XNYS:SKS Quarterly Report 10-Q Filing - 4/28/2012

Effective Date 4/28/2012

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Table of Contents

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

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

For the quarterly period ended April 28, 2012

OR

 

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

For the transition period from                  to                 

 

Commission file number: 1-13113

SAKS INCORPORATED

(Exact name of registrant as specified in its charter)

 

Tennessee   62-0331040

(State or other jurisdiction of

incorporation or organization)

 

(I.R.S. Employer

Identification No.)

12 East 49th Street, New York, New York   10017

(Address of principal

executive offices)

  (Zip Code)

212-940-5305

(Registrant’s telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act:

 

Title of each class

 

Name of exchange on which registered

Common Stock, par value $0.10   New York Stock Exchange

Securities registered pursuant to Section 12(g) of the Act: None

 

 

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

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

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

 

Large accelerated filer                þ    Accelerated filer   ¨
Non-accelerated filer   ¨             (Do not check if a smaller reporting company)    Smaller reporting company               ¨         

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

As of May 24, 2012, the number of shares of the registrant’s common stock outstanding was 159,233,396.

 

 


Table of Contents

SAKS INCORPORATED

TABLE OF CONTENTS

 

PART I – FINANCIAL INFORMATION   

Item 1.

  Financial Statements (Unaudited).      2   
  Consolidated Balance Sheets as of April 28, 2012, January 28, 2012, and April 30, 2011      2   
  Consolidated Statements of Income for the three months ended April 28, 2012 and April 30, 2011      3   
  Consolidated Statements of Comprehensive Income for the three months ended April 28, 2012 and April 30, 2011      4   
  Consolidated Statements of Cash Flows for the three months ended April 28, 2012 and April 30, 2011      5   
  Notes to Consolidated Financial Statements      6   

Item 2.

  Management’s Discussions and Analysis of Financial Condition and Results of Operations.      25   

Item 3.

  Quantitative And Qualitative Disclosures About Market Risk.      31   

Item 4.

  Controls and Procedures.      31   
PART II – OTHER INFORMATION   

Item 1.

  Legal Proceedings.      32   

Item 1A.

  Risk Factors.      32   

Item 2.

  Unregistered Sales of Equity Securities and Use of Proceeds.      32   

Item 3.

  Defaults Upon Senior Securities.      32   

Item 4.

  Mine Safety Disclosures.      32   

Item 5.

  Other Information.      32   

Item 6.

  Exhibits.      33   
SIGNATURE      34   

 

1


Table of Contents

PART I – FINANCIAL INFORMATION

Item 1. Financial Statements.

SAKS INCORPORATED & SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(Dollar amounts in thousands, except per share amounts)

(Unaudited)

 

     April 28,
2012
    January 28,
2012
    April 30,
2011
 

ASSETS

      

Current assets

      

Cash and cash equivalents

   $ 189,032     $ 200,176     $ 201,983  

Merchandise inventories

     793,517       721,887       732,212  

Other current assets

     101,855       78,139       144,602  

Deferred income taxes, net

     76,734       85,472       58,849  
  

 

 

   

 

 

   

 

 

 

Total current assets

     1,161,138       1,085,674       1,137,646  

Property and equipment, net

     867,668       875,431       881,265  

Deferred income taxes, net

     134,672       140,455       162,450  

Other assets

     25,715       26,905       29,745  
  

 

 

   

 

 

   

 

 

 

TOTAL ASSETS

   $ 2,189,193     $ 2,128,465     $ 2,211,106  
  

 

 

   

 

 

   

 

 

 

LIABILITIES AND SHAREHOLDERS’ EQUITY

      

Current liabilities

      

Trade accounts payable

   $ 155,046     $ 115,893     $ 146,258  

Accrued expenses

     213,462       208,795       198,633  

Accrued compensation and other related items

     43,805       64,552       33,882  

Current portion of long-term debt

     8,744       7,472       148,181  
  

 

 

   

 

 

   

 

 

 

Total current liabilities

     421,057       396,712       526,954  

Long-term debt

     372,983       367,962       363,000  

Other long-term liabilities

     157,738       157,007       136,291  

Commitments and contingencies

                     

Shareholders’ equity

      

Preferred stock, $1.00 par value - 10,000 shares authorized;
no shares issued and outstanding

                     

Common stock, $0.10 par value - 500,000 shares authorized;
160,552, 160,043, and 163,508 shares issued and outstanding as of April 28, 2012, January 28, 2012, and April 30, 2011, respectively.

     16,055       16,004       16,351  

Additional paid-in capital

     1,294,189       1,296,191       1,311,688  

Accumulated other comprehensive loss

     (54,268     (54,705     (46,091

Accumulated deficit

     (18,561     (50,706     (97,087
  

 

 

   

 

 

   

 

 

 

Total shareholders’ equity

     1,237,415       1,206,784       1,184,861  
  

 

 

   

 

 

   

 

 

 

TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY

   $       2,189,193     $       2,128,465     $       2,211,106  
  

 

 

   

 

 

   

 

 

 

See accompanying Notes to Consolidated Financial Statements

 

2


Table of Contents

SAKS INCORPORATED & SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME

(Dollar amounts in thousands, except per share amounts)

(Unaudited)

 

     Three Months Ended  
     April 28,
2012
    April 30,
2011
 

NET SALES

   $         753,607     $         725,998  

Cost of sales (excluding depreciation and amortization)

     419,142       406,064  
  

 

 

   

 

 

 

Gross margin

     334,465       319,934  

Selling, general and administrative expenses

     190,024       178,371  

Other operating expenses:

    

Property and equipment rentals

     26,161       25,341  

Depreciation and amortization

     28,850       29,224  

Taxes other than income taxes

     23,378       23,563  

Store pre-opening costs

     846       134  

Impairments and dispositions

     310       2,868  
  

 

 

   

 

 

 

OPERATING INCOME

     64,896       60,433  

Interest expense

     (9,407     (13,596

Loss on extinguishment of debt

            (539

Other income, net

     823       533  
  

 

 

   

 

 

 

INCOME BEFORE INCOME TAXES

     56,312       46,831  

Provision for income taxes

     24,167       18,422  
  

 

 

   

 

 

 

NET INCOME

   $ 32,145     $ 28,409  
  

 

 

   

 

 

 

Earnings per common share:

    

Basic

   $ 0.21     $ 0.18  

Diluted

   $ 0.18     $ 0.16  

Weighted-average common shares:

    

Basic

     154,678       156,402  

Diluted

     199,143       201,564  

 

 

 

See accompanying Notes to Consolidated Financial Statements

 

3


Table of Contents

SAKS INCORPORATED & SUBSIDIARIES

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(Dollar amounts in thousands)

(Unaudited)

 

     Three Months Ended  
     April 28,
2012
     April 30,
2011
 

NET INCOME

   $         32,145      $         28,409  

Other comprehensive income:

     

Defined benefit plans:

     

Amortization of net loss included in net periodic benefit cost, net of tax (1)

     437        348  
  

 

 

    

 

 

 

Other comprehensive income, net of tax

     437        348  
  

 

 

    

 

 

 

COMPREHENSIVE INCOME

   $ 32,582      $ 28,757  
  

 

 

    

 

 

 

 

(1) Net of tax benefits of $289 and $231 for the three months ended April 28, 2012 and April 30, 2011, respectively.

 

 

 

 

 

See accompanying Notes to Consolidated Financial Statements

 

4


Table of Contents

SAKS INCORPORATED & SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Dollar amounts in thousands)

(Unaudited)

 

     Three Months Ended  
     April 28,
2012
    April 30,
2011
 

OPERATING ACTIVITIES

    

Net income

   $ 32,145     $ 28,409  

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

    

Loss on extinguishment of debt

            539  

Depreciation and amortization

     28,850       29,224  

Stock-based compensation

     4,391       4,160  

Amortization of discount on convertible notes

     3,411       3,131  

Deferred income taxes

     15,000       16,918  

Impairments and dispositions

     (180     (51

Excess tax benefits from stock-based compensation

     (8,644     (656

Gain on sale of property and equipment

            (156

Changes in operating assets and liabilities:

    

Merchandise inventories

     (71,630     (60,829

Other current assets

     (23,674     (39,917

Accounts payable and accrued liabilities

     20,078       38,401  

Other operating assets and liabilities

     2,640       2,695  
  

 

 

   

 

 

 

NET CASH PROVIDED BY OPERATING ACTIVITIES

     2,387       21,868  
  

 

 

   

 

 

 

INVESTING ACTIVITIES

    

Purchases of property and equipment

     (20,760     (12,095

Proceeds from the sale of property and equipment

     172       156  
  

 

 

   

 

 

 

NET CASH USED IN INVESTING ACTIVITIES

     (20,588     (11,939
  

 

 

   

 

 

 

FINANCING ACTIVITIES

    

Payments of long-term debt

            (2,438

Payments of capital lease obligations

     (1,801     (1,520

Payment of financing fees

            (2,961

Excess tax benefits from stock-based compensation

     8,644       656  

Net proceeds from the issuance of common stock

     214       451  
  

 

 

   

 

 

 

NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES

     7,057       (5,812
  

 

 

   

 

 

 

INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS

     (11,144     4,117  

CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD

     200,176       197,866  
  

 

 

   

 

 

 

CASH AND CASH EQUIVALENTS AT END OF PERIOD

   $         189,032     $         201,983  
  

 

 

   

 

 

 

See accompanying Notes to the Consolidated Financial Statements.

