By and  on November 4, 2008

Shrinking profit margins, negative comparable-store sales and an empty corner office added up to a debt downgrade for Barneys New York on Monday.

Moody’s Investors Service cut the retailer’s corporate family and probability of default ratings to “Caa1” from “B3” on Monday. Barneys’senior secured term loan was also downgraded to “Caa1” from “B3.” About $280 million in debt is covered by the ratings, which have a negative outlook.

The move indicates Barneys’ debt is subject to “very high credit risk,” according to the rating agency’s scale that gauges how likely it is a firm will make good on its IOUs.

“The downgrades reflect Barneys’ weaker-than-expected operating performance and debt protection measures since the company was purchased in a [leveraged buyout] transaction in September 2007,” Michael Zuccaro, analyst at Moody’s, said in the downgrade.

Istithmar, an investment firm controlled by the government of Dubai, bought the retailer from Jones Apparel Group for $942 million in September 2007.

But Istithmar was able to hold on to chief executive officer Howard Socol for less than a year, leaving one of the most high-profile jobs in retailing open at a time when the shrinking economy, stock market declines and faltering consumer confidence are hurting even high-end chains.

“Moody’s is increasingly concerned that the company continues to operate in this challenging environment without a ceo,” Zuccaro said.

Socol stepped down in June amid speculation he disagreed with Istithmar on exactly how the chain should expand. He led Barneys for more than seven years. The retailer had 38 U.S. stores, including seven flagships, and sales of over $780 million for the year ended Aug. 2, the rating agency said. As a privately held company, Barneys does not release financial results.

“Barneys is reliant on successful store expansion in order to service its heavy debt load,” Zuccaro said. “Despite incremental revenue growth from recent new store openings, Barneys’ year-to-date operating performance has deteriorated due to significant macroeconomic pressures. As a result, its comparable-store sales are negative, margins have eroded due to increased promotional activity, and credit metrics have weakened.”

There’s been no shortage of speculation about candidates for the ceo job, including Vittorio Radice, ceo of Italy’s La Rinascente, and Bonnie Brooks, formerly of Lane Crawford and now ceo of The Bay in Canada. Barneys has been interested in Radice, but Radice last week said he was not joining Barneys. Brooks joined The Bay in August.

Rumors have also swirled around Mark Lee of Gucci, who is stepping down at the end of this year and does not appear headed to Barneys; Caryn Lerner, president of Holt Renfrew; Marigay McKee, fashion director of Harrods, and Andrew Jennings, group managing director of retail at Woolworths in South Africa.

It’s a tough position to fill, considering the field of candidates would be small. Few executives have experience running luxury retail and those currently in such slots, such as at Saks Fifth Avenue or Neiman Marcus, would likely have non-compete clauses in their contracts.

Moreover, candidates may be hesitant to join Barneys because of the pressures involved, both internally and from the looming recession. In part because of the high price paid by Istithmar last year, there is a determination to open stores, grow volume and get a return on the investment. Barneys also has laid out an uncertain growth strategy involving building flagships in affluent urban areas around the world and stocking them with expensive contemporary and designer offerings. With its cutting-edge image, Barneys has a narrower appeal and customer base than other luxury chains such as Neiman Marcus and Saks, and many retail experts have questioned the portability of the brand. In the past few years, Barneys has opened flagships in Dallas, Las Vegas and Boston. The units were said not to be meeting expectations even before the economic downturn. The Madison Avenue flagship, however, is believed to still be performing well.

As far as seeking a new Barneys ceo, Istithmarceo David Jackson has said he isn’t wedded to having a luxury retail executive and could go out of the box. “We are looking for someone really who is a leader. To the extent we can find that person, it could be someone from a slightly off-beat path,” he said last summer after Socol’s abrupt departure. Jackson did say he would prefer that a retailer fill the post, however.

Barneys is looking for store locations in Europe, the Middle East and the Far East. In the Far East at least, Barneys would be faced with strong competition from Lane Crawford. Outside the U.S., it would be challenging for Barneys to secure the designer lines it wants because many are already sold at other stores, such as Harvey Nichols, and have tightly controlled distribution agreements with retailers.

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