Saks Q3 Earnings Call Transcript

123jump.com Staff
08 Dec, 2010
New York City

The department store retailer net sales for the quarter grew 4.3% to $658.8 million on comparable store sales rise of 5.7%. Net quarterly income surged 476% to $36.3 million. Earnings increased to 20 cents per share from 4 cents per share in the year-ago quarter.

Saks Incorporated ((SKS))
Q3 2010 Earnings Call Transcript
November 16, 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

Deborah Weinswig – Citigroup
Lorraine Hutchinson – Bank of America/Merrill Lynch
Paul Swinand – Morningstar
Dana Telsey – Telsey Advisory Group
Carla Casella – J.P. Morgan
Jennifer Davis – Lazard Capital Markets
Adrianne Shapira – Goldman Sachs
Christopher Cuomo – Morgan Stanley
Emily Shanks – Barclays Capital
Robert Drbul – Barclays Capital
Charles Grom – J.P. Morgan

Presentation

Operator

Greetings and welcome to the Saks Incorporated Third Quarter Earnings Conference Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. If any should require operator assistance during the conference, please press star zero on your telephone keypad. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Steve Sadove, Chairman and CEO of Saks Incorporated. Thank you. You may begin.

Stephen I. Sadove

Thanks. Good morning. This is Steve Sadove. I''m joined on the call today by Ron Frasch, our 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 third quarter and nine months ended October 30, 2010, our outlook for the fourth quarter 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 in more detail, let me note that I am pleased with our third quarter and year-to-date performance. The year-over-year improvement was primarily driven by our continued comp store sales growth and meaningful gross margin expansion.

With improvement in the financial markets, we have experienced a more stable and predictable operating environment this year. And we feel much better about the overall tone of business and the way our customers are responding to our initiatives.

Having said that, we realize a number of challenges remain in the macroeconomic environment and a complete recovery will take more time. As we approach the fourth quarter and beyond, we will continue our conservative bias but we will also work to balance that with making certain strategic, targeted investments in inventory and infrastructure where we believe the biggest opportunities lie to drive sales and profit growth.

Now, let me turn the call over to Kevin to provide more color on our operating results and our 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 laws. 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 or our company. For a description of the risks and assumptions related to these projections, please refer to the release and our filings with the SEC, including our most recent Form 10-K.

For the third quarter, we reported net income of $36.3 million or $0.20 per diluted 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. Excluding this gain, the company would have recorded net income of $9.7 million or $0.06 per share for the third quarter.

This $0.06 per share number is based on outstanding shares of approximately 158 million, which excludes the impact of the convertible notes as they are not diluted at the $9.7 million net income level. This compares to a net income of $1.9 million or $0.01 per share in last year''s third quarter also excluding a tax reserve reversal in that period.

For the nine months, we recorded net income of $22.9 million or $0.14 per diluted share. Those results included a net after-tax gain, totaling $13.9 million or $0.08 per share related to the aforementioned $26.7 million gain related to the tax reserve reversal netted against $12.8 million of net lease termination, severance and other store closing costs primarily related to the closing of six Saks Fifth Avenue stores.

Excluding these items, we would have recorded net income of $9 million or $0.06 per share for the nine months. This compares to a net loss of $57.7 million or $0.40 per share for the prior year and nine months, also excluding a tax reserve reversal. All the numbers we will discuss today exclude the previously mentioned lease termination, severance and other store closing costs and the tax reserve reversals.

As Steve noted, the year-over-year improvement in our third quarter results principally resulted from comparable store sales growth and significant gross margin rate improvements. Our 5.7% third quarter comp stores sales increase was consistent with our expectations and was achieved even as we continued to strategically reduce our promotional activity. Our comparable store sales grew 5.5% for the nine months.

In the Saks Fifth Avenue stores, several merchandise categories showed strength during the quarter, including shoes, women''s apparel, dresses, men''s sportswear and fashion jewelry. The New York City flagship store sales performance was solid, in line with the company''s aggregate comp stores sales performance during the quarter. Please keep in mind that we are beginning to anniversary the improved performance of our New York store that began last fall.

Saks Direct posted approximately 21% and 25% comp stores sales increase for the third quarter and nine months respectively. OFF 5TH''s comparable store sales performance was below the company''s aggregate comparable store sales performance for both the quarter and the nine months, although sales trends did improve in October.

For the third quarter, our gross margin rate increased 230 basis points to 42.6% this year from 40.3% in last year''s third quarter. The improvement resulted from increased floor priced selling and a reduced level of promotional activity. For the nine-month period, the gross margin rate was 41.1% in the current year versus 36.6% in the prior year, a 450 basis point improvement.

Managing SG&A continues to be a priority, although as expected, we experienced deleverage for the quarter. As previously disclosed, we realized a reduction in proprietary credit card income, primarily related to previously announced term changes with HSBC equating to approximately $2 million for the quarter and $5 million for the nine months. And the company is making targeted investment spending to support growth in Saks Direct.

