Saks Cuts Losses as Luxury Shoppers Return

Saks (SKS) reported business is getting better in the luxury department-store space, but the retailer will be looking at the Internet and cheaper outlet stores for growth this year. Saks executives said they see opportunities to grow sales in children's clothing and housewares in those channels, even as shoppers begin to come back to the clothing racks at its department stores.The retailer reported a net loss of $4.6 million, or three cents per share for the quarter. That met analysts' expectations, according to Thomson Reuters consensus estimate, but it's a big improvement over a loss of 72 cents per share it posted a year earlier. For the full year, Saks posted a net loss of $57.9 million, or 40 cents per share, compared to a loss of $158.8 million in the year-ago period.

CFO Kevin Wills noted that, after factoring out several one-time charges, the company posted a "modest" profit in the fourth quarter. Adjustments due to accounting, pension and tax charges took out $14.8 million off profits from the quarter, or nine cents per share.

Increasing Profit Margins

Comparable sales were down 4.8% for the quarter and 14.7% for the year. But the company managed to increase its profit margin by cutting inventories and controlling markdowns better than in 2008. Gross margins grew 15.3 percentage points during fiscal year 2009 and inventories dropped 10% on a comparable basis by the end of the fourth quarter.

Online sales have come into their own within the company, Saks executives said. Saks' direct sales had a comparable sales increase of 23% in the fourth quarter and 13% for the year. Wills noted that if direct sales were counted as a store, it would be second only to the Fifth Avenue flagship in sales volume.

But while Saks managers believe luxury shoppers are coming back, they remained modest in their guidance. They did not give analysts an earnings forecast and said comparable sales will only rise in the low- to mid-single digit range for the year, with better sales in the second half.

'A More Balanced Environment'

"We're going back to a more balanced environment," said CEO Steve Sadove. He added he is optimistic for the long-term outlook and sees more "stability and predictability" this year, but consumers remain discriminating in their shopping.

"We're yet to see a significant rebound in consumer demand," he said.

Thanks to the recent upswing in the stock market, wealthy customers are returning, but Saks continues to struggle to boost sales among "aspirational" middle class shoppers.

During the recession, customers shifted from the "best" product category -- the higher-priced designer items -- to the lower priced "better" and "good" clothing and accessories lines, said Ron Frasch, president and chief merchandising officer. Saks has expanded those selections and boosted its lineup of exclusive merchandise to attract more sales among the "best" shoppers. For example, he noted Saks will carry designer Zac Posen's new line exclusively and is the only retailer outside Ralph Lauren boutiques to carry that designer's Blue Label line.

Cutting Back On Discounting

Those changes are helping improve sales at full price and cut back on discounting, which in turn increases margins. Frasch wouldn't give details, but said Saks has eliminated some sales from its calendar and shortened others.

"We're trying to wean ourselves and wean the consumer off promotional activity," he said.

Meanwhile, Off 5th, the outlet chain that has performed well during the recession, will get some more attention during 2010. Saks plans to add another three to five locations during the year and expand the chain's product selection to focus less on leftover merchandise from Saks stores and more on exclusive goods. Off 5th will also add more products in categories that are not as important at the full-line Saks stores, such as children's apparel, home and gourmet items, said Sadove.

Farsch said Saks has seen opportunities for growth in those departments that have been under the radar. He said menswear has "underpenetrated" the Off 5th stores, childrens clothing is a bigger business online than in stores and Saks is only "scratching the surface" in jewelry.

'Tiny In The Home Business'

"We're tiny in the home business...we think we could be much bigger players in home," he said. "We bring cachet we think would play very well."

Adding Off 5th stores makes more sense in this environment than opening new department stores, said Sadove. The department stores will focus this year on increasing full-price selling and cross-selling existing customers, he said. He noted expanding the customer loyalty program will be one of this year's projects.

"We believe in the luxury sector, we believe there is growth potential over time," said Sadove. That time is not right now, he acknowledged, but "I do believe you're starting to see signs of a return to more normal business."
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