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The Makeover at Saks: Losses Cut in Quarter, But Outlook Hits Stock

When it comes to making money, Saks Fifth Avenue lags the luxury industry. But the retailer is gaining ground.

When it comes to making money, Saks Fifth Avenue lags the luxury industry. But the retailer is gaining ground and made that clear Tuesday by posting top- and bottom-line improvements for the second quarter ended Aug. 4.

Saks Fifth Avenue narrowed its net loss in the quarter to $24.6 million, or 17 cents a share, from $51.9 million, or 39 cents, the previous year. Comp-store sales rose 13.2 percent in the quarter, while total sales increased 14.9 percent to $694.1 million from $603.8 million.

But Stephen I. Sadove, Saks’ chairman and chief executive officer, admitted the retailer faces tougher gross margin comparisons in the second half and won’t see the same kind of improvement as in the first six months. The outlook pushed Saks’ stock down $1.11, or 6.2 percent, to $16.83 on the New York Stock Exchange Tuesday.

Overall, the second-quarter results demonstrated that Saks’ turnaround efforts, orchestrated by Sadove and Ron Frasch, president and chief merchandising officer, are bearing fruit, though the game is far from won.

“Clearly we are less productive than some of the competition, such as Neiman Marcus,” Sadove told WWD. “We have a lot of catching up to do, but the way you catch up is through outsized comp-store growth.”

Sadove believes the 13.2 percent comp-sales lift tops most, if not all, of retailing. Gross margins widened 270 basis points due to fewer markdowns and better full-price selling. Saks in the past has been notorious for slashing prices.

The company also reduced sales, general and administrative expenses 60 basis points and the operating loss narrowed to $32.6 million from $77 million, and executives said store renovations are paying off.

“We really didn’t see any weakness in any categories or geographies across the country,” Sadove said. Other retailers, notably Macy’s Inc., have shown recent sales declines and particular weakness in Florida.

Saks did sound some less upbeat notes for the rest of the year. While expecting continued solid same-store sales in August, September and November partly due to calendar shifts, there will be weaker growth in October and December, the company said. For 2007 overall, same-store sales are seen in the high-single-digit range.

Much of Saks’ top-line growth has to be attributed to being an industry underachiever for years, having plenty of upside potential to remerchandise and lately taking some dramatic steps. “We had so much more opportunity in terms of assortments,” Sadove acknowledged during the interview. “We had been light on inventory.”

Saks was also heavy on management and unfocused in its merchandise selection. Now management has been culled and the merchandise is directed toward prices in the designer, bridge and contemporary zones, and tailored more to suit demands at each location.

Saks has had an up-and-down ride in the past year, moving in and out of the red. But the second quarter has to be regarded as the toughest of the year for retailers. As Sadove noted, the quarter is marked by far greater markdowns than the first quarter. Saks’ second-quarter loss also included about $4.3 million, or 3 cents a share, in charges mostly from severances, retentions and selling assets, while the year-ago period included more than $18 million in charges for similar items and costs from investigations into accounting and chargeback practices, which have been resolved.

For the year, Sadove projected a 4 percent profit margin, and an 8 percent rate should be achieved in the next three years or so. The margin will continue to rise subsequently and gradually approach the double-digit profit rates of competitors such as Nordstrom Inc. and Neiman Marcus Group Inc., Sadove expects.

“We feel we are on track. We are making very good progress, but we are still in the early stages,” the ceo said. “We are achieving near-term objectives while making investments in the business that will pay off.”

Those investments include a series of main floor remodelings at key locations and inventory buildups in certain categories. Inventories were up 23 percent in the quarter because the company is reinvesting in designer shoes, men’s wear, handbags and select designer ready-to-wear brands. Saks said 40 percent of the inventory buildup was low-risk replenishment product.

On a conference call, Sadove said the comp-store gain indicates “customers are responding to our focused merchandise assortment, as well as our customer service and marketing initiatives. The number of transactions and the average dollar transaction rose during the quarter….Nearly all categories performed well, especially men’s apparel, accessories and shoes; women’s contemporary and designer sportswear; women’s shoes, and handbags. We generated solid performance across all geographies and stores, from our flagship to our smaller-market locations, in spite of disruption caused by several major store remodeling projects under way.”

Renovations at the Beverly Hills store were recently completed with expanded handbag shops for Gucci, Prada, Chanel and Louis Vuitton. A Fendi shop was added and shoes and jewelry were refurbished. The store’s revenues were up 20 percent in the second quarter.

Renovations at the Phoenix and South Coast Plaza (Costa Mesa, Calif.) units will be finished in October; remodelings at the Palm Beach Gardens, Fla., store will be done in November and renovations at the Naples, Fla., unit should be completed next year. Saks has budgeted $125 million to $150 million on capital expenditures this year and plans to spend about the same next year.

Of all the renovations, the new designer shoe salon that opened last Friday on the eighth floor of the Fifth Avenue flagship is getting the most attention. “It’s amazing,” Sadove said. “It’s getting very good traffic and sales. I was there at lunchtime yesterday and it was very crowded, which is amazing for a late August afternoon.”

Further helping drive sales is a new system for clientele, which is up and running at about two dozen stores, including the flagship. It arms sales associates with detailed customer data and the tools to better communicate with shoppers, including sending them e-mails that could contain photos of products.

Sadove characterized the Off 5th outlet chain as another bright spot, having recently introduced additional private brands and more product directly from vendors, and serving less as a vehicle to clear the regular stores.

Kurt Salmon Associates has also been hired to enhance assortment planning and upgrade the selling environment, and Saks is increasing its planner-to-buyer ratio to enable buyers to be in the market more often.

Saks’ sales momentum could dampen if the stock market declines further and Wall Street bonuses are slashed, which perhaps contributed to the slide in the retailer’s shares Tuesday, given growing nervousness over the health of the economy. “There is uncertainty in financial markets right now, but I continue to feel luxury, long term, is a very good place to be,” Sadove said. “I look at traffic in the stores today and I feel very good about the luxury sector.”

He also said the euro is strong against the dollar, and that on any weekend, the Saks flagship is filled with tourists.

And many seem to be shopping handbags on the main floor, an area performing at “an extremely strong level,” Frasch said, citing Chanel, Louis Vuitton, Prada and Dolce & Gabbana. He also cited fine jewelry on one and the new Zegna men’s shop on six, which he said will probably be the largest point of wholesale volume for Zegna in the world.

“But the key to the excitement is the eighth floor with the shoe department,” Frasch added.

Other Saks accomplishments during the last quarter stressed by executives were:

– The completion of corporate integrations in New York and streamlinings. The company had been overstuffed with top management.

– Progress in the company’s “parallel planning” process, which means doing the buying and allocating cooperatively with buyers, planners, store managers and marketing, and tailoring assortments at a local level.