Neiman Marcus Inc. appears headed for an initial public offering, with owners TPG Capital, formerly called Texas Pacific Group, and Warburg Pincus itchier than ever to cash in on their investment.
This story first appeared in the May 7, 2013 issue of WWD. Subscribe Today.
The question is when, according to retail and financial sources, who this week were eagerly speculating about NM’s future amid reports that Credit Suisse is exploring different financial scenarios.
Representatives at TPG, Warburg Pincus and Credit Suisse declined comment Monday. The bank already has ties to the Dallas-based luxury retailer, however. Susan Schnabel, who is a managing director at Credit Suisse and cohead of the affiliated DLJ Merchant Banking Partners, sits on Neiman’s board, although she has no involvement with Credit Suisse’s investment banking business.
“This would be a very good time to cash out,” said Isaac Lagnado, president of Tactical Retail Solutions, citing the frothy stock market and Neiman’s “tremendous” brand equity.
“From a new issue standpoint, the new offering market is very hungry for product, and I think an offering managed by the usual suspects would be well oversubscribed,” Lagnado said. “Neiman Marcus is not just a passing fad. It goes back many decades. It’s still the entry of choice for any luxury brand maker. The gift registry is prestigious and the loyalty program has been very good. Even the discounting strategy at Last Call has been more authentic” than the competition’s. “You really see merchandise that comes from Neiman’s and Bergdorf’s and is not just cut for Last Call….This is the golden day for the owners. Time is on their side as the economy recovers.”
“The market seems to be strong today, but generally speaking we probably have to wait before doing an IPO,” said Walter Loeb of Loeb Associates. He’s expecting retail sales and earnings in general to be disappointing in the first quarter, adding that some retailers have “involuntary inventory accumulations, which means they will have to take markdowns in the second quarter. One should wait until after the second quarter to see how the third quarter goes. We are in a period of uncertainty. For that reason, I would be very careful. There’s an uncertainty over the earnings power of Neiman’s and the outlook for consumer spending in general.”
European tourism to the U.S. has been slowing, which also concerns Loeb. “We’re looking at a slowdown of the luxury market, at least in New York City and in the major [tourism] cities as there are fewer foreign visitors than a year ago,” he said.
The U.S. isn’t the only luxury market feeling a pinch either — the European economy remains weak while luxury brands have said the all-important Chinese market is slowing on the back of a government crackdown on bribery and gifting.
Still, Robert Carbonell, chief credit officer at Bernard Sands Credit Consultants, expects a Neiman’s IPO will likely get done, although not necessarily immediately, even though there are firms “tripping over each other to bring Neiman’s to market.”
As an alternative, Neiman’s owners could choose to give themselves another dividend, which would add more debt to the books. Last year, Neiman Marcus declared a onetime cash dividend of $442.6 million, or $435 a share of its outstanding common stock, and used both cash on hand and borrowed about $150 million to pay for it.
One financial source said the IPO market continues to be soft as an exit vehicle for private equity firms and that dividend recapitalizations are often used for shareholders to get a return on their investment while waiting for a better opportunity to exit their investments.
Carbonell sees no problem with another dividend. The credit markets “love” retailers right now, he said. “Every major player was able to get financing and kick their debt down the road. Neiman was no exception.”
Sources believe TPG and Warburg may be struggling to get their price because they paid a premium for the brand, $5.1 billion in 2005, and the company is highly leveraged with long-term debt of $2.68 billion. “The normal holding period is five years,” said one retail chief executive officer, who requested anonymity. “I’ve heard the rumors, but pulling off an IPO totally depends on their price expectations.”
Beyond the current climate, any buyer or investor must be concerned about Neiman’s limited expansion potential in the U.S. The luxury chain has already tapped most of the country’s affluent markets, and those still untapped have questionable demand for luxury goods. Neiman’s does plan to open a 100,000-square-foot store in Roosevelt Field in Garden City, N.Y., in spring 2015, which will be the retailer’s first Long Island location.
In the past year, NM has worked hard to demonstrate growth potential. Neiman’s invested $38 million in Glamour Sales Holdings, an Asian-based e-commerce site specializing in flash sales, giving it a 44 percent stake; launched neimanmarcus.com.cn, and at Bergdorf Goodman, unleashed a spectrum of projects — 40 in all — including new designer shops, relocating and rebuilding others and a few formats not seen at the store before.
Contemporary departments were recast as Cusp across the Neiman Marcus chain to capitalize on the hottest women’s apparel sector, and associates were recently equipped with smartphones to elevate service.
One financial source said it was unlikely that Neiman Marcus would be sold to a strategic player or to another private equity firm. “You’re looking at some kind of an IPO,” the source observed. “But to do an IPO you have to highlight the growth options, what good things are going to happen to the [company] that the public shareholders are going to benefit from. They’re working very hard on e-commerce. They’re working hard on outlets….I just don’t see many places they can put new stores.”