Can a New Leader Save Scandal-Plagued Saks?
By Ellen Florian Kratz


(FORTUNE Magazine) - Something clearly had to give. When we wrote about Saks in August (see "Marked Down" on fortune.com), the luxury retailer was besieged not only by SEC and federal probes into the improper collection of markdown money--what retailers charge vendors when merchandise fails to move swiftly--but also by an anemic growth rate and operating margins well below those of its competitors. So shareholders applauded in January when Saks Inc.'s beleaguered chairman and CEO, Brad Martin, relinquished the corner office to his handpicked successor, COO Steve Sadove (Martin remains chairman through 2006).

But Martin's exit doesn't mean an end to Saks's troubles. "The whole business, honestly, has been a debacle," says Howard Davidowitz of retail consultancy Davidowitz & Associates. During the Christmas season, Saks Fifth Avenue posted same-store sales growth of 3.1%, compared with 8.6% at Neiman Marcus and 7.7% at Nordstrom. Costs remain way out of line, and corporate bloat is one of the first things the new CEO wants to tackle. "We're going to be looking at every line item of the P&L to right-size the cost base," says Sadove.

The new CEO is known for his diplomacy, but critics note that, like Martin, Sadove has little background in retailing--he came from the beauty-products division of Bristol-Myers Squibb. "What Saks needs is a strong retail merchant, not just a general, if talented, executive," says Parker Phillips of hedge fund Bondurant Management, which holds shares of Saks. Counters Sadove: "When I went from General Foods to Clairol, everybody said, 'What the heck does a food guy know about beauty?' ... It turned into one of the fastest-growing consumer companies during the '90s."

Sadove's background may not matter. Some think his mission is to dismantle the company. (Sadove declines to comment.) Last year Saks sold off two of its department store chains. It's about to unload five more and has announced that another, Parisian, is on the block. That will leave the company with just Saks Fifth Avenue and Club Libby Lu, a preteen specialty store.

The possible endgame? "You get down to the core business and you make it perform," says Davidowitz. "Then you can sell it for a pretty penny." It's doubtful it will be anything like the $5.1 billion that Neiman Marcus recently fetched, but at least it could offer some relief to long-suffering shareholders. Top of page

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