 

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Table of Contents

SAKS INCORPORATED & SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Dollar amounts in thousands, except per share amounts)

(Unaudited)

NOTE 1: GENERAL

Basis of Presentation

The accompanying unaudited consolidated financial statements have been prepared in accordance with generally accepted accounting principles in the United States of America (“GAAP”) for interim financial information and in compliance with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair statement have been included. The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Operating results for the three months ended April 28, 2012 are not necessarily indicative of the results that may be expected for the fiscal year ending February 2, 2013 (“fiscal year 2012”). The financial statements include the accounts of Saks Incorporated and its subsidiaries (collectively, the “Company”). All intercompany amounts and transactions have been eliminated.

The accompanying Consolidated Balance Sheet as of January 28, 2012 has been derived from the audited financial statements at that date but does not include all of the disclosures required by GAAP. These interim consolidated financial statements should be read in conjunction with the consolidated financial statements and related notes thereto included in the Company’s Annual Report on Form 10-K/A for the fiscal year ended January 28, 2012.

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

Net Sales

Net sales include sales of merchandise (net of returns and exclusive of sales taxes), commissions from leased departments, shipping and handling revenues related to merchandise sold, and breakage income from unredeemed gift cards. Sales of merchandise from the Company’s retail stores are recognized at the time customers provide a satisfactory form of payment and take delivery of the merchandise. Sales of merchandise from Saks Direct are recognized upon estimated receipt of merchandise by the customer. Revenue associated with gift cards is recognized upon redemption of the card. The Company estimates the amount of goods that will be returned for a refund and reduces sales and gross margin by that amount. Commissions from leased departments included in net sales were $11,114 and $8,726 for the three months ended April 28, 2012, and April 30, 2011, respectively. Leased department sales were $76,645 and $63,415 for the three months ended April 28, 2012 and April 30, 2011, respectively, and were excluded from net sales.

Cash and Cash Equivalents

Cash and cash equivalents primarily consist of cash on hand in the stores, deposits with banks, and investments with banks and financial institutions that have original maturities of three months or less. Cash equivalents are stated at cost, which approximates fair value. Cash equivalents totaled $183,695, $195,449 and $192,786 as of April 28, 2012, January 28, 2012 and April 30, 2011, respectively, primarily consisting of money market funds, demand deposits, and time deposits. Income earned on cash equivalents was $190 and $244 for the three months ended April 28, 2012 and April 30, 2011, respectively, and is included in other income on the accompanying Consolidated Statements of Income.

Inventory

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

 

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Table of Contents

SAKS INCORPORATED & SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Dollar amounts in thousands, except per share amounts)

(Unaudited)

 

Impairments and Dispositions

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

During the three months ended April 28, 2012, the Company incurred charges of $310 primarily related to final expenses associated with the Saks Fifth Avenue Pittsburgh store closing. During the three months ended April 30, 2011, the Company incurred store closing costs of $2,868 primarily due to a lease termination fee for the relocation of its Hilton Head OFF 5TH store.

Segment Reporting

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

Fair Value Measurements

As of April 28, 2012 and April 30, 2011, the Company had no financial assets or liabilities measured at fair value on a recurring basis. The carrying value of the Company’s financial instruments, including cash and cash equivalents, receivables, accounts payable, and accrued expenses as of April 28, 2012, January 28, 2012, and April 30, 2011 approximates their fair value due to the short-term nature of these financial instruments. See Note 5 for fair value disclosures related to the Company’s long-term debt.

Operating Leases

The Company leases the land or the land and building at many of its stores, as well as its distribution centers, administrative facilities, and certain equipment. Most of these leases are classified as operating leases. Most of the Company’s lease agreements include renewal periods at the Company’s option. Store lease agreements generally include rent holidays, rent escalation clauses, and contingent rent provisions that require additional payments based on a percentage of sales in excess of specified levels. Contingent rental payments are recognized when the Company determines that it is probable that the specified levels will be reached during the fiscal year. For leases that contain rent holiday periods and scheduled rent increases, the Company recognizes rent expense on a straight-line basis over the lease term from the date the Company takes possession of the leased property. The difference between the straight-line rent amounts and amounts payable under the leases are recorded as deferred rent. Tenant improvement allowances and other lease incentives are recorded as deferred rent liabilities and are recognized on a straight–line basis over the life of the lease. As of April 28, 2012, January 28, 2012, and April 30, 2011 deferred rent liabilities were $70,812, $66,524, and $61,201, respectively. These amounts are included in other long-term liabilities on the Consolidated Balance Sheets.

Gift Cards

The Company sells gift cards with no expiration dates. At the time gift cards are sold, no revenue is recognized and a liability is established for the value of the card. The liability is relieved and revenue is recognized when the gift cards are redeemed by the customer for merchandise. The liability for unredeemed gift cards was $26,258, $28,933, and $28,663 as of April 28, 2012, January 28, 2012, and April 30, 2011, respectively and is included in accrued expenses on the Consolidated Balance Sheets.

 

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Table of Contents

SAKS INCORPORATED & SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Dollar amounts in thousands, except per share amounts)

(Unaudited)

 

NOTE 2: RECENT ACCOUNTING PRONOUNCEMENTS

Recently Adopted Accounting Pronouncements

In June 2011, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update No. 2011-05, Presentation of Comprehensive Income (“ASU 2011-05”). ASU 2011-05 requires reporting entities to present the total of comprehensive income, the components of net income, and the components of other comprehensive income either in a single continuous statement of comprehensive income or in two separate but consecutive statements. In December 2011, the FASB indefinitely deferred certain provisions of ASU 2011-05 related to the presentation of reclassification adjustments of items out of accumulated other comprehensive income. Effective January 29, 2012, the Company adopted the applicable portions of ASU 2011-05. The adoption did not affect the consolidated financial position, results of operations, or cash flows of the Company.

In May 2011, the FASB issued Accounting Standards Update No. 2011-04, Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs (“ASU 2011-04”), which amends the existing fair value guidance to improve consistency in the application and disclosure of fair value measurements in U.S. GAAP and International Financial Reporting Standards. ASU 2011-04 provides certain clarifications to the existing guidance, changes certain fair value principles, and enhances disclosure requirements. Effective January 29, 2012, the Company adopted ASU 2011-04. The adoption of ASU 2011-04 resulted in additional disclosures but did not affect the consolidated financial position, results of operations, or cash flows of the Company.

Recently Issued Accounting Pronouncements

In December 2011, the FASB issued Accounting Standards Update No. 2011-11, Disclosures about Offsetting Assets and Liabilities (“ASU 2011-11”). ASU 2011-11 enhances disclosure requirements regarding financial instruments and derivative instruments that are either offset or subject to an enforceable master netting arrangement or similar agreement. ASU 2011-11 requires disclosure of both net and gross information for these assets and liabilities in order to enhance comparability between those entities that prepare their financial statements in accordance with U.S. GAAP and those entities that prepare their financial statements in accordance with International Financial Reporting Standards. ASU 2011-11 is effective for annual reporting periods beginning on or after January 1, 2013 and interim periods within those annual periods. The adoption of ASU 2011-11 will not affect the consolidated financial position, results of operations or cash flows of the Company.

NOTE 3: INCOME TAXES

The effective income tax rate for the three-month period ended April 28, 2012 was 42.9% as compared to 39.3% for the three-month period ended April 30, 2011. The increase in the effective tax rate for the three months ended April 28, 2012 is primarily due to the write-off of a deferred tax asset associated with non-deductible compensation and an increase in state tax expense.

A reconciliation of the Company’s income tax expense for the three months ended April 28, 2012 and April 30, 2011 is as follows:

 

     Three Months Ended      
     April 28,
2012
    April 30,
2011
 

Expected federal income taxes at statutory rate of 35%

   $ 19,709     $ 16,391  

State and local income taxes, net of federal benefit

     4,026       2,811  

Valuation allowance adjustment related to state net operating losses

     (465     (710

Effect of tax reserve adjustments

     (385     (116

Non-deductible compensation

     1,152         

Other, net

     130       46  
  

 

 

   

 

 

 

Income tax expense

   $         24,167     $         18,422  
  

 

 

   

 

 

 

 

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Table of Contents

SAKS INCORPORATED & SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Dollar amounts in thousands, except per share amounts)

(Unaudited)

 

The Company files a consolidated U.S. federal income tax return as well as state tax returns in multiple state jurisdictions. The Company has completed examinations by the Internal Revenue Service or the statute of limitations has expired for taxable years through February 2, 2008. With respect to the state and local jurisdictions, the Company has completed examinations in many jurisdictions through the same period and beyond and currently has examinations in progress in several jurisdictions.