In addition, year-over-year incentive compensation expense increased. SG&A expenses were 26.7% of sales in the third quarter of this year compared to 25.7% in the prior year. On a year-to-date basis, we experienced modest year-over-year deleverage of 30 basis points.

Our operating income improved to 4.8% of sales in the current year third from 2.5% in the prior year third quarter. For the current nine months, excluding the lease termination, severance and other store closing costs, our operating margin was 2.9% of sales, an improvement over the operating loss of 2.7% in the prior-year nine-month period.

Inventories at the end of the third quarter totaled $830.6 million, a 3.9% increase over the prior year. On a comparable store basis, inventories increased approximately 5.9%, which was in line with their expectation and we feel good about the content and currency of our current inventory position.

At quarter-end, we had approximately $109.5 million of cash on hand and no outstanding borrowings on our $500 million revolving credit facility. Funded debt, including capitalized leases, senior notes and the debt and equity components of the convertible debentures at quarter-end totaled approximately $573.6 million and debt to capitalization was 35.2% without giving effect to cash on hand.

We have $22.9 million of senior notes maturing next month and we intend to retire those notes with cash. We are very comfortable with our capital structure, liquidity and our financial flexibility.

Today, we also announced that our Board of Directors has approved contributing up to $20 million in Saks common stock to the company''s frozen defined benefit pension plan. The contribution, which may be made in installments, will be fully tax-deductible and is expected to be made before the end of November. The final value of any stock contribution and the number of shares involved will be determined when the contributions are made.

The plan''s investment policy requires the divestiture in an orderly manner of any Saks common stock that is received as a contribution to the plan as soon as practical after it is received. These sales will be managed by a third-party advisor independent of the company and its board of directors and executives.

The net effect of the contribution on earnings per share including the impact of increased shares outstanding is expected to be minimal in 2010 and future periods. This voluntary stock contribution will significantly strengthen our pension plan, getting it closer to a fully funded status and will reduce future pension contributions.

Net capital spending for the third quarter and nine months totaled $9.5 million and $29.5 million respectively. Let me now turn the call over to Ron. Ron?

Ronald L. Frasch

Thank you, Kevin. We continue to focus on our four pillars, merchandising, service, marketing and expense management. Let me spend a minute updating you on the actions we are taking to offer our customers differentiated merchandise, a great service experience and innovative and effective marketing.

Steve will talk about the cost structure in just a moment. We believe we are making meaningful progress on delivering the right balance of good, better and best merchandise by category, by store. Of course, over time our customers will dictate how this balance ebbs and flows.

Customers have responded to our offerings, and we were able to generate another quarter of good full-priced selling across all price points in nearly every merchandise category. As we ended the third quarter, our comparable store inventories were essentially in line with sales growth after lagging sales trends for most of the past two years.

We are prudently building our inventories where we believe we have the most sales opportunity in such areas as handbags, shoes, the women''s bridge area which we call WEAR and men''s sportswear with a particular emphasis on exclusive product. And, of course, our Saks Direct inventories are up, warranted by its continuing strong sales performance.

We are making headway in expanding our assortment of exclusive and limited distribution product. Currently, we estimate that about 10% of our merchandise is exclusive to Saks Fifth Avenue. Over time, we hope to increase the penetration of exclusive product to closer to 20%.

One of the best examples of exclusive merchandise continues to be our own Saks Fifth Avenue Men''s Collection. And we are continuing to expand the offerings within this unique line. These products have filled a void in our merchandise assortments and have been extremely well received by our customers.

For holiday, our goal is to be the gift-giving headquarters for our customers, the destination where they can do all of their holiday shopping. Our 100 Great Gifts program features 100 items spanning all price points in all merchandise categories and a number of the items are exclusive to Saks.

We have achieved gross margin expansion over the last several quarters and we have several initiatives in place to drive further improvement going forward. We continue to invest in process and technology enhancements that allow our merchants to more efficiently buy and allocate product and to achieve our right product, right price, right-time goal.

We have talked about our hold and flow system which will drive allocation effectiveness by holding back a portion of certain product orders in our distribution center and flowing the merchandise to the stores as demand dictates. Hold and flow is currently being implemented in a phased approach.

By year-end, about 5% of our total inventory will have a hold and flow component to it with all merchandise divisions participating to some degree. We hope to increase this to more than 20% of our total inventory over the next three years or so. Of course, the key driver of our gross margin improvement to date has been better full-price selling supported by reduced promotional activity.

We have been able to strategically reduce the duration of certain promotions and eliminate others altogether, reduce the discount offering on our Friends and Family promotions and pare back the participation of certain vendors in key price promotion events. We will continue to look for opportunities to further reduce promotional activity going forward, although keep in mind that we are now anniversarying the dramatic reductions that began last year.

You have heard us talk a lot about local marketing and local business development and how we have shifted a portion of our budget and focus away from national marketing efforts towards a buy 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 spearheading and supporting these efforts. These initiatives are paying dividends.

