Faced with steep declines and affluent consumers losing wealth in a deteriorating economy, Saks Inc. pulled the trigger on a sweeping round of cutbacks on Thursday, saying it would eliminate 1,100 corporate and store positions, or 9 percent of the workforce.

This story first appeared in the January 16, 2009 issue of WWD. Subscribe Today.

Saks is also eliminating 2009 merit-based wage increases for all employees, and is suspending its 401(k) matching contributions for a minimum of one year, and future benefit accruals for associates remaining in the company’s pension plan. Inventories, benefits and capital expenditures are being curtailed as well.

“This is the toughest thing I’ve ever had to do in my career,” an emotional Stephen I. Sadove, Saks chairman and chief executive officer, told WWD. “I feel horrible.”

But he said that with the store’s volume declines, the size of the business couldn’t support the cost structure, which had to be taken down. “It’s no different from what’s happening with many companies across America,” Sadove said. “This is very tough, but I think it’s necessary.”

In the deepening recession, cutbacks in the retail industry have become standard operating procedure. Earlier this week, Neiman Marcus Inc. unveiled 375 layoffs, or about 3 percent of the workforce. Hudson’s Bay Trading Co. announced about 100 layoffs at its Lord & Taylor division last year and is expected to disclose further consolidations between divisions soon. Department stores, specialty and luxury chains have been hit the hardest by the recession, whereas discounters such as Wal-Mart Stores Inc. have been less impacted.

Saks said it will save $50 million to $60 million through the cuts. “That’s very significant,” Sadove said, adding the savings will help ensure the company comes out healthier when the economy turns around.

With Goody’s Family Clothing Inc., Gottschalks Inc., Linens-N-Things, Sharper Image and Steve & Barry’s going bust, among other retailers, over the last several months, rumors have been swirling through the industry, touching Saks and many other chains. However, sources recently said that Saks has been paying its vendor bills and does have financial cushioning if things got worse.

“I keep reiterating that we have very much been managing the business for cash” and conserving it, Sadove said, responding to the speculation.

He pointed out that Saks has no debt coming due in 2009 and that there’s $45.9 million due in December 2010, and $141.6 million in October 2011, and that Saks has a $500 million revolver, largely untapped, that comes up for renewal in 2011, as well as valuable unencumbered real estate. The Fifth Avenue flagship or other properties could be borrowed against or sold to generate more cash. With other senior notes, there is also $2.9 million due in December 2013, $1.9 million in February 2019 and a 2 percent $230 million convertible debenture that matures in 2024.

“We are taking the appropriate actions to insure we remain healthy,” Sadove said.

Regarding the types of jobs being eliminated, Sadove replied, “People at all levels are being affected. The largest portion is in the stores. Sales associates represent the largest portion of payroll.” But he also said the cuts affect a lot of people at headquarters.

Sadove said the team had been working on the downsizing for “quite a while” and that he felt it was best to disclose it now rather than last year so as not to ruin the holidays for associates. Retailers do generally announce cuts after the holidays, partly because they need a full staff to work the critical Christmas season. However, this year there was probably too many staffers on selling floors at many different stores, considering the anemic level of transactions that occurred. Saks’ comparable-store sales were down 19.8 percent in December, while Neiman’s fell 27.5 percent.

Over the next several days, Saks will notify workers affected by the cutback. Most positions will be eliminated by Jan. 30.

Asked how the cost reductions will affect company morale, Sadove said, “I think people have responded exceptionally well. Their spirits are as good as can be in a difficult economy.”

He didn’t dismiss the possibility of additional cuts this year, though he stressed, “It’s highly unlikely you would see any of this magnitude.” Costs are something that are always being examined, he added.

No store closings were announced, though some are possible in the future, Sadove acknowledged. “We are not looking at massive store closings. It would be a few, not a substantial number.” Any closings are dependent on working out arrangements with developers, he noted. There are 53 Saks Fifth Avenue stores, and 51 Off 5th outlets. Saks also operates saks.com.

The inventory reductions, at about 20 percent, won’t be at that level across the board by brand. With clothing performing the worst lately, other categories will be hit less hard by Saks’ receipt reductions.

In his prepared statement, Sadove said, “Our financial performance is increasingly being challenged by some of the most difficult economic conditions our company has faced in its 84-year history. It is our expectation that the economic environment will remain extremely challenging through 2009, if not beyond. The sustained downturn in the economy and the decline in luxury consumer demand necessitates that we take appropriate and decisive measures to position the company for this new operating environment. The cost and capital expenditure reductions are structured to minimize the impact on our customers, and the reduction in inventory receipts is reflective of the decrease in consumer demand. Each of our actions will benefit 2009 and should better position the company for the future, when economic conditions improve. We continue, however, to focus on and make targeted investments in our strategic merchandising, marketing and selling initiatives.”

Eligible associates will be offered appropriate severance packages, resulting in charges of about $9 million, principally in the fourth quarter. Saks also has identified additional nonemployee-based cost reductions, primarily in the areas of procurement, information technology, distribution and logistics, and travel.

Capital expenditures for fiscal 2009 have been reduced to about $60 million, a decrease of over 50 percent from the projected 2008 level. However, a critical project to complete the renovation of the flagship’s third-floor designer showcase is continuing. About half the project was already completed.

Other renovations are also continuing in the flagship, but not all.

Sadove concluded, “We have an exceptional brand, valuable and unencumbered real estate, a loyal customer base, solid vendor relationships and an outstanding team. Although we are staying the course with our long-term strategies, we are making prudent adjustments to our organization and our operations that are needed in this environment. We are positioning the company to be an even stronger organization when the economy improves.”