NEW YORK — The financial pressure is back on Barneys New York, which continues to be dogged by debt concerns and speculation that certain stores are struggling.
On Wednesday, the $700 million luxury retailer confirmed it has hired law firm Kirkland & Ellis LLP to help renegotiate its $200 million revolving credit loan due in September. Barneys also has a $280 million term loan due in September 2014 and a $180 million payment-in-kind loan due March 2016, but immediate concerns center on the revolver.
Citigroup and Wells Fargo are the primary lenders. Two private equity players have been circling Barneys for a few years, though. Ron Burkle, chief executive officer of Yucaipa Cos., bought about 15 percent of Barneys’ senior term loan in late 2009, along with roughly 60 percent of the luxury retailer’s subordinated loan. Yucaipa declined comment Wednesday. Burkle has been eyeing Barneys, as has Richard Perry, whose Perry Capital also has a large piece of Barneys’ debt.
The retailer’s decision to hire Kirkland & Ellis has fueled speculation about a range of scenarios — from refinancing, to store closings, to even a bankruptcy filing. However, Barneys officials on Wednesday assured that “it’s business as usual” at the store. Kirkland & Ellis, according to one source, was hired to handle the negotiations on the revolver and possible contingencies in case those discussions failed to reach an agreement. The law firm did not return a call for comment.
A Barneys spokeswoman responded to queries on possible refinancings and restructurings by stating, “Barneys New York is actively engaged in discussions with the company’s small group of lenders to improve its balance sheet and further position Barneys New York for sustainable, long-term growth and success. We are focused on resolving this matter as expeditiously as possible, and it will remain business as usual at Barneys New York.”
While there are industry reports that the retailer had a disappointing holiday season, the spokeswoman characterized 2011 as “a stellar year for the company’s operating performance. We enjoyed a record December, with comp sales of plus 18 percent.” Barneys declined to comment on its highly touted Gaga’s Workshop presentation for the holiday season, which brought a pop, punk and exclusive point of view to the store.
Barneys also said that it closed fiscal 2011 with “double-digit comp sales growth for the full year and a 40 percent increase in annual EBITDA [earnings before interest, taxes, depreciation and amortization] compared to 2010, which was also a profitable EBITDA year. We remain committed to serving our loyal customers.” Other luxury retailers, including Neiman Marcus Group, also had a good year.
Barneys insiders indicated that renovations at the Madison Avenue flagship are proceeding as planned, including work to overhaul the fifth floor for shoes later this year. Barneys is also in the process of creating a new staircase that leads to the lower level for beauty products, and recently completed other renovations around the store. The physical changes have received mixed reviews from the industry. Barneys has also been spending significantly on new marketing for the past year. Such projects would have been derailed if there were a serious financial shortfall.
A few factors and credit-checking firms said they haven’t been approving orders for Barneys since financial information hasn’t been forthcoming from the retailer. The latest financial information from Barneys is due later this month or in early March, which is expected to shed more light on the retailer’s performance. One factor said that Istithmar, the Dubai investment fund that owns Barneys, and Dubai World, which is Istithmar’s parent, are “tight-lipped” on Barneys’ financials. Some vendors ship Barneys anyway, particularly those that are smaller in volume and have limited distribution options. Gary Wassner, co-chief executive officer at factoring firm Hilldun Corp., whose client accounts are primarily high-end designers, said, “We are approving as usual with no changes under consideration.”
Market sources contacted Wednesday indicated that Barneys has been paying its bills and that vendors are responding well to the new management, including Mark Lee, ceo, and Daniella Vitale, chief merchant and executive vice president. “The market has appreciated the engagement of Mark and Daniella,” said one source. “They are both very visible and out there. I sense that they might be having a hard time getting some of the more commercial brands they are seeking and that most of these brands already have all the points of distribution they want.”
The source said that the main challenge of Barneys is to broaden its appeal to generate greater traffic at its stores without losing its specialness and becoming too commercial. Reports have persisted that certain branches, including those in Dallas, Boston, Phoenix and Las Vegas, have been weak, while the flagships on Madison Avenue and in Chicago and Beverly Hills are stronger.
Last November, at the WWD CEO Summit, Lee said Barneys is “reenergizing, not reinventing” and that the vision for the retailer entails elevating the element of surprise, so that Barneys builds on its reputation for exclusives, showcasing new designers and merchandising and marketing innovation. “The overarching goal is to create surprise and speak to our customer in different ways,” Lee said. “Barneys always had a large amount of surprise and wit.” He also said Barneys is not “heavily invested in megabrands” because its customer desires “rare and less distributed, less ubiquitous” merchandise that is also “a little cool.”
Credit watchdogs have had Barneys on their radar for some time, though.
Istithmar has pumped millions into the business to pull it back from the brink in the past, though further capital infusions might not be in the offing. Istithmar has been trying to sell Barneys for several years. Istithmar bought Barneys from The Jones Group Inc. for $942 million in 2007. Barneys’ heavy debt load is, at least in part, a product of that acquisition, which came at the end of a strong runup in the luxury market.
An investment banker, who requested anonymity, said that one possibility, should ownership revert to bondholders in the event of a restructuring, is for Istithmar to agree to take a smaller equity position in hopes for a better return down the road when the company does get sold.
In December, Standard & Poor’s described the company as “highly leveraged” and said it would likely need to restructure its balance sheet. “Although the company’s sponsor, Istithmar, provided additional capital in April 2009 and April 2010, we are not assuming that additional sponsor support will cover any funding shortfalls,” S&P said. “Like other luxury retailers, Barneys continues to benefit from good consumer demand and an increase in full-priced sales. While we anticipate these trends are likely to continue over the near term, we do not believe they will be significant enough to meaningfully improve credit protection measures.”
S&P rated the retailer’s $280 million senior secured term loan at “CCC-minus,” indicating the financial obligation is currently vulnerable to nonpayment.
In its most-recent update on the company in July, Moody’s Investors Service said Barneys’ capital structure was “unsustainable.” The credit agency rates the retailer’s debt at “Caa3,” pointing to very high credit risk, and said it was “uncertain” if Istithmar would make additional equity contributions to Barneys.
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