Earlier this fall, we expanded local marketing to include individual business development plans for all sales associates. In conjunction with their managers, every sales associate now has their own plan on how to grow their customer and revenue base and they have the tools to do so, which include our robust clienteling systems and enhanced training.

We are in the very early stages of implementing this program but I am confident that these efforts will further differentiate us in the marketplace, strengthening existing customer relationships and forming new ones. We are continually striving to elevate our service and selling culture, making it even more special, differentiated and professional.

Our fall ad campaign, I''m Going to Saks, has been a big hit. The catalogs, in-store signage, shopping bags and ads translate into a fun, well-received campaign. For holiday, our 100 Great Gifts program will be marketed by catalog, direct mail, in-store signage and most importantly, our sales associates.

The execution of our differentiated merchant strategy, our clienteling service initiatives and our innovative marketing efforts have led to improved operating performance this year. And I believe they will continue to drive future improvement. Steve.

Stephen I. Sadove

Thanks, Ron. Let me update you on a few other topics. As you know, we very aggressively managed our cost structure throughout the recession, reducing SG&A expenses excluding certain items by approximately $155 million from mid-2008 to the end of fiscal 2009.

These reductions meaningfully exceeded our original expectations. We are a much leaner organization today. I believe that the expense culture at Saks has permanently changed. Having said that, we are making some very targeted investments this year to support areas which we believe have great upside potential.

The best example is Saks Direct. We did not have adequate infrastructure needed to support the tremendous growth we are experiencing. So we''re adding key merchandising, marketing and planning staffing, along with additional capacity and capabilities in areas such as our photo studio. We believe these investments will position us for further growth.

This year, we’ve worked aggressively with our landlords to address some of our most underperforming locations. And we are pleased with the progress we have made. We were able to close six stores, Portland, Oregon; San Diego and Mission Viejo, California; Charleston, South Carolina; Plano, Texas; and Southampton, New York. In aggregate these six store closings represent approximately $55 million in annual revenue and about 425,000 square feet of space. Removing these stores will result in a positive but not significant impact on our overall operating margin.

More importantly, the closings are freeing up critical working capital and other company resources, permitting us to focus on more important, productive locations. We have a very limited number of additional stores that may meet our closing criteria and accordingly we will continue to evaluate our options on these stores. To be clear, we expect at most very few additional potential Saks Fifth Avenue store closings.

Let me now take a minute to give an update on OFF 5TH and Saks Direct. So far this year we have opened four new OFF 5TH stores, one in Metro Pittsburgh in May, one in Metro Portland Oregon in September and stores in Metro Houston and Raleigh/Greensboro opened this month.

We renovated our Riverhead, New York location this spring and the renovations of our Bergen, New Jersey and Woodbury Commons, New York locations will be complete in the spring of 2011. Since we have launched our new prototype store design in April 2008, we have opened nine new and three replacement stores and remodeled one location.

We continue to believe we can add a few new stores annually for the foreseeable future. Consistent with the outlet channel as a whole, our OFF 5TH business somewhat slowed this year, although sales trends did improve in October. Keep in mind that the off-price business is less volatile and did not experience the same magnitude of sales decline that the Saks Fifth Avenue stores did in 2008 and 2009.

We feel good about our new store format and the steady improvements we have made and continue to make in the merchandise and service elements. We remain committed to our strategy and see growth for OFF 5TH going forward.

Saks Direct revenue growth continues to substantially outpace the company average and we remain confident of its potential as evidenced by our investment in the business over the course of the year. We’ve strengthened our online assortments, adding new vendors and expanding our merchandise selection. Women shoes, Bridge or WEAR fashion jewelry and children''s apparel have performed exceptionally well.

We have also made a number of important website enhancements, including one-page checkout, automated product recommends, product reviews and our new mobile-friendly website. Finally, we have recently launched a new Kiva robotic system in our warehouse, which will improve efficiency and allow us to deliver orders even faster to our customers.

We outlined our assumptions for the fourth quarter in this morning''s press release. 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.

We expect comp stores sales growth in the mid-single-digit range for the fourth quarter and the second half and the full fiscal year in the aggregate. Comp store inventory levels are expected to be up in the mid-single-digit range at the end of the year. Based upon current inventory levels and our promotional calendar and permanent markdown cadence, we expect our gross margin rate to approximate 37% to 37.5% for the fourth quarter, which would bring the gross margin rate to approximately 39.4% to 39.7% for the second half and approximately 39.8% to 40% for the full fiscal year.

Keep in mind that second-half gross margins are typically lower than those in the first half due to additional promotions inherent during the holiday selling season. Expense containment will remain a priority but as I previously mentioned, we expect SG&A deleverage of approximately 30 to 50 basis points for the fourth quarter, approximately 50 to 70 basis points for the second half of 2010 and approximately 30 to 40 basis points for the full fiscal year.

SG&A dollar increases principally are expected to arise 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, increased incentive compensation and the targeted investment spending that I discussed earlier.

