For the Neiman Marcus Group, the balance sheet is just part of the repair job.
“The bigger challenge for Neiman’s is to earn its status back as the preeminent place for luxury in America, particularly for the new generations,” said one former NMG executive. “But what the pandemic is going to do is to make everything tougher. Six months ago no one was thinking about health and safety.”
“They are missing a younger generation, the contemporary audience, a casual audience. And they could have a good children’s business, and a strong cosmetics business, particularly on the treatment side,” observed Allen Questrom, the former Neiman Marcus, Macy’s, Barneys New York and J.C. Penney chairman and chief executive officer. “This is not a reinvention, they have a clear concept. They’re just not executing to what the concept is. Their store in NorthPark [in Dallas] hasn’t had a total renovation in decades. The layout is very complicated. How do you make sure that it’s an exciting place, easy to shop?”
Three months ago, Tom Robertson, professor at the Jay H. Baker Retailing Center at the Wharton School, visited Neiman Marcus at Hudson Yards in Manhattan. What surprised him was the lack of surprise and delight he felt. “I was at Neiman’s in the Lenox Square mall in Atlanta where they told me that their new store in Hudson Yards was very different. So I go to Hudson Yards and the store is beautiful but it doesn’t look any different. I go to this one little station, where you can put a patch on your jeans. I thought it would maybe take an hour to get it done — they said it would be ready in three days. That’s supposed to be experiential?”
It’s open season for criticizing Neiman Marcus, now muddling through the proceedings, paperwork and competing interests of a Chapter 11 bankruptcy.
With its prepackaged reorganization plan, Neiman’s should emerge from bankruptcy quickly, within four or five months. “The fact that their primary lenders are willing to convert their debit for equity likely ensures success in emerging from bankruptcy,” said Jon Pasternak, bankruptcy partner at Davidoff Hutcher & Citron LLP.
In the days ahead, Neiman’s will seek approvals on the DIP financing, contracts, benefits, third-party professionals, stays on rents, lease annulments. Creditors committees get formed and a new business plan with new financial targets gets drawn up, taking into account a pared down Neiman Marcus Group and the pandemic. “They’re fast-tracking the bankruptcy,” Pasternak said.
Post-Chapter 11, the Neiman Marcus story could unfold in different ways. The possibilities are:
• The company gets sold, in its entirety or in pieces. The Hudson’s Bay Co., run by Richard Baker, remains keenly interested.
• The new owners, its former lenders, are sympatico with existing management and work with NMG’s chief executive officer Geoffroy van Raemdonck on his “transformation,” attempting to make NMG profitable again, and keeping the company independent.
• The company gets liquidated.
Assuming the reorganization is successful, Neiman’s has new majority owners/lenders — TPG Specialty Lending, Pimco and Davidson Kempner Capital Management — supplying the $675 million DIP and $750 million in post-bankruptcy financing. They’re not retail operators. They want their money back and more, one way or another, and therein lies the dilemma.
“If you are in a business just to sell it, that is the kiss of death. That’s not the way to build an upscale, quality business,” Questrom said. “When I worked at Neiman Marcus, it was owned by the Smith family. They were in it for the long term and Richard Smith was fabulous to work for.”
“Neiman’s is going to be owned by people who don’t want to own things,” said a luxury executive. “These debt guys, they do a calculus on the business, an analysis on a liquidation, or what they can get by selling the business. Either one of those is far more likely than running Neiman’s as is.”
“Filing bankruptcy and wiping out the debt is crucial to Neiman’s, but bankruptcy is an interesting situation,” said one source close to NMG. “You can go into bankruptcy with a particular plan but ultimately it’s the court that decides what happens. It’s not up to any of those players to determine the penultimate situation. If someone came forward and said, ‘We want the business for a penny more than the financing provided,’ it’s up to the court to decide that. We have seen a handful of retailers where bankruptcies wipe out the debt and they go on to live another day as an independent company – and then there have been other outcomes.”
Barneys, for example, was bought in a debt-for-equity swap in 2012 by billionaire Richard Perry to avert a bankruptcy, but the business went bankrupt anyway last year and was liquidated because of a flawed expansion and business strategy.
“With Neiman’s, it’s not necessarily a liquidation,” said the source close to the group. “The question is does Richard Baker jump in. Or does someone else see a piece of the business, like Bergdorf Goodman, and jump in. There have been sovereign wealth funds interested in Bergdorf’s.”
