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Battling the Downturn: Saks Posts $99M Loss

Amid the pullback in luxury spending and markdowns, luxury retailer Saks Fifth Avenue's fourth-quarter deficit reached $98.8 million.

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The pullback in luxury spending, unprecedented markdowns and a sharp slowdown at its iconic New York flagship took a severe toll on Saks Fifth Avenue.

This story first appeared in the February 26, 2009 issue of WWD.  Subscribe Today.

 

Characterizing the current economic climate as the most difficult ever in its 84-year history, Saks Inc. on Wednesday posted a $98.8 million loss, or 72 cents a diluted share, in the fourth quarter ended Jan. 31.

 


Comparable-store sales declined 15.3 percent, while total revenues sank 14.9 percent to $835.5 million from $981.7 million. Excluding a $15.8 million after-tax loss from the discontinued Club Libby Lu specialty chain, Saks registered a loss of $82.9 million, or 60 cents a share.

For the year, the company posted a net loss of $154.9 million, or $1.12 a share. Excluding its loss from discontinued operations, Saks said the net loss was $32.2 million, or 23 cents a share. Sales slid 6 percent, to $3.03 billion from $3.22 billion.

But company executives stressed that by biting the bullet, they’re starting spring a lot cleaner. Inventories are down 14.6 percent on a comp-store basis, and planned down 20 percent going forward. They also contended that relationships with designers remain good and vendor terms remain unchanged, despite catching the ire of the industry for its torrent of markdowns in the run-up to holiday.

Saks also gave assurances that the store is not abandoning the luxury business, just fine-tuning the presentation with its “good-better-best” pricing platform for luxury products, and that they’re encouraging designers to work on exclusives, particularly in the bridge zone, which the retailer has reorganized and renamed Wear. (For more on the concept, see sidebar.)

Saks’ shares leaped 24 cents, or 13 percent, to close at $2.09 in New York Stock Exchange trading Wednesday.

To underscore its continuing stake in luxury, Stephen I. Sadove, chairman and chief executive officer, noted the store is spending “tens of millions” of dollars to renovate the designer third floor at the Fifth Avenue flagship, and that the project should be complete around midyear. He also cited the opening of new upscale Saks men’s store in Palm Beach, Fla., replacing an old one. (See related story.)

In a surprise, Sadove broke from the usual policy of not responding to industry rumors, which have been swirling like never before, by dismissing speculation about the possibility of bankruptcy.

“There have been a lot of rumors, including bankruptcy,” Sadove said during a conference call. “Although it is policy not to comment on bankruptcy rumors, all of the actions [Saks is taking] are ensuring we are free cash flow positive in 2009. Bankruptcy would destroy shareholder value. Our intent is to insure and enhance shareholder value.”

Sadove later told WWD that he decided to post the fourth-quarter results 10 days earlier than the company did a year ago to clear the air about various issues dogging the business. “I wanted to get out there with our story. There is so much stuff out there in the marketplace. Some of it is silliness,” he said.

Regarding Saks’ aggressive markdowns of last year, Sadove explained: “We had a material imbalance in supply and demand. We had to take some serious actions…. By being aggressive in the markdowns, we [achieved] a 14.6 percent [inventory] decline at the end of the quarter. It came at a cost of gross margin, but we do feel good at where we came out in terms of product and inventory level.”

Gross margins fell to 20.8 percent in the quarter from 37.1 percent a year ago, though the company expects margin recovery in the second half of 2009, to the 35 to 37 percent range.

Sadove also explained the decision to break price on designer product a week earlier came after the annual private sale in November failed to capture sufficient response. In an obvious reference to Neiman Marcus Inc., he said the competition broke price a few days earlier than Saks, but it responded with sharper designer discounts.

“The increased discounts were very successful in reducing inventory,” Sadove said. “We reacted and responded both timely and appropriately. The actions we took clearly came at a price, but better positioned stock levels.”

