Saks to end discounts of prestige brands- FT.com

[NorCal_1]

Saks to end discounts of prestige brands
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By Jonathan Birchall in New York

Published: February 25 2009 19:00 | Last updated: February 26 2009 02:33

Saks, the US luxury retailer, on Wednesday said its aggressive discounting of prestige brands would not be repeated in the year ahead but predicted falls in sales and a shift to a lower-priced mix of products.

Stephen Sadove, chief executive, compared the price cuts of up to 70 per cent that Saks rolled out in early December with the discounting produced by the slump in demand following the September 11 2001 attacks.

"Is demand going to be as high as it was? In the short term, no," he said.

"But I anticipate that if you have more of a balance between the supply and demand, it is unlikely you will see the same kind of discounting going on."

The retailer said it expected comparable store sales to fall 20 per cent in the first half and to be down in the mid to high single digits in the second half.

Yet it predicted that its gross margin rates would recover by the second half as its exceptional discounting ended.

Robert Drbul, a retail analyst at Barclays Capital, said ending the luxury customer's taste for steep discounts was "one of the biggest challenges" facing Saks.

"The customer has become accustomed to the clearance sales, the discounting, the 70 or 80 per cent off, and ending that thinking is a huge challenge," he said.

Saks reported that its network of 104 stores lost $98.8m in the Christmas quarter as its forecast of a sales increase of more than 4 per cent turned into a 15.3 per cent decline.

Mr Sadove said the retailer had had no option but to cut prices and to cancel and return orders to its vendors around the world, leading to it ending the year with inventories down about 14 per cent on a year ago.

"It was an ugly period - we ruffled some feathers," he said in a reference to the retailer's relationships with suppliers.

The discounting reduced Saks' gross profit margins to about 20 per cent from 37 per cent a year ago, a steeper drop than analysts had expected.

Saks said it was expecting its vendors to provide products at price points more in line with the current climate.

Net sales for the chain fell 14.9 per cent to $835.5m during its fourth quarter.

Its shares, which were trading above $17 a year ago, closed up 15 per cent at $2.13 in New York.

 

[Kuro]

I see the same thing at BG and Barneys; selection is not what it was. However, I wonder how they reconcile this with the new Kiton boutique that they are opening?

 

[cwh812]

Hello, I'm a newbie and this is my first post. Been lurking for a couple weeks and think this place is great.

I think the steep discounts were a bad business decision and will not be soon forgotten by customers and SFer's. I took part in those huge sales in Nov. and Dec. and I can't bring myself to pay full price for almost anything now - I think this sentiment is shared by others and will last a while.

It helped clear out the inventory, but as the WSJ article today noted it is going to be challenging weaning its customers off of steep discounts. As a customer I was thrilled by the discounts and amazed at the items I purchased. I think it was a bad move by them though and they should have found other ways to offload inventory (i.e. Off Saks 5th and other discount stores). The WSJ article points out that even with the off-loading of the inventory and big sales in the 4th quarter they still took a massive hit.

 

[babygreenspots]

Why did I have to be in China for the best sales of the century?

 

[83glt]

It's pretty simple really. If the consumer simply holds out and refuses to buy, at some point these retailers will have to offer the steep discount, or simply not carry the high-end items at all anymore. And at that point, what will these stores be living on? Reputation alone? That won't carry you far if you've basically become a more expensive or fancier Sears. These guys offered blood to the vampires, what do they expect?

 

[Cary Grant]

Originally Posted by 83glt

It's pretty simple really. If the consumer simply holds out and refuses to buy, at some point these retailers will have to offer the steep discount, or simply not carry the high-end items at all anymore. And at that point, what will these stores be living on? Reputation alone? That won't carry you far if you've basically become a more expensive or fancier Sears. These guys offered blood to the vampires, what do they expect?

Not really- this current economic climate is, in many ways, unlike anything any current consumer, company, CEO or board has lived through. It's incited some pretty panicky behavior.

If the economy is such that people cannot afford what is being sold, there are a few choices:

Consumers can go to Target instead of Barneys
Barneys can sell products much lower in price, but that's not why most folks shop Barneys. The crowd who drops $350 on a tshirt isn't generally worried about cost.
Or the consumer can stop buying altogether or shops go out of business.

I chuckle at folks here who lambast a place like Barneys for prices that are ungodly high. Those folks aren't Barneys key demo.

