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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

For the quarterly period ended: July 31, 2004

or

For the transition period from              to             

Commission File Number: 1-13113

SAKS INCORPORATED

(Exact Name of Registrant as Specified in Its Charter)

Registrant’s telephone number, including area code: (205) 940-4000

Indicate by check mark whether Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days.    Yes  x    No  ¨

Indicate by check mark whether Registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).    Yes  x    No  ¨

As of July 31, 2004, the number of shares of the Registrant’s Common Stock outstanding was 141,863,394.

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TABLE OF CONENTS

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SAKS INCORPORATED and SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(Dollar amounts in thousands)

(Unaudited)

See notes to condensed consolidated financial statements.

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SAKS INCORPORATED and SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF INCOME

(Dollar amounts in thousands, except per share amounts)

(Unaudited)

See notes to condensed consolidated financial statements.

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SAKS INCORPORATED and SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Dollar amounts in thousands)

(Unaudited)

See notes to condensed consolidated financial statements.

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Dollar amounts in thousands, except per share amounts)

(Unaudited)

NOTE 1 – BASIS OF PRESENTATION AND ORGANIZATION

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the six months ended July 31, 2004 are not necessarily indicative of the results that may be expected for the year ending January 29, 2005. The financial statements include the accounts of Saks Incorporated and its subsidiaries (collectively, the “Company”). All intercompany amounts and transactions have been eliminated. For further information, refer to the consolidated financial statements and footnotes thereto included in the Company’s Annual Report on Form 10-K for the year ended January 31, 2004.

The accompanying balance sheet at January 31, 2004 has been derived from the audited financial statements at that date but does not include all disclosures required by generally accepted accounting principles.

The Company is a national retailer currently operating, through subsidiaries, traditional and luxury department stores. The Company operates the Saks Department Store Group (“SDSG”), which consists of stores operated under the following nameplates: Proffitt’s, McRae’s, Younkers, Parisian, Herberger’s, Carson Pirie Scott, Bergner’s, and Boston Store and Club Libby Lu specialty stores. The Company also operates Saks Fifth Avenue Enterprises (“SFAE”), which consists of Saks Fifth Avenue stores and Saks Off 5^th stores.

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. Commissions from leased departments were $9,617 and $8,970 for the three months ended July 31, 2004 and August 2, 2003, respectively. Leased department sales were $63,814 and $58,719 for the three months ended July 31, 2004 and August 2, 2003, respectively, and were excluded from net sales. Commissions from leased departments were $20,750 and $18,926 for the six months ended July 31, 2004 and August 2, 2003, respectively. Leased department sales were $138,303 and $126,575 for the six months ended July 31, 2004 and August 2, 2003, respectively, and were excluded from net sales.

Cash and cash equivalents primarily consists of cash on hand in the stores, deposits with banks and investments in short-duration fixed income mutual funds. Certain cash equivalents are stated at cost, which approximates fair value. Cash and cash equivalents included $144,000 and $349,000 at July 31, 2004 and August 2, 2003, respectively, invested principally in various short-duration fixed income funds, which were marked to market. At July 31, 2004, the Company had all of its invested cash of $144,000 invested in a single short-term bond fund. Income earned on

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these cash equivalents was $1,851 and $1,242 for the three-month periods ended July 31, 2004 and August 2, 2003, respectively. For the six-month period ended July 31, 2004 and August 2, 2003, income earned on these cash equivalents was $2,338 and $2,444, respectively. These amounts were reflected in Interest Expense.

NOTE 2 – EARNINGS PER COMMON SHARE

Earnings per share (“EPS”) is computed based on the weighted average number of common shares outstanding. The Company had 20,114 and 27,259 options to purchase shares of common stock outstanding at July 31, 2004 and August 2, 2003, respectively, and 12,307 of potentially exercisable shares under convertible debt at July 31, 2004, which were not included in a computation of diluted EPS, principally because the Company had a loss for the period.

The Company’s $230,000 convertible debt includes a contingent conversion price provision and the option for a settlement in either cash or shares, known as net share settlement. Under current generally accepted accounting principles, these two provisions individually influence application of the as-if-converted method of calculating earnings per share. The Financial Accounting Standards Board (FASB) and the Emerging Issues Task Force (EITF) are contemplating changes to generally accepted accounting principles surrounding earnings per share that would require the Company to (1) assume share settlement and (2) to treat the convertible securities as non-contingent securities. The impact of both of these changes would require the Company to use the if-converted method in calculating dilutive earnings per share. When applying the if-converted method, conversion shall not be assumed for purposes of computing diluted EPS if the effect would be anti-dilutive.

