Saks Holdings, Inc.

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Saks Holdings, Inc.

12 East 49th Street
New York, New York 10017
U.S.A.
(212) 940-4048
Fax: (212) 940-4299

Public Company
Incorporated: 1902 as Saks and Co.
Employees: 15,636
Sales: $2.19 billion (1998)
Stock Exchanges: New York
Ticker Symbol: SKS
SICs: 5311 Department Stores; 5651 Family Clothing Stores; 6719 Holding Companies, Not Elsewhere Classified

The name “Saks” is known throughout the retail world, synonymous with luxurious haute couture. Saks Holdings, Inc. is the holding company for the famous Saks Fifth Avenue retail chain which includes over 56 traditional full-line, resort-area, and Main Street stores, over three dozen OFF 5TH stores (a bargain-priced outlet chain), and its high-gloss direct mail service, called Folio. Saks, along with other tony retailers like Neiman Marcus, Barneys, and more recently Nordstrom, rule the fashion empire with beautifully outfitted stores from coast to coast, with an elite global clientele. With roots dating back to just after the Civil War, the company has undergone several ownership changes, including that by the Bahrain-based Investcorp International in 1990. Investcorp took Saks public in 1996, yet retained a 50 percent stake, which was then put up for sale in early 1998. In July Proffitt’s, Inc. announced that it would purchase Saks; the news was largely heralded by industry analysts, who saw a rosier future for the classic chain under new ownership.

The Earliest Saks Stores, Late 1800s to 1925

Andrew Saks was born in Baltimore, Maryland, and moved to Washington, D.C., to make his fortune. He established a successful clothing business in 1867, and opened a store in New York on 34th Street in 1902 as Saks and Co. Andrew Saks ran the New York store as a family affair with his brother Isadore, and his sons Horace and William. Young Horace, who had been privately schooled and attended Princeton University, became the driving force of the family enterprise after Andrew died in 1912. With a keen eye and good business sense, Horace pushed to open a new store on Fifth Avenue, to appeal to a higher-class clientele. At the same time Horace Saks was exploring his options in the New York retail world, another young man, Bernard Gimbel, was considering the attributes of a merger between the two families.

The Gimbels were well-known in the retail business, their empire begun in Vincennes, Indiana, in 1842 by Adam Gimbel. After successfully opening stores in Milwaukee and Philadelphia, Gimbel Brothers, Inc. (made up of Adam’s eight sons, including Bernard’s father, Isaac) opened a store in New York at Bernard’s urging. The resulting Gimbels built in 1910 at Broadway, between 32nd and 33rd Streets, was just a stone’s throw from Saks. After going public in 1922, Gimbel Bros, approached the Saks family, and the two joined forces. Although the Gimbel family ultimately secured ownership of the Saks stores, each continued to operate under the Saks name and Horace Saks oversaw operations.

In 1924, the first joint effort of the Saks and Gimbel families was to create an upscale “specialty” store on Fifth Avenue, between 49th and 50th streets. The proposed site of the Saks/ Gimbel store was in a mostly residential area, occupied by the Buckingham Hotel and the Democratic Club—both of which were demolished to make way for the store of the future. Saks and Gimbel envisioned an elegant high-fashion mecca of excellent fabrics and styles for men and women, with customer services to match.

The new Saks Fifth Avenue opened on September 15, 1924—a year in which Ford produced its 10-millionth car, Calvin Coolidge won the presidential election, and Knute Rockne’s Fighting Irish were undefeated. The store’s debut proved historic, as a monument to both architecture (the building won a gold medal from the Fifth Avenue Association for the best structure) and merchandising. In the midst of all the hoopla, Bernard Gimbel’s cousin, Adam, became Horace Saks’s right-hand man. It was a serendipitous move; for upon Horace’s untimely death from septic poisoning in 1925, Adam Gimbel succeeded him as president of Saks Fifth Avenue and was credited with not only keeping the Saks vision alive, but turning an extraordinary store into a national chain. In the years that followed, Saks Fifth Avenue garnered a global reputation, one that would eclipse even the Gimbel name.

