Q&A with Steve Sadove, CEO of Saks, Inc.

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Steve Sadove, CEO of Saks, Inc., answers some questions about customers, competitors, vendors, the impact of the great recession on high-end retailing, and some of the strategies he and his team are implementing to turn around the great American luxury brand.

Q:You and your team began a turnaround effort during the Great Recession, about which you said “Don’t let a good recession go to waste,” and you did not. At what point are you in that turnaround, and what remains to be done?

A: Maybe we’re on the third or fourth inning of a nine inning game. We’ve made some great strides, but recognize we’ve still got a long way to go. At the peak, some of our competition was at 11-12% operating margins. We had aspirations to go to an 8% operating margin, which I absolutely believe we can achieve, but it’s going to take time. We’re still at the 2% level. We’re making enormous efforts along many fronts – cost structure, rationalizing the store base, getting out of some underproductive stores, merchandise mix, more exclusives, technology to improve gross margin, etc. Remember, this is a business that took a punch to the stomach, and lost $600-700 million in revenue, off a $3.3 or 3.4 billion base. We’ve survived the blow, and we’re recovering from it. We’ve got the balance sheet in order, and have started investing in some key areas of the business, like the Internet, which had not been sufficiently invested in. I feel very good about where we are, but it’s still early.

Q: What does the Saks brand stand for today?

A: Saks has always been a luxury brand, and you can’t change the customer’s mind about that. It has a classic New York attitude, but it needs to be accessible and approachable, not so serious, and not just for the very rich, which is why we’ve spent a lot of time on developing advertising that has a little “wink” to it. We’ve also spent a lot of time in the stores helping associates be friendlier, which is especially important when times are tough. Let’s face it, people shop us for product and service. A welcoming environment is important, so we’ve started tying store performance to ratings of customers.

Q: Who is your core consumer?

A: She’s the 35-50-year-old woman with a household income of $200K-plus, who is fashion-focused and interested in the latest trends. We’ve seen the average age of our customer base decrease by about 5 years. And there’s an even younger customer – I’m guessing 6 or 7 years younger – who’s shopping us on the Internet, making that a meaningful part of the total business.

Q: Have you been implementing the much talked about localization efforts?

A: We’ve had localized assortments for years, and localization has always been a key part of our process. I can’t imagine anything more different from a flagship store in New York City than a small one in, for example, Raleigh, North Carolina. It’s night and day. The brand matrix and style offering will be different. Every one of our stores has a different buy. However, localization of marketing – having a different marketing plan for each store based on the demographics, lifestyle, age, values, etc., of the community, is a new area for us. How you market in Atlanta, where 50% of the target customer base is African-American, is very different from, say, San Francisco, which has a large gay community.

Q: How have relationships with vendors been since you took over the reins?

A: I think we have some of the best relationships with the vendor community and the designer brands in the industry today, for which I give a lot of credit to Ron (Frasch, President and Chief Merchant.) Relationships have actually improved during the recession, as we’ve been able to work very closely on innovation and creativity, whether on product or deal structures. These are true partnerships, and I feel better than ever about our relationships with vendors.

Q: You’ve said that 10% of product is private or exclusive. Will that increase? And if so, what will that do to your designer relationships?

A: We hope to see it grow to 20%, and some of that growth could very well be in the form of exclusive lines done for us by the designer vendors. Also, remember that Saks is a luxury brand, too, and we haven’t done enough with it. With “10022 Shoe” that was a way of branding a shoe department, similar to what we’ve done in Bridge with “Wear.” It’s like a specialty store within the store. Take a brand like Brunello Cucinelli (high end cashmere knitwear), which we’re doing phenomenally with. He’s doing Riva Monte which will be a Saks exclusive, and will be in some stores in which we don’t have Brunello.

Q: Do you have any leased space?

A: Most of the LVMH complex is leased, and we also do some leasing with Christian Dior, Fendi, and are piloting shops with Gucci and others. You can’t end up in the European model, though, with 50% leased. It only makes sense with vendors who know how to be retailers, who can maximize productivity, manage inventory, and introduce newness. Then it’s a win-win.

Q: Who is your number one competitor?

A: That’s a hard question to answer, because there are so many pieces – direct and indirect. On a bullseye you would say Neiman and Bergdorf. In the contemporary space it’s Bloomingdale’s. In other areas Nordstrom and in some cases it’s the vendors. Indirectly, it’s even a bigger pool. There are some customers who’ll wear an H&M top with a Chanel jacket. The Internet is a competitor and an opportunity. We watch all of them.

Q: How would Nordstrom coming into Manhattan affect you?

A: I have no idea if they’re going to come. In the end, you’ve got to be about brands and service. I feel very good about our ability to compete in Manhattan.

Q: So, you’re still in turnaround mode, stabilized and growing again. Do you have a cohesive growth strategy going forward?

A: I hope we do! Differentiation is key, in terms of product, service, and mix. We plan to accelerate growth in the online experience, and feel that Internet could be 20% of the business in 5 years. We don’t feel like global expansion will be a vehicle for significant growth, however – we have a few licensed stores, but that’s really just the icing on the cake for us.

Q: What About China?

A: I don’t think we’ve cracked how to do it. Multi-brand luxury hasn’t yet emerged in China. Consumers there are very brand-focused.

Q: Speaking of Globalization, how have the investments in Saks by Carlos Slim and Diego Della Valle impacted the way you do your business? Do you treat them differently from other institutional investors?

A: We don’t treat them any differently. We communicate with them regularly just like we do with any investor, and we’re happy to have them as investors. Diego came to us in the depth of the recession and said “I believe in the brand and the company.” We told him it’s a public company you can do what you want, but he wouldn’t buy in unless we agreed. He’s done very well with his investments. But both are passive investors with no management role.

Q: Does their presence insulate you from any activist activity like JC Penney has had to contend with?\’

A: We haven’t had any activist activity. Honestly, I don’t know what we’d do differently. Does it insulate us? It might – they two of them have 35% of the shares.

Q: What about private equity interest in department stores in general, and Saks in particular?

A: There’s no doubt that the private equity sector is interested in the department stores. TPG/Pincus Warburg own Neiman’s, and TPG went after J. Crew last week. I don’t look at it as a private or public question, I just don’t think we’d do anything differently.

Q: This is a bit of a philosophical and economic question, but do you think that value in the aggregate is being pushed down, as evidenced by the fact that more outlets are being opened, that designers are opening up diffusion brands, like Vera Wang in Kohl’s – is this, in effect, lowering all ships?

A: First of all, the word you chose – Value – is a very important word in the luxury sector. Value can mean low price, but it can also mean high price for very high quality. You see ads showing what goes into making a Louis Vuitton bag, because it’s important that the consumer understands. You do also have brands that are trying to broaden their appeal by playing across various segments. It’s a game that can be successful but is fraught with risk. The most successful at this has been Ralph. He’s maintained his positioning at the top while establishing a mainstream following. But the market is littered with brands that have ruined their image doing so.

Q: How do you see business in 2011?

A: I don’t know what comps are going to be. We haven’t given any guidance for 2011 yet, but we’re feeling better about the consumer and the environment. The stock market at 11,000 is much better than at 6,500.The primary determinant of our sales is how consumers feel about their net worth. There are still clouds on the horizon, though. We’re making a number of bets, going on the offense, for example getting much more aggressive in some areas, like shoes and handbags. But we’re reasonably optimistic going into next year. Although the aspirational customer took a hit, and will be slow to come back, there is a core luxury consumer that is alive and healthy, and I’m very encouraged by what I see.

See our video interview with Steve Sadove >>



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