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WIKI ANALYSIS
Saks Incorporated (NYSE:SKS) sells luxury apparel, shoes, jewelry and accessories in the U.S. through its Saks Fifth Avenue (SFA), Saks Fifth Avenue Off Fifth and Club Libby Lu (CLL) stores. The company managed 5% average annual sales growth from 2001 to 2006 but it lagged the overall luxury retail market, which grew during the past decade at a double double-digit annual clip. Sales growth picked up in fiscal 2007 as net sales totaled over $3.2 billion, an 11.6% increase from 2006. However high expenses took a 39% gross margin rate down to a 3% operating margin for the year.
Saks—and most other luxury goods retailers—are relatively shielded from trends such as rising oil prices because it targets a higher-income demographic; however, luxury consumption exaggerates more fundamental up and down swings, typically rising and declining at a faster rate than the overall economy. Evidence of this has surfaced in the first quarter of fiscal 2008 as net sales and comparable store sales grew 8.7% and 8.4%, respectively, while net profit increased 66% (largely due to non-recurring charges in last year's first quarter).
Saks depends heavily on consumption from foreigners. Already, the company sources about 20% of its sales from tourists, and global instability such as terrorism would be a blow to the companies sales. In addition, Saks has been more active in expanding its retail locations overseas, having built or announced specific plans for SFA stores in the Middle East (Saudi Arabia and Dubai), as well as Mexico and China.[1]. Success in the latter could have pave the way for significant growth because luxury consumption in China is growing fast, as the population there becomes increasing wealthy.
Business Overview
Saks owns and operates luxury retail stores, selling high-end fashion apparel, accessories and furnishings to its traditionally middle-aged, higher-income female customers. While the company is best known for and most profitable with its Saks Fifth Avenue (SFA) stores, its Saks Fifth Avenue Off 5th (re-named in Q1 FY08 from just "Off 5th") and Club Libby Lu (CLL) units also make up a bulk of the company’s retail locations:
Stores and locations
As of May 2008, Saks operated 54 SFA stores, 48 Sakes Fifth Avenue Off 5th units, and 90 CLL specialty stores and also maintained an affiliation with an e-commerce site, saks.com. While most of its stores are in the U.S., the company does have SFA stores in Riyadh, Saudi Arabia; Dubai, United Arab Emirates and Mexico City, Mexico. Saks also plans on opening a store in Shanghai, China during fiscal 2009. Some items of note:
- In fiscal 2007, nearly 20% ($600 million) of the company’s sales came from the flagship SFA store in New York City. [2]
- CLL revenues account for less than 2% of total company sales annually. [3]
The company previously operated the Saks Department Store Group (sold to Belk in July 2005), the Northern Department Store Group, (sold to Bon-Ton Stores (BONT) in March 2006), as well as Parisian department stores (sold to Belk in October 2006).[4]
Products
Saks sells through these retail location a variety of designer apparel and accessories, including those made by premiere American and European fashion houses such as Louis Vuitton, Armani, and Ralph Lauren. In recent years, SFA has expanded their product offerings to be geared towards the notoriously fashion fickle younger demographic. [5]
Financial Performance
Saks managed 5% sales growth from 2001 to 2006, lagging the luxury retail market, which grew during the past decade at a double double-digit clip.
Total sales in fiscal 2007 increased by 11.6% to $3.28 billion while same store sales growth rose by 11.7%.[6] The increase in the critical retail metric came from increased sales of full-priced merchandise [7] as well as an accounting blip that increased FY 2007 by one week (this occurs every six years of the accounting cycle), supplementing a $43.6 million increase in sales.[8]
Saks Incorporated posted operating losses from 2004 through 2006, as the company suffered from a significant decline in gross profit margins, poor inventory management and high discounting.[9] However, the retailer turned a profit in fiscal 2007, earning a 3% operating margin on its sales for the yea.
Trends and Forces
Luxury retail exaggerates swings in economic cycles
While luxury goods consumption is well-insulated from trends such as rising oil prices, the industry is sensitive to longer-term changes in economic cycles, as luxury goods exaggerate up and down swings. During a boom, consumers' demand tends to increase faster than the growth rate of economies while slowdowns can lead to rapid declines in sales. Reduced demand for luxury items might induce the company to take inventory markdowns or offer discounted items, which detract from the cache of expensive items. Saks also on the local economy of New York City, as its flagship store on Fifth Avenue there generated roughly 20% of the company’s sales in 2006.
Tourism drives 20% of sales
A substantial number of Saks’ department stores are in tourist markets, including the flagship SFA store on Fifth Avenue in New York City, and approximately 20% of the company’s total sales come from tourists. Global instability, such as terrorist activity would discourage tourism. Furthermore, many tourists take advantage of the U.S dollar’s weakness in relation to other currencies when buying from Saks; a strengthening of the dollar may discourage tourist business for the company.
