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Neiman Marcus Cautious, Despite Return to Black

Neiman Marcus returned to profitability in the third quarter with a 10.5 percent leap in sales.

Executives at Neiman Marcus Inc. are crossing their fingers.

Having returned to profitability in the third quarter with a 10.5 percent leap in sales and a 170-point increase in gross margin, officials at the Dallas-based upscale department store are hoping factors that weighed in their favor in the last quarter — a revival among luxury shoppers and even a return among less-affluent aspirational shoppers — won’t be erased by recent declines on the stock market and the dramatic drop in the euro.

Like others in the luxury sector, they’ll also be up against stronger comparisons during the back half of the calendar year as well as the knowledge, spelled out by Hermès International’s chief executive officer Patrick Thomas on Monday, that high-end firms with strong recent results need to be on guard against overly optimistic forecasts moving forward.

The euro could cut either way for Neiman’s, which buys the majority of its merchandise from European luxury vendors and could benefit from lower pricing on future orders. However, the retailer could see a reduction in foreign shoppers or a decrease in their propensity to spend. The euro, which averaged $1.35 during the last quarter, ended Tuesday at $1.194.

“It’s simply too early to know whether what’s happened with the euro and the stock market will affect the business,” Burton M. Tansky, president and ceo of the privately held company, told WWD. “It hasn’t so far. But business is a month-to-month project. Bergdorf [Goodman] has held up very well, but the majority of its business is local.”

On a conference call earlier in the day, Tansky disclosed that sales at Bergdorf’s stores, both in New York, improved more than 25 percent during the third quarter. “We have definitely benefited from the strong economic rebound in New York City,” he said.

Overall, net income for the third quarter ended May 1 hit $18.5 million, reversing a net loss of $3.1 million in the 2009 period. Revenues advanced to $895.2 million from $810.1 million a year ago as comparable-store sales grew 9.1 percent. Gross margin advanced to 38.2 percent of sales from 36.5 percent a year ago.

Operating income in the specialty retailing unit rose 41.5 percent to $98 million while direct marketing contributed $28.9 million, a 39.6 percent increase. Top-line growth in specialty retailing was 11.3 percent, to $740.7 million. Direct marketing’s growth was a more modest 6.9 percent, to $154.5 million.

In addition to Bergdorf’s, pockets of strength included footwear and handbags, the two best performing categories in the store; Internet sales, up 15.4 percent to $130.9 million, and stores in Florida.

Although pleased with the results, Tansky, four months in advance of his retirement, emphasized that “these improvements are against the diminished sales base from a year ago.”

Turning to the balance sheet, cash and cash equivalents more than doubled year-on-year, to $513.3 million at the end of the third quarter from $229.4 million on year earlier, as inventories dropped exactly 10 percent to $779.4 million.

For the nine months, Neiman’s reported net income of $30.9 million versus a net loss of $499.5 million in the first three quarters of last year, when the firm recorded pretax impairment charges of $560.2 million. Revenues declined 0.3 percent to $2.87 billion from $2.88 billion and were down 1.9 percent on a comparable basis.

Karen Katz, who will succeed Tansky in October and currently serves as president and ceo of Neiman Marcus Stores, was careful to provide balance in her discussion of the better customer.

“We’re definitely seeing our core customer; she’s come back,” she said. “And her trips…are starting to increase also. We are starting to see some aspirational customers back in the stores and the kinds of categories that we typically associate with the aspirational customer, we’re getting some traction with those categories. And so we’re seeing overall improvements in traffic from what we say are both sets of customers.

“But I will caution all of you by saying that they’re all being very selective in how they’re shopping,” she continued.

Aspirational customers, Tansky told WWD, “got hit hard and had more to deal with” than did affluent shoppers.

Katz acknowledged that Neiman’s disciplined approach to inventories might have caused it to miss some sales, but asserted the conservative approach to stocks has prodded the consumer to act. Limited inventories have “encouraged them to buy early those things that they desire the most,” helping the regular-price business.

Tansky said that, while there was no hard evidence of shoppers clamoring to stores fearful of low inventories, “there is a certain urgency to make decisions.”

In remarks before Saks Inc.’s annual meeting in Boston Tuesday, Stephen I. Sadove, chairman and ceo, painted a picture similar to the one provided by Neiman’s.

“Our consumer is shopping again and at full price. But I think the economy is fragile,” he said. “The market is volatile, and volatility is not good for the luxury consumer. So we watch very carefully what’s happening. But longer term, I’m very optimistic.”

Although Saks plans to be “a little more aggressive with inventory in certain categories, such as shoes, handbags and accessories,” inventories are still expected to grow more slowly than sales.

At the 17-minute meeting attended by a handful of shareholders, Sadove said he expects recent reductions in the amount and scope of promotional activity to hold through the holiday season. On the marketing front, he estimated that between 15 percent and 20 percent of advertising expenditures had been moved to local from national budgets.