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Saks Inc.’s Tough Times: As Results Disappoint, 2nd Vendor Sues Store

Saks Inc.'s woes continued, with the company issuing a disappointing report card on its first-quarter performance amid ongoing legal problems.

NEW YORK — It was another bad day for Saks Inc. on Tuesday as the retailer issued disappointing first-quarter figures and was hit by a second lawsuit from a disgruntled vendor.

The Birmingham, Ala.-based retailer said net income was $17.1 million, or 12 cents per share, for the quarter ended April 30. That fell below Wall Street analysts’ expectations of 16 cents per share, according to Thomson Financial. Sales for the first quarter rose 0.6 percent to $1.55 billion versus $1.54 billion a year ago.

Meanwhile, International Design Concepts filed a lawsuit Tuesday in Manhattan federal court against Saks Inc. and its Saks Fifth Avenue unit, alleging claims for breach of contract and fraud in connection with its chargeback and vendor allowance practices.

IDC, represented by the law firm Phillips Nizer, said in the lawsuit that it is the assignee of assets of Apparel Group International, the licensee of Oscar de la Renta for the “Oscar by Oscar de la Renta” trademarks that AGI used in connection with the women’s sportswear bridge collection at SFA. IDC also said in the lawsuit that AGI is “no longer in operation,” alleging that it was “forced out of business by the actions of the Saks defendants.”

A spokeswoman for Saks said Tuesday that the company does not comment on pending litigation. Onward Kashiyama had earlier sued Saks for $9,275,643 for “substantial deductions and credits which were not allowed under the terms of the agreement,” according to legal papers. The retailer is said to be repaying Onward Kashiyama, which no longer supplies Saks.

The lawsuit charged that AGI had the license for the Oscar mark through Dec. 31, 2005. The lawsuit said that from 1996 until 2003, AGI sold licensed products to Saks and other retailers, but that Saks was its most important customer, representing 60 percent of AGI’s total sales. AGI, from 1996 to 2003, issued invoices to Saks totaling $90.2 million for the purchase of licensed products, which Saks accepted. The chargebacks issued and deductions taken by the Saks defendants against AGI invoices for claimed vendor allowances totaled $31.4 million and represented nearly 35 percent of AGI’s sales to Saks, the lawsuit charged.

The lawsuit also charged that as a direct consequence of the alleged “improper and excessive chargebacks to AGI and resulting deductions against the AGI invoices, AGI was unable to pay its royalty obligations due under the Oscar de la Renta license.” That allegedly led to Oscar de la Renta ending the licensing agreement in February 2004. Another consequence was AGI’s inability to meet its financial obligations to HSBC Bank, its bank and principal lender. HSBC foreclosed on its loan, forcing AGI out of business, a “direct consequence of the improper and excessive chargebacks issued by Saks,” the lawsuit charged.

This story first appeared in the May 18, 2005 issue of WWD.  Subscribe Today.

The lawsuit also alleged that AGI was unable to verify the accuracy of the amounts charged by Saks because the retailer failed to “provide a comprehensive itemized accounting or explanation.”

The lawsuit said the “fraud perpetrated” by Saks on AGI and other vendors affected the public interest and that punitive damages should be imposed on the retailer.

“Since retailers base their retail prices on the wholesale prices charged to them by their vendors, the public is affected, because consumers are forced to pay higher prices for the goods they purchase,” the lawsuit said. It added that because of the improper collections, “consumers have been forced to pay improperly inflated retail prices for products purchased from the Saks defendants.”

In addition to punitive damages, the plaintiff is seeking unspecified damages it said is believed to be in the “millions of dollars.”

As for the results, Saks was hurt by soft sales at the department store group and unsatisfactory inventory management and gross margins at the Saks Fifth Avenue Enterprises division. Sales at the department stores came to $844 million, versus $858 million in the year-ago quarter, representing a 1.6 percent comp decline. SFAE’s sales came to $706 million, a 3.5 percent increase from last year’s $682 million.

The Saks department store group posted $22.9 million in operating income, while Saks Fifth Avenue Enterprises posted operating income of $39.2 million.