High Times and Higher Sales, 1926-69

After Horace’s passing, Adam Gimbel initiated a series of progressive changes with long-ranging implications. As the permanent wave, invented by Antonio Buzzacchino, gave men and women a variety of hair fashions, Adam decided to give them a refashioned Saks. He turned the store into a modern art masterpiece a la Paris Exposition, and broke up the huge department-store floor into specialty salons for the discriminating tastes of his clients. While few stores measured up to Saks for many years, competitors emerged from time to time, some with far greater staying power than others. Among these was Neiman Marcus, a similarly elegant store founded in Texas in 1907 by Herbert Marcus, his sister Carrie Marcus Neiman, and her husband A. L. Neiman. The rivalry between Saks and Neiman Marcus kept both retailers on their toes into the next century.

Meanwhile, Gimbels had become the largest department store chain in the world, with some 20,000 employees and net sales of $123 million in 1930, a year in which the U.S. population had grown to 122 million, and New Yorkers could not stop talking about the Max Schmeling-Jack Sharkey fight. Bernard became president of Gimbels Bros. Inc. as cousin Adam made his name and reputation at Saks. As a purveyor of the finest in fashion and taste, Adam sought to distinguish Saks Fifth Avenue from its competitors and from Gimbels; the latter was not difficult since Gimbels catered to consumers of virtually all income levels and Saks dealt exclusively with wealthy shoppers who were enamored of Greta Garbo in Anna Christie and Marlene Dietrich in Blue Angel. To keep Saks head-and-shoulders above its competitors, Adam sought not just to meet his clients’ needs but to exceed them and predict them.

Saks and Gimbels remained intricately connected through the years, the former often mirroring the successes of the latter. In the 1950s, a time when 30 percent of the United States’ workforce worked in commerce and industry, retailing began moving out of the cities and into suburban areas. Gimbels was reluctant to jump on the suburban mall bandwagon, even as competitors built store after store in non-metro malls. Saks, too, was a city establishment and few could imagine a store of Saks’s reputation in a mall. Yet as more and more shoppers frequented outlying department stores, buoyed by the musical hit “Baubles, Bangles, and Beads,” Gimbels established its first in 1953. Like Gimbels, Saks eventually moved to suburbia as well, and even took another cue from the venerable chain—entering the bargain-priced merchandise arena as well.

By the mid-1960s as teens mooned over the Beatles and their folks crooned Sinatra’s “It Was A Very Good Year,” there were over two dozen Saks stores, many of them gracing the new suburban shopping malls. Gimbels, too, had grown to 27 stores, though the company’s fortunes were destined to slow down as Saks’s heated up. At the end of the decade, in 1969 when Adam Gimbel retired from Saks, Richard Nixon had become the 37th president of the United States, Apollo 11 landed on the moon, and the world’s population had grown to 3.5 billion people. It was a year in which inflation reared its head, though not so much so to Saks’s wealthy clientele. As Gimbel stepped down, ending an era of close association with both the Gimbel name and its retailing enterprises, he had managed not only to make Saks Fifth Avenue a jewel of Manhattan, but had placed similar gems in major metropolitan areas throughout the United States.

New Frontiers, 1970-90

Over the next two decades, Saks’s expansion plans branched into the direct-mail marketplace. Its first mail-order catalogue, Folio, was produced in the early 1970s, and sought to entice customers who could not get to a Saks store to order its merchandise. The catalogue also provided national exposure for the company, at a time when Saks was opening stores in the Midwest, Texas (Neiman Marcus’s stronghold), and elsewhere in the United States as older stores were remodeled and updated to maintain the high standards associated with the Saks name.