The Company’s Consolidated Balance Sheet as of April 28, 2012 includes a gross deferred tax asset of $101,991 related to U.S. federal and state net operating loss and alternative minimum tax credit carryforwards. The majority of the net operating loss carryforward is a result of the net operating losses incurred during the fiscal years ended January 30, 2010 and January 31, 2009 due principally to difficult market and macroeconomic conditions. The Company has concluded, based on the weight of all available positive and negative evidence, that all but $18,752 of these tax benefits relating to certain state losses are more likely than not to be realized in the future. Therefore, a valuation allowance in the amount of $18,752 has been established. The Company evaluates the realizability of its deferred tax assets on a quarterly basis. The Company will continue to assess the need for a valuation allowance in the future. If future results are less than or more than projected or tax planning strategies are no longer viable, then changes to valuation allowances may be required which could have a material impact on the Company’s results of operations in the period in which it is recorded.

NOTE 4: EARNINGS PER SHARE

Basic earnings per share (“EPS”) is computed by dividing income available to common shareholders by the weighted-average number of common shares outstanding during the period. For the three months ended April 28, 2012 and April 30, 2011, the computations of diluted EPS assume that the Company’s convertible notes would be settled in shares of common stock. Diluted EPS is computed by adjusting: (i) the income available to common shareholders for the amount of interest expense recognized related to the convertible notes, and (ii) the weighted-average number of common shares outstanding to assume conversion of the Company’s convertible notes and the issuance of all other potential common shares, if the effect is dilutive. The following table sets forth the computations of basic and diluted EPS for the three months ended April 28, 2012 and April 30, 2011:

 

     Three Months Ended  
     April 28, 2012     April 30, 2011  
     Net
Income
     Shares      Per
Share
Amount
    Net
Income
     Shares      Per
Share
Amount
 

Basic EPS

   $         32,145        154,678      $         0.21     $         28,409        156,402      $         0.18  

Effect of dilutive potential
common shares

     4,155        44,465        (0.03     3,984        45,162        (0.02
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

    

 

 

 

Diluted EPS

   $ 36,300        199,143      $ 0.18     $ 32,393        201,564      $ 0.16  
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

    

 

 

 

For the three-month periods ended April 28, 2012 and April 30, 2011, the computations of diluted EPS include the effects of 40,889 shares that could be issued upon the conversion of the Company’s convertible notes and the related interest expense, net of tax, of $4,155 and $3,984, respectively, as the effect is dilutive. As of April 28, 2012 and April 30, 2011, there were 1,279 and 1,340 stock options, respectively, that were excluded from the computations of diluted EPS because the exercise prices of the stock options exceed the average market price of the Company’s common stock for the period. As of April 30, 2011, there were 19,219 written call options that were excluded from the computation of diluted EPS because the exercise price of the options exceeded the average market price of the Company’s common stock for the period. The written call options expired during 2011. These options represent the number of instruments outstanding at the end of the period and application of the treasury stock method would reduce this amount if they had a dilutive effect and were included in the computation of diluted EPS.

 

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Table of Contents

SAKS INCORPORATED & SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Dollar amounts in thousands, except per share amounts)

(Unaudited)

 

NOTE 5: DEBT

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

 

     April 28, 2012      January 28, 2012      April 30, 2011  
     Carrying
Amount
    Fair
Value
     Carrying
Amount
    Fair
Value
     Carrying
Amount
    Fair
Value
 

Notes 9.875%, matured fiscal year 2011

   $      $       $      $       $ 141,557     $ 146,186  

Notes 7.00%, maturing fiscal year 2013

     2,125       2,146        2,125       2,183        2,125       2,268  

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

     110,832       256,730        109,549       228,592         105,908       278,022  

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

     212,968       247,768        210,840       234,894        204,649       248,402  

Capital lease obligations (3)

     55,802       n/a         52,920       n/a         56,942       n/a   
  

 

 

   

 

 

    

 

 

   

 

 

    

 

 

   

 

 

 

Total debt

     381,727       506,644        375,434       465,669        511,181       674,878  

Less current portion:

              

Notes 9.875%, matured fiscal year 2011

                                   (141,557     (146,186

Capital lease obligations (3)

     (8,744     n/a         (7,472     n/a         (6,624     n/a   
  

 

 

   

 

 

    

 

 

   

 

 

    

 

 

   

 

 

 

Current portion of long-term debt

     (8,744             (7,472             (148,181     (146,186
  

 

 

   

 

 

    

 

 

   

 

 

    

 

 

   

 

 

 

Long-term debt

   $     372,983     $     506,644      $     367,962     $     465,669      $       363,000     $       528,692  
  

 

 

   

 

 

    

 

 

   

 

 

    

 

 

   

 

 

 

 

(1)

Amount represents the $120,000 convertible notes, net of the unamortized discount of $9,168, $10,451, and $14,092 as of April 28, 2012, January 28, 2012, and April 30, 2011, respectively.

(2)

Amount represents the $230,000 convertible notes, net of the unamortized discount of $17,032, $19,160, and $25,351 as of April 28, 2012, January 28, 2012, and April 30, 2011, respectively.

(3)

Disclosure regarding fair value of capital leases is not required.

The fair values of the Company’s debt instruments are classified as Level 2 within the fair value hierarchy and were determined based on recently reported market transactions for the identical liability when traded as an asset or pricing information obtained from a third-party financial institution. The inputs and assumptions used in the pricing models of the financial institution are primarily derived from market-observable sources.

Revolving Credit Facility

The Company has a $500,000 revolving credit facility, subject to a borrowing base equal to a specified percentage of eligible inventory and certain credit card receivables. The availability is based primarily on current levels of inventory, less outstanding letters of credit.

In March 2011, the Company entered into an amendment to its existing revolving credit agreement. The amendment extended the maturity date of this facility from November 23, 2013 to March 29, 2016 and revised certain terms of the existing revolving credit facility. The maximum committed borrowing capacity of the amended facility remains at $500,000. Fees incurred associated with the amendment to the revolving credit agreement were $2,961. As of April 28, 2012, the Company had no direct outstanding borrowings under the facility and had letters of credit outstanding of $5,787.

The obligations under the facility are guaranteed by certain of the Company’s existing and future domestic subsidiaries, and the obligations are secured by the Company’s and the guarantors’ merchandise inventories and certain third party receivables. Borrowings under the facility bear interest at a per annum rate of either: (i) LIBOR plus a percentage ranging from 2.00% to 2.50%, or (ii) the higher of the prime rate or the federal funds rate plus a percentage ranging from 1.00% to 1.50%. Letters of credit are charged a per annum fee equal to the then applicable LIBOR borrowing spread (for standby letters of credit) or the applicable LIBOR

 

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SAKS INCORPORATED & SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Dollar amounts in thousands, except per share amounts)

(Unaudited)

 

spread minus 0.50% (for documentary or commercial letters of credit). The Company also pays an unused line fee ranging from 0.38% to 0.50% per annum on the average daily unused revolver.

During periods in which availability under the agreement is $62,500 or more, the Company is not subject to financial covenants. If and when availability under the agreement decreases to less than $62,500, the Company will be subject to a minimum fixed charge coverage ratio of 1.0 to 1.0. There is no debt rating trigger. As of April 28, 2012, the Company was not subject to the minimum fixed charge coverage ratio. The credit agreement contains default provisions that are typical for this type of financing, including a provision that would trigger a default under the credit agreement if a default were to occur in another debt instrument resulting in the acceleration of more than $20,000 of principal under that other instrument.

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

Senior Notes

As of April 28, 2012, the Company had $2,125 of unsecured senior notes outstanding that mature in 2013 with an interest rate of 7.0%. The senior notes are guaranteed by all of the subsidiaries that guarantee the Company’s revolving credit facility. The notes permit certain sale/leaseback transactions but place certain restrictions around the use of proceeds generated from a sale/leaseback transaction. The terms of the senior notes require all principal to be repaid at maturity. There are no financial covenants associated with these notes, and there are no debt-rating triggers.

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

Convertible Notes

7.5% Convertible Notes

The Company issued $120,000 of 7.5% convertible notes in May 2009 (the “7.5% Convertible Notes”). The 7.5% Convertible Notes mature in December 2013 and are convertible, at the option of the holders at any time, into shares of the Company’s common stock at a conversion rate of $5.54 per share of common stock (21,670 shares of common stock to be issued upon conversion). The Company can settle a conversion of the notes with shares, cash, or a combination thereof at its discretion.

Authoritative accounting literature requires the allocation of convertible debt proceeds between the liability component and the embedded conversion option (i.e., the equity component). The liability component of the debt instrument is accreted to par value using the effective interest method over the remaining life of the debt. The accretion is reported as a component of interest expense. The equity component is not subsequently revalued as long as it continues to qualify for equity treatment. Upon issuance, the Company estimated the fair value of the liability component of the 7.5% Convertible Notes, assuming a 13.0% non-convertible borrowing rate, to be $97,994. The difference between the fair value and the principal amount of the 7.5% Convertible Notes was $22,006. This amount was recorded as a debt discount and as an increase to additional paid-in capital as of the issuance date. The discount is being accreted to interest expense over the 4.5 year period to the maturity date of the notes in December 2013 resulting in an increase in non-cash interest expense.

