19     SAKS FIFTH AVENUE ENTERPRISES       Saks Direct Virtual Style. Virtual Saks.
We launched saks.com   in September 2000 to parallel the Saks Fifth Avenue shopping experience. saks.com  is fast becoming an effective merchandising and marketing tool, as well as a new channel to extend the geographic and demographic reach of the Saks Fifth Avenue brand. During its initial months of operation, our order size averaged over $300. Cross-channel opportunities abound, from optimizing business partnerships to driving Saks Fifth Avenue promotions and events on the site.	During the start-up year of 2000, we invested significantly in site development and infrastructure to build the foundation for this value-creating channel of distribution. With our foundation now established, during the first half of 2001 we are further integrating the Saks Fifth Avenue catalog and saks.com  operations with those of the core Saks Fifth Avenue business. The loss in our e-commerce business totaled $.14 per share for 2000, and we expect this number to decline substantially in 2001.

                                         SAKS DEPARTMENT STORE GROUP
                                                                             Real-Life Style

22          SAKS DEPARTMENT STORE GROUP

 Saks Department Store Group
        Defining Style Across the Country

Saks Department Store Group, or DSG, is a leading branded department store operator in the Southeast, Midwest and Great Plains markets, holding the number one or number two market share in approximately 90% of our trade areas.

We operate 243 stores, in 24 states, with 26.8 million square feet of high-quality, well-positioned real estate. Our nameplates--Proffitt's, McRae's, Younkers, Parisian, Herberger's, Carson Pirie Scott, Bergner's and Boston Store--offer upper-moderate to better branded and proprietary branded apparel, cosmetics, shoes, accessories and decorative home furnishings. These regional franchises carry tremendous brand equity with established customer relationships and a broad customer base.

                                                                                 SAKS DEPARTMENT STORE GROUP

SAKS DEPARTMENT STORE GROUP

SAKS DEPARTMENT STORE GROUP
        Real Life Style

                                                                 SAKS DEPARTMENT STORE GROUP
                                                                                                   Real Life Style

SAKS DEPARTMENT STORE GROUP
                     Real Life Style

                                                                             SAKS DEPARTMENT STORE GROUP
                                                                                                   Real Life Style

SAKS DEPARTMENT STORE GROUP
                         Real Life Style

29        SAKS DEPARTMENT STORE GROUP

                                                                                                  Parisian

                                                                                                  Proffitt's

                                                                              ; Real-Life Style     

                                                                                                  McRae's

                                                                                                  Younker's

                                                                                                  Herberger's

                                                                                                  Carson Pirie Scott

                                                                                                  Boston Store

                                                                                                  Bergner's

	30        SAKS DEPARTMENT STORE GROUP         Saks Department Store Group Regaining Momentum
	In the second half of 2000, we began implementing the decisive actions necessary to regain operating momentum at DSG. Implementation and refinement of these initiatives continue today. Specifically, we have made substantial progress toward: *   Improved merchandising.  Refocusing      merchandise content on key items and      products geared toward our traditional      customer base; collaborating with our      vendor partners to better meet our      customers' expectations; developing      profitable relationships with new vendors;      refining assortments by store based on      customer research and analysis of      shopping patterns; enhancing our private      brands; and continuing to emphasize      inventory controls and improved execution.  *  Enhanced marketing.  Focusing efforts in      support of key items; leveraging customer      databases with increased direct mail and      enhanced loyalty programs; and increasing      our customer relationship marketing. *  Improved customer service.  Better      matching staffing needs by department,      ranging from personalized service in areas      requiring more consultation to fast      transaction processing in areas oriented	toward self-selection; and installing new     customer service centers in nearly 100     stores. *  Strengthened management focus.     Consolidating McRae's home offices into     Proffitt's headquarters and Herberger's     home offices into Carson Pirie Scott     headquarters and placing previously     centralized merchandising staff into the     operating divisions, creating a more     efficient cost structure; leveraging key     managers in merchandising, marketing     and store administration; and     streamlining decision making. As a result of these initiatives, DSG generated positive comparable store sales growth and improved year-over-year operating performance in the fourth quarter of 2000. Through the continued execution of these strategies, we are positioned to achieve our objectives at DSG in 2001. We have completed construction on our new state-of-the-art distribution center located in Steele, Alabama. The consolidation of three existing distribution facilities into this center will be completed during spring 2001 and will generate cost savings of approximately $10 million annually, beginning in 2002.

