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Saks Profits Climb 51%, Sets New Growth Plans

The luxury chain disclosed a round of new tactics to sustain the momentum.

A view of the Saks Web site.

Just how nimble can Saks Inc. get?

As it rides the recovery in the economy and the financial markets, reporting Tuesday a 51 percent gain in profits for the quarter ended April 30, the luxury chain disclosed a round of new tactics to sustain the momentum.

Among the more experimental: Within the last month, Saks has begun “drop-shipping” bedding products directly from vendors to consumers as a possible prelude to launching other categories not previously carried and possibly increasing electronics and gourmet food sales, where its present offering is limited. Then there is Saks’ “fashion fix,” a version of the popular flash sale phenomenon, which will increase in frequency to five times a week this quarter from two to three currently, with a separate buying team now in place to further the strategy.

On tap this year as well:

• Introducing private label women’s ready-to-wear and shoes, following the recent success of the Saks Fifth Avenue Men’s Collection. The goal is to have exclusive merchandise, encompassing products from designers sold just to Saks, as well as private label goods, to represent around 20 percent of the inventory over the next few years, from the current figure of less than 10 percent.

• A redressing of the balance in the “good, better and best” price structure to a higher percent at the top of the spectrum as consumers gravitate back to more expensive items. Prior to the recession, the split was one-third each but shifted more toward good and better during the economic downturn.

• A new national advertising campaign to usher in the fall season, replacing the current “I am going to Saks” campaign. It’s in tandem with beefed-up local marketing

initiatives around the country, including spotlighting the Fifth Avenue flagship this fall. The flagship rings up 20 percent of Saks’ total revenues, which amounted to $2.8 billion in 2010.

• Enhancing the multichannel approach with incremental investments to increase sharing of inventory across channels and elevate fulfillment and distribution capacity.

• Capital expenditures of $70 million to $75 million, with a significant chunk absorbed by logistics and technology enhancements; a new fourth floor at the flagship to recast the Wear bridge department, and for renovating the Palm Desert store.

All of the tactics are geared to get Saks back to prerecession volumes at some point. “We’re still not back, but we are getting closer,” Saks chairman and chief executive officer Stephen I. Sadove told WWD. “Consumers are feeling more comfortable and buying more at full price. The core customer is clearly back. There are more purchases at the higher end.”

It’s also about achieving an 8 percent operating profit, which is at about half of that now. “I feel good about the progress we are making. We will get to the 8 percent operating margin. I’m not going to give a date,” Sadove said in a conference call with analysts.

In the last quarter, Saks’ net income rose 51 percent to $28.4 million, or 16 cents a diluted share, from $18.8 million, or 11 cents, a year earlier. Adjusted earnings beat analyst estimates by 1 cent.

Sales increased 8.8 percent to $726 million from $667.4 million on a 10.2 percent rise in comparable-store sales and a 25 percent gain in direct sales. Saks expects comparable-store sales to rise in the high-single-digit range in the second quarter, and mid- to high-single digits in the second half, as the company crawls its way back to its old self after the recession dragged it down to a low of $2.7 billion in revenues in 2009, from as high as $3.3 billion prerecession.

In his commentary on what’s happening on the sales floor, Sadove said traffic was up slightly in the quarter, and unit sales were relatively flat, though more occurred at full price. “We are starting to see a healthy influx of tourists in gateway cities,” though the primary driver of increases has been core customers, Sadove said. “We have a bit of a gravitation towards best price points. I think we feel good about selling across all price points, but we are seeing a bit of shift into higher price points.”

Saks customers “are willing to pay more for merchandise if that merchandise is accompanied with an exceptional service experience,” added Ron Frasch, president and chief merchandising officer.

That’s being factored into the buying for the fourth quarter and first quarter of next year, and Saks buyers currently are chasing a fair amount of merchandise, particularly shoes and handbags, which have experienced “very outsized growth,” Sadove said.

He depicted the future as bright, with consumers responding to differentiated merchandising, service and marketing. That’s a marked difference from what’s occurring in lower-income demographics, where consumers feel pinched by inflation and are therefore shopping less at places like Wal-Mart.

To satisfy those more inclined to shop bargains and lower prices, this week Saks revealed plans to open four new Off 5th outlets, in keeping with its strategy of three to five annually for the near future. However, business is not as robust at the outlets, compared to the full-line and online stores. Asked to account for the Off 5th performance, Sadove explained, “If you look at the industry, it never took as much of a hit during the recession, and therefore is not recovering as much.” He also cited renovations at key outlets, including those recently completed at Woodbury Common and Riverhead in New York, and Bergen County, N.J., as impacting business. For the past few years, Saks has rolled out Off 5th units redesigned in a more open and upscale “loft” format. The new format is currently seen in 17 of the 57 locations. Saks also operates 46 full-line stores.

Sadove added that the Off 5th performance is in line with how the competition is faring, and that the company is committed to the strategy. “Off 5th is not performing badly. It’s just not as robust. Right now developers are coming forward with a fairly robust number of opportunities,” he said.