By and  on June 25, 2007

With the $825 million sale of Barneys New York to the Dubai-based Istithmar investment firm, the international appeal of an enduring Manhattan retail institution will be tested.

So will the future of Barneys' former parent, Jones Apparel Group. As Jones searches for ways to turn its remaining clothing brands into growth vehicles or prepare for further disposals, Istithmar is expected to bring the 84-year-old Barneys to, among other regions, the Middle East. One possibility is Palm Islands where homes, shopping centers and hotels are being developed on three large man-made islands off the coast of Dubai.

On Sunday, Howard Socol, Barneys' chairman and chief executive officer, told WWD he signed a new contract with Istithmar [which means investment in Arabic] to stay on at Barneys. Socol visited Palm Islands a year ago to explore the possibility of a Barneys store there. "That's how Istithmar developed an interest in Barneys," said one source. When Jones Apparel Group in its entirety was up for sale last year, Istithmar expressed an interest in acquiring Barneys, but Jones hesitated to sell an individual asset.

Socol has also visited London, triggering reports that Barneys would open a store there, too. But that's a tough proposition, considering Selfridges, Harvey Nichols and Harrods are entrenched in the British capital and the cost of real estate there is exorbitant.

Macao is also said to be on Barneys' radar. The Asian island nation is undergoing a casino-fueled boom that has many luxury brands viewing it as the next Las Vegas, or even bigger, in terms of gambling.

Such moves across borders seem probable now, in light of Friday's announcement that Jones Apparel Group sold Barneys to Istithmar.

Socol also said he's studied international expansion possibilities for the last two years, but no locations are set. "We looked at Palm Islands over a year ago and other locations where we have been invited. We have done some homework on international expansion. But there is a lot of work that has to go into opening any store. We have an exciting growth strategy planned for the next five years. It does not include international at this point."

Socol described Istithmar as a company with worldwide exposure. "Only 25 percent of its business is done in the Middle East, 75 percent is around the rest of the world. We haven't met to discuss [overseas moves], but they have a lot of international expertise. Every new buyer brings something to a company," he said."We are excited to acquire Barneys New York," said Khaled Al Kamda, vice chairman of Istithmar, in a statement over the weekend. "We believe that the luxury market generally and the Barneys platform specifically have incredible growth prospects."

Istithmar's ceo, David Jackson, a former Lehman Bros. executive, added: "This investment will further our continued focus on the retail sector. We believe that we will be able to accelerate the growth of Barneys' business by leveraging our experience in the sector and other investments worldwide."

One executive familiar with Istithmar described the company as "a passive investor" tending to let management do their own thing, while taking seats on the boards and investing in growth. The source said Jones probably would not have taken Barneys international, but the cash-rich Istithmar could manage two flagship openings a year. Barneys' Co-op format also offers international potential.

Istithmar has a global expansion of its own under way. The firm has been scooping up prime real estate in New York, including the Mandarin Oriental Hotel and W New York, Union Square. It also has a significant investment in Kerzner Group, the developer and operator of Atlantis Resorts. Istithmar also controls Loehmann's, buying into the off-price chain a year ago, and investment bank Perella Weinberg Partners LP.

Last week, Istithmar purchased the QE2, the luxury liner owned by Cunard Lines, in a $100 million deal.

Established in 2003, Istithmar has offices in New York and Shanghai and is 100 percent owned by Dubai World, which in turn is wholly owned by the Dubai government. Over the last several years, it has invested in more than 30 companies in three sectors — consumer, industrial and financial services — deploying in excess of $1.6 billion in capital.

"Istithmar has a keen interest in retail and loves the luxury space. They bought Loehmann's because it is discount luxury," said Marc Cooper, a managing director at investment banking firm Peter J. Solomon Co., adviser to the Dubai fund on the Barneys and Loehmann's deals.

