| SAKS INC Item 1A Risk Factors The following are certain risk factors that affect the Company’s business, financial condition, results of operations and cash flows, some of which are beyond the Company’s control |
| These risk factors should be considered in connection with evaluating the forward-looking statements contained in this Annual Report on Form 10-K The risks and uncertainties described below are not the only ones facing the Company |
| If any of the events described below actually occur, the Company’s business, financial condition, results of operations or cash flows could be adversely affected and differ materially from expected and historical results |
| Poor economic conditions affect consumer spending and may significantly harm the Company’s business |
| The retail industry is continuously subject to domestic and international economic trends |
| The success of the Company’s business depends to a significant extent upon the level of consumer spending |
| A number of factors affect the level of consumer spending on merchandise that the Company offers, including, among other things: • General economic, industry and weather conditions; • High crude oil prices, that affect gasoline and heating oil prices; • The level of consumer debt; • Interest rates; • Tax rates and policies; • War, terrorism and other hostilities; and • Consumer confidence in future economic conditions |
| Changes in consumer confidence and fluctuations in financial markets can influence cyclical trends, particularly in the luxury sector, and can also cause secular trends in certain traditional department store trade areas |
| The merchandise the Company sells generally consists of discretionary items |
| Reduced consumer confidence and spending may result in reduced demand for discretionary items and may force the Company to take significant inventory markdowns |
| Reduced demand also may require increased selling and promotional expenses |
| Additionally, a number of the Company’s stores are in tourist markets, including the flagship Saks Fifth Avenue New York store |
| A downturn in economic conditions or other events such as terrorist activity could impact travel and thus negatively affect the results of operations for stores located within these tourist markets |
| Increases in transportation and fuel costs, the financial condition of the airline industry and its impact on air travel and sustained recessionary periods in the US and internationally could also unfavorably impact future results of the stores located within these tourist markets |
| The Company’s business and results of operations are subject to a broad range of uncertainties arising out of world events |
| The Company’s business and results of operations are subject to uncertainties arising out of world events, especially as these events may affect US tourism |
| These uncertainties may include a global economy slowdown, changes in consumer spending or travel, the increase in gasoline and natural prices, epidemics (such as SARS and bird flu) and the economic consequences of natural disasters, military action or terrorist activity (including threats of terrorist activity) |
| Any future events arising as a result of terrorist activity, natural disasters or other world events may have a material impact on the Company’s business, its ability to source products, results of operations and financial condition in the future |
| 7 ______________________________________________________________________ [55]Table of Contents [56]Index to Financial Statements The Company’s business and results of operations may be adversely affected by weather conditions and natural disasters |
| The Company’s business is adversely affected by unseasonable weather conditions |
| Periods of unseasonably warm weather in the fall or winter or unseasonably cold or wet weather in the spring or summer affect consumer apparel purchases and could have a material adverse effect on the Company’s results of operations and financial condition |
| Additionally, natural disasters such as hurricanes, tornadoes, earthquakes, etc may adversely affect the Company’s results of operations and financial condition |
| The Company’s business is intensely competitive and increased or new competition could have a material adverse effect on the Company |
| The retail industry is intensely competitive |
| As a retailer offering a broad selection of upper-moderate to luxury fashion apparel, shoes, accessories, jewelry, cosmetics and decorative home and gift items, the Company currently competes against a diverse group of retailers, including e-commerce retailers, which sell, among other products, products similar to those of the Company |
| The Company also competes in particular markets with a substantial number of retailers that specialize in one or more types of products that the Company sells |
| Due to the sale of Proffitt’s and NDSG and the potential strategic alternatives for Parisian, the Company has become increasingly less diversified and is now predominantly reliant on its luxury retail sector |
| The volatility of SFAE and the Company’s ability to restore and maintain profitability at SFAE, make the Company even more susceptible to material adverse effects resulting from the highly competitive industry |
