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Saks Net Up, Margins Down

Saks Inc. is out to make sure the aspirational consumer sticks around despite the economic malaise.

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with contributions from Jeanine Poggi
financial/news
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Stephen I. Sadove

Photo By WWD ARCHIVE

NEW YORK — Saks Inc. is out to make sure the aspirational consumer sticks around despite the economic malaise.

The luxury retailer on Tuesday reported a 66 percent jump in first-quarter earnings to $18.3 million, or 13 cents a share, but aggressive promotions dented profit margins as the retailer responded to the hyper-promotional retail atmosphere in which even the most affluent shoppers responded to the siren call of discounts. As a result, Saks is being cautious while at the same time remaining aggressive about product development, with a major push in the bridge category, and marketing initiatives.

"The high-end consumer continues to be healthy, and they're also liking a deal if they can get one," chairman and chief executive officer Stephen I. Sadove said. "The aspirational customer is having a little bit of a harder time. We're seeing more pressure in the 'good' and 'best' categories. The consumer is operating as if we're in a recession, whether we technically are or not."

Sadove was referring to a program aimed at "good, better and best" customers, with "good" targeting entry-level price shoppers, "better," aspirational shoppers and "best," high income consumers.

Saks' first-quarter earnings compared with profits of $11.04 million, or 7 cents a share, in the corresponding period a year ago. Revenues in the first quarter rose to $862.4 million, compared with $792.8 million in the same period a year ago, which included a one-time charge last year of 12 cents a share. Same-store sales rose 8.4 percent.

The heightened promotional agenda, prompted by a desire to clear inventory and compete effectively with other stores, included a more extensive Friends & Family event and the acceleration of a spring season clearance sale into the last week of April this year from the first week of May last year.

The impact of the promotional activity was a 320 basis point decline in the gross margin rate, with about 175 basis points of the deterioration attributed to clearance markdowns moved into the first quarter. The fall in gross margins resulted in a 30 percent decline in operating income (excluding prior year certain items) to $40.1 million for the quarter.
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