During Jones' ownership, Barneys flagships opened in Boston and Dallas last year and a new store in Seattle is set to open this week, replacing a smaller one there. Flagships were also announced for San Francisco this fall, Las Vegas in early 2008 and Scottsdale, Ariz., in 2009. Other possible locations for flagships are Atlanta, San Diego, Miami, Washington, the Chicago metro area, and on Long Island, N.Y., in the Mall at Oyster Bay, which is being planned by Taubman Centers. However, the project has been stalled for years in the courts because of local opposition and environmental concerns.Barneys is also steadily opening Co-ops, which are smaller specialty shops for contemporary sportswear and premium denim. The format is suitable for many more locations than Barneys flagships, though they still require upscale suburban or urban settings where there is an appetite for higher-priced, casual, fashion-forward clothes. Retail experts expect the Co-op store count to ultimately be far greater than the flagships, though flagships, considering their size and positioning in dense urban areas, will generate greater total volume. Barneys operates five flagships, two smaller regional stores and 14 Co-ops and is estimated to generate in the range of $600 million in volume.

As far as where Barneys will go, "It could be London. It could be Paris. It could Frankfurt — anywhere you have an urban-centric, upscale community," observed Allen Questrom, a former Barneys ceo, who also once ran Federated Department Stores Inc. [now Macy's Inc.] and J.C. Penney Co. Inc. Questrom believes Barneys is already known in the Middle East. "People shopping there are international in scope. In Dubai now, there are international brands, primarily from Europe or the U.S."

"Dubai is nonpolitical. It's all about business," said Marvin Traub of Marvin Traub Associates. "People in the Middle East are sophisticated and aware of the major contemporary stores around the world. There is an interest in brands."

In Dubai, three giant malls, the Dubai Mall, Mall of Arabia and The Lagoons are on the drawing boards. Each will have more than 1 million square feet. Galleries Lafayette is said to be in a deal to open its first store in the Middle East, a 200,000-square-foot anchor at the Dubai Mall. Saks Fifth Avenue and Harvey Nichols, which already have units in the Middle East, are said to be eyeing the new projects. Harrod's has made some inroads toward opening in Dubai.

Space in existing centers is at a premium. When H&M entered Dubai, it split its store into two units at the Mall of Emirates for want of a single large space. "I'm sure there would be space for Barneys," said Martin Anderson, a principal at Callison, a retail design firm based in Seattle, which works in the Middle East. "Any mall probably would love them as a tenant."The retail situation in Dubai "is just bursting," Anderson said. Regional malls are massive and within 15 miles of one another. Shopping has a social aspect and the climate lends itself to being indoors. In August, temperatures reach 125 to 130 degrees with high humidity and haze.

"Barneys is a great social institution unto itself," Anderson said. "The majority of the population in Dubai is traveled. There are a great deal of expats, Brits, Australians and Americans. They would be well aware of what Barneys is. The majority of the people who are familiar with Harvey Nichols would be familiar with Barneys. Tourists are mainly European and eastern European."

Traub believes Barneys has shown improved performance recently, encouraging the expansion. "While the new [flagships] have yet to prove themselves, these openings do increase the stature of the brand," Traub said. "Barneys has a strong global reputation."

Barneys does not operate stores overseas, though there are four licensed locations in Asia.

"The biggest issue for Barneys when they go into the markets," Traub continued, "is how to compete with local [retailers and distributors] that already control the brands" including some that Barneys typically sells in the U.S., such as Armani.

"Barneys has an excellent concept that is also rather original," said Patrizio Di Marco, ceo of Bottega Veneta. "So I really hope to see some foreign expansion."

"They've been really buying in the runway men's and women's and they're taking the business to the next level. So no complaints from our standpoint," said Angela Ahrendts, ceo of Burberry.

Patrick Guadagno, president and chief operating officer of wholesale at Versace USA, said Barneys is a "trend and luxury store…outside of the department store mentality. I think they can be more of a player in the key cities, like Neiman Marcus [is]."

"Barneys has huge global potential," said Diane von Furstenberg.

