WWD.com/globe-news/department-stores/katz-talks-neimans-growth-strategy-7640657/

Karen Katz, the president and chief executive officer of Neiman Marcus Group, is getting down to the brass tacks of revving up growth strategies for NMG’s new owners, Ares Management and the Canada Pension Plan Investment Board.

This story first appeared in the April 14, 2014 issue of WWD.  Subscribe Today.

“They’re encouraging us to think big and are really giving us the courage to look at Neiman Marcus and Bergdorf Goodman in a bolder way,” said Katz. “They’re interested in investing more capital in our business.”

In an interview at the Neiman’s online distribution center in Dallas, Katz, wearing an Alexander Wang baseball jacket and white Givenchy blouse, spoke of taking risks, formats to roll out, advances in technology and customer experience, investments in the Neiman’s and Bergdorf’s stores, and reexamining the character of partnerships with certain vendors.

More specifically, Katz outlined several growth priorities, supported by Ares and CPPIB. Among them:

• Investing more capital to renovate Neiman Marcus stores, some of which are dated or need to reconfigure selling space to maximize categories with greater potential and to develop and enhance vendor shops.

• Adding leased shops, otherwise known as concessions, to Neiman’s selling floors. It’s a possibility that would represent a break from Neiman’s long-standing business model that encourages sales associates to work all departments in the stores to better service and outfit customers, and prohibits leased shops.

• A five-year strategic plan for Bergdorf Goodman women’s. It’s called “BG 20/20” and reflects the vision of Bergdorf’s president Joshua Schulman. An overhaul of the main floor for fine jewelry and luxury accessories will be a big piece. Schulman is putting the plan together, following his grand revamp of Bergdorf’s men’s store, opposite the women’s store on Fifth Avenue.

• Rolling out Last Call Studio off-price stores. Katz says locations are being vigorously pursued.

Ares and CPPIB paid $6 billion to buy the $4.65 billion NMG from TPG Capital and Warburg Pincus last year, putting pressure on Katz and her team to increase volume and profits and pay down increased debt resulting from the deal. Some say Neiman’s, with 43 stores in the U.S., including Bergdorf’s, has most affluent markets already covered and therefore limited prospects for expansion.

Nevertheless, Neiman’s is in a good position to meet the challenges. Its productivity leads the industry and was tracking at $567 in sales per square foot for Neiman’s second quarter; the luxury customer continues to spend, and Saks Fifth Avenue is in the throes of transition, making management changes, rethinking its mix and continuing to close locations.

Also, Katz, who took the NMG helm in 2010, makes a good case on how to navigate the future. She stressed that while Neiman’s strategies, shopping channels and the way customers shop are all changing, the 107-year-old luxury retailer is sticking to what’s always been the mission: “To provide the best edited merchandise and do it with gracious and welcoming service,” as she put it.

Moreover, “We know how to operate under private equity ownership. They want to spend capital and at the same time be very protective of our brands. They are appropriately active partners. I probably talk to someone every few days and e-mail constantly,” Katz said referring to, among others, David Kaplan and Adam Stein, partners at Ares. “We are in constant conversation. They are very collaborative. They own other retailers.”

Ares has invested in GNC, Floor & Decor, House of Blues, Maidenform Brands, Samsonite, Serta, Simmons, Smart & Final and 99 Cents Only Stores.

Perhaps the biggest transformation under Katz’s watch has been in the organization, with her tapping Schulman to head Bergdorf’s, naming John Koryl president of Neiman Marcus stores and online after earlier naming him head of Neiman Marcus Online, and recruiting Michael Kingston as chief information officer and Wanda Gierhart as chief marketing officer.

“The executive leadership has changed by more than 50 percent,” Katz said. “It’s done with the intent of having good, fresh eyes around the business of retailing. It’s very energizing for me and the company in general.”

Starting today, another organizational change takes root. Neiman’s store and online merchandising and planning teams merge into a single organization run by Jim Gold, who has been named president and chief merchandising officer of the Neiman Marcus brand after serving as president of specialty retail. General merchandise managers, divisional merchandise managers and planners now have “omni” responsibilities covering the stores, mail-order and e-commerce businesses, and 187 buyers and planners at Neiman Marcus Online facilities are moving into the downtown Dallas headquarters. Buyers continue to be channel-specific, with the buying team for stores and another team of buyers for the direct-to-consumer businesses remaining in place.

These changes underscore Katz’s strategy to “deliver a seamless experience….The biggest change is how the customer views shopping between the channels — that’s where a huge focus has been.”

