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Saks’ Sadove Sees Opportunity in Omnichannel, New Formats

The one thing the retailer's ceo didn’t discuss at its annual meeting was the ongoing speculation that it is looking for a buyer.

NEW YORK — Within Saks Inc.’s evolving digital, omnichannel space, there’s room for brick-and-mortar.

This story first appeared in the June 6, 2013 issue of WWD.  Subscribe Today.

While Saks continues to shrink its full-line store base, chairman and chief executive officer Stephen I. Sadove sees the possibility of rolling out new specialty stores that could be under different Saks formats.

“It’s an opportunity, long term,” Sadove told WWD after the luxury store’s annual meeting here Wednesday. “It could be any number of concepts. I think there are opportunities, but I couldn’t comment on any specifically.”

Saks Fifth Avenue’s successful 10022-Shoe footwear format, as well as its private-label and Wear bridge offerings, would likely be among the formats considered.

During the 25-minute meeting, attended by a total of 45 shareholders, board members and executives at the University Club, Sadove updated where the company stands on brick-and-mortar, its valuable real estate and the omnichannel culture.

The one thing he didn’t discuss was the ongoing speculation that Saks is looking for a buyer. As reported, the retailer is said to have hired Goldman Sachs to assist in the process. After the meeting, Sadove declined to comment on the speculation.

Several retailers, private equity funds and overseas investors are reportedly kicking the tires, and it seems increasingly unlikely that Saks would merge with Neiman Marcus, a scenario that Saks may have considered recently and in the past.

Instead, the ceo focused on progress at Saks on different fronts. On the full-line business: “I feel terrific about where the store bases exist today. We also feel good about the rationalization that we’ve made in terms of closing a number of underproductive stores.” Over the last decade, 20 Saks locations have been closed, including 12 in the last three years, bringing the store count down to 42. By the beginning of 2014, the count will fall further to 40 locations. Between renovations and weeding out weak units, “We’re getting to the point where we feel good about where the store base is going,” Sadove said.

On the burgeoning 66-unit Saks Off 5th outlet chain, “We’re opening to the tune of six, seven stores a year. And we’re seeing continued growth in terms of the store base,” Sadove said.

Saks is said to be eyeing a couple of locations for full-line stores, one of which could be revealed soon, though downsizing the full-line business has been the emphasis for years. A store in Puerto Rico and a replacement unit in the Sarasota, Fla., area were recently unveiled.

Sadove was bullish on the retailer’s omnichannel potential. The company recently extended the responsibilities of its top merchants to cover both saks.com and stores, and this fall, Saks will launch off5th.com, in another omnicentric move.

“We believe firmly that omnichannel and bricks-and-mortar linked to the digital is the longer-term winning strategy. The lines are blurring between channels, and it’s one of the reasons we don’t report the Internet sales anymore,” Sadove said.

While the lines between store and direct channels are blurring, there’s a clear distinction between outlets and full line. “There are very different mind-sets between the two,” Sadove observed. With the Off 5th outlets, it’s about brands and deals, he said. With the full-line stores, it’s about the latest fashion and service.

On saks.com, Sadove said it’s “a growth story, from the breadth and depth of the business —the offering. We’ve made major improvements in terms of the shopping experience, the merchandise, the site. We continue to get rated as one of the best luxury sites in the marketplace. We opened our new distribution center in La Vergne, Tenn., and we’re seeing extremely good results there. It’s a fully robotic system there.”

However, “the most important activity in 2012 was our move towards omnichannel,” Sadove said. “It’s permeating everything that we do and we’re making a major investment in people, in technology that will allow us to be able to meet consumer demand anywhere, anytime that they want to be able to shop and whether it’s buy online, ship from store.” The objective is to have “one view of the customer, one view of the inventory, one view of the product — to be seamless in the way that we operate. It’s a major undertaking in which we’re spending well north of $100 million over a four- or five-year period to get that capability. That’s going to be a major competitive advantage going forward.”

Sadove said $70 million of the $100 million has been spent so far, and that most of the expense is for the Oracle enterprise system for a range of functions from planning to human resources to merchandising. “It goes well beyond just dollar spending, it’s a cultural change. It’s an organizational realignment, changing roles and responsibilities of our merchants, our planners, and getting people to be tied much more closely so that we can move inventory around. We’re now going to the vendor community as a single entity between the stores and the dot-com. And we’re looking at our business on an omnichannel basis and managing the inventory in that manner. The customer who shops both online and in store buys about three or four times as much as the person who’s shopping on an individual channel basis.

“We’re in a ‘crawl, walk, run’ stage of how we are approaching things like shipping from the store,” Sadove said. All stores have the ability to use their inventory to fulfill online orders, though Sadove acknowledged that here the volume is still low. “We’re moving from crawling to starting to walk, and we’ve been at it now for the last six months.”

Saks has been criticized for merchandising differences from online to the stores, with online not as high end. “We’re starting to see a convergence in terms of opportunities to add more breadth and depth to our offering,” Sadove said. “We were constrained on what we could put online. And now we’ve increased our photo studio capacity, we’ve increased our editorial capacity. So we’re putting a lot more items online, and the consumer is responding.”

When asked by a shareholder if Saks would unlock the real estate value through a sale-leaseback or creating a separate real estate investment trust, Sadove replied, “We do believe we have valuable real estate. During the depths of the recession, people constantly were asking us, ‘Should we be doing sale-leasebacks? Should we be doing alternative ways of capturing the value of that real estate?’ We found that it was an expensive form of financing and we didn’t need that financing. We didn’t think that was an appropriate way to go. And we continually look at how do we optimize the value of the real estate.”

Regarding a REIT or sale-leaseback, Sadove said, “I’m not going to comment specifically on any proposal. As you look at alternative uses of real estate, you have to look at tax leakage. And there were some inefficiencies in doing some of these things. We don’t preclude anything. We’ll look at any number of alternatives.”

The shareholder noted that Saks’ operating profits are lower than the competition’s and implied that “the already-low number would be lower” if Saks had to pay rent on properties that were sold and leased back. “It really speaks very clearly to the failure to leverage our assets, particularly in real estate,” the shareholder said. Last year, Saks’ operating margin was 5 percent, excluding certain items. The company has an 8 percent goal for the future.