Net capital expenditures should total approximately $50 million to $55 million for the full year. This total encompasses some vendor shop and visual improvements in select Saks stores, new OFF 5TH stores, information technology and logisitics 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. In closing, first, I would like to say that I''m really proud of our team and all that we have accomplished so far this year. As we look to the balance of the year and beyond, we remain very focused on driving additional revenue growth, further gross margin expansions and controlling expenses. I''m confident that with our talented team and by making the right investments in executing our strategies, we will continue to enhance shareholder value and delivering on our long-term financial goals.

At this point, I’d like to open it up to questions.

Question-and-Answer Session

Operator

Thank you. Ladies and gentlemen, we will now conduct the question-and-answer session. If you would like to ask a question, please press star one on your telephone keypad. A confirmation tone will indicate that your line is in the question queue. You may press star two if you would like to remove your question from queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. Our first question comes from Deborah Weinswig with Citi. Please state your question.

Deborah Weinswig – Citigroup

Congratulations on a great quarter, Steve.

Stephen I. Sadove

Good morning, Deb.

Deborah Weinswig – Citigroup

Good morning. Can you please provide an update on hold and flow and how it will be used over the holiday season?

Stephen I. Sadove

I think one of the things to remember as you will recall, hold and flow, as we said in our remarks, is holding back a portion of the buys to post-allocate, basically to send out to the stores based upon the demand that we are seeing on specific categories. At this point, it is really less than 5% of the product is in hold and flow. So it''s really not having a material effect at this point on the business. It is really on the margin.

I think you are going to start to see more of an impact as we go into next year and beyond. But we are very, very encouraged by what we are seeing, though.

Deborah Weinswig – Citigroup

Okay. And then in terms of what you are seeing in the bridge categories, what has your performance in those categories?

Stephen I. Sadove

Well, we are seeing very good performance in what we are calling WEAR businesses across a number of the brands, the exclusive brands as well as some of the core brands like the Taharis of the world. So we are seeing very good growth overall in that category. Ron, do you want to make any comments on it?

Ronald L. Frasch

We are very encouraged. We have really tried to penetrate this zone of business with a significant component of exclusives and have some things that we are working on for next year that we will announce at the end of the year that we are quite excited by.

Deborah Weinswig – Citigroup

Would you say that WEAR is where you have the greatest penetration of exclusives?

Ronald L. Frasch

No. I said that is where we do have a very significant penetration of exclusives.

Stephen I. Sadove

To direct answer your question, we are up in the high single digits in our WEAR growth.

Deborah Weinswig – Citigroup

Excellent. And then just in terms of what we are seeing or how should we think about CapEx in 2011, I know obviously we will get an additional update going forward. But Steve, you have talked about being extremely disciplined in terms of new store growth. How should we think about OFF 5TH and just growth going forward?

Stephen I. Sadove

I think that you are going to see us continuing to be focused on managing the CapEx levels. Right now this year, we''re saying we''re going to be in the 50, 55 type of range. I think the final number will be dependent on how many projects actually get completed and some of it might flow into next year. I think that you are going to not see a materially different number next year than this year within a few million dollars either way.

So we think that we can manage this level of capital spend for the foreseeable future. So whether it is 55 or 60 or 50, it''s going to be in that kind of number that as we saw this year, depending on the carryout. And I think we are not going to be seeing a lot of new full-line stores. We are on a track to we have said three to five OFF 5TH stores that we will be opening a year. I think you will see that again next year.

In terms of shop capital, we will continue to renovate our shops and keep them current. We are going to spend maintenance capital as we need to and you will see continued technology investments. You know, we feel very good about the investments we made in the logistics systems, the robotics, the Kiva robotics system. It is expanding, performing exceptionally well in the distribution center and you may see some other smaller technology investments, but that is really where the focus will be.

Deborah Weinswig – Citigroup

And I don''t want to overly focus on one month performance but anything to call out in terms of OFF 5TH''s performance in the month of October?

Stephen I. Sadove

Nothing to call out about. I think you''re seeing a little bit of improved traffic trends. There is a meaningful -- if I look at the most recent, let''s call, it 45, 60-day trend, it is better than what we have seen earlier in the year. So we are continuing to see the outlets starting to improve. I actually feel reasonably good about what we are seeing there right now.

Deborah Weinswig – Citigroup

Great. Thanks so much and best of luck this holiday season.

Stephen I. Sadove

Thanks.

Operator

Our next question comes from Lorraine Hutchinson with Bank of America/Merrill Lynch. Please state your question.

Lorraine Hutchinson – Bank of America/Merrill Lynch

Thank you. Good morning. Could you just talk through the comp metrics that you were able to put up this quarter and if you expect that mid single-digit increase in the fourth quarter to follow the same trend?

