Richard Perry’s Blueprint for Barneys New York

The retailer's new chairman aims to build a sizable return on his latest investment with a healthier, more profitable Barneys.

Richard Perry already shares Barneys’ clean, cool aesthetic. But he hasn’t taken a majority stake in the business to meet fashion models and trendy designers.

This story first appeared in the July 16, 2012 issue of WWD.  Subscribe Today.

One of the richest men in New York, Perry has an impressive track record for wealth creation and aims to build a sizable return on his latest investment with a healthier, more profitable Barneys.

As the new chairman of Barneys New York, Perry sees the selling floors as being reenergized, and believes the hubbub that permeates Fred’s bistro in the Madison Avenue flagship can replicate to other levels. It’s a tall order, but he’s backing renovations, new merchandising concepts and adjacencies, not the least of which entails smoother integrations and transitions between men’s and women’s areas.

Through Perry’s debt-for-equity deal to take over Barneys last May, he’s cleaned up the balance sheet, wiping out practically all of the $550 million in debt and giving Barneys the wherewithal for some capital improvements. He wants Barneys to be as much a luxury mecca as a social setting, to make a more fun shopping experience that translates into better business.

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On Thursday, WWD caught up with Perry, just after he toured Barneys’ latest renovation project, the fifth floor for shoes, with chief executive officer Mark Lee. “I am completely blown away by this floor and I am not a person who exaggerates,” said Perry. “Look at the lighting, the floors, the product. It’s different from anywhere else. It’s so darn exciting.”

The floor is almost entirely devoted to shoes, and connects women’s and men’s designer shoes for the first time. It also has luggage and travel accessories for both men and women, and is graced by marble pedestals, limestone floors and cushy mohair seating, all making for a spacious, comfortable setting.

Barneys’ Madison Avenue flagship opened in 1993 and was designed like two separate stores: one for men’s, one for women’s. Now renovations in the works break the gender barriers with better flow-throughs and wider, inviting passageways. Perry sees the value in it. “Twenty years ago, the world wasn’t ready for that. Today men and women are ready. But I had nothing to do with this floor. I have no sense of ownership of this. It’s clean. It’s different. You have the ability to communicate. You can sit and talk. With luxury shopping, it’s really important to have a good time. This is going to be a New York City mall.”

He doesn’t mean mall in the strict sense of appealing to all demographics. It’s about Barneys becoming kind of a community center for fashionable, upscale families and friends, or as Perry put it, “a place to meet and greet and see and be seen.” In other words, a retailer that transcends mere shopping. He said the shoe floor represents the “next reiteration of Fred’s — that’s the vision.” Other renovations in the works, such as the main floor, should further the vision. “The main floor — it’s been a really good investment. Of all of the projects, both financially and aesthetically, it’s been a really good investment,” and is getting a healthy return on the investment, he added. “There’s a tremendous amount of excitement. This is just the beginning of it.”

How did Perry arrive at Barneys? It wasn’t last May, in the debt-for-equity deal catapulting Perry Capital, managed by Richard Perry, to majority owner, and The Yucaipa Cos., another key lender run by Ronald Burkle, as a minority owner. The deal with Barneys then-owner, Istithmar World, wiped out $550 million in Barneys debt, leaving the company virtually debt free. Nor was it when Perry, a shrewd investor with a strong track record, helped finance Istithmar’s acquisition of Barneys from The Jones Group in 2007 for $942.3 million.

It was in 1978 or 1979 when Perry shopped Barneys for the first time, when it was on 17th Street in the Chelsea section of Manhattan, and bought his first Armani suit. He’s been shopping Barneys with his wife, the designer Lisa Perry, pretty regularly since then. “It’s our aesthetic,” Perry explained. “We are clean, minimal.”

Though it wasn’t required, Perry became Barneys’ chairman because as he explained, “We have the controlling shares and Barneys happens to be in a world I am very comfortable with.”

