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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

For the quarterly period ended: May 1, 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

Indicate by check mark whether Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities 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 whether Registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).    Yes  x    No  ¨

As of May 1, 2004, the number of shares of the Registrant’s Common Stock outstanding was 142,739,980.

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SAKS INCORPORATED and SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(Dollar amounts in thousands)

(Unaudited)

See notes to condensed consolidated financial statements.

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SAKS INCORPORATED and SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF INCOME

(Dollar amounts in thousands, except per share amounts)

(Unaudited)

See notes to condensed consolidated financial statements.

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SAKS INCORPORATED and SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Dollar amounts in thousands)

(Unaudited)

See notes to condensed consolidated financial statements.

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Dollar amounts in thousands, except per share amounts)

(Unaudited)

NOTE 1 - BASIS OF PRESENTATION AND ORGANIZATION

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the three months ended May 1, 2004 are not necessarily indicative of the results that may be expected for the year ending January 29, 2005. The financial statements include the accounts of Saks Incorporated and its subsidiaries (collectively, the “Company”). All intercompany amounts and transactions have been eliminated. For further information, refer to the consolidated financial statements and footnotes thereto included in the Company’s Annual Report on Form 10-K for the year ended January 31, 2004.

The accompanying balance sheet at January 31, 2004 has been derived from the audited financial statements at that date but does not include all required generally accepted accounting principles disclosures.

The Company is a national retailer currently operating, through subsidiaries, traditional and luxury department stores. The Company operates the Saks Department Store Group (“SDSG”), which consists of stores operated under the following nameplates: Proffitt’s, McRae’s, Younkers, Parisian, Herberger’s, Carson Pirie Scott, Bergner’s, and Boston Store and Club Libby Lu specialty stores. The Company also operates Saks Fifth Avenue Enterprises (“SFAE”), which consists of Saks Fifth Avenue stores and Saks Off 5^th stores.

Net sales include sales of merchandise (net of returns and exclusive of sales taxes), commissions from leased departments and shipping and handling revenues related to merchandise sold. Commissions from leased departments were $11,133 and $9,956 for the three months ended May 1, 2004 and May 3, 2003, respectively. Leased department sales were $74,489 and $67,857 for the three months ended May 1, 2004 and May 3, 2003, respectively, and were excluded from net sales.

Cash and cash equivalents primarily consists of cash on hand in the stores, deposits with banks and investments in mutual funds that have original maturities of three months or less. Certain cash equivalents are stated at cost, which approximates fair value. Cash and cash equivalents included $500,000 and $463,000 at May 1, 2004 and May 3, 2003,

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respectively, invested principally in various short-term bond funds, which were marked to market. At May 1, 2004, the Company had approximately $200,000 invested in a single short-term bond fund. Income earned on these cash equivalents was $486 and $1,202 for the three-month periods ended May 1, 2004 and May 3, 2003, respectively, and was reflected in Interest Expense. Cash of approximately $283,000 was used to fund a special one-time dividend on May 17, 2004. The remaining portion of less than $3,000 will be paid prospectively as restricted shares vest.

NOTE 2 - EARNINGS PER COMMON SHARE

Basic earnings per share (“EPS”) have been computed based on the weighted average number of common shares outstanding.

Additionally, the Company had 7,297 and 27,195 options to purchase shares of common stock outstanding at May 1, 2004 and May 3, 2003, respectively, which were not included in the computation of diluted EPS because the exercise prices of the options were greater than the average quarterly market price of the common shares. If the average quarterly market price becomes greater than the exercise price, these options will be dilutive, and the treasury stock method will be applied to determine the number of dilutive shares.

The Company’s convertible notes were also not considered in the calculation of dilutive shares because the terms of the notes include a conversion price in excess of the current market value of the Company’s stock and the holder cannot convert until the share price exceeds the conversion price by 20% for a specified trading period.

NOTE 3 - DEBT AND SHARE ACTIVITY

At May 1, 2004, the Company had interest rate swap agreements with notional amounts of $150,000 and $100,000, which swapped coupon rates of 8.25% and 7.50%, respectively, for floating rates. The fair value of these swaps at May 1, 2004 was a loss of $6,319.

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On March 23, 2004, the Company issued $230,000 of convertible senior notes that bear interest of 2.0% and mature in 2024. The provisions of the convertible notes allow the holder to convert the notes to shares of the Company’s common stock at a conversion rate of 53.5087 shares per one thousand dollars in principal amount of notes. The conversion rate reflects an adjustment required by the special one-time dividend. The most significant terms and conditions related to the convertible senior notes include: the Company can settle a conversion with shares and cash (limited to the principal); the holder may put the debt back to the Company in 2014 or 2019; the holder cannot convert until the Company’s share price exceeds the conversion price by 20% for a certain trading period; the Company can call the debt after year seven; the conversion rate is subject to a dilution adjustment; and the holder can convert upon a significant credit rating decline and upon a call. The Company used approximately $25,000 of the proceeds from the issuances to enter into a convertible note hedge and written call options on its common stock to limit the exposure to dilution from the conversion of the notes by increasing the effective conversion premium.

During the three-month period ended May 1, 2004, the company repurchased 744 of the Company’s common shares in the amount of $12,082. At May 1, 2004, there were 21,148 shares remaining available for repurchase under existing share repurchase programs. Included in prior year repurchase activity were shares repurchased subject to a June 2004 price settlement agreement containing a cap and a floor. The Company’s maximum and likely exposure under this agreement is approximately $5,000.

NOTE 4 – EMPLOYEE BENEFIT PLANS

The Company sponsors defined benefit pension plans for a significant portion of its employees. The Company generally funds pension costs currently, subject to regulatory funding requirements.

The components of net periodic pension expense for the three months ended May 1, 2004 and May 3, 2003 are as follows:

The Company expects minimal funding requirements in the current year.

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NOTE 5 – SHAREHOLDERS’ EQUITY

On March 15, 2004, the Company’s Board of Directors declared a special one-time cash dividend of $2.00 per common share to shareholders of record as of April 30, 2004. As of May 1, 2004, the Company had recorded a dividend payable and reduced retained earnings for the $285,551 dividend. Approximately $283,000 was paid out on May 17, 2004. The remaining portion of the dividend will be paid prospectively as restricted shares vest.

As a result of the special one-time dividend, the anti-dilution provisions of the employee stock plans prompted the exercise price and number of stock options to be adjusted pro-rata for the change in the share price on the ex-dividend date (April 28, 2004). The effect of this anti-dilution adjustment is presented below:

The following table summarizes the changes in shareholders’ equity for the three months ended May 1, 2004: