UPDATE 2-Saks profit misses estimates; stock falls

(Adds company and analyst comments)

ATLANTA, May 20 (Reuters) - Upscale retailer Saks Inc (SKS.N: Quote, Profile, Research, Stock Buzz) reported lower-than-expected quarterly profit on Tuesday as markdowns pressured gross margin, and its shares sank 8 percent.

Earnings rose to $18.3 million, or 13 cents a share, for the fiscal first quarter ended May 3, from $11 million, or 7 cents a share, a year earlier.

Analysts had expected 17 cents a share, according to Reuters Estimates.

The operator of Saks Fifth Avenue stores said sales rose 9 percent to $862.4 million as consumers responded to promotions. Sales at stores open at least a year, or same-store sales, rose 8.4 percent.

But gross margin contracted to 38.2 percent from 41.1 percent a year earlier, hurt by increased promotional activity and clearance markdowns.

"With inventory levels now in line with sales trends, and Saks focusing its merchandising on its most productive brands, we look for gross margins to improve over the balance of the year," retail analyst Jason Asaeda of Standard & Poor's Equity Research said in a note.

Saks is renovating stores and expanding commission programs for its workers to boost results. All retailers face a challenging environment as higher gasoline and fuel prices lead consumers to curb spending.

Saks Chairman Steve Sadove said higher-end consumers who crave designer brands were still willing to spend, while lower-end buyers were more pressured.  Continued...