With the exception of sales information, the company did not provide comparisons because it has concluded that the financial statements for fiscal 1999 through the third quarter of fiscal 2004 are unreliable. The company is expected to restate its financials later this year, following an internal investigation of vendor allowances and related accounting issues. The first-quarter numbers released Tuesday were deemed preliminary and subject to change.

Inventories totaled $1.56 billion, a slight increase over the prior-year first quarter. Consolidated comparable store inventories were essentially flat with last year, with levels at SDSG below last year and at SFAE above last year.

R. Brad Martin, chairman and chief executive officer of Saks Inc., said in a statement, “Our first quarter results reflected a 1.9 percent comparable store sales increase, below-plan gross margin performance, and a modest amount of continued investment spending at SFAE.”

Saks Inc. is being investigated for alleged improper collections of markdown allowances at its Saks Fifth Avenue division and accounting procedures related to the timing and the recognition of the allowances.

The quarter included a net gain of $1.4 million (net of taxes), primarily because of store closings. The quarter also included approximately $2 million (net of taxes), of expenses associated with Saks’ own internal investigation of vendor markdown allowances. So far, the investigation has led to the dismissal of 11 employees, including three senior level financial executives and eight SFA merchants within the chain’s bridge department, as previously reported. The Securities and Exchange Commission and the U.S. Attorney, Southern District of New York continue to probe.

The company has divided its department store group into four segments —Proffitt’s/McRae’s, Carson Pirie Scott & Co., Club Libby Lu, and Parisian — to sell them off. According to Martin, “After careful consideration, we determined it was appropriate to divide the SDSG businesses into four distinct parts, permitting us to create a focused future for each. We believe this strategy is in the long-term best interests of our shareholders, our customers and our associates.”

As reported, the $700 million Proffitt’s/McRae’s segment is being sold to Belk, Inc. for $622 million. The company wants to sell the $2.2 billion Carson Pirie Scott & Co. northern department store business, which includes stores called Carson Pirie Scott, Bergner’s, Boston Store, Herberger’s, and Younkers. The company is also exploring “strategic alternatives” for its $30 million Club Libby Lu specialty store business catering to preteen girls, which could include its sale. Saks operates 232 department stores and 57 Saks Fifth Avenue stores as well as 52 Off 5th outlets and 43 mall-based Club Libby Lu stores.

During the conference call, Martin said “the big disappointment was the gross margin rate at SFAE,” meaning too many markdowns, while Fred Wilson, chairman and ceo of SFAE, acknowledged the problem in inventory management. “We carry too much inventory for the business we have,” Wilson said. But he added that the inventories are starting to get into line, and this fall a new merchandise information system will be installed. The company is also testing enhancements to point-of-sale systems and customer relationship management programs at two stores in Boca Raton, Fla., and Boston.

“We believe we can do substantially better with less,” Wilson said, explaining that gross margins will be impacted the most through improved inventory management. “Our primary focus for 2005 is to improve productivity at our stores in core markets,” Wilson said, including units in Atlanta; San Francisco; San Antonio; Boca Raton, Fla., and Boston.

The corporation is pumping about $150 million into capital expenditures this year, mostly focused on “those big strong, solidly growing stores we consider core to our business,” Wilson said. There is also “a sizeable maintenance budget to keep our stores looking good.”

Asked by one analyst if more store closings were in the cards, Wilson responded, “We constantly review our real estate portfolio, and we’ll take whatever action we deem appropriate as it becomes obvious to us. With regard to commenting on any specific stores, we don’t do that.”

During the call, management took some tough questions from analysts, including one asking why anyone should have confidence in the Saks management anymore, since the results suggest the team is taking the company in the wrong direction.

Martin responded first by acknowledging the company is not generating the kind of earnings growth rate expected, but that since 2001, a “devastating” year for the company, “there has been steady progress with this business,” including “dramatic” changes in the real estate portfolio, the addition of management talent, increased operating earnings and careful capital investment.

“Does [company performance] meet our standard? No. Are we satisfied? Absolutely not. Do we want dramatic improvement? Absolutely.

“It is unfair to suggest that there has not been a lot of high-quality work done to add value to this franchise. The team is focused on doing the right thing for the business, the right thing for the shareholder…A lot of terrific things have been done to position the business for future value creation,” Martin said.