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Saks Cuts Outlook in Wake of Sandy

Amid a retail climate getting increasingly precarious and discount driven, the department store has lowered its sales forecast for the fourth quarter.

Saks Fifth Avenue

Saks Inc., amid a retail climate getting increasingly precarious and discount driven, has lowered its sales forecast for the fourth quarter, citing the impact of Hurricane Sandy.

This story first appeared in the November 14, 2012 issue of WWD.  Subscribe Today.

Saks did report gains in third-quarter sales and profits, but projected comparable-store sales will be flat for the fourth quarter while gross margins could be flat to down 50 basis points. Nor was Saks alone: The TJX Cos. Inc. also on Tuesday projected sales flat to 1 percent up in November and flat to 2 percent up in December and January for its Marmaxx Group, composed of TJ Maxx and Marshalls, though the off-pricer had a 7 percent comp-store gain in the third quarter. Other retailers, too, are responding to the storm and the macroeconomic forces by stepping up their discounting and accelerating Black Friday specials.

Noting that many Saks stores were in the path of the storm’s epicenter, Stephen I. Sadove, chairman and chief executive officer, told WWD, “As much as 55 percent of our business was affected. New York alone is 20 percent. In the Northeast, we saw a substantial drop on the Internet,” because people did not have electricity.

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Off-5th, Saks’ outlet division, was also impacted, and there was “a high linkage” in business results between stores in New York and those in Florida, which was not hit hard by the hurricane, though families there worried about relatives up north and therefore didn’t shop much, Sadove said.

Retail executives have already noticed a surge in price promoting since Sandy, though a few said business appeared to be softening even before Sandy hit on Oct. 29, because of consumer concerns about the U.S. government’s “fiscal cliff” of tax hikes and spending cuts, the debt crisis, the nation’s political divide, and some dire predictions that the economy could revert back to recession.

There apparently has not been a post-presidential election lift in retailing. Craig Johnson, president of consultancy Customer Growth Partners, believes Sandy’s impact has been exaggerated and used as an excuse for lackluster results. Historically, retailers do tend to blame the weather for sales shortfalls, if it’s severe, but Johnson did say that some New York stores, such as Saks, will be impacted short-term. “Well-managed stores, based on history, will make up the difference in the rest of Q4,” Johnson predicted, to a large extent online or in stores over the next few weeks.

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Still, discounting and promoting have kicked in a few weeks earlier than normal, while some retailers are opening Thanksgiving Day in a bid to grab whatever sales they can. A Saks First Triple Point event running from Nov. 9 to 11 was extended for a week, and in a conference call Sadove acknowledged that there could be “a little bit more clearance selling versus full price” in the fourth quarter, though that’s all reflected in the wider range of guidance the company has supplied.

Sports Authority has been running a Black Friday “pre-sale” event since Sunday, offering deals through Saturday on more than 25 products that can be purchased in-store and picked up over Black Friday weekend. Kohl’s unveiled an “Operation: Black Friday” sale offering more than 500 early-bird specials on kohls.com starting Wednesday, Nov. 21. Kohl’s said it was its earliest offering of Black Friday deals ever. Shoppers can get $15 Kohl’s Cash for every $50 spent in store or online during the event.

“Sandy’s impact was terrible in the Northeast, and it’s still very tough,” said one senior retail executive, who requested anonymity. “It’s accelerated promotions and discounts. Black Friday has begun. Go online. You see it. There is going to be lots more pressure on the fourth-quarter earnings and moving inventory that didn’t sell for those few weeks.”

Some retailers may have underestimated Sandy’s impact. “I don’t think any of us had any sense of it,” said the retail executive. “No one has experience in dealing with this.”

“There’s probably no question there will be some intensification of the promotional calendar,” said Arnold Aronson, managing director of retail strategies at Kurt Salmon. “I don’t see across-the-board reductions. This is not a recession thing. It was an act of God changing business temporarily. Most customers have not lost considerable parts of their net worth. Sandy will defer some business from early November into late November and into December.”

“People are going to be committed to getting inventories in line by the end of the quarter,” said another retail ceo. “The storm hit one of the most densely and richly populated parts of the country and basically created a paralysis for business, for the supply chain to work, for people to get around and lingering, unexpected delays. People were just not thinking about commerce or buying.”

“Stores are open, but in some cases distribution centers are not, so the flow of goods has been impacted, meaning in some cases stores are not getting fresh merchandise,” observed Mortimer Singer, ceo of Marvin Traub Associates.

Saks was forced to close its distribution center in Aberdeen, Md., for a few days after the storm. Some vendor distribution centers were also forced to close temporarily. “If customers are not finding what they need, it might push people to shop online,” Singer said. “I believe e-commerce is going to have a huge jump.”

At Saks, sales trends were soft for the first two weeks of November in the aftermath of Hurricane Sandy, Sadove said. For the third quarter ended Oct. 27, two days before the storm hit the Northeast, Saks posted net income of $22.6 million, or 14 cents a diluted share, compared with net income of $17.8 million, or 11 cents a share for the year-ago period. Those results included a reversal of about $3.3 million in federal income tax reserves deemed no longer necessary. Excluding this item, the company would have recorded net income of $19.3 million, or 12 cents a share, for the latest quarter.

Total sales rose 3 percent to $713.2 million, from $692.3 million a year-ago. Comparable-store sales increased 3.3 percent, below expectations. The best-performing categories were women’s and men’s contemporary apparel, women’s and men’s shoes, handbags, fine jewelry, and fragrances, while designer apparel continued to be weak. Women’s apparel continued to have a mixed performance, with classic styles showing weaker results than the more fashion-forward looks.

Sadove said the company, post-Sandy, was taking a “more realistic view of the business….We feel really good about where we are going as a company. Sandy has been a little bit of a punch to the stomach. Everybody in the Northeast has been affected. I think we will be back on track as we go through the quarter.”

“They’re not panicking at all,” said Aronson. “There’s a reasonable chance they will make up this business.”