Barneys Sees Daylight As Third-Quarter Profit Reflects a Tighter Ship

NEW YORK — Whether it’s the irreverent Christmas windows or the cool vibe of an Austin Powers party, Barneys New York almost always has a buzz. Now it’s emanating from where you’d least expect: the income...

NEW YORK — Whether it’s the irreverent Christmas windows or the cool vibe of an Austin Powers party, Barneys New York almost always has a buzz. Now it’s emanating from where you’d least expect: the income statement.

This story first appeared in the November 26, 2002 issue of WWD.  Subscribe Today.

Barneys, for a long time cavalier about spending but now with new priorities, on Monday reported improved results for the third quarter and nine months, turning losses into decent profits.

In the quarter ended Nov. 2, earnings before interest, taxes, depreciation and amortization rose to $8.1 million, versus a loss of $1 million a year ago, and comparable-store sales increased 14.9 percent, with overall sales of $103.3 million.

For the nine months, comp sales increased 3.1 percent, with a total of $277.4 million, EBITDA rose to $19.6 million from $6.8 million, and net income was $2.9 million, or 21 cents per share, compared with a net loss and loss per share of $15.6 million and $1.12, respectively.

While the third quarter reflects easier comparisons to last year’s post-September 11 plunge, the longer stretch has been more about cutting costs, implementing operating efficiencies, inventory control, better rents and capital improvements and expansions in productive, higher-margin categories, like shoes, jewelry and private label.

“The improvement has really been across the board, from increased margins to lowered inventories and better customer service,” said Howard Socol, chairman, president and chief executive. The last time Barneys posted a profit was 2000, but it came from the fourth quarter, whereas this year, profits are happening earlier, when it’s more challenging.

Barneys also credits its gains to strengthening the designer image, which has always been focused on a younger, hipper crowd, artistic styles and modern classicism and innovative merchandising. And, despite the bankruptcy from January 1996 through January 1999, that image never faded much. Still, increasing sales and profits while keeping a narrow luxury focus seems tricky in a tough economy, but Barneys says it’s doing just that.

Barneys would have been expected to take a more conventional route to profits, such as broadening assortments and price points to reach a wider audience. First of all, there’s a sense of urgency to elevate performance because Barneys came out of bankruptcy in 1999, with new financial owners that are eager to get a return on their investment, and maybe sell the business. At this point, Barneys would be a “trophy” for any new owner willing to take a risk on a business with limited growth potential and just starting to show profits.

Secondly, Socol, who came on board in March 2001, is a department store executive with no real luxury experience, but with a reputation as a strong retail operator, successfully running the Miami-based Burdines division of Federated in the Eighties and Nineties. For the marketing and merchandising edge, he relies on longtime Barneys executive vice presidents and general merchandise managers Judy Collinson, in women’s, and Tom Kalenderian, in men’s, as well as creative director Simon Doonan, another Barneys veteran.

With financial investors and a department-store executive at the helm, Barneys seemed vulnerable for trading down. “I am sure some people would say that we were out to make it more commercial,” Socol suggested in an interview. “That’s not case. We are making it more of a luxury store, more of a fashion store. We’re expanding its uniqueness. We can expand on who is our fashion customer, not just in luxury. It can be in Co-op, which is our young contemporary area, or in Chelsea Baby, where we sell Juicy Couture and Theory. The perception of Barneys is as good as it’s ever been.

“When I came here, the first thing I did was to look at every inch of space. I felt there were three things we had to do — continue to elevate and grow the image, grow the profit, and grow the business. That’s the essence. The Barneys point of view is probably cooler and younger. We know we can have a lot of traditional resources found in other stores. But that doesn’t fit our game plan.”

Ultimately, Barneys’ continued success depends more on a pickup in the luxury market, though recently Saks Fifth Avenue and Neiman Marcus have shown improvements and more full-price selling, but with smaller third-quarter comp gains, at 5.2 and 4.8 percent, respectively.

“If the economy gets a little brighter, we are really poised to do well,” Socol said. “All you need is a little tailwind. Barneys has a customer that is very tied into the stock market.”

Barneys is expected to post $390 million in sales this year, and surpass $400 million in 2003. With 1,400 employees, the company operates the Madison Avenue, Beverly Hills and Chicago flagships, three smaller stores in Manhasset, N.Y., Chestnut Hill, Mass., and Seattle, two Co-op stores in SoHo and Chelsea, 12 outlets, and two semiannual warehouse-sale events. The store in the World Financial Center has been closed since September 11 of last year and won’t reopen.

Barneys is also looking to expand, but currently not via flagships — though last year, a site was considered in San Francisco, but was nixed based on the economics. Additional freestanding Co-op shops are being sought, and two, according to Socol, will open next year, possibly in the spring.