2.0% Convertible Senior Notes

The Company issued $230,000 of 2.0% convertible senior notes in March 2004 (the “2.0% Convertible Notes”). The 2.0% Convertible Notes mature in 2024 and, in certain circumstances, allow the holders to convert the notes to shares of the Company’s common stock at a conversion rate of $11.97 per share of common stock (19,219 shares of common stock to be issued upon conversion)

 

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SAKS INCORPORATED & SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Dollar amounts in thousands, except per share amounts)

(Unaudited)

 

subject to an anti-dilution adjustment. The holders may put the debt back to the Company in 2014 or 2019 and the debt became callable at the option of the Company on March 21, 2011. The Company can settle a conversion of the notes with shares, cash or a combination thereof at its discretion. The holders may convert the notes at the following times, among others: (i) if the Company’s share price is greater than 120% of the applicable conversion price for a certain trading period; (ii) if the credit ratings of the notes are below a certain threshold; or (iii) upon the occurrence of certain consolidations, mergers or share exchange transactions involving the Company. As of April 28, 2012, none of the conversion criteria were met.

In connection with the issuance of the 2.0% Convertible Notes, the Company entered into a convertible note hedge and written call options on its common stock to reduce the Company’s exposure to dilution from the conversion of the 2.0% Convertible Notes. These transactions were accounted for as a net reduction of shareholders’ equity of $25,000 in 2004. Both the convertible note hedge and written call options expired during 2011.

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

NOTE 6: EMPLOYEE BENEFIT PLANS

The Company sponsors a funded defined-benefit cash balance pension plan (“Pension Plan”) and an unfunded supplemental executive retirement plan (“SERP”) principally benefiting former employees of the Company. Effective January 1, 2007, the Company amended the Pension Plan, suspending future benefit accruals for all participants, except certain participants who as of December 31, 2006 had attained age 55, completed 10 years of credited service, and who are not considered to be highly compensated employees. Effective March 13, 2009, the Company amended the Pension Plan, suspending future benefit accruals for all remaining participants. The Company funds the Pension Plan in accordance with regulatory funding requirements. The components of net periodic benefit cost related to the Pension Plan and SERP for the three months ended April 28, 2012 and April 30, 2011 were as follows:

 

     Three Months Ended  
     April 28,
2012
    April 30,
2011
 

Interest cost

   $           1,309     $           1,700  

Expected return on plan assets

     (1,723     (2,100

Amortization of net loss

     726       579  
  

 

 

   

 

 

 

Net periodic benefit cost

   $ 312     $ 179  
  

 

 

   

 

 

 

The Company contributed $928 to the Pension Plan during the three months ended April 28, 2012 and expects additional funding requirements of approximately $3,450 for the remainder of fiscal year 2012.

 

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SAKS INCORPORATED & SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Dollar amounts in thousands, except per share amounts)

(Unaudited)

 

NOTE 7: SHAREHOLDERS’ EQUITY

The following table summarizes the changes in shareholders’ equity for the three months ended April 28, 2012:

 

     Common Stock     Additional
Paid-In

Capital
    Accumulated
Deficit
    Accumulated
Other
Comprehensive

Loss (1)
    Total
Shareholders’

Equity
 
     Shares     Amount          

Balance at January 28, 2012

     160,043     $ 16,004     $ 1,296,191     $ (50,706   $ (54,705   $         1,206,784  

Net income

                   32,145         32,145  

Other comprehensive income, net of tax

                         437       437  

Issuance of common stock

     39       4       210           214  

Net activity under stock compensation plans

     1,806       181       (181           

Shares withheld for employee taxes

     (1,336     (134     (15,507         (15,641

Income tax effect of stock compensation plans

         8,316           8,316  

Stock-based compensation

         4,391           4,391  

Deferred tax adjustment related to convertible notes

         769           769  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance at April 28, 2012

     160,552     $       16,055     $       1,294,189     $ (18,561   $ (54,268   $ 1,237,415  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

(1)

Accumulated Other Comprehensive Loss is composed of net gains and losses associated with the Company’s defined benefit plans.

The Company has a share repurchase program that authorizes it to purchase shares of the Company’s common stock. There were no shares repurchased during the three months ended April 28, 2012 and April 30, 2011. As of April 28, 2012, there were 29,172 shares remaining available for repurchase under the Company’s share repurchase program.

NOTE 8: STOCK-BASED COMPENSATION

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

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

Total pre-tax stock-based compensation expense for the three months ended April 28, 2012 and April 30, 2011 was approximately $4,391 and $4,160, respectively.

 

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SAKS INCORPORATED & SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Dollar amounts in thousands, except per share amounts)

(Unaudited)

 

NOTE 9: COMMITMENTS AND CONTINGENCIES

Legal Contingencies

On February 2, 2011, the plaintiffs in Dawn Till and Mary Josephs v. Saks Incorporated et al, filed a complaint, with which the Company was served on March 10, 2011, in a purported class and collective action in the U.S. District Court for the Northern District of California. The complaint alleges that the plaintiffs were improperly classified as exempt from the overtime pay requirements of the Fair Labor Standards Act (“FLSA”) and the California Labor Code and that the Company failed to pay overtime, provide itemized wage statements and provide meal and rest periods. On March 8, 2011, the plaintiffs filed an amended complaint adding a claim for penalties under the California Private Attorneys General Act of 2004. The plaintiffs seek to proceed collectively under the FLSA and as a class under the California statutes on behalf of individuals who have been employed by OFF 5TH as Selling and Service Managers, Merchandise Team Managers, or Department Managers and similar titles. On February 8, 2012, the same plaintiffs’ counsel from the Till case filed a complaint, with which the Company was served on March 2, 2012, in the U.S. District Court for the Southern District of New York, alleging essentially the same FLSA claim and related claims under New York state law (Tate – Small et al v. Saks Incorporated et al). The Company believes that its managers at OFF 5TH have been properly classified as exempt under both federal and state law and intends to defend these lawsuits vigorously. It is not possible to predict whether the courts will permit these actions to proceed collectively or as a class. The Company cannot reasonably estimate the possible loss or range of loss, if any, that may arise from these matters.

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

Income Taxes

The Company is routinely under examination by federal, state or local taxing authorities in the areas of income taxes and the remittance of sales and use taxes. These examinations include questioning the timing and amount of deductions, the allocation of income among various tax jurisdictions and compliance with federal, state and local tax laws. As of April 28, 2012, certain state sales and use tax examinations were ongoing. Based on annual evaluations of tax filing positions, the Company believes it has adequately accrued for its income tax exposures. To the extent the Company were to prevail in matters for which accruals have been established or be required to pay amounts in excess of reserves, the Company’s effective tax rate in a given financial statement period may be materially impacted.

Other Matters

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

 

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SAKS INCORPORATED & SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Dollar amounts in thousands, except per share amounts)

(Unaudited)

NOTE 10: CONDENSED CONSOLIDATING FINANCIAL INFORMATION

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

The condensed consolidating financial statements presented as of and for the three months ended April 28, 2012 and April 30, 2011, and as of January 28, 2012 reflect the legal entity compositions at the respective dates.

Separate financial statements of the guarantor subsidiaries are not presented because the guarantors are jointly, severally, fully and unconditionally liable under the guarantees. Borrowings and the related interest expense under the Company’s revolving credit agreement are allocated to Saks Incorporated and the guarantor subsidiaries under an intercompany revolving credit arrangement. There is also a management fee arrangement among Saks Incorporated and its subsidiaries. As of April 28, 2012, Saks Incorporated was the sole obligor for the majority of the Company’s long-term debt.

 

 

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SAKS INCORPORATED & SUBSIDIARIES

CONDENSED CONSOLIDATING BALANCE SHEET AS OF APRIL 28, 2012

(Dollar amounts in thousands)

(Unaudited)

 

     Saks
Incorporated
     Guarantor
Subsidiaries
     Eliminations     Consolidated  

ASSETS

          

Current assets

          

Cash and cash equivalents

   $ 183,695      $ 5,337        $ 189,032  

Merchandise inventories

        793,517          793,517  

Other current assets

        101,855          101,855  

Deferred income taxes, net

        76,734          76,734  
  

 

 

    

 

 

    

 

 

   

 

 

 

Total current assets

     183,695        977,443               1,161,138  

Property and equipment, net

        867,668          867,668  

Deferred income taxes, net

     108,055        26,617          134,672  

Other assets

     8,992        16,723          25,715  

Investment in and advances to subsidiaries

     1,267,570         $     (1,267,570       
  

 

 

    

 

 

    

 

 

   

 

 

 

TOTAL ASSETS

   $ 1,568,312      $ 1,888,451      $ (1,267,570   $ 2,189,193  
  

 

 

    

 

 

    

 

 

   

 

 

 

LIABILITIES AND SHAREHOLDERS’ EQUITY

          

Current liabilities

          

Trade accounts payable

      $ 155,046        $ 155,046  

Accrued expenses and other current liabilities

   $ 4,972        252,295          257,267  

Current portion of long-term debt

        8,744          8,744  
  

 

 

    

 

 

    

 

 

   

 

 

 

Total current liabilities

     4,972        416,085               421,057  

Long-term debt

     325,925        47,058          372,983  

Other long-term liabilities

        157,738          157,738  

Investment by and advances from parent

        1,267,570      $ (1,267,570       

Shareholders’ equity

     1,237,415             1,237,415  
  

 

 

    

 

 

    

 

 

   

 

 

 

TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY

   $     1,568,312      $       1,888,451      $ (1,267,570   $       2,189,193  
  

 

 

    

 

 

    

 

 

   

 

 

 

 

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SAKS INCORPORATED & SUBSIDIARIES

