By  on October 18, 2005

NEW YORK — The pressure is building on Saks Fifth Avenue's management team.

Even as its parent, Saks Inc., on Monday reported a profit for the second quarter, its Saks Fifth Avenue Enterprises division saw an operating loss of $42.8 million. The loss prompted Saks Inc. chairman and chief executive officer R. Brad Martin to promise Wall Street analysts during a conference call, "I expect improved business discipline and execution at Saks Fifth Avenue Enterprises going forward."

SFAE showed a 4.2 percent comp gain in the quarter, but its loss widened from just $6.2 million in the year-ago quarter. The retailer suffered a substantial decline in gross margin rate and increased operating expenses during the period. The company also said the quarter was "challenging" due to the activities surrounding the recently completed audit investigations, which caused disruptions among merchant and planning teams.

But the SFAE team — led by chairman and ceo Fred Wilson and including president Andrew Jennings and vice chairman Ron Frasch — recognizes there is work to be done.

"During the quarter, business was not as robust as we had expected," said Wilson in a statement. "We are in the process of exiting certain products, such as certain private brand merchandise, that we do not feel are consistent with the Saks Fifth Avenue brand."

He noted that as a positive, the New York flagship of SFA on Fifth Avenue, which the company operates as a "laboratory," achieved a "significant increase" in sales for the quarter.

Wilson explained during the conference call that the year-over-year second-quarter gross-margin decrease was due primarily to two factors: "Unsatisfactory inventory management led to increased markdowns, and we experienced a decline in vendor markdown support."

He explained in response to an analyst's query that the problem with inventory management was not an issue going forward. "The inventory management at Saks really was a result of the systemic, what I call a dysfunction that we've gotten corrected."

Wilson added that as SFA was exiting certain products, it also was also making focused investment in high growth-opportunity businesses such as contemporary, modern and designer sportswear; women's and men's shoes, and handbags. In addition, Wilson noted there is an "overall upward movement in price points with the average price per transaction increasing approximately 7 percent thus far in 2005."

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