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SAKS APPEAL

Department store tries to regain footing by serving local demographics better

By Dees Stribling

Saks Fifth Avenue is an ailing brand in the luxury department store segment. But parent company Saks Inc. has a new chief executive with a plan to inject new life into the chain. Instead of closing stores, CEO Stephen I. Sadove wants to remerchandise them to better target local demographics.

Americans know Saks Fifth Avenue and probably think of luxury retailing when they hear the name. But in recent years this has not translated into strong sales for the Birmingham, Ala.-based retailer, which also owns Saks outlet stores and other department stores, under the Bergner’s, Boston Store, Carson Pirie Scott, Herberger’s and Younkers nameplates. Saks Fifth Avenue’s fiscal 2005 operating margins last year were an anemic 2 percent, down from 4 percent the year before.

During the first quarter of 2006, the company’s cash coffers swelled to $1.2 billion from the sale of its 142-unit northern department store group to Bon-Ton Stores. The company distributed $547 million of that windfall to shareholders through a special dividend in April. But same-store sales declined 1.9 percent, with the mid-tier department stores reporting a 1.5 percent drop in comp-store sales and the Saks Fifth Avenue stores posting a 2.2 percent drop.

“Saks Fifth Avenue has definitely lost its way over the last decade or so,” said George Whalin, a retail consultant based in San Marcos, Calif. “It lost a good number of its older, more affluent customers gradually by trying to be too fashion-forward and by focusing on lower-priced merchandise.”

Saks could learn from other retailers in its segment, Whalin says. “Nordstrom went down the road of being too fashion-forward a while ago, and it learned quickly from that mistake,” he said.

Cynthia Cohen, president of Strategic Mindshare, a Miami-based retail and business-management consulting firm, cites a previous marketing effort by Saks as another possible factor in its soft sales. “Part of the problem was a marketing campaign to reposition Saks as younger — not to teen-agers, but trying not to be ‘your mother’s Saks,’ ” she said. “I’m not sure the merchandise in the stores actually supported that image. There was a disconnect, and customers knew it.”

Still other reasons for the retailer’s problems were publicly noted by the new CEO himself, including the discontinuation of some revenue-producing lines, such as the Real Clothes private-label collection, without bothering to replace them, and a focus on the flagship store in New York City at the expense of the chain’s other stores.

Irrespective of what management did in the past decade or so, the deck has been stacked against all department stores anyway, sources say. It may be that what Saks did was not as important as what it did not do: respond to a retail landscape that is radically changed from the early 1990s.

“Consumer expectations are high, and there’s been a lot of growth in the specialty store segment, which is chasing women’s apparel customers especially,” said Janet Hoffman, managing partner of Chicago-based Accenture’s North American retail practice. “Department stores overall haven’t been as agile as they should have been.”

On the other hand, Bloomingdale’s, Neiman Marcus, Nordstrom and others in the upscale segment have adapted better to change, at least if their consistently better margins relative to Saks are any indication.

In some sense, the crisis at Saks does not really represent a failure (no one is suggesting that the brand will disappear, for one thing), but rather a problem relative to other upscale stores. “It isn’t that Saks is so much worse,” said Whalin. “It’s more that their competitors have gotten better.” “Everyone in the segment is in a reinvention phase,” said Cohen. “Saks’ issue is that they’re further behind in reinvention.”

Sadove, who became chief executive only in January, having joined the company as vice chairman in 2002 and adding the title of COO in 2004, declined to be interviewed for this article. But he did make clear his plans and expectations for the brand at a Bank of America consumer conference in New York City in March. The goal is to raise Saks Fifth Avenue to an 8 percent operating margin over the next two or three years, he said. The centerpiece of the effort is a new merchandising matrix, he said, a nine-option grid that combines “good-better-best” and “classic, modern and contemporary.”

Each store’s merchandise mix is going to be calibrated according to this grid, the better to accommodate local tastes and market conditions, which Sadove says the company did not pay enough attention to before. Each store will have a greater “depth of assortment” — another positive Sadove says has been missing from some Saks stores.

The effort will not involve closing many stores, he said. Only a handful of the 55 full-line stores are under consideration for closure. “I don’t think real estate is an issue to get to the 8 percent margin,” he told the conference. “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 merchandising mix.”

Other new strategies will include “core vendor growth,” he said, and offering “wow” products every season. The company also says it plans to make unspecified changes to its compensation program, which rewards local management based on individual store performance.

During the conference, Sadove declined to answer a question about whether the brand would be sold, but he reiterated that he is “focused on getting improved performance out of Saks Fifth Avenue.”

Whether it will happen is going to be an educated guess at best, sources say, given a fickle buying public.

In any case, obstacles remain. “The chain needs to invest more in conveying an upscale appearance,” Whalin said. “The stores look good, but they have to look great. Neiman Marcus is an outstanding example of that. When you go in, there’s no doubt what kind of store you’re in — not a place to find that $19 T-shirt.”

Another problem is that Saks does not boast the square footage of some of its rivals, says Cohen. “Bloomingdale’s and Nordstrom have more stores and larger footprints to work with,” she said. “While their competitors are adding restaurants or cafés or other features, Saks doesn’t often have the space to do all that.”

Still, there is room for optimism, Whalin says. “The determination is there, and management has been forthcoming about the brand’s problems,” he said. “It’s quite likely that Sadove and his team can make Saks into what it should be, a strong upscale brand.”

Cohen agrees. “I get the sense that they’re working on the issues,” she said. “There’s no one playbook for all department stores on how to be successful. But Saks still has a lot of loyal customers and still has brands that sell well, so they’re in a good starting position to make a turnaround.”