CONDENSED CONSOLIDATING STATEMENT OF INCOME

FOR THE THREE MONTHS ENDED APRIL 28, 2012

(Dollar amounts in thousands)

(Unaudited)

 

     Saks
Incorporated
    Guarantor
Subsidiaries
    Eliminations     Consolidated  

NET SALES

     $ 753,607       $     753,607  

Cost of sales (excluding depreciation and amortization)

       419,142         419,142  
  

 

 

   

 

 

   

 

 

   

 

 

 

Gross margin

            334,465              334,465  

Selling, general and administrative expenses

   $ 398       189,626         190,024  

Other operating expenses

     5       78,384         78,389  

Store pre-opening costs

       846         846  

Impairments and dispositions

       310         310  
  

 

 

   

 

 

   

 

 

   

 

 

 

Operating income (loss)

     (403     65,299              64,896  

Equity in earnings of subsidiaries

     36,740       $ (36,740       

Interest expense

     (7,958     (1,449       (9,407

Other income, net

     823           823  
  

 

 

   

 

 

   

 

 

   

 

 

 

INCOME BEFORE INCOME TAXES

     29,202       63,850       (36,740     56,312  

Provision (benefit) for income taxes

     (2,943     27,110         24,167  
  

 

 

   

 

 

   

 

 

   

 

 

 

NET INCOME

   $       32,145     $         36,740     $         (36,740   $ 32,145  
  

 

 

   

 

 

   

 

 

   

 

 

 

 

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SAKS INCORPORATED & SUBSIDIARIES

CONDENSED CONSOLIDATING STATEMENT OF COMPREHENSIVE INCOME

FOR THE THREE MONTHS ENDED APRIL 28, 2012

(Dollar amounts in thousands)

(Unaudited)

 

     Saks
  Incorporated  
     Guarantor
  Subsidiaries  
       Eliminations          Consolidated    

NET INCOME

   $           32,145      $         36,740      $         (36,740)       $           32,145  

Other comprehensive income:

           

Defined benefit plans:

           

Amortization of net loss included in net periodic benefit cost,

net of tax benefit of $289

        437           437  
  

 

 

    

 

 

    

 

 

    

 

 

 

Other comprehensive income, net of tax

             437                437  
  

 

 

    

 

 

    

 

 

    

 

 

 

COMPREHENSIVE INCOME

   $ 32,145      $ 37,177      $ (36,740)       $ 32,582  
  

 

 

    

 

 

    

 

 

    

 

 

 

 

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SAKS INCORPORATED & SUBSIDIARIES

CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS

FOR THE THREE MONTHS ENDED APRIL 28, 2012

(Dollar amounts in thousands)

(Unaudited)

 

     Saks
  Incorporated  
    Guarantor
  Subsidiaries  
      Eliminations         Consolidated    

OPERATING ACTIVITIES

        

Net income

   $             32,145     $         36,740     $         (36,740   $           32,145  

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

        

Equity in earnings of subsidiaries

     (36,740       36,740         

Depreciation and amortization

       28,850         28,850  

Stock-based compensation

       4,391         4,391  

Amortization of discount on convertible notes

     3,411           3,411  

Deferred income taxes

     (567     15,567         15,000  

Impairments and dispositions

       (180       (180

Excess tax benefit from stock-based compensation

       (8,644       (8,644

Changes in operating assets and liabilities, net

     4,218       (76,804       (72,586
  

 

 

   

 

 

   

 

 

   

 

 

 

NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES

     2,467       (80            2,387  

INVESTING ACTIVITIES

        

Purchases of property and equipment

       (20,760       (20,760

Proceeds from the sale of property and equipment

       172         172  
  

 

 

   

 

 

   

 

 

   

 

 

 

NET CASH USED IN INVESTING ACTIVITIES

            (20,588            (20,588

FINANCING ACTIVITIES

        

Intercompany borrowings, contributions and distributions

     (14,435     14,435           

Payments of capital lease obligations

       (1,801       (1,801

Excess tax benefit from stock-based compensation

       8,644         8,644  

Net proceeds from the issuance of common stock

     214           214  
  

 

 

   

 

 

   

 

 

   

 

 

 

NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES

     (14,221     21,278              7,057  

INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS

     (11,754     610         (11,144

CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD

     195,449       4,727         200,176  
  

 

 

   

 

 

   

 

 

   

 

 

 

CASH AND CASH EQUIVALENTS AT END OF PERIOD

   $ 183,695     $ 5,337     $      $ 189,032  
  

 

 

   

 

 

   

 

 

   

 

 

 

 

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SAKS INCORPORATED & SUBSIDIARIES

CONDENSED CONSOLIDATING BALANCE SHEET AS OF APRIL 30, 2011

(Dollar amounts in thousands)

(Unaudited)

 

    

Saks
  Incorporated  

    

Guarantor
  Subsidiaries  

    

  Eliminations  

    

  Consolidated  

 

ASSETS

           

Current assets

           

Cash and cash equivalents

   $         192,786      $           9,197         $ 201,983  

Merchandise inventories

        732,212           732,212  

Other current assets

        144,602           144,602  

Deferred income taxes, net

        58,849           58,849  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total current assets

     192,786        944,860                1,137,646  

Property and equipment, net

        881,265           881,265  

Deferred income taxes, net

     93,189        69,261           162,450  

Other assets

     12,171        17,574           29,745  

Investment in and advances to subsidiaries

     1,347,593         $ (1,347,593)           
  

 

 

    

 

 

    

 

 

    

 

 

 

TOTAL ASSETS

   $ 1,645,739      $ 1,912,960      $ (1,347,593)       $ 2,211,106  
  

 

 

    

 

 

    

 

 

    

 

 

 

LIABILITIES AND SHAREHOLDERS’ EQUITY

           

Current liabilities

           

Trade accounts payable

      $ 146,258         $ 146,258  

Accrued expenses and other current liabilities

   $ 6,639        225,876           232,515  

Current portion of long-term debt

     141,557        6,624           148,181  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total current liabilities

     148,196        378,758                526,954  

Long-term debt

     312,682        50,318           363,000  

Other long-term liabilities

        136,291           136,291  

Investment by and advances from parent

        1,347,593      $ (1,347,593)           

Shareholders’ equity

     1,184,861              1,184,861  
  

 

 

    

 

 

    

 

 

    

 

 

 

TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY

   $ 1,645,739      $ 1,912,960      $   (1,347,593)       $      2,211,106  
  

 

 

    

 

 

    

 

 

    

 

 

 

 

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Table of Contents

SAKS INCORPORATED & SUBSIDIARIES

CONDENSED CONSOLIDATING STATEMENT OF INCOME

FOR THE THREE MONTHS ENDED APRIL 30, 2011

(Dollar amounts in thousands)

(Unaudited)

 

     Saks
  Incorporated  
     Guarantor
  Subsidiaries  
       Eliminations          Consolidated    

NET SALES

      $         725,998         $         725,998  

Cost of sales (excluding depreciation and amortization)

        406,064           406,064  
  

 

 

    

 

 

    

 

 

    

 

 

 

Gross margin

             319,934                319,934  

Selling, general and administrative expenses

   $ 371        178,000           178,371  

Other operating expenses

     5        78,123           78,128  

Store pre-opening costs

        134           134  

Impairments and dispositions

        2,868           2,868  
  

 

 

    

 

 

    

 

 

    

 

 

 

Operating income (loss)

     (376)         60,809                60,433  

Equity in earnings of subsidiaries

     35,758         $ (35,758)           

Interest expense

     (12,076)         (1,520)            (13,596)   

Loss on extinguishment of debt

     (539)               (539)   

Other income, net

     533              533  
  

 

 

    

 

 

    

 

 

    

 

 

 

INCOME BEFORE INCOME TAXES

     23,300        59,289        (35,758)         46,831  

Provision (benefit) for income taxes

     (5,109)         23,531           18,422  
  

 

 

    

 

 

    

 

 

    

 

 

 

NET INCOME

   $           28,409      $ 35,758      $       (35,758)       $ 28,409  
  

 

 

    

 

 

    

 

 

    

 

 

 

 

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Table of Contents

SAKS INCORPORATED & SUBSIDIARIES

CONDENSED CONSOLIDATING STATEMENT OF COMPREHENSIVE INCOME

FOR THE THREE MONTHS ENDED APRIL 30, 2011

(Dollar amounts in thousands)

(Unaudited)

 

     Saks
  Incorporated  
     Guarantor
  Subsidiaries  
       Eliminations          Consolidated    

NET INCOME

   $             28,409      $         35,758      $         (35,758)       $           28,409  

Other comprehensive income:

           

Defined benefit plans:

           

Amortization of net loss included in net periodic benefit cost,

net of tax benefit of $231

        348           348  
  

 

 

    

 

 

    

 

 

    

 

 

 

Other comprehensive income, net of tax

             348                348  
  

 

 

    

 

 

    

 

 

    

 

 

 

COMPREHENSIVE INCOME

   $ 28,409      $ 36,106      $ (35,758)       $ 28,757  
  

 

 

    

 

 

    

 

 

    

 

 

 

 

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Table of Contents

SAKS INCORPORATED & SUBSIDIARIES

CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS

FOR THE THREE MONTHS ENDED APRIL 30, 2011

(Dollar amounts in thousands)

(Unaudited)

 