“We’re still working on the locations. We’re looking at it as a national thing, but not a 40-store rollout.” Chicago, San Francisco and other parts of California, the tri-state area, Miami, Boston, Washington D.C., are being scouted. “I don’t view expansion as a short-term thing,” Socol said. “Barneys needs to grow externally and internally.” Co-op for women, sold on floors seven and eight at the flagship, has three elements, “which is a reason why we feel we can grow it,” Socol said. There’s denim, where Barneys introduced Habitual in New York last August, with jeans priced from $85 to $800; a lineup of strong contemporary vendors, like Marc by Marc Jacobs, Joie, Theory, and Miu Miu, and smaller vendors such as Project Alabama T-shirts not carried at other department or specialty stores.

The Madison Avenue flagship has been the focus of internal growth. In the second week of August, for example, Barneys opened an expanded shoe department, with 8,000 square feet, including 4,800 for selling, doubling the previous space. Shoes and fine jewelry do about four times the sales per square foot of the store. With shoes, “We’re in the process of bringing in new lines. Now we have an expanded assortment in key lines,” such as Manolo Blahnik, and Gianni Barbato, as well as private label shoes, including cowboy-influenced boots for $200 and suede knee-high boots, $295.

In April 2002, the Foundation beauty floor opened on the lower level, providing Barneys with its first full-fledged floor just for cosmetics, skin care and fragrance. Fred’s Restaurant was moved to the ninth floor, where there is extra space being considered for selling area.

With cosmetics moving from one to the lower level, fine jewelry was expanded. Also, men’s sportswear was consolidated to one floor, after being scattered over a few floors. “Probably in men’s we were more skewed to clothing, now we are more balanced to sportswear. By bringing sportswear together on four, it looks like a sportswear business. The clothing customer continues to be a challenge, but it will get better if our clothing resources create excitement for the customer. I haven’t seen any trends in clothing yet,” though he added, “More guys are wearing suits and ties to work, especially in the investment community — everyone wants to make a good impression.”

Narrowly distributed merchandise is being played up. On the first floor of the Madison Avenue flagship, Goyard, a venerable French luggage brand, put up its first shop outside Paris, and it involved a six-month courtship by Barneys. “This is very special product, and it’s a long-term venture,” Socol said.

In the watch department, prices range from $2,000 to $8,000, including $8,800 Ikepod watches.

After adding Malo cashmere shops for men on Madison Avenue and in Beverly Hills, there’s a chance that Barneys will eventually decide to sell Malo for women. “We’re waiting to go forward,” said Lisa Dundon, vice president of Malo wholesaling. “They’ve begun taking steps to add new angles to their product presentation. Barneys has one of the most focused and clearly defined points of view in retail, and season after season they continue to reinforce that vision. It’s a unique eye and it’s fundamental to its success. Modern classics is the best way to express it.”

“We’ll be doing a lot more of these kinds of things,” Socol said. “One of our biggest growth areas is our private collection, on six in the Madison Avenue flagship, which offers a range of merchandise, including long-haired shearling coat for $1,995, suitings from $800 to $1,000, knitwear from $100 to $400, and novelty button shirts with cat patterns, $195, as well as $335 for cashmeres.

“Private label is growing as a percentage of the business, but [the percentage] clearly depends on the category,” Socol said.

“Next year, we will be attacking the Beverly Hills store, the same way we did here. There are more ways to make Barneys more productive.”

Among other steps he’s taken, Socol said he hired a vice president of customer service, and said sales associates are getting better training, with more product seminars and more designers coming to the store to explain product. The Goyard sales associate was sent to Paris for three days, for example. Socol also said there is between 5 and 10 percent more personnel on the selling floor, depending on the location.

On the expense side, “We fight every battle to reduce expenses,” including re-negotiating rents, which was an opportunity when Barneys got a new landlord, Ben Askenazi. He bought the three flagship buildings this year. They were owned by Isetan, Barneys’ former partner in expansion and adversary in bankruptcy. Barneys has also renegotiated maintenance contracts.

“The whole back of the house was not the focus before,” Socol said. “We want to be very efficient.”

He characterized advertising expense as low, with net advertising under 2 percent of sales. (Net advertising excludes Co-op dollars.) The company is adding some new marketing vehicles, such as brochures, particularly in handbags and jewelry. “We feel direct mail is our vehicle,” Socol said. “We run two to three ads in the The New York Times each week, to show new items and new ideas, and then focus on our target customer through direct mail.”

In addition, Barneys continues to renegotiate debt, and has $98 million in long-term debt that comes due in January 2004, primarily owed to the landlord, Whippoorwill Associates and Salomon Smith Barney, which Barneys is trying to push back. It also recently signed a new agreement with G.E. Capital for a revolver, with new terms. Whippoorwill and Bay Harbour Management are the principal owners.

No sale of the business is looming, with the owners feeling “patient,” Socol said, and willing to wait for when Barneys could command a respectable price — or one the owners would settle for.

“Nobody knows what’s going to happen,” Socol said. “But if things are normal, we should have a very solid year. We are marching the way we said we would.”