What Saks' Strategy Teaches Us About Best Buy

From: James Cramer
Sent: Tuesday, December 13, 2011 5:20 AM
To: Nicole Urken
Subject: sks

How many SKT outlet malls is SKS in? How many SPG outlet malls is SKS Off Fifth in?

Nicole Urken, Mad Money Research Director

From: Nicole Urken
Sent: Tuesday, December 13, 2011 6:31 AM
To: James Cramer
Subject: Re: sks

Looks like 5 Tanger locations and about 33 Simon Properties locations (for Off Fifth). The outlet (and direct--ie internet) really is their answer to growth. Question is if downsizing the core stores while growing outlet/internet will be enough

From: James Cramer
Sent: Tuesday, December 13, 2011 6:35 AM
To: Nicole Urken
Subject: RE: sks

It is very strange how little growth there is with this company

Nicole Urken, Mad Money Research Director

From: Nicole Urken
Sent: Tuesday, December 13, 2011 6:36 AM
To: James Cramer
Subject: Re: sks

Interesting also that while clearly not levered to Europe, it is highly correlated to the stock market (which trades on European worries these days), Wall St/New York market (vulnerable to layoffs, etc) and tourism from europeans (they estimate about 25 percent of NY store is from tourism—some of this is from abroad)

From: James Cramer
Sent: Tuesday, December 13, 2011 6:37 AM
To: Nicole Urken
Subject: RE: sks

Yeah, I thought the stock market stuff was amazing.. they are the market

When you think of Saks Fifth Avenue , you think of the quintessential city shopping experience. This is never truer than during December, when the flagship 5th Avenue store’s ground floor lights up with white lights and the windows close to St. Patrick’s Cathedral and Rockefeller Center feature holiday story displays to lure in native New Yorkers and tourists alike. This year, if you were wondering, the windows present the ‘Land of the Bubblemakers.’

Yet one of the key take-aways from Jim’s interview with Saks CEO Steve Sadove Tuesday was the company is looking to minimize the emphasis on its full-price locations. In fact, Sadove has talked in the past about an ideal chain of 30 full-line stores—down significantly from its current 46 stores, which is significant considering the company has had eight closures over the last two years.

Why is this so key? Because the prototype for in-store service and in-store experience (Saks!) is instead focusing on their growth online along with harnessing the secular growth opportunity in outlet growth through their Off Fifth Concept, currently sporting 61 locations and growing.

Saks is the company that has focused on a “personalized, distinct, and differentiated shopping experience” that helps build loyalty. But, as Sadove said on Wednesday, the focus is on Internet and outlet.

“The reality is that you don’t need that many more Saks stores," Sadove said of his company's focus on the Internet. "The consumer today is thinking multi-channel. They want a product anywhere, anytime they want. The Internet provides you the opportunity to be that store.”

On the outlets? Sadove said the Off Fifths have been doing well because “you want the brands and you want a great deal” — and this is working without the service component. Opening up to five Off Fifth stores per year will be Saks’ growth engine. And the outlet channel is something we know is a huge secular opportunity, as outlined last week on "Mad Money" by Steve Tanger of Tanger Factory Outlet Centers.

This brings us back to the curious case of Best Buy. There was much analysis surrounding its quarterly miss on Tuesday, which caused the stock to decline a staggering 15 percent—adding further insult to the stock’s poor performance year-to-date. This quarter the culprit was margin, which was depressed as Best Buy strove to keep pace with competitor pricing. While Best Buy posted its first positive comp in over a year, this too was very modest—at just under 1 percent. Ultimately the Best Buy story can be boiled down to this: It is a business in secular decline. Some call its brick-and-mortar focus ‘best browse,’ others call it ‘Amazon’s show room.' Whatever you want to call it, the legacy business remains a core part of the story and will continue to put pressure on shares.

What’s more? This name is guilty of buyback-as-driver with the company on target to repurchase approximately $1.5bn of its stock in fiscal year 2012. Buybacks alone driving EPS are not going to be a solution for this name. While bulls on the stock point to the company’s free cash flow and continued efforts to shift the business online, the truth is that they remain light years behind the likes of Amazon and their legacy business overhang is not something they will be able to shrug away. When the drive of consumers is about brand and newness as product commoditization threat lingers, Best Buy is not where you want to be for anything other than a short trade.

Ultimately, when it comes to retail, we want growth. Saks is searching for growth in its online and outlet channel, as its core stores don’t have it. Saks is a solid long-term story but one that will continue to face many near-term hiccups. For Best Buy, though, any semblance of growth is elusive. Today’s world is about brands and great deals. A consumer doesn’t need a Best Buy to get to his Apple iPhone, Google Android, or Samsung TV. As JPMorgan wrote in their note, “Play it again, Sam.” The Best Buy woes remain the same and they will not turn around anytime soon.

The bottom line: The Land of the Bubblemakers has, well, popped. Bring on the online. Oh, and the outlets too. And stay away from Best Buy for anything other than a trade.


Random musings: For a better brick & mortar story, just add a “B” to BBY—Bed, Bath and Beyond. This home furnishing name is still working its way up from a depressed base for the industry and has shown superior execution. With smaller ticket items, a better placed category for in-store selection, and mid-single digits store growth, it also has the longer-term opportunity to benefit from a recovery in home furnishings spending when the housing market does ultimately rebound—one of the reasons we also like Home Depot.

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