Saks Therapy

Focus on upscale strengths stirs hope for retailer

CHRISTOPHER BYRON
New York Post

THERE'S been some tentative nibbling at the shares of Saks Inc. lately, and if you've been reading the press coverage of this long-troubled department store chain, you'll know the main reason seems to be the departure of R. Brad Martin, the company's chairman and CEO, a Tennessee statehouse politician-turned real estate developer.

In fact, the resignation and early retirement of Martin, 53, who has been a fixture on the retailing scene in one form or another for the past 22 years, is only part of the reason for the nearly 8 percent gain that Saks' stock price has racked up in the past three weeks.

The other half - and less reported - part of the story is the turnaround strategy that Martin is now bequeathing to his hand-picked successor and protégé at Saks, an ex-Clairol man named Stephen I. Sadove, 54. Sadove's startling assignment: proceed with the terminal erasure of virtually every initiative and acquisition Martin inflicted upon Saks during his eight ruinous years as its chairman and CEO.

We'll turn in a minute to the particulars of that game plan - a lot of which has been implemented already - for it amounts to a reversal of a misguided strategy Martin pursued back in the winter of 2000-01. His game plan then: Save the combined businesses by spinning off the Saks segment - a solution that amounted to cutting costs by eliminating the company's most appealing and marketable merchandise as well as its most coveted retail shoppers.

Now, Martin's belated about face underscores a message that companies' everywhere are coming to accept. In this era of "deconglomeratization," growth by acquisition doesn't guarantee a more profitable and efficient company at all, just a bigger and more musclebound one.

In fact, Saks was already bulked up on the financial equivalent of steroids when Martin acquired the company for $1.45 billion in a 1998 stock swap. Long revered as retailing's epitome of high fashion elegance and good taste, the 74-year-old department store chain was reeling from nearly a decade of directionless expansion at the hands of some Persian Gulf money men.
Bahrain investment bank Investcorp Group had gone into business to help members of the Saudi royal family move their money to the more stable locales of Europe and the U.S.

Unfortunately, the Investcorp crew arrived on Wall Street wearing "Free Money Here" signs around their necks, and wound up paying a startling 15 times earnings, or $1.5 billion - half in cash, the other half in debt - to acquire the Saks chain from B.A.T. Industries.

ALMOST immediately the new owners began laying off workers, while at the same time launching a nearly decadelong expansion that created close to 100 Saks stores in upscale malls across the U.S.

A recently resigned top executive at Saks summed up the strategy this way: "For generations, Saks' greatest strength had been its brand image of exclusivity. But you cannot be both exclusive and ubiquitous at the same time."

In 1998, Investcorp sold out to Martin, who was then thought to be one of retailing's brightest new stars. As head of an obscure Tennessee department store chain called Proffitt's Inc., Martin had used the proceeds of a 1987 IPO to buy up rivals across the South and the Midwest. By the time the Saks opportunity materialized, Proffitt's had already surpassed $3.5 billion in annual sales.

Yet the $2.5 billion all-stock deal seemed expensive even then, and it soon grew more so as few of the merger's hoped-for savings ever materialized. Indeed, the two chains served different clienteles, with different tastes, in different markets, with the result that the combined companies wound up nearly doubling in size, but with no accompanying gains in efficiency.

Every attempt to fix the merger only made matters worse. The worst idea: unloading excess inventory through Proffitt's-style end-of-season sales and markdowns, which quickly undermined the five-star image of Saks.

"It's the biggest single problem the company now has," says a top official at the retailer. "Saks has pursued the discounting gimmick for so long now that it has turned a large percentage of its customer base into people who simply don't show up until a sale is announced." That policy has worked to slash operating margins at Saks so that now they are about half those of archrival Bergdorf's.

Then, by renaming the combined companies as Saks Inc., while letting the Proffitt's side remain based in Birmingham, Ala., Martin created not just rival power centers but redundant corporate offices filled with two of everything.

The coup de grace came when Martin appointed cronies and supporters to key jobs. Then he rose majestically above the bedlam and devoted himself to real estate deals while his underlings fought over every issue imaginable.

By the start of last year, Saks was in free fall. Revenues hadn't grown since 1998, and in 2005 they actually began to decline. Meanwhile, the company's inventory turnover - a key measure of retailing efficiency which tracks how long a company's merchandise sits on shelves and in warehouses before being sold - had slumped to a pathetic 135 days, compared with, say, Dillards (122), and a mere 113 days at the Neiman Marcus/Bergdorf Goodman chain.

On top of that came accounting scandals, complete with delinquent corporate filings at the Securities and Exchange Commission, followed by three years of writedowns and financial restatements. Martin, then, seemed to realize the jig was up - that he was faced with no choice but to begin jettisoning either the Profitt's side or the Saks side.

What role his successor, Steve Sadove, may have played in convincing him to dump the Proffitt's operation and hang on to Saks isn't clear. But it was the Proffitt's operation that got the heave-ho, and by now most of it is either going or gone. In fact, except for the 40-store Parisian chain that Goldman Sachs has been hired to sell, there really isn't much left to Saks that wasn't there before Martin came along.

When I talked to Steve Sadove recently about all this, he reminded me of one more thing on his Must Do list for the year ahead: close down the company's Birmingham offices and consolidate the company's corporate headquarters where it has belonged all along - at 12 E. 49th St., across the street from Saks' flagship store.

There'll still be much to do even then, of course. Saks needs to come up with better and more effective marketing, promoting the labels of designers that will appeal to well-heeled female shoppers in their late thirties rather than late forties. And that needs to be done while weaning the entire customer base away from its increasing dependence on markdown and liquidation sales, which the experts all seem to agree won't be easy but is vital.

SO is Sadove the man for the job? He has limited experience in retail marketing, which could be a problem. But on the positive side he is also said to be a big picture thinker with strong people skills, and is frequently praised by colleagues for his work, as Sak's vice chairman, in keeping the company's brass from tearing the place apart in their fights over turf and corporate resources.

Whether Sadove succeeds or not, he'll at least be getting the chance. And that is something that his boss, Brad Martin, will forever he able to say he made possible all by himself - first by nearly destroying Saks, then deciding in the nick of time to save it by dismembering it. Not an easy choice, to be sure, but the right one, as Saks' stock is beginning to show.