A sale of the Mytheresa luxury web site has also been considered by NMG, though that asset is being contested in court. The retailer’s “conveyance” of Mytheresa to another entity that’s not considered part of NMG has already been the subject of litigation, including a suit by UMB Bank NA, the trustee for certain debt Neiman’s has issued, currently pending in New York State Court. As reported, Neiman’s attorney Anup Sathy, a partner at Kirkland & Ellis LLP, told the Dallas bankruptcy court on Friday that Mytheresa’s operations had “always been independent” from Neiman’s, and that the entities running Mytheresa were not guarantors of Neiman’s debt. Marble Ridge Capital, Neiman’s largest unsecured creditor, believes the “conveyance” was fraudulent and designed to shield Mytheresa from creditors’ claims in the bankruptcy.
With NMG, the bankruptcy spells “a change in ownership, cleaning up the balance sheet, and the new owners looking to get a return on their investment,” Pasternak said. “How they decide to recoup could be by trying to restore the company to profitability, by taking it public, or selling it. Generally, you are not going to get the best return on investment in a liquidation. I don’t think that a liquidation will be the plan here.”
Even by eliminating most of the debt and the costs of servicing it, profits won’t come easy to Neiman Marcus, if at all, due to the impact of the pandemic, which is keeping stores closed and shoppers away.
There are other headwinds.
The group has been a steady, slow growth business and already has stores operating in just about all the U.S. communities with the money and mind-set for luxury. Were it not for carrying $4.6 billion in debt since Texas Pacific and Warburg Pincus sold NMG to Ares Management and the Canada Pension Plan Investment Board in 2013 for $6 billion, the company would have had the capital to modernize with store upgrades and new experiences. Lack of capital aside, the Neiman Marcus stores have been among the nation’s most productive, hovering between $500 and $600 in sales per square foot each year.
But the most growth in the luxury sector stems from brands opening their own stores and web sites, making them less dependent on Neiman’s and other department stores for distribution.
“Part of the value of luxury lies in its scarcity,” said Craig Johnson, president of Customer Growth Partners. “But almost all of these luxury houses have opened their own boutiques, creating many more points of distribution. Coach and Michael Kors expanded all over. To some degree, the same thing holds true for true luxury. Because of that, traffic has declined over time at Neiman’s and clearly, the stores are less productive than in the past. Strong sustained traffic growth is the hallmark of all superior retailers, whether you are Wegman’s, Costco, Home Depot or TJX.
“The second issue is broader than Neiman’s,” added Johnson. “The organic demand for luxury goods is down in the U.S. largely because of the decline in foreign tourism spending. Pre-COVID-19, the average spend per tourist was down.”
Neiman’s woes can also be traced to a merchandising approach that became formulaic, stayed overly dependent on big-name designers for too long, and was too tied to an older demographic who could afford the expensive offerings. Profitability will be further impeded by some of those same luxury brands increasingly moving to the concession model, such as Chanel, Christian Louboutin, Gucci and Celine, among other luxury brands. Chanel — which is owned more than $6 million in the bankruptcy — has been Neiman’s biggest volume vendor, selling the store across ready-to-wear, beauty, footwear and accessories. Previous regimes at Neiman Marcus have been steadfast against concessions, allowing for very few exceptions, such as Louis Vuitton.
Meanwhile, Saks Fifth Avenue has been advancing its business with renovations and merchandise changes, and grabbing more of the spotlight. The store has been growing its business with such designer brands as Saint Laurent and Gucci, and at its Manhattan flagship recently added Prada, The Row and Celine. Saks has also bolstered its fashion sneaker and men’s businesses.
“The Saks team has been pushing their fashion quotient and have made a lot of progress,” said one fashion retailer.
Saks’ owner, the Hudson’s Bay Co., last year came close to a deal to buy NMG and consolidate it into Saks, creating synergies and a North American luxury powerhouse. While HBC has had its own financial difficulties, it is believed that Baker, an innovative dealmaker prone to bringing partners into his ventures, could pull off an acquisition of NMG if the price was right. A deal becomes more palatable with store closings, back office consolidations and layoffs that seem inevitable at Neiman’s, whether it stays independent or gets sold.
