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Moody’s Downgrades Barneys

Barneys New York was downgraded by Moody's yesterday due to liquidity concerns. Moody's action covers about $270 million of rated debt securities.

Barneys New York was downgraded by Moody’s Investors Service late Thursday due to liquidity concerns, but the retailer quickly responded by stating it has taken several measures to put itself in a “stronger financial condition.”

“Barneys has responded aggressively in the midst of these challenging conditions in the luxury retail market,” a company spokeswoman said.

“Controllable operating expenses have been reduced by approximately 10 percent to 15 percent on an annualized basis, and capital spending has been reduced by 50 percent in comparison to last year. Inventory purchases have been reduced for fall 2009 and spring 2010 by over 20 percent.

“These measures will put Barneys in a stronger financial position, with anticipated better margins,” she continued. “Our sales trend is improving and we expect a stronger performance in the second half of 2009.”

Barneys said Moody’s action is primarily a reflection of its financial performance in the fourth quarter of 2008 and first quarter of 2009.

Moody’s downgraded Barneys’ credit two notches, to “Caa3” from “Caa1.” The move, which covers the corporate family rating as well as the probability of default rating and ratings on Barneys’ senior secured term loan, keeps the debt within the class carrying “very high credit risk.”

However, it places the retailer’s debt just one tick above a “Ca” rating, which is reserved for securities that “are likely in, or very near, default, with some prospect of recovery of principal and interest.”

This is Moody’s first rating action on Barneys since Nov. 4, when the corporate family rating was reduced to “Caa1” with a negative outlook.

Moody’s action on Thursday covers $270 million of rated debt securities.

“Moody’s remains concerned that in the aggregate, free cash flow will remain negative over the near term,” the company said. The combination of its 2007 acquisition by Istithmar PJSC from Jones Apparel Group Inc. and “significant declines in revenue and earnings that are consistent with the overall luxury retail segment” have left Barneys in “strained financial condition,” wrote Kendra Smith, managing director of the corporate finance group, and Michael Zuccaro, analyst in the group.

Free cash flow is expected to remain in negative territory. Excess availability on the firm’s $200 million asset-based revolving credit agreement is likely limited because the revolver has been used to fund recent cash-flow deficits.

Complicating matters, according to Moody’s, is a “springing financial covenant” if excess availability falls below $20 million. “Moody’s believes that the company would not meet this test, if required,” the ratings agency said. Moody’s doesn’t rate the $200 million revolver.

Moody’s also noted that retail spending, especially for luxury goods, is expected to continue to contract, “although at a declining rate,” in the near term.

Barneys has been experiencing double-digit declines of a magnitude comparable to competitors in the luxury sector, though store officials see signs the worst could be over. “Although sales and operating results continue to reflect the difficult economic operating environment, we experienced slight improvements in the sales trend beginning in May and the trend has continued into July,” the company told WWD. In the first quarter, total sales were down 26.3 percent and, on a comparable-store basis, were down 27.6 percent. However, from May to July 20, sales were down 14.6 percent, and 16 percent on a comp basis. Year-to-date sales are running negative 20.9 percent, and negative 22.1 percent on a comparable-store basis. Moody’s estimated that the retailer’s sales in the last 12 months are about $675 million.

Barneys did get a lift from its new Chicago flagship, which opened in April and is tracking 15 percent ahead of the store it replaced. Barneys also said its Web site is 32 percent ahead, year-to-date. The company is building a flagship store in Scottsdale, Ariz., scheduled to open in October. Barneys operates seven flagships, two regional stores, 19 Co-Ops and 13 outlets. The company also has two warehouse sale locations, in New York and Los Angeles.

The absence of a chief executive officer “also remains a concern in this difficult environment,” said Moody’s. Howard Socol left as ceo in July 2008. The company is being led by its tier of seven executive vice presidents.

Moody’s move follows by just over three months a downgrade from Standard & Poor’s, which cut its rating to “CCC” from “B-minus,” skipping over the “CCC-plus” grade.

Just one day after the Moody’s downgrade in April, Istithmar opted to pump another $25 million into Barneys, helping to ease concerns and ensure shipments.

In other news, Barneys executive vice president and chief financial officer, Steve Feldman, is resigning today, after 13 years with the company. He will be succeeded by Vince Phelan, treasurer and also a veteran of Barneys, having been at the firm for 14 years. Barneys said Feldman decided to leave to pursue other interests.