Saks Fifth Avenue Has Seventh Avenue Shaking

The rumor has been circulating for months: Saks Fifth Avenue is in trouble. Many suppliers and creditors say they haven't gotten any word about the elegant department-store chain's operating results since August, 1990. In July, two apparel credit reporting agencies, Bernard Sands Credit Consultants and Credit Exchange Inc., said that they had stopped recommending Saks to their clients. Then, Heller Financial Inc., a large factoring company, stopped approving shipments of merchandise to Saks. Now, many on Seventh Avenue worry that Saks may be hiding something.

In early June, Saks Chairman Melvin Jacobs assured BUSINESS WEEK that business was good. But since then, Women's Wear Daily asserted that Saks lost as much as $100 million in the seven months ended last January. Arthur Martinez, Saks's vice-chairman, calls the report "highly speculative and grossly inaccurate." He says he doesn't know why Heller stopped approving orders. "We are not going to release detailed financial information," says Martinez. "We are the best-capitalized retailer in America today."

FRETTING. Yet even suppliers who were shipping with confidence are nervous. "The longer you don't have information, you can't help but think equity has been pulled out, they didn't make their banking covenants, and the losses are more extensive than have been reported," says Leonard Rabinowitz, chairman of Los Angeles-based Carole Little for St. Tropez W, whose factor is Heller. (A factor is a credit company that buys manufacturers' receivables at a discount and then retrieves payment from retailers.)

Rabinowitz sells $10 million worth of apparel through Saks annually and counts Saks as one of his best customers. He's continuing to ship to Saks, but frets: "You don't want to roll out of bed one morning and find you have $3 million on the ledger that's not collectable."

It wasn't supposed to be this way. When Saks was bought by Bahrain-based Investcorp International Inc. for $1.5 billion in 1990, Seventh Avenue said the Arab company had overpaid, but was relieved that at least one New York-based retail chain had deep pockets. Investcorp has a history of making lucrative investments in upscale retailers such as Tiffany & Co., and was renowned for turning ailing establishments around quickly. Plus, Saks had long been known as one of the biggest "pencils" on Seventh Avenue--it wrote huge orders for suppliers' goods.

Since the takeover, Saks has taken a series of cost-cutting steps. To widen margins, it set out to slash some 700 jobs and expand its private-label operations. It abandoned the gift business and children's clothing, saying neither was profitable enough. The Saks discount outlet in Pennsylvania was thriving, and the company said it planned to open a series of smaller Saks specialty stores.

But something was amiss. In July, Investcorp filed suit against Saks's former owner, British American Tobacco Co., alleging that BAT had overvalued Saks's inventory. Meanwhile, the Manhattan tourist traffic that Saks relies on heavily during the summer dwindled. And the recesssion is taking a bite out of the high-end retail trade, Saks probably included. How much, though, no one can know since the store won't reveal its finances. "Saks is really sticking it to Seventh Avenue," says Alan Millstein, an apparel consultant in New York. "Their attitude is: `Ship us or be damned, and we don't have to show you any numbers.' "

Most factors say they're impatient with the zipped lips. They're demanding that Saks disclose at least its balance sheet, income statement, and bank covenants. But with the retail biz on its ear, until Saks caves in, many manufacturers are facing the unpleasant choice of shipping to a potentially unstable customer or losing yet another big pencil.