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Saks Plans Strategic Shifts to Adapt

Saks Fifth Avenue plans more cost cuts, better pricing while reporting $5.1 million loss in the first quarter ended May 2.

Saks Fifth Avenue is in the throes of more strategic shifts, involving price and product changes and expense slashing.

This story first appeared in the May 20, 2009 issue of WWD.  Subscribe Today.


In the works are merchandising initiatives on the local store level, exclusive lines in collaboration with brands and rejiggering the company’s “good, better and best” brand platform.

“Clearly, there is a cultural change going on, focusing on adapting to this new environment,” Stephen I. Sadove, chairman and chief executive officer of Saks Inc., told WWD. “It involves cost management, controlling inventories and ensuring that strategies are sound for the short term as well as long term. Business is terrible. It’s a tough environment. We feel the team has responded remarkably well.”

For the $3 billion Saks, there’s been no letup in the pressure, as the company on Tuesday reported a $5.1 million loss and a 26.9 percent sales decline, to $621.3 million from $850 million, in the first quarter ended May 2.

Shareholder pressure could increase, too, as Diego Della Valle, chairman and ceo of Tod’s, reportedly intends to boost the stake in Saks held by his firm Diego Della Valle & C. S.A.P.A. from 5.9 to 10 percent and might seek to present a turnaround plan to Saks’ management. According to a report in the Italian newspaper Il Sole 24, Della Valle also wants to meet with Carlos Slim Helú, the Mexican billionaire who owns 18.6 percent of Saks. The company is not officially on the market but could be a good investment, considering its low but rising stock price, closing at $4.81, up 73 cents, or 17.9 percent, on Tuesday on the New York Stock Exchange.

Asked if he would entertain a visit from Della Valle, Sadove replied: “Of course. I entertain visits with shareholders all the time. Diego has been a great vendor for Saks and knows the business. I am happy he is an investor in the company.”

Sadove said he didn’t know if Della Valle was definitely planning to visit Saks or up his stake. Della Valle couldn’t be reached for comment Tuesday.

Meanwhile, Saks’ management remains more focused on fixing the mix. The luxury chain is striving for its “best” brands, the top tier, including Chanel, Jil Sander and Oscar de la Renta, to comprise roughly 25 percent of the mix, down from about a third.

About 75 percent will be equally divided, more or less, by “better” labels (such as Max Mara and Burberry) and “good” lines (such as Tory Burch and Lafayette 148). These two tiers each represent about one-third of the assortment.

Prices could be down roughly 10 percent for fall and next spring as the chain changes its mix and encourages vendors to implement fabric and style adjustments. Sadove cautioned not to assume price cuts will be on existing items from vendors. “We don’t control their pricing. It’s more about changing the mix of product,” he told WWD. “We may be buying a shoe with different fabric or embellishment [and], in some cases, trying to get vendors to offer better price points within the assortment and have more of a range.”

Among shoppers, “We are seeing a trading down in price point, but our customer does not want to trade down brands. They love the brands,” Sadove said during a conference call with Wall Street analysts. “They are valuing brands as much or more than before, but they like the idea of getting lower price points in terms of the brands they like.”

“There are a number of brands developing exclusive private collections for us,” added Ron Frasch, president and chief merchandising officer. “Branded private label is the best way to put it, involving a series of initiatives from ready-to-wear to accessories to men’s wear, which we will announce through the end of the year.”

 

Despite the loss, Saks was able to exceed expectations last quarter, largely due to accelerated expense cuts. At 4 cents a share, the loss was much better than the 26 cent deficit analysts had forecast. In the year-ago quarter, Saks earned 12 cents a share, or $17.3 million.

Last quarter, Saks experienced merchandise weakness across the board, though cosmetics and contemporary sportswear outperformed the rest of the business. The retailer moved its clearance from the first quarter last year to the second quarter this year, resulting in better margins for the first quarter but lower sales.

Saks cut nearly $44 million in expenses in the first quarter, and could cut in excess of $60 million in expenses in total this year, up from the $20 million to $30 million previously projected. The chain has been reducing head count, cutting salaries and benefits, and shrinking capital expenditures, though not when it comes to store maintenance. Pay decreases from 3 to 7 percent will be effective in June. Merchandise and payroll are the first and second biggest costs for the company.

“From travel to supplies to benefits to marketing to information technology, we are leaving no stone unturned,” Sadove stressed. “We are approaching, identifying and implementing cost reductions beyond what we originally anticipated, but being very cautious in areas where we interface with the consumer.”

With inventories still high but getting pared down to levels approaching demand, no extraordinary clearances of the magnitude seen in the fourth quarter of 2008 are expected. “I certainly don’t anticipate the kinds of aggressive markdowns we were seeing last fall, largely because you don’t have the same kind of supply and demand situation,” Sadove said during the call.

“We are pretty pleased with our first-quarter margin. Markdown dollars were very much in control,” said Frasch. “We have been very cautious with the promotional portion of our business. We have every hope of running a normal pattern of promotions this quarter.” The first and third quarters are characterized by friends-and-family events, temporary markdowns, opportunities to earn points and electronic gift card offerings. The second and fourth quarters entail clearance events and permanent markdowns.

For the future, Sadove said store closings will occur, but not on a wholesale basis. Store openings are seen as well, with two nonbinding letters of intent announced for units in the Ridge Hill development under construction in Westchester, N.Y., and in San Juan, Puerto Rico, in the Plaza Internacional, also being developed. No specific opening dates were disclosed.

“We are not going to be averse to open up stores where we have attractive real estate deals and volume opportunity,” Sadove said. “We are also not being averse to closing stores where we can.”

Operating covenants with malls often prohibit closings, and there are “very few stores with leases expiring in the next couple of years….This is not a situation where we take this from a 50-some-odd store chain to something dramatically smaller,” Sadove stressed.

In terms of liquidity, Saks expects to have ample availability on its $500 million revolver, and to be free-cash-flow positive this year. The company could also raise money through sale-leaseback deals, but none has been announced. Saks owns 29 of its 53 full-line stores, including the Chicago and Fifth Avenue flagships, and leases all of its Off 5th units.

New points of sale, planning and clienteling are enabling the development of “comprehensive by-store local business plans….Every store is taking ownership of expanding market share by identifying customers,” Frasch said.

“In my entire career I have never seen the industry so engaged to change and adapting at every level,” he added. “We are learning how to be much better buyers. We are trying to get much more granular in the localization of the product offer.”

It also involves changing the role and responsibilities of general managers at the stores so they build business plans and better understand the markets and customers on a “zip code-by-zip code” basis, Sadove said.

Looking ahead, “the macroeconomic picture will remain extremely difficult through the balance of 2009, if not beyond,” Sadove said. The company projects comp-store sales declines in the low double digits for the year, with a second-half mid- to high-single-digit decline. Merchandise receipts are planned down 20 percent.

For spring, no hot item is seen. “I don’t think we are going to have a pet rock this season,” Frasch noted.