores and the Saks OFF 5th, that you would have had opportunities in all those channels if you had more inventory?

Stephen I. Sadove

Well, we made a brief comment that on the comment on it in the release, which is, yes, I think that had we had more inventory, we probably could have had a few more sales in certain categories. We are taking inventory in certain of the categories right now in the spring season, and had we had more inventory, I''m sure we''ve lost some sales. On the other hand, it is a balance because if you had too much inventory then you''re going to end up with a risk of a high level of markdowns.

So we actually also feel that it was good -- a year and a half ago remember in the fall of ''08, you got into the situation of a huge amount of excess of inventory and promotions and people were asking me all the time, will anyone ever pay full price again? And you''re going -- is the luxury sector going to survive? And now you''re in a situation where people are paying full price. There is back to scarcity, which is what luxury goods is all about, and not having the last sale in terms of the amount of inventory in luxury goods is probably a positive thing.

Mark Kaufman – Rafferty Capital Markets

If I can ask one other question, given the tightness of credit out there in combination with what appears to be a good balance sheet on your part, are there opportunities that you can help some of these vendors in an exclusive area? I''m talking about not with your existing vendors, but are there opportunities with other new designers. You know, the company in the past has been good in that area.

Stephen I. Sadove

Well, I think that we are constantly looking to innovate and work with new designers, emerging designers, and showcase their products. I think that we -- clearly our large vendors have not had credit issues in terms of being able to flow product. I think we want to create an environment for new vendors. Ron, do you want to make a comment?

Ronald L. Frasch

Yes. I think that we even throughout this past year really done everything we possibly could to support some of the emerging talent. Actually we feature quite a number of them on our new third floor in New York, which we are going to expand it now and actually recently had an event at the end of last month dedicated to (inaudible). It is an area that I think that we do a very good job of, and, quiet frankly, we want to get a lot more credit for what we are doing. So it''s a very good callout.

Mark Kaufman – Rafferty Capital Markets

Thank you.

Operator

Again ladies and gentlemen, if you would like to ask a question, press star then the number one, that is star one to ask a question. Your next question comes from the line of Todd Slater with Lazard Capital Markets.

Stephen I. Sadove

Hey, Todd.

Jennifer – Lazard Capital Markets

Hi. It’s actually Jennifer for Todd. Congratulations on a good quarter. Most of my questions have been answered, but I was wondering if you could maybe comment a little bit on May trends?

Stephen I. Sadove

On May trends? No, we will not comment on mid-month trends. Obviously, we will talk about it at the end of the month.

Jennifer – Lazard Capital Markets

Okay. And then can you -- I don''t know if you have this information, but do you know approximately what percent of the New York City store is driven by tourism?

Stephen I. Sadove

Well, it is not a precise number. We usually think in terms of the New York store about 20% to 25% of that store volume being driven by tourism. But that is both domestic as well as international tourism. But we have a very large domestic tourist component as well. So it is in that type of range and as we indicated in the script in terms of comments that the New York store is outperforming the aggregate -- had been outperforming, went to underperforming during the depth of the recession and now is back to outperforming mode.

Jennifer – Lazard Capital Markets

Okay. Back to -- I know you will not comment on mid-month trends, but should we think about May as a little weaker than June and July due to the Memorial Day shift or can you talk about that a little bit?

Stephen I. Sadove

I really would not talk about May specifics callouts at all. We have given guidance in terms of what we think the second quarter would be. But I really would not talk within the quarter by month.

Jennifer – Lazard Capital Markets

Okay. And then one last quick housekeeping one. On share count, can you talk about that for the second quarter versus the back half because I''m having a hard time getting to the 158 to 160 for the year with the almost 200 for the first quarter?

Kevin Wills

We covered that earlier, and it is basically the converts being included in the share count in the first quarter because the $120 million converts were diluted, and even though the $230 million converts are out of the money due to our debt rating trigger, they are included in the share count or Q1. I would tell you on a go forward basis and extending the profitability of each individual quarter as to whether they will be in, and again, we have given the range that we would expect for the year.

Jennifer – Lazard Capital Markets

Okay. Thanks.

Operator

There are no further questions at this time. I would like to turn the call back over to Mr. Sadove.

Stephen I. Sadove

Well, thank you all very much for joining us, and we look forward to speaking with you at the end of the second quarter. Thanks a lot.

Operator

Ladies and gentlemen, this does conclude today''s conference call. Thank you for your participation. You may now disconnect.