Saks Unveils Aggressive Game Plan

Retailer's priorities include growth through the Internet, Off 5th outlet openings and renovating full-line stores.

Saks Inc. came out of the economic crisis OK, back in the black and with its core strategies intact. But there’s a postrecession game plan with a definite list of priorities: growth through the Internet, a steady diet of Off 5th outlet openings, renovating full-line stores and pushing for differentiated merchandise.

This story first appeared in the April 27, 2011 issue of WWD.  Subscribe Today.

The time is right to take “balanced risks” and make “infrastructure investments,” said chairman and chief executive officer Stephen I. Sadove, who updated the Saks agenda at the Barclays Capital Retail & Restaurants Conference on Tuesday.

After surviving the recession and shifting from a defensive to an offensive posture, “Now it’s about differentiation — in merchandising, service and marketing,” Sadove said, including raising the percentage of private label and exclusive products supplied by designers and brands to 20 percent in total over time; currently, exclusives and private label represent a percentage in the low teens.

For 2011, the $2.8 billion Saks projects midsingle-digit top-line growth, modest gross margin improvement and $65 million to $75 million in capital expenditures. The retailer reported a 4 percent operating profit margin for 2010, marking a return to the prerecession rate. Ultimately, the goal is 8 percent. Saks operates 46 full-line stores, 57 Off 5th outlets and saks.com.

Sadove stressed that the nine-box merchandising grid, based on three price tiers —good, better, best — and three general lifestyles — classic, uptown and contemporary — remains the “guiding principle” of managing the business. Saks is seeing a shift in spending toward the highest or “best” price tier, reversing a recession trend where shoppers opted more for “good and better” price tiers.

“We are seeing pretty good selling across the board” with “a bit of gravitation to best price points,” Sadove observed. Consequently, Saks shifted some of the fall buy to the higher designer prices. “There’s clearly a trend to higher-end items selling again,” representing substantial gross margin improvement opportunities, said Sadove. He also sees potential margin improvements through greater full-price selling, continuing to pare back promotions, and the company’s hold-and-flow technology enabling improved distribution of products at the right time and the right stores.

During his presentation and the question-and-answer session following, Sadove tackled a wide range of subjects, among them:

• Store closings: After shutting seven underproductive units over the last year, “There are still a few more that we might want to close.” However, Sadove admitted it’s not easy to close a Saks Fifth Avenue because they are anchors with lease requirements.

• Off 5th outlets: “It’s a growth vehicle,” with three to five openings seen annually in the near future.

• On full-line stores: “I don’t think there is a need to open up a lot, maybe one or two over time,” though there are “productivity opportunities in our stores.”

• The Internet: “We continue to see outsized growth,” after last year’s 28 percent leap in sales. “We are expanding the depth and breadth of categories, and drop-shipping,” which involves getting vendors to ship directly to consumers who shop saks.com. “Some people think the Internet is driven largely by people who are shopping in cities where we don’t have stores. That’s not really the case. The largest market for the Internet is probably New York.…We are seeing very good cross-shop patterns.” Sadove cited a 70 percent product overlap in merchandise in stores and on saks.com.

• On tourism: “A bit stable, maybe a little bit of a positive, though not a dramatic driver for the business.…We haven’t seen the influx of the Chinese tourist yet, if you went to London or Paris or Rome, you have a massive influx.” The U.S. has “tourist visa issues that have to get solved. That will be when you see a big impact of Chinese. Japanese tourists are not a big component of our business,” and therefore Saks hasn’t felt much, if any, from Japan’s devastating earthquake and tsunami.

• On this year’s best-performing regions: “We are seeing a big influx of Latin business in southern Florida and that’s helped.…The New York flagship up until about six months to a year ago had been a substantial outperformer.” But lately it’s “about in line with the rest of the store base, all of which are performing quite well.”

• On inflation: “It’s not hurting the luxury channel or our business nearly as much as you find at the lower end. We are seeing some increase impact, maybe on average 5 to 10 percent.…I worry in some cases more about the euro than I do about commodity cost increases. As you start to push $1.50, you are going to start to push some potential pricing [increases] coming on European-based goods. [But] brands are very sensitive to not pushing the price too high. Otherwise at some point, you are going to push the consumer away.”