NEW YORK — Saks Inc., seeing luxury customers spending enough to offset some softness in women’s apparel, reported net earnings rose 13 percent in the first quarter, driven by a 4.8 percent same-store sales gain.

This story first appeared in the May 16, 2012 issue of WWD. Subscribe Today.

To sustain momentum, Saks said it’s investing in new technologies and systems to achieve omni-channel objectives; renovations at key stores; marketing initiatives that are local in character and personalized to customers, and opening five or six Off 5th outlets annually.

Saks merchants are working harder to pump up women’s apparel, where the performance is mixed. They’re also working to boost the Fifth Avenue flagship, which accounts for more than 20 percent of Saks’ total sales of $3 billion and isn’t generating the “outsized” sales seen in past seasons. It’s currently performing on par with the chain overall.

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“Certain areas of women’s apparel, contemporary, sexy and flirty are doing extremely well. Certain areas with classic brands aren’t doing as well,” Saks chairman and chief executive officer Stephen I. Sadove told WWD. “Overall, the women’s business is healthy but it’s being driven more by fashion — where it’s more contemporary.”

Asked if the softness in certain women’s apparel segments was an industry issue, rather than being particular to Saks, Sadove replied: “I would guess the answer to that is yes.…Some brands are more suited. More formal may not be the way people are dressing. That is a change in taste.”

He said men’s tailored clothing is performing well, with sport coats doing better than suits. “People are dressing up but with a little more of a casualization. That’s not the same as casual Friday dress down. It’s more about wearing a sport coat with or without a tie. Overall, the luxury consumer is healthy, though the customer is being a little more particular.”

Sadove said the best-performing categories last quarter were the Wear Now updated bridge department; contemporary apparel; dresses; women’s shoes, and men’s contemporary apparel, shoes and accessories. A few apparel areas experienced a deceleration in sales, including women’s designer, which did not meet sales expectations. That will lead to some markdown pressure in the second quarter, as inventory gets cleared.

“We are still selling $1,000 shoes,” added Ron Frasch, Saks’ president and chief merchandising officer, during a conference call. “I don’t see a slowdown with the designer customer. We are seeing such growth in the contemporary zone. There’s more mixing and matching, creatively. We are trying to adjust our inventory allocations as quickly as we can.”

In New York, “The flagship is performing well but there’s a lot of opportunity for growth,” Sadove said during the interview. “There was a period of time up until two years ago when it was outperforming. Now it’s in line” with the rest of the chain. He said it’s a priority to get it growing faster, and noted that the 10022 shoe floor on eight is expanding by 7,000 square feet so it ultimately occupies the entire floor. Shoes are taking over the gift space, which is being relocated to the ninth floor. He also said work on the Wear Now floor on level four is nearing completion, which should give a lift to the business. While tourism to New York has been holding up, Sadove speculated there could be some reduced spending by customers with careers in the financial sector affecting the flagship.

Saks’ earnings came to $32.1 million, or 18 cents a diluted share, in the first quarter ended April 28, compared with $28.4 million, or 16 cents a share, in the year-ago period. Gross margins in the quarter grew 30 basis points to 44.4 percent from 44.1 percent in last year’s quarter, primarily resulting from increased full-price selling. Total sales came to $753.6 million, representing a 3.8 percent gain from last year’s $726 million.

The company is projecting comparable-store sales growth in the midsingle-digit range for the second quarter and second half. Comparable-store inventory levels are expected to be up in the midsingle-digit range for the balance of the year.

Capital expenditures will be between $110 million and $120 million for the year, including $30 million to $40 million for “project evolution,” which was unveiled last year and involves investing in foundational systems and new technology to support omni-channel efforts and establish tighter links between merchandising and marketing.

“We want to have a very strong technical foundation to compete in the omni-channel world,” Sadove said, citing new financial, merchandise planning and human resource systems and tools that enable merchants to get a better look at the inventory and move products from one channel to another. The goal is also to provide greater conveniences such as being able to buy online and pick up the purchases in stores, or being able to have online orders tied to inventories at stores, which then ship items to the customer’s homes. Saks is also planning markdown optimization at Off 5th.

“We hired IBM to work with us to find the best enterprise system out there and we chose Oracle,” Sadove said. “It’s a four- or five-year journey. We are investing $85 million to $95 million.” Saks recently implemented state-of-the-art point-of-sale systems and clienteling.

The capital budget includes $50 million to $60 million for store renovations and vendor shops, while the balance of the budget will be for maintenance. Renovations are occurring or will occur at several top Saks locations, including Chevy Chase, Md.; Troy, Mich.; St. Louis; Beverly Hills, and Bal Harbour, Fla., as well as the New York flagship. One hundred new vendor shops are being added at Saks stores across the country this year.

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