Back to GetFilings.com

Table of Contents

Index to Financial Statements

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K

(Mark One)

For Fiscal Year Ended: January 31, 2004

or

For the transition period from              to             

Commission File Number: 1-13113

SAKS INCORPORATED

(Exact Name of Registrant as Specified in Its Charter)

Registrant’s telephone number, including area code: (205) 940-4000

Securities Registered Pursuant to Section 12 (b) of the Act:

Securities Registered Pursuant to Section 12 (g) of the Act: None

Indicate by check mark whether Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities and Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days.     Yes  x    No  ¨

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of the Registrant’s knowledge, in definitive proxy or information statement incorporated by reference in Part II of this Form 10-K or any amendment to this Form 10-K.  ¨

Indicate by check mark whether registrant is an accelerated filer (as defined in Exchange Act Rule 12b-2).      Yes  x    No  ¨

The aggregate market value of the voting stock held by non-affiliates of the Registrant as of August 2, 2003 was approximately $1,435,387,724.

As of April 13, 2004, the number of shares of the Registrant’s Common Stock outstanding was 142,604,590.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the Saks Incorporated Proxy Statement for the Annual Shareholders’ Meeting to be held on June 8, 2004 are incorporated by reference into Part III.

The Exhibit Index is on page E-1 of this report.

Table of Contents

Index to Financial Statements

TABLE OF CONTENTS

Table of Contents

Index to Financial Statements

PART I

Item 1. Business.

General

Saks Incorporated and its subsidiaries (together the “Company”) operate two business segments, Saks Department Store Group (“SDSG”) and Saks Fifth Avenue Enterprises (“SFAE”).

SDSG currently operates 241 department stores in 24 states under the following nameplates: Parisian (42 stores), Proffitt’s (26 stores), McRae’s (28 stores), Younkers (50 stores), Herberger’s (40 stores), Carson Pirie Scott (31 stores), Bergner’s (14 stores) and Boston Store (10 stores). SDSG stores are principally anchor stores in leading regional or community malls, and the stores typically offer a broad selection of upper-moderate to better fashion apparel, shoes, accessories, jewelry, cosmetics and decorative home furnishings, as well as furniture in selected locations. SDSG stores are promoted as “the best place to shop in your hometown.” In addition, SDSG operates 22 Club Libby Lu mall-based specialty stores, targeting female customers aged 5-12 years old.

SFAE includes Saks Fifth Avenue (“SFA”) luxury department stores (62 stores in 26 states) and Off 5th Saks Fifth Avenue Outlet (“Off 5th”) (53 stores in 23 states). Saks Fifth Avenue stores are principally free-standing stores in exclusive shopping destinations or anchor stores in upscale regional malls, and the stores typically offer a wide assortment of distinctive luxury fashion apparel, shoes, accessories, jewelry, cosmetics and gifts. Customers may also purchase SFA products by catalog or online at saks.com. Off 5th is intended to be the premier luxury off-price retailer in the United States. Off 5th stores are primarily located in upscale mixed-use and off-price centers and offer luxury apparel, shoes, accessories, cosmetics and decorative home furnishings, targeting the value-conscious customer.

Merchandising, sales promotion, and store operating support functions are conducted in multiple locations. Back office sales support functions for the Company, such as accounting, credit card administration, store planning and information technology, are largely centralized.

A summary of each business segment’s revenue, profitability and total assets for each of the last three years is shown in Note 14 to the Consolidated Financial Statements contained in this report.

Merchandising

In both the SDSG and SFA stores, the Company believes that its commitment to a branded merchandising strategy, enhanced by its merchandise presentation and high level of customer service, makes the Company’s stores a preferred distribution channel for premier brand-name merchandise.

SDSG stores attempt to consistently offer a wide selection of unique and limited distribution merchandise as well as competitively priced national brands. Key brands featured in the Company’s SDSG stores include Liz Claiborne, Susan Bristol, Marisa Christina, Sigrid Olsen, Polo/Ralph Lauren, Tommy Hilfiger, Columbia, Hart Schaffner & Marx, Estee Lauder, Clinique, Lancome, Chanel, Nine West, Enzo, Timberland, Clarks, Waterford, and Bali. In addition to the these brands, Parisian stores may carry brands such as Karen Kane, BCBG, Garfield & Marks, Tahari, Oakley, Robert Talbott, Tommy Bahama, Joseph Abboud, Callaway, Trish McEvoy , Stuart Weitzman, Kate Spade, Via Spiga and Brighton, which are typically carried only at specialty stores. SDSG differentiates its offerings from its competitors through exclusive merchandise from its core vendors, assortments from unique and emerging suppliers, and proprietary brands.

