Saks Fifth Avenue Liquidation Program

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Luxury slide could spur closings and consolidation

The announcement in late January by Saks Fifth Avenue that it plans to cut 9 percent of its workforce as a result of slumping economic conditions could portend things to come for the luxury retail sector, warn analysts. Little more than a year ago, analysts forecast luxury retailers would average annual growth of 6 percent, making the sector resistant to the effects of a downturn. But today, as wealthy consumers reel from the plunge in the stock market and mid-tier shoppers shift to discount retailers, luxury looks like the most vulnerable retail sector.

While most of the retail industry struggled in 2008 (same-store sales for all U.S. chain stores rose just 1.1 percent for the year), the luxury sector experienced same-store sales declines during 10 of the past 12 months, according to ICSC. Things got worse as the year went along as well. In each of the last four months of 2008, luxury retailers posted double-digit same-store sales declines, including a 10.5 percent decline in November and a jaw-dropping 17.4 percent decline in December. During those months, same-store sales for all U.S. stores declined 2.7 percent and 1.7 percent, respectively.

So far, the disappointing sales figures have not resulted in luxury store closings or bankruptcies. However, it’s only a matter of time, according to C. Britt Beemer, CEO of America’s Research Group, a Charleston, S.C.-based consumer behavior research firm. Jeff Green, president of Jeff Green Partners, a Mill Valley, Calif.-based consulting firm, foresees closings for both Saks Fifth Avenue and Tiffany & Co.

“I wouldn’t be surprised to see Saks close some stores; some of [its] smaller secondary market stores or smaller tourist market stores,” Green says. “They are going to need more cuts than they have announced. And it wouldn’t surprise me if Tiffany closed a few, but remember these are [companies] that haven’t closed stores for a while.”

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The ongoing recession has taken its toll on brand-conscious aspirational shoppers—middle-class and upper-middle class consumers willing to spend a portion of their income on luxury brands normally reserved for the truly wealthy. Meanwhile, customers of luxury retailers have also been disproportionately hit by Wall Street layoffs and troubles in the stock market, notes Craig Johnson, president of Customer Growth Partners, LLC, a New Canaan, Conn.-based retail consulting firm. Meanwhile, the strengthening dollar—which has risen more than 15 percent against the Euro since August 2008, as well as the global reach of the recession, have diminished foreign traveler’s spending power and reduced the number of tourists visiting the U.S. for luxury bargains, he says.

“There is a triple-whammy and luxury has not been hit like that in our memory,” according to Johnson.

As a result, Johnson too, expects consolidations among luxury sellers in the near future; particularly in the jewelry sector. Green estimates between store closings and lower sales, luxury retailers will experience flat same-store sales growth this year. Surveys by America’s Research Group show that since September, luxury retailers have been struggling more than discount or mid-tier stores. In the first two weeks of January, for example, traffic at jewelry stores fell 1.2 percent compared to the prior year, the worst decline in 30 years. During the same period in 2008, traffic was up 15.4 percent.

“The luxury side is challenged because so many of the dollars spent by those shoppers are discretionary dollars,” Beemer says. “Luxury is going to be the most difficult to turn around for at least two or three years.”

In December, Saks Fifth Avenue, the New York City-based luxury department store chain, reported a 19.8 percent decline in same-store sales, after a 5.2 percent dive in November. On January 15, Saks said it would eliminate approximately 1,100 positions among its corporate staff and at its 53 U.S. stores , citing the sluggish economy.

Meanwhile, Neiman Marcus reported same-store sales declines of 27.5 percent in December and 11.9 percent in November. The Dallas-based company operates 40 Neiman Marcus stores and two Bergdorf Goodmans.

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A week ago, Tiffany & Co. reported U.S. same-store sales for the November/December 2008 period dropped 35 percent. To deal with the new “retail environment for luxury goods,” the company’s chairman and CEO Michael J. Kowalski already announced cost-saving measures, including an early retirement program. The upscale jewelry retailer operates 70 stores in the United States.

–Elaine Misonzhnik

Saks Fifth Avenue Liquidation Program Online

At 7 a.m., 10 senior Sears executives gather in a sixth-floor conference room in Hoffman Estates for a daily meeting — or, as some refer to it, a 'daily beating' — with Edward 'Eddie' Lampert.

Via teleconference from his home base in Greenwich, Conn. (and, at least one time, via a call from his yacht in Italy), the famously mercurial Sears Holdings Corp. chairman listens to updates on everything from the company's market segmentation strategy to its IT issues. Some days, he barely glances up from his laptop. Other days, he rips into executives before they've gotten through the second screen of their PowerPoints.

But not knowing whether it's going to be a good Eddie day or a bad Eddie day is just the beginning of the uncertainty that plagues the hallways of Sears' northwest suburban corporate complex.

'You never know what the strategy or the plan is,' says one executive who requested anonymity because of a confidentiality agreement. 'What are we building? What are the criteria for success?'

Sears soon may face more fundamental questions. After the second-worst year in the company's history, and with its annual shareholders meeting two weeks away, there is open discussion of a once-unthinkable proposition: Will this 126-year-old company, which helped define modern America, continue to exist?

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'The challenges the company faces today are far worse than ever before, but they're very much self-inflicted,' says Arthur Martinez, who served as CEO from 1995 to 2000.

Saks Fifth Avenue Liquidation

From its origins peddling watches to Minnesota farmers, Sears Roebuck & Co. morphed into one of America's corporate juggernauts. Along with a handful of other corporations — General Motors Co., IBM Corp., General Electric Co. — Sears created the cultural and economic context of the American Century. But even more than those other companies, Sears reflected everyday Americans' way of life.

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In its early years, the Sears catalog offered a previously unimaginable cornucopia of merchandise to a rural nation lacking many creature comforts. Those pages of baby buggies and dresses, shoes and sewing machines — even violins and ready-to-build homes — helped conjure dreams of a better life.