"We've always had a fashion and artisan point of view," Socol said. "We don't have every designer brand. Our customer wants an edited assortment of what we consider the best brands and the new and innovative. Being different is critical for us. We stretch the customers. We stretch our vendors. We stretch the ideas. It's important for the luxury industry."Not to be forgotten is Barneys' ill-planned rollout of stores in the Eighties and Nineties, marked by mis-merchandised stores and the wrong locations. The expansion helped drive the business into bankruptcy and forced out the Pressman family, descendants of founder Barney Pressman, who started the retailer in 1923 as a discount men's wear store on 17th Street in Manhattan. Eventually, Pressman's grandsons, Gene and Bob Pressman, expanded the chain, gave it an upscale focus and introduced women's fashions to the mix. It was under the grandsons' rule that Barneys filed for Chapter 11 bankruptcy protection, and two vulture funds, Whippoorwill Associates and Bay Harbour Management, bought it out of bankruptcy and sold it to Jones in 2004.

By comparison, the current expansion is calculated and cost-conscious. It's led by Socol, who is considered a cautious and reserved executive, in contrast to the high-profile character of Barneys.

Among its flagships, those in New York, Chicago and Beverly Hills are said to do well, while there have been reports from vendors that Dallas, which is Neiman Marcus territory, is not as successful. Responding to the Dallas reports, Socol said, "It takes a while to move into a city and get adjusted and understand what a city wants and their fashion flavor." Socol added that the Chicago store a few years ago had been performing unsatisfactorily, but business there has "blossomed substantially" by attacking virtually all fronts, from customer service, to marketing to culling or bolstering certain products and vendors.

"We have a great team of people who will make each of our new stores work," he said, adding that each new store will appear different from any other, to fit the city.

He said overall, Barneys had double-digit comparable store sales increases for the last three years. "We are headed that way again this year."

Last year, Barneys took a challenging location, a former movie theater, in Boston's Copley Place. "Considering they don't have an ideal configuration, they did a good job," Traub said.

The Barneys transaction includes a so-called "fiduciary out" clause that enables others to propose offers for either Barneys or all of Jones Apparel Group. Jones can consider unsolicited proposals from third parties to acquire Barneys until July 22, and all due diligence and negotiations with a third party would have to be completed by Aug. 11. In that event, Jones must pay a termination fee of $20.6 million to Istithmar.Citibank was co-adviser to Istithmar in the Barneys transaction, and provided financing to the Dubai firm.

Jones is making a healthy return on its Barneys investment. Jones acquired Barneys in 2004 for $397.5 million and will net approximately $290 million from the sale of the chain. Due to some tax benefits, Peter Boneparth, president and ceo of Jones, said the group will have net cash proceeds after taxes and transaction expenses of approximately $770 million.

But the group's challenge is how to grow its remaining assets at a time when consolidation in department stores is placing immense pressure on vendors.

Boneparth said in a conference call Friday that some of the proceeds will translate to a "significant return of capital to shareholders" as well as additional financial flexibility to continue investing in the company's core brands, which include Jones New York and Anne Klein. Other labels under the Jones corporate umbrella include Nine West, Easy Spirit, Evan-Picone, Norton McNaughton, Kasper and Gloria Vanderbilt. Jones is considering selling off some of its brands.

"We see in Barneys a very nice growth asset. From our perspective…the asset required more capital investment to grow, [with the] operating margin not likely to approach [that of] our wholesale business as we go forward," Boneparth said. "We didn't buy [Barneys] with the intent to sell it, but this is a great opportunity for shareholder return."

With a richer owner with international holdings, expansion opportunities will arise faster than under Jones.

From the cash Jones attained from the Barneys deal, "I could see [Jones] acquiring brands with higher margins that take it away from department stores," said Allan Ellinger, senior managing director at Marketing Management Group.

"The likelihood is pretty strong that Nine West could be sold," said Andrew Jassin, managing director of Jassin & O'Rourke Group, a New York industry consulting firm. "It's a self-contained unit, and its combination of being a retailer and wholesale distributor is highly desirable."

Consultant Emanuel Weintraub said: "You have to recognize the reality of the retail condition and make your brands destination brands. You have to invest in your brands, and you can't do that with 20 or 30 brands, so you limit the number of brands and heavily promote them."Analyst Jennifer Black, of the firm that bears her name, agrees Jones should turn its focus to its three "core viable businesses," all of which she predicts "will be winners with the Federated consolidation."

"We believe Jones Apparel has made the right adjustments to its wholesale business, which began nearly two years ago, and we would expect them to reap nice rewards in 2008," Black said in a recent report.  — With contributions from WWD staff

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