The retail sector will hardly be a star performer in the five-year period ahead, particularly if the U.S.'s 'frugal consumer' trend continues. A decade of excessive consumption, over-expansion by chains and malls and now tightened credit spell one sure thing for retail: consolidation. Several chains will go out of business. But there are exceptions and Saks (SKS) will be one.%%DynaPub-Enhancement class="enhancement contentType-HTML Content fragmentId-1 payloadId-61603 alignment-right size-small"%%Saks, the high-end retailer led by its namesake flagship chain, Saks Fifth Avenue, is fortunate. If we were in the midst of a mild pullback in spending, you might expect to see an improvement in sales among mid-retail stores first and then high end retailers after that. But these are not normal times. Mid-retail stores probably will not recover quickly due to the 7.6 million job lay-offs that will put a dent in sales. Instead, it's likely that the luxury segment will snap-back first, to Saks' benefit.

Saks is also prudent. The company, during these difficult times is focusing on its most productive lines, brands, and markets (including closing unproductive stores) to generate better results. It is also improving its supply chain processes and re-emphasizing customer service.

Saks.com Attracts Younger Shoppers

Finally, Saks has recognized that -- even at the luxury level -- the Internet is a force that's arrived: Internet/online sales at saks.com now represent Saks' 'second biggest store.' Another Internet bonus: Saks.com is attracting a slightly younger female demographic, which should compliment and expand its existing customer base. The First Call FY2010/FY2011 EPS estimates for SKS are a loss of 47 cents per share to a loss of 27 cents per share.

Technically, Saks' stock chart, while not for the squeamish, displays the signs of business model recovery -- an uptrend, and a price that's consistently above the key, 50-day moving average -- which indicates institutional investors are adding to and establishing positions. Further, the stock's recent pull-back from $7 represents a buying opportunity. SKS may be vulnerable to year-end profit-taking by short-term institutional investors, but this will likely serve as a pit stop. According to my analysis, Saks' stock price is headed north.

Note: In general, the investing model preferred here avoids stocks under $10, and the reason is obvious enough: Institutional investors - the big guns who set the tone for the markets -- avoid stocks under $10; but there are exceptions, and Saks is one.

Stock Analysis: Saks Inc. is a moderate-risk stock. If you've already purchased the company's shares, hold them. If not, consider buying a 50% position in SKS now; then buy another 25% in one month, if U.S. economic conditions don't worsen substantially. Under any circumstance, don't buy more than 75% of your SKS position before February 2010. Sell/Stop Loss if you were to buy shares in this company: $3.

Disclosure: Lazzaro has no positions in stocks, but does own shares in two Pimco Bond Funds: PHDAX and PYMAX.


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