NOTE 3 – DEBT AND SHARE ACTIVITY

At July 31, 2004, the Company had interest rate swap agreements with notional amounts of $150,000 and $100,000, which swapped coupon rates of 8.25% and 7.50%, respectively, for floating rates. The fair value of these swaps at July 31, 2004 was a loss of $7,246.

On March 23, 2004, the Company issued $230,000 of convertible senior notes that bear interest of 2.0% and mature in 2024. The provisions of the convertible notes allow the holder to convert the notes to shares of the Company’s common stock at a conversion rate of 53.5087 shares per one thousand dollars in principal amount of notes. The conversion rate reflects an adjustment required by the special one-time dividend. The most significant terms and conditions related to the convertible senior notes include: the Company can settle a conversion with shares and/or cash; the holder may put the debt back to the Company in 2014 or 2019; the holder cannot convert until the Company’s share price exceeds the conversion price by 20% for a certain trading period; the Company can call the debt on or after March 11, 2011; the conversion rate is subject to a dilution adjustment; and the holder can convert upon a significant credit rating decline and upon a call. The Company used approximately $25,000 of the proceeds from the issuance to enter into a convertible note hedge and written call options on its common stock to limit the exposure to dilution from the conversion of the notes.

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During the six-month period ended July 31, 2004, the Company repurchased 744 of the Company’s common shares in the amount of $12,082, which were all repurchased during the first quarter. At July 31, 2004, there were 21,148 shares remaining available for repurchase under the Company’s existing share repurchase program. Subsequent to July 31, 2004 and up through September 8, 2004, the Company repurchased an additional 4,368 shares of the Company’s common stock for $53,389.

The Company entered into an accelerated stock buyback program during 2003, whereby it purchased 4,570 shares subject to a price settlement agreement containing a cap and a floor. The Company settled the maturity of this agreement in June 2004 for $6,579, which served to reduce shareholders’ equity.

NOTE 4 – EMPLOYEE BENEFIT PLANS

The Company sponsors defined benefit pension plans for a significant portion of its employees. The Company generally funds pension costs currently, subject to regulatory funding requirements. The components of net periodic pension expense for the six-months ended July 31, 2004 and August 2, 2003 were as follows:

The Company expects no additional funding requirements in the current year.

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NOTE 5 – SHAREHOLDERS’ EQUITY

On March 15, 2004, the Company’s Board of Directors declared a special one-time cash dividend of $2.00 per common share to shareholders of record as of April 30, 2004. The Company reduced retained earnings for the $285,551 dividend payment, and $282,700 was paid out on May 17, 2004. The remaining portion of the dividend will be paid prospectively as restricted shares vest.

As a result of the special one-time dividend, the Human Resources Committee of the Company’s Board of Directors exercised its discretion under anti-dilution provisions of the employee stock plans to adjust the exercise price of stock options and number of shares subject to oustanding stock options to reflect the change in the share price on the ex-dividend date (April 28, 2004). The effect of this anti-dilution adjustment is presented below:

The following table summarizes the changes in shareholders’ equity for the six months ended July 31, 2004:

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NOTE 6 – STOCK-BASED COMPENSATION

The Company recorded compensation expense for all stock-based compensation plan issuances prior to 2003 using the intrinsic value method. Compensation expense, if any, was measured as the excess of the market price of the stock over the exercise price of the award on the measurement date. In 2003, the Company began expensing the fair value of all stock-based grants over the vesting period on a prospective basis.

If compensation cost for the Company’s stock-based compensation plan issuances prior to 2003 had been determined under the fair value method, the Company’s net income and earnings per share would have been reduced to the pro forma amounts indicated below.

NOTE 7 – CONTINGENCIES

The Company is involved in several legal proceedings arising from its normal business activities, and reserves for such claims have been established where appropriate. Management believes that none of these legal proceedings will have a material adverse effect on the Company’s consolidated financial position, results of operations or liquidity.

The Company is routinely under audit by federal, state or local authorities in the areas of income taxes and the remittance of sales and use taxes. These audits include questioning the timing and amount of deductions and the allocation of income among various tax jurisdictions. The Company believes it has appropriately accrued for probable exposures.

Under the terms of a customer proprietary credit card program with Household Bank (SB), N.A. (“Household”), there are certain provisions that would allow each party to terminate the Program Agreement that governs the relationship. If Household were to terminate the Program Agreement, the Company might be required to return to Household a declining portion of the

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premium it received when the credit card portfolio was sold to Household in 2003. The maximum contingent payment had the program been terminated early at July 31, 2004 would have been approximately $127,000. If the Company were to terminate the program, the Company would have the right to purchase the credit card accounts and associated accounts receivable from Household at their fair value.