There’s some precedent that goes back roughly 18 years, when Perry bought FTD, the delivery service for flowers struggling at the time, for around $130 million, with $20 million of his own equity and mostly borrowed money. For that deal to happen, Perry had to visit florists all around the country to convince them he had good ideas on building the company, so they would back his takeover. He got their vote and installed Meg Whitman (former eBay ceo) as ceo of FTD and he became chairman. Years later, Perry sold FTD for $450 million to a private equity firm.

FTD was formative in his investment strategy, for Perry learned the importance of being deeply involved with his investments, and how to capitalize on troubled situations.

“A big part of our investment analysis is to invest in distressed securities,” Perry said during the interview, though he doesn’t put Barneys quite in the same category. “Barneys was not distressed because of the brand. It was distressed because it had too much debt — $550 million. You never know what you get until you get a company. But with the original buyout [in 2007] my feeling was Barneys was worth at least as much as the bank debt. The worst-case scenario was that it was a ‘loan-to-own.’”

“Purchasing the debt created the opportunity to own the company,” said one banker who knows Perry. “It was always on his mind. Richard also values design, values fashion and values creative talent. As a result, Richard will enhance Barneys under his ownership, unlike other hedge fund owners who own retail. He is going to invest in brands and stores instead of taking capital out through things like share repurchase or giving dividends to themselves. He is going to fix up New York, but eventually he’s got to approach Scottsdale, Ariz., Dallas and some other stores where it’s more about having the right merchandise for the right customers. He’ll let Mark Lee run Barneys, but the end game is to have a profitable, well-regarded, well-capitalized chain of luxury stores, and Barneys has demonstrated in the past that it always can get a buyer, be it strategic, international investor, hedge fund or maybe down the road, an IPO.”

“My family has been an investor in his fund,” said one industry executive. “He’s been excellent. He’s done extremely well for us. He’s not industry specific. He’s athletic, smart, intense and competitive. He’s got to close some Barneys stores even though Barneys was able to get some huge subsidies from landlords. It’s just not a concept that plays well in a lot of places. But Perry is a smart, intense, competitive guy. He will figure it out.”

In 2003, Warnaco Group Inc. was faced with activist shareholder Daniel Loeb who wanted a seat on the board and wanted to break up the company. Then-ceo Joseph Gromek sought Perry’s counsel, since Perry had been one of the owners. Gromek’s intuition was to fight back, but Perry gave him some insights on how to diffuse the situation and avoid a battle. Gromek took Loeb to lunch, listened, learned and shortly thereafter, Loeb sold his shares and disappeared. “It was good advice and it worked,” Gromek said.

Perry is originally from Chicago but moved with his family to New York as a child. He attended the University of Pennsylvania’s Wharton School and after graduating joined Goldman Sachs. He earned an MBA by going to night school at New York University.

He is an avid Pop Art collector, owning a large collection of works by Andy Warhol, Roy Lichtenstein and Jeff Koons, including a large giant green diamond sculpture by Koons that dismayed some neighbors when he put it on his roof in Sutton Place. He’s also a triathlon runner, though he hasn’t run one in two years. Like his minority partner in Barneys, Ron Burkle, Perry is also a big supporter of Democrats, and has been noticed carrying a white patent-leather murse, or man purse. He started his Perry Capital hedge fund right after working at Goldman Sachs, where he began his career on the options trading desk in the mid-Seventies. He was one of the few investors to bet against subprime mortgages in 2006, two years before Lehman Brothers crashed.

People who know Perry see him as a shrewd businessman and very clear thinker, although he’s been described as “quirky.” He fits in well with both the fashion and the finance crowds, and is seen as almost a quintessential Barneys man. In his spare time, Perry thinks retail, rather than run numbers. “It’s very clear to me that I don’t want to spend my spare time on financial analysis,” Perry said. “My wife and I are very focused on fashion and retail.” They just came from Europe where they visited several shops in Paris, Rome, Milan, including Colette in Paris. It’s simple. He craves shopping and luxury. “I think we have a pretty good feel for it,” he said.

Perry’s involvement is seen as good for Barneys, and how his interaction with Lee plays out remains to be seen. “It’s interesting that he’s bought the company with very little leverage, which is smart because it sets the company on a conservative, strong, able-bodied footing because they’ve got a long way to go,” said one person who knows Perry.

