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Saks Loss Narrows, but Shares Fall on Weak Margin Outlook

Saks said Tuesday its second-quarter loss narrowed on strong same-store sales and an expanded gross margin, but shares fell as the upscale retailer said gross margin will likely be flat for the rest of the year.

Shares fell 78 cents, or 4.4 percent, to $17.16 during midday trading. The stock has traded between $14.10 and $23.25 during the past 52 weeks.

Saks said its quarterly loss totaled $24.6 million, or 17 cents per share, compared with a loss of $51.9 million, or 38 cents per share, in the year-ago quarter. Results include 3 cents per share in charges related to the sale of Saks Department Store Group, asset impairments and dispositions and a loss on the extinguishment of debt.

Saks sold off its Saks Department Store Group businesses, including Parisian stores, in 2005 and 2006 to focus on its core luxury business.

Year-ago results include a penny-per-share gain from discontinued operations and 13 cents per share in one-time charges.

Second-quarter sales jumped 15 percent to $694.1 million, from $603.8 million in the prior-year period.

Strongest sales categories were men's apparel, accessories and shoes as well as women's contemporary and designer sportswear, shoes and handbags.

Analysts surveyed by Thomson Financial, who typically exclude one-time items, forecast a loss of 15 cents per share on sales of $684.6 million.

Chairman and Chief Executive Stephen Sadove said the company's operating performance was driven by a 13.2 percent rise in same-store sales. Same-store sales, or sales at stores open at least a year, is a key indicator of retailer performance since it measures growth at existing stores rather than newly opened ones.

"Our customers are responding to our focused merchandise assortment, as well as our customer service and marketing initiatives," Sadove said during a conference call with analysts on Tuesday.

Sadove also said the company expanded its gross margin rate 2.7 percent, to 35.6 percent from 32.9 percent a year ago, through fewer markdowns. The number of transactions and the average dollars per transaction rose during the quarter.

However, Sadove said beginning in the third quarter, the company begins to anniversary gross margin improvements made a year ago, and he predicted "relatively flat" gross margins for the rest of the year

"I remain optimistic regarding our long-term strategic plans and believe we can deliver additional operating margin expansion in 2008 and 2009," Sadove said.

Due to a retail calendar shift, the company expects high same-store sales growth in August, September and November and below average same-store sales growth in October and December. For all of 2007, Saks sees same-store sales growth in the high single digits.

Morgan Stanley analyst Michelle L. Clark said results were "solid" but expects upcoming comparisons to be difficult.

"Second-quarter results were helped by the retailer's easiest gross margin comparison of the year," said Clark, who rates Saks "Underweight." "In the third and fourth quarters, comparisons grow increasingly difficult and incremental improvements should slow materially."