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Fighting Back: Istithmar Says Barneys Not for Sale

Barneys New York will not be sold and a new ceo will arrive, according to Istithmar.

Barneys New York is not for sale, hopes to resolve its issues with factors in a few weeks and intends to have a new chief executive officer in place by midyear.

So says David Jackson, chief executive officer of Istithmar, the Dubai-based parent of Barneys, in a wide-ranging interview from Dubai on Monday.


In addition to battling the recession, sharp declines in luxury spending, and lately a handful of factors — including Hilldun Corp. and Rosenthal & Rosenthal Inc. — that have stopped approving shipments, Barneys has been dogged by speculation that Istithmar wants to unload the business amid mounting financial pressures.

But on Monday, Jackson went on the defensive, flatly denying the for-sale rumors and even contending Barneys is outperforming the competition.

“There are a lot of rumors about Barneys, about what’s going on. All of these are unfounded and unwarranted,” Jackson said. “Barneys is owned by Istithmar and will continue to be owned by Istithmar and will do everything it can to protect that investment.

“I would say most of those [factor] inquiries are general things, about the overall health of the industry…. Some of the requests coming from factors are unwarranted.”

So what do the factors want? “Some of it is as simple as providing some information; some things are more tangible in terms of support,” meaning financial support. Asked how many factors are at issue, Jackson replied, “Management has indicated to us there are four or five conversations they want us to have.

“I most want to put to rest any concerns that these factors have so Barneys’ management can focus on running the business and not on idle speculation about the financial strength of Barneys or concerns about Istithmar standing behind Barneys,” added Jackson.

While there have been a few reports of payment delays, Barneys, Jackson argued, “has met all of its obligations. Barneys continues to pay people. We have done all of the things we are supposed to do. Some of the factors have made requests for additional support. It’s not universal. We will do what we think is reasonable [regarding] those requests,” to ensure timely deliveries to Barneys stores.

“Factors play a major role in the industry. We’re hopeful they will be responsible here and recognize Barneys is a major player. Barneys has continued to pay the factors and will continue to. Everyone is on edge given the state of the economy. We don’t think [the factors issue] is Barneys specific. It’s the industry that’s suffering now…. If appropriate, we will provide some level of support to make sure Barneys is not at a competitive disadvantage.”

 

So far, the issues with certain factors “have not affected us from getting merchandise to the stores,” Jackson said.

“We look at Barneys and benchmark it against all the major competitors. In the time we have owned Barneys, we certainly think Barneys has consistently outperformed its competitive set,” he continued, though he declined to cite any statistics to back up the claim.

Still, reports have proliferated that the four Barneys flagships built within the past three years — in Las Vegas, San Francisco, Dallas and Boston — have been very slow since they opened, hampered by the retailer’s narrow appeal with sometimes esoteric labels that take time for the public to grasp, and of course the economic headwinds.

But Jackson argued the verdict on the expansion isn’t in yet. “My view on all of those stores is they haven’t been open long enough to make that judgment.”

He said it takes time for sales to ramp up, even in the best of times. “There isn’t enough cause for concern to take steps to shut any of them down, he said. “The stores are new; they are operating in a difficult environment.”

Asked if any Co-ops could be closed, Jackson replied: “We don’t have any immediate plans to close any Co-ops. In a difficult economic environment, we are evaluating all options. We don’t want to make any decisions based on the market in 2009.” The company needs to reflect on assortments, the marketing and other aspects as well, he added. “We just need to be patient before we make any draconian decisions on store closings. Our bias is we shouldn’t make any decisions based on market conditions we find ourselves in today.”

He characterized the Madison Avenue, Beverly Hills and Chicago units as “more seasoned stores that are doing better,” adding, “They have deep customer bases and are more known in their markets.”

When Istithmar bought Barneys from Jones New York in September 2007 for over $900 million, expansion in Asia, Europe and the U.S. was a hot topic. The new Barneys owner was eager to recoup its investment and prosper from it by growing the size of the chain and its volume. Since then, the strategy, largely involving building big flagships in major cities, has simmered down. “We are not ready to announce any of those expansion plans,” Jackson said. “We continue to believe there are opportunities both domestic and international.”