SFA stores carry luxury merchandise from both core vendors and new and emerging designers. SFA has key relationships with the leading American and European fashion houses, including Louis Vuitton, Christian Dior, Giorgio Armani, Chanel, Dolce

1

Table of Contents

Index to Financial Statements

and Gabbana, Salvatore Ferragamo, Gucci, Donna Karan, Calvin Klein, Ralph Lauren, Judith Leiber, Prada, Escada, Carolina Herrera, Oscar de la Renta, St. John, Yves St. Laurent, TOD’S, Ermenegildo Zegna and Max Mara.

The Company has developed a knowledge of each of its trade areas and customer bases for its SDSG, SFA, and Off 5th stores. This knowledge is gained through the Company’s regional merchandising structure in conjunction with store visits by senior management and merchandising personnel and use of on-line merchandise information. The Company strives to tailor each store’s merchandise assortment to the characteristics of its trade areas and customer bases and to the lifestyle needs of its local customers.

Certain departments in the Company’s stores are leased to independent companies in order to provide high quality service and merchandise where specialization, focus, and expertise are critical. The leased departments vary by store to complement the Company’s own merchandising departments. The principal leased department in the SDSG stores is fine jewelry, and the principal leased departments in the SFA stores are furs and certain designer luxury leather goods products. The terms of the lease agreements typically are between one and seven years and require the lessee to pay for fixtures and provide its own employees. Management regularly evaluates the performance of the leased departments and requires compliance with established customer service guidelines.

For the year ended January 31, 2004, the Company’s percentages of owned sales (exclusive of sales generated by leased departments) by major merchandise category were as follows:

Purchasing and Distribution

The Company purchases merchandise from many vendors. Management monitors profitability and sales history with each vendor and believes it has alternative sources available for each category of merchandise it purchases. Management believes it maintains good relationships with its vendors.

The Company has six distribution facilities serving its stores. Refer to “Item 2. Properties” for a listing of these facilities.

Each of the Company’s distribution facilities is linked electronically to the Company’s merchandising staffs through a computerized purchase order management system that facilitates re-order and replenishment of merchandise. The Company utilizes electronic data interchange (“EDI”) technology with the majority of its vendors, which is designed to move merchandise onto the selling floor more quickly and cost-effectively by allowing vendors to deliver floor-ready merchandise to the distribution facilities. High-speed automated conveyor systems are capable of scanning bar coded labels and diverting incoming cartons of merchandise to the

2

Table of Contents

Index to Financial Statements

proper processing areas. Many types of merchandise are processed in the receiving area and immediately “cross docked” to the shipping dock for delivery to the stores. Certain processing areas are staffed with personnel equipped with hand-held radio frequency terminals that can scan a vendor’s bar code and transmit the necessary information to a computer to record merchandise on hand.

Information Technology

Company management believes that technological investments are necessary to support its business strategies, and, as a result, the Company is continually upgrading its information systems to improve efficiency and productivity.

The Company’s information systems provide information deemed necessary for management operating decisions, cost reduction programs, and customer service enhancements. Individual data processing systems include point-of-sale and sales reporting, purchase order management, receiving, merchandise planning and control, payroll, human resources, general ledger, credit card administration, and accounts payable systems. Bar code ticketing is used, and scanning is utilized at point-of-sale terminals. Information is made available on-line to merchandising staff and store management on a timely basis.

The use of EDI technology allows the Company to speed the flow of information and merchandise in an attempt to capitalize on emerging sales trends, maximize inventory turnover, and minimize out-of-stock conditions. EDI technology includes an advance shipping notice system (“ASN”). The ASN system identifies discrepancies between merchandise that is ready to be shipped from a supplier’s warehouse and that which was ordered from the supplier. This early identification provides the Company with a window of time to resolve any discrepancies in order to speed merchandise through the distribution facilities and into its stores.

Marketing

For the SDSG stores, advertising campaigns include fashion and image advertising, price promotions, and special events. The Company uses a multi-media marketing approach for the SDSG stores, including newspaper, television, radio, and direct mail. To promote its image as the fashion and style leader in its trade areas, the Company also sponsors local fashion shows and in-store special events highlighting the Company’s key brands and offerings.

