The Raw Facts

On May 1, Saks Global Enterprises LLC received court approval to move forward with a creditor vote on its Chapter 11 reorganization plan. It’s a critical step to get Saks out of bankruptcy and operating normally again.

If the plan is approved by the creditors, the new company’s store footprint will be:

13 Saks Fifth Avenue stores

12 Saks OFF 5TH locations

32 Neiman Marcus stores

1 Bergdorf Goodman

Between 53% and 60% of the stock of the company will likely be controlled by two investors, Pentwater Capital Management LP and FFI Fund Ltd. That’s according to calculations based on the plan documents and disclosures in related filings. Their expected equity would come from their positions as Saks lenders during the bankruptcy.

Will It Work?

On the plus side, Saks, Neiman’s and Bergdorf have a great history. Millions of consumers are accustomed to shopping and spending there. Many brands’ legitimacy grew out of having a presence at Saks and Neiman’s.

The new CEO, Geoffroy van Raemdonck, was previously CEO of Neiman Marcus and Group President for Europe, Middle East & Africa at Ralph Lauren. He has reportedly mended fences with many brands whose bills weren’t being paid by previous management and has gotten inventory flowing into the stores again.

So the stage is set with fresh capital coming into the business, fresh goods coming into the stores, and a reduced and a more manageable scope having shuttered the majority of Saks Fifth Avenue and Saks OFF 5TH stores which reduced productivity and stretched human and financial resources.

Looks like a winner.

On The Other Hand

But wait, there’s more.

When department stores close permanently, so many consumers react with “I’m so sad they’re closed but I haven’t been there in ages.” Consumers aren’t going to department stores anymore.

And if you look at the income statements of most brands, they don’t make the kind of money they used to by selling to department stores. They do much better and make more money selling products on their own websites and in their own stores if they have them.

Department stores and retail generally have risk, and a lot of it. One of the biggest risks is the inventory and getting the fashion right. If you don’t take chances on creative fashion products, it won’t be interesting for consumers. But it’s impossible to be right all the time. So department stores have to be right enough of the time to cover their mistakes.

With department stores having such an encyclopedic range of products, they have to have the right skills in-house to choose the right inventory.

You might say, “can’t AI do that?” Yes it can, but not yet and it’s probably going to take a while. Stores still need creative people with talent and great fashion sense in every category of product.

All of that is hard to arrange and requires the right environment. And it requires ownership that is willing to see management take chances in order to succeed.

Many financial investors have believed they could manage the creative risks of retail. The history of retail bankruptcies suggests otherwise.

And changing consumer habits compound those problems.

Historically full price fashion consumers asked three questions: Does it fit? Do I look great? Is it priced right?

Those questions are still important but now they’re also asking: Do I identify with the value system of the brand and the retailer? When the retailer is a department store, it’s hard for it to have a specific value system-based identity because the product line is so broad.

That leads back to the question of how much longer high-end fashion consumers are going to shop in department stores.

And then there are the people who work there. Will the financial owners who invest in distressed properties like Saks and Neiman’s, give management the financial leeway required to take chances and succeed?

Ultimately, the question is can they make it fun for consumers? If they can, it’s a winner. But that’s harder to do now than it ever was.

All these factors are weighing on the opportunity for the emerging Saks.

So Will It Work?

It’s possible. But a lot of things including consumer trends, the inherent risk of the business, the nature of the ownership and their culture, are pulling against it.

(In case you’re worried that the investors will lose their money, you can probably rest easy. Distressed investors can often find downside protection in the real estate, brand value, inventory and other assets that can sometimes provide recoveries when the retail strategy doesn’t work out.)

If it works, it will be a legendary comeback. If it doesn’t, no one will be surprised.