NOTE 8 – NEW ACCOUNTING PRONOUNCEMENTS

In March 2004, the FASB issued accounting and disclosure requirements related to the Medicare Prescription Drug, Improvement and Modernization Act of 2003 (the “Act”). Any measures of the accumulated projected benefit obligation or net periodic postretirement benefit cost in the financial statements or accompanying notes do not reflect any amounts associated with the Act since the effects of the Act on the Company’s plan remain unknown until regulations are developed. The adoption of future guidance is not expected to have a material effect on the Company’s financial position or its results of operations.

As further discussed in Note 2, The FASB and the EITF are contemplating changes to generally accepted accounting principles surrounding earnings per share that would require the Company to (1) assume share settlement and (2) to treat the convertible securities as non-contingent securities. The impact of both of these changes would require the Company to use the if-converted method in calculating dilutive earnings per share. When applying the if-converted method, conversion shall not be assumed for purposes of computing diluted EPS if the effect would be anti-dilutive. The FASB is also contemplating a change in the accounting for equity compensation. The Company will implement new accounting pronouncements if and when they become effective.

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NOTE 9 – SEGMENT INFORMATION

The following tables represent summary segment financial information and are consistent with management’s view of the business operating structure.

“Operating Income” for the segments includes sales; cost of sales; direct selling, general, and administrative expenses; other direct operating expenses for the respective segment; and an allocation of certain operating expenses, including depreciation, shared by the two segments. Items not allocated are those items not considered by the chief operating decision maker in measuring the assets and profitability of the segments. These amounts are generally represented by two categories: (1) general corporate assets and expenses and other amounts including, but not limited to, treasury, investor relations, legal and finance support services, and general corporate management; and (2) certain items, while often times related to the operations of a segment, are not considered by segment operating management, corporate operating management and the chief

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operating decision maker in assessing segment operating performance. During the three and six-month periods ended July 31, 2004 and August 2, 2003, items not allocated were comprised of the following:

Losses from long-lived assets in 2004 primarily consisted of charges associated with store closures and the write-off of software.

Net gains from long-lived assets in 2003 primarily resulted from the sale of property associated with closed stores. Integration charges in 2003 primarily related to the consolidation of Younkers home office into Carson Pirie Scott. Other items consisted of the revisions made to previous store closing cost estimates.

NOTE 10 – CONDENSED CONSOLIDATING FINANCIAL INFORMATION

The following tables present condensed consolidating financial information for: (1) Saks Incorporated; (2) on a combined basis, the guarantors of Saks Incorporated’s Senior Notes (which are all of the subsidiaries of Saks Incorporated except for National Bank of The Great Lakes (“NBGL”), the subsidiaries associated with the Company’s former proprietary credit card securitization program, and other immaterial subsidiaries); and (3) on a combined basis, NBGL, the subsidiaries associated with the Company’s former proprietary credit card securitization program, and other immaterial subsidiaries, which collectively represent the only subsidiaries of the Company that are not guarantors of the Senior Notes. The condensed consolidating financial statements presented as of and for the three and six-month periods ended July 31, 2004 and August 2, 2003 and as of January 31, 2004 reflect the legal entity compositions at the respective dates. In December 2003, NBGL and the subsidiaries associated with the Company’s former proprietary credit card securitization program were dissolved. Thus, there were no assets or liabilities associated with non-guarantor subsidiaries at January 31, 2004 or July 31, 2004. Separate financial statements of the guarantor subsidiaries are not presented because the guarantors are jointly, severally, fully and unconditionally liable under the guarantees. Borrowings and the related interest expense under the Company’s revolving credit agreement are allocated to Saks Incorporated and the guarantor subsidiaries under an intercompany revolving credit arrangement. There are also management and royalty fee arrangements among Saks Incorporated and the subsidiaries. At July 31, 2004, Saks Incorporated was the sole obligor for a majority of the Company’s long-term debt, owned one store location and maintained a small group of corporate employees.

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SAKS INCORPORATED

CONDENSED CONSOLIDATING BALANCE SHEETS AT JULY 31, 2004

(Dollar Amounts In Thousands)

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SAKS INCORPORATED

CONDENSED CONSOLIDATING STATEMENTS OF INCOME

FOR THE THREE MONTHS ENDED JULY 31, 2004

(Dollar Amounts In Thousands)