     Saks
  Incorporated  
    Guarantor
  Subsidiaries  
      Eliminations         Consolidated    

OPERATING ACTIVITIES

        

Net income

   $           28,409     $         35,758     $         (35,758   $           28,409  
Adjustments to reconcile net income to net cash provided by (used in) operating activities:         

Equity in earnings of subsidiaries

     (35,758       35,758         

Loss on extinguishment of debt

     539           539  

Depreciation and amortization

       29,224         29,224  

Stock-based compensation

       4,160         4,160  

Amortization of discount on convertible notes

     3,131           3,131  

Deferred income taxes

     (377     17,295         16,918  

Impairments and dispositions

       (51       (51

Excess tax benefit from stock-based compensation

       (656       (656

Gain on sale of property and equipment

       (156       (156

Changes in operating assets and liabilities, net

     (1,481     (58,169       (59,650
  

 

 

   

 

 

   

 

 

   

 

 

 

NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES

     (5,537     27,405              21,868  
  

 

 

   

 

 

   

 

 

   

 

 

 

INVESTING ACTIVITIES

        

Purchases of property and equipment

       (12,095       (12,095

Proceeds from the sale of property and equipment

       156         156  
  

 

 

   

 

 

   

 

 

   

 

 

 

NET CASH USED IN INVESTING ACTIVITIES

            (11,939            (11,939
  

 

 

   

 

 

   

 

 

   

 

 

 

FINANCING ACTIVITIES

        

Intercompany borrowings, contributions and distributions

     13,264       (13,264         

Payments of long-term debt

     (2,438         (2,438

Payments of capital lease obligations

       (1,520       (1,520

Payment of financing fees

     (2,961         (2,961

Excess tax benefit from stock-based compensation

       656         656  

Net proceeds from the issuance of common stock

     451           451  
  

 

 

   

 

 

   

 

 

   

 

 

 

NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES

     8,316       (14,128            (5,812
  

 

 

   

 

 

   

 

 

   

 

 

 

INCREASE IN CASH AND CASH EQUIVALENTS

     2,779       1,338         4,117  

CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD

     190,007       7,859         197,866  
  

 

 

   

 

 

   

 

 

   

 

 

 

CASH AND CASH EQUIVALENTS AT END OF PERIOD

   $ 192,786     $ 9,197     $      $ 201,983  
  

 

 

   

 

 

   

 

 

   

 

 

 

 

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Table of Contents

SAKS INCORPORATED & SUBSIDIARIES

CONDENSED CONSOLIDATING BALANCE SHEET AT JANUARY 28, 2012

(Dollar amounts in thousands)

(Unaudited)

 

     Saks
  Incorporated  
     Guarantor
  Subsidiaries  
       Eliminations          Consolidated    

ASSETS

           

Current assets

           

Cash and cash equivalents

   $         195,449      $ 4,727         $ 200,176  

Merchandise inventories

        721,887           721,887  

Other current assets

        78,139           78,139  

Deferred income taxes, net

        85,472           85,472  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total current assets

     195,449        890,225                1,085,674  

Property and equipment, net

        875,431           875,431  

Deferred income taxes, net

     104,343        36,112           140,455  

Other assets

     12,171        14,734           26,905  

Investment in and advances to subsidiaries

     1,221,270         $ (1,221,270)           
  

 

 

    

 

 

    

 

 

    

 

 

 

TOTAL ASSETS

   $ 1,533,233      $ 1,816,502      $ (1,221,270)       $ 2,128,465  
  

 

 

    

 

 

    

 

 

    

 

 

 

LIABILITIES AND SHAREHOLDERS’ EQUITY

           

Current liabilities

           

Trade accounts payable

      $ 115,893         $ 115,893  

Accrued expenses and other current liabilities

   $ 3,935        269,412           273,347  

Current portion of long-term debt

        7,472           7,472  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total current liabilities

     3,935        392,777                396,712  

Long-term debt

     322,514        45,448           367,962  

Other long-term liabilities

        157,007           157,007  

Investment by and advances from parent

        1,221,270      $ (1,221,270)           

Shareholders’ equity

     1,206,784              1,206,784  
  

 

 

    

 

 

    

 

 

    

 

 

 

TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY

   $ 1,533,233      $     1,816,502      $     (1,221,270)       $       2,128,465  
  

 

 

    

 

 

    

 

 

    

 

 

 

 

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Table of Contents

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

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

 

  ¡  

Management’s Overview

  ¡  

Results of Operations

  ¡  

Liquidity and Capital Resources

  ¡  

Contractual Obligations and Off-Balance Sheet Arrangements

  ¡  

Critical Accounting Policies and Estimates

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

MANAGEMENT’S OVERVIEW

GENERAL

The operations of Saks Incorporated and its subsidiaries (together the “Company”) consist of Saks Fifth Avenue (“SFA”) stores and SFA e-commerce operations (“Saks Direct”) as well as Saks Fifth Avenue OFF 5TH (“OFF 5TH”). The Company is an omni-channel luxury retailer offering a wide assortment of distinctive fashion apparel, shoes, accessories, jewelry, cosmetics, and gifts. SFA stores are principally free-standing stores in exclusive shopping destinations or anchor stores in upscale regional malls. Customers may also purchase SFA products online at saks.com or by catalog. OFF 5TH is intended to be the premier luxury off-price retailer in the United States. OFF 5TH stores are primarily located in upscale mixed-use and off-price centers and offer luxury apparel, shoes, and accessories, targeting the value-conscious customer. As of April 28, 2012, the Company operated 45 SFA stores with a total of approximately 5.4 million square feet and 61 OFF 5TH stores with a total of approximately 1.8 million square feet.

FINANCIAL PERFORMANCE SUMMARY

For the first quarter ended April 28, 2012, the Company recorded net income of $32.1 million, or $0.18 per diluted share. The results included after-tax charges of $0.6 million, or $0.01 per share, composed of $0.4 million of pre-opening costs associated with the Company’s new fulfillment center opening in Tennessee in August 2012 and $0.2 million of final expenses related to the Saks Fifth Avenue Pittsburgh store closing.

For the first quarter ended April 30, 2011, the Company recorded net income of $28.4 million, or $0.16 per diluted share. The results included after-tax charges of $1.8 million, or $0.01 per share, of store closing costs primarily related to the lease termination charge incurred in connection with the relocation of the Hilton Head OFF 5TH store and a $0.3 million loss on extinguishment of debt related to the early retirement of the $1.9 million 7.375% senior notes.

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

 

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Table of Contents

RESULTS OF OPERATIONS

The following table sets forth, for the periods presented, selected items from the Company’s Consolidated Statements of Income, expressed as percentages of net sales (numbers may not total due to rounding):

 

           Three Months Ended        
     April 28,

 

2012

    April 30,

 

2011

 

Net sales

     100.0      100.0 

Cost of sales

     55.6       55.9  
  

 

 

   

 

 

 

Gross margin

     44.4       44.1  

Selling, general & administrative expenses

     25.2       24.6  

Other operating expenses

     10.5       10.8  

Impairments and dispositions

     0.0       0.4  
  

 

 

   

 

 

 

Operating income

     8.6       8.3  

Interest expense

     (1.2     (1.9

Loss on extinguishment of debt

     —          (0.1

Other income, net

     0.1       0.1  
  

 

 

   

 

 

 

Income before income taxes

     7.5       6.5  

Provision for income taxes

     3.2       2.5  
  

 

 

   

 

 

 

Net income

     4.3      3.9 
  

 

 

   

 

 

 

THREE MONTHS ENDED APRIL 28, 2012 COMPARED TO THREE MONTHS ENDED APRIL 30, 2011

DISCUSSION OF OPERATING INCOME

The following table shows the changes in operating income for the three-month period ended from April 30, 2011 to April 28, 2012:

 

(In millions)    Total
    Company    
 

For the three months ended April 30, 2011

   $                 60.4  

Store sales and margin

     14.6  

Operating expenses

     (12.7

Impairments and dispositions

     2.6  
  

 

 

 

Increase

     4.5  
  

 

 

 

For the three months ended April 28, 2012

   $ 64.9  
  

 

 

 

For the three months ended April 28, 2012, the Company’s operating income was $64.9 million compared to operating income of $60.4 million in the same period last year. The $4.5 million improvement in operating income for the quarter was primarily driven by a 4.8% increase in comparable store sales as well as a 30 basis points improvement in the period-over-period gross margin rate resulting from increased full-price selling.

NET SALES

For the three months ended April 28, 2012, total net sales increased 3.8% to $753.6 million from $726.0 million for the three months ended April 30, 2011. Comparable store sales increased $33.5 million, or 4.8%, from $697.3 million for the three months ended April 30, 2011 to $730.8 million for the three months ended April 28, 2012.

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

 

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Table of Contents

GROSS MARGIN

For the three months ended April 28, 2012, gross margin was $334.5 million, or 44.4% of net sales, compared to $319.9 million, or 44.1% of net sales, for the three months ended April 30, 2011. The Company’s gross margin rate increased 30 basis points in the quarter primarily as a result of increased full-price selling compared to the same period last year.

