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Saks Is Shaking Off Retail Gloom With a Fifth Avenue Face-Lift

Saks & Co.
Adam Jeffery | CNBC

Marc Metrick stepped off a freight elevator at Saks Fifth Avenue one recent afternoon and navigated his way past mangled wires and bare concrete beams, his Prada lace-ups crunching on broken glass.

"The staircase is going to come up here," he said, on the gutted fourth floor. Turning toward a jumble of boxes, he added, "And here's our fur business."

"It might look like nothing to you right now," said Mr. Metrick, the retail chain's president, "but to me, it's a passion project."

Department stores, as a class, are under siege: online retailers are making inroads into luxury, off-price outlets are peddling name brands at deep discounts, and there has been a shift in where and how people shop. But Saks, the 91-year-old department store chain that long defined American fashion and luxury, is betting that shoppers still care about glamour and is putting its hopes on a $250 million, three-year restoration of its Fifth Avenue flagship store.

Marilyn Monroe purchased dresses at Saks Fifth Avenue, and Elvis Presley his slick leather jacket. Saks helped introduce haute European fashion houses, like Givenchy, to elite American clientele. It introduced the Estée Lauder cosmetics line. It designed Lady Bird Johnson's red coat and dress for the 1965 inaugural parade.

But in more recent times, Saks has been adrift under the ownership of British American Tobacco and then the Southern regional department store chain Proffitt's. A patchy nationwide expansion saddled Saks with unprofitable mall locations. Heavy markdowns during the 2008 financial crisis tarnished its exclusive image. When the Canadian retail giant Hudson's Bay snapped up Saks in 2013 for $2.4 billion, its sales were dwarfed by those of rivals like Neiman Marcus and Nordstrom.

Now turmoil is hitting the entire department store sector. Macy's and Nordstrom — two industry stalwarts — reported disappointingly weak traffic and sluggish sales heading into the holiday season. Over the last week, investors have erased almost $5 billion from their combined market values.

It has fallen on Mr. Metrick, a 42-year-old father of two, to undertake a Saks revival. He was not the first choice of the Hudson's Bay chairman, Richard A. Baker. The task initially was assigned to Marigay McKee, who led a turnaround at the British luxury department store Harrods. But in April, Ms. McKee was ousted after just 15 months on the job because of what insiders have described as a personality clash with top executives at Hudson's Bay, which also owns Lord & Taylor.

Mr. Metrick, who worked for almost two decades at Saks and Hudson's Bay in less glamorous positions like chief administrative officer, gives off the air of a corporate lifer who has long toiled for uninspired bosses and now unexpectedly finds himself in charge.

"You spend your whole life saying, 'If I was in charge, I would. If I was in charge, I would,'" Mr. Metrick said. "You have all these ideas. Then all of a sudden, I can."

When the merchants Horace Saks and Bernard Gimbel teamed up to open a luxury department store on the Fifth Avenue in 1924, it was still largely a quiet stretch of stately homes. It wasn't too long before Saks's designers were creating and stitching lavish gowns for Manhattan debutantes dressing for their coming-out balls. In 1935, Saks constructed an indoor ski slope where Scandinavian instructors offered lessons. Above the 50th Street marquee, an electric sign system was installed so that chauffeurs could be summoned to pick up society ladies laden with purchases.

"Saks had gravitas. For a long time, it was one of the leading department stores of New York City," said Marie Driscoll, chief executive of the retail consultancy Driscoll Advisors and a longtime luxury analyst. "But their positioning needs a refresh."

For Mr. Metrick, reinventing the flagship is a priority. A lavish, indulgent in-store shopping experience, he said, was something that online retailers could never replicate. But he said Saks, even its flagship store, needed to work on its game.

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"Look at this. People are moving around you, they're bumping into you, they're coming off the elevator," he said on the store's ground floor, a vast concourse populated by shiny cosmetics counters. "When you look at the store from the outside, it's huge, but when you go in, you almost can't tell that there are other floors."

Mr. Metrick complained about Saks's restaurant on the eighth floor, Cafe SFA. "I never thought it was a productive thing to have a restaurant back here," he said, waving his hand toward a lunchroom with customers seated at only a handful of tables. "See how it's empty?" And a terrace outside the shoe floor on eight, which overlooks Rockefeller Center, is currently in disuse, he grumbled. "What a waste. Imagine having dinner out here, or lunch. Or coming out here with a drink," he said, warming to the idea. "Shoes and booze!"

To open up the entire store to shoppers, Saks is making some radical changes. It is punching a hole through the ceiling of the ground floor to make way for a 23-foot-high spiral staircase, wrapped around a glass elevator. The beauty department will jump to the second floor, leaving the first floor to handbags and other accessories. About 55,000 square feet of back-room space in the basement will be transformed into a boutique for fine jewelry to be called the Vault. (Think of "million-dollar pieces," Mr. Metrick says.) To replace Cafe SFA, Saks is installing the Paris restaurant L'Avenue. It is also installing a champagne bar and a John Barrett beauty salon.