I also roll my eyes at many people who want high-end everything: fancy shoes, unique clothing, etc yet feel it should be priced more like Sears or Target.

 

[cchen]

I think they definitely changed consumers' views on luxury goods pricing, especially in the metropolitan cities where they had the best merchandise discounted. For those here, however, I don't see it changing much of anything, as I know most SF'ers never paid close to full-retail price anyway. I never did, at least, except for items that never or rarely went on sale (mostly SW&D clothing). If they choose not to discount as much, I can always do MTM for cheaper.

 

[Taxler]

Originally Posted by Cary Grant

...I also roll my eyes at many people who want high-end everything: fancy shoes, unique clothing, etc yet feel it should be priced more like Sears or Target.

Sears and Target aren't doing well either. Perhaps consumers want the good stuff deeply discounted or nothing at all.

 

[Cary Grant]

Originally Posted by Taxler

Sears and Target aren't doing well either. Perhaps consumers want the good stuff deeply discounted or nothing at all.

Sure- that's the tough economy. And the longer it goes on, the harder it will be on retail. Just like the 30's. And some businesses won't recover.

However, that's not an indictment of previous pricing, simply a statement of consumers' spending power.

 

[dkzzzz]

US consumers in an absence of consumer protection in this country are used to SALES being held 330 days out of the year. So the argument that consumers are not going to pay full price since Saks 70% sale is a fantasy .
In absence of alternative consumers will chuck it up and start paying $399 for Kiton shirts on sale and be giddy about it, again.

Sacks sale or Barney's warehouse sales or Paul Stuart bi-annual sales or numerous other high end sales do not affect those respective retailers . What it does, aside from obvious, it brings some of the frugal consumers into the fold and turns them into full retail customers.

Because lets admit it: Once you tried 2-ply Chinese Loro Piana cashmere you could never go back to 2-ply Chinese non- Loro Piana cashmere...

 

[jcc123]

What are you people on? I've never paid retail. The money is in my pocket so I can wait as long as it takes.

 

[robin]

Originally Posted by Kuro

However, I wonder how they reconcile this with the new Kiton boutique that they are opening?
The layout and design for that boutique is pretty tacky.

 

[KaiserSose]

Well this makes me glad I purchased 17 dress shirts, five pairs of pants & about 10 other items from there in the last four months.

 

[83glt]

Originally Posted by Cary Grant

Not really- this current economic climate is, in many ways, unlike anything any current consumer, company, CEO or board has lived through. It's incited some pretty panicky behavior.

If the economy is such that people cannot afford what is being sold, there are a few choices:

Consumers can go to Target instead of Barneys
Barneys can sell products much lower in price, but that's not why most folks shop Barneys. The crowd who drops $350 on a tshirt isn't generally worried about cost.
Or the consumer can stop buying altogether or shops go out of business.

I chuckle at folks here who lambast a place like Barneys for prices that are ungodly high. Those folks aren't Barneys key demo.

I also roll my eyes at many people who want high-end everything: fancy shoes, unique clothing, etc yet feel it should be priced more like Sears or Target.
I guess my point was that the high end retailers' problems regarding consumer expectations have been largely self-inflicted. Are you saying that no one in the boardrooms raised long-term concerns with slashing prices so steeply? I highly doubt it. Yet, the decision to go forward was made. Once those expectations are set, how difficult it will be for the retailers to revert back. And that's the problem they're facing now. But implicit in this being a "problem", is the fact that the retailers want to continue to draw consumers of all income levels. Because they must realize that if they intend to solely rely on the wealthy, they're in for dark days ahead.

 

[Toorman]

It's all about supply and demand. Way to much supply and too little demand = 70% off. The key for them is to find the right inventory balance. You need enough product that you don't prematurely sell-out yet not to much that you're forced to drastically cut prices to empty your warehouses. It's one thing to move your house brands at 70% - another to give away Isaia, Oxford and RLPL at 70%. The draw to purchase will be scarcity. The fear that if you pass on an item today it won't be available later on sale. The problem is, they can get it right but if Barney's get's it wrong, I'll be there grabbing the deals. My concer is that there will be a lot of downward price pressure on the suppliers and they will have to choose between maintaing their integrity or pricing themselves out of the market. I would not be surprised to see some diffusion lines in the near future.