For the SFA stores, the Company’s marketing principally emphasizes the latest fashion trends in luxury merchandise and primarily utilizes direct mail advertising, supplemented with national magazine and local radio advertising. To promote its image as the primary source of luxury goods in its trade areas, SFA sponsors fashion shows and in-store special events highlighting the designers represented in the SFA stores. SFA also participates in “cause-related” marketing. This includes special in-store events and related national advertising designed to drive store traffic, while raising funds for charitable causes and organizations such as women’s cancer research.

In-house advertising and sales promotion staffs, in conjunction with outside advertising agencies, produce the Company’s advertising for both SDSG and SFAE.

For both SDSG and SFA, the Company utilizes data captured through the use of proprietary credit cards to develop advertising and promotional events targeted at specific customers who have purchasing patterns for certain brands, departments, and store locations.

Proprietary Credit Cards

Prior to April 15, 2003, National Bank of the Great Lakes (“NBGL”), the Company’s wholly owned credit card bank subsidiary, issued all proprietary credit cards to the Company’s customers and made all credit card

3

Table of Contents

Index to Financial Statements

loans. On April 15, 2003, Household Bank (SB), N.A. (“Household”), an affiliate of Household International, acquired the Company’s proprietary credit card business, consisting of the proprietary credit card accounts owned by NBGL and the Company’s ownership interest in the assets of the Saks Credit Card Master Trust, which previously owned and securitized the accounts receivable generated by the proprietary credit card accounts.

As part of the transaction, for a term of ten years and pursuant to a program agreement, Household will establish and own proprietary credit card accounts for customers of the Company’s operating subsidiaries, retain the benefits and risks associated with the ownership of the accounts, receive the finance charge income and incur the bad debts associated with those accounts. During the ten-year term, pursuant to a servicing agreement, the Company will continue to provide key customer service functions, including new account opening, transaction authorization, billing adjustments and customer inquiries, and will receive compensation from Household for the provision of these services.

Historically, proprietary credit card holders have shopped more frequently with the Company and purchased more merchandise than customers who pay with cash or third-party credit cards. The Company also makes frequent use of the names and addresses of the proprietary credit card holders in its direct marketing efforts.

The Company seeks to expand the number and use of the proprietary credit cards by, among other things, providing incentives to sales associates to open new credit accounts, which generally can be opened while a customer is visiting one of the Company’s stores. Customers who open accounts are frequently entitled to discounts on initial and subsequent purchases. Proprietary credit card customers are sometimes offered private shopping nights, direct mail catalogs, special discounts, and advance notice of sale events. The Company has created various loyalty programs that reward customers for frequency and volume of proprietary charge card usage.

There are approximately 5.0 million proprietary credit accounts that have been active within the prior twelve months, and approximately 44% of the Company’s 2003 sales were transacted on the proprietary credit cards.

The Company liquidated NBGL on December 31, 2003. The proprietary credit card programs are subject to government regulations, including consumer protection laws that impose restrictions on the making and collection of consumer loans and on other aspects of credit card operations. There can be no assurance that the existing laws and regulations will not be amended or that new laws or regulations will not be adopted, in a manner that could adversely affect the proprietary credit card program operated by Household for the Company or the Company’s credit card servicing operations.

Trademarks and Service Marks

The Company owns many registered trademarks and service marks, including, but not limited to, “Saks Fifth Avenue,” “SFA,” “S5A,” “The Fifth Avenue Club,” and “Off 5th,” along with its various other store names and its private brands. Management believes its trademarks and service marks are important and that the loss of certain of its trademarks or trade names, particularly the store nameplates, could have a material adverse effect on the Company. Many of the Company’s trademarks and service marks are registered in the United States Patent and Trademark Office. The terms of these registrations are generally ten years, and they are renewable for additional ten-year periods indefinitely so long as the marks are in use at the time of renewal. The Company is not aware of any claims of infringement or other challenges to its right to register or use its marks in the United States that would have a material adverse effect on its consolidated financial position, results of operations, or liquidity.

From time to time, the Company also licenses the trademarks of designers and celebrities so as to be able to offer differentiated product in its stores. Examples of such licenses include those for the trademarks Jane Seymour, Laura Ashley and Ruff Hewn, each of which the Company has the exclusive right to use in certain merchandise categories.

4

Table of Contents

Index to Financial Statements

Reliance on Fifth Avenue Store

The Company’s Saks Fifth Avenue store located on Fifth Avenue in New York City accounted for approximately 7% of total Company owned sales and approximately 18% of SFAE’s owned sales in 2003 and plays a significant role in creating awareness for the Saks Fifth Avenue brand name.

Customer Service

The Company believes that good customer service contributes to increased store visits and purchases by its customers.