31          SAKS DEPARTMENT STORE GROUP       Saks Department Store Group Right Time. Right Place.
In 2000, the Company added a new Parisian store in Charleston, South Carolina and a new Carson Pirie Scott store in Schaumburg, Illinois and closed five under performing units. Consistent with our strategy of rationalizing our store base and asset base in a fashion that creates a higher growth, higher margin, value-creating business, in March 2001 the  Company sold nine DSG stores and related assets to The May Department Stores Company. The stores totaled approximately 1.7 million square feet and included five Proffitt's stores in Nashville, Tennessee; three Parisian stores in Baton Rouge and Lafayette, Louisiana and Orlando, Florida; and one McRae's store in Baton Rouge.	The cash purchase price, including the working capital assets, totaled approximately $307 million. The price obtained for these assets demonstrates the substantial value embedded in the DSG portfolio. The Company will use proceeds from the sale to reduce debt and to repurchase equity. The $31 million after tax loss on disposition of the assets, primarily related to the non-cash impairment of goodwill, was recorded in the fourth quarter of 2000. This loss is expected to be significantly offset by the gain on there purchase of the Company's debt securities with the proceeds, although such gains will be realized in 2001. The Company will open two new traditional department stores in fall 2001--a Parisian store in Atlanta, Georgia and a Younkers store in Muskegon, Michigan.

 36        MANAGEMENT'S DISCUSSION AND ANALYSIS

FISCAL YEAR ENDED FEBRUARY 3, 2001 COMPARED TO FISCAL YEAR ENDED JANUARY 29, 2000

Net Sales
Net sales for 2000 include 53 weeks of sales versus 52 weeks in 1999.

Net sales increased 2.3% in 2000 over 1999 primarily due to sales resulting from the 53rd week, incremental sales generated from new store additions, offset partially by the loss of sales from closed stores, and a comparable stores sales increase of 0.2%.

Net sales for DSG were $3,909.1 million in 2000 compared to $3,928.9 million in 1999, a total sales decrease of 0.5%, principally attributable  to a comparable stores sales decrease for the 52 weeks ended January 27, 2001 of 1.8%. Net sales for SFAE were $2,672.2 million in 2000 compared to $2,505.2 million in 1999, a total sales increase of 6.6%, principally attributable to a comparable stores sales increase  for the 52 weeks ended January 27, 2001 of 5.0% and incremental sales from new stores.

Gross Margin
Gross margin as a percentage of net sales was 36.0% in 2000 compared to 37.4% in 1999. The decrease in gross margin percent from 1999 to 2000 was primarily attributable to markdowns associated with the general weakness in the DSG segment and the extraordinary markdowns taken to clear excess spring and summer apparel inventories in DSG.

Selling, General and Administrative Expenses
Selling, general and administrative expenses ("SG&A") as a percentage of net sales were 21.8% in 2000 compared to 21.1% in 1999. The increase in 2000 from 1999 was primarily due to 1) expenses of $21.3 million associated with launching saks.com without a corresponding increase in sales, 2) the inability to reduce operating expenses commensurate with the comparable  store sales decline in DSG during the first three quarters of the year and with the comparable store sales decline in SFAE during the fourth quarter of the year, offset partially by 3) an increase in finance charge income on proprietary credit cards as a result of terms changes initiated in late 1999. Included in SG&A expenses in 2000 were expenses totaling $6.7 million ($4.1 million net of taxes) associated with the terminated proposal to spin-off SFAE and revisions to 1999 charges associated with store closings.

Other Operating Expenses
Other operating expenses as a percentage of net sales were 8.8% in 2000 compared to 8.3% in 1999. The increase was primarily due to 1) increased depreciation and rental expenses associated with the remodel and expansion of comparable stores without a corresponding increase in comparable store sales, 2) depreciation and rental expenses associated with new stores without a corresponding increase in new store sales and 3) increased depreciation resulting from infrastructure capital spending (principally information technology systems).

Certain Items

INTEGRATION CHARGES
The Company incurred certain costs to integrate and combine the operations of acquired companies. The 2000 charges were primarily comprised of severance benefits and systems conversions related to the consolidation of the McRae's and Herberger's operating divisions and three distribution centers. The 1999 charges were primarily comprised of systems conversion costs and severance benefits related to redundant systems and administrative operations associated with the SFA and Carson's acquisitions.

LOSSES FROM LONG-LIVED ASSETS
Losses from long-lived assets in 2000 of $73.6 million were primarily comprised of the non-cash impairment of goodwill associated with the pending sale of nine former Mercantile stores and, to a lesser extent, impairments on abandoned software and under-performing store assets. Losses from long-lived assets in 1999 of $12.5 million were principally comprised of the write-off of the carrying amounts of relocated or closed stores.

37          MANAGEMENT'S DISCUSSION AND ANALYSIS

YEAR 2000 EXPENSES
Prior to January 1, 2000, the Company incurred costs related to required system upgrades, replacements and modifications to prepare for the year 2000. The Company experienced no significant system delays or interruptions on or after January 1, 2000.

Operating Income
Operating income decreased from $456.2 million in 1999 to $261.9 million in 2000 primarily due to 1) an increase in markdown activity resulting from the general weakness in DSG, 2) the excessive markdowns required to clear excess spring and summer apparel inventories in DSG, 3) the expenses associated with launching saks.com, 4) increased occupancy costs without a corresponding increase in sales, 5) the impairment of goodwill associated with the pending sale of the nine former Mercantile stores, partially offset by 6) lower integration charges and the absence of Year 2000 expenses.

Interest Expense
Interest expense as a percentage of net sales increased to 2.3% in 2000 from 2.2% in 1999. The increase was due principally to higher average borrowing rates on floating rate debt and higher average debt levels.

