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Steve Sadove and Ron Frasch: The Exit Interview

The retail executives sit down with WWD for a frank and wide-ranging interview on their exit from Saks Inc.

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Newman-Redford. Batman-Robin. Sadove-Frasch.

In retailing, it’s been a great fit. Stephen I. Sadove — the marketing and consumer products whiz who turned retailer in 2004 when he found himself in the role of Saks Fifth Avenue’s chief operating officer, and two years later, chairman and chief executive officer to fill the leadership void and stabilize the business. And Ron Frasch, a consummate merchant whose strong connections to designers kept Saks in the game through difficult times. Frasch has been Saks’ president and chief merchant since February 2007. He joined in 2004 in a non-merchant role due to a non-compete agreement with his previous employer, Bergdorf Goodman.

The expected closing today of Hudson’s Bay Co.’s deal to buy Saks Inc. for $2.9 billion also brings to an end the Sadove-Frasch story at Saks, after a 10-year association. Their last day at Saks was Friday, bringing a sense of major accomplishment as well as a sense of some unfinished business.

In a frank and wide-ranging joint interview at the corporate office days before, Sadove and Frasch expressed sadness about leaving Saks, and acknowledged they would have liked more time to further the turnaround they orchestrated. They detailed how they rebuilt a business that was dysfunctional, compared Saks with its arch rival Neiman Marcus, recounted some of the highs and lows of their stewardship and were clear in saying that they are leaving Saks Fifth Avenue on firm footing.

“The fact that we sold at $16 a share, among the highest multiples for a department store, is indicative of not only the opportunities ahead for Saks but that the company is in sound shape,” Sadove said. “It is a healthy business. The stores never looked better. The stores are in good shape. This is not a broken company. Saks weathered a storm, has great potential and commanded a good price. We never put Saks up for sale. We were approached. We made it clear from the start that if we sold the company it would have to be at an attractive price. At the same time, company ‘B’ came up for sale, so we were simultaneously looking at buying a company, or selling, or doing nothing at all.”

Company B was, of course, Neiman Marcus, which was recently sold to Ares Management LLC and the Canada Pension Plan Investment Board for $6 billion.

With leaving Saks, “There is an element of bittersweet,” Sadove said. “But we did something very good for the shareholders. Obviously, we feel there is unfinished business, but we’ve had clear growth in omni. There remains potential in the stores. We continue to improve the matrix. There is never an end to the journey.”

“In this business, I don’t think you ever leave a company where you feel you completed all of your objectives,” Frasch said. “I don’t think you can put a period at the end of it. There is more to do.”

The executives agreed Saks needs to close more stores. In 2005, the retailer had 66 stores; it’s currently down to 41. “We fundamentally changed the real estate base,” Sadove said. Downsizing is not an easy process, he said, complicated by lease terms and landlord negotiations, helping the property owners find alternative formats to fill the space Saks vacates, and laying off staff. The best scenario is when the lease on an underperforming store expires, giving the retailer an easier exit.

Sadove said Saks should be a chain with 30-something stores. Nevertheless, “The closing of stores isn’t going to drive profitability,” he explained. “It will help a little. The real growth in earnings will come from making the stores more productive, taking the Fifth Avenue flagship from $700 million in sales to $1 billion, and improving our margins. If Saks had the brand matrix of Neiman’s, it would have better productivity. We’ve been inconsistent with the brands. When we have the brands and the right-size store, Saks does very well. Short Hills [N.J.] is a small store. We are way underproductive there.”

On the other hand, the Boston, Beverly Hills, Bal Harbour, Fla., and Troy, Mich., branches are among the company’s strongest performers, Sadove added. “Where there’s a good matrix of brands, great service and a great-size store, we compete very well,” he said.

“Neiman’s has big stores in big markets and all the brands, and our stores have been in every market without attention to acquiring the brands,” Frasch observed.

Sadove and Frasch also addressed Saks’ image. The retailer maintains its tony status, despite its low profit rate. Yet some retailers and suppliers believe Saks could use a major refresh, or to be reimagined with an identity that’s as sharp as Barneys New York’s or Bergdorf’s and different, to which Sadove replied, “It’s easy for someone from the outside to say that. If you try to change too quickly, you can alienate your customer base. If you move too quickly, it’s the end of the game for the franchise. There’s a balancing act. You’ve also got to continue to evolve the franchise.”

“We are not trying to be so one-dimensional, and people expect we won’t be,” Frasch said of the criticism. “You can’t just consider the fashionistas and what they think. Saks has this broader customer base. One of the attractions for me to come to Saks Fifth Avenue in the first place was that there was this broader customer base, and not just fashionistas. Our client base is broader and a little younger than before. Our point of view is to try to be a little more modern, and not so classic and expected. I do think we have made great headway. We are the number-one account in New York for Azzedine Alaïa. At the same time, we do a fabulous business with St. John. I am very proud of that.”

“There has been enormous progress,” Sadove added. “The average age has come down, though Saks is still not a young brand.”

While Saks blazed the trail in elevating department store footwear departments with its innovative 10022-Shoe format, there have been some issues with the newer contemporary piece of the floor. “It’s a work in progress,” Frasch said. “The shoe floor [overall] continues to be extremely vibrant. The Christian Louboutin addition has been successful. Louis Vuitton shoes is the number-one or number-two door in the States, and in the top four or five globally.”

Saks has also been repositioning women’s contemporary to be more fashion-forward and “cooler,” Frasch said. Some of that repositioning involves labels, such as Phillip Lim, Helmut Lang and Rag & Bone, shifting to an adjacent location in proximity to designer collections, and in more modern environments, Frasch explained.

