By and  on April 19, 2005

NEW YORK — Expend, then expand.

With Neiman Marcus Group expected to be sold as early as next month for a minimum of $100 a share, or in the $5 billion range, concerns are mounting over what it will all mean for the luxury chain’s future and its ongoing expansion.

At the moment, it appears the bidding action has boiled down to two front-runners — Kohlberg, Kravis Roberts & Co. teaming with Bain Capital Partners, and Thomas H. Lee with The Blackstone Group. Other private equity firms apparently have taken a pass. According to a source close to one of them: “Final bids are due no later than April 29. Most likely there will be a decision by the second week of May.”

But whoever buys Neiman’s will be under enormous pressure to maintain and build on the significant growth the retailer has seen over the last few years. Higher revenues and earnings will be required to support the huge investment, and for a financial buyer seeking to flip the business for a profit, that means an accelerated expansion is practically a certainty.

Industry experts say Neiman’s could tap many more locations in the U.S., and begin opening stores overseas.

“Neiman Marcus is the sleeping giant of luxury,” said Steve Greenberg, president of the Greenberg Group retail real estate advisers. “They’re in so many markets, like Boston, where they have one store downtown and never went to the suburbs. In Chicago, there’s Neiman’s downtown and one in Northbrook. That’s not a lot of stores for one of the biggest markets in America. There are 25 major markets in America, and Neiman’s only has 35 stores.

“I don’t think we need one in Pittsburgh, but you can have second stores in a lot of major markets,” he continued. “And why can’t there be a small Neiman’s in La Jolla or Santa Barbara [Calif.] — smaller markets that are very, very affluent? Neiman’s already seems to be picking off some of the smaller markets, particularly in Texas where the brand is so strong.”

Speculation on expanding Neiman’s heated up this month when an executive from Vornado Realty, at one time said to be among the firms that could invest in the retailer, estimated at a recent investor luncheon that the chain could double its store count. Several hedge funds, who have done their own leveraged buyout models on Neiman’s, said the brand could support up to 60 or 70 stores, as reported. Based on their LBO models, doubling the store base would peg Neiman’s earnings before interest, taxes, depreciation and amortization at $1 billion, against the expected $500 million based on existing operations. For fiscal year 2004, total revenues were $3.55 billion compared with $3.1 billion in the prior year. Net earnings were $205 million, compared with $109 million for fiscal year 2003, which represents an increase of 87 percent.

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