Risk & Compliance

Return to Vendor: SEC Boosts Saks Probe

Commission looking at how the retailer accounted for vendor markdown allowances between 1999 and 2003.
Stephen TaubMarch 30, 2005

The Securities and Exchange Commission has upgraded its informal probe of Saks Inc. to a formal order of private investigation, according to the retailer.

The inquiry relates to alleged improper collections of vendor markdown allowances in one of Saks Fifth Avenue’s six merchandising divisions. In addition, the SEC is looking at the adequacy of an initial Saks investigation in 2002 into the matter, as well as accounting and disclosure issues that have arisen in the course of Saks’s audit committee’s own investigation.

Saks’s management also indicated that the completion of the internal investigation into the allegedly improper collections of vendor markdown allowances has been pushed back until April. The in-house probe was first slated to wrap up by the end of March.

Earlier this month, Saks’s management indicated that it would likely have to restate earnings from 1999 through 2003 as a result of the improperly collected markdown allowances from vendors. Markdown allowances are payments to retailers by vendors whose merchandise didn’t sell at its original price, and thus had to be marked down. Such payments have become controversial in the trade, with vendors complaining that the payments are hurting their bottom line, according to published reports.

Saks’s management noted that, based on early estimates, the allowances plumped up Saks income by as much as $21.5 million. Saks added that most of the allegedly improper collections occurred from 2000 through 2002, and that it currently believes no improper collections were made in 2004.

Further, Saks plans to restate results from 1999 through the third quarter of fiscal 2004 to reflect accounting errors stemming from the way the company accounts for certain operating leases. Saks estimates that correcting the errors would reduce reported pretax income by about $31.6 million, including an approximate $10.0 million increase in previous impairment charges.

Saks generated sales of roughly $6.4 billion in fiscal 2004. The company currently operates Saks Fifth Avenue Enterprises, which consists of 57 Saks Fifth Avenue stores and 52 Off 5th stores. The retailer also operates Saks Department Store Group, which consists of 233 department stores under various names, including Parisian, Bergner’s, and Club Libby Lu.