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Neiman Marcus’ Future: Speculation Mounts Smiths May Sell Shares

The eyes of Wall Street are on Richard Smith, chairman of Neiman Marcus Group, who with his family may be ready to cash out of the luxury retailer.

NEW YORK — The eyes of Wall Street and the fashion industry are on the intensely private Richard Smith.

Speculation is building that the most likely scenario for the Neiman Marcus Group is that the Smith family will hold a secondary offering of some or all of its shares, rather than a accept a bid for the luxury retailer. And the man in the driver’s seat is the family’s 81-year-old patriarch, Richard, who is NMG’s chairman.

Smith is also clearly a shrewd investor. He started with a $300 million investment in what was then Carter Hawley Hale, which included Neiman’s, capitalized on trading the shares over the years, and currently has a stake in NMG today worth over $630 million.

While the industry has been swirling with speculation that acquisition-hungry Federated Department Stores might bid for Neiman’s — especially since Federated’s chairman Terry Lundgren once ran the chain — sources said a secondary share offering by the Smiths appears to be the likely outcome of all the intrigue surrounding NMG in recent weeks.

The offering would enable the Smiths to both capitalize on Neiman’s soaring share price and do some estate planning.

Regardless of the outcome, the speculation over the last few weeks is putting the spotlight on Richard Smith, a man who prefers to remain out of it.

As the story goes, when Richard Smith first visited Bergdorf Goodman after gaining control of Bergdorf’s and its sister Neiman Marcus division in 1986, the reception was subdued.

“When he walked in, no one recognized him,” said a retailer.

That’s precisely how Smith would have wanted it. The corporate investor and chairman of the Neiman Marcus Group is intensely private. Despite the showy nature of Neiman’s, with all its trunk shows, fashion galas and over-the-top Christmas catalogues, Smith has always shunned the press and rarely made store appearances.  Meetings with store management are generally in Boston, where he’s based, or by phone.

“There aren’t any bells and whistles. He’s not that kind of guy. He’s soft spoken, easy to deal with, and just very smart,” said Marvin Traub, the former Bloomingdale’s chairman who was Smith’s classmate at Harvard College, Class of 1946. “Underneath it all, he’s very strong-willed.”

“He’s incredibly low profile, but he would hire good managers to run the business and offer the capital support you need to get the job done,” said one retailer close to the company. “He’s always had high expectations, but he would treat people well.”

The Smith family owned 31 percent of Neiman’s Class B preferred stock, which gives holders the right to elect at least 82 percent of the board of directors, according to the November 2004 proxy statement. That’s over six million shares. Richard Smith, the patriarch of the group, individually owns 16.6 percent of the class B. He also owns 127,385 shares of class A stock, whose holders have the right to elect up to 18 percent of the board. Otherwise, the shares are identical.

The timing seems right, considering the stock is priced high, with Class B shares closing at $68.39 last Friday, though it’s dipped a bit in recent weeks from over $70. The 52-week range is from $47.48 to $74.65. Some sources believe Smith wouldn’t necessarily seek a premium off the current price, since he’s already made a lot from his major investment, which occurred in the Eighties when the stock was less than a third of its current value and NMG was under the ownership and shadow of the ill-fated Carter Hawley Hale.

“He’s been a very good investor long term. He never did things on the short,” said Allen Questrom, the former chairman and ceo of J.C. Penney, who ran Neiman Marcus from 1988 to 1990 before heading up Federated Department Stores.

Questrom also said that it wasn’t Smith’s style to be fixated on stock price, in whatever company he invested in, or work the business purely for the sake of lifting the stock. “He believes that the stock price is a product of the quality of the business over time, and was generally less involved in it,” Questrom added.

Sources said a secondary offering could be related to some estate planning by Smith. In addition, investors might be asking if the stock price has even more upside potential, and how much more the Neiman Marcus chain can expand its store base. The $3.6 billion company, with an operating margin of 9.86 percent, has 35 Neiman’s stores, as well as two Bergdorf Goodman units in Manhattan. The company already operates in most areas of the country that are affluent and fashion-minded enough to support a Neiman’s unit.

However, Neiman’s has been one of the strongest performers in the department store sector over the last 18 months, regularly registering double-digit increases in comp store sales. Its Web site also continues to grow exponentially, broadening Neiman’s reach into geographical areas where it doesn’t have a store.

The speculation about a stock disposition has been fueled by reports that Burt Tansky, the 66-year-old president and chief executive of the Neiman Marcus Group, has been making frequent trips to Boston. If Smith unloads his stake, it raises the question of who would be the next chairman. Tansky would be a strong candidate, considering the company has done well under Tansky’s tutelage.

Furthermore, Smith’s son, Robert, and son-in-law, Brian Knez, who serve as vice chairmen of the Neiman Marcus Group, have been less active in the business in the past couple of years and more involved in other activities, including their investment firm, Castinea Partners, which Robert founded in 2001.

