By  on June 5, 2008

The Neiman Marcus Group Inc. is running up against the economy's headwinds.

Facing excess inventories and customers holding back, the Dallas-based luxury chain on Wednesday reported a 7 percent dip in earnings and a comparable-store sales drop of 2.5 percent for its third quarter that ended April 26.

Neiman Marcus Group said earnings fell to $55.4 million from $59.5 million last year as total revenues fell 1 percent to $1.06 billion from $1.07 billion.

The Neiman Marcus Stores division saw a 4.4 percent drop in comp sales, while Bergdorf Goodman's rose 3.4 percent. Sales at Neiman Marcus Direct rose about 2 percent.

For the nine-month period, earnings grew 40 percent to $178.5 million from $127.8 million in the year prior. Revenues grew 4.7 percent to $3.57 billion from $3.41 billion, while comps increased 2.6 percent.

This year, the company has shifted into an unusually promotional posture, battling to reduce inventories bought last year that are proving to be excessive compared with the sales trends. The problem is most pronounced in basics, according to store executives, who said they expect to have inventories in line by the end of the store's fiscal year, which concludes July 31.

Neiman's isn't the only luxury retailer feeling the squeeze. Saks Fifth Avenue did report a 66 percent jump in its first quarter's earnings, though margins were down a bit due to accelerated promotions, and many midmarket stores, such as Macy's, have reported declines.

But there are some hopeful signs, as Burt Tansky, chairman and chief executive officer of the Neiman Marcus Group, outlined in an interview. Designers, he said, have been "very anxious to get the goods out of their warehouse" to spur shopping by the affluent. The tactic, for now at least, appears to be working, with early fall goods selling, he told WWD. "When new fall goods come in this early, they traditionally sell well. The affluent customer is moving forward and already thinking about fall."

Recent sales shortfalls are attributed more to aspirational customers pulling back.

Tansky also observed that lighter-weight fabrications and lighter colors in fall collections are more evident than previous seasons, which should spur sales, though black and plum are very visible, too. "I believe we are slowly starting to see fabrications and colorations that make more sense," he said during a conference call.

Still, Tansky cautioned the current trend is not necessarily a barometer of the fall season ahead, and that he didn't want to read too much into the early fall sales pattern. For a true read on the season's performance, "You have to wait until post Labor Day," Tansky said. "This is just an indicator that our customers are buying into early fall deliveries."

Meanwhile, "Promotional activity will continue as long as the inventories are high," Tansky said during the call. "We are driving our inventories to our year-end plan and once we get there we intend to stay there. From our perspective, we hope the promotional activity will normalize. We would like to avoid them in the future." Gross margins declined 150 basis points in the quarter.

"This battle on price is just not our game but we got into more promotions than we liked because of our inventory levels....Most of these downturns take on similar characteristics," said Tansky. "[Retailers] make moves to capture as much top line business as they can and try to preserve as much gross margin as they can."

The ceo told WWD that Neiman's is cutting costs "across the board....We look at every expense with a discerning eye — you name it, from payroll to utility costs, to the handling of the merchandise." Asked if the climate for business was worsening or improving, Tansky replied: "In a macro sense, I don't know. From our point of view, it seems to be stabilizing."

Texas and New York City area stores were the strongest in the quarter, with main floor accessories, handbags, precious and designer jewelry, women's and men's and shoes, and beauty outperforming other categories. California is the most difficult market.

"Apparel has been a mixed bag," Tansky said. "Contemporary has been some very good business," though "customers are very focused and very deliberate in their buy. They seem to know what is good and what isn't. We have some very good businesses and some that are not so good."

Neiman's program of store openings, expansions and renovations remains on track, including six new stores through 2011, with the next set for Topanga, Calif., in September. The chain has allocated $180 to $190 million for capital expenditures in fiscal '08. "Year-to-date cash flow remains strong, allowing the company to make strategic investments," Tansky said.Another bright spot are the Last Call clearance stores, he said. "Over the last two years, we have added infrastructure to support the growth of this business." Three Last Call units are opening soon, bringing the total to 27. "All the merchandise in Last Call stores are either from Neiman Marcus stores or goods purchased from one of our existing vendors. During this challenging time, sales at our Last Call stores have remained strong."

Asked by one analyst if there are international ambitions, Tansky said Neiman's has been on the Internet and transactional in Canada for six weeks and off to a very good start. With stores, Tansky said, "There are no plans today for international expansion. We are observing the scene. I took a team to China a year ago last month. There are considerable barriers and issues to get into business."

Tansky also said the company is studying Dubai. "We are not plunging or rushing" into the international arena. "We may have more report to you in the future, but right now there is nothing more than I just said."

He said recent reports that Neiman's was exploring India were "absolutely untrue."

There had been talk that Neiman Marcus Group, owned by TPG and Warburg Pincus, would launch an initial public offering around this time of year, but given the poor market conditions and uncertain economy, the speculation has withered. Tansky told WWD, "nothing is happening."

Summarizing the corporation's strategy for these recessionary times, Tansky said, "We are planning conservatively, controlling our expenses, overmanaging inventories and identifying all opportunities to improve our results while investing in the future. We are able to continue to invest in our stores.

"In closing, we are moving forward assuming the remainder of the calendar 2008 year will remain challenging. There are lessons to be learned and disciplines to be applied when consumers are cautious and business is challenging."  

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