Stephen I. Sadove

When we say the metrics, I mean we saw mid single -- we have basically been seen mid single digits for the first half of the year and the third quarter. So it has been pretty consistent in terms of that kind of growth. Clearly the Saks -- you know, the Saks Direct numbers in the quarter were in the 20% plus range, so we saw very good performance in Saks Direct. We don''t report the exact numbers on OFF 5TH but it was clearly a bit lower than we saw for the aggregate performance.

I think, as we look into the fourth quarter, we have indicated that we expect to see mid single-digit growth again. I think we''re not going to give breakout by segment, but clearly outsized growth that we have been seeing in Saks Direct, you would expect to see continuing into the fourth quarter as well.

Lorraine Hutchinson – Bank of America/Merrill Lynch

And has the comp been driven by traffic or ticket?

Stephen I. Sadove

I think it has been -- basically you have seen flattish traffic. We don''t really have traffic counters in all of our stores but transactions are relatively flat and you have been seeing an uptick in the average dollar per transaction and that has been quite healthy.

Lorraine Hutchinson – Bank of America/Merrill Lynch

Great. Thank you.

Stephen I. Sadove

And I would just comment that that is obviously -- it can be mixed, but it also, as we have been less promotional, you''re going to be getting a higher average dollar per transaction.

Operator

Our next question comes from Paul Swinand with Morningstar. Please state your question.

Paul Swinand – Morningstar

Good morning. My first question was you talk about strategically trying to reduce promotions and could you give us a little more color about that? Are you driving fewer ads or is it just in the stores taking fewer markdowns? Any color you could give us would be helpful.

Stephen I. Sadove

There are a lot of ways that promotions -- that you see promotions. So, for example, we run our Friends and Family event, that’s a major promotional event for us. We reduced the value of the Family and Friends event from 25% to 20%. We also excluded a large number of the designer brands from the event. So the net effect of it was a substantial reduction of it.

We took our cosmetic discount from 15% to 10%. We have run these gift card events, we call them EGC events and we have cut down some of those from three days to two days. We have also excluded a number of the brands from the EGC event. So what you see is by brand exclusion, lower number of days, elimination of events, so in a number of cases where we might have run two EGCs, you may run one EGC.

In the first half of the year, we estimate that -- and there is no precise number on this but we estimated we probably reduced somewhere 25% to 30% the amount of promotion that we executed in the third quarter. While not precise, we are probably in the 15% type of range because now we are starting to lap some of the reductions that we took a year ago. But we are consistently trying to reduce the number of events, the brands included, the value of the events and move towards a more full-priced selling environment.

Paul Swinand – Morningstar

Very interesting. Thank you for that. And then along the same lines, are you seeing that certain categories or certain hot items are actually selling out sort of conditioning the consumer to buy full price again?

Stephen I. Sadove

No question about it as we have reduced the amount of inventory, our associates are telling their customers, hey, there''s only two of these shoes in your size left or we only have a couple of these bags. And sure, if you want to wait until it goes to markdown, the chances are it might not be there and so you ought to get it now or it will not be there. You are seeing a dramatic increase in our full-priced selling.

And it''s because we are keeping our inventories lean and being very focused on the full-price event. So yes, the associates are training the customers on that and the customers are responding.

Paul Swinand – Morningstar

Very interesting. Thank you, again, for that. And real quick do you have a long-term goal for sales per square foot? Just thinking back to more profitable times, what do you need to do to get to your long-term goal for sales per square foot?

Stephen I. Sadove

We don''t look at it just in terms of sales per square foot. Obviously, we do -- you''re going to see a lot of ways you affect the increase in the productivity -- productivity of the stores is going to increase sales per square foot. When we closed the six stores that we did with doing at what was $55 million on 425,000 square feet, that by definition improves your sales per square foot.

What we believe is over time we need to get some topline growth to get to our operating margin targets and it is not Herculean growth, but it is getting ourselves back to levels we were pre-recession. And we think that is very achievable with all the kinds of initiatives that we are talking about.

Paul Swinand – Morningstar

Okay. Thank you very much.

Operator

Our next question comes from Dana Telsey with Telsey Advisory Group. Please state your question.

Dana Telsey – Telsey Advisory Group

Good morning everyone.

Stephen I. Sadove

Good morning, Dana.

Dana Telsey – Telsey Advisory Group

Hi. With the stent in full-priced selling that you have been seeing, what are you seeing from the vendors? What should we expect in terms of the pricing environment going into 2011 and is there any difference by categories? And just lastly on OFF 5TH, how is pricing there changing given the full-priced selling that you are experiencing in the full line stores?

Stephen I. Sadove

Let me talk first about OFF 5TH and then I may have Ron talk a little bit about the other. I think that, remember, if you look at our OFF 5TH business, the business model has changed. It is not just a selloff channel anymore. It is a distribution channel. Only about 15% to 20%, let''s say, of the product is leftovers from the stores. Maybe 20% or so is being sold under our own brands and the remainder is being cut for us by the vendor community.