Income Taxes
In 2000, the effective income tax rate differed from the federal statutory tax rate due to state income taxes and nondeductible goodwill amortization, offset by the favorable effect of the disposal of a real estate investment ($4.1 million). In 1999, the effective income tax rate differed from the statutory tax rates principally due to state income taxes and nondeductible goodwill amortization. The change in year-over-year effective tax rates was primarily attributable to the favorable effect of the real estate investment disposition.

Extraordinary Items
The extraordinary item in 1999 related to the prepayment of $236 million in REMIC certificates, which resulted in an extraordinary loss from early extinguishment of debt. The loss was comprised of the write-off of unamortized deferred debt issuance costs.

Net Income 
Net income in 2000 decreased to $75.2 million from $189.6 million in 1999 primarily due to the decline in operating income.

FISCAL YEAR ENDED JANUARY 29, 2000 COMPARED TO FISCAL YEAR ENDED JANUARY 30, 1999

Net Sales
Net sales increased 7.9% in 1999 over 1998 primarily due to a comparable stores sales increase of 2.6% and incremental sales generated from new store additions, offset partially by the loss of sales from closed stores.

Net sales for DSG were $3,928.9 million in 1999 compared to $3,647.4 million in 1998, a total sales increase of 7.7%, principally attributable to a comparable stores sales increase of 1.5% and incremental sales from new stores. Net sales for SFAE were $2,505.2 million in 1999 compared to $2,316.4 million in 1998, a total sales increase of 8.2%, principally attributable to a comparable stores sales increase of 4.7% and incremental sales from new stores.

Gross Margin
Gross margin as a percentage of net sales was 37.4% in 1999 compared to 36.4% in 1998. The increase in gross margin percent from 1998 to 1999 was primarily attributable to the effect of the markdowns taken in 1998 related to aged and excessive quantities of inventory recognized contemporaneous with the SFA acquisition.

38          MANAGEMENT'S DISCUSSION AND ANALYSIS

Selling, General and Administrative Expenses
SG&A as a percentage of net sales was 21.1% in 1999 compared to 22.3% in 1998. The decrease in 1999 from 1998 was primarily due to merger related charges incurred in 1998 in connection with the SFA acquisition. Those charges consisted of increased reserves for legal claims and self insurance liabilities, expenses related to real estate realignments and store closings, and a loss recognized from conforming SFA's policies for delinquent proprietary credit card accounts to those of the Company.

Other Operating Expenses
Other operating expenses as a percentage of net sales were 8.3% in 1999 compared to 8.4% in 1998. The decrease in other operating expenses percentage was primarily attributable to the excess of the growth in sales percentage over the percentage growth in expense. This favorable benefit was principally due to leveraging the comparable store sales increase over a relatively fixed expense base.

Certain Items

INTEGRATION CHARGES
In connection with its acquisitions, the Company incurred certain costs to effect the transactions and costs to integrate and combine certain operations. The 1999 charges were primarily comprised of systems conversion costs and severance benefits related to redundant systems and administrative operations. The 1998 charges were related principally to the SFA acquisition and consisted of investment banking, legal and accounting fees, transfer taxes and other direct merger costs and integration charges such as severance, the consolidation of administrative operations and the write-off of redundant information technology systems and certain development projects.

LOSSES FROM LONG-LIVED ASSETS
Losses from long-lived assets in 1999 of $12.5 million were principally comprised of the write-off of the carrying amounts of relocated or closed stores. The 1999 charges were less than the 1998 charges of $61.8 million primarily as a result of the charges taken in 1998 contemporaneous with the Company's review of the SFA real estate portfolio immediately prior to and subsequent to the acquisition.

YEAR 2000 EXPENSES
The Company incurred costs in 1999 and 1998 related to required system upgrades, replacements and modifications to prepare for the year 2000.

Operating Income
Operating income increased from $154.9 million in 1998 to $456.2 million in 1999 primarily due to 1) an increase in comparable store sales and new store sales, 2) the absence of markdowns taken in 1998 related to aged and excessive quantities of inventory recognized contemporaneous with the SFA acquisition, 3) the absence of charges taken in 1998 related to increased liabilities, real estate alignments, store closings and changes in delinquent proprietary credit card policies, 4) a decrease in integration costs and 5) the absence of merger charges taken in 1998 resulting from the SFA acquisition.

Other Income (Expense), Net
Other income in 1998 consisted of gains recorded from the favorable settlement of litigation, partially offset by charges related to the termination of certain interest rate hedging agreements.

Interest Expense
Interest expense as a percentage of net sales increased to 2.2% in 1999 from 1.9% in 1998. The increase was due to higher average levels of borrowings due to funding capital expenditures and working capital related to new stores and higher average borrowing rates due to more fixed versus variable rate debt.

39          MANAGEMENT'S DISCUSSION AND ANALYSIS

Income Taxes
In 1999, the effective income tax rate differed from the federal statutory tax rate principally due to state income taxes and nondeductible goodwill amortization. The change in the 1999 tax rate from the 1998 rate was attributable to nondeductible merger costs reflected in the 1998 rate.

