Saks Fifth Avenue Switches to Edgier and Pricier Designs in its Stores

Saks has received a makeover which returns the retailer’s look to that of its glamorous past and adds new and innovative designs meant to increase customer traffic.

Apr 13, 2014 at 10:00AM

It's a new day for Saks Fifth Avenue.

The retailer owned by the Canadian Hudson's Bay Company (TSX:HBC) is revamping the look of Saks' stores and changing its merchandise styles to bring more unique items to its customers. The change in direction comes from Saks' new president, Marigay McKee, imported from London's Harrods, who is wasting no time in injecting new energy into the company. Saks' buyers have been instructed to make their buying decisions with their "gut," using "passion and instinct."

Conservative styles are out, while edgier and more-exotic choices are in
For several years conservative gray-suited men, who favored more commercial and safer fashion choices, ran Saks. The tone they set for the retailer's buyers lulled the company into a somewhat bland selection of goods. Ms. McKee, who came on board in January, is changing all that and she's seeking to cater to the typical Saks customer, a 48-year-old woman. She should know, since The Wall Street Journal described her as "an energetic 48-year-old" who "...seems not to know the meaning of hesitation ."

Much of the new merchandise on offer comes from emerging designers, whose inexperience and at times unstable businesses can scare away established retailers. After chasing cost-conscious luxury goods during 2008's financial crisis, the company now looks to add apparel with more complex designs and exotic materials. The first full collection under Ms. McKee's watch will arrive in time for Fall 2014.

As far as Saks' physical stores, the retailer will return to its glamorous roots; the New York City store will have black awnings, topiaries by the front doors, and doormen dressed in black uniforms. Store boxes will come in the colors of black and white, the new color scheme the retailer has chosen for its decor.

An opportune time for change
The change in merchandising strategy comes at an opportunistic time as Saks grapples with the results of heavy discounting of its merchandise, which prompted customers to delay purchases in hopes of securing better deals. Saks has reported flat sales in recent quarters. The latest earnings report shows that for fiscal 2013, ended Feb. 1, 2014, fourth-quarter consolidated same-store sales rose by 3.1%.

Hudson Bay completed its acquisition of Saks in November 2013; the company paid $2.9 billion in cash plus debt for the U.S. retailer. Hudson's sales growth strategy with Saks includes expanding the online business and OFF 5th, the Saks outlet store business. The company plans to open 25 OFF 5th stores in Canada and seven full-line Saks Fifth Avenue locations. By fiscal 2016, in addition to top-line growth, Hudson expects to earn $100 million in annualized synergies from the Saks acquisition .

Saks will need to contend with other fashion authorities
As Saks updates its fashion lines, rival retailer Nordstrom (NYSE:JWN) has a strategy of engaging with its customers through multiple channels, which increases customer loyalty to the retailer. The company also offers a rewards program that invites repeat purchases from its customers. Nordstrom has noted that customers are visiting its stores twice as often and spending three times as much because of the rewards program. For fiscal 2013, the company's net earnings were mostly unchanged as they dropped 0.1% to $734 million; earnings per diluted share increased 4.2% to $3.71 .

Nordstrom has a strategy similar to that of Saks -- moderate growth of its full-line stores and a more aggressive expansion of its Nordstrom Rack outlet stores. In 2013, the company increased its online selections by 30%; Saks may need to play catch-up in this channel with its rivals, as it appears to be placing a greater short-term focus on its physical locations. Saks has been investing in its digital business, which it expects to grow its revenues over the long term. Like Saks, Nordstrom also sees growth in Canada and it predicts $1 billion sales potential in this market.

Bloomingdale's, owned by Macy's (NYSE:M), offers full-line, upscale merchandise selections which compete more directly with those of Saks. During fiscal 2013, Macy's had its fifth-straight year of double-digit growth in EPS and its fourth-straight year of same-store sales growth. In the past four years, its total sales have grown by more than $4.4 billion.

Macy's and Bloomingdale's are also engaging with their customers through various channels that include physical stores, mobile devices, and computers . Like Saks, Bloomingdale's is working to separate from mainstream apparel and reinforce its authority within upscale, contemporary fashion. There's a focus on mixing a variety of established brands and up-and-coming designers. Bloomingdale's seeks to open smaller stores and plans to continue its own rewards program, which is similar to Nordstrom's and helps to increase customer loyalty .

My Foolish conclusion
Saks' parent company Hudson's Bay's shares fell by 5.1% last week when it missed market forecasts. The company expects that its EBITDA will range between $526 million to $562 million in 2014; according to Bloomberg, the market predicts an average EBITDA of $624 million . The company says it's working on expanding its gross margin and its acquisition of Saks should help in this regard . Current Hudson Bay investors could benefit from Saks' new and unique merchandise, which could bring the retailer additional profits in the next few quarters and make it more competitive with its fashion-forward rivals.

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