I don''t think you''re seeing dramatic price increases in the outlet channel. It has been relatively stable. You may see a little bit pricing as you have got some of these commodity cost issues coming up that might affect it a little bit as you go into next year. But I don''t see it as being material increases that we have been seeing on the OFF 5TH side of the business. Ron, do you want to talk a little bit about what has been going on in terms of on the full-line side?

Ronald L. Frasch

Sure. Sure. I think that the environment has really rationalized itself. I think everyone''s goal is to push more goods at full price to control inventories and control pricing. And there, of course, are exceptions to that. But I think that we see a very normalized marketplace to do business in.

Stephen I. Sadove

Yeah. I think that the vendors have experienced and reacted well in this environment. We have balanced our assortments on a good, better, best basis. I think many of them have done the same thing in terms of offering products at a good, better, best price point. As you''re starting to get changes in either the euro or commodity costs, that they will just play with the fabrications. I don''t think you are seeing -- you have seen price decreases, but I don''t think that you''re seeing massive price increases either.

Dana Telsey – Telsey Advisory Group

So this bodes well for gross margin going forward than?

Stephen I. Sadove

I clearly think that the combination of full-price selling, the technology improvements, the editing that we have been doing and the cultural changes that we have been working with our organization on, we think all are positive for full-price selling for the longer term.

Dana Telsey – Telsey Advisory Group

Thank you.

Operator

Our next question comes from Carla Casella with J.P. Morgan. Please state your question.

Carla Casella – J.P. Morgan

Hi. I wanted to talk just a moment about the private brand. You mentioned it is about 10% today. I''m assuming that is on an annualized basis. I''m wondering if you could just describe the presentation last year during the holiday versus this year and the holiday. Was it a 10% last holiday, same this year or should we see an increase? And then I''m also just curious on the margins in the private brands, if you can give us any sense. Are those -- I know private brand merchandise is usually higher than regular merchandise, but would it be as high as an accessory or another higher-margin area in the store that you could point us to?

Stephen I. Sadove

First, let me make sure we are clear. When we talk about 10%, we are not thinking just private brand. We think -- and it''s a little bit different than if you were dealing with some other competitors in the marketplace at different tiers. We think about exclusive brands and it might be a private brand. Saks Fifth Avenue Men''s Collection is an example of a private brand but it also might be exclusive brands that are under a manufacturer''s label or a brand that has been created for us by a manufacturer. So all of those combined give us the differentiated exclusive product that’s really what we are talking about.

Private brand per se is only a portion of the 10%. Now, it is a growing portion and it is -- in terms of your question about gross margin, it can be more profitable or less profitable depending upon sell-throughs obviously. But we have been feeling very good about the margins that we have been generating on our private brand business. It is substantially higher than the aggregate. We are not going to give specific numbers but we feel very good about the gross margins. I would also be careful in terms of, as you think about the profitability of categories, the markup may not be that different between a designer business or a WEAR business per se. It really is a -- margin by category is more a function of sell-through and the amount of discounting that has to take place as opposed to just the inherent margin of a given category.

Carla Casella – J.P. Morgan

Okay. That is very helpful. And then did you -- the stores that you are closing, will you be carrying any dark store rent for those or are you fully buying out of the remaining (inaudible)?

Stephen I. Sadove

Kevin, do you want to…?

Kevin Wills

Yes, we have bought those out.

Carla Casella – J.P. Morgan

Okay. So and the closing costs have all already been recognized or will there be some charges in the fourth quarter or 2011?

Kevin Wills

They have all substantially been recognized between Q3 and Q2.

Carla Casella – J.P. Morgan

Okay.

Kevin Wills

We might have a few little spillover calls in Q4 but it will be immaterial.

Carla Casella – J.P. Morgan

Okay. And then just one housekeeping item. Did you get stock compensation for the quarter?

Kevin Wills

No, we did not break it out. Did we get stock compensation?

Carla Casella – J.P. Morgan

No, no, did you give the amount of it for the quarter?

Kevin Wills

No, we don''t break out that component of SG&A.

Carla Casella – J.P. Morgan

Okay. Thanks.

Operator

Our next question comes from Todd Slater with Lazard Capital Markets. Please state your question.

Jennifer Davis – Lazard Capital Markets

Hi guys, it’s Jennifer for Todd. Let me add my congratulations on another great quarter. Just a couple of quick clarifications. First, I assume that when your comp inventory, I assume that that does include direct, right, when you talk about your comp store inventory up 5.9%?

Stephen I. Sadove

Correct, it does.

Jennifer Davis – Lazard Capital Markets

Okay. And then would you mind commenting on monthly comp flow since November? You are up against a much easier compare than December, January. I assume we should see a much higher comp in November versus December and January?

Stephen I. Sadove

We really don''t break out comps by month. We have given the guidance for the quarter in terms of the mid-single but we really have not broken it out by month.

Carla Casella – J.P. Morgan

I figured you would say that. All right. Thank you.

Stephen I. Sadove

Okay.

Operator

Our next question comes Adrianne Shapira with Goldman Sachs. Please state your question.