Robert Smith served as co-chief executive of the Neiman Marcus Group from 1999 to 2001 and has been a member of the board since 1997. Previously at NMG, he was president and chief operating officer  and was more visible in the running of the business than his father, particularly on real estate matters. “Developers swarmed around him,” said one former Neiman’s official.

Other Smith family members are also major shareholders, including Smith’s sister, Nancy Lurie, but they have no involvement in the business.

“I’m of the opinion that Dick Smith is filing a registration statement to sell the stock. They were sellers when the stock was at $51. Now it’s over $70,” said one investment banker.

Smith graduated from Harvard College with a bachelor of science degree in 1946, served in the Navy and later worked for his father’s chain of drive-in movie theaters, the General Cinema Corp., which was started in 1922 in Massachusetts. In the decades ahead, he led the company’s development into a diversified enterprise including beverages, bottling, book publishing, educational products and retailing, which purchased Harcourt Brace Jovanovich publishing in 1991. The corporation’s name was later changed to Harcourt General, and the General Cinema portion was spun off. Harcourt General in 2001 was sold to European publisher Reed Elsevier plc. But the Neiman Marcus piece has remained under the Smith family’s control, though some of its interest has been sold off over the years.

In addition to his investments, Smith has been active in civic and charitable concerns, including the Dana-Farber Cancer Institute, which in 1997 named its new research building for him and his wife, Susan.

Smith’s preliminary involvement in retailing was as an investor in the former Carter Hawley Hale chain in the early Eighties, when he was chairman of General Cinema. Carter Hawley Hale, based in Los Angeles, owned the Neiman Marcus Group, as well as a department store group concentrated in California that consisted of The Broadway, Emporium, and Weinstock’s, and Thalhimer’s in the East.

In 1984, Smith invested roughly $300 million in Carter Hawley Hale and became a white knight, helping to thwart a hostile takeover attempt by Limited Brands, then called Limited Inc. Limited and its aggressive chairman Leslie Wexner attempted another hostile takeover two years later, but CHH fought hard to remain independent. A crucial step in defeating the takeover challenge was when Smith converted a big chunk of CHH stock into a majority holding of the Neiman Marcus Group.

The strategy led to a restructuring of CHH into two separate companies, one for the department stores that would be called Carter Hawley Hale and the other The Neiman Marcus Group, which would include Neiman Marcus, Bergdorf Goodman and the now defunct Contempo Casuals specialty chain. Smith’s control of the Neiman’s half through the stock conversion carried an even greater share of voting rights. The Carter Hawley Hale half ended up being owned by its employees.

But Smith got the better half, even if he didn’t fully realize it at the time. “Richard knew very little about the retail business then, but he became fascinated by it,” said Traub.

Eventually, CHH went bankrupt and was taken over by Federated, while Neiman Marcus would develop into the nation’s strongest luxury chain. 

The Neiman’s maneuver helped establish Smith as a master of timing stock buys and sells and of knowing when to get in and out of businesses.

“When they were in the movie theater business, they saw the rise of videos and knew back then that it was time to diversify,” Traub noted.

“The Smiths have made some brilliant investments over the years, and they’ve always had great managers,” including Questrom, Terry Lundgren, Ira Neimark, Robert Tarr and Tansky, added Gilbert Harrison, chairman of Financo Inc.

Smith’s investment acumen has rubbed off to extended members of the family, including his nephew Robert Lurie, who owns the Philadelphia Eagles, which lost in the last Super Bowl to the New England Patriots but is said to be worth four times the purchase price of $185 million, according to published reports.

It’s not clear whether Smith, who was unavailable for comment for this article, had a vision that luxury in the U.S. would soar in the 21st century. Some sources said it may be more a matter of his being in the right business at the right time.

It is clear, however, that Smith fostered the growth of Neiman Marcus by having a thumb’s-up approach on significant capital expenditures for new stores and renovations, back in the late Eighties and Nineties, creating spacious, unsurpassed retail showcases for building designer brand offerings, well before luxury sales started taking off. Former executives who worked for him also said that he was a big supporter of information technology, enabling Neiman’s to maintain a tight grip on its customer base and clientele and merchandise information.

“With capital requests, or if you had a plan for the year, he was involved,” said Questrom. “But he wouldn’t deal with you on day-to-day issues. He wouldn’t call you on the phone if the business went bad for a month.”

“I am great admirer of Dick Smith,” said Ira Neimark, a former chairman and ceo of Bergdorf Goodman. “He gave you the responsibility and let you run with it as long as you did your job. Sometimes, he would give you some guidelines, but he’s not a retailer. He’s a very sound businessman. When you went to a meeting, you didn’t say very much, but he would always ask the key question.”

Said another source who worked for him, “It was difficult to get him to come to Neiman’s stores. All of my connections to him were on the phone or a visit to Boston. For sure, the Smiths didn’t want publicity. It was not important for Neiman’s to have press, and they didn’t care if the store was ever in the papers.

“This is not a flashy guy.”

See related article “So What Is a Secondary Stock Option?” in today’s financial section.