Saks Inc.

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Saks Inc.

750 Lakeshore Parkway
Birmingham, Alabama 35211
U.S.A.
Telephone: (205)940-4000
Fax: (205)940-4987
Web site: http://www.saksincorporated.com

Public Company
Incorporated: 1919
Employees: 55,000
Sales: $6.58 billion (2000)
Stock Exchanges: New York
Ticker Symbol: SKS
NAIC: 45211 Department Stores

Saks Inc., formerly Proffitt’s, Inc., is one of the largest operators of department stores in the United States. Aside from its namesake Saks Fifth Avenue stores, the company also runs the Proffitt’s chain, with close to 30 stores; the 50-store Younkers chain; Carson Pine Scott, with more than 30 stores; the 40-store Herberger’s chain; 40 specialty department stores called Parisian; the smaller chains Boston Store and Bergner’s, as well as approximately 50 outlet stores under the name Off 5th. The company also has a mail-order and e-business division. This handles two catalogs, Folio and Bullock & Jones, and sells over the Internet at www.saks.com. As Proffitt’s, Inc., the company grew from a small chain of Tennessee retailers into a complex of department store chains with markets across much of the Southeast and Midwest. The company acquired Saks Holdings in 1998, and changed its name that year.

Under the Proffitt Family: 1919–84

Proffitt’s was founded in 1919 by David W. Proffitt. It was a department store in Maryville, Tennessee (near Knoxville) selling everything from clothing and bedding to furniture and farm implements. Evidently no place for sophisticates, it attracted customers to anniversary sales during the 1920s and 1930s by hurling live poultry from its second floor windows. Another Proffitt’s was opened later in Athens, Tennessee. D.W.’s son Harwell took charge of Proffitt’s in 1958. He closed the Maryville store in 1962, moving to a strip shopping center his family had developed a mile away in suburban Alcoa. “My father thought that was awful,” he told a (Norfolk)Virginian-Pilot reporter in 1993. “Then, after we doubled our sales, he thought it was just great.”

Proffitt’s opened a store in Knoxville’s first mall in 1972 and a store in Oak Ridge two years later. In 1984, when a fifth store opened in another Knoxville mall, D.W.’s heirs, including another son and daughter, began looking for a buyer who would keep the family on as managers. They found their man in Brad Martin, who, at the age of 21, became in 1972 the youngest state legislator in Tennessee history. While serving in the state assembly for ten years he earned two degrees, pieced together deals to build shopping centers in three states, and became a venture capitalist. Martin and his partners bought Proffitt’s in October 1984 for $14 million. At this time the company had annual sales of about $40 million.

First Expansion Moves: 1987–93

After Martin pulled out of a planned race for governor in 1986, he began to take a more active role in his investment. He succeeded Harwell Proffitt as chairman of the company in 1987 and Harwell’s son, Fred, as chief executive officer in 1989. Proffitt’s went public in 1987, offering 28 percent of its common stock at $8 a share. The company had record net sales of $43.5 million and net income of $1.4 million in fiscal 1987 (the year ended January 31, 1987) but also had a long-term debt of $18.4 million.

The $8 million or so raised by public subscription enabled Proffitt’s to buy the Loveman’s, Inc. five-unit chain, based in nearby Chattanooga, in 1988 for $9.3 million in cash and notes. Proffitt’s thereby doubled in size overnight but also assumed Loveman’s considerable debt, weakening earnings in 1989 and 1990. During 1990 Proffitt’s also opened stores in Chattanooga and Asheville, North Carolina, but closed an unprofitable store in Chattanooga.

By selling more stock at $12 a share in 1992, Martin raised an added $29 million. He then bought eight stores from Hess Department Stores Inc.—seven in eastern Tennessee and the eighth in Bristol, Virginia. In April 1993 Proffitt’s bought eight more stores from Hess—five in the Hampton Roads area of Virginia, two in Kentucky, and one in Georgia—for $7.4 million, selling more stock to finance the purchase and to pay for store renovations. Two months later Proffitt’s bought two more Hess stores in Richmond, Virginia, for about $1.6 million.