SELLING, GENERAL AND ADMINISTRATIVE EXPENSES (“SG&A”)

For the three months ended April 28, 2012, SG&A was $190.0 million, or 25.2% of net sales, compared to $178.4 million, or 24.6% of net sales, for the three months ended April 30, 2011. The period-over-period increase was primarily the result of higher variable costs associated with the $27.6 million sales increase for the period and targeted investment spending to support growth areas such as Saks Direct and other omni-channel initiatives.

OTHER OPERATING EXPENSES

For the three months ended April 28, 2012, other operating expenses, including property and equipment rentals, depreciation and amortization, taxes other than income taxes and store pre-opening costs, were $79.2 million, or 10.5% of net sales, compared to $78.3 million, or 10.8% of net sales, for the three months ended April 30, 2011. As a percentage of sales, other operating expenses improved by 30 basis points year-over-year. The increase in operating expenses of $0.9 million was principally driven by increases in property and equipment rentals of $0.8 million and store pre-opening costs of $0.7 million which were partially offset by lower depreciation and amortization.

IMPAIRMENTS AND DISPOSITIONS

For the three months ended April 28, 2012, impairment and disposition costs were $0.3 million compared to $2.9 million for the three months ended April 30, 2011. The current period charge was primarily due to the final expenses related to the Saks Fifth Avenue Pittsburgh store closing. The prior year charges were primarily driven by a lease termination charge incurred in connection with the relocation of the Hilton Head OFF 5th store.

INTEREST EXPENSE

For the three months ended April 28, 2012, interest expense was $9.4 million, or 1.2% of net sales, compared to $13.6 million, or 1.9% of net sales, for the three months ended April 30, 2011. The decrease of $4.2 million was primarily due to the extinguishment of $141.6 million of the 9.875% senior notes that matured in October 2011. Non-cash interest expense associated with the amortization of the debt discount on the Company’s convertible notes was $3.4 million and $3.1 million for the three months ended April 28, 2012 and April 30, 2011, respectively.

INCOME TAXES

The effective income tax rate for the three-month periods ended April 28, 2012 and April 30, 2011 was 42.9% and 39.3%, respectively. The increase in the effective tax rate for the three months ended April 28, 2012 is primarily due to the write-off of a deferred tax asset associated with non-deductible compensation and an increase in state tax expense.

The Company’s Consolidated Balance Sheet as of April 28, 2012 includes a gross deferred tax asset of $102.0 million related to U.S. federal and state net operating loss (“NOL”) and alternative minimum tax credit carryforwards. The majority of the NOL carryforward is a result of the NOLs incurred during the fiscal years ended January 30, 2010 and January 31, 2009 due principally to difficult market and macroeconomic conditions. The Company has concluded, based on the weight of all available positive and negative evidence, that all but $18.8 million of these tax benefits relating to certain state losses are more likely than not to be realized in the future. Therefore, a valuation allowance in the amount of $18.8 million has been established.

LIQUIDITY AND CAPITAL RESOURCES

CASH FLOW

Net cash provided by operating activities was $2.4 million for the three months ended April 28, 2012 and $21.9 million for the three months ended April 30, 2011. Cash provided by operating activities primarily represents income before depreciation and non-cash charges and after changes in working capital. Working capital is significantly impacted by changes in inventory and accounts payable. Inventory levels typically increase or decrease to support expected sales levels and accounts payable fluctuations are generally determined by the timing of merchandise purchases and payments. The $19.5 million decrease is primarily due to changes in working capital.

 

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Table of Contents

Net cash used in investing activities was $20.6 million for the three months ended April 28, 2012 and $11.9 million for the three months ended April 30, 2011. Cash used in investing activities primarily relates to construction of new stores, renovation and expansion of existing stores, and investments in support areas (e.g., technology and distribution centers). The $8.7 million increase in cash used in investing activities is related to an increase in capital expenditures for the period.

Net cash provided by financing activities was $7.1 million for the three months ended April 28, 2012 and net cash used in financing activities was $5.8 million for the three months ended April 30, 2011. The $12.9 million change in cash flows from financing activities is primarily due to an $8.0 million increase in excess tax benefits from stock-based compensation. Additionally, there were $3.0 million of financing fees and $2.4 million of long-term debt payments made in the prior year related to the amendment of the Company’s revolving credit facility and the redemption of the Company’s 7.375% senior notes. There were no such payments in the current period.

CASH BALANCES AND LIQUIDITY

The Company’s primary sources of short-term liquidity are cash on hand and availability under its $500.0 million revolving credit facility. As of April 28, 2012 and April 30, 2011, the Company maintained cash and cash equivalent balances of $189.0 million and $202.0 million, respectively. Exclusive of $5.3 million and $9.2 million of store operating cash as of April 28, 2012 and April 30, 2011, respectively, cash was invested primarily in money market funds, demand deposits, and time deposits.

The primary needs for cash are to fund operations, acquire or construct new stores, renovate and expand existing stores, provide working capital for new and existing stores, invest in technology and distribution centers and service debt. Additionally, the Company began a multi-year transformation of its information technology systems that will result in the migration of its existing merchandising, finance, and human resources systems to an enterprise-wide systems solution. The Company anticipates that working capital requirements related to existing stores, store renovations and capital expenditures will be funded through cash on hand, cash provided by operations, and the revolving credit facility.

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

CAPITAL STRUCTURE

The Company continuously evaluates its debt-to-capitalization ratio in light of business and economic trends, interest rate levels, and the terms, conditions and availability of capital in the capital markets. As of April 28, 2012, the Company’s capital and financing structure consisted of a revolving credit facility, senior unsecured notes, convertible senior unsecured notes, and capital and operating leases. As of April 28, 2012, total funded debt (including the equity component of the convertible notes) was $407.9 million, representing a decrease of $142.7 million from the balance of $550.6 million at April 30, 2011. This decrease in debt was primarily the result of the maturity of $141.6 million of the Company’s 9.875% senior notes in October 2011. Additionally, the Company’s debt-to-capitalization ratio decreased to 25.2% as of April 28, 2012 from 32.5% as of April 30, 2011.

Revolving Credit Facility

The Company has a $500.0 million revolving credit facility that matures in March 2016 and is subject to a borrowing base equal to a specified percentage of eligible inventory and certain credit card receivables. As the Company’s inventory levels fluctuate, these changes may, at times, cause the borrowing capacity to fall below the stated $500.0 million maximum. There are no debt ratings-based provisions in the revolving credit facility. The facility includes a fixed-charge coverage ratio requirement of 1.0 to 1.0 that the Company is subject to only if availability under the facility is less than $62.5 million. As of April 28, 2012, the Company was not subject to the fixed charge coverage ratio requirement as its availability under the facility exceeded $62.5 million. Based on the inventory and credit card receivables balances as of April 28, 2012, the Company had $494.2 million of availability under the facility, after deducting outstanding letters of credit of $5.8 million. The facility contains default provisions that are typical for this type of financing, including a provision that would trigger a default under the facility if a default were to occur in another debt instrument

 

28


Table of Contents

resulting in the acceleration of more than $20.0 million in that other instrument. As of April 28, 2012, the Company had no direct outstanding borrowings under the revolving credit facility.

Senior Notes

Excluding the convertible notes, as of April 28, 2012, the Company had $2.1 million of senior notes outstanding that mature in 2013 with an interest rate of 7.0%. The terms of the senior notes call for all principal to be repaid at maturity and places limitations on the amount of secured indebtedness the Company may incur. There are no financial covenants or debt-ratings-based provisions associated with these notes. The Company believes it will have sufficient cash on hand, availability under its revolving credit facility, and access to various capital markets to repay the senior notes at maturity.

7.5% Convertible Notes

As of April 28, 2012, the Company had $120.0 million of convertible notes outstanding that bear cash interest semiannually at an annual rate of 7.5% and mature in 2013. The provisions of the convertible notes allow the holder to convert the notes at any time to shares of the Company’s common stock at a conversion rate of 180.5869 shares per one thousand dollars in principal amount of notes. The Company can settle a conversion with shares, cash, or a combination thereof at its discretion.

Upon issuance of the convertible notes, the Company estimated the fair value of the liability component of the 7.5% convertible notes, assuming a 13.0% non-convertible borrowing rate, to be $98.0 million. The difference between the fair value and the principal amount of the 7.5% convertible notes was $22.0 million. This amount was recorded as a debt discount and as an increase to additional paid-in capital as of the issuance date. The current unamortized discount of $9.2 million is being accreted to interest expense over the remaining 1.6 year period to the maturity date of the notes in December 2013 resulting in an increase in non-cash interest expense.

2.0% Convertible Senior Notes

As of April 28, 2012, the Company had $230.0 million of convertible senior notes outstanding that bear interest at a rate of 2.0% per annum and mature in 2024. The provisions of the convertible notes allow the holder to convert the notes to shares of the Company’s common stock at a conversion rate of 83.5609 shares per one thousand dollars in principal amount of notes (subject to an anti-dilution adjustment). The holder may put the debt back to the Company in 2014 or 2019 and the convertible notes became callable at the option of the Company beginning on March 21, 2011. The Company can settle a conversion of the notes with shares, cash, or a combination thereof at its discretion. The holders may convert the notes at the following times, among others: (i) if the Company’s share price is greater than 120% of the applicable conversion price for a certain trading period; (ii) if the credit ratings of the convertible notes are below a certain threshold; or (iii) upon the occurrence of certain consolidations, mergers or share exchange transactions involving the Company. As of April 28, 2012, none of the criteria were met.