Towards the end of the decade, Saks began a construction project to renovate its New York flagship store (including the installation of escalators, an innovation widely used after Ellis Gimbel put one in the family’s Philadelphia store), heightening not only its look and feel but square-footage by building a 36-floor office and retail complex behind it. The massive undertaking, which took years to complete, gave Saks almost 30 percent more selling space, and a more spectacular landmark as well.

Company Perspectives

Saks Fifth Avenue’s customers are changing —and Saks Fifth Avenue is changing with them. Month by month, we are rolling out new initiatives focused to reach and satisfy this affluent and selective group. They are younger in spirit, increasingly discerning, career —and family —driven. They want quality, value and service. With our merchandising experience, we have the intuition to SENSE what these customers want —in fashion, cosmetics, fragrance, accessories and shoes —for their changing lifestyles. Our business, marketing and financial acumen gives us the ABILITY to deliver what they need, when and where they need it —in new and rewarding ways —at home, at work, at vacation resorts. Our innovative SENSE/ABILITY is propelling the continued growth of Saks Fifth Avenue as we move into a changing retail world.

By the 1990s, change was imminent. Saks was bought by the Bahrain-based Investcorp International for $1.6 billion, stunning the retail industry with a price said to be over $300 million more than the company was worth at the time. While analysts scratched their heads, Investcorp’s principals had long-range goals in mind—to trim expenses, expand sales, and add more luxurious stores in strategic locations. Nonetheless, Investcorp was known for buying well-branded companies and spinning them off (such as Tiffany & Company and later Gucci) and many wondered whether Investcorp would be true to form with Saks as well. Philip B. Miller was named vice-chairman in 1990, and Brian Kendrick was appointed senior vice-president and CFO the following year. At the close of 1991, Saks generated $1.25 billion in sales, though suffered an operating loss of over $40 million.

Public and Private Woes and Triumphs, 1995 and Beyond

In the early 1990s Saks, which previously sold “residue” merchandise to stores like Filene’s Basement, decided to try its hand in the burgeoning outlet market with a store called Saks Clearinghouse, in Franklin Mills, Pennsylvania. Though the move raised eyebrows and was decidedly unglamorous, the outlet store held its own with pricing from 25 to 75 percent lower than traditional Saks stores. The chain (later rechristened OFF 5TH in 1995) even produced a 64-page catalogue mailed to 750,000 Saks clients. While outlet sales in the industry remained strong, Saks planned to open as many as 20 new outlet stores, including one in downtown New York, not far from its flagship Saks Fifth Avenue store, over the next few years.

While some of the competition turned up their noses at the OFF 5TH gambit as beneath the status of a high-end retailer like Saks, others applauded the company’s initiative. Such initiative was Saks’s way of preparing for the future amidst ever-growing competition and a fluctuating marketplace. In 1993, Miller was named chairman and CEO, and the next year Kendrick became vice-chairman as Saks moved west in a big way, buying up former rival I. Magnin’s stores in Beverly Hills, Carmel, San Diego, and Phoenix. By the next year, when Saks West debuted on Rodeo drive, it was the largest retailer in the area with 260,000 square feet, including the space occupied by its sibling Saks East, which had been remodeled and expanded. For 1994, Saks’s sales were $1.42 billion with an operating income of $66.1 million.

Though Saks had dabbled in several retail areas to accommodate shoppers, like its mail-order business and OFF 5TH, less productive areas like home furnishings and children’s apparel were phased out of its stores in 1995 to concentrate on its core business in women’s sportswear and designer labels, accessories (including shoes and jewelry), cosmetics, and fragrance. In the case of home furnishings, however, what was taken out of the stores went into a new catalogue, set to mail in the fall to over a million of Saks’s clients. Saks also prepared to toss its hat into another fashion arena, an underserved and not always popular market segment—larger-sized women’s clothing. Seemingly on the right track, year-end total sales had climbed to $1.69 billion, with an operating income of $79.7 million—an increase of 17 percent over 1994’s—then reduced to $36.3 million after deducting special charges (including a new, state-of-the-art distribution facility in Aberdeen, Maryland; the integration of the four I. Magnin stores; and higher management fees for the fiscal year).

