By  on August 19, 2008

Saks Inc. fell deeper into the red in the second quarter, hurt mostly by the sluggish economy, aspirational customers retrenching and an overall tepid response to ready-to-wear.

Net losses rose to $31.7 million, or 23 cents a diluted share, for the quarter ended Aug. 2, compared with a loss of $24.6 million, or 17 cents a share, in the year-ago period. Revenues dipped 3.6 percent to $669.2 million from $694.1 million, while same-store sales were down 4 percent.

For the rest of the year, the trend should remain tough. Flat or a low, single-digit decline in same-store sales is seen, with the luxury chain up against 11.4 percent and 9 percent comp gains in the third and fourth quarters of last year, respectively. Continued margin pressures are also seen, compounded by prices on European goods rising for fall by 10 to 15 percent.

On Tuesday, after the report card on the quarter was issued, Stephen I. Sadove, Saks’ chairman and chief executive officer, conducted three town hall meetings at company headquarters in New York to explain the results and reassure his team the retailer is staying the course strategically, investing in the store base, improving the vendor matrix and focusing on clienteling while recognizing that the customer is generally feeling insecure.

Later, when asked about rtw receiving a low grade, Sadove told WWD, “We’ve seen more strength over a longer period in some of the other categories, such as accessories, jewelry, handbags.”

However, he added that while, broadly speaking, rtw is not healthy, “there are some areas doing well over time, in evening, contemporary, denim and Gold Range sportswear, but clearly bridge sportswear has not performed well for some time and some brands in designer sportswear have not performed well. Some price points have started to become an issue in the category.”

Asked if sportswear will be downplayed, Sadove replied, “Absolutely not.” It’s more a case of “modifying the buy.…I think you want to appropriately understand the needs of each store and assort correctly.”

Sadove also said it was important to keep the 4 percent comp slide in perspective. They would have been slightly positive for the quarter had Saks not moved a private shopping night from the second to the first quarter. Comp sales were up 2.7 percent for the half, he added, though there was “clearly a deterioration of the growth rate” happening in quarter two.

“We are still trending better than most of the competition,” he stressed. Neiman Marcus and Nordstrom have also seen aspirational shoppers holding back and their results have reflected that.

Earlier, in a conference call, Sadove told retail analysts, “Everywhere you turn, there is a lot of focus on the current environment and how bad everything is. We know the near-term will be difficult and that we will continue to face challenges. However, we remain optimistic about the long-term outlook for the luxury channel and for Saks Fifth Avenue.”

Sadove and his team were also bullish about Saks Direct and the Off 5th outlets, which are outperforming other units, and a rebuilding of the bridge business. There has been progress reducing inventory levels so they’re closer to sales trends.

“I believe our organization has responded well to the changing environment,” Sadove said. “During the quarter, we experienced a softening across nearly all geographies and merchandise categories, although generally the better-performing geographies and categories in prior quarters were still better performing in the second quarter.” Stronger categories included women’s shoes, jewelry, accessories, and men’s contemporary apparel, shoes, and accessories. But there was “widespread weakness in women’s apparel.” He’s noticed “more of a weakness from our aspirational customer and stronger trends from the Platinum, Diamond or the Saks First loyalty customer.”

Tourist-driven stores, such as those in New York and Beverly Hills, and stores receiving capital for renovations, such as South Coast Plaza in California and Palm Beach Gardens in Florida, fared the best.

Inventories were up 1.9 percent at the beginning of fall, a sharp improvement from spring when they were up 9 percent. “We’ve approached buying for fall ’08 and spring ’09 conservatively,” said Ron Frasch, president and chief merchandising officer. “We have challenged the merchant organization to make the hard decisions, to exit or reduce distribution in brands that aren’t working.”

However, Frasch maintained Saks still seeks emerging designers with potential. “Everyday in tough times, this balancing process becomes even more critical. Having said all that, we believe our fall fashion assortments are compelling,” highlighted by romantic blouses, dresses, boots and big bold necklaces, among other looks.

Saks is spending $125 million this year on capital improvements, including renovations and technology for better merchandise information and clienteling. By yearend, Saks will have opened or remodeled over 100 vendor shops, and completed expansions of the Naples, Fla., and Boston stores and a remodel of the South Coast Plaza store in Costa Mesa, Calif. The Bal Harbor, Fla., Miami and Houston stores also are being renovated.

A lot of the work involves remodeling jewelry and handbag areas and rolling out the 10022-SHOE concept to key doors including Beverly Hills, Houston, Phoenix, South Coast Plaza and San Francisco.

At the Fifth Avenue flagship, renovations are extensive, touching almost all of the 10 selling floors, with the most dramatic project happening on the third floor for women’s designer collections. That renovation should be complete next year, but next month will feature the flagship’s first Chanel rtw shop. Chanel is also getting new shops for cosmetics and handbags.

With the nation’s trading down, Saks has renewed the outlet strategy. Off 5th outlets will open this fall in Deer Park, N.Y.; St. Augustine, Fla., and Mercedes, Tex., reflecting the design of the Orlando prototype, opened last spring. Three new outlets are set for 2009. About 25 percent of the goods are leftovers from regular Saks stores; 75 percent is direct from vendors. Contemporary merchandise is selling the best.

Bridge is another major initiative. “Beginning this fall and into next spring, you will begin to see improvements in our existing vendor structure,” including the reintroduction of the Real Clothes private brand, with better visuals, adjacencies and service, said Frasch. “We believe that the reinvention of this business serves one of the most significant volume and margin opportunities facing Saks Fifth Avenue,” he added.

While Saks’ operating margin this year is expected by analysts to be around 2.7 percent, down from 4.3 percent last year, Sadove said 8 percent is still attainable. “We are not backing off from that. I still believe that. We are on a very good track. And I feel like over the last three years, we’ve made enormous progress having gone from basically negative to zero to 2 to 4. And I was hoping that we would be continuing on that path. It doesn’t feel good that we are stepping back from where we were. But the programs, the strategies, we feel very good about and feel that the 8 percent can be achieved.”

Sadove did not give a specific timetable because of the volatile environment.

Saks stock closed down 8 percent, or 93 cents, to close at $10.29 on the New York Stock Exchange Tuesday.

“We recommend that investors fill their portfolios with this luxury value before anticipated price increases take effect over the next 12 months,” Todd Slater, analyst at Lazard Capital Markets, wrote in a research note. “Yes, earnings are down and margins depressed due to lower levels of consumer spending. However, Saks is a significantly better operation now that ceo Sadove and president Frasch have taken the reins, and the profit upside is significant, in our estimation, from 3 percent operating margin to 9 percent in a stronger macroeconomic environment. In our view, Saks represents one of the best positioned names for a recovery play.” Standard & Poor’s maintained its “buy” opinion on Saks shares. In his research note, analyst Jason Asaeda said the operating loss was wider than estimates on markdowns and lack of expense leverage from a 4 percent same-store sales decline. “But we also look for Saks to reduce expenses without compromising merchandising, customer service and store investments, which we view as growth drivers.”

Adrianne Shapiro of Goldman Sachs, however, advised steering clear of Saks shares and maintained the neutral rating. “We expect the top line to remain vulnerable given the tough year-ago comparisons, weakened consumer spending across the high end and challenging tourism benefits from last year. Given inventory levels have yet to realign with sales, further earnings shortfalls potentially loom on the horizon.

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