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Is the timing right for Neiman Marcus Inc. to go public again? Some bankers and Wall Street analysts think it is.
Sources close to the company said the high-end retailer is considering an initial public offering, which could occur as soon as the end of summer, although early 2008 appears more likely. Neiman’s is run by Burt Tansky and is owned by two private equity firms, TPG and Warburg Pincus.
TPG and Warburg Pincus, which purchased Neiman’s in May 2005, are said to have put out “feelers” in the investment community to gauge interest for an IPO, according to market and financial sources.
The usual time frame for equity players to sell an investment is three to five years after they buy it. When Neiman’s was sold to the two equity firms, industry observers said at the time that they expected them to sell the retailer faster than that due to activity in the equity and M&A markets.
TPG is no stranger to IPOs as an exit strategy. The company, formerly known as Texas Pacific Group, invested $560 million and acquired a 60 percent stake in J. Crew in 1997. TPG waited nine years before launching an IPO for the preppy retailer in 2006 because it took that long to turn the retailer around. When J. Crew went public, it became the hottest offering in the retail sector. The J. Crew IPO was issued on July 6 at $27.75 and shares have since gained 44 percent, to $39.85 in trading last Friday.
Financial sources said recent concern over the equity markets had created a narrow window for an IPO. One banker said the sooner the better, as sales at Neiman’s are still climbing. Ginger Reeder, vice president of corporate communications for Neiman Marcus Group, said Sunday, “We have no announcement to make about an impending IPO.” Executives at TPG and Warburg Pincus declined comment for this story.
Since being acquired for $5.1 billion, the specialty retailer, which caters to a well-heeled crowd, hasn’t missed a beat. One investment banker said Neiman’s had been doing well year-to-year, each year operating off a bigger sales and earnings base than in the prior periods.
For the second quarter ended Jan. 27, operating earnings rose to $127.8 million from $69.7 million a year ago. Adjusted operating earnings gained 23.9 percent, to $145.9 million from $117.8 million, excluding amortization, acquisition costs and noncash charges. Results were bolstered by increased full-price selling and improved margins, the company said.
Sales rose 8.5 percent, to $1.3 billion from $1.2 billion, and same-store sales gained 6.8 percent. Sales per square foot increased to $624 from $597. By division, Neiman Marcus posted a 5.5 percent comps gain, while Bergdorf Goodman jumped 17.7 percent.
“A company often will do an IPO during a period of time when there is a high degree of comfort with the firm’s operations, such as visibility of earnings growth and an expansion of the business. Good leases also help. You want the trend of the winds blowing at your back rather than in your face,” said Michael Kollendar, an investment banker at Stifel Nicolaus.
Kollendar said there still was an “appetite” for IPOs in the market, even though there have been few retail public offerings lately. The last one in the sector was J. Crew.
“The challenge is that private equity firms pay such a strong value that there’s not a big differential between that and going public. And then there are the monthly comps reports and Sarbanes-Oxley requirements [resulting in a] greater outflow of firms going private rather than an inflow of companies going public. Still, there is strong interest for strong, growing retailers in the public markets. Specialty retailers and consumer companies are sought after by institutional investors,” he said.
Stock offerings of Neiman’s could be done in stages; TPG and Warburg Pincus could float shares every few months or so. Such a strategy would make it easier for Wall Street to digest the IPO, especially of a company with $4.1 billion in sales.
To be sure, the timing of any IPO can be a guessing game. Generally, volatility in the equity markets can prompt a company to pull back an intended IPO until conditions are more stable and investors are more receptive. The markets may be in good shape for retailers, but inventory levels or sourcing issues can delay an IPO, and overall economic conditions can affect the launch of a stock. Right now, core economic data shows some strength, and some analysts said if there were an economic slowdown, it would be brief.
Regardless of the timing of an IPO, Neiman’s is pushing ahead with its growth plans. Earlier this year, the company opened its third Cusp store in the Georgetown neighborhood of Washington. A fourth is to be opened in July in the Northbrook Court, near Chicago.
The retailer plans to expand Neiman Marcus to 50 or 52 stores from its current 44 by 2010. To achieve that rate of growth, Neiman’s probably will have multiple sites in some markets. In addition, it plans to roll out more Last Call clearance centers and hopes to reach 30 locations from its current 18 in the next five years. Bergdorf Goodman is also part of the Neiman Marcus umbrella.
Patricia Pao, of consulting firm the Pao Principle, noted, “Neiman Marcus was sold just two years ago. It literally was the deal of the decade. It had 10 years of very strong numbers, and Neiman’s is in a clearly defined market. It was a slam dunk and those deals are once in a lifetime. When you compare it with J. Crew, TPG has been putting money into its investment for years, and it wasn’t until Mickey Drexler came in that [there’s been a] turnaround. TPG is still trying to turn around the Bally brand.”
TPG’s investment in J. Crew initially wasn’t much of a success. The preppy chain was once viewed as a has-been in retail circles because of the lackluster fashion merchandise in its stores. On May 1, 2002, its chief executive officer, Mark Sarvary, left the retail chain. A year earlier, in 2001, J. Crew had reported a loss of $11 million against income of $11.9 million in 2000. Sales for the year had fallen 6 percent, to $778 million from $827.6 million in 2000. J. Crew also went through three ceo’s in five years.
Drexler’s arrival almost immediately reenergized the chain, and it has been one of the fastest-growing retailers over the last two years. The growth has stemmed, as the ceo describes it, from the chain’s continual “trading up in quality.”