SDSG stores are intended to be customer-friendly and easy to shop. SDSG stores generally offer two types of service. A higher degree of personalized service is typically offered in several areas of the stores including cosmetics, shoes, women’s better sportswear, women’s special size sportswear, men’s tailored clothing, men’s better sportswear, intimate apparel, china, and furniture. These departments frequently offer clienteling programs and dedicated checkout facilities and are staffed by associates with significant product training. Convenience oriented service is generally offered in the remaining areas of the stores. These areas frequently feature centralized customer service centers and are staffed with knowledgeable sales associates intending to deliver efficient transactions.

The Company has implemented service features in certain SDSG stores in order to make them more convenient to shop. Some of these features include:

At Saks Fifth Avenue, the Company’s goal is to deliver an inviting, customer-focused luxury shopping experience. Compensation for sales associates is, in part, based upon customer satisfaction measures and productivity. Sales associates undergo extensive service, selling, and product knowledge training and are encouraged to maintain frequent, personal contact with their customers. Sales associates are instructed to keep detailed customer records, send personalized thank-you notes, and routinely communicate with customers to advise them of new merchandise offerings and special promotions. Stores generally have a “ServiceFirst” desk, which is a centralized point of contact for service offerings including personal shopping, merchandise returns, coat check, alterations, credit services, and electronic gift card purchases. Stores also typically provide comfortable seating areas and refreshments throughout the store.

At both SDSG and SFAE, good customer service is encouraged through the development and monitoring of sales/productivity goals and through specific award and recognition programs. Service levels are monitored, measured, and analyzed through an independent research organization.

5

Table of Contents

Index to Financial Statements

Seasonality

The Company’s business, like that of many retailers, is subject to seasonal influences, with a significant portion of its sales and net income realized during the second half of the fiscal year, which includes the holiday selling season. Generally, more than 30% of the Company’s sales and over 75% of its net income are generated during the fourth fiscal quarter.

Competition

The retail business is highly competitive. The Company’s stores compete with several national and regional department stores, specialty apparel stores, designer boutiques, outlet stores, discount stores, general and mass merchandisers, and mail-order and electronic commerce retailers, some of which have greater financial and other resources than those of the Company. Management believes that its knowledge of its trade areas and customer base, combined with providing a high level of customer service and a broad selection of quality fashion merchandise at appropriate prices in good store locations, provides the opportunity for a competitive advantage.

Associates

As of April 1, 2004, the Company employed approximately 52,000 associates, of which approximately 43% were employed on a part-time basis. The Company hires additional temporary associates and increases the hours of part-time employees during seasonal peak selling periods. Less than one percent of the Company’s associates are covered by collective bargaining agreements. The Company considers its relations with its associates to be good.

Website Access to Information

The Company provides access free of charge through the Company’s website, www.saksincorporated.com, to the Company’s annual report on Form 10-K, quarterly reports on From 10-Q, current reports on Form 8-K and all amendments to those reports as soon as reasonably practicable after the reports are electronically filed with or furnished to the Securities and Exchange Commission. In addition, the Company’s Board of Directors has adopted Corporate Governance Guidelines, a Code of Business Conduct and Ethics and written charters for its Audit, Human Resources and Corporate Governance Committees, copies of which are available on the Company’s website or in print to any shareholder who requests them.

Item 1A. Executive Officers of the Registrant.

The name, age, and position held with the Company for each of the executive officers of the Company are set forth below.

6

Table of Contents

Index to Financial Statements

R. Brad Martin has served as a Director since 1984 and became Chairman of the Board in February 1987 and Chief Executive Officer in July 1989.

Stephen I. Sadove joined the Company in January 2002 as Vice Chairman and assumed the additional responsibility of Chief Operating Officer in March 2004. Mr. Sadove served as Senior Vice President of Bristol-Myers Squibb and President of Bristol-Myers Squibb Worldwide Beauty Care from 1996 until January 2002. From 1991 until 1996, Mr. Sadove held various other executive positions with Bristol-Myers Squibb. From 1975 until 1991, Mr. Sadove held various positions of increasing responsibility with General Foods USA.

James A. Coggin was named President and Chief Administrative Officer of Saks Incorporated in November 1998. Mr. Coggin served as President and Chief Operating Officer of the Company from March 1995 to November 1998 and served as Executive Vice President and Chief Administrative Officer of the Company from March 1994 to March 1995. From 1971 to March 1994, Mr. Coggin served in various management and executive positions with McRae’s, Inc.