Will there be a repeat of the markdown mania? “If you have more of a balance between supply and demand, it’s unlikely you will see the same kind of discounting going on, because you don’t have to,” Sadove said.

As far as consumers returning to full-price buying, “This will be a question that will be resolved over time. Value will be very important, not just price. Value is [also] quality and design.

“In hindsight, I think we had to be more promotional,” Sadove said. “We bought these products nine months in advance when we were growing double digits. We didn’t jump the competition. We made the decision we would follow, but we would be much more aggressive once we followed.”

Sadove acknowledged that in certain categories, “we did not have to go as deep” on the discounting. “We could have gotten away with 55 to 60 percent [off] in shoes and handbags,” instead of 70 percent.

But with cleaner inventories currently, Saks, he said, has no regrets “in being aggressive or being responsive.”

Going forward, with the current macroeconomic and retail landscape “perhaps the most challenging that the company has faced in its 84-year history, it remains impossible to predict future sales and gross margin performance with any degree of certainty,” Sadove said, though he did say Saks expects 2009 to remain difficult, and projected a low, double-digit decline in same-store sales for the year, estimated at about 20 percent down in the first half, and down in the mid- to high-single-digit range in the second half.

“The fourth quarter was the culmination of an incredibly difficult year,” Sadove said, citing weakness in all geographies, merchandise categories and channels of distribution. “Women’s apparel continued to be the most challenging merchandising category.”

Nevertheless, Saks did open over 100 vendor shops, renovated and expanded a few key branches, including Naples, Fla., and Boston, renovated the Fifth Avenue flagship’s handbag area on the main floor, and started renovating the third floor designer department. The company also rolled out a planning and allocation organization and a point-of-sale clienteling system, repositioned Saks Off 5th outlets and discontinued Club Libby Lu.

In perhaps its most dramatic move, Saks eliminated 1,100 jobs.

Despite all the cutbacks, “We remain steadfastly committed to luxury, from accessible luxury to designer products,” said Ron Frasch, president and chief merchandising officer.

The challenging environment “creates tremendous opportunity for change…. We are working with designers in 2009 to rebalance product assortments by brand and store.” According to Frasch, perceptions that relationships with vendors are strained are wrong. “The fact is that our vendor relationships are really very good.”

He said his team continues to work with designers on tightening lead times and providing more wear-now product per delivery. He also cited back-of-the-house efforts such as the new clienteling system, quicker deliveries of merchandise to selling floors and enhanced local marketing.

“We expect to drive more full-price selling over time,” he said.

Although capital expenditures have been slashed to $60 million from $150 million, putting some renovations on hold, Saks’ “physical plant is in excellent condition, and we plan to keep it that way,” Sadove said.

If the environment becomes even worse than anticipated, Saks does have contingency plans to keep it liquid. Sadove cited unencumbered real estate, including the Fifth Avenue flagship, which could be borrowed against or sold and leased back. Saks owns nearly 70 percent of its square footage, including the flagship, which accounts for about a quarter of the chain’s volume. However, the company is focused on “everyday business,” and not extraordinary asset dispositions, he stressed.

He acknowledged “a handful” of stores that are cash flow negative. “There are a couple if I had a choice, I would prefer to close.” But lease agreements with developers prohibit such closings. He said he doesn’t foresee many closings in the near term.

While no retailers are citing improving sales trends, Frasch did say, “The customer is still buying brands, but buying less. She buys emotional, colorful things that aren’t in the closet, and a lot more items.

“Our evening business happens to be very strong at all price points,” Frasch noted. Blouses, knitwear, color, dresses, prints and items that can be worked into what women already have in their wardrobes are selling. So are fashion denim, and handbags in the $1,000 to $1,500 range, though once the price of the bag exceeds $1,500, they don’t sell as well, with the exception of Chanel, Frasch said. Fashion shoes are selling as well, but not basics. The men’s business, other than shoes and sneakers, was described as tough but holding up a bit better than women’s.

 

 

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