Neiman Marcus Group had a tough go of it last quarter, but a Citi analyst said the heavily indebted retailer also has lots of advantages — including at least $1.3 billion worth of real estate — and won’t have to start making interest payments with additional debt.
As of the end of its second quarter on Jan. 30 the company had $4.5 billion in long-term debt, including $600 million in unsecured bonds due 2021 and giving investors 8.75 percent interest that can be paid off either in kind with more debt or in cash. Neiman’s has to decide next month on which option to choose for its October interest payment.
Companies typically pay more richly on PIK, or payment-in-kind, bonds, but view the expenditure worthwhile since they give the firm the option to not draw down its cash balance if things get tight. J. Crew Group Inc., which is also heavily indebted and owned by private equity firms, also has PIK bonds.
Citi analyst Jenna Giannelli said: “We don’t think [Neiman’s] needs to elect the PIK option in April for its October interest payment given our view of liquidity, free cash flow, and differences in environment now versus 2009 [when the luxe company did choose to pay interest in kind].”
Neiman’s has hinted that it would stay with interest payments in cash. Two weeks ago, chief financial officer Donald Grimes told analysts that “we haven’t made any decision regarding the PIK option….We’re managing our liquidity and our balance sheet with a view that we would pay interest in cash, but that is an option available to us and one that we may choose to pursue.”
Giannelli, who rated the company’s notes a “buy” on Monday said, “We believe many of the issues plaguing today’s retailers are not an issue for [Neiman’s], including weakening mall traffic, fashion sensitivity, competition from off-price and fast-fashion retailers and lack of online penetration.”
The strong dollar and the accompanying weaker sales to tourists are an issue that the analyst estimated would cut Neiman’s sales by 2 to 7.4 percent.
Neiman’s is not generally seen as real estate-heavy as some other broadline retailers — that are now busy monetizing their fleet, like Hudson’s Bay Co. or Sears Holding Corp. or fending off activists, like Macy’s Inc. — but the high-end chain does have some significant value in its stores.
“We think the value of [Neiman Marcus Group’s] real estate is $1.3 billion, a meaningful valuation, though still representing less than 40 cents of recovery on the loan,” Giannelli said, noting how much money the real estate represents per dollar invested by creditors. “Rents, sales performance and traffic in higher tier malls has been growing, unlike the case for mid- and lower-tier malls. Occupancies remain high in desirable locations, supporting [Neiman Marcus Group’s] property values versus other department store or strip mall real estate.”
The analyst reached that real estate value by estimating the fair value of the leases. A different calculation that used a one-times multiple of sales per square foot of $571 came up with a real estate value of near $1.6 billion.