Years ago, it would have been tough to be quite so granular due to bigger-picture concerns. “I came in when Saks was still a holding company with department stores,” Sadove said. “I was involved in those department store divestitures. There had been very little synergy between the department store group and Saks Fifth Avenue, and the team wasn’t really working well together.”

Sadove became ceo of in January 2006 when Saks Inc. was in the midst of serious change. The company had just struck a deal to sell 142 department stores under the Younkers, Herberger’s, Carson Pirie Scott, Bergner’s and Boston Store nameplates, and the 40-door Parisian chain was immediately put on the block.

Ultimately, the company grew smaller and more profitable during Sadove’s tenure, with net sales between 2005 and 2012 shrinking to $3.15 billion from $5.95 billion. Net income rose to $62.9 million last year from $22.3 million in 2005.

The flagship division on its own also grew more profitable during Sadove’s reign, even as the number of full-line stores fell to 43 at the end of last year from 55 in 2005. Operating income expanded to $138.5 million from $22.3 million, as sales rose 15 percent.

Saks’ stock stood at $11.53 when Sadove moved into the corner office, and the company paid out two dividends of $4 each in 2006 and was ultimately sold to Hudson’s Bay for $16 a share.

Saks sold the Proffitt’s, McRae’s and Parisian chains because “it was a slow-growth environment and we could get good prices. At the same time, we believed Saks had a lot of growth potential,” Sadove said, even though it was beset by an overstacked senior team that didn’t work well together and overlapped responsibilities.

In 2006, when the board asked Sadove to become ceo, “there was a broader question: Saks had a broken culture. It wasn’t supportive. It needed fundamental change,” he said. “The culture drives the success, and the role of leaders is to create a great culture. I decided that Ron and I would partner. I had gotten to know him, and he brought a skill set totally different from mine. We had complementary views regarding people, service, innovation. We had a consistent vision. When we first got together, we spent a ton of time working on strategy, building teamwork, a sense of collaboration, honesty. It wasn’t really that people were lying to each other — it was that they weren’t communicating their concerns or did it behind people’s backs. There was a culture of finger pointing.”

“We really had trouble keeping people,” Frasch recalled. “It was a tough environment. It was not a collaborative environment. What Steve insisted on was honesty, communication, and if someone disapproved of something, it was voiced at the meeting, not after the meeting.”

There was also a disturbing and disruptive Securities and Exchange Commission investigation into markdown allowances and overcharging vendors. “We brought it to the SEC,” Sadove said. Eventually, Saks settled.

“Steve wasn’t dealt a great deck of cards,” Frasch noted. “You had a culture challenge, a quality-of-people challenge, a real estate challenge, which all affected the vendors that we could attract. It felt like you were bouncing around. If you walked into Saks wearing a sweat suit, associates would look away. A lot of people didn’t want to sell us. We needed a breakthrough. Two brands eventually came through for us: Loro Piana and Roger Vivier. It didn’t happen overnight, but the perception of Saks changed.”

“This wasn’t a company about to go under,” Sadove said. “It was dysfunctional, with no clarity of strategy. We had big stores, small stores, ‘Main Street’ stores. We didn’t have clarity of merchandising. Ron came up with the nine-box grid, the notion of creating a common language, which was fundamental to getting the merchandising right, store by store by store, and by category. It became the foundation for Ron’s team to say, ‘What do you want each store to look like?’ It really changed the way people thought and forced people to collaborate.”

Among the store’s darker days was the ill-conceived “Wild About Cashmere” promotion in 2005 where there were sheep in the store. “We still have some cashmere gloves in one of our outlets,” Frasch said.

The most challenging time was when the Great Recession hit in fall 2008. “It was pretty ugly. We woke up one morning and 25 percent of our customers went away,” Sadove said.

Merchandise wasn’t moving quickly enough, even at 40 or 50 percent off. “It wasn’t until we went to 70 percent off that people in the stores began fighting for the merchandise,” Sadove said. “We were very up front with vendors and the organization. I still believe it was the right decision.” Designers were shocked by the severity of the markdowns, however, and blamed Saks for promoting so steeply and so early, even though Neiman’s started its price promotions at about the same time. Relationships were frayed, though designers eventually got over it.

“We were ahead of the curve” responding to the recession, Sadove said. “We cleared the inventory, got the cash and took actions to strengthen the balance sheet. The organization was downsized by 12 to 13 percent, and there were pay cuts from 3 to 7 percent” that Frasch and Sadove participated in. “We communicated what we were doing very clearly, internally and externally.” Sadove launched his “Straight Talk” Webcasts, keeping employees in the loop.

“Amid the recession, we were also placing our bets on the future,” Sadove said. “We funded new projects. We bet on the future of the Internet, 10022-Shoe and robotics” at the distribution center. Marketing dollars shifted from national to local efforts, and store managers’ responsibilities extended to the local marketing and service standards.

Another highlight: Saks launched Project Evolution in 2011, investing millions in foundational systems and new technology to support omnichannel efforts and establish tighter links between merchandising and marketing.

As far as his personal evolution after Saks, Sadove said he plans to seek more seats on corporate boards, and recently joined the J.C. Penney board. He also cited the possibility of doing private equity work, and consulting. “I didn’t come to Saks with a deep knowledge of retailing. I never tried to play the merchant. I am much more of a culture builder,” he said.

Frasch said he’s not sure about the future, though for right now he will be spending more time with his children, coach baseball and play golf.

“We’ve had so few disagreements, I can count them on one hand,” Frasch said.

“We felt a little different about the Internet. Ron came from a store background. I was probably a little more aggressive,” Sadove added.

“It wasn’t a clash,” Frasch said. “We are friends. We play golf together.”

 

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