The chief executive and chairman of Saks Inc., R. Brad Martin, is a man on a mission. Sprinting through the retail chain's Saks Fifth Avenue (SKS
) store in Birmingham, Ala., Martin rattles off the myriad changes he has implemented to give the grande dame of fashion a warmer, inclusive feel--"inviting luxury," as he puts it. You find it in the coffee kiosk just inside the front door, as well as in a brighter layout and the new "gold range" of less-expensive designer apparel.
Martin, 50, is confident he has found the formula that will boost traffic and sales at the beleaguered retail icon. "Luxury does not need to be exclusive or aloof, or, we could say, snooty," says Martin, who in 1998 bought the Saks Fifth Avenue chain. A one-time Tennessee state legislator--the youngest ever at age 21--Martin built his fortune in the real estate business before buying a local department store chain, Profitt's, in 1984. He accumulated a portfolio of mid-market regional department store chains, including Younkers, Bergner's, Carson Pirie Scott, and Herberger's, before the Saks deal.
But earnings have plunged since then (chart), forcing Martin to rethink his original plan. That had called for expanding Saks Fifth Avenue and its fashionable high-priced merchandise into smaller markets. Battered by increased competition and the recession, and burdened with $1.33 billion in debt, he has instead been forced to cut back sharply on expansion. Martin is focusing even more heavily on cost-cutting, and in July had to sell Saks Inc.'s lucrative credit-card operation to Household International Inc., netting $300 million.
Meanwhile, Martin is seeking the right merchandise mix to boost sales at Saks Fifth Avenue. Revenues at Saks Inc. stores open at least a year fell 0.5% during the period from January through July, largely because of a 2.2% drop at the Saks Fifth Avenue division. Along with other upscale retailers, Saks Fifth Avenue was hit hard by the post-September 11 drop-off in tourism. The company estimates that one-third of sales at its flagship Manhattan store, for example, come from tourists. "There's a clear correlation between our sales and airlines bookings," says Martin. Thus, after barely eking out a profit last year, Saks Inc., with $6.1 billion in annual revenues, posted a $45.8 million loss in the first half of fiscal 2003, ended Aug. 3. The bright spot: the second-quarter loss of $20.4 million was smaller than analyst estimates and only one-third the loss in the year-earlier period.
Right now, Wall Street finds Saks Inc. a less than luxurious investment. Although the stock has taken a healthy bounce following its latest earnings report, shares are only about $11, down from more than $40 at the time of the purchase. As a result, Martin is under pressure from some on Wall Street to sell the crown jewel of his retailing empire, leaving only the regional stores. Says Robert F. Buchanan, retail analyst at A.G. Edwards & Sons Inc.: "I'd like to see the two businesses run separately." But Martin vows that there will be no sale. "Ain't gonna happen," he says.
Martin has had to rein in his growth plans, however. Between 1998 and 2002, the company added 14 new Saks Fifth Avenue stores, expanded 12 more, and closed only 4, for a total of 61. The new locations included Cincinnati, San Antonio, and Kansas City, Mo. "They had kind of diluted the Saks brand," contends Rusty Robinson, president of Robinson Investment Group in Brentwood, Tenn., which owns 100,000 Saks Inc. shares. Those small markets did not provide the same margins as bigger ones, analysts say. The problems show in the numbers. Saks Fifth Avenue sells $341 per square foot, only 85% of what luxury leader Neiman Marcus Group Inc. does and just $20 above long-floundering Nordstrom Inc. Saks Inc. does not release individual store sales--but after the feverish expansion of past years, only two new Saks Fifth Avenue stores will open in the next two years, in Raleigh, N.C., and Richmond, Va., shaving $40 million from capital expenditures this year alone.
When Martin bought it, the 78-year-old chain was already ailing, a victim of neglect and poor merchandising choices by its previous owner, Invesco International Ltd. Martin still bridles at the idea that what he calls the "merchant princes" of Manhattan know more than he does about how to revive Saks Fifth Avenue. Martin last year ousted many veteran execs who, he laments, wanted to be graded on "style points" rather than financial goals. "At first, I thought they knew more about fashion than I did," says Martin. "Eventually, I decided they didn't."
One key hire in January was Steve Sadove, former president of Bristol-Myers Squibb's beauty lines, including Clairol. Sadove is no fashionista, but that's fine with Martin--as vice-chairman, he's expected to bring organizational structure and discipline. For instance, Sadove is trying to bring cross-learning to Saks Fifth Avenue and the middlebrow department stores, which previously rarely talked. A loyalty program that did well at Saks Fifth Avenue is being extended to the other chains. And as he did at Clairol, Sadove is creating management teams to force marketing and merchandising executives to share ideas.
One key marketing challenge for the new team is luring a younger crowd. Saks Fifth Avenue hopes to do that by signing up more hot designers such as Jimmy Choo, whose shoes, at $300 a pair and up, have achieved new popularity through HBO's Sex and the City. The chain also will offer new lines of low-riding jeans geared toward twenty-somethings. Such choices could alienate Saks Fifth Avenue's older shoppers, of course. Says Ronnie Deutchman, a 58-year-old Atlantan, of the racy fashions on a recent visit: "They've got pants that go below your navel. You have to be 20 years old to wear [that] stuff."
Those moves strike some observers as grasping at straws. Saks Fifth Avenue has "been forced to look for another advantage for the customer, and I don't think they've found it yet," says a former company executive. Other outsiders are more encouraged by Martin's moves, though they caution that any payoff could still take a while. "Turning around Saks Fifth Avenue cannot be achieved in one month," says Kurt Barnard, founder of Barnard's Retail Trend Report. For one thing, it's getting harder for luxury retailers to maintain their exclusivity, given that names like Louis Vuitton, Anne Klein, and Tahari are popping up in less rarified stores.
If he appears to be under attack on all sides, Martin doesn't seem to mind the pressure. He likes to tell about how after his 1996 buyout of Herberger's, a venerable Minnesota chain, radio host Garrison Keillor dropped a note warning him to "be alert to the awesome responsibility you bear" with the many "Wobegonians" who still shopped at Herberger's. That chain is now much improved. Indeed, Martin would do well to get Saks Fifth Avenue back to a place where its results, like all the children of Lake Wobegon, are above average.
By Brian Grow with Dean Foust in Birmingham
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