By and  on January 10, 2006

NEW YORK — The Saks shakeout has finally happened.

After months of turmoil at the department store retailer — ranging from chargeback investigations to speculation over the possible sale of Saks Fifth Avenue — the company on Monday said R. Brad Martin would step down as Saks Inc.'s chief executive officer and be replaced by Stephen I. Sadove, currently vice chairman and chief operating officer. Martin will remain Saks' chairman.

Meanwhile, Fred Wilson, chairman and ceo of Saks Fifth Avenue Enterprises, has been forced out after his job was eliminated.

The company also said Monday that it plans to explore "strategic alternatives" for its $700 million Parisian unit, which could include a sale of the company, and for its $30 million Club Libby Lu division. Saks Inc. said that, as chairman, Martin will focus on this process and "real estate matters."

The management shakeup immediately reignited speculation the Saks board might put Saks Fifth Avenue itself up for sale. Financial investors had eyed a possible bid for Saks Fifth Avenue last year, but the board was said to want too high a price.

As part of the management changes, Andrew Jennings continues as president and chief operating officer of Saks Fifth Avenue and Ron Frasch remains vice chairman and chief merchant. Frasch still reports to Jennings, but Jennings now reports to Sadove instead of Wilson.

The changes at the highest rungs reflect insufficient progress in trying to turn around the Saks Fifth Avenue division, and a bloated, sometimes factious management structure. As Saks Inc.'s assets were sold off last year, the team seemed even more cumbersome and costly.

Other problems have plagued Saks Inc., based in Birmingham, Ala., and the New York-based Saks Fifth Avenue.

Up until recently, the stock price has languished — it closed Monday at $18.71, up 4.76 percent, on the New York Stock Exchange — and is less than half the value it was when Martin took over Saks Fifth Avenue in 1998 and blended it into his Proffitt's regional retail conglomerate, naming the new group Saks Inc. The company had a particularly disappointing second quarter marked by a $42.8 million operating loss, but the third quarter showed improvement with an operating profit of $15.6 million.Historically, Saks Fifth Avenue has suffered from executive turnover, changing strategies and inconsistent designer presentations door to door. Lately, it also has been grappling with excessive markdowns. The most recent post-Christmas sale was launched two days before the holiday, whereas most other retailers waited for the day after the holiday.

The corporation has been further hampered by government and internal probes into chargeback practices, leading to the dismissal of several executives last year, a few lawsuits, millions in paybacks to certain vendors and declining confidence in management. But Saks Inc. said Monday's executive changes were unrelated to the investigations.

Sadove, considered a strong operator and strategist, is expected to affect change fast to attain a better operating performance, though he said he wasn't necessarily contemplating a new vision for the company. Sadove reported to Martin and now reports to the board. He will be responsible for Saks Fifth Avenue and all the Saks Inc. support functions, administrative functions and transition services for Belk and Bon-Ton, which made deals to buy the Saks Inc. southern and northern department store units.

His direct reports will include Jim Coggin, president and chief administrative officer, and three executive vice presidents: Doug Coltharp, chief financial officer; Kevin Wills, finance and chief accounting officer, and Charles Hansen, general counsel. Dave Ferguson, chief ethics and compliance officer, also reports to Sadove. In 1998, Sadove joined the Saks Inc. board and joined the management team in 2002 as vice chairman from Bristol-Myers Squibb.

Wilson completed two years of his three-year contract, but left behind a lot of unfinished business and several unfulfilled goals. Among them were to make more of an independent division with its own merchandising staff; a top-to-bottom renovation of the Fifth Avenue flagship, which was supposed to have begun last year; rein in markdowns, and improve profitability, which has only been in the $100 million range — and small, considering Saks Fifth Avenue's total volume of about $2.7 billion.

"His whole philosophy was to turn merchandise more," said a former Saks executive. "They bought more thinking they could get the inventory to turn more. There was a tremendous markdown problem."

Another setback was said to be the Wild About Cashmere promotion last fall, which apparently too few customers were wild about. "There were low sell-throughs," said the source.Wilson joined SFAE as president and ceo in December 2003 and was named chairman and ceo in February 2004. Before SFAE, he ran Donna Karan International and was a longtime LVMH Moët Hennessy Louis Vuitton executive. At Saks, he often invoked Louis Vuitton as a model for what Saks could be, meaning a firmly established luxury business with a broad following.

Among his accomplishments, Wilson established a "brand filter," meaning a vision for SFA on how it should be perceived and what kinds of customers the company should target. Business did improve at the flagship, and there were 30 percent gains at the dot-com business. Also, key renovations in the Atlanta, San Antonio and Boca Raton, Fla., stores, considered flagship locations, were accomplished and generally stores have cleaner presentations with enhanced visuals. Wilson also eliminated proprietary brands, such as Real Clothes, but felt the Saks Fifth Avenue label could be played up more by utilizing private label manufacturers to supply and design exclusive merchandise, rather than getting it done in-house. It is believed that Wilson had a great deal of independence running SFA.

He also was instrumental in getting merchants to bring in many luxury brands that were not sold in the store previously, such as Roger Vivier shoes and accessories, and expanding Graff diamonds.

