Byline: David Moin / With contributions from Rusty Williamson, Dallas

CHICAGO — Under intense pressure from Wall Street, Saks Inc. is making major adjustments, and not just in the numbers scrutinized by stock analysts.
While officials of the $7 billion retail conglomerate have lowered their financial forecasts, they have also raised their prospects for the department store divisions and have designated “growth opportunities,” particularly in contemporary collections, teens, juniors, footwear and home furnishings.
They are fast rolling out a one-year-old private label program, with deeper assortments planned for more locations, in an attempt to boost department store productivity and margins, and project merchandise distinction. Private label will be dramatically increased to 20 percent of the inventory by the end of 2000, compared to 8 percent at the end of last year.
“All of us in the department store industry are becoming once again product-focused,” emphasized Brad Martin, chairman and chief executive of Saks Inc. “That’s very, very important.”
At the Saks Fifth Avenue specialty division, millions of dollars are being poured into renovations and expansions to better showcase the fashions. There’s $60 million earmarked to renovate and add selling space to the Fifth Avenue flagship, and over $10 million slated for renovations at the Michigan Avenue store and an upcoming freestanding men’s store across the street. However, construction costs on future projects are being slashed 20 percent through more participation with corporate planning and programs. While some feel the merger of Saks Fifth Avenue into Saks Inc. could affect the tone and look of future SFA units, Martin has said all along that it won’t, and that he won’t cheapen Saks down to the level of the Saks Inc. department stores, which include Proffitt’s, Carson Pirie & Scott, Herberger’s, McRae’s and Younkers. He also said the Saks acquisition is working out well in terms of back office consolidations, hitting the savings estimates.
Inventories are another issue. Saks Fifth Avenue in recent quarters became too reliant on lower-margin businesses, particularly certain high-end designer labels that have been plagued by markdowns. While the company declined to name names, and many designers will continue to be showcased, the specialty chain’s inventory growth rates are being slowed, according to Martin.
There is yet another critical issue: succession.
Philip Miller, the division’s chairman, ceo and top merchant of Saks Fifth Avenue, is set to retire in July 2001, which as far as designers and manufacturers are concerned, could leave a huge void in leadership.
“No succession strategy has been clearly articulated yet,” said a source inside the company, although vice chairman and second-in-command Christina Johnson, who has a strong reputation in store operations and marketing, while less known in fashion circles, is a candidate to succeed Miller. Martin would not comment on a succession plan.
But it remains a sensitive issue, given the departure of previous high-level executives, including heir-apparent Rose Marie Bravo and Jeane Daniel, who left as executive vice president of merchandising after about six months.
Saks Inc. is considered a well-managed group of steady but unflashy regional department stores with many merchandise and price similarities. The corporation got some added cachet thanks to Saks Fifth Avenue, acquired a year ago, and some added headaches that came with the acquisition, including a closer watch by Wall Street.
Last month, as reported, Saks Inc. stock took a pounding, falling over 25 percent after Martin announced on Aug. 17 that earnings are seen at $1.80 for the year, not the $2.10 a diluted share that was originally projected. Wall Street focused on the second quarter forecast, not the latest results, where Saks Inc.’s comparable-store sales rose 4 percent, and earnings rose to $18.8 million from $2.6 million after charges.
Since then, the stock has continued to suffer, closing down 3/16 Wednesday to 16 5/8. That’s close to a 52-week low of 15 3/8. The stock’s 52-week high is 39 1/2.
Against this uneasy backdrop, Saks Inc. held its annual “vendor celebration” here last week at the Hilton Chicago and Towers Hotel. The event is for thanking suppliers, acknowledging high-achieving store associates and pumping up morale. This time, it also became a platform for some damage control and clarifying strategies, which Martin did with characteristic understatement.
It was also an occasion for Martin to show off his sax — not Saks — skills. At the vendor party at the House of Blues, he joined the band on stage before an audience of hundreds. “I thought I was a well-known guy until someone came up to me and said they wanted to meet a member of the band,” Martin said later.
Before the party, Martin sat for an interview at the Saks Fifth Avenue on Michigan Avenue. “Historically, we have been conservative in our targets, but we did get a little too aggressive,” he acknowledged, continuing some of the damage control he undertook when the second quarter’s earnings came out. Speaking sparingly and in hushed tones, apparently tired after meeting with retail analysts and vendors earlier, he noted, “We will build a conservative business plan — that lets us achieve our plans.”
This year, he suggested, the company is not looking to leap ahead of last year’s sales-growth rate. Comparable-store sales rose 4 percent in the fourth quarter of 1998. “We’ll take that [for the second half of this year],” Martin said. Earlier this year, Saks Inc. established a 6 percent projection.
Martin’s main message was about making the retailer’s enormous base of 352 stores more productive, and that, despite Wall Street’s jitters, his department store businesses are poised for greater success.
He called footwear, teens, young men’s and home furnishings “underdeveloped areas” through the chains, and said the casualization of America is “a huge opportunity” for the Saks Inc. department stores, though he acknowledged the trend does have a downside. “It hurts the dress-up business, but I don’t think it has to hurt luxury businesses.”
But Saks Fifth Avenue and other luxury businesses have felt a negative impact from casualization, as well as from designers opening their own shops over the past few years. At the vendor celebration, one Saks Fifth Avenue official acknowledged the company will eliminate some ready-to-wear designers who haven’t delivered the margins, but they will also look to increase business with other designer labels, particularly lucrative handbag and accessories lines that could be “brand-extended” to a greater degree in rtw.
