What to Know About Neiman Marcus' Potential Bankruptcy

For the Neiman Marcus Group, any possible bankruptcy should not spell extinction — just huge disruption and anguish through a reorganization.

Owners end up with nothing, creditors scramble for financial recovery, vendors get stiffed, management gets tossed out, some stores close for good. Yet a case for Neiman’s survival and relevance in a society where luxury always has a place can be made, and it would be a better one were it not for the coronavirus’ crushing impact on retailing and the rest of the economy.

While being stymied for six years by its huge debt, Neiman’s stores have remained productive, dominating luxury markets in Texas, California and Florida, and generating high revenues in Northpark Mall in Dallas, on Wilshire Boulevard in Beverly Hills and in Palm Beach and Bal Harbour, Fla., among other locations.

NMG has had the right stuff: designer exclusives, superior service, a high percentage of digital sales, a loyal clientele and a clear mission focused on luxury. Like other retailers, Neiman’s has become very promotional, unbecoming the otherwise tony image, though the business is perceived as less promotional than the competition.

“Neiman’s greatest asset is the strength of the brand,” observed Suzanne Silverstein, president of Seven For All Mankind premium denim. “It’s associated with luxury — the ultimate in luxury shopping. Bergdorf’s falls under the same umbrella. They have incredible followings.”

“Neiman’s always excelled as a luxury player. The service standards have always been extremely high, the customer base for Neiman’s and Bergdorf’s is as loyal as anyone’s, and the selling associates are outstanding,” said Ron Frasch, the former Saks Fifth Avenue president and top merchant at Neiman’s for about a decade starting in the mid-Eighties. “The associates have great relationships with customers. They always cultivated that, and Neiman’s was among the first to advance its loyalty program way ahead of others.”

More than one-third of Neiman’s $5 billion in annual volume is generated online, which is important considering how COVID-19 has forced retailers to shut stores, many likely to never reopen, and how the health crisis has accelerated the shift from shopping stores to buying online. Neiman Marcus adopted the Internet early, in the late Nineties, though its sister division Bergdorf Goodman has been playing catchup. 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. The investment in the web site was significant, Bergdorf’s president Darcy Penick said in a recent WWD interview, without revealing what it actually was. She insisted that overhauling the web site in no way meant that the physical stores were being neglected.

“Rob Smith saw the future in e-commerce and really invested in it,” Frasch added. Smith was a member of the family who owned a significant portion of Neiman Marcus Group for years until selling the company to Texas Pacific and Warburg Pincus in 2005, which in turn sold it to Ares Management and the Canada Pension Plan Investment Board in 2013. Neiman’s bolstered its stake in the online luxury market when it purchased the Berlin-based Mytheresa luxury web site in 2014, and has recently been exploring possibly selling it or an initial public offering.

Neiman Marcus was founded in 1907 on “a bad business decision,” as the story goes. The founders Herbert Marcus Sr., his sister Carrie Marcus Neiman and her husband, A.L. Neiman, all former Texas department store workers, had been operating a sales promotion company in Atlanta when the opportunity arose to buy the Coca-Cola Co., which back then was a small soda-pop business. Instead, they chose to open their own retail business in Dallas.

Years later, Herbert’s son Stanley joined the business and took the helm after his father’s death in the early Fifties. Though Neiman Marcus already had a fine reputation, it was Stanley who catapulted the company into a premiere luxury institution, redefining retailing with a business model centered on lavishing service on affluent clientele, building up dominant assortments of America’s and Europe’s most coveted designer brands and bringing glamour and entertainment to the stores through innovative marketing and special events. He invented the Fortnight, a two-week celebration of the goods, culture and arts of a single nation such as France or Italy, which would be eventually copied by Bloomingdale’s, J.C. Penney and other retailers.

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Marcus also created the “His and Her Fantasy Gifts” each year for the holiday season, introducing extravagant and rarefied gifts ranging from Egyptian mummy cases and Chinese junks to Black Angus steer and super yachts. A consummate showman and salesman, Stanley influenced not only how people dressed, but how they conducted themselves and appreciated fine arts and crafts. He also created the Neiman Marcus Collection of fine art, which includes works by Alexander Calder, Frank Stella and Roy Lichtenstein, many of which adorn the Neiman Marcus stores.

Neiman’s distinct aura continued to glow throughout Stanley’s 49-year reign over the company, and his influence lasted well beyond the years he actually ran the retailer. In fact many people thought he was still running it long after he retired from his day-to-day responsibilities and became chairman emeritus. A mentor to many, he became known affectionately within Neiman’s as “Mr. Stanley” right up until his death in 2002.

When the Great Recession hit and the stock market plunged, Neiman’s lost around a third of its volume and its status as the nation’s dominant luxury chain began to fade. Heavy debt stemming from the 2013 purchase of the business by Ares and CPPIB for $6 billion has drained the company of profits and capital for upgrades and adding new experiences. Neiman’s woes can also be traced to a formulaic merchandising approach that stayed overly dependent on big-name designers for too long and was too tied to an older demographic who could afford the expensive offerings, as well as to the rise of freestanding designer and brand shops.

“I’d say with too many designer brands, Neiman’s was almost loyal to a fault,” said one fashion supplier who requested anonymity. “When you walk into their stores, you see some brands like St. John and Escada that commanded all this real estate. It was just wrong. And other brands had far better sell-throughs. I get my best sell-throughs at Nordstrom. Neiman’s is second best.”

