By  on February 24, 2010

Saks Inc., after sharply narrowing its fourth-quarter loss through expense cuts, better margins and less price promoting, is “carefully moving from defense to offense.”

That’s the mood and strategic shift at Saks Fifth Avenue, according to the luxury chain’s chairman and chief executive officer, Stephen I. Sadove.

“I was pleased with the quarter. We are making progress. We are less promotional,” Sadove told WWD.

On Wednesday, the $2.6 billion Saks reported losses of $4.6 million, or 3 cents a share, in the quarter ended Jan. 30. Adjusted for charges, the company posted earnings per share of 6 cents. The results were a far cry from the year-ago quarter, when Saks lost $99.7 million, or 72 cents, and slashed prices to move bloated inventories exacerbated by the recession.

Revenues in the latest quarter fell 3.4 percent to $811.3 million from $839.6 million, and comparable-store sales dropped 4 percent, though gross margins jumped to 36.5 percent of sales from 21.2 percent. The company has $147 million in cash and zero owed on its revolver loan.

For the year, the loss was $57.9 million, or 40 cents a share, versus a loss of $158.8 million, or $1.15, in 2008. Comp-store sales were down 14.7 percent.

Sadove said the best-performing categories were women’s designer sportswear, handbags, shoes and jewelry. Men’s sportswear held up and cosmetics was OK, but men’s tailored clothing was disappointing.

While still coping with the weak economy, and concerned about reports of depressed consumer confidence, Sadove cited several growth initiatives for Saks Fifth Avenue, among them:

• Becoming a bigger player in the children’s, gourmet and home categories, particularly online.

• Continuing to shift the percentage of inventory to more goods at the “better” and “good” price zones and away from the “best,” or highest, price tier.

• Building the array of exclusives to exceed 20 percent of total volume from less than 10 percent currently.

• Enhanced technology at the main distribution center in Maryland with robotics from KIVA Systems for savings in labor costs and space and improved order fulfillment, and “hold and flow” systems to hold and push out inventory on a demand basis for stocking stores better.

• Ongoing expansion of Off 5th, adding three to five outlets annually and building the jewelry, men’s tailored clothing and classic categories, which are all underpenetrated at the chain.

• Paring back on price promotions.

• Encouraging local marketing initiatives so stores can connect better with consumers at the community level, including events tied to charities and schools, and a resulting dollar shift away from national marketing. Twenty marketing managers were added across the country.

• Training associates for better selling and clienteling skills.

“There appears to be more stability and predictability than this time last year,” Sadove said on a conference call. “We believe recovery will be fragile. We have yet to see a considerable rebound in consumer demand. We are planning conservatively but carefully moving from defense to offense. We will take some balanced risks.…I don’t see a major shift in terms of traffic. We are very much focused on improving the performance of our current customer base.”

Saks predicts low to midsingle-digit comp-store sales gains for 2010, with the back half stronger than the first. Saks does 45 percent of its volume in the spring and 55 percent through the fall. The company also expects gross margins of 37.5 to 37.8 percent.

Saks’ previously stated goal of achieving an 8 percent operating margin has been put on the back burner. Sadove said he sees “substantial profit growth out there,” but didn’t give a new profit margin target. Last quarter, the Saks’ operating margin expanded to 3.6 percent from a 12.2 percent operating loss a year ago.

Ron Frasch, the retailer’s president and chief merchant, said, “It’s more important than ever to offer differentiated merchandise” and that the aim is to “optimize the good and better product zones and limited distribution product.” Last year, each price zone represented about one-third of the business. Now, Saks is reducing the best price zone by about five to 10 points, even though the retailer remade the third floor of the New York flagship for designer collections last year to demonstrate continued commitment to the top tier.

“There’s no trading down of designers,” Sadove said. The matrix, he stressed, still includes the same designers, just more of their merchandise at lower prices.

Frasch emphasized the Wear bridge floor and the revamped assortment of modern labels and exclusives, including Ralph Lauren Blue, Z Spoke by Zac Posen and La Via 18, as a big differentiator. Elie Tahari and Valentino Red are also key labels there.

On the selling floors, Sadove cited an increased management presence and renewed efforts at clienteling and encouraging shoppers to cross-shop departments.

Regarding the outlets, Sadove said: “Growing Off 5th makes more sense in this environment” and the stores have less leftovers from full-price stores and more product made exclusively for Off 5th. Sadove said the 55-unit outlet chain could grow to 75 stores over five years.

The Fifth Avenue flagship in the fourth quarter outperformed the rest of the store base, though Sadove added that geographically, there aren’t enormous variations in performance. Florida is performing better and some West Coast store declines have moderated a bit, he said.

Sadove did acknowledge the gap between the productivity at Neiman Marcus stores and Saks stores, roughly $500 to $600 in sales per square foot versus $350, respectively, though Neiman’s also has struggled through the recession.

“Some of the gap is location,” Sadove explained. “Some is vendor matrix. Some of it is selling environment. We are dealing with all of those.” In some cases, Saks locations are more productive; in others, they can be lower, he noted.

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