Part of that means further linking sales associates to customers by giving sales associates access to more customer information and shopping carts virtually through an app that is being developed. Three years ago, Neiman’s decided to outfit all of its 4,200 sales associates with iPhones and iPads — there are 7,000 of the devices in use. With the iPhone, the original intent was to better communicate with customers through phone calls, texts and photos of merchandise. Now, Katz explained, “We are going from a communications tool to really delivering a shopping experience. We are building apps for sales associates to further their relationships, virtually,” providing tools enabling associates to review customers’ shopping lists, check the status of shipments, and have customers see products and boutiques inside the stores. In technology, Neiman’s was long underinvested. “Even though we were ahead in e-commerce, many of our systems were old. There wasn’t enough invested in technology.” That’s changed now, with Katz noting that $100 million will be spent on NMG One, a new merchandising system enabling the locating and sharing of inventory across channels to improve turn and better meet customer demand, over three to four years. “That’s the biggest capital expenditure in NMG.”

On the brick-and-mortar side, “We are in the process of putting together major capital into more Neiman Marcus stores. That’s the most direct result of the new shareholders,” Katz said. She declined to say how much money will be allocated for the stores, but she sees realignments of square footage to grow some more promising categories, interiors getting modernized, certain vendor shops being enhanced and possibly new shops all on the horizon.

In some locations, “We don’t have enough space for shoes, handbags, maybe men’s.” To capture greater selling area, back-office space will be converted and a few areas, such as gifts, could get downsized. “The majority of our stores are in really good shape. Some over the last 10 years haven’t seen any investment,” Katz said.

Enhancing designer presentations could entail concession shops — a sensitive subject industrywide. Designers want them, retailers not necessarily. A few years ago, Prada pulled out of Barneys New York after Barneys declined to convert to a Prada concession. While Bloomingdale’s and Saks Fifth Avenue are increasingly embracing the model, Neiman’s has resisted, yet has maintained the most dominant and productive designer presentation in the U.S.

“We still believe doing concessions works against our business model, which is being able to serve the customer throughout the store,” Katz said. “Our sales associates are at their best when they can go from one area to another. Concessions don’t necessarily [enable] that service model to thrive.” With concessions managed and manned by the brands, the question Katz has begun posing to vendors is, in her words, “How are you going to allow us to serve our clients the way they have always been served?”

There are always exceptions to the rules. Neiman’s does have Louis Vuitton leased shops and could in the near future have more.

“We are having some discussions but they’re not broad-based,” Katz said. “They’re store-by-store discussions. The key to it I believe is that our vendors have to be assured that we will do everything in our power to protect their brand and promote their brand.”

As those talks progress, so will renovations. They’ve just begun at the Beverly Hills branch, while those at the Oak Brook, Ill., store will begin later this month and at the Palo Alto, Calif., store in the fall. The Michigan Avenue renovation in Chicago is expected to be completed in June. “We have a whole list” of projects, Katz said.

Last Call Studio is poised for an aggressive rollout as well. “We’re actively looking at sites,” Katz said, on top of opening six in the next nine months, including Brooklyn, N.Y.; New Orleans; Dedham, Mass.; San Francisco; Chicago, and one that is yet-to-be-announced.

Unlike the Last Call outlets, the Last Call Studio stores have “no residues” of merchandise that didn’t sell at Neiman’s and operate as off-pricers. Eighty percent of the Last Call Studio assortment is supplied by the same Neiman’s vendor base, but the merchandise, which emphasizes contemporary lines, is different. The environments are “clean and modern” and the customers are “affluent yet still price-sensitive,” Katz said. Last Call Studio stores are 15,000-square-foot, loftlike settings, compared with the 25,000-square-foot Last Call outlets, and according to Katz, can operate in a variety of settings, from lifestyle centers to downtowns and next to regular price retailers. In Dedham, Last Call Studio will be near regular-priced J. Crew and Abercrombie & Fitch stores.

Not everything has been green-lighted for growth. Cusp stores, which specialize in contemporary fashions, continue to be on the back burner. There are just six. Instead, Cusp departments have been planted inside Neiman’s locations, sparking business.

Also, Neiman’s has been on the sidelines of launching international stores, while Saks, Nordstrom and Bloomingdale’s have all made moves. Asked if one is being considered, Katz replied, “Not at this point,” though she noted Neiman’s ships online orders to 100 countries.

Neiman’s is considering one arguably far-flung location — Hudson Yards on Manhattan’s West Side. The sprawling project is under development by Related and years away from establishing a retail base. Katz declined to discuss the talks, though she suggests Neiman’s will be stepping out more. Last year, after investing $38 million in Glamour Sales Holdings, an Asian-based e-commerce site specializing in flash sales, NMG decided not to hold inventory in Chinese warehouses and instead to ship to Chinese customers from the U.S. Neiman’s maintains a smaller China team now, for customer care, marketing and the Web merchandising in Shanghai.

“You have to take risks in the business and not everything is going to work,” Katz said. “You have to learn to see when it is working and when to pull back if it is not working.”