Saks Is Hot

Tickers in this article: SHLD SKS
NEW YORK (TheStreet) -- Shares of Saks have surged more than 30% this week on a better-than expected-earnings report and on speculation that the company is exploring strategic alternatives that may include the sale of the company.

It has been a long road back for Saks, which was seemingly priced for bankruptcy in early 2009, when shares reached a low of $1.55. SKS ChartSKS data by YCharts

That was a difficult market for most retailers. In the fourth quarter of 2008, Saks' same-store sales plunged 19.8%. The company was also burdened by $650 million in debt, and for a while, the market did not believe that Saks would survive. That turned out to be a great buying opportunity for those with an iron stomach; some company assets were being overlooked, in my view, but more on that later. SKS Long Term Debt ChartSKS Long Term Debt data by YCharts

The company responded to the crisis by making moves that helped right the ship. It cut inventory and strengthened its capital structure with a stock offering and debt restructuring. Saks repurchased senior notes and issued convertible debt, and it emerged a much stronger company. A return to profitability followed, and Saks is now a "ten-bagger" since early 2009. The stock now trades at about $15.50.


Today's Saks is a leaner and meaner version of the company expected to implode just four years ago. The company ended the first quarter with $20 million in cash and $317 million in debt, less than half of the debt level in late 2008. First-quarter revenue and adjusted earnings beat estimates as same-store sales rose 5.9%.

Of course, much of the excitement we've seen this week in Saks is due to speculation that the company may be up for sale. I've seen estimates that it might fetch between $16 and $19 per share (Deutsche Bank), but in my view, a price in that range would be disappointing. There's still life left in Saks as a retailer, as evidenced by its first-quarter results, and there's much more to the valuation story.