Between Saks and Maxx, 2009 seems promising

Faced with shrinking sales and rumors of pending bankruptcy, luxury retailer Saks Inc. (SKS) announced a retrenchment plan that it hopes will enable it to weather the recession. In a February 25 conference call with investors, CEO Stephen Sadove stated that bankruptcy is not on the table at this time. Instead, the store plans to skew toward more affordable merchandise, cut inventory, and emphasize customer service.

Sadove's announcement came on the heels of an announcement that the retailer lost almost $99 million in the fourth quarter of 2008. The declining revenues were largely attributed to the company's decision to reduce the prices of its designer merchandise by up to 70%. While the reductions massively boosted Christmas season sales, they decimated profit margins.

In addition to its changes to merchandise and inventory, Sadove stated that Saks plans to cut its workforce by 9% and is planning to cut capital expenditures by 50%, partially by negotiating lower rents. Sadove also discussed the possibility of selling some real estate, and acknowledged that the company may be open to a potential buyout.

After Sadove's call, Saks shares jumped by almost 13%. With Mexican billionaire Carlos Slim increasing his substantial holdings in the company, there is talk that he may be planning a buyout; this, in turn, seems to be boosting investor confidence.

The future also looks good for the other end of the clothing spectrum. TJX Companies (TJX), which owns TJ Maxx, AJ Wright, Marshalls, and other discount clothing chains, announced that quarterly profits were higher than expected. While the company experienced a 17% fourth quarter drop, it managed to post earnings of 55 cents per share, exceeding analyst projections of 51 cents. In 2009, the company plans to reduce expenditures by $150 million, largely by eliminating merit pay raises and offering voluntary retirements.

Given that customer service is not a priority for TJX, the move toward smaller staffs should have a minimal effect on their sales. Moreover, as the economy slumps, more and more shoppers are flocking to discount stores. The irony is that last quarter's massive Saks discounts, the move toward luxury store price cuts, and the increased profits in discount sales may be laying the groundwork for some massive brand confusion. As TJX's sales continue to hold steady, discounts seem to be dropping by the wayside. On the flip side, plummeting sales at luxury retailers are inspiring deep cuts.

As prices in the two market segments draw closer to each other, it will be interesting to see how this affects relative profits!

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