The only imminent development is a replacement flagship in Chicago, which is expected to open in May, though there are some “normal ongoing” enhancements occurring, including a few men’s shops in the Madison Avenue flagship, which should be completed this year. “I wouldn’t characterize them as major renovations,” Jackson said. “There’s the normal [capital expenditure] plan for these stores.”

Barneys’ last major capital project at the Madison Avenue flagship was a men’s made-to-measure suite that opened on the seventh floor last September. It was the first time the floor had undergone renovation since the store opened in 1993.

Rumors that Barneys was up for sale began with a media report earlier this year on Bloomberg. Subsequently, Reuters ran a report quoting the chairman of Istithmar that Barneys was not up for sale. “Our chairman did say that it is not for sale,” Jackson noted. “We have reiterated that it is not for sale. [The rumor] is completely wrong.”

Jackson stressed that it was only after the first news report that some parties showed interest in the company. “We don’t have any agenda to sell this company. We recognize it is a difficult environment, and we don’t think people are going to pay what is the true equity value for Barneys. Nobody has showed up with an offer for a $1 or $1 billion.”

Meanwhile, the quest for a Barneys ceo has continued since Howard Socol resigned last July. “We are still searching, contemplating,” Jackson said, adding, “We are not ready to appoint anyone at this step. We think we are in a state of flux around the retail environment and want to see more data” on the company’s performance to determine the skill set required to lead the business.

“We have seen some tremendous candidates. We think that any number of them could make a great ceo. A lot of it depends on where the market for luxury retail shakes out through this economic crisis. We got a list of candidates that covers the spectrum of what we [might] want,” from a merchant to a financial executive to a general strategist.

He said the company is down to a “short list” of three or four people, all currently gainfully employed, and that one will be selected “within the first half of 2009.”

“Searches for ceo’s often take a year. It’s not easy to find people to put in these positions. The difference was we had hoped Howard might have stayed longer, and that there was a more structured succession plan.

“Not to minimize the value of a ceo, but people don’t seem to realize there is an extremely talented, capable group of individuals [at Barneys] who have been together for a long time,” Jackson added. He said Barneys is currently being run by a committee of five executive vice presidents along with some senior vice presidents, and “is not handicapped” by not having a single person in charge. The committee reports to him. Jackson does not run the business but does get involved in financial and other matters.

Barneys had sales of over $780 million for the year ended Aug. 2. It’s widely perceived Istithmar overpaid for the retailer, that it will be tough for the investment to be recouped and that any global expansion would be difficult given Barneys’ unique concept and some formidable competition, such as Lane Crawford in Asia.

Istithmar’s issues are compounded by Dubai’s financial turmoil. Late last month, the Dubai government launched a $20 billion long-term bond program which is designed to replace the funds that have dried up globally in the last 12 months. Dubai, unlike many of its Arab neighbors, relies on real estate investments for its financial growth rather than oil. These financial difficulties leave observers wondering just how much more money Istithmar is willing to pump into Barneys.

So far, Barneys has not announced any major layoffs or cutbacks, in sharp contrast to its luxury competitors, including Saks Fifth Avenue and Neiman Marcus Inc., which have each laid off hundreds of workers.

As one former executive said, the retailer’s strategy over the past few years has been “flawed. You can still do huge revenue with a few stores, but the Barneys concept can’t be exported everywhere; the merchandise is very special.”

Estimates of how much the business is currently worth vary widely, from $450 million to much to less.

According to retail consultant Jack Abelson of Austin & Associates, “Barneys has a perception problem. It doesn’t play outside of New York and L.A.”

Abelson is surprised that Barneys’ ceo post is still vacant. “Does no one want the job?” he asked. “You’ve got to believe someone wants it. It’s a high-profile position and could be a terrific job.” That said, however, any chief executive would face enormous challenges. “You need a leader, especially today. Their lack of leadership has really hurt them.”