Is Saks Fraying At The Seams?

Weak results plus aggressive expansion spell trouble

September has been one tough month at Saks Holdings Inc. The company's president and chief merchandiser, Rose Marie Bravo, stepped down on Sept. 4, Saks reported disappointing August sales, and its stock, at 22 13/16, is out of fashion on Wall Street, trading near its all-time low. But Saks' chairman and CEO, Philip B. Miller, is as cool and collected as a mannequin. "I don't want to sound cavalier about missing our plans, because we paid a [market] penalty on that that I wish we hadn't had to pay," he says. But, he adds: "We feel we are on a much better footing going into fall than we were in the spring."

Miller better be right. Saks began stalling last spring when some of its merchandise flopped. The gaffe in its core business came when the $1.9 billion fashion chain was launching new stores, extending a discount-store operation, and reworking its catalog business. The combination of disappointing results and aggressive growth plans is a red flag, says analyst Robert F. Buchanan of NatWest Securities Corp.: "I'm worrying." Miller has to assuage Wall Streeters --and also please Investcorp, the Bahrain-based holding company that is Saks' largest shareholder.

Last December, Miller outlined a new growth plan for Saks. He said he would open 20 new stores and remodel 12 of 90 existing ones by the end of 1998. Markets slated for expansion include Texas, home of rival Neiman Marcus Group Inc. The company is also planning smaller units for resorts and small but affluent markets. "The resort and Main Street stores are a very logical way to grow," says Arnold Aronson, a consultant at Kurt Salmon Associates who was CEO of Saks from 1979 to 1983.

Another Miller strategy is to expand the company's Off 5th discount stores, which have grown from two units in 1993 to 38 now, accounting for 12% of sales. Analysts worry the Off 5th outlets dilute Saks' upscale image and divert management's attention from the core luxury-store business. Saks also has had difficulty maintaining consistent levels of popular merchandise in the stores. "As a clearance outlet for the main stores, I think it's a perfectly good idea. When it gets to be a major strategy initiative, I think it's problematic," says Isaac Lagnado, principal at Tactical Retail Solutions Inc., a retail consulting firm.

LEARNING CURVE. Miller concedes the stores have had problems. "We are in a very rapid rollout phase," he says. "We are obviously going up a learning curve as we go through that rollout phase." He insists an updated store design and a new distribution center for Off 5th merchandise will help, and he says the stores are a source of rapid growth. But analysts want the problems fixed now. "If Off 5th has a bad fall season, they should think about slowing it down," says Janet J. Kloppenburg, an analyst at Robertson Stephens & Co.

At the same time, Saks is trying to improve Folio, its catalog business, which accounts for about 4% of revenues. The company has backed off this year after aggressively mailing catalogs in 1996. Miller has added managers with direct-marketing experience, and given the unit its own merchandising, operations, and telemarketing groups.

The growth plans had already given Miller a huge workload. Now, he's taking on Bravo's merchandising role, too. Miller says he can handle the added work because he spent most of his career in merchandising at places such as Marshall Field's and Neiman Marcus. And, he preceded Bravo in the merchandising role at Saks. Besides, he says, "the [expansion] strategy is in place, so that work is done."

Still, retail experts say Miller is spread too thin. "He's got to bring in a top general merchandise manager," says Howard Davidowitz, chairman of New York consultants Davidowitz & Associates Inc. "He can't handle all this." If such fears prove right, September won't be the last cruel month for Saks.

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