By  on May 22, 2007

Saks Fifth Avenue's turnaround keeps gaining steam.

The department store retailer said Monday it is making up ground on the competition and pointed to strong first-quarter results released Monday as evidence.

Though net profits fell 86 percent in the quarter ended May 5, due to big gains a year ago from department store sell-offs and severance costs as a result of downsizings, operating income grew to $32.6 million in the quarter versus $12.2 million a year ago, and comparable-store sales rose a robust 14.4 percent. Total sales rose 15.9 percent to $792.7 million versus $684.1 million in last year's quarter.

"I can't remember the last time Saks had a comp-store increase that high,&" Stephen I. Sadove, Saks Inc.'s chairman and chief executive officer, told WWD. "I feel good about our report. It's good progress. But I keep reiterating we're early in our turnaround. There's a lot of recovery ahead.&"

Sadove said the operating profit margin should hit 4 percent this year and restated confidence in attaining an 8 percent operating margin in the next three years, which is still below the double-digit margins of competitors such as Nordstrom and Neiman Marcus. Nevertheless, Sadove characterized Saks' three-year target as "a respectable performance we need to aspire to, but not the end point.&"

Those heady comp gains will moderate somewhat as Saks projects low, double-digit increases in the second quarter and mid- to high-single-digit gains for fall. Saks Direct posted a sales increase of approximately 50 percent. Off 5th, the outlet division, was modestly up.

Not long ago, Saks was overstaffed and unfocused with a mix of luxury and middle-market store operations that were poorly merchandised. Now the company, through a variety of streamlinings and culling management, is directed toward the upscale, luxury market and driving traffic with remodels and investments in designer shops at key locations such as Beverly Hills and Fifth Avenue. Furthermore, Saks has been sharpening assortments at each door to better meet local demands, as it strives to narrow the performance gap with other upscale and luxury retailers.

"I feel great about handbags, shoes and accessories — all accessories — and the men's business, particularly tailored clothing, was exceptional,&" Sadove said, when asked to break down the best-performing categories in the first quarter. "We also did well in designer sportswear and jewelry,&" though designer eveningwear was "a little soft&" without experiencing any actual declines, he said.Sadove sees opportunities for growth "across the board,&" although he singled out the modern bridge category, such as Elie Tahari, and contemporary as among the biggest opportunities. Then he quickly added: "I don't want to minimize special areas, like petites, that had a good quarter.&"

Geographically speaking, "what was really interesting was the growth we saw not only in New York, but in a lot of these smaller stores that in the past hadn't grown at all.&" He cited the Raleigh, N.C.; Richmond; Birmingham, Ala., and Mission Viejo, Calif., units. Mission Viejo once was slated for closure, until Saks decided to reinventory the store and bolster it with some marketing. "I would say they had been underperforming, neglected stores,&" Sadove said of those units.

In a prepared statement, Sadove said the sales increase indicates "significant progress in refining and strengthening our merchandise assortments by store, and that our selling culture and marketing efforts continue to improve. The trends in the number of transactions and the average dollars per transaction improved for the first quarter, and we experienced growth in nearly all merchandise categories.&"

Net income was $11.04 million, or 7 cents a share, down from $77.9 million, or 57 cents, in the year-ago quarter, largely due to more than $66 million in income last year from selling off the Northern Department Store Group to The Bon-Ton Stores and Parisian to Belk Inc. Net profits in the most recent quarter also were brought down by expenses of $13.5 million for retention, severance and transition costs due to the dispositions, and another $1 million due to investigations by the Securities and Exchange Commission and the Office of the U.S. Attorney for the Southern District of New York, regarding past markdown and accounting practices. There was also debt reduction of $3.1 million related to the repurchase of $95.9 million of senior notes.

Sadove said, excluding the onetime costs, such as severances and relocating headquarter functions in Alabama to New York, Saks earned 19 cents a share, beating analysts' projections of 16 cents. The company operates 54 Saks Fifth Avenue stores, 49 Off 5th units, and Club Libby Lu.The restructurings are mostly behind the business. Sadove said the company is "substantially complete with the reduction in force, and we expect to finalize the integration and consolidation process by the end of the second quarter.&"

During the quarter, there was a 19 percent increase in inventory that is leading to increased sales productivity, with about 40 percent of that related to replenishment product, and the rest in key items and vendor intensifications in footwear, handbags and men's, which are considered high potential growth areas. The company also said there were investments in certain core designer ready-to-wear brands, but did not provide specifics.

Summarizing the 2007 game plan, Sadove said the Saks team this year is focusing on:

l Tailoring assortments door-by-door through the "nine-box&" grid strategy, providing stores with a road map on how to balance inventories.

l Strengthening luxury offerings at flagships with the top 25 vendors, and expanding private brands.

l Continuing the "Want It!&" key item campaign, which this fall will stress cardigans, tuxedo dressing and novel ties.

l Improving customer experience and sales productivity through a new point-of-sale system being rolled out. Performance-based, commissioned programs also are being rolled out.

"We're continuing to make targeted capital investments, particularly in high-impact vendor shops and first-floor selling space with a heightened focus on return on investment,&" Sadove said on a conference call with analysts. "An example of the success of our focused main-floor capital strategy is the recently completed renovation of our Beverly Hills flagship, which has renovated and expanded shops for Gucci, Prada, Chanel and Louis Vuitton, and jewelry, bringing revenues up in those businesses almost 70 percent.

"We plan on executing this type of capital project in several of our stores in 2007. In Phoenix, we're remodeling and expanding the existing Chanel shop and adding vendor shops with Prada, Gucci, Louis Vuitton and Fendi. We expect huge returns from this investment. In the New York flagship, we are excited about moving our women's shoes from a confined fourth-floor space to a new department, which will encompass much of the eighth floor,&" enabling Saks to nearly double the shoe inventory.Capital spending should total between $125 million and $150 million this year.

Ronald Frasch, president and chief merchandising officer, said planning the assortments and merchandising with buyers, planners and store managers has been effective. He also said the nine-box grid, where merchandise is classified along the lifestyles of classic, modern or contemporary and the price points of good, better and best, is helping tailor assortments locally. Frasch said men's wear was resurrected last year, and up 20 percent in the first quarter.

Some analysts expressed concerns that gross margins, at 41.4 percent versus 41.3 percent a year ago, weren't higher in light of the hefty comp-store sales. Kevin Wills, executive vice president and chief financial officer, responded that the company felt good about the gross margin performance, coming off a strong gross margin performance the prior year. "We thought it was a solid level. We certainly did not feel like we were buying markdowns at all toward the end of the quarter.&"

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