After a decade in the orbit of private equity, Neiman Marcus is being prepped to relaunch into the realm of public companies.
The tony retailer’s move toward another IPO is a tentative one — with no banker specified and no indication of how many shares will be sold and at what price — but the timing and character of the proposed offering says much about the stock market today and the enduring reputation of the company.
It’s also a reminder about just how good private equity owners are at keeping their options open.
Ares Management and the Canada Pension Plan Investment Board bought Neiman’s for what many saw as a steep price of $6 billion in 2013.
And in addition to cranking the gears on the IPO machine, last week’s registration statement might be interpreted by some as a “For Sale” sign outside Neiman’s Dallas headquarters — one that has no doubt been noticed by retail empire builder Richard Baker of Saks Fifth Avenue-parent Hudson’s Bay Co., who has had his eye on Neiman’s for some time. Middle Eastern-based funds also have a keen interest in luxury trophy assets and would likely eyeball such a high-end property. (Neiman’s previous owners were TPG and Warburg Pincus, which took the company private in 2005, also filed the paperwork for an IPO, using the possibility of an offering to create a sense of urgency and perhaps find a new buyer).
If another buyer did step in now, it would be a quicker turn on the investment than initially envisioned.
David Kaplan, who is now chairman of Neiman’s and cohead of the private equity group at Ares, told WWD when the leveraged buyout was first disclosed in 2013 that he had plans to pump more money into the retailer for five years.
“We are very focused on the top line and growing this company, its top line and its cash,” he said. “This is not about taking real estate, flipping it, changing it. That’s not what we’re about. We have a very long-term approach.”
An IPO could be consistent with that longer-term view, since the investors would start by selling off a portion of the company’s stock, perhaps 20 percent, and then hope it rises as they sell off the rest over time.
David Shiffman, managing director at investment bank Peter J. Solomon Co., said that companies have to wait 21 business days before they can hit the road to sell an offering and that a window for retailers coming to market opens between Labor Day and Thanksgiving.
“If you’re deciding to go public you’re inherently more bullish on your business longer term,” Shiffman said, speaking generally of IPOs.
The market seems ripe now for private-equity owned companies that lead their sectors, like Neiman’s.
Despite Tuesday’s selloff after China’s devaluation of its currency, The Dow Jones Industrial Average is still not far from its all-time high and the Federal Reserve has been warning for years that it would raise long-term interest rates and finally seems ready to pull the trigger this fall. (Higher interest rates would weigh on stock prices and if Wall Street has a single organizing principle, it’s to sell high).
And plenty are getting into the game.
Seventy companies went public in the second quarter, raising a total of $12.7 billion, according to Renaissance Capital.
Nineteen of those companies were backed by private equity and six of the IPOs in the quarter were in the consumer space, where the stocks performed particularly well after the offerings.”
“The consumer sector handily delivered the best returns: After just one consumer deal in the first quarter (Shake Shack, which is still the best-performing IPO of 2015), the six second-quarter deals all returned above 10 percent, including three restaurants, Fitbit and Party City,” Renaissance said.
The new consumer IPOs rose a collective 35.7 percent by the end of June.
If Neiman’s could get a piece of that action, why not?
Plus, while the company doesn’t appear to have lost any of its merchandising potency during its stay in private equity hands, it has accumulated $4.7 billion in debt — a 10-fold increase from just before the company was taken private.
Arnold Aronson, managing director of retail strategies at Kurt Salmon, said Neiman’s remains a “blue chip” luxury store. “It’s an annuity type of growth company because they’ve had such steady and consistent performance over the years. They have been at the forefront of technology and innovation in this channel of distribution. They’re on top of omnichannel. They’re doing the right things to propel the business.”
And as for all that debt, he said, “That’s life in the big leagues. I don’t know too many situations where you have a debt-to-equity situation that is pristine.”
Last October, Karen Katz, chief executive officer of the retailer, said at WWD’s CEO Summit, “We know how to run a company with a lot of debt on the balance sheet. Not everybody is up for this challenge but our team understands what it takes to have to make $260 million in interest payments every year because of the $4.5 billion in debt.”
Neiman’s debt load has remained heavy as it spent to cover interest payments and to keep the retailer moving forward, transforming it into a business that saw 24 percent of its $4.8 billion in sales from e-commerce last year.
If an IPO does come, the company is expected to use at least some of the proceeds to pay down its debts, which would free up more money for expansion.
There’s also the chance that this could be the moment to back away from the high-end.
Pam Danziger, president of Unity Marketing and a luxury expert, observed that affluent consumers are less confident than they have been in recent years and that big structural changes are coming to the luxury world as the smaller Generation X enters its key spending years.
“This ‘Luxury Drought’ is likely to last through 2026-2029, when the Millennials on the road to affluence will reach their highest-earning years (age 35-54) — that corresponds to a strong acquisitive appetite for luxury goods as a material expression of wealth and status,” she said.
“My guess is that the Neiman Marcus owners want to get out while the getting is good,” she said.