Among the weaker locations Neiman’s could close permanently this year are those in St. Louis; Natick, Mass.; Fort Lauderdale, Fla., and downtown Dallas, where NMG is based. In addition, the first-year performance of the store in Hudson Yards on the West Side of Manhattan is questionable, depending on whom you talk to. The three-level store, which opened in March 2019, according to Neiman’s executives has been on or above plan, though some market sources say it’s mostly the Chanel and Louis Vuitton shops, the Zodiac Room restaurant, the Mr. Stanley bar, and epicure area by one of the entrances (along with other popular food and restaurants at Hudson Yards) that are carrying the business. Neiman’s is said to have received a break on the rent from Related, the developer, which certainly helps.
Among Neiman’s stronger locations are those in Beverly Hills; Bal Harbour, Fla.; Houston; Short Hills, N.J.; NorthPark, Dallas; Chicago, and San Francisco. The luxury retailer generated $4 billion in annual volume in its latest fiscal year ended Aug. 3, 2019, through its 43 Neiman’s stores, two Bergdorf Goodman stores, neimanmarcus.com, bergdorfgoodman.com, Mytheresa.com, the Horchow direct-to-consumer business and Last Call outlets.
“It was hardly surprising that Neiman’s went bankrupt, given their debt load but also given they have a concept that’s less relevant that it once was,” said Robertson of the Jay H. Baker Retailing Center. “In some way, they have to segment their stores so it’s aspirational and not just the usual luxury concepts. They have to keep their upscale luxury customers and in some way segment the stores and bring in more younger people. These are big stores. How do you fill a big store? If you can segment and bring in different generations. They’ve got to think differently and that’s easier said than done.”
“The root of their problem was the balance sheet. It’s all about the financial leverage that Wall Street put on this company,” said one senior-level real estate executive. “It wasn’t as if the underlying company was broken and the bankruptcy had nothing to do with the pandemic. It’s all due to the financial leverage put upon the company.
“What you need to do now is evolve the business to create an exciting environment where the store itself, the store brand, becomes more relevant,” the real estate executive added. “The problem with both Neiman’s and Saks is that they really became a collection of brands that have been more important than the stores themselves. Nordstrom feels more relevant with its mix of price points and fashion profiles, and really great service. I would say there is still a place for multivendor stores. They just need to rethink the editing and the display. Neiman’s really needs to evolve the customer experience to keep itself relevant. They need to find a way to rethink the box, create new types of events, work differently with vendors and do special buying, and evolve the merchandise so that it feels fresh and contemporary. I don’t think there is one big idea. Otherwise, somebody would have done it already. It’s about assembling many different things so the sum is greater than the parts.”
With layoffs, store closings and management changes likely to occur, morale at the Neiman Marcus Group will sink lower than it has since the coronavirus outbreak forced the company to temporarily close all of its doors for shopping, furlough thousands of workers and implement salary cuts, among other cost saving maneuvers.
According to Questrom, the key to navigating through a bankruptcy has much to do with attitude, and getting all the employees to buy into whatever the new strategy is. “They have to believe in themselves and the strategy,” said Questrom, who decades ago lifted Federated, Macy’s and Barneys from the depths of bankruptcy. “If they don’t have the attitude that this is ‘my’ company, if you don’t have that in your gut, then it’s hard to be successful. The organization has to understand the mission and should not focus on dozens of different things. Boil it down. Lay out the five issues or things that we really got to make happen — and don’t talk to me unless it’s about one of these five things.”
Van Raemdonck, NMG’s ceo since February 2018, has been on a mission to modernize NMG into a “luxury customer platform” with new types of products and services, elevating sales associates so they have the data and tools to develop stronger connections to customers online and off-line, and more consistent and seamless shopping experiences from selling channel to selling channel. He’s also been streamlining the company by closing most of the 22 Last Call clearance outlets and cutting hundreds of jobs. Neiman’s has 13,700 corporate and store associates. Early this year, Bergdorf’s completed an eight-month revamp of its web site, with cleaner visuals, lifestyle shops, editorialized storytelling, less clutter, new navigation tools and other features to better align the web site with the image of the Bergdorf’s brand and the Fifth Avenue stores, and capture greater business.
“To me, the quality of sales associates is the number-one thing to differentiate,” Questrom said. “It’s not just about how well they are trained. It’s also how effectively they can coordinate people’s wardrobes and keep track of what customers own, and what they might need for their lifestyles and whatever activities they’re involved in. They have some smart people over at Neiman’s but I’m not sure they have a feel for the customer the way they used to. Look at Ralph Lauren. He really understands his customers and designs thinking about you and the lifestyle you are aspiring to. Neiman Marcus has to be an aspirational store. We have to see new ideas there….I hope Neiman’s and Saks stay independent. Competing against each other makes both of them better businesses.”
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