Extraordinary Items
The extraordinary item in 1999 related to the prepayment of $236 million in REMIC certificates, which resulted in an extraordinary loss from early extinguishment of debt. The loss was principally comprised of the write-off of unamortized deferred debt issuance costs. The 1998 extraordinary item related to the early extinguishment of several debt instruments that occurred contemporaneous with the SFA merger and were designed to enhance liquidity, strengthen the balance sheet and position the Company for future growth. These transactions included 1) the repurchase of approximately $272.0 million of 5.5% convertible subordinated notes, 2) the repayment and subsequent cancellation of a revolving credit facility and certain property leases and 3) the repurchase of $65.0 million of REMIC certificates.

Net Income
Net income in 1999 increased to a $189.6 million profit from a $0.9 million loss in 1998 due to the improvement in operating income and fewer extinguishment of debt charges, partially offset by incremental interest expense.

Liquidity and Capital Resources

CASH FLOW
The primary needs for liquidity are to acquire or construct new stores, renovate and expand existing stores and to provide working capital for new and existing stores. The Company anticipates that cash generated from operating activities and borrowings under its revolving credit agreement and accounts receivable securitization will be sufficient to meet its financial commitments and to capitalize on opportunities for future growth.

Cash provided by operating activities was $485.5 million in 2000, $209.7 million in 1999, and $522.9 million in 1998. Cash provided by operating activities principally represents income before depreciation and amortization charges, losses from long-lived assets and changes in working capital. The increase in 2000 from 1999 was related to a lower investment in working capital. The decrease in 1999 from 1998 was primarily related to the favorable effect of the sale of Carson's proprietary credit card receivables on 1998 cash flows.

Cash used in investing activities was $248.7 million in 2000, $407.8 million in 1999, and $943.7 million in 1998. Cash used in investing activities principally consists of construction of new stores, renovation and expansion of existing stores and business acquisitions. The decrease in 2000 from 1999 was due to lower capital spending on new store openings, expansions and remodels. The decrease in 1999 from 1998 was due to the 1998 acquisitions of the former Mercantile stores from Dillard's, the Brody's stores and Bullock & Jones.

Cash provided by (used in) financing activities for 2000, 1999 and 1998 totaled $(191.6) million, $184.9 million and $402.6 million, respectively. The change from 1999 to 2000 was due primarily to increased operating cash flow and lower capital spending which allowed for the reduction of debt. The change from 1998 to 1999 was due to the 1998 issuance of $1.1 billion in senior notes and an increase in revolving credit facilities to fund 1) the acquisition of the former Mercantile stores from Dillard's, 2) the repayment of the Carson's receivables facility, 3) the repayment of the Company's senior notes, 4) the repayment of SFA convertible debentures and 5) the repayment of REMIC certificates.

The availability of net operating loss carry forwards and other tax benefits generated in prior years by SFA and Carson's will enable the Company to reduce its cash requirements for income tax payments in the next several years.

40          MANAGEMENT'S DISCUSSION AND ANALYSIS

ACCOUNTS RECEIVABLE SECURITIZATION
All accounts receivable are generated by proprietary credit cards that are issued by National Bank of the Great Lakes, the Company's wholly owned subsidiary (the "Bank"), and are sold to wholly owned special purpose subsidiaries of the Company. The special purpose entities transfer the receivables, with limited recourse, to either a credit card related trust or a bank conduit  facility in exchange for cash and subordinated certificates representing undivided interests in the pool of receivables. The trust also issues certificates of beneficial interest, which represent an undivided interest in the pool of receivables, to investors. At February 3, 2001 the funding capacity consisted of approximately $1.3 billion of which $422 million were fixed rate certificates and $921 million were variable rate certificates. In 2001, securitization facilities totaling approximately $765 million of the $1.3 billion will mature. The Company anticipates issuing new certificates or establishing new conduit facilities that will be sufficient to maintain funding of accounts receivable under terms similar to those currently in place.

In September 2000, the FASB issued SFAS No. 140, "Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities." The guidance in SFAS No. 140 supercedes SFAS No. 125. Under SFAS No. 125, the Company's securitization transactions are accounted for as sales of receivables. SFAS No. 140 requires additional disclosures relating to securitized financial assets and retained interests in securitized financial assets for fiscal years ending after December 15, 2000. These disclosures are included in Note 4 to the consolidated financial statements. In addition, SFAS No. 140 changes the requirements for an entity to be a qualifying special purpose entity and modifies under what conditions a transferor has retained effective control over transferred assets. The updated rules for transfers of financial assets are effective for transfers occurring after March 31, 2001. Early adoption of the new rules is not allowed.

Unless the Company modifies its existing securitization structure, SFAS No. 140 will result in the reinstatement of previously sold accounts receivable and the establishment of a liability for secured borrowings. The Company believes it will be successful in amending its current securitization structure so as to retain accounting for the securitization as a sale of receivables.