This acquisition proved to be one of Martin’s few mistakes because Hess’s unprofitable stores cut into company income. Revenues rose from $128 million in fiscal 1993 to $201 million in fiscal 1994, but net income dropped from $6.7 million to $5.7 million. In December 1996 Dillard Department Stores agreed to buy the Hampton Roads and Richmond stores for an undisclosed sum, and Proffitt’s took a $2 million aftertax charge on the sale.

McRae’s Acquisition: 1994

Martin’s next move was bolder. In March 1994 he purchased McRae’s, Inc., a retailer about twice Proffitt’s size, for $176 million in cash and $32 million in notes. Founded in 1902 by Samuel P. McRae in Jackson, Mississippi as a dry goods store, McRae’s was a privately held chain with 28 stores (compared with Proffitt’s 25) in Mississippi, Alabama, Louisiana, and Florida with $419 million in sales in 1993. It was strong in home furnishings, men’s apparel, and cosmetics. Thirteen of its 14 Alabama stores had been purchased from Pizitz, Inc. in 1987. In acquiring McRae’s, Proffitt’s assumed about $109 million in long-term debt and other financing and also paid $18 million to purchase four regional mall stores owned by McRae family partnerships. The McRae’s stores retained their name and operated as a subsidiary.

Despite the high price Proffitt’s paid, investor reaction was favorable. McRae’s was regarded as one of the most successful family-owned businesses in the United States, its sales having grown from only $1 million in 1955 to $10 million in 1970. Just months before the sale, Richard McRae, Jr., president and chief executive officer, told the Daily News Record, “Our debt-to-equity ratio is the lowest it’s been since the early 1970s, yet all of our growth has been from internal financing. We are sound. No one has ever lost a dollar by selling McRae’s. … In fact, we have a higher Dun & Bradstreet rating than any of our competitors.”

Younkers Acquisition: 1996

With the acquisition of McRae’s, Proffitt’s revenues swelled to $617 million in fiscal 1995, and its net income grew to $16.1 million. In April 1995 Proffitt’s acquired a majority interest in Parks-Belk Co., owner and operator of four Tennessee department stores. But this transaction paled in relation to Proffitt’s purchase, in February 1996, of Younkers, Inc., a Midwestern 53-store chain with annual sales slightly larger than Proffitt’s own.

Based in Des Moines, Iowa, Younkers had a history even longer than Proffitt’s or McRae’s, dating back to 1856. Acquired by Equitable of Iowa in 1979, it became an independent company again in 1992 but soon found itself the object of a takeover bid by Carson, Pirie Scott & Co. Younkers’s management turned down Carson’s offer of about $163 million for the company, but succumbed to Proffitt’s bid of $216 million. Like McRae’s, Younkers continued to operate under its own name as both a division and a subsidiary of Proffitt’s. Counting Younkers, Proffitt’s revenues for fiscal 1996 surpassed $1.3 billion. Younkers was described by Martin as a “fashion-driven” business. Proffitt’s converted its shoe departments from leased to in-house, and Martin said there were opportunities for the chain to grow in cosmetics and accessories.

Parisian Acquisition: 1996

Hardly had Martin completed the Younkers acquisition when he purchased Parisian, Inc., a 38-store chain in the Southeast and Midwest with annual sales of $675 million, for $110 million in cash, $100 million in stock, and assumption of $243 million in debt. Well regarded for quality and customer service, Parisian began as a Birmingham, Alabama fabric store in 1887. It was acquired by the Hess and Hollner families in 1920. Until 1963 Parisian was a single store, but over the next 14 years it built a network of a half-dozen stores, all in Alabama.

