By and  on November 18, 2008

Saks Inc., citing “widespread weakness” in women’s apparel and the precipitous decline in shopping by the affluent, reported a net loss of $42.8 million for the third quarter ended Nov. 1.

The performance, in stark contrast to a year ago when Saks earned $21.6 million and seemed to be enjoying the fruits of turnaround efforts, triggered a strong response: spring receipts are planned to be down by at least 15 percent, cost-cutting efforts are being intensified, capital expenditures are being slashed, and every brand sold at the store is subject to reevaluation. Some could be taken off the matrix.

Total sales in the quarter fell 12.3 percent to $698 million, from $796.1 million. The loss equates to 31 cents a share, while Wall Street was expecting 3 cents a share. Saks Inc.’s stock suffered as a result, falling 14.6 percent to close at $3.29, down 56 cents. The final price on Tuesday is 85.2 percent below the stock’s 52-week high of $22.19, set last Dec. 24.

Saks’ trend, like most retailers, hasn’t been good. For the nine months, the retailer recorded a net loss of $56.2 million, or 41 cents a share, compared with net income of $8 million, or 5 cents a share. Sales fell 2.3 percent to $2.23 billion from $2.28 billion.

In the quarter, the retailer on Tuesday reported a comparable-store sales decrease of 11.5 percent while inventories were up 4.4 percent, leaving the chain overinventoried and still very pressured to clear out goods. The company anticipates that it could take several more quarters to properly align inventories by working with vendors, marking down and running extra sales. But the objective is to clear inventory as fast as possible through full-line stores and Off-5th outlets. Saks also is testing clearing inventory in its direct business.

“It’s the toughest environment I have seen in my career,” Stephen I. Sadove, Saks’ chairman and chief executive officer, told WWD. “We’ve gone from a double-digit growth business last year to an environment where a high-end consumer has substantially slowed down shopping leading to a period of double-digit decline.”

Earlier in the day, Sadove conducted a town hall meeting with the retailer’s staff, which he does after reporting every quarter. “It went fine,” he said. “I am of the belief that the best thing you can do in a tough environment is be candid. Let them in on our expectations. I told the team exactly the same thing I told the analysts — the need to manage our inventories, manage our expenses, our purchases and that there would be a difficult promotional environment over the next several months.

“The business weakened everywhere,” Sadove said, adding the divisions that were flying high recently have slowed, including Saks Direct, which posted a 10 percent sales gain against last year’s 40 percent rise. Off-5th slowed down, too, but still grew.

Even the iconic Saks Fifth Avenue flagship, which long seemed impervious to economic downturns, finally lost some steam. In past quarters, the flagship “meaningfully outperformed” the balance of the store base. However, the trend changed this fall, with sales only slightly better than the chain’s average. Sadove has previously cited signs that tourism to New York was slowing. Layoffs and bank failures in the New York metro area have contributed to the slowing.

Categories within the full-line stores that had seen “very outsized growth,” including jewelry, handbags and shoes, are challenged in the current environment, Sadove said. Women’s apparel was among the weakest, he added.

On the brighter side, contemporary men’s was a strong performer, and contemporary women’s performed less worse than overall ready-to-wear. Cosmetics, fragrances, jewelry and men’s shoes also did relatively well. Fashion styles in premium denim, such as the skinny-legged jean, are selling, but the basic denim business has deteriorated.

“Up until the last three months, we had said that the aspirational customer [accounting for roughly 20 percent of Saks’ shoppers] had gotten hurt and the high end held up,” the ceo said. “This quarter, the high end slowed down their purchases substantially,” due to the plunge on Wall Street. “I believe they will come back when the market stabilizes.”

Earlier in his statement, Sadove said, “It is impossible to predict future performance with any degree of certainty.” But with the business slowing, “This is an opportunity for us to take a very hard look at every brand.”

“We must make the hard decisions on a brand-by-brand basis,” said Ron Frasch, Saks’ president and chief merchandising officer, during a conference call with Wall Street analysts. “Those brands that are nice to have can’t exist in the new environment. Each brand must lend both financial and strategic [value] to the company.

“Merchants are being challenged to approach the business and their buys from a zero base, both financially and strategically. First, we have to justify our metrics both at points of distribution as well as the level of investment that we make, then we have to make sure that we only invest and focus on business categories that yield strategic and financial value to the business. Most categories that do not fit through this filter will be eliminated,” said Frasch.

