Shiny Things

Saks is improving as a retailer, but real estate is its crown jewel

May 22, 2013
May 22, 2013

Will one of the retailers for the 1% get a new owner? Luxury department store retailer Saks Fifth Avenue is exploring a sale, according to media reports. Although luxury goods sellers have fared better than middling retailers since the financial crisis, their sales haven’t returned to pre-crisis levels. In fact, the real estate holdings for companies like Saks, which has locations in large cosmopolitan cities like New York and Chicago, may be more valuable than its services.

Saks, which has long been rumored as a possible deal target, owns a good chunk of its own stores, including its flagship 5th Avenue store in Manhattan. That prime real estate alone could be worth about $1 billion, which was more than half of Sak’s market capitalization ($1.7 billion) before the reports of a possible sale. (Shares of Saks have since shot up, making its current value $2.2 billion.)

Beyond its real estate holdings, Saks may still have legs as a retailer. Even though first quarter profit for Saks fell by 38%, sales improved, rising more than 5%. Also, the company has been closing stores and paring down debt.

But retail investing hasn’t been an easy play for private equity firms, which have struggled to find ways to exit those deals. Private equity firms TPG Capital and Warburg Pincus held on to Neiman Marcus for about eight years before exploring a sale or IPO this year. That’s about three years longer than the typical holding period for a private equity investment.

Real estate, however, is becoming a more attractive investment for private equity firms as the US economy recovers, including the real estate of struggling retailers. In April, Goldman Sachs arranged a $1.75 billion loan for JC Penney, which was backed by the department store’s valuable real estate.

Saks also has brand cachet. High-end brand names are especially attractive to sovereign wealth funds, which have prioritized brand equity over financial performance in those investments. The retail sector is in a bad state, but Saks may have a few shiny traits left to woo the right kind of investors.

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