CAPITAL STRUCTURE
As of February 3, 2001, the Company's total debt outstanding consisted of $148.7 million outstanding on various capital leases, $8.6 million in mortgage debt and $1.65 billion in senior notes with maturities ranging from 2004 to 2019. Total indebtedness of $1,807.3 million represented a debt to total capitalization percentage of 44.1% and a decrease of $167.3 million from total debt outstanding at January 29, 2000. The reduction in debt was principally in the amounts owed under the revolving credit agreement and was the result of a lower investment in working capital and reduced capital expenditures.

As of January 29, 2000, the Company's total debt consisted of $159.0 million outstanding on its revolving credit agreement, $155.1 million outstanding on its capital leases, $10.5 million of mortgage debt, and $1.65 billion in senior notes. During 1999, the Company issued $200 million in 7.375% senior notes that mature in 2019 and $350 million in 7.0% senior notes that mature in 2004. Proceeds of both issuances were used to refinance borrowings under the Company's revolving credit agreement.

In July 1999, the Company authorized a share repurchase program for up to five million shares. During 1999, the Company repurchased 2.004 million shares under the program for an aggregate amount of $33.3 million. During 2000, the Company repurchased  an additional 2.041 million shares for an aggregate purchase price of $25.0 million, leaving 0.955 million shares available under the program at February 3, 2001. In March 2001, the Company authorized an additional repurchase program of five million shares.

In March 2001, the Company completed the sale of nine former Mercantile stores to The May Department Stores Company  for an aggregate purchase price of approximately $307 million. The Company anticipates using the proceeds to repurchase both equity and debt; based on current conditions, the Company anticipates recording a gain on the extinguishment  of debt.

CASH BALANCES 
At February 3, 2001 and January 29, 2000, the Company maintained cash and cash equivalent balances of $64.7 million and $19.6 million, respectively. These amounts primarily consist of cash received in payment of credit card balances that remain in transit from our lock box bank accounts, cash receipts related to sales near month end and cash maintained in the stores to facilitate sales transactions.

41          MANAGEMENT'S DISCUSSION AND ANALYSIS

CAPITAL NEEDS
The Company estimates capital expenditures for 2001 will approximate $300 million, primarily for the construction of new stores opening in 2001, initial construction work on stores expected to open in 2002, store expansions and renovations, enhancements to management information systems and regular maintenance capital expenditures.

The Company anticipates that working capital requirements relating to planned new and existing stores and capital expenditures will be funded through cash provided by operations, borrowings under its revolving credit agreement, ongoing sales of receivables under the securitization programs and proceeds from the sale of the nine former Mercantile stores that are not used to fund equity and debt repurchases. The Company maintains favorable banking relations and anticipates that the necessary credit agreements will be extended or new agreements will be entered into in order to provide future borrowing requirements as needed. The Company also believes it has access to a variety of capital markets. At February 3, 2001, the Company had $750 million available to borrow under its revolving credit agreement.

Inflation and Deflation
Inflation and deflation affect the costs incurred by the Company in its purchase of merchandise and in certain components of its SG&A expenses. The Company attempts to offset the effects of inflation through price increases and control of expenses, although the Company's ability to increase prices is limited by competitive factors in its markets. The Company attempts to offset the effects of merchandise deflation through control of expenses.

Seasonality
The Company's business, like that of most retailers, is subject to seasonal influences, with a significant portion of net sales and net income realized during the fall season, which includes the Christmas selling season. In light of these patterns, SG&A expenses are typically higher as a percentage of net sales during the first three quarters of each year, and working capital needs are greater in the last two quarters of each year. The increases in working capital needs during the fall season have typically been financed with internally generated funds, ongoing sales of receivables under the securitization programs and borrowings under the revolving credit agreement. Generally, more than 30% of the Company's net sales and over 50% of net income are generated during the fourth quarter.

Segment Reporting 
In June 1997, the Financial Accounting Standards Board ("FASB") issued SFAS No. 131, "Disclosures about Segments of an Enterprise and Related Information." The objective of this statement is to provide users of financial statements information about the different types of business activities in which a company engages and the different economic environments in which it operates. Prior to 2001, the Company operated three segments which are as follows: department stores, furniture and Saks Direct. The combined operations of the furniture and direct business segments represented less than three percent of the Company's total revenues, assets and operating profit. Accordingly, the results of operations of these two segments were not separately presented. Consistent with its reorganization announced in February 2001, the Company identified three reportable segments: SFAE stores, Saks Direct and DSG. It is expected that Saks Direct will continue to represent less than three percent of the Company's total revenues, assets and operating profit. As the reorganization is effected, the Company will begin disclosing more detailed separate financial information for two segments, SFAE, including the Saks Direct segment, and DSG, in the first quarter of fiscal 2001, including comparative historical financial information.

New Accounting Pronouncements
SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities," as amended by SFAS No. 138, will be effective for the Company in the first quarter of fiscal 2001. The FASB issued FIN No. 44, "Accounting for Certain Transactions Involving Stock Compensation, an interpretation of APB Opinion No. 25," in March 2000. These new standards will not have a material effect on the Company's consolidated financial statements.

