Proffitt's shares fall 9.8% after rich deal for Saks Retailing

July 07, 1998|By BLOOMBERG NEWS

BIRMINGHAM, Ala. -- Proffitt's Inc. is paying top dollar for Saks Holdings Inc., spurring investor concern that the nation's fourth-largest department-store operator is getting away from the bargain-basement ways that made it a favorite on Wall Street.

Proffitt's shares fell 9.8 percent after it agreed to buy Saks Fifth Avenue, one of the best-known names in retailing, for $2.82 billion in stock and assumed debt. That's about 11 times Saks' estimated cash flow this year and more than any of Proffitt's recent purchases of regional department store chains.

"I'm not real happy about it," said John Cabell, portfolio manager at USAA Investment Management, which owned 53,000 shares as of March. "There are a lot of small regional chains that I would have liked to see them do instead."

Investcorp International, a Bahrain-based investment company that holds about 45 percent of Saks' stock with its clients, is swapping a disappointing eight-year investment for 12 percent of Proffitt's shares and a seat on the board. Shares of the New York- based luxury retailer are up 12 percent the past year, trailing Proffitt's 52 percent gain.

Proffitt's stock fell $4 to $36.6875 yesterday in trading of 5.8 million shares, 15 times the three-month daily average. The shares have gained an average 27 percent each of the past five years, almost double the 15 percent average gain for S&P's department store index. Saks shares rose 43.75 cents yesterday, to $29.4375.

Proffitt's said it will swap 0.82 share for each Saks share and take on about $890 million in debt.

Saks, which sells mostly clothing made by designers such as Bill Blass, Chanel and Georgio Armani, might not mesh with Proffitt's other chains, which focus on mostly mid-price brands such as Dockers and Jones New York. Saks, which will almost double Proffitt's annual sales, also exposes the retailer to the fickle market for designer fashions.

Saks also isn't likely to add to Proffitt's earnings as much as or as quickly as previous acquisitions have, investors said.

The purchase will add 1 cent to 2 cents a share to earnings by the end of the year, Proffitt's said. It forecast profit of about 96 cents a share for the fiscal fourth quarter, which will end Jan. 30, and $1.66 for the year. Next year, it will add about 3 cents to 5 cents a share, resulting in annual earnings of $2.20 a share, Proffitt's said.

Proffitt's integrates the inventory, distribution and other everyday operations when it buys a retailer. With Saks, the companies expect to save $10 million to $12 million this year, $60 million to $70 million next year and $75 million to $85 million in 2000 on advertising, property and other costs.

Proffitt's will change its name to Saks Inc. and move its headquarters to Birmingham, where its Parisian chain is based, from Alcoa, Tenn.

Pub Date: 7/07/98

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