Birmingham, AL, May 2--Saks Inc. said it is selling its Proffitt's and McRae's department stores to privately held retailer Belk Inc. for $622 million in cash.
Saks, however, said it will retain and continue to operate its luxury Saks Fifth Avenue Enterprise division, as well as its upscale Parisian stores.
Upon completion of the transaction, which has been approved by the boards of directors of both companies, Belk, based in Charlotte, N.C., will operate a total of 275 stores in 14 states with an estimated annual sales volume of $3.15 billion.
Belk's acquisition -- which includes 22 Proffitt's stores and 25 McRae's stores -- is expected to solidify the regional chain's strength in the Southeast, where it already operates 228 units in 14 states. The deal is set to be completed in the second quarter.
"Proffitt's and McRae's are an excellent geographic fit," said Tim Belk, chairman and CEO of Belk, in a statement. "They give us a leading position in Tennessee and Mississippi and a stronger presence in nine other states. In addition, the combination will create synergies that will improve operating efficiency."
Belk anticipated it will take 18 months to complete the integration of these stores, which will include the opening of a new distribution center in the fall of 2006.
For Saks, the move unravels a 1998 merger of Saks Fifth Avenue with Proffitt's Inc., a combination that hasn't exactly helped create big cost savings, resulting in disappointing earnings. By selling its store divisions in two geographic clusters, it seeks to create better shareholder value, while allowing the company to focus more closely on its remaining businesses.
"Over the last several years, we have dedicated significant management effort, investment, and resources into strengthening our (Saks Department Store Group) franchises and positioning the business for future growth," said R. Brad Martin, Saks chairman and chief executive, in a statement. "As a result, we believe it is appropriate to divide the businesses into distinct enterprises and permit each to have its own focused future."
Saks said it's exploring strategic options for its northern mid-price department store division, which consist of 143 stores under the names of Carson, Pirie Scott, Bergner's, Boston Store, Younkers and Herberger's, as well as for its Club Libby Lu division, which operates 43 specialty stores aimed at the preteen customer. It said it could sell one or both divisions. The northern store group generated revenues of $2.2 billion last year.
The 47 Proffitt's/McRae's stores being sold are located throughout 11 Southeastern states and generated revenues of approximately $700 million in 2004. The deal also includes the assumption of approximately $1 million in capitalized lease obligations and the assumption of certain other ordinary course liabilities. Belk will also assume operating leases on leased store locations.
The deal is a step toward paring Saks down to a core luxury business, said Michael Appel, a retail expert at corporate restructuring specialist Quest Turnaround Advisors. "Saks Fifth Avenue will have more value as a separate entity" than when it was affiliated with the mid-price department store group, whose performance was dragging down the company.
He added that for Belk, the acquisition gives it "more penetration in a market place," and could enable it to compete better with a much more powerful Federated Department Stores Inc., whose $11 billion play for St. Louis-based rival May Department Stores Co. will be consummated later this year.
For the year ended Jan. 29, Saks earned $60.9 million, or 42 cents per share, compared to $80 million, or 56 cents per share, the year before.