“I don’t think anybody could compete with him [to take over Barneys] because he was essentially bidding his debt,” said another acquaintance of Perry’s. “He’s built a brilliant business, tries to hire the best and brightest in his firm, dresses elegantly casual — suit, no tie — and is exceptionally bright. He’s not doing this for the glamour and pomp.”

And even with a designer wife, Perry is seen as the style authority at home. His daughter, Samantha Perry David, was featured on Tory Burch’s blog this year and given the prompt, “The best piece of fashion advice my mother ever gave me…” she answered, “I usually get fashion advice from my father.”

Asked how much of his work schedule he devotes to Barneys currently, Perry responded, “Not a lot of time right now.” After all, he’s the guardian of a fund with a portfolio of other investments, not just Barneys.

But don’t be surprised if the tall and trim, 57-year-old Perry takes a seat in the front rows at fashion weeks in New York and abroad. Other fund managers that owned Barneys also got caught by the fashion bug. When asked if show-hopping is on his agenda, he replied it would be prudent on occasion to go. “If there is a reason to go, or a relationship that I have. I know the owners of a lot of these companies.” It could help the business, he suggested.

He considers his bigger role as chairman is to make sure the management team executes on the vision. More specifically, Perry told WWD he’s got three priorities — the Madison Avenue and Beverly Hills flagships, and e-commerce. According to sources, Madison Avenue is Barneys’ biggest volume generator, said to yield roughly one-third of the $700 million-plus in total annual sales. Beverly Hills ranks second in volume, at about $100 million, and barneys.com represents the third largest volume business, at roughly $40 million. Perry would not confirm volumes.

Barneys.com was relaunched in May, though as a Perry priority, it’s still a work in progress. He said he’s come up with 20 ideas for the Web site, and that reflects his role as chairman. “I’m an idea-generative person.”

On the brick-and-mortar front, challenges lie ahead. Barneys has been coasting with cheap rents at its Madison Avenue and Beverly Hills flagships ever since it emerged from bankruptcy in 1998 and commenced a 20-year lease in 1999. It’s got renewal options beginning in 2019, but that’s when the rents are subject to market rate adjustments and could skyrocket.

That seems like a long way off. However, in retail and real estate time, seven years is around the corner. Barneys does have 10-year renewal options on the Madison Avenue and Beverly Hills sites, meaning they can stay put there, but the company will have to contend with the “fair-market” adjustment. “Even with the lease up for renewal in 2018, they should start negotiating very soon,” said one real estate ceo. “Perhaps they can negotiate a new 10-year or 20-year lease, with increases that start in 2013 so they don’t get penalized so much in 2018. In any case, they’ve got to start negotiating next year or the year after.”

Barneys has not started negotiations with landlords yet. “It’s up to them,” said Jack Dushey, manager of Flagship Capital, the real estate partnership that owns the Madison Avenue property at 660 Madison Avenue, between 60th and 61st Streets. “They have to exercise [the renewal] and then we determine the rate. If they want to come in and negotiate, we are willing to do that. That hasn’t happened. They are as good a tenant as anyone. We haven’t had an ounce of trouble. I don’t think they are going anywhere. We would be very happy to work on something with them.”

With the future market rate adjustment, Barneys’ rent on Madison Avenue might at least double, with estimates ranging from well over $30 million to topping $40 million. It’s currently about $15 million, up from $11 million in annual rent in 1999. The main floor alone, at 22,000 square feet, is worth more than $22 million in rent, and Madison Avenue continues to increase in value since the recession.

In 1999, Barneys began paying about $3 million in Beverly Hills. It’s currently about $4 million. Sixteen percent increases in rent every five years on Madison Avenue and in Beverly Hills were written into the lease. Madison Avenue has four 10-year renewal options; Beverly Hills has three 10-year renewal options.

For Perry, it’s not an immediate concern. “We have excellent relationships with our landlords and we have really good leases. This is not high on my radar.”