"Saks suffers from the same old ghosts — too many cooks and too many different strategies. Neiman's has had a focused strategy for years," said the source.

Martin and Sadove stressed in interviews Monday that Martin's stepping down was part of a previously arranged transition. "I discussed it with Steve when I asked him to join the company in the beginning of 2002," Martin said. "It's part of a long-term personal plan. I have been ceo of this company for 16 years. It is evolving into a New York-based company with Saks Fifth Avenue being its only asset. It has a talented team. I can support them."

As chairman, Martin's direct reports will be Toni Browning, president and ceo of Parisian; Mary Drolet, president of Club Libby Lu, and Paul Ruby, senior vice president of real estate. 

Martin said he will be involved in the private sector as a private investor, but he wouldn't speculate on what he might invest in. Martin has consistently spoken highly of Parisian, but it's not likely he would buy Parisian, or lead a group to buy it, considering the potential conflict of interest since he is currently involved in trying to sell off the division.Martin built Saks Inc. into an $8 billion regional retailer through a string of acquisitions that included Proffitt's, Parisian, Carson Pirie Scott, Bergners, McRae's and Herbinger's as well as Saks Fifth Avenue.

"I am proud of what we have done over 16 years," Martin said, noting Saks Inc. started as a very small business and grew into a very substantial one. Many on Wall Street had long been skeptical of the strategy of mixing primarily moderate regional retailers with a luxury chain.

Over the past year, he has been dismantling the company, and on Monday, Saks confirmed that it anticipates completing the sale of its northern department store group to The Bon-Ton Stores Inc. early in the first fiscal quarter of 2006 for $1.185 billion. Last July, Proffitt's/McRae's was sold to Belk Inc. for $623 million. Club Libby Lu has been on and off the market over the past year.

"We are finding good homes for the businesses that we are selling," Martin said.

He called the Parisian chain "a very vibrant business" with high service levels, distinctive product offerings and attractive growth prospects. "Parisian will flourish as an independent business. In some instances, it has been held back from really executing its strategy, as part of a bigger department store company. As an independent, there can be more of a focus."

Goldman Sachs & Co. and Citigroup Corporate and Investment Banking have been retained to advise the company in this formal process. Parisian has been opening stores and showing improved results, according to Saks Inc. officials. Over the next 18 months Parisian will open in Birmingham, Ala.; Detroit, and Little Rock and Rogers, Ark. Parisian generally operates in mid- or large-size cities, with up to one million in population, while avoiding major metro areas such as New York or Los Angeles. It is often compared with Lord & Taylor, a division of Federated, and sees an opening with L&T downsizing. Martin cited two years of "solid comparable-store sales growth, gross margin expansion and careful expense management."

At Saks Fifth Avenue, "I don't think that there will necessarily be a new vision," said Sadove. "This is a wonderful brand with a lot of opportunity to improve the operating performance. It's [had] a disappointing financial performance over the last year," but he added he expects improvement this year. "There is a lot of talent in the organization. I am very excited about prospects."Asked about the chances of selling Saks Fifth Avenue, Sadove replied: "Clearly, I am focused on shareholder value." But the most important goal is to improve the operating performance, he said.

"I am not going to talk about whether we might or might not sell Saks Fifth Avenue."

He said SFA's fleet of stores "looks terrific" and employs lots of talented people. However, "it has not come together in a way I would like to see," he said. Lately, SFA has done best in contemporary and designer sportswear, cosmetics and jewelry, Sadove said, and less well in bridge and private label, which the company has been deemphasizing. Large sizes and home also have not performed up to expectations.

Sadove said no "wholesale openings or closings" of SFA stores are planned. He said stores are constantly assessed, so there could be a few openings or closings "through the normal course of business....I am excited about leading this business. I feel there is an opportunity to substantially improve it."

As for vendor reaction to the shake-up, Robert Duffy, president of Marc Jacobs, said: "It doesn't come as a surprise to me. It seems to be too many chiefs.

"Marc and I have been in business with Saks forever. They were the first large store to support us. I've been through every management change and reincarnation of Saks Fifth Avenue for 20 years. This was one of the toughest to deal with. I knew all the players and knew there were problems internally. It was very easy to pick up on. There was so much stress," he added.

Duffy said SFA seems to be all over the place. "I feel like there are so many people giving direction. Still, the store has an incredible name and they have amazing real estate. Saks has just lost some of its luster and some of its focus."

"Saks hasn't defined who they are," said Bud Konheim, president and ceo of Nicole Miller. "They're busy saying who they're not. Fred [Wilson] is a very high energy guy and he gets people on his side. He's a people person. But in this business, you're dealing with a sensationally overcrowded marketplace and you could get caught in the tide. I hope that Saks doesn't become a disappearing act."Designer Josie Natori said, "This is the best for everybody. They were all very good people and each one had their strengths, but perhaps there were too many chiefs. Fred was a wonderful person and a friend to us. In many ways, this sort of makes things clearer. It sounds like it's becoming a leaner company and that's great for the organization."

Natori said Sadove has been very involved in Saks' business from the outset. "He's the right hand of Brad Martin and I think he'll be there to watch over everything. Saks is such a great franchise. It has so much potential."

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