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Saks Loss Widens in 2nd Quarter

Management for luxe retailer Saks Fifth Avenue stress better-than-expected results after reporting a net loss of $54.5M in the quarter.

Saks Inc. is losing money but plans to be a winner in the long term.

That was the message Tuesday from the retailer’s management, which stressed its money-losing second-quarter performance was better than expected, aided by nimble expense and inventory reductions.

Top executives also stressed that vendor and online consumer initiatives will serve the company well when the economy rebounds and consumers start shopping in earnest again. Saks is working to develop private label and designer exclusives, broaden its array of opening price points within the collections it already sells, and to beef up service and overtures to customers, particularly those who haven’t shopped Saks in awhile.

In the three months ended Aug. 1, Saks had a net loss of $54.5 million, or 39 cents a diluted share, versus a net loss of $32.7 million, or 24 cents, in the year-ago quarter. The analysts’ consensus estimate was for a loss of 52 cents a diluted share.

Sales fell 14.5 percent to $561.7 million from $657 million, and dropped 15.5 percent on a same-store basis. Sales benefited from the shift of a spring clearance into the second quarter this year from the first quarter last year. Excluding the shift, comp sales would have declined 18.5 percent in the second quarter.

“We beat the street by 13 cents. We’re still not profitable, but we are certainly less unprofitable,” Stephen I. Sadove, Saks’ chairman and chief executive officer, told WWD. “We did a very good job of managing expenses in a tough environment, controlling what we control….No expense is sacred. We are continuing to look for additional reductions although the vast majority of reductions have been made.”

Saks was able to reduce SG&A expenses by $33 million in the quarter, exceeding the $15 million target, and raising the annual target to approximately $87 million.

“The team is doing very well,” Sadove said.

He’s also encouraged by signs the prolonged and frustrating decline in shopper traffic has bottomed out. “Business was free falling, but we have seen a stabilization over the last couple of months,” Sadove said. “Business is a little more predictable in terms of traffic and trends. We do know people love to shop,” he added. “People love brands. They like exclusivity. They like luxury. There is a long-term secular component that will continue to bode well for the luxury sector. On the other hand, in the near term, I don’t think it’s going to be a very quick turnaround.”

Saks said it expects same-store sales declines for the rest of the year in the mid-to high-single digit range, with the fourth quarter better than the third. Regarding the performance by category, Sadove said, “Nothing is standing out, however, shoes are trending a little better, and anything with fashion is trending better. Fashion jewelry is trending better than fine jewelry. Men’s contemporary sportswear is trending a little better than tailored.” He characterized cosmetics as always a little less volatile and a bit of an overperformer versus other categories.

Saks Direct and the Off-5th outlets continue to outperform the company average, with Off-5th opening three to five stores annually and not cannibalizing the regular stores. According to Sadove, the customer overlap between the two channels is under 10 percent.

The Manhattan flagship is underperforming the aggregate of the rest of the company, though it could get a lift from its new designer floor on the third level, which has been renovated with over 40 designer shops and an expanded Fifth Avenue Club for personal shopping.

Saks came into the fall season with 18 percent less inventory than a year ago, and expects to be much less promotional this fall than last year’s drastic markdowns. “We have no intent to repeat last year’s promotional initiatives,” Sadove said.

“The decline in shopping frequency may be leveling off,” added Ron Frasch, vice chairman and president of merchandising, during a conference call. “The strong majority of consumers are unwilling to trade down in quality but are shopping less frequently. It’s more important than ever that we offer differentiated merchandise.”

He said more of the buy has shifted toward products in the “good and better” price zones and away from “best,” or highest, price zones. The “best” buy is being reduced from roughly a third to 25 percent of the total buy.

Saks, with 53 Saks Fifth Avenue stores, has also been pushing localization, getting all its stores to complete business plans in the second quarter and reaching out to customers via a new Web-based clienteling system, enabling associates to communicate directly with clients online from point-of-sale stations and send fashion photographs. Saks also operates 54 Off 5th outlets and saks.com.

For the six-month period, Saks posted a net loss of $59.6 million, or 43 cents a share.

The second quarter gross margin rate was 29.9 percent compared with 34.6 percent in last year’s second quarter, though still higher than management’s expectation of 27 to 29 percent. For the six months, the gross margin rate was 34.4 percent versus 36.5 percent in the prior year. The company expects gross margin recovery in the second half of 2009, in the 35 to 37 percent range, bringing the full year to 35 to 36 percent.

The operating loss widened to $67.7 million in the second quarter from a $40 million loss in the year-ago period (excluding certain items). On a year-to-date basis, the operating loss was $65.5 million compared with operating income of $2.7 million in the prior year, excluding certain items. Sales for the half totaled $1.18 billion versus $1.5 billion in last year’s half.