By  on September 29, 2006

NEW YORK — Fueled by another healthy year of growth and its new owners' desire to get a return on their investment, Neiman Marcus is ready to expand on several fronts.

The luxury chain was acquired for $5.1 billion last year by an investment group led by Texas Pacific Group and Warburg Pincus LLC, and on Thursday reported adjusted operating earnings for fiscal year ended July 29 of $450 million, a 7.6 percent increase compared with the $418.1 million in adjusted operating earnings for fiscal 2005.

Fourth-quarter adjusted operating earnings came to $38.5 million, compared with $40.6 million in the year-ago period, with the difference primarily due to the loss of finance charges stemming from the sale of the credit card business and higher depreciation.

Sales continued to be robust, climbing 9 percent to $915.5 million in the fourth quarter, compared to $839.8 million in the prior-year period, with comp-store sales increasing 6.6 percent. For the year, the company posted revenues up 7.9 percent to $4.1 billion, compared with $3.8 billion in the prior year, with comps rising 6.8 percent.

"Fiscal 2006 was an outstanding year from every aspect," Neiman's chairman and chief executive Burt Tansky said, marked by several new performance records for the business. Aside from cracking $4 billion in sales for the first time, sales per square foot reached $611, compared with $577 in fiscal 2005, an increase of just under 6 percent.

"It's a level of productivity substantially higher than our competitors," Tansky boasted.

He also said the company achieved nearly an 11 percent operating margin, maximized full-price selling, and that the merchant organization maintained "a very disciplined buying strategy."

Recently, business has been strongest in contemporary sportswear and designer handbags, both up by more than 15 percent, as well as eveningwear, couture and dresses, precious and fine jewelry, and shoes.

The company reported net income of $56.6 million for the year, against $248.8 million in the year before, and a fourth-quarter net loss of almost $42 million, versus a profit of $56.6 million in the prior year's period. The fourth-quarter figure includes a loss on the sale of the Gurwitch color cosmetics business, which owns the Laura Mercier brand.Net income was driven down largely by interest expense — totaling $217 million this year versus $12 million last year — and other costs related to the acquisition. Officials stressed adjusted operating earnings were a truer measure of the retailer's health because they exclude transaction costs, amortization of customer lists and favorable lease commitments, purchase accounting adjustments, the gain on the credit card sale and the loss on the disposition of Chef's Catalog.

Neiman's does have to be careful in its expansion, considering the luxury chain already has a presence in most affluent U.S. markets that can support a luxury business. But officials during a conference call Thursday were not coy in listing the opportunities. Tansky sees the retailer growing to 50 or 52 stores by 2010, from the current 44.

"Expect another eight to 10 [stores] over next few years," Tansky said.

However, "We will not take a site unless it's absolutely a double-A site. It has to pass demographic and psychographic tests ... In Florida, there could be another three or four additional sites. There are four or five markets that could take on additional stores."

One of those markets is Boston, where the company is building a store in the Natick, Mass., suburb for a fall 2007 opening. Six other stores have been announced for the next four fiscal years, including Austin for spring 2007; Oyster Bay, Long Island, fall 2008; West Los Angeles for fall 2008; Bellevue Square in Washington in spring 2009, and Princeton, N.J., in spring 2010.

The Last Call clearance centers will be rolled out. "We are spending additional time analyzing this division," Tansky said. "We have 18, and we plan to reach 30 in the next five years. We believe this can be a very important growth driver."

The company operates one Last Call for every two to three full-line stores as a support vehicle, but with the full-lines stores demonstrating higher productivity, there will be more investment in merchandise being bought expressly for Last Call, Tansky said.

Contemporary sportswear is another ripe avenue of growth. "We are intensifying that effort every year. We are getting faster and more alert to incoming trends," Tansky said."The average age of the customer has come down somewhat, and [contemporary] has become a very large business with very good margins, with the core business driven by several important vendors," he said, citing Theory, Tahari, Diane von Furstenberg, Vince, Lafayette and Juicy Couture.

"On top of that, there have been some terrific categories with hot items. We are giving contemporary additional space. The marketing thrust has been very intense," and there's been "a comprehensive approach to reaching out to a younger customer."

Bergdorf Goodman renovated its fifth floor for contemporary this year and branded it "5F." Tansky cited the possibility that Neiman's also brands its contemporary floors with a name, but said he doubted if it would be 5F.

Cusp, the smaller store format targeting a younger fashion customer, is part of the contemporary push. It debuted in late July in Tysons Corner in McLean, Va., recently opened a second site in Century City mall in L.A., and a third unit will open in Georgetown this year; a fourth location is being determined. The mix includes some vendors sold at Neiman's and some lower-priced ones that aren't. Aside from being able to use Neiman's credit cards, customers see no other association with the Neiman's stores.

"Cusp is off to an encouraging start. However, we view this as research and development and take a prudent approach to expansion," Tansky said. "We are very pleased with the early results, but, again, it's very early. It could well be a big idea as we look down the road, but [we're] not going to make any commitment until we see how the experiment goes."

Bergdorf Goodman is considering opening a branch in Las Vegas, but Tansky did not mention the idea during the call. No decision has been made yet.

Internet sales are growing by more than 30 percent. "This is a highly leverageable business model," Tansky said. The company is planning additional designer "sitelets" that Neiman's creates, as well as technology investments. The retailer has nine active designer sitelets, including ones for Michael Kors, Valentino and Juicy Couture and anticipates unveiling two more before the end of the yearSaid Tansky, "NM Direct had an outstanding year and ended the year with a strong fourth quarter: comp sales up 13 percent. We have many initiatives planned and are very focused on attracting and developing new customers." A "stand-alone closeout Web site is being planned for the second half of fiscal 2007," he said.

For the quarter and year, sales at the specialty stores (Neiman's and Bergdorf's) rose 5.8 percent and 6.1 percent, respectively. Neiman Marcus did not break out specific sales figures, however.

Projecting revenues ahead, Tansky said, "We continue to look at mid-single digits. We continue to be very optimistic. We see no slowdown or change in our approach."

Asked to project Christmas, Tansky said he wouldn't put a percentage on it, though he added, "Based on the trend line, there is no reason to believe it won't be a good to very good Christmas season. Our customer is spending, buying quality, buying key resources and buying the big trends and hot items at a steady clip. There is no reason to believe that will stop."

Asked by one analyst about rising competition from the likes of Barneys New York and Saks Fifth Avenue, Tansky responded, "We are very aware that Barneys is opening in NorthPark Center," in Dallas, where Neiman's is based and where Barneys years ago had a store. "We welcome them back. This time, they're coming with a larger store. After the initial break-in period with the curiosity shopper who moves around from store to store, it will be a benefit by bringing in more customers to the mall. We are watching their continued expansion with great interest.

"On the Saks side, we are still watching their improvement. In both cases, we don't expect major impact. We stay focused. We don't deviate from our business model. We make some adjustments in our thinking, but it's more of a tweaking."

The Kate Spade accessories division has been up for sale for about a year, but officials said that if it's not sold, then Neiman Marcus might end up owning 100 percent of the brand as early as the company's second quarter. Neiman's currently owns 56 percent, and the Spades have 44 percent but have exercised a put agreement.

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