42          MANAGEMENT'S DISCUSSION AND ANALYSIS

Forward-Looking Information 
Certain information presented in this report addresses future results or expectations and is considered "forward-looking" information within the definition of the Federal securities laws. Forward-looking statements can be identified through the use of words such as "may," "will," "intend," "plan," "project," "expect," "anticipate," "should," "would," "believe," "estimate," "contemplate," "possible," "attempts," "seeks" and "point." The forward-looking information is premised on many factors.  Actual consolidated results might differ materially from projected forward-looking information if there are any material changes in management's assumptions.

The forward-looking information and statements are based on a series of projections and estimates that involve risks and uncertainties. Potential risks and uncertainties include such factors as: the level of consumer spending for apparel and other merchandise carried by the Company and its ability to respond quickly to consumer trends; adequate and stable sources of merchandise; the competitive pricing environment within the department and specialty store industries as well as other retail channels; favorable customer response to planned changes in customer service formats; the effectiveness of planned advertising, marketing and promotional campaigns; favorable customer response to increased relationship marketing efforts and proprietary credit card loyalty programs; appropriate inventory management; reduction of corporate overhead; effective operations of the Bank's credit card operations; and changes in interest  rates. For additional information regarding these and other risk factors, please refer to Exhibit 99.1 of the Company's Form 10-K filing with the Securities and Exchange Commission, which may be accessed via EDGAR through the Internet at www.sec.gov.

The Company undertakes no obligation to correct or update any forward-looking statements, whether as a result of new information, future events or otherwise. Readers are advised, however, to consult any further disclosures the Company makes on related subjects in its reports with the Securities and Exchange Commission and in its press releases.

Quantitative and Qualitative Disclosures About Market Risk 
The Company's exposure to market risk primarily arises from changes in interest rates. The effects of changes in interest rates on earnings generally have been small relative to other factors that also affect earnings, such as sales and operating margins. The Company seeks to manage exposure to adverse interest rate changes through its normal operating and financing activities and, if appropriate, through the use of derivative financial instruments. The Company uses derivative financial instruments as part of an overall risk management program in order to manage the costs and risks associated with various financial exposures. The Company does not enter into derivative instruments for trading purposes, as clearly defined in its risk management policies.

47      SAKS INCORPORATED & SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
          (In thousands, except per share amounts)

Note.1.
Organization

Saks Incorporated (hereinafter together with its subsidiaries the "Company") is a national retailer currently operating premier, traditional and off-price department stores.  The Company operates Saks Fifth Avenue Enterprises ("SFAE"), which consists of Saks Fifth Avenue stores, Saks Off 5th stores, and Saks Direct, which includes the Folio and Bullock & Jones catalogs and the operations of saks.com.  The Company also operates the Saks Department Store Group ("DSG"), which consists of Proffitt's, McRae's, Younkers, Parisian, Herberger's, Carson Pirie Scott ("Carson's"), Bergner's and Boston Stores.

The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from these estimates.

The accompanying consolidated financial statements include the accounts of the Company and its subsidiaries. All intercompany accounts and transactions have been eliminated.

Note. 2.
Summary of Significant Accounting Policies

FISCAL YEAR
The Company's fiscal year ends on the Saturday closest to January 31. Fiscal year 2000 contained 53 weeks and ended on February 3, 2001. Fiscal years 1999 and 1998 contained 52 weeks and ended on January 29, 2000 and January 30, 1999, respectively.

NET SALES 
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. In 1999, in response to the Securities and Exchange Commission's Staff Accounting Bulletin No. 101, the Company changed its method of recording leased department sales to reflect only the commissions related to such sales. As a result of the issuance of EITF 00-10, net sales and cost of sales, as previously reported in prior years, have been restated to include revenues and expenses from shipping and handling of merchandise sold with no effect on previously reported operating income, net income, shareholders' equity or cash flows. The Company had previously included revenues and expenses from shipping and handling in selling, general and administrative expenses.

Revenues from shipping and handling included in net sales were $10,597 in 2000, $10,348 in 1999 and $8,571 in 1998. Commissions from leased departments included in net sales were $41,260, $36,665 and $38,348 in 2000, 1999 and 1998, respectively. Leased department sales were $277,050 in 2000, $244,806 in 1999 and $259,615 in 1998 and were excluded from net sales.

CASH AND CASH EQUIVALENTS 
Cash and cash equivalents primarily consist of cash on hand in the stores and deposits with banks and financial institutions that have maturities, when purchased, of three months or less. Cash equivalents are stated at cost, which approximates fair value.

RETAINED INTEREST IN ACCOUNTS RECEIVABLE 
National Bank of the Great Lakes (the "Bank"), a wholly owned subsidiary, provides credit to and performs ongoing credit evaluations of certain customers of the Company's stores and direct business. Concentration of credit risk is limited because of the large number of customers and their dispersion throughout the United States and other countries.

The Bank sells its credit card receivables to wholly owned special purpose subsidiaries of the Company. Gains or losses on the sale of the receivables depend in part on the cost of receivables sold in proportion to their estimated fair values. The Company estimates fair value based on the present value of expected future cash flows determined using management's best estimates of assumptions including portfolio yield, credit losses, payment rates and the weighted average cost of funding. The carrying value of the Company's retained interest approximates fair value. The Company retains the servicing rights to all receivables sold to the special purpose subsidiaries and trusts.