While most of its stores are in the U.S., the company does have SFA stores in Riyadh, Saudi Arabia, Dubai, United Arab Emirates and Mexico City, Mexico.
Expansion to China, the next hotbed of luxury consumption
Expansion to Shanghai in 2009 may allow the company to ride the wave of luxury consumption in China. Currently, China is the third largest luxury goods market in the world, accounting for 12 percent of sales worldwide in 2006; at the rate of its current per capita income growth, China may surpass Japan in luxury consumption and become the world's second-largest purchaser of luxury goods by 2015.
High dependence on fashion trends
Much of success in the retail business depends on the company’s ability to predict and anticipate consumer tendencies as order agreements are made months in advance of sales to consumers. Consequently, if the company inaccurately predicts consumer preferences, it could face lower sales, an overflow in inventories and lower profit margins—all of which would adversely affect the company’s financial health. Missteps in this area led to negative operating margins in 2005 to 2007.
Competition
The luxury retail market has become increasingly competitive, and Saks’ prime competitors include Neiman Marcus (privately held), Nordstrom (JWN), Bloomingdale’s, and Barney’s (privately held), all of which offer comparable merchandise and cater to a customer demographic that earns roughly $175,000 to $200,000 a year, though Nordstrom targets a slightly less affluent average customer. In 2007, Saks' total sales of $3.28 billion were significantly less than sales figures at Neiman Marcus and Nordstrom, $4.39 billion and $8.8 billion, respectively.
- Saks’ merchandise is dominated by apparel, which constitutes about 55% of the total assortment
- Nordstrom derives a sizeable portion of sales from shoes
- Bloomingdale’s derives a high portion of its revenue from home goods.
Saks has an operating margin of 3%, significantly below that of its competitors, most likely due to an accrual of costs and sales losses from the selling off various branches of department stores.
While Saks operates more locations than either Neiman Marcus or Bloomingdale’s, the company announced that it will focus on improving its current infrastructure and not expanding, while competitors Neiman Marcus and Bloomingdale’s have made moves to continue opening new stores.
Regional Store Distribution [10]
| Saks | Neiman Marcus | Nordstrom (JWN) | Bloomingdale’s | Barney’s | |
| Northeast | 19% | 18% | 13% | 36% | 43% |
| California | 14% | 13% | 30% | 22% | 14% |
| West (ex California) | 9% | 8% | 20% | 3% | 14% |
| South | 12% | 18% | 8% | 0% | 14% |
| Southeast | 31% | 26% | 17% | 25% | 0% |
| Central | 14% | 10% | 8% | 11% | 14% |
| Northern Central | 2% | 5% | 2% | 3% | 0% |
| Regional Sales Exposure | 20% of revenues generated at NYC flagship | 11% of revenues generated Bergdorf Goodman, NYC location | Skewed toward the Northwest and West Coast | California, New York, and Florida account for more than half the store base | Skewed toward NYC flagship |
International Presence
While Saks’ international presence is still growing, Nordstrom's Façonnable outlets have 36 boutiques located in France, Portugal and Belgium, and distributes to over 45 countries. The branch also has licensee and franchisee agreements in Spain, Turkey, Greece, the Middle East, Taiwan, Canada and Latin America. Meanwhile, Bloomingdale’s, in addition to its primary U.S locations operates in Puerto Rico and Guam. Other competitors have not yet expanded beyond the U.S region.
References
- ↑ Saks (SKS) 10-K, Fiscal Year 2007, "Business," p. 1
- ↑ Saks (SKS) 10-K, Fiscal Year 2007, “Business”, p. 5
- ↑ Saks (SKS) 10-K, Fiscal Year 2007, “Business”, p. 1
- ↑ Saks (SKS) 10-K, Fiscal Year 2007, “Business”, p. 1
- ↑ Saks (SKS) 10-K, Fiscal Year 2007, “Business”, p. 1-2
- ↑ Saks (SKS) 10-K, Fiscal Year 2007, “Management’s Discussion and Analysis of Financial Condition and Results of Operations”, p. 24
- ↑ Saks (SKS) 10-K, Fiscal Year 2007, “Management’s Discussion and Analysis of Financial Condition and Results of Operations”, p. 25
- ↑ Saks (SKS) 10-K, Fiscal Year 2007, “Management’s Discussion and Analysis of Financial Condition and Results of Operations”, p. 24
- ↑ Saks (SKS) 10-K, Fiscal year 2007, “Management’s Discussion and Analysis of Financial Condition and Results of Operations”
- ↑ Company data
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