Parisian sold stock to the public for the first time in 1983. It was acquired in a leveraged buyout by Australia-based Hooker Corp. in 1988, but after Hooker filed for bankruptcy the following year, Birmingham’s Hess and Abroms families bought it back, with investment from Lehman Merchant Bank Partners. The new owners opened stores in Atlanta, Indianapolis, Cincinnati, suburban Detroit, Nashville, and Orlando. Because of the large debts inherited from Hooker and disappointing 1994 results, Standard & Poor’s placed $125 million in notes issued by the company on its CreditWatch. The company lost $5.5 million in 1994 but returned to profitability the next year, earning $8.8 million.

Like Younkers and McRae’s, Parisian became a division and subsidiary of Proffitt’s, but its corporate offices were moved to Jackson. Martin indicated that Parisian would be the company’s upscale division and that home furnishings might be added to what had been almost purely an apparel chain. Interviewed by WWD in 1997, he said, “We see it as the premier specialty store, with many resources that aren’t in traditional department stores.” Parisian President and Chief Executive Officer Donald Hess remained president and joined Proffitt’s board of directors.

Company Perspectives:

Saks Inc. is one of the country’s premier retail enterprises, operating 354 stores in 39 states, with over $6.5 billion in annual revenues and 55,000 associates.

Herberger’s and Carson Pirie Scott: 1996–97

Proffitt’s topped off 1996 by agreeing, in November, to acquire G.R. Herberger’s for $153 million. Based in St. Cloud, Minnesota, Herberger’s was a chain of 40 department stores in ten Midwestern and Western states that became Proffitt’s fifth division. Strong in women’s, children’s, and moderately priced men’s apparel, Herberger’s was scheduled to develop lines in shoes and cosmetics. Martin indicated that it would focus on branded businesses, adding name brands such as Nautica, Ralph Lauren, and Tommy Hilfiger.

Founded in 1927, the chain was sold by the Herberger family in 1972, a year in which it consisted of 11 department stores and six fabric stores with $17 million in sales. In subsequent years it made a transition from downtown locations to anchor tenant in regional malls. In 1993, when the company had sales of $265 million and income of $5.5 million, it was about 55 percent owned by an employee stock option plan. About 450 employees, including officers and directors, owned the rest of the stock. Herberger’s had revenues of $327 million in 1995. The acquisition was ratified as Proffitt’s ended its 1997 fiscal year in early February 1997. Because of its acquisitions, Proffitt’s in fiscal 1996 more than doubled its revenues. The company lost $6.4 million after special charges of $31.4 million, including merger, restructuring, and integration costs of $20.8 million. During fiscal 1997 Proffitt’s had net income of $37.4 million on sales of $1.89 billion. Its long-term debt was $510.8 million in November 1996.

As fiscal 1997 ended on February 3 of the calendar year, Proffitt’s had 19 stores in its Proffitt’s division (12 in Tennessee), 29 in the McRae’s division (14 in Alabama and 12 in Mississippi), 48 in the Younkers division (18 in Iowa and 17 in Wisconsin), 40 in the Parisian division (15 in Alabama), and 39 in the Herberger’s division (14 in Minnesota). A Proffitt’s Merchandising Group had recently been formed to coordinate merchandising planning and execution, as well as visual, marketing, and advertising activities between the merchandising divisions. Certain departments in Proffitt’s stores were being leased to independent companies and included fine jewelry, beauty salon, and maternity departments. During fiscal 1997 women’s apparel was the leading sales category in all five Proffitt’s divisions. Men’s apparel ranked second in all but the Proffitt’s division, where it trailed cosmetics. The other categories, in order of overall sales, were home furnishings, cosmetics, children’s apparel, accessories, shoes, and lingerie.

Next the company went for another Midwestern retailer, the Chicago-based Carson Pirie Scott chain. In November 1997 Proffitt’s offered $790 million in stock for Carson’s, which had 52 stores in Illinois, Wisconsin, Indiana, and Minnesota. Carson’s was a regional chain, much like the other Southern and Midwestern department store chains Proffitt’s had picked up earlier. Carson’s was a big retailer, with 1997 sales of $1.1 billion, and its acquisition vaulted Proffitt’s into the number four spot in department store retailing, behind Federated, May Department Stores, and Dillard’s Inc.