The Company estimated the fair value of the liability component, as of the date of issuance, of its 2.0% convertible senior notes assuming a 6.25% non-convertible borrowing rate to be $158.1 million. The difference between the fair value and the principal amount of the notes was $71.9 million. This amount was recorded as a debt discount and as an increase to additional paid-in capital as of the issuance date. The discount is being amortized over the expected life of a similar liability that does not have an associated equity component (considering the effects of embedded features other than the conversion option). Since the holders of the convertible notes have put options in 2014 and 2019, the debt instrument is being accreted to par value using the effective interest method from issuance until the first put date in 2014, resulting in an increase in non-cash interest expense. The current unamortized discount of $17.0 million will be recognized over the remaining 1.9 year period.

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

Capital Leases

As of April 28, 2012, the Company had $55.8 million in capital leases covering various properties and pieces of equipment. The terms of the capital leases provide the lessor with a security interest in the asset being leased and require the Company to make periodic lease payments, aggregating between approximately $6.0 million and $9.0 million per year, excluding interest payments.

Pension Plan

The Company is obligated to fund a defined-benefit cash balance pension plan. The Company’s current policy is to maintain at least the minimum funding requirements specified by the Employee Retirement Income Security Act of 1974. The Company amended the

 

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Saks Fifth Avenue Pension Plan (“Pension Plan”) during 2006, freezing benefit accruals for all participants except those who have attained age 55 and completed 10 years of credited service as of January 1, 2007, who are considered to be non-highly compensated employees. In January 2009, the Company suspended future benefit accruals for all remaining participants in the plan, effective March 13, 2009. The Company contributed $0.9 million to the Pension Plan during the three months ended April 28, 2012 and expects additional funding requirements of approximately $3.5 million for the remainder of fiscal year 2012.

CONTRACTUAL OBLIGATIONS AND OFF-BALANCE SHEET ARRANGEMENTS

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

There were no other material changes in the Company’s contractual obligations specified in Item 303(a)(5) of Regulation S-K during the three months ended April 28, 2012. For additional information regarding the Company’s contractual obligations as of January 28, 2012, see the Management’s Discussion and Analysis section of the Company’s Annual Report on Form 10-K/A for the year ended January 28, 2012.

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

A summary of the Company’s critical accounting policies and estimates is included in the Management Discussion and Analysis section of the Company’s Annual Report on Form 10-K/A for the year ended January 28, 2012.

RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS

In December 2011, the FASB issued Accounting Standards Update No. 2011-11, Disclosures about Offsetting Assets and Liabilities (“ASU 2011-11”). ASU 2011-11 enhances disclosure requirements regarding financial instruments and derivative instruments that are either offset or subject to an enforceable master netting arrangement or similar agreement. ASU 2011-11 requires disclosure of both net and gross information for these assets and liabilities in order to enhance comparability between those entities that prepare their financial statements in accordance with U.S. GAAP and those entities that prepare their financial statements in accordance with International Financial Reporting Standards. ASU 2011-11 is effective for annual reporting periods beginning on or after January 1, 2013 and interim periods within those annual periods. The adoption of ASU 2011-11 will not affect the consolidated financial position, results of operations or cash flows of the Company.

ADOPTION OF NEW ACCOUNTING PRONOUNCEMENTS

In June 2011, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update No. 2011-05, Presentation of Comprehensive Income (“ASU 2011-05”). ASU 2011-05 requires reporting entities to present the total of comprehensive income, the components of net income, and the components of other comprehensive income either in a single continuous statement of comprehensive income or in two separate but consecutive statements. In December 2011, the FASB indefinitely deferred certain provisions of ASU 2011-05 related to the presentation of reclassification adjustments of items out of accumulated other comprehensive income. Effective January 29, 2012, the Company adopted the applicable portions of ASU 2011-05. The adoption did not affect the consolidated financial position, results of operations, or cash flows of the Company.

In May 2011, the FASB issued Accounting Standards Update No. 2011-04, Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs (“ASU 2011-04”), which amends the existing fair value guidance to improve consistency in the application and disclosure of fair value measurements in U.S. GAAP and International Financial Reporting Standards. ASU 2011-04 provides certain clarifications to the existing guidance, changes certain fair value principles, and enhances disclosure requirements. Effective January 29, 2012, the Company adopted ASU 2011-04. The adoption of ASU 2011-04 resulted in additional disclosures but did not affect the consolidated financial position, results of operations, or cash flows of the Company.

FORWARD-LOOKING INFORMATION

The information contained in this Form 10-Q that addresses future results or expectations is considered “forward-looking” information within the definition of the Federal securities laws. Forward-looking information in this document can be identified through the use of words such as “may,” “will,” “intend,” “plan,” “project,” “expect,” “anticipate,” “should,” “would,” “believe,”

 

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“estimate,” “contemplate,” “possible,” and “point.” The forward-looking information is premised on many factors, some of which are outlined below. Actual consolidated results might differ materially from projected forward-looking information.

The forward-looking information and statements are or may be based on a series of projections and estimates and involve risks and uncertainties. These risks and uncertainties include such factors as: the level of consumer spending for luxury apparel and other merchandise carried by the Company and its ability to respond quickly to consumer trends; macroeconomic conditions and their effect on consumer spending; the Company’s ability to secure adequate financing; adequate and stable sources of merchandise; the competitive pricing environment within the retail sector; the effectiveness of planned advertising, marketing, and promotional campaigns; favorable customer response to relationship marketing efforts of proprietary credit card loyalty programs; appropriate inventory management; effective expense control; successful operation of the Company’s proprietary credit card strategic alliance with HSBC Bank Nevada, N.A.; geo-political risks; the performance of the financial markets; changes in interest rates; and fluctuations in foreign currency. For additional information regarding these and other risk factors, please refer to the Company’s Annual Report on Form 10-K/A for the fiscal year ended January 28, 2012 filed with the Securities and Exchange Commission, which may be accessed through the Internet at www.sec.gov.

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

Item 3. Quantitative and Qualitative Disclosures about Market Risk.

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

Based on the Company’s market risk sensitive instruments outstanding at April 28, 2012, the Company has determined that there was no material market risk exposure to the Company’s consolidated financial position, results of operations, or cash flows as of such date.

Item 4. Controls and Procedures.

DISCLOSURE CONTROLS AND PROCEDURES

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

CHANGES IN INTERNAL CONTROL OVER FINANCIAL REPORTING

There were no changes to the Company’s internal control over financial reporting that occurred during the three months ended April 28, 2012 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

 

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PART II – OTHER INFORMATION

Item 1. Legal Proceedings.

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

Item 1A. Risk Factors.

There have been no material changes to the risk factors as disclosed in the Company’s Annual Report on Form 10-K/A for the fiscal year ended January 28, 2012.

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

During the three months ended April 28, 2012 the Company did not sell any equity securities which were not registered under the Securities Act.

The Company has a share repurchase program that authorizes it to purchase up to 70.0 million shares of the Company’s common stock. The Company did not repurchase and retire any shares of common stock during the three months ended April 28, 2012. As of April 28, 2012, approximately 29.2 million shares remained available for repurchase under the Company’s share repurchase program.

Item 3. Defaults Upon Senior Securities.

None.

Item 4. Mine Safety Disclosures.

Not applicable.

Item 5. Other Information.

Not applicable.

 

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Item 6. Exhibits.

 

Exhibit

    Number    

         

Exhibit Description

10.1      #      

Form of Employment Agreement for Executive Officers (executed by Jennifer de Winter and Denise Incandela) (incorporated by reference to Exhibit 10.1 to the Company’s Quarterly Report on Form 10-Q filed on December 6, 2007); Form of Amendment to Employment Agreement for Executive Officers (executed by Jennifer de Winter and Denise Incandela) (incorporated by reference to Exhibit 10.40 to the Company’s Annual Report on Form 10-K filed on March 18, 2011); Form of Amendment to Employment Agreement for Executive Officers (executed by Jennifer de Winter and Denise Incandela) (to comply with IRC 409A) (incorporated by reference to Exhibit 10.41 to the Company’s Annual Report on Form 10-K filed on March 18, 2011)

31.1      *      

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

31.2      *      

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

32.1      *      

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

101.INS            XBRL Instance Document
101.SCH            XBRL Taxonomy Extension Schema Document
101.CAL            XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF            XBRL Taxonomy Extension Definition Linkbase Document
101.LAB            XBRL Taxonomy Extension Label Linkbase Document
101.PRE            XBRL Taxonomy Extension Presentation Linkbase Document

 

# Management contract or compensatory plan or arrangement

 

* Filed herewith

 

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

 

 

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SIGNATURE

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

 

   

Saks Incorporated

(Registrant)

    By:   /s/ Kevin G. Wills
      Kevin G. Wills
Date: May 31, 2012      

On behalf of registrant and as Executive Vice President and Chief Financial Officer

(Principal Financial Officer)

 

34

XNYS:SKS Quarterly Report 10-Q Filling

XNYS:SKS Stock - Get Quarterly Report SEC Filing of XNYS:SKS stocks, including company profile, shares outstanding, strategy, business segments, operations, officers, consolidated financial statements, financial notes and ownership information.

XNYS:SKS Quarterly Report 10-Q Filing - 4/28/2012
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