Adrianne Shapira – Goldman Sachs

Thanks. Hi, Steve.

Stephen I. Sadove

Hi, Adrianne.

Adrianne Shapira – Goldman Sachs

Hi. A question, just to talk about the New York store. It sounds as if it was in line with the average. As you say, you are obviously anniversarying some of the pickup from a year ago but shed some light in terms of what you''re seeing in New York and maybe specifically talk about tourism in light of the weak dollar?

Stephen I. Sadove

I feel very good about the New York performance. It is in line with the rest of the chain, not materially different. I think you are starting to anniversary some of the bigger growth out of New York. You are also anniversarying the launch of the third floor, so you''re off a higher number -- you know, the new designer floor in New York. So you are offered some higher numbers there. And I feel quite good about the performance that we are seeing there. You know, a lot of excitement in the store. A good business trends, less promotional.

In terms of the tourism, I think it is healthy. I don''t think it is swinging the numbers dramatically one way or another. If you look at the hotel occupancy, the traffic coming into the airports, it is healthy. But I don''t think it is the same as we were in the pre-recession period when we''re in the $1.55 type of euro and people were coming in with the empty suitcases. I think you''re in a more traditional -- we don''t give specific numbers, but I''m guessing that the international tourism -- you know, total tourism is probably 20%, 25% of that store and it is probably in that range right now.

Adrianne Shapira – Goldman Sachs

Great. And then beyond that, can you shed some light on some regional differences, what you are seeing across the country?

Stephen I. Sadove

You know, we are not really seeing that much in the way of regional differences. I see some real strength and a few of our Florida stores are doing quite nicely. A couple of stores in the Northeast are doing well but I don''t see a material difference between the regions. A couple of the -- what I would call some of the tourist resort type of cities that got over-extended have had some difficulty with the housing bubble but over and above that, it is pretty equivalent around the country.

Adrianne Shapira – Goldman Sachs

Anything to call out in California?

Stephen I. Sadove

No. A couple of stores are doing better, a couple of stores are doing worse, but I don''t see a material trend. It is a little bit weaker in California than I see in some of the other markets but it''s not huge swings.

Adrianne Shapira – Goldman Sachs

Great. Thank you.

Operator

Our next question comes from Michelle Clark with Morgan Stanley. Please state your question.

Christopher Cuomo – Morgan Stanley

Hi. Good morning. This is actually Chris Cuomo filling in for Michelle. The first question I had was on the direct business. I just wanted to know how you think about the growth rate of that business over the next 12 to 24 months? So is it fair to say that as you lap the more difficult comparisons things might slow or do you expect your investments in the business to perhaps sustain that 20% plus growth rate that we have seen this year?

Stephen I. Sadove

I''m not going to give you a specific number. I would expect you to see, us to see outsized growth from the direct business going forward. There are a number of initiatives that -- remember, we have just started investing some of the resources this year to accelerate the growth whether it is the web enhancements, the one-page checkouts, the product reviews, the functionality of the site. We have added new categories. We have added inventory. We have added capabilities.

In our logistics back office, we have added photo studio capacity. All of those are things that are happening real-time. Whether or not -- I don''t want to talk to a specific percentage, but I would expect us to continue to see very good outsized growth in the direct business going forward.

Christopher Cuomo – Morgan Stanley

Great. Thank you. And then I just had one other question on longer-term SG&A. So I just wanted to get your perspective on to what extent you view some of the SG&A items this year as one time in nature? Put another way, you''re tracking at about a 5% comp, but you are delevering for the year. So if we think about go forward, let''s say, you can continue to post mid-single-digit comps, to what extent would you expect to leverage on a 5% mid-single-digit comp in the future?

Stephen I. Sadove

I think that over time on a 5% type of comp we will be able to get SG&A leverage.

Christopher Cuomo – Morgan Stanley

Okay. Thank you very much.

Operator

Thank you. Our next question comes from Emily Shanks with Barclays Capital. Please state your question.

Emily Shanks – Barclays Capital

Hi. Good morning. I was looking for a little bit more color around the inventory build. I was just curious, is there anything baked into those numbers that reflect any forward buy as it relates to potential shipping stopgaps that you were concerned about or any resets that went into those numbers, anything like that or is that 100% to match what your sales expectations are?

Stephen I. Sadove

No, that matched our sales expectations. There was nothing really unusual and that clearly included the direct business as we mentioned. But it was nothing unusual and it was about where we expected it to be. The investments in inventory are very targeted. A very substantial amount of that inventory increase went into shoes, for example. And it was a targeted investment we made across both our Internet as well as full-line business.

Emily Shanks – Barclays Capital

Okay. And as we look into the beginning of next year, are you guys planning that type of inventory growth?

Stephen I. Sadove

Well, we have not made any comments about our sales performance or inventory performance as we go into next year. We have given -- we have said where we think we will end up on inventory at the end of the year.

Emily Shanks – Barclays Capital

Okay. Thank you very much.