Saks reached an important and expected milestone in 1996 by becoming a publicly traded company. The company’s IPO sold nearly 18.1 million common shares at $25 each, raising $418 million. Shares peaked at just over $41 in the third quarter, but closed the year back at the IPO level. Some analysts were less than enthusiastic about Saks’s share data, such as Money magazine’s Junius Ellis, who declared Neiman Marcus’s stock a far more stable buy in the winter of 1996, and stating “Saks is destined to disappoint.” Others speculated Saks was spreading itself too thin, and many times the numbers seemed to bear this out. Year-end net sales, however, proved Saks was holding on by topping $1.95 billion, an increase of 15.3 percent over 1995, and an impressive 37 percent from 1994. Comparable sales grew by 10.3 percent, which contributed to a surge in operating income to $109.4 million, and the $418 million raised through the IPO helped decrease debt to $708 million (down from the previous year’s $976 million). Division-wise, the primary stores (full-line, resort, and Main Street) brought in the lion’s share of sales (86 percent) at $1.67 billion, to OFF 5TH’s 10 percent or $200.1 million (up from six percent in 1995 and four percent in 1994), while Folio maintained a four percent share or nearly $80 million.

Saks took the bull by the horns in Texas in 1997, going head-to-head with rival Neiman Marcus on the latter’s home territory. By opening two new stores within a week in Houston, the first in the legendary Galleria, a stronghold of Neiman Marcus, and another at the Town and Country Center, Saks turned up the heat in Houston’s tony retail market. Was the market big enough for both Saks and Neiman Marcus? Chairman and CEO Miller thought so (and he was a former Neiman Marcus executive from 1977 to 1983)—and the Gallería store brought in over $2 million in sales in its first three days. Well-heeled shoppers seemed to think there was room enough for both as well, flocking from one store to the other.

Saks continued its Texas invasion with another new store in Austin, and additional stores in San Antonio and the Dallas-Ft. Worth area. Meanwhile, back on the West Coast, the battle between Neiman Marcus and Saks became even more heated with the appearance of a new Barneys New York in Beverly Hills. As was the case in Houston, shoppers found the competition invigorating, and analysts believed the stores complemented one another. Whether each could maintain profits in such hothouse conditions, however, remained to be seen.

Despite some shaky quarters, and the closing of several underperforming stores, Saks had plans for further expansion in California, Florida, and New York. Yet as the Saks stock price dipped to all-time lows and its credit rating was downgraded, Investcorp, which still owned 50 percent of Saks, opened its doors to suitors in early 1998. The news of either a merger or selling the retailer outright brought share prices up to a 52-week high, with analysts speculating about old rivals Neiman Marcus, Macy’s, or Nordstrom as buyers, or even Hong Kong’s Dickson Poo or London’s Harrods coming to the rescue. Although the New York Times reported that would-be suitors might be kept at bay by an asking price of as much as $2.5 billion, Birmingham, Alabama-based Proffitt’s secured Saks in early July for a price of $2.1 billion [for the history of Proffitt’s, please see IDCH 19]. The all-stock deal, expected to be finalized by October 31, 1998, would create a $6 billion retailing company with 330 stores in 38 states. In addition, the Saks name would be assumed by the larger Proffitt’s, which held the number four position among the nation’s department store chains. In a St. Cloud Times article, industry forecaster Kurt Barnard called the merger “a very good deal for Saks, Proffitt’s and the investment community. Referring to Investcorp’s sale of its stake, Barnard added, “Under the new management of Proffitt’s, Saks will find a far more sympathetic ear for its needs and potential.” Whatever the future held, one thing remained unchanged: that Saks was far more than a retailer or chain of stores, it was an establishment whose name would forever signify the very embodiment of style and elegance.