Saks’ Stumble No Surprise

Saks (SKS) just reported a wider second quarter loss. I’m going to go out on a limb here and say that I am not surprised. No, not because the U.S. economy is shrinking and the dollar is getting sand kicked on it by a pumped-up euro. The reason is that while Saks positions itself as a luxury brand it just isn’t quite luxurious–or global–enough.

Sure, Saks sells Prada, Jimmy Choo, Oscar de la Renta and a host of other big-name labels but it also sells a lot of other, less well-known brands across a wide range of price points. But unlike brands such as Hermes (HRMS) or Manolo Blahnik (neither of which are sold at Saks), it tries to appeal to too wide an audience. That might have worked when the economy, artificially pumped up by a booming housing market and cheap credit, was roaring along because many of its middle-income customers felt comfortable buying more than they could afford. No longer.

To compound matters, Saks, like many other department stores, became over-dependent on customers who used inhouse charge cards to pay for their merchandise. And believe me, when belts get tightened the first thing many people ignore or choose to pay the bare minimum on is their inhouse charge cards. So that pool of customers has shrunk considerably.

And while many luxury brands, such as the aforementioned Hermes or Jimmy Choo, have actively expanded their reach into developing markets such as Russia and India, Saks remains a purely U.S. play. This has hurt Saks because it is these developing markets that are spurring much of the revenue growth in the luxury fashion and accessories business these days. Another problem, albeit a more psychological one, is that even when Euro-laden shoppers hit U.S. stores they are less inclined to hit the big department stores. The reason? In my opinion it is simply because most shoppers would rather have a shopping bag or a shoe box that says ‘Chanel’ than a bag or box that says ‘Saks,’ which has little overseas brand resonance. If one is going on a shopping spree, one wants as much cachet as possible to go with their new purchases.

The last and possibly biggest problem with Saks announcing a wider loss and 3.5% revenue drop-off to $669.2 million is that much of the department store world works on consignment. Company buyers place orders with designers in advance of each season. If the store fails to sell what it orders, that means that it takes longer for the designers to get paid. That in turn makes the designers more wary about working with the store in the future because they have their own bills to pay too. And if Saks suddenly finds itself unable to offer the range or chic its remaining customers expect, they will ultimately go elsewhere. Of course, Saks has been around a long time and has weathered worse storms, but it would seem that if they haven’t already, they may want to start looking at commercial space in Shangai and Moscow.

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