Merchants at Saks Fifth Avenue also expressed eagerness to tap the contemporary markets, particularly California, where they say some of the hottest collections are emerging. Although Saks already carries a host of contemporary labels, such as Katayone Adeli and Max Mara, there is an opportunity to market the category more aggressively. Hence, Saks is adopting a more colorful and youthful identity to attract a broader base of shoppers.
As for assimilating Saks Fifth Avenue into Saks Inc., Martin acknowledged, “It’s been challenging, but we’ve made great progress on the integration and achieving all of those numbers,” meaning cost-savings projections.
In the Aug. 17 announcement, he cited “a smooth integration” of the back office and sales support functions from all acquisitions and a successful integration of the Saks Fifth Avenue credit card administration, previously handled by a third party, into the corporate operation.
In his address to vendors the next day, Martin cited the following opportunities:
Building more business and marketing more intensively to the corporation’s six million charge customers. He noted they shop a Saks Inc. store each month on average.
Raising comparable-store sales and margins.
Investing a substantial portion of the company’s $800 million to $900 million in cash flow into renovating and expanding store plants. By the end of this year, the firm will add 14 units and two replacement units.
Extending the Saks Fifth Avenue brand and other store brands into electronic commerce and the Internet. “It’s a big strategic initiative,” Martin said.
A major component of the capital improvement strategy is to beef up Saks Fifth Avenue in several key markets, including Chicago, where a new men’s store will open this fall on Michigan Avenue. The existing Saks flagship on Michigan Avenue is well into a full renovation, and a Saks Fifth Avenue Main Street store is planned for Highland Park, an upscale Chicago suburb.
In addition, the Carson Pirie Scott flagship on State Street in downtown Chicago completed a redo of its shoe department. The division has converted its shoe business from leased to owned.
“Saks Inc. has fabulous growth prospects,” Martin told the vendors. “Virtually every door can do more business, and we want to do more business with you. I think our best days are ahead of us and our best days with you are ahead of us.”
Among the vendors that were singled out for fast growth at Saks Inc. included Liz Claiborne, Easy Spirit, Clinique, Tommy Jeans and private label Relativity. According to Robert Mosco, president and ceo of Saks Inc. Merchandising Group, Relativity, a moderate misses’ collection launched in 1998, could grow to become a $100 million brand. It hits gross margins in the high 40 percent range, he said.
Other private labels getting rolled out at Saks Inc. stores are Pursuits better-priced sportswear, Consensus men’s sportswear, RBM men’s dress furnishings, shirts and suits, and URIT, for kids.
Meanwhile, Saks Fifth Avenue is making a direct run at Neiman Marcus in Dallas, where Neiman’s is based, as well as in Chicago, where Neiman’s has a store on Michigan Avenue. That Neiman’s store seems dated, but remains generously stocked and spaced with the finest designer labels, compared with the Saks unit across the street.
At the Dallas Galleria, Saks has operated a low-key unit for 17 years, one that was never remodeled. A replacement unit will occupy 175,000 square feet formerly housing a Marshall Field’s store. Located next to Nordstrom, it’s due to open Sept. 16 with a black-tie benefit for Neuro-Oncology at UT Southwestern. The luxurious three-level store will rank fifth in size among Saks’ 59 stores.
“We’ll substantially increase store volume and do around $60 million our first year. This store will be in the top 10, maybe number six or seven, in the Saks chain within five years,” Miller said recently. “It’s now in the middle range of all our stores. We’re doubling in size, and sales should reflect it.”‘
Calling Texas an underdeveloped luxury market, Miller said Saks also plans to open two more units around Dallas in the next five years: in Hurst in 2000, and Plano in 2004.
While experiencing inventory problems in bridge and certain expensive designer labels, Saks Fifth Avenue, less pricy rtw, accessories, shoes, special sizes and cosmetics are generally steady. But the problems in designer won’t be evident in Dallas.
The new unit at the Dallas Galleria will quadruple the amount of designer clothing that was housed in the former store, filling 25,000 square feet with a lineup that’s been reformulated with plenty of labels that will be new to Saks in the mall, including Badgley Mischka, Vera Wang, John Galliano, Carolina Herrera, Christian Dior, Richard Tyler Couture, Collette Dinnigan, Herve Leger, Alberta Ferretti, Missoni, Jil Sander and Lela Rose.
It will be the only site in the city to carry the Issey Miyake women’s collection and the Pierre Balmain line designed by Gilles Dufour. The store also will have an exclusive on By Terry, a luxury cosmetics line with lipsticks costing $75.
Boutiques are under construction for Jil Sander, Giorgio Armani Le Collezioni for men and women, Vera Wang Bridal, St. John Knits, Bulgari, Christian Dior and Louis Vuitton accessories.
Reflecting the enduring strength in accessories, handbag offerings will quadruple in size through the addition of such resources as Fendi, J.P. Tod’s, Christian Dior, Miu Miu, Celine, Moschino, Burberry, and Delvaux, a Belgian label that the store has exclusively. The unit also will have an Elizabeth Arden Red Door Salon.
“The biggest growth will be in men’s wear, fine jewelry and designer clothing,” noted Gary Guthrie, vice president and general manager of the Dallas unit.
The store is modeled on the 207,000-square-foot prototype that Saks opened in 1997 at the Houston Galleria, spending over $50 million to construct it in opulent Art Deco style with silver-leaf ceilings. The Dallas unit will have the same layout, with departments radiating from a central rotunda, but it has been refined, with a natural-light dome as well as improved finishes on certain wood floors, and stonework, noted Guthrie.
“The store has been really bridge-driven, but with this type of environment we can properly offer designer clothing,”‘ Guthrie pointed out.
“Dallas will be a repeat of Houston, with a greatly expanded assortment of high-end luxury merchandise,” he contended. “This is definitely the market for it.”