Saks’ Plan to Profit

Stephen Sadove outlines initiatives.

Saks INC. wants to get back what it lost last year — profitability.

This story first appeared in the April 2, 2009 issue of WWD.  Subscribe Today.

The luxury company seeks a return to midsingle-digit profitability in a couple of years through continued cost cutting, evolving the mix, procuring more exclusives and growing the outlet and Internet businesses, according to Saks chairman and chief executive officer Stephen I. Sadove, who outlined the strategy Wednesday at a Telsey Advisory Group Consumer Conference.

“We will dramatically shift the mix of products consumers want,” Sadove said. “Consumers’ love of brands isn’t going away. I do believe we are going to have more exclusivity. Walk up and down Madison or Worth Avenue, and you are seeing [fewer] shops,” meaning brands closing stores will seek other channels to sell their goods.

“We are working with the vendor community on margin structure, and working on full-price selling,” Sadove said. After sharply cutting inventories, healthier margins and greater full-price selling are feasible, he stressed.

Sadove characterized 2007 as a strong year, marked by 12 percent comp-store growth and 4.5 percent operating profit. But last year Saks reported a $154.9 million loss on a 6 percent sales slide. “Despite the tough financial results, a lot of good things did happen,” Sadove said, citing a 14.6 percent inventory decline after being bloated by excess supply, carrying out renovations at key locations and implementing new planning and allocation and clienteling systems.

He said Saks Direct is an “ongoing growth vehicle” and the outlets are performing “substantially better” than full line, and viewed as a distribution channel rather than just a sell-off vehicle. More products are being ordered specifically for Off-5th, three to five outlet openings are planned this year, with 5 to 10 percent square footage growth in outlets annually over the next several years.

Sadove expects Saks to be “free cash flow positive this year” by managing the company “very tightly.” Capital spending has been cut to under $60 million from $130 million last year. He projected low-to-mid-teen comp sales declines in 2009.

Saks is evolving its merchandise mix but not abandoning luxury, Sadove stressed. “We are not trading down from Prada to some entry price point.” However, “You will see some shifting within Prada, the Diors, the Chanels and a mix of product offering at the good, better, best [prices] within those brands. So our buy will be gravitating a little bit. It’s very important that we are not moving away from [being] the luxury player. We are balancing it by store. Some brands will actually get more product; some brands will be edited out.”

Sadove spoke at length about the consumer mind-set. “There is a lack of trust in the markets,” though there have been some encouraging signs of change, including statistics this week that consumer confidence is stabilizing. “Our customer is very driven about how they feel about the stock market. The fact that the market improved in the last couple of weeks [provides] some semblance of saying, ‘Hey, this has maybe bottomed out.’”

On spending: “We don’t expect things to go back to exactly as things were. People are going to be looking for value, not just price. There are still consumers buying at full price today, but consumers generally respond exceptionally well to discount. A lot of people have money and still have jobs — 90 percent or so. The issue is, do they feel confident that things are getting back on track? There is no black-and-white answer.”

“Luxury is about exclusivity and limited distribution. We will continue to see people wanting limited distribution brands.” Also, the public’s fascination with fashions that appear on red-carpet celebrities, and the fascination with what Michelle Obama wears: “That cultural element is going to continue.”

There has been speculation that Mexican billionaire Carlos Slim Helu could try to take over Saks. He’s already Saks’ biggest investor, with an 18.5 percent stake, as Sadove noted, and the stock is cheap, closing at $2.12 Wednesday.

Sadove said little to illuminate the situation with Slim. “He’s a good, long-term investor in a buy mode.”