Is This Saks Talk Threatening Nordstrom?

Private equity firm KKR & Co. (NYSE:KKR) is considering an investment in Saks Inc. (NYSE:SKS) and may seek a merger with Saks’s rival luxury retailer Neiman Marcus Group Inc.

Both retailers have been looking to sell. Saks recently hired Goldman Sachs Group Inc. (NYSE:GS) to explore possibilities related to selling, and Neiman Marcus has considered alternatives including sale or a public offering. The two stores could end up in the same shopping bag.

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While still in the early stages, this merger could create an upscale department store chain with more than $7 billion in annual sales. The merged companies would become the second biggest luxury department store chain in the U.S., second only to Nordstrom Inc. (NYSE:JWN).

The retailers have a long-standing rivalry. Neiman Marcus believes it offers superior service and is thought to have richer clients. Saks tends to run more sales and has used its New York image to gain a younger, hipper customer base.

If combined, the companies would benefit from closing duplicate stores in the same malls, gaining efficiency in advertising, and consolidating distribution centers. It is unlikely the retail chains would combine under one name, as both are iconic names that offer different brands. Despite their differences, Neiman Marcus and Saks are essentially targeting the same affluent customer base with different luxury brand rosters and exclusive goods from designer brands. This partnership would function differently from Macy’s (NYSE:M) ownership of Bloomingdale’s, in which the customer base doesn’t overlap as much.

Michael Appel, founder of the retail consulting firm Appel Associates LLC, commented on the proposed merger, “You could obviously get a huge benefit to the bottom line. You could keep the customer-facing part of the business — the branding, the merchandising — separate but you could then collapse the two back ends of the companies, like logistics, sourcing. You would get tremendous operating leverage.”

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While in the early years of the recession luxury retailers suffered huge losses, now that the economy is turning around, luxury retailers are bouncing back more quickly than lower-end stores, as the strong stock market has left the wealthy confident enough to begin shopping again.

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