| A number of different competitive factors could have a material adverse effect on the Company’s business, results of operations and financial condition including: • Increased operational efficiencies of competitors; • Competitive pricing strategies, including deep discount pricing by a broad range of retailers during periods of poor consumer confidence or economic instability; • Expansion by existing competitors; • Entry by new competitors into markets in which the Company currently operates; and • Adoption by existing competitors of innovative retail sales methods, including e-commerce and gift cards |
| The Company may not be able to continue to compete successfully with its existing or new competitors, or be assured that prolonged periods of deep discount pricing by its competitors will not have a material adverse effect on the Company’s business |
| The Company faces risks associated with consumer preferences and fashion trends |
| Changes in consumer preferences or consumer interest could have a material adverse effect on the Company’s business |
| In addition, fashion trends could materially impact sales |
| Success in the retail business depends, in part, on the Company’s ability to anticipate consumer preferences |
| Early order commitments often are made far in advance of consumer acceptance |
| If the Company fails to anticipate accurately and respond to consumer preferences, it could experience lower sales, excess inventories and lower profit margins, any of which could have a material adverse effect on the Company’s results of operations and financial condition |
| Any failure by the Company to manage divestitures and other significant transactions successfully could harm the Company’s financial results, business and prospects |
| As part of the Company’s strategy to continually increase shareholder value, the Company recently sold its Proffitt’s and NDSG businesses |
| Additionally, the Company is currently evaluating potential strategic alternatives for Parisian, which could possibly include its sale |
| In order to complete the strategic alternatives 8 ______________________________________________________________________ [57]Table of Contents [58]Index to Financial Statements process successfully, the Company must find a purchaser that is willing to pay an acceptable price for the business |
| The Company must also manage post-closing issues, such as fulfilling all responsibilities entered into in both signed and contemplated purchase agreements, including Transition Services Agreements (“TSA”) |
| Both Bon-Ton and Belk entered into TSA’s whereby the Company will continue to provide, for varying transition periods, certain back office services related to the sold operations |
| If the Company fails to complete successfully a transaction that furthers its strategic objectives, the Company may be required to expend resources above and beyond what is anticipated, the Company may be at a competitive disadvantage or the Company may be adversely affected by negative market perceptions, any of which may have a material adverse effect on the Company’s revenue, gross margin and profitability |
| In addition, the pricing and other terms of the Company’s TSA contracts may require management to make estimates and assumptions at the time the Company enters into these contracts, and management may fail to identify all of the factors necessary to estimate its costs accurately |
| Any increased or unexpected costs, unanticipated delays or failure to achieve contractual obligations could have an adverse financial impact |
| Managing a transaction requires varying levels of management resources, which may divert management’s attention from other business operations |
| The transaction could result in significant costs and expenses and charges to earnings, including those related to severance pay, employee benefit costs, asset impairment charges and other liabilities, legal, accounting and financial advisory fees, and required payments to executive officers and key employees under retention plans |
| In addition, the Company’s effective tax rate on an ongoing basis is uncertain, and a transaction could impact the effective tax rate |
| The Company also may experience risks relating to the challenges and costs of closing a transaction and the risk that an announced transaction may not close |
| As a result, any completed, pending or future transactions may contribute to financial results that differ from the investment community’s expectations |
| The Company faces a number of risks in opening new stores |
| Management remains confident regarding the future prospects for SFAE SFAE has a highly recognized brand name in luxury retailing, a top quality real estate portfolio led by the New York flagship store, and strong vendor relationships |
| Management plans to capitalize on the growth prospects and competitive dynamics of the luxury sector |
| As part of its growth strategy, SFAE could potentially increase the total number of stores, which may include opening new stores in both new and existing markets |
| SFAE may not be able to operate any new stores profitably |
| Further, new stores may not achieve similar operating results to those of its existing stores |