“Because Neiman’s was so dominant for so long, they became dismissive of the competition and cocky,” said a former Neiman’s employee. “They felt they were just the best ever. For a long time, they felt Saks was weak, that Bloomingdale’s was going so much more mainstream, and they still weren’t looking at Nordstrom as a main competitor in luxury.”

Seeking to adapt to changing times and shifts in consumer shopping behavior, the company has been undergoing a “transformation” strategy led by Geoffroy van Raemdonck, the chief executive officer since February 2018. He’s been on a mission to modernize the business 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 through closing most of the 22 Last Call clearance outlets and cutting hundreds of jobs. Neiman’s has 13,700 corporate and store associates. While advances have been made, apparently it appears to be too little too late to avoid the bankruptcy fate, though industry experts, including former Neiman’s employees, have felt for a while that bankruptcy was inevitable.

Geoffroy van Raemdonck

Geoffroy van Raemdonck  Masato Onoda

In retrospect, Ares and CPPIB overpaid. Since the 2013 acquisition, Neiman’s has been paying around $300 million in annual interest to service the $4.46 billion in long-term debt. The luxury retailer generates $5 billion in annual volume through its 43 Neiman’s stores, two Bergdorf Goodman stores, neimanmarcus.com, bergdorfgoodman.com, the Mytheresa web site, the Horchow direct-to-consumer business and Last Call outlets.

Compared to other retailers, Neiman’s has experienced less management turnover. While continuity can be a good thing, being based in Dallas made it difficult to attract new talent and come up with fresh approaches to think about brands and how they organize the brands. “People simply didn’t want to relocate to Dallas,” said one source familiar with Neiman’s.

“They always had the same shops and the big brands, and it skewed a little more mature,” said the former Neiman’s employee. “Neiman’s is more of luxury than Saks. They are better in the designer market. They were also renowned for their shoe departments. But Saks has repositioned their shoe business, which is strong, and is stronger in beauty.” The Saks team, led by Marc Metrick, president, and Tracy Margolies, chief merchant, “is getting younger customers in and modernizing the store. It’s working for them. With Neiman’s and Saks, as one rises, the other usually settles.”

Neiman’s never would do concessions, with a few exceptions such as Louis Vuitton. “Saks and Bloomingdale’s play the concession game. But not Neiman’s,” said the ex-Neiman’s executive. “They got very stuck in their ways. It was their way or the highway.” Neiman’s philosophy has been to control its selling floors and enable sales associates to be able to freely accompany clients from shop to shop without competing with those manning concessions.

It’s expected that with Chanel announcing in late 2018 a shift from wholesaling to concessions, Neiman’s will suffer a hit to profits. Chanel has been Neiman’s biggest volume vendor, selling the store across ready-to-wear, beauty, footwear and accessories. “Typically in beauty you get 40 percent margins; handbags 50 percent; rtw 40 percent. If you take those out and you become a concession, where Chanel pays you 10 percent on a sale, that’s a big hit,” said one retail consultant.

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With the coronavirus forcing the closing of all its stores since March 18, Neiman’s defaulted on $76.8 million in interest payments that were due April 15. Despite the liquidity crunch, certain vendors received some payments recently. “It’s not that they wanted to keep continuity with us for after the bankruptcy. We work with factors so the banks would have put a lot of pressure on them,” said one vendor source. Another vendor source felt that the recent payment, a partial one, would sustain some goodwill during a bankruptcy and after.

Even before the coronavirus outbreak, there was speculation that Neiman’s could go bankrupt. The retailer did show some improved selling trends last year, but stopped publicly reporting its quarterly results. With highly productive stores, Neiman’s was for years able to service the debt.

There’s mixed reviews over the first-year performance of the Neiman Marcus store in Hudson Yards on the West Side of Manhattan, which opened in March 2019. Neiman’s executives have indicated that it’s 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. “They got the deal of all deals,” said one retail source.

Because of its history, and singular image of standing for true luxury, Neiman’s future engenders wide concerns in the fashion industry. As it stands now, a Chapter 11 filing, with senior debt holders taking over ownership and initiating store closures and management changes to keep the business alive, seems most probable. A filing, according to sources, is being held up by negotiations involving terms of the debtor-in-possession financing such as rates and covenants, and who ends up providing the loan.

Reports that the Hudson’s Bay Co., led by executive chairman Richard Baker, will bid on Neiman Marcus have been around, but if Baker makes a bid at all, it would be sometime after the filing, sources said. Baker would be a strong bidder given the synergies and cost savings he could initiate by consolidating the HBC-owned Saks Fifth Avenue with Neiman Marcus Group. 

Keeping Neiman Marcus alive is something designer brands would want, though some worry about the increased leverage HBC would have over them. “I am concerned it’s going to cost me a fortune to do business with Saks, especially if Richard Baker takes control of the market,” said one president of a fashion brand who requested anonymity.

“I’m worried because if they consolidate a lot of the teams, how would you distinguish between the two banners? With one owner, do the brands lose differentiation or become more differentiated? It does create a dominant luxury monopoly, but if LVMH or Kering isn’t happy with Neiman’s or Saks, they just won’t sell them. LVMH, Kering still call the shots. Saks and Neiman’s do understand the power of those luxury house conglomerates, but most brands do what Saks and Neiman’s ask them to do.”

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