Customers, he said, are changing. Modest evolution in the product isn’t enough and the buy won’t be determined by historical data any longer. “The core sensibility of what the customer is looking for in the fashion product is very different from what they were asking for last year.”

Saks is planning its fall 2009 buys to be shipped between May and October. “We are being even more conservative as we plan fall,” compared with the spring, according to Frasch.

While Frasch said “the current environment is the most challenging that I have ever experienced,” he added that he remains “optimistic for the future of Saks Fifth Avenue. I believe some of our more recent strategic initiatives, such as our commitment to a good, better, best assortment through the nine-box grid approach, the reorganization of our merchandise planning and buying function, the addition of our point-of-sale/clienteling system, and the implementation of various in-store and support process improvements will allow us to manage through this very difficult environment.”

“The organization is very focused on expense reduction and cost containment,” Sadove said, adding that capital expenditure is being reduced by about 40 percent in 2009, to $75 million. Some renovations will be postponed, Sadove noted, but not the third floor of the Fifth Avenue flagship that houses designer collections.

“We are looking at every line item…how many people do we need to have in the store to support the sales base? We’re looking at organizational structure within headquarters, travel expenses. There is a substantial number in terms of savings we can see in 2009.”

Gross margins dropped 640 basis points in the quarter, due to steeper markdowns and more selling during “friends and family” and other events.

Store closings are another issue. Saks is said to be saddled with several units that are weak. “I don’t see dramatic changes in the store base right now,” Sadove said. “We are going through the exercise of understanding every store. We did close our Fort Lauderdale store. We are certainly not averse to closing stores. Some have covenants [with mall developers] we are not going to be able to get out of.” However, discussions with developers are being held to see if they could close eventually. “We are not talking about a lot of stores. It’s a handful.” Discussions revolve around telling a developer that the resources Saks puts into an ailing store would be better spent on a newer store elsewhere. “I think we are making some progress.”

Asked about Saks’ liquidity, Sadove responded, “I feel very comfortable with our financial situation and our ability to weather the storm.’’ He noted that Saks has only modestly tapped into the store’s $500 million revolving credit facility and has a New York flagship that’s “unencumbered.”

Saks said there are no short-term maturities of senior debt. The company’s revolving credit facility terminates in September 2011 and is subject to no covenants unless the availability falls below $60 million. The company’s remaining senior notes total $192.3 million and mature from December 2010 to February 2019. The company also has a 2 percent, $230 million convertible debenture, which matures in 2024.

At the end of the quarter, the company had $20 million in cash on hand and $80.6 million of direct outstanding borrowings on its $500 million revolving credit facility. Funded debt (including capitalized leases and borrowings on the revolving credit facility) totaled approximately $649 million, and debt-to-capitalization was 37.2 percent (without giving effect to cash on hand). Subsequent to the quarter’s end on Nov. 15, $84.1 million of senior notes matured and, as anticipated, the company retired the notes by drawing on the revolving credit facility.

The company also had some high expenses recently, including $10.6 million from discontinuing its Club Libby Lu chain, which couldn’t be sold.

Looking ahead, inventory levels are expected to be up in the low-single-digit range at fiscal yearend, further gross margin declines are seen.

The loss at Saks and overall difficult retail environment once again saw the Standard & Poor’s Retail Index lag the overall market.

Stocks rallied in the final hour of trading Tuesday, lifting the Dow Jones Industrial Average, Nasdaq and S&P 500 higher for the day, but the S&P Retail Index closed at 239.46, down 0.2 percent, after bottoming out at 231.67, the lowest point since its mid-2002 recalculation.

Saks was hardly alone in its double-digit stock decline. American Apparel Inc. suffered a 27.6 percent swoon to $2.75, followed closely by The Bon-Ton Stores Inc.’s 26.2 percent contraction to 90 cents. Tween Brands Inc. and New York & Company Inc. dropped 18.2 and 16.4 percent, respectively, and Macy’s Inc. endured a 13.1 percent drop.

Among vendors, True Religion Apparel Inc. was off 17.6 percent to $10.37, and Liz Claiborne Inc. also suffered a double-digit dip, dropping 12.4 percent to $3.19. Polo Ralph Lauren Corp. dropped 9.6 percent to $36.31.

Among the day’s strongest gains were Mothers Work Inc.’s 19.4 percent advance, to $8.36, after narrowing its fourth-quarter loss, and Pacific Sunwear of California Inc.’s 9.4 percent charge, to $1.40, in advance of its third-quarter earnings report.

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