Still Seeking Synergy At Saks Fifth Avenue

By buying the troubled chain, critics say, Brad Martin may have bitten off more than he can chew

He's something of an accidental retail magnate. In 1984, when R. Brad Martin was a Tennessee real estate developer and longtime state legislator, he bought Proffitt's Inc., a chain of five local department stores, mostly because Martin was convinced the real estate was worth as much as the stores. But after the CEO retired, Martin was thrust into the job and caught the retailing bug. And in the ensuing years, he has earned a reputation as a savvy dealmaker with a thirst for acquisitions--five in four years, including such regional chains as Carson Pirie Scott, Herberger's, and Parisian.

Then, two years ago, Martin took his biggest gamble yet with the $2.1 billion purchase of the venerable but troubled Saks Fifth Avenue chain. The deal expanded his empire to 359 stores in 39 states and thrust Martin from the humble ranks of middle-market department stores into the international fashion scene. Martin's bet: that by consolidating Saks's back-office functions and investing free cash from his other chains, he could make the luxury icon more profitable.

The problem is that taking on Saks Fifth Avenue (SFA) is proving far more challenging than Martin had bargained for. While concentrating most of his attention on the Saks luxury stores, Martin's Birmingham (Ala.)-based conglomerate--which he rechristened Saks Inc.--has mostly struggled. Last year, Saks earned a mere $189 million on $6.4 billion in sales, less than half the profits the company made in 1998. In the first quarter of this year, earnings fell 19% to $32 million though analysts estimate full-year earnings of $241 million. As a result, return on investment is 4.7%, well below the industry average of 13.2%, says Howard Davidowitz, chairman of Davidowitz & Associates Inc., a retail consulting firm based in New York. Meanwhile, rivals from Neiman Marcus Group to Kohl's Corp. have been enjoying booming sales. "Saks, the whole company, is a company under stress," says Davidowitz.

With two years under his belt, Martin insists that big improvements are at hand. He's introducing new proprietary clothing lines and, to make sure they sell, he has promoted Saks veteran Christina Johnson to chief executive of the luxury chain. An up-and-comer at Saks since joining the company in 1991, Johnson is a well known merchandising and operations ace within the industry.

Even before she took over, though, the Saks team had been working to get the stores in better shape. Starting in 1998, they attacked waste in back-office operations. Credit-card processing, logistics, and legal services were folded into the parent company's leaner back-office network, generating $75 million in savings last year. The upscale department store's freewheeling army of buyers was reined in with new compensation plans that tied bonuses to performance. And Martin slashed construction costs for seven new Saks stores an average 25% by using the purchasing power of his chain. "It's taken longer to get to where I wanted, but I'm pleased with our progress," says Martin. So far this year, same-store sales are up in the high single digits, he says.

But with SFA far from fixed even as new problems crop up at his middle-market chains, critics wonder if Martin and his retailing savvy are spread too thin. "The Saks acquisition really hurt. They just weren't quite ready for it," says Kenneth Gassman, a retail analyst at Davenport & Co. Beyond back-office bloat, the luxury chain still suffers from marketing and image problems. Until recently, few concessions were made to regional tastes--the same merchandise was stocked in all stores. Far worse, the chain has an aging customer base and holds little cachet with younger shoppers. "The typical customer is a well-heeled woman aged 40 to 60," says Steven Kernkraut, an analyst with Bear Stearns.

"MORE FOCUSED." Now, the task of providing SFA with an image update falls largely to Tina Johnson, who took over as CEO in February. The first woman to hold that job at Saks, Johnson previously held posts at Carson Pirie Scott and Marshall Field's. After the departure in 1997 of Rose Marie Bravo, Johnson became the likely successor to longtime Saks CEO Philip Miller. As part of their grooming of Johnson, Martin and Miller gave her increasing responsibilities, first by making her vice-chairman of Saks in 1998 and then adding chief operating officer duties in 1999.

Under Johnson, SFA will get a series of new and more contemporary private-label clothing lines. Johnson is also imposing more discipline on SFA buyers, who now go into the field with more advance planning. That reduces the need for costly markdowns later. Vendors are already noticing the change in attitude. Buyers, for instance, are ordering "more focused" selections, says Paul Charron, chief executive of Liz Claiborne Inc. Even more important, he says, "they are better at adhering to order deadlines."

In another attempt to become more contemporary, Saks is about to launch an e-commerce site that will offer shoppers some 10,000 items. The company is investing $30 million in its Internet venture in hopes of building both deeper loyalty among its current customers and attracting new, Web-savvy followers--especially in the markets where Saks does not have stores. Analysts applaud the moves, predicting that SFA will post gains at stores open at least one year of about 5% this year.

But just as SFA may be getting its act together, it has become clear that Martin's long-stable department-store base is hitting the skids, along with much of the department store industry. Indeed, the drop in first-quarter earnings was mostly the result of weakness in the women's-apparel business at Saks Inc.'s regional retailers. Chains such as Younkers and Herberger's have struggled to handle the onslaught of aggressive rivals, such as Kohl's, which has gobbled up market share in the last year, and Target Stores, which has lured budget-minded shoppers with its expanded clothing department.

Martin, so busy attending to the job of fixing SFA, is only just getting around to addressing the problems at the other chains. His first move will be to give the chains more private-label merchandise in an attempt to differentiate them from the competition. In addition to that push, Martin has appointed a new executive vice-president for marketing. Martin has also enlisted buyers to be on the lookout for new suppliers who can give the tired stores some hip new lines. "We have clearly been too reliant on a handful of vendors," Martin says.

Critics say Martin's difficulties are bigger than just vendor choices. The problem, they say, is that there may be a lot less synergy between SFA and the rest of Saks Inc. than Martin originally expected. The two companies don't fit, says retail consultant R. Fulton Macdonald. While that doesn't mean that Martin can never make all his divisions hum, it certainly will take longer than everyone had hoped. "I don't expect great things from SFA in the next two to three years," says Macdonald.

Many investors aren't willing to wait that long. Saks stock now hovers around 10--a third its value a year ago and close to its 52-week low. "We lost confidence in their ability to grow at 20% [in earnings per share], which was our original expectation," says Matt Brown, manager of Wilmington Trust Diversified Equity Fund, which sold all its 75,000 Saks Inc. shares last August. So just put rebuilding credibility with Wall Street on Martin's priority list. As if he didn't have enough on his plate already.

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