Operator

Our next question comes from Bob Drbul with Barclays Capital. Please state your question.

Robert Drbul – Barclays Capital

Hi. Good morning.

Stephen I. Sadove

Good morning, Bob.

Robert Drbul – Barclays Capital

Just a couple of questions. As you head into the fourth quarter, Ron, average selling price versus last year in terms of what are your expectations on that good, better, best mix? And when you look at the good, better, best matrix versus last year, how has it changing for the fourth quarter and how would you expect to change it looking into next year?

Stephen I. Sadove

Ron.

Ronald L. Frasch

Yeah, Bob, I don''t see it changing a whole lot. I would say that there is some -- we had a much more intensified focus on gifting items at certain price points this fourth quarter than we did last quarter, last year. So I feel very good about that. But, as we move back into the spring season, it’s, quite frankly, being dictated by the expectation of the customers and they are not drifting significantly differently this year than this past year.

Robert Drbul – Barclays Capital

Okay. And then on the new prototype for the OFF 5TH store, can you maybe just talk a little bit about any of the early trends that you are seeing there and how it is performing versus the rest of the chain?

Stephen I. Sadove

You know, we feel very good about the new format. If you happen to be anybody in the New York area, go out to the Hamptons, you can see it in Riverhead at the Tangier outlet. It is a more open, lighter, easier to shop format. The product is the same. And we''re seeing good numbers out of those stores. Essentially, the financial returns on all of these stores that we have been opening are very good, very solid. So we feel quite good about it and we feel good about opening up new ones as I mentioned three to five or so a year, and we are starting a few remodels.

Robert Drbul – Barclays Capital

Great. Thank you very much, Steve.

Operator

Just a reminder, if you’d like to ask a question, please press star one on your telephone keypad. To remove yourself from the queue, please press star two. Our next question comes from Charles Grom with J.P. Morgan. Please state your question.

Charles Grom – J.P. Morgan

Thanks. Good morning. Just…

Stephen I. Sadove

Good morning.

Charles Grom – J.P. Morgan

Just on the comp increase in the quarter, if traffic is flat, ticket must be up close to 6%. I''m wondering if you could break down AUR versus UPT for us during the quarter and I guess how that has trended over the past couple of periods?

Stephen I. Sadove

Basically, we really don''t break it out in terms of basically essentially the average transaction is up. Units are relatively flat and the dollar per unit essentially is up in that kind of range, mid-single range.

Charles Grom – J.P. Morgan

Okay. That is helpful. And then in terms of the promotional dollars and days in the first half, if I recall, were down roughly 30%. It sounds like they were down about I think you said 15% in the third quarter. I''m just wondering what your expectations are for the fourth quarter and as we go into 2011 what you think that will look like?

Stephen I. Sadove

Well, obviously we''ve got to work with what the competitive environment is like, and we will respond appropriately. But we are continuing to look towards less promotion in both the fourth quarter. And hopefully, we will keep pushing towards a more full-priced environment going into next year.

Charles Grom – J.P. Morgan

Okay. And then last one, I know you guys still source out of Asia in a material amount, but I was wondering if you could touch on what you''re hearing for input costs for the back half of next year and I guess what your vendors are saying? And then along those lines, where do you think you have the greater pricing power with your vendors and consumers either at the OFF 5TH stores or the Fifth Avenue stores?

Stephen I. Sadove

Well, again, I think what Ron stated well, which is we''re going to continue to flex the good -- as the consumer needs in terms of good, better, best and shift the mix appropriately -- as appropriate to what the consumer demands are, I think that you''re going to see some upward pressure a little bit in the OFF 5TH side on some things like cashmere, cotton that might affect you a little bit in the second half of next year. Our European goods, which is largely what we source on the full-line stores. I don''t know that that it is going to be commodity cost-driven in terms of the pricing. It is going to be what the fabrications are, what is happening with the euro. I don''t know, Ron, if you want to make any comments on it.

Ronald L. Frasch

No, I think it is well said. I think if the people we work with, generally if they find the prices of the raw materials going up, they are going to create an enhancement to the product that really creates the value component. So, so far we have very, very little observations of price increases. We are just getting into fall purchasing now. So we will probably know a little more by our next call.

Charles Grom – J.P. Morgan

Okay. Then I guess one more question if I could. You said that New York City trended in line with the company average. Was that consistent throughout the quarter?

Stephen I. Sadove

Yes. It is consistent throughout the quarter. We''re actually feeling very good about the New York City performance in trend, but it is pretty consistent through the quarter.

Charles Grom – J.P. Morgan

Okay. Thanks.

Operator

Ladies and gentlemen, there are no further questions at this time. I will turn the conference back over to management for closing remarks. Thank you.

Stephen I. Sadove

Great. Thank you very much. Thank you all for joining us on the third quarter call and we look forward to talking with you at the end of the fiscal year. Thanks a lot.

Operator

Thank you. This concludes today''s conference. All parties may disconnect now.