It’s too soon to declare a turnaround, but Saks Inc. is back in the black as a result of a tighter grip on its operations and a rebound of the luxury sector.

This story first appeared in the February 24, 2011 issue of WWD. Subscribe Today.

“Over the course of the year, business continued to strengthen,” Stephen I. Sadove, Saks chairman and chief executive officer, told WWD. “The core customer has come back.” However, “the aspirational customer still hasn’t come back to the same degree.”

On Wednesday, Saks reported net earnings of $25 million, or 14 cents a share, for the fourth quarter ended Jan. 29, compared to a loss of $4.6 million, or 3 cents, in the year-ago period.

For the year, Saks posted net earnings of $47.8 million, or 30 cents, compared to a loss of $57.9 million, or 40 cents, in the year before.

Sales in the fourth quarter rose 8.4 percent on a comparable-store basis to $866.3 million, from $811.3 million in the year-ago quarter. For the year, sales rose 6.4 percent on a comparable-store basis to $2.79 billion from $2.63 billion in the year-ago period.

Overall, sales volumes are not yet back to prerecession levels. “Simply from a top-line sales perspective, the answer is we are not there yet. In some ways, that’s the opportunity,” said Sadove, who has been charting a new course for Saks after years of missteps and poor performance under previous leadership. He attributed the positive results in 2010 to improved cost and inventory controls, better gross margins, greater full-price selling at around 70 percent last year, and a stabilized management team after significant turnover in previous years.

Growth strategies for 2011 include:

• Renovating the Wear bridge department and adding some cosmetics shops at the Fifth Avenue flagship.

• Renovating the Bal Harbour, Fla., store.

• Creating a new team for women’s private label development, similar to how Saks created a men’s team for the Saks Fifth Avenue Men’s collection. A women’s casual lifestyle component is being planned.

• Making “outsized” investments in shoes, handbags and the Wear bridge assortments, as well as Saks Direct, which was up 28 percent last year off a low base. Saks also will be expanding its flash sale schedule.

• Intensifying the exclusive and limited-distribution product offering. It represented more than 10 percent of Saks’ total volume last year, from 5 percent in 2009. Ultimately, the goal is to exceed 20 percent.

Yet challenges remain in the multiyear turnaround campaign. For one, Saks is constantly dogged by takeover rumors, but it would be a tough sell because of its uneven profit record. The chain has set an 8 percent operating profit margin goal but has no timetable. Last year, Saks had a 3.9 percent operating margin.

Also, retail prices will be going up beginning this fall due to increases in raw material costs impacting wholesale prices. The increases would likely be passed along to the consumer, said Sadove, meaning Saks’ margins would not be impacted. However, he said mainstream chains selling lower-priced commodity products will be affected more.

“You will see some price increases, but you will see it affecting the lower-end basics, such as underwear, a lot more than the luxury, designer end,” where raw materials represent a lower percentage of the production costs, Sadove said. He said price increases could be noticed as soon as May and June with early fall deliveries, and that a ballpark estimate was that prices across the Saks portfolio could be up by 5 to 10 percent, depending on the category. “We are in the market now buying products, so we don’t have a specific number yet,” he said.

Saks, with 47 full-line units, will also be closing stores in years to come, including one announced for March in Denver, on top of the six closed last year. “There are going to be a few more over time,” Sadove said. “I wouldn’t expect it to be a massive number of stores by any means.”

The company forecasts comp stores in midsingle digits for 2011, inventories up in midsingle digits, and gross margin modestly up to exceed the 40.1 percent rate. This year’s promotional cadence is expected to be consistent with 2010.

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