48          SAKS INCORPORATED & SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
              (In thousands, except per share amounts)

In September 2000, the FASB issued SFAS No. 140, "Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities--a Replacement of SFAS No. 125." It revises criteria for accounting for securitizations (effective for reporting periods beginning after March 31, 2001) and introduces new disclosures.

The new disclosures are presented in Note 4 of these financial statements. Compliance with the revised accounting criteria is not expected to have a material effect on the Company's financial position or results of operations.

MERCHANDISE INVENTORIES AND COST OF SALES 
At February 3, 2001 and January 29, 2000, merchandise inventories are valued by the retail method and are stated at the lower of cost (last-in, first-out ["LIFO"]), or market and include freight and certain buying and distribution costs. At February 3, 2001 and January 29, 2000, the LIFO value of inventories exceeded market value and, as a result, inventory was stated at the lower market amount.

Consignment merchandise on hand of $99,737 and $87,384 at February 3, 2001 and January 29, 2000, respectively, is not reflected in the consolidated balance sheets.

ADVERTISING 
Direct response advertising relates primarily to the production and distribution of the Company's catalogs and is amortized over the estimated life of the catalog. Direct response advertising amounts included in other current assets in the consolidated balance sheets at February 3, 2001 and January 29, 2000 were $7,951 and $15,403, respectively. All other advertising and sales promotion costs are expensed in the period incurred. Advertising expenses were $222,020, $220,303 and $198,617 in 2000, 1999 and 1998, respectively.

STORE PRE-OPENING COSTS
Store pre-opening costs are expensed when incurred.

PROPERTY AND EQUIPMENT 
Property and equipment are stated at cost. For financial reporting purposes, depreciation is computed principally using the straight-line method over the estimated useful lives of the assets. Buildings and improvements are depreciated over 20 to 40 years while fixtures and equipment primarily are depreciated over 5 to 15 years. Leasehold improvements are amortized over the shorter of their estimated useful lives or their related lease terms. Gains or losses on the sale of assets are recorded at disposal. Costs incurred in the discovery and post-implementation stages of obtaining internal computer software are expensed as incurred.  Costs incurred for the development of internal computer software are capitalized and amortized using the straight-line method over 3 to 7 years. At each balance sheet date and as changes in circumstances arise, the Company evaluates there cover ability of its property and equipment based upon the utilization of the assets and expected future cash flows.

GOODWILL AND INTANGIBLES 
The Company has allocated the purchase price of purchase transactions first to identifiable tangible assets and liabilities based on estimates of their fair value, with the remainder allocated to intangible assets and goodwill. Amortization of goodwill and intangibles is provided on a straight-line basis over the respective lives of the various intangible assets ranging from 5 to 40 years. The Company recognized amortization expense of $19,659, $17,593 and $11,601 in 2000, 1999 and 1998, respectively. As of February 3, 2001 and January 29, 2000, the accumulated amortization of goodwill and intangible assets was $76,322 and $56,663, respectively.

At each balance sheet date or as changes in circumstances arise, the Company evaluates the recoverability of goodwill and intangible assets based upon utilization of the assets and expectations of related cash flows. In 2000 and 1999, the Company recorded charges of $42,000 and $6,000, respectively, related to dispositions and impairments of goodwill and intangibles which are included in losses from long-lived assets in the consolidated statements of income. The 2000 charges primarily relate to the impairment of goodwill associated with the sale of the nine former Mercantile stores, which was consummated on March 16, 2001, and the 1999 charges relate to a store closing. Based upon its most recent analysis, the Company believes that no other impairment of remaining goodwill and intangibles exists at February 3, 2001. 

49          SAKS INCORPORATED & SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
             (In thousands, except per share amounts)

DERIVATIVES POLICY 
The Company uses financial derivatives only to manage its costs and risks in conjunction with specific business transactions. 

At February 3, 2001, the Company maintains one interest rate swap agreement used to convert a portion of its fixed rate senior notes to variable rate debt. The financial institution associated with this agreement is considered to be a major, well-known institution. 

SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities" as amended by SFAS No. 138, will be effective for the Company in the first quarter of fiscal year 2001. This new standard will not have a material effect on the Company's financial statements.

STOCK-BASED COMPENSATION PLANS 
The Company records compensation expense for all stock-based compensation plans using the intrinsic value method. Compensation expense, if any, is measured as the excess of the market price of the stock over the exercise price of the option on the measurement date. Pro forma disclosures of net income and earnings per share are presented in Note 11, as if the fair value method had been applied.

INCOME TAXES 
The Company uses the asset and liability method of accounting for income taxes. Under this method, deferred tax assets and liabilities are determined based on differences between financial reporting and tax bases of assets and liabilities and are measured using the enacted tax rates and laws that will be in effect when the differences are expected to reverse.