Saks Inc. in the Late 1990s and After

Proffitt’s growth had been tremendous after Brad Martin took over the company. Starting with the acquisition of Loveman’s in 1988, Proffitt’s had been growing nonstop. Barely a year separated the Herberger’s deal from the buyout of Carson’s, and about a month after the Carson’s transaction was finalized in February 1998, Proffitt’s bought up the small North Carolina retail chain Brody’s. But the biggest deal of all came later in 1998, with the acquisition of the preeminent New York retailer Saks Fifth Avenue. Saks Fifth Avenue was a storied New York store, with a high fashion pedigree that Proffitt’s previous acquisitions lacked. Saks had been owned since 1990 by an investment group based in Bahrain, Investcorp. Invest-corp. had previously owned the luxury retailers Gucci and Tiffany, and it expected to handle Saks like it had these others: run it for a few years, then cash out. But Saks apparently lacked retail focus, and it was not consistently profitable. It went public in 1996, but its stock did not do well. It had grown to close to 100 stores, including more than 40 outlet stores called Off 5th, when its owners decided to put it up for sale. Proffitt’s was quick to offer a stock swap estimated at about $2.1 billion for the chain. The deal was consummated in a matter of months, and in late 1998 Proffitt’s changed its corporate name to Saks Incorporated. Industry analysts were divided about the wisdom of the merger. On the one hand, Saks was wildly different from Proffitt’s previous acquisitions, which had filled the moderate-to-better niche. Saks offered cutting-edge couture, with almost no merchandise overlap with any other Proffitt’s chains. On the other hand, Saks had been run by bankers since 1990, and perhaps it would prosper even more under the guidance of an experienced retailer like Proffitt’s. Proffitt’s Brad Martin promised he could save Saks around $65 million by combining some financial and management functions with his other chains.

Key Dates:

1919:: David Proffitt founds first store in Maryville, Tennessee.
1987:: Brad Martin buys five-store Proffitt’s chain.
1988:: Firm makes first major acquisition, buying Love-man’s, Inc.
1996:: Proffitt’s buys Younkers chain, moving the company into the Midwest for first time.
1998:: In its biggest acquisition yet, the firm acquires Saks Holdings, and changes its name to Saks Inc.

But the Saks Fifth Avenue acquisition did not go as smoothly as most of the company’s others. A year after the merger, Saks Inc.’s stock had fallen 55 percent. Problems with Saks Fifth Avenue merchandise led the company to post lower than expected earnings. The company admitted that it was having trouble integrating the luxury retailer with its other operations. Although same-store growth increased overall by 4 percent in 1999, the rate was lower than Saks Inc.’s management expected or desired. In August 2000, Saks Inc. announced that it would spin off Saks Fifth Avenue into a separate, publicly owned company with New York headquarters. The new entity would include the Saks Fifth Avenue stores, the Off 5th outlet stores, and the chain’s e-business and catalog division. But this plan was short-lived. In early 2000 Saks Fifth Avenue sales were growing, while other chains such as Younkers and Carson’s were declining. The fourth quarter of 2000 told a different story, with 1.3 percent same-store sales growth at the regional chains and a drop of 3.4 percent for the upscale Saks. With the luxury goods sector in general declining, and with the Saks.com web site pulling in losses of around $7 million, the spin-off no longer seemed a safe bet. Saks Inc. canceled the split-up in early 2001. At the same time, it sold nine of its Southern regional stores, including five Proffitt’s, three Parisians, and one McRae’s, to the May Department Stores Co. for $310 million.

Principal Subsidiaries

Parisian, Inc.; Younkers, Inc.; G.R. Herberger’s Department Stores; McRae’s, Inc.; Proffitt’s, Inc.; Boston Store; Boston Store Department Stores; Carson Pirie Scott & Co.; Saks Fifth Avenue.

Principal Competitors

May Department Stores Co.; Dillard’s Inc.; Federated Department Stores, Inc.