NEW YORK — It looks like the $2.7 billion Saks Fifth Avenue is headed for a major merchandise overhaul.

That was the message from the retailer’s chief executive, Stephen Sadove, during a presentation at a Bank of America consumer conference here Tuesday, where he spelled out his formula for fixing a business that’s been sick for years. It’s a broad revival program with a new merchandising matrix and a “good-better-best” and “classic, modern and contemporary” nine-part grid. The goal is to boost Saks Fifth Avenue’s operating margins to 8 percent within the next two to three years, compared with the 2 percent margins it had in 2005.

There is also a particular emphasis on getting branches back on track with assortments tailored to local tastes; greater team play between stores, planning, financial and merchant personnel, and cutting corporate overhead. According to Sadove, about 20 branches, including those in places such as Tulsa, Okla.; Birmingham, Ala., and Indianapolis, could contribute far greater productivity if changes are implemented.

He cited the example of the Saks in Birmingham, where the parent Saks Inc. is based. The ceo characterized Birmingham as an extremely affluent city, probably the second most affluent in the South after Atlanta, with customers seeking both classic and advanced apparel. “But when you walk into Saks and look at the assortment of men’s products, we don’t have the multiplicity of price points or array of styling from classic to advanced,” said Sadove.

He said the store lacks “depth of assortment” meaningful to customers.

But Sadove said he is pleased overall with the retailer’s real estate and that only three stores, for now, are being considered for closure. Most stores are in good physical shape, since Saks over the last decade has poured millions into capital improvements, although some observers have said the retailer needs to close a lot more stores.

Sadove did not specify the locations he’d like to close. Saks operates 55 full-line stores and owns more than 60 percent of its real estate, including the Fifth Avenue flagship here. It also operates 50 Off 5th outlets, 39 Parisian stores, 57 Club Libby Lu shops and

“I don’t think real estate is an issue to get to the 8 percent margin,” Sadove said. “We’ve talked about wanting to close three more stores. It’s probably going to be more, and we will be adding a store or two” in the not-too-distant future. “But there’s no reason why stores in smaller markets than Beverly Hills or New York can’t deliver greater productivity if they had the appropriate merchandise mix….We feel good about the real estate. The focus is on getting [branches] to grow. There’s no reason we can’t get them to deliver on a four-wall margin.”

This story first appeared in the March 15, 2006 issue of WWD. Subscribe Today.

But Sadove also said Saks has “very good vendor relations” to get the job done. Market sources have said that it might be tough to get some vendors to sell locations where business has not been good, or where the competition is fierce. Saks is largely up against Neiman Marcus, Nordstrom, Bloomingdale’s and Barneys New York.

He said the Saks strategy is to offer both high-end luxury and accessible luxury. “You can’t think about [Saks] as one store type. What New York is, is a little different from Tulsa….We have to execute merchandise and store strategies focused on good, better, best,” with good being bridge merchandise, which Seventh Avenue sources say is among the softer categories for Saks Fifth Avenue; better in the Gold Range, and best being designer priced.

Sadove said that, based on those criteria, a new merchandising matrix has been developed for every store. “That nine-box grid is going to yield a lot of benefit over time. Focus is the name of the game at Saks Fifth Avenue.”

In addition, Saks stores will focus on core vendor growth, key item intensification, “wow” products each season and getting assortments right on a door-by-door basis through planning and allocation system improvements.

Moreover, Sadove said there will be changes in the compensation program, where part of merchants’ pay will be based on performance at the store level.

Some merchandising changes will happen soon in several markets, Sadove said, including a Real Clothes-type offering of “easy weekendwear, comfortable-fitting product” that will begin hitting shelves in the summer, with much more visibility in the fall and into the holiday season.

The Saks chief also emphasized the potential of Saks Direct, which is “rapidly approaching $100 million in volume” and has a new “dedicated merchandising and planning team.” It recently added important vendors such as Giorgio Armani, Michael Kors and Marc Jacobs. And on Tuesday, the company announced that Amy O’Connor has been appointed senior vice president and general merchandise manager of Saks Direct. It’s a new position and O’Connor will report to Denise Incandela, senior vice president of Saks Direct.

O’Connor will oversee the buying team and merchandise selection for’s Web site and catalogues. She was with Neiman’s for the past 13 years, most recently as vice president and divisional merchandise manager, overseeing areas such as couture evening, St. John, Galleria Dresses and intimate apparel. Neiman’s is one of the main competitors for Saks Direct and its NM Direct division dwarfs the New York-based retailer’s, with sales of about $590 million last year.

During the conference, Sadove also reiterated goals he set forth in a prior call on fourth-quarter earnings this month, including attaining an 8 percent operating profit in three to four years; shrinking corporate expenses from $45 million to $50 million to around $20 million as assets continued to get sold off, and greater team play. Asked when the company can get it down to that, Sadove replied: “Part of the answer is what’s going to happen with Parisian. We are still in the early stages of the strategic alternatives process. It will play itself out over a year-and-a-half.”

“It’s not acceptable to have a 2 percent operating margin. Some of our competitors have 8 to 10 percent. We were at 4 percent in ’04.”

Sadove wants stores, planning and financial personnel and merchants to work closer together.

“Saks Fifth Avenue is disappointing. We need to get performance back on track and I believe we can do it.”

Citing mistakes of the last several seasons, Sadove said Saks:

  • Lost sight of the core customer, bringing in many expensive designer collections that didn’t resonate.
  • Moved too quickly to capture a younger clientele, but the average Saks customer is 48. The average new customer is 44.
  • Discontinued some businesses, such as the $60 million Real Clothes private label collection, without replacement strategies.
  • Focused on the flagship to the expense of branches. “We have focused too much on the flagship, which accounts for 20 percent of the business. We have to grow the remaining business, as well.”

Further complicating matters were the internal and government investigations into certain chargeback and markdown practices, and a costly over-bloated senior team that was streamlined in January, when Sadove was put at the helm, succeeding Fred Wilson as SFA ceo, and Brad Martin as Saks Inc. ceo, though Martin remains chairman. Previously, Sadove was vice chairman of Saks Inc. Now he’s more involved in the day-to-day operations, as well as strategy.

Asked by one analyst during the call if SFA could be sold, Sadove replied: “I am focused on getting improved performance out of Saks Fifth Avenue. We need to get the performance back on track. There is nothing about a public environment that is going to inhibit us from improved performance. It’s not about a public environment or a private environment.”

Earlier this month, Saks posted disappointing results for the fourth quarter and year. The parent Saks Inc. had a $2.2 million loss in the fourth quarter ended Jan. 28, versus net income of $96.6 million in the year-ago period. At SFA, fourth-quarter operating income totaled $7.6 million, a $50.4 million decline from the prior year. Sales totaled $802 million, versus $839.9 million a year ago, and comps increased 1.4 percent.

For the year, SFA’s operating income fell to $22.3 million from $118.8 million, comp sales rose 4 percent while total sales were $2.73 billion versus $2.74 billion.

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