EARNINGS PER SHARE
Basic earnings per share ("EPS") have been computed based on the weighted average number of common shares outstanding. The Company's 5.50% convertible subordinated debentures were considered in diluted earnings per share, when dilutive. In the fourth quarter of 1998, the Company repurchased these 5.50% convertible subordinated debentures with cash for $272,000.

50          SAKS INCORPORATED & SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
              (In thousands, except per share amounts)

SEGMENT REPORTING 
In June 1997, the Financial Accounting Standards Board ("FASB') issued SFAS No. 131, "Disclosures about Segments of an Enterprise and Related Information." The objective of this statement is to provide users of financial statements information about the different types of business activities in which a company engages and the different economic environments in which it operates. Prior to 2001, the Company operated three segments which are as follows: department stores, furniture and Saks Direct. The combined operations of the furniture and direct business segments represented less than three percent of the Company's total revenues, assets and operating profit. Accordingly, the results of operations of these two segments were not separately presented. Consistent with its reorganization announced in February 2001, the Company identified three reportable segments: SFAE stores, Saks Direct and DSG. It is expected that Saks Direct will continue to represent less than three percent of the Company's total revenues, assets and operating profit. As the reorganization is effected, the Company will begin disclosing more detailed separate financial information for two segments, SFAE, including the Saks direct segment, and DSG, in the first quarter of fiscal 2001, including comparative historical financial information. Sales information for SFAE and DSG is provided in Note 15.

COMPREHENSIVE INCOME 
Components of the Company's comprehensive income for 2000, as presented in the consolidated statements of shareholders equity, include net income of $75,216 and a minimum pension liability adjustment of $(1,852), net of taxes. Components of the Company's comprehensive income for 1999 include net income of $189,643 and the adjustment to relieve the minimum pension liability adjustment of $7,487, net of taxes. Components of the Company's comprehensive income for fiscal year 1998 include the net loss of $896 and a minimum pension liability adjustment of $(7,487), net of taxes.

Note. 3.
Mergers, Acquisitions and Dispositions

The Company has experienced significant growth since 1994, primarily through a series of acquisitions. In September 1998, the Company acquired Saks Holdings ("SFA") by issuing 52.5 million shares. The acquisition was accounted for using the pooling of interest method.

The Company acquired 15 former Mercantile stores, including inventories and proprietary credit card accounts and receivables, from Dillard's in the third and fourth quarters of 1998 for the aggregate purchase price of $482,000. At February 3, 2001, the Company had entered into an agreement to sell nine of the former Mercantile Stores to The May Department Stores Company for an aggregate purchase price of approximately $307,000. A pre-tax loss of approximately $51,000 is expected from the sale, comprised primarily of a goodwill impairment. The transaction, including the sale of real and personal property, along with certain related merchandise inventory and customer accounts receivable, was consummated on March 16, 2001.

Note.4.
Accounts Receivable Securitizations

The Bank is a wholly owned national credit card bank subsidiary and issues all proprietary credit cards to certain of the Company's customers and makes all credit card loans. The securitization of receivables involves the continual transfer of receivables from the Bank to wholly owned special purpose subsidiaries and then with limited recourse to either a credit card related trust or a bank conduit facility in exchange for cash and subordinated certificates representing undivided interests in the pool of receivables. These facilities subsequently issue certificates of beneficial interest, also representing undivided interests in the pool of receivables, to investors.

51          SAKS INCORPORATED & SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL
              STATEMENTS (In thousands, except per share amounts)

The Company has the ability to issue certificates of beneficial interest in fixed or variable denominations with fixed or variable implicit discount rates. At February 3, 2001, the Company had available the following funding sources:

The various agreements contain covenants requiring the maintenance of certain financial ratios and receivables portfolio performance measures. While the Company has no obligations to reimburse the trust or investors for credit losses, the Company is obligated to repurchase receivables related to customer credits such as merchandise returns and other receivables defects.

Gains from the sale of receivables are included in selling, general and administrative expenses. Gains are equal to the excess of the fair value of the receivables sold over the carrying amount of the receivables generated from the sale of merchandise. Implicit in the gains is the finance charge income generated by the outstanding receivables, the portion of finance charge income retained by the certificate investors, credit losses and servicing costs. Finance charge income totaled $269,812 in 2000, $246,870 in 1999 and $225,120 in 1998. Finance charges earned by the certificate investors were $77,119, $65,156 and $66,930 for 2000, 1999 and 1998, respectively. Gains on sales of accounts receivable also included $6,972, $19,500 and $36,400 in 2000, 1999 and 1998, respectively, representing the year-over-year increase in the fair value of the sold receivables. The fair value of sold receivables is influenced by changes in the amount of securitized receivables and the estimated future portfolio yield assumptions.

The Company's assumptions in measuring the retained interests in accounts receivable as of and for the period ended February 3,2001 and the sensitivity of the fair value to immediate 10% and 20% adverse changes in those assumptions are as follows:

These sensitivities are hypothetical and should be used with caution. The effect of an adverse change in a particular assumption on the fair value of the retained interest is calculated without changing any other assumption; changes in one factor may result in changes in another, which might alter the reported sensitivities.