| The success of any future store openings will depend upon numerous factors, many of which are beyond SFAE’s control, including the following: • The ability of management to adequately analyze and identify suitable markets and individual store sites within those markets; • The ability to attract appropriate vendors; • The competition for suitable store sites; • The ability to negotiate favorable lease terms with landlords; • The availability of employees to staff new stores and SFAE’s ability to hire, train, motivate and retain store personnel; and • The ability to attract customers and generate sales sufficient to operate new stores profitably |
| SFAE may enter into additional markets in 2006 and beyond |
| These markets may have different competitive conditions, consumer trends and discretionary spending patterns than its existing markets, which may cause new stores in these markets to be less successful than stores in existing markets |
| 9 ______________________________________________________________________ [59]Table of Contents [60]Index to Financial Statements The loss of, or disruption in, the Company’s centralized distribution centers would have a material adverse effect on the Company’s business and operations |
| The Company depends on the orderly operation of the receiving and distribution process, which depends, in turn, on adherence to shipping schedules and effective management of distribution centers |
| Although the Company believes that its receiving and distribution process is efficient, unforeseen disruptions in operations due to fire, hurricanes or other catastrophic events, labor disagreements or shipping problems, may result in delays in the delivery of merchandise to the Company’s stores |
| Additionally, freight cost is impacted by changes in fuel prices through surcharges |
| Fuel prices and surcharges affect freight cost both on inbound freight from vendors to the distribution centers and outbound freight from the distribution centers to the Company’s stores |
| Although the Company maintains business interruption and property insurance, management cannot be assured that the Company’s insurance coverage will be sufficient, or that insurance proceeds will be timely paid to the Company, if any of the distribution centers are shut down for any reason |
| The Company is dependent on external funding sources, which may not make available sufficient funds when the Company needs them |
| The Company, like other retailers, relies on external funding sources to finance a portion of its operations and growth |
| Management currently believes that the Company’s cash flow from operations and funds available under its revolving credit facility will satisfy its capital requirements for the next 12 months |
| The Company’s ability to obtain additional financing is dependent upon its future operating performance, general economic and competitive conditions and financial, business and other factors, many of which the Company cannot control |
| The Company believes that its previously disclosed internal investigations, and related inquiries by the SEC and the Office of the United States Attorney for the Southern District of New York, adversely affected the Company’s results of operations for its 2005 fiscal year, which adverse effect could continue |
| The Company understands that the inquiries by the SEC and the Office of the United States Attorney for the Southern District of New York are continuing |
| The Company understands that these inquiries were initiated as a result of previously disclosed internal investigations by the Company |
| The Company believes that the publicly disclosed findings of the internal investigations, and the restatement by the Company of previously published financial information as reflected in its Annual Report on Form 10-K for 2004, adversely affected the Company’s ability, at least temporarily, to collect vender allowances from some SFAE merchandise vendors and may have damaged, at least temporarily, SFAE’s reputation among SFAE’s merchandise vendors and the investment community generally |
| These adverse effects could continue to negatively impact the future results of SFAE’s operations, which as of March 4, 2006 comprised the Company’s principal business, and the market price of the Company’s common stock |
| The Company’s internal investigations also resulted in disciplinary actions being taken against a number of SFAE associates |
| These disciplinary actions eliminated the employment positions of several experienced merchandising associates and adversely affected associate morale and focus on SFAE’s business |
| These adverse effects could continue |
| The inquiries by the SEC and the Office of the United States Attorney for the Southern District of New York could result in enforcement action or actions being taken against the Company, including the imposition of fines and penalties that could adversely affect the Company’s financial condition and results of operations |
| During 2005 and continuing into the first quarter of 2006, the Company incurred significantly larger legal and related fees, compared to prior periods, as a result of the investigations |
| The Company expects that it will continue to incur significant legal fees with respect to the investigations, the end and outcome of which the Company cannot predict |
| 10 ______________________________________________________________________ [61]Table of Contents [62]Index to Financial Statements |