George L. Jones joined the Company in March 2001 as President and Chief Executive Officer of Saks Department Store Group. Mr. Jones served as President of Worldwide Licensing and Studio Stores for Warner Brothers from 1994 until February 2001. Prior to that, he held various executive positions with Target.

Douglas E. Coltharp joined the Company in November 1996 as Executive Vice President and Chief Financial Officer. From 1987 to November 1996, Mr. Coltharp was employed by Bank of America, where he held a variety of positions including the post of Senior Vice President of Corporate Finance.

Charles J. Hansen was promoted to Executive Vice President and General Counsel of the Company in September 2003. He served as Senior Vice President and Deputy General Counsel for the Company from February 1998 to August 2003, and prior to that he served in various legal capacities with Carson Pirie Scott & Co. and its predecessors, including the post of Vice President, General Counsel, and Secretary. Prior to that, he was an attorney with Baxter International, Inc. and Shearman & Sterling.

Donald E. Wright was promoted to Executive Vice President and Chief Accounting Officer in February 2001. Prior to that, he served as Senior Vice President of Finance and Chief Accounting Officer since joining the Company in April 1997. Prior to joining the Company, Mr. Wright was a Partner with Coopers & Lybrand LLP (the predecessor firm to PricewaterhouseCoopers LLP).

Julia A. Bentley has served as Senior Vice President of Investor Relations and Communications and Secretary of the Company since September 1997. Ms. Bentley joined the Company in 1987 and has held various financial positions, including Chief Financial Officer. Prior to joining the Company, she was an audit manager with an international accounting firm.

Item 2. Properties.

The Company currently operates six principal distribution facilities as follows:

7

Table of Contents

Index to Financial Statements

The Company’s principal administrative offices are as follows:

The following table sets forth information about the Company’s stores as of April 1, 2004. The majority of the Company’s stores are leased. Store leases generally require the Company to pay a fixed minimum rent and a variable amount based on a percentage of annual sales at that location. Generally, the Company is responsible under its store leases for a portion of mall promotion and common area maintenance expenses and for certain utility, property tax, and insurance expenses. Typically, the Company contributes to common mall maintenance and is responsible for property tax and insurance expenses at its owned locations. Generally, store leases have primary terms ranging from 20 to 30 years and include renewal options ranging from 5 to 20 years. Off 5th leases typically have shorter terms.

In addition to the stores listed above, SDSG also operates 22 Club Libby Lu specialty stores as of April 1, 2004. These stores are leased and are typically one to two thousand square feet of space in regional malls.

Item 3. Legal Proceedings.

The Company is involved in several legal proceedings arising from its normal business activities and has accruals for losses where appropriate. Management believes that none of these legal proceedings will have an ongoing material adverse effect on the Company’s consolidated financial position, results of operations, or liquidity. Also, the Company has voluntarily entered into a consent order with the U.S. Office of the Comptroller of the Currency (the “OCC”). The consent order requires, among other things, that the Company implement and monitor policies and procedures to ensure compliance with the provisions of the Bank Secrecy Act and the related regulations of the OCC, including without limitation the requirements to maintain policies and procedures designed to comply with the recordkeeping and reporting requirements of the Bank Secrecy Act and to timely file Currency

8

Table of Contents

Index to Financial Statements

Transaction Reports and Suspicious Activity Reports with respect to certain currency payments taken on NBGL’s credit card accounts and on credit card accounts for which the Company or its subsidiaries act as servicer.

Item 4. Submission of Matters to a Vote of Security Holders.

None.

PART II

Item 5. Market for Registrant’s Common Equity and Related Stockholder Matters.

The Company’s common stock trades on the New York Stock Exchange (“NYSE”) under the symbol SKS. As of April 1, 2004, there were approximately 2,400 shareholders of record. The prices in the table below represent the high and low sales prices for the stock as reported by the NYSE.

The Company did not declare any dividends to common shareholders for the fiscal years ended January 31, 2004 or February 1, 2003. On March 15, 2004, the Company declared a special one-time cash dividend of $2.00 per share of our common stock payable on May 17, 2004 to holders of record on April 30, 2004. The dividend payout is expected to total approximately $284 million. Future dividends, if any, will be determined by the Company’s board of directors in light of circumstances then existing, including the Company’s earnings, its financial requirements, and general business conditions.

9

Table of Contents

Index to Financial Statements

Item 6. Selected Financial Data.

The selected financial data set forth below should be read in conjunction with the Consolidated Financial Statements and notes thereto and the other information contained elsewhere in this report.