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(B)(N) SKS Saks Incorporated

June 25, 2013

Deal Book. Saks 5th Avenue is an icon – and a wonderful place to shop – but we don’t know why it’s a stock. The stock price was $10 in 1930 and it was $10 again as recently as last  year. If those numbers are adjusted for consumer price inflation, then it’s trading for zero now, and the company that owns it, Saks Incorporated, has paid a dividend only twice in the last ten years – $2 in 2004 and $4 in 2006.

The Look at Saks 5th AvenueCourtesy: Saks 5th Avenue

The Look at Saks 5th Avenue
Courtesy: Saks 5th Avenue

Fortunately, the company has been rumored to be in-play and somebody might take it in-house at the rather unlikely stock price of $16 per share, or $2.4 billion, which is just shy of one year’s sales which are less than 1% of Wal-Mart’s sales and less than 5% of Target’s (The Canadian Press, June 24, 2013, Hudson’s Bay weighs acquisition of high-end U.S. retailer Saks Incorporated: source).

Although we’re not an expert on the Saks business, looking at the income statements seems to indicate that the cost of sales is about $2 billion per year and the company loses money if the sales are less than $3 billion and makes a lot of money – almost dollar for dollar – at sales above that level.

Which is nice for the owner but we have no idea why the stockholder would be excited by that because Saks is a high-end luxury retail destination store – like jewelry and expensive handbags – and there aren’t that many destinations in the world, but it would certainly be a nice anchor if we also happen to own the mall or hotel in which it’s located.

Despite all of that, the company became eligible for the Perpetual Bond™ at $2 in 2009 and we were last sold out at $10 in 2011, but have held it again at or above that price since early 2012. Please see Exhibit 1 below, Red Line Stock Price (SP) above the Black Line Risk Price (SF) and for no other reason.

The stock is trading today at $13.50 and our estimate of the downside in the stock price due to the demonstrated volatility is minus ($2) so that a stop/loss would sell us out again at $11, which is not unlikely. But to stay in the game, we could take some of our current profits, set the stop/loss at $13 for free (although the July put at $13 would cost us $0.90 per share today), and buy the August call at $14 for $0.65 per share, which is risky but fully paid for from our current profits, which are, after all, unearned because this is not a business for mere shareholders.

If we’re sold out again, there’s no incentive for us to buy it, but the call might be worth something in the next several months because, apparently, the owners are interested in selling and several other owners are said to be interested in buying (New York Times, June 24, 2013, Owner of Hudson’s Bay Explores a Deal to Buy Saks).

Exhibit 1: (B)(N) SKS Saks Incorporated – Risk Price Chart

(B)(N) SKS Saks Incorporated

Saks Incorporated is an omni-channel luxury retailer offering assortment of distinctive fashion apparel, shoes, accessories, jewelry, cosmetics, and gifts.

(Please Click on the Chart to make it larger if required.)

From the Company: Saks Incorporated operates retail stores in the United States. The company’s retail stores offer an assortment of fashion apparel, shoes, accessories, jewelry, cosmetics, and gifts. It operates Saks Fifth Avenue stores that are primarily free-standing stores in premier shopping destinations or anchor stores in upscale regional malls. The company also operates Saks Fifth Avenue OFF 5TH stores, a luxury off-price retail store located in upscale mixed-use and off-price centers. As of April 23, 2013, it operated 43 Saks Fifth Avenue stores; and 66 Saks Fifth Avenue OFF 5TH stores. The company also sells its products online at saks.com or by catalog. Saks Incorporated was founded in 1919, has 10,000 employees, and is headquartered in New York, New York.

The Price of Risk

The calculated Risk Price (SF) is a provably effective estimate of the “price of risk” which is “the least stock price at which the company is likeable” (Goetze 2006) and “likeability” is determined by the demonstrated factors of “risk aversion” – we want to keep our money and obtain a hopeful return above the rate of inflation – and the properties of portfolios of such stocks. Stock prices that are less than the price of risk can be said to be “bargain prices” but with the risk attached that the company might never get a higher price other than that due to ambient volatility or “surprise”; on the other hand, investors who are willing to pay the “full price” above the price of risk, and buy and hold the stock at those prices, must also be confident, and have reason to believe, that the company will produce those values, absent new information.

Please see our Posts, The Price of Risk, August 2012 and The Nash Equilibrium & Its Stock Price, October 2012, for more information on the theory.

To see what else “risk averse” investing can do for us, please see our recent Posts, The Wall Street Put, April 2013, and earlier Posts such as The Dow Transports, March 2013, or The Risk Adjusted Dow, March 2013, or The Canada Pension Bond, February 2013, and for a more colorful description of investment risk and the application of the “price of risk” to mergers & acquisitions, please see our Post, Bystanders & Collateral Damage, April 2013.

Postscript

We are The RiskWerk Company and care not a jot for mutual funds, hedge funds, “alternative investments”, the “risk/reward equation” and every other unprovable artifact of investment lore. We have just one product

The Perpetual Bond™“
Alpha-smart with 100% Capital Safety and 100% Liquidity”
Guaranteed
With No Fees and No Loads on Capital

For more information on RiskWerk, please follow the Tags or Categories attached to this Letter or simply enter Search for additional references to any term that we have used. Related data may be obtained from us for free in a machine readable format by request to RiskWerk@gmail.com.Disclaimer Investing in the bond and stock markets has become a highly regulated and litigious industry but despite that, there remains only one effective rule and that is caveat emptor or “buyer beware”. Nothing that we say should be construed by any person as advice or a recommendation to buy, sell, hold or avoid the common stock or bonds of any public company at any time for any purpose. That is the law and we fully support and respect that law and regulation in every jurisdiction without exception and without qualification to the best of our knowledge and ability. We can only tell you what we do and why we do it or have done it and we know nothing at all about the future or the future of stock prices of any company nor why they are what they are, now. The author retains all copyrights to his works in this blog and on this website. The Perpetual Bond®™ is a registered trademark and patented technology of The RiskWerk Company and RiskWerk Limited (“Company”) . The Canada Pension Bond®™ and The Medina Bond®™ are registered trademarks or trademarks of the Company as are the words and phrases “Alpha-smart”, “100% Capital Safety”, “100% Liquidity”, ”price of risk”, “risk price”, and the symbols “(B)”, “(N)” and N*.

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