To some observers, the Saks overhaul is puzzling.

"Are there not enough people going upstairs? Then something's not working," said the department store historian and author Michael Lisicky. "And why would anyone want to buy expensive jewelry in the basement?" he said. "You have to know your shopper."

It is increasingly difficult to know who the Saks shopper is.

Saks's wealthy clientele seems to be prospering, as wealth becomes increasingly concentrated at the top and foreign money pours into major American cities.

But the luxury consumer is changing. The typical shopper today is rarely loyal to any particular store and hunts for value on favorite name brands, often mixing "high" and "low" labels. Harried consumers also look for efficiency. And e-commerce is altering the relationship between department stores and the brands they sell, as fashion houses like Chanel and Gucci start to sell directly to consumers online, and through online luxury retailers like Net-a-Porter.

The consulting firm McKinsey & Company estimates that e-commerce already accounts for about 4 percent of luxury sales, and is growing more than three times as fast as the wider luxury industry. And though department stores, including Saks, are redoubling their e-commerce offerings, they risk getting cut out of the picture.

Those concerns add to general hand-wringing over department stores, many of them once hubs that sold electronics, appliances, toys, books and furniture, along with fashion. Regional chains have fallen one by one, leaving nationwide names like Saks, Neiman Marcus and Macy's to battle it out. But now even those chains are struggling.

Saks is now altering how it sells fashion, adding ultra-high-end designers like Balmain and Balenciaga, but also shifting away from segregating the store by price, mixing high and low brands on the same floor. Saks has also hedged its bets by opening an off-price chain, Saks Off 5th, which sells excess designer inventory at deep discounts. Sales growth at Saks Off 5th, which is now run under a separate arm of Hudson's Bay, far outpaces growth at the Saks mainstay stores. But some analysts worry that the Off 5th stores will eventually start cannibalizing Saks's full-price offerings.

Even among full-price stores, Saks faces stiff competition on its home turf. Bergdorf Goodman, another Fifth Avenue stalwart, is going through its own revamp. Neiman Marcus and Nordstrom have said they will open their first Manhattan locations in 2018.

Saks, wary of this intrusion, is opening a second store in Manhattan, at Brookfield Place in the fast-growing financial district, and will follow with a third location, a men's-only store, also downtown. Across the country, Saks is opening seven stores, including new locations in Miami, Houston and Hawaii. Saks is also expanding into Canada.

"That's always the big challenge: How do you find a way to appeal to the next generation without alienating the current one?" said Arnold Aronson, a partner at Kurt Salmon and former Saks chief executive.

Saks sorely needs a turnaround. In the second quarter, Hudson's Bay booked sales of $2 billion, a 15.2 percent increase from last year. But sales at Saks Fifth Avenue were flat, compared with 12.7 percent growth in Saks Off 5th stores, and 4.9 percent growth at the group's other retailers, Lord & Taylor and Hudson's Bay.

Federica Levato, a principal at Bain & Company, the consulting firm, said that reinvigorating the flagship was a prudent move, especially if it diversified beyond apparel and beauty.

"But this will not be a game changer in the future of their core business," Ms. Levato said. People who are buying online or off-price, "will keep buying online or off-price," she said.

One way Hudson's Bay is tapping Saks is by monetizing the flagship's valuable real estate. In 2014, the company took out a loan against the Fifth Avenue location that valued the store at $3.7 billion, more than Hudson's Bay paid for the entire Saks chain.

Mr. Baker has said that he will use the new mortgage to pay down some of Hudson's Bay's debt and give it an infusion of cash. And there may be more real estate deals coming. Analysts have estimated the total value of the company's real estate at about $7 billion. Other retailers have explored similar moves, as the value of the ground beneath their stores looks enticing in a world of uncertain retail sales.

Mr. Metrick remains focused on Saks's retail business. When Hudson's Bay bought Saks in 2013, many senior executives quickly departed. Mr. Metrick, who had been wooed away by Mr. Baker the previous year, returned to Saks, becoming its chief administrative officer.

At times, it seems Mr. Metrick still cannot believe that he is now at Saks's helm. He recalls growing up on Long Island, and taking trips into the city.

"I wasn't a fashion guy, I didn't have a Saks nearby. But every year, right around this time of year, like all good Jewish families, we'd pile into the car and drive into the city. And we would see the Saks windows," he said. "We've come full circle now, because I'll be unveiling them in a few weeks. I think that's kind of cool."

On the Saks terrace, Mr. Metrick clambered onto an exposed ledge and leaned precariously over the street below, explaining that he had been photographed there the previous day.

"Don't!" his handler cried in alarm. Mr. Metrick climbed down, looking impish as a schoolboy caught in a reckless prank. He would never have done something like this as chief administrative officer. But as Saks president, he is taking liberties.