The Neiman Marcus Group has come to grips with the reality of its situation.
Amid slumping sales and profits, deteriorating shopper loyalty and a systems fiasco that’s been impeding the business since the fall, the Dallas-based luxury chain has put itself up for sale — and Richard Baker, governor and executive chairman of the Hudson’s Bay Co., may be about to come to the rescue.
Sources tell WWD that a deal for HBC to acquire the Neiman Marcus Group could be struck in four to six weeks. The price would most certainly be less than the $6 billion paid for the business by the Canada Pension Plan Investment Board and Ares Management in 2013, and possibly less than the $4.9 billion in debt that Neiman’s has on its books as a result of the acquisition.
“The challenge is what multiple are you going to pay for a luxury brick-and-mortar than needs meaningful cap ex in this market,” said one banking source. A multiple of eight times Neiman’s cash flow of $500 million in earnings before interest, taxes, depreciation and amortization, or about $4 billion, would be “a comfortable price,” the banker said.
HBC is believed to be the only serious suitor. Baker has had Neiman’s on his radar at least since his company purchased Saks Fifth Avenue in 2013, and has held talks a few times a year with Neiman’s owners.
On Feb. 7, WWD reported that Baker still had his sights on Neiman’s after his attempts to strike a deal to buy Macy’s Inc. faded.
On Tuesday, Neiman’s said it was exploring “strategic alternatives” that may include the sale of the company or other assets, as well as other initiatives to improve its capital structure. The announcement reflects an effort to entice other suitors to the negotiating table, aside from HBC, and an acknowledgement that Neiman’s has to take action given its deteriorating performance.
The retailer on Tuesday reported that for its second fiscal quarter ended Jan. 28, it was hurt by poor sales and traffic trends, higher markdowns and impairment charges, resulting in a net loss of $117.1 million, compared with net earnings of $7.9 million for the second quarter of fiscal-year 2016. The debt load also drags down profitability and adds pressure. Neiman’s bonds begin to come due in 2021.
Adjusted EBIDTA for the second quarter of fiscal-year 2017 were $126.8 million, compared to $183 million in the prior year.
Total revenues came to $1.4 billion, a decrease of 6.1 percent compared to total revenues of $1.49 billion for the second quarter of fiscal-year 2016. Comparable sales decreased 6.8 percent.
The company recorded non-cash impairment charges of $153.8 million in the second quarter, primarily related to its Neiman Marcus brand.
In addition, the Dallas-based luxury retailer made changes to its corporate structure to enhance its financial flexibility with respect to some of its assets. The company said certain subsidiaries including Mytheresa.com were designated as “unrestricted subsidiaries” for purposes of cash pay notes and payment-in-kind toggle notes. Though sources indicate a deal for the company could be imminent, Neiman’s said there is no timetable for a sale of the retailer or any of its assets. Neiman’s has been pulling assets out of its collateral pool for the debt to protect them from credit agreements.
Two years ago, the company was intending to launch an initial public offering. But that plan was scrapped due to Neiman’s declining fortunes and changing market conditions.
Even with its heavy debt, slumping business and uncertain prospects, Neiman Marcus is still considered North America’s most prestigious luxury chain with some excellent assets, including certain store properties and Bergdorf Goodman. It’s moving forward on building the first Neiman Marcus in New York City, which will be in Hudson Yards under development on Manhattan’s west side; Bergdorf’s continues to renovate, and the group has a well-developed dot.com business representing 31 percent of the company’s nearly $5 billion in annual revenues.
Responding to reports of its interest in NMG, Hudson’s Bay issued the following statement: “As a matter of company policy, we do not comment on rumors or market speculation. Generally speaking, as we have previously stated, we selectively evaluate opportunities to accelerate the company’s strategic growth while maintaining or enhancing its credit profile.”
If it bought the Neiman Marcus Group, HBC would inherit Bergdorf Goodman, considered a retail crown jewel. Neiman’s and Bergdorf’s would bolster the HBC-owned Saks Fifth Avenue chain. HBC — which also owns Lord & Taylor, Hudson’s Bay, Saks Off 5th, Home Outfitters, Galeria Kaufhof, Galeria Inno, Gilt and Sportarena — has itself been struggling with recent negative comp-store sales.
“Hudson’s Bay is a very logical and good buyer for Neiman’s because there are quite a bit of potential synergies,” observed Stephen I. Sadove, who ran Saks Fifth Avenue as chief executive officer from 2006 to 2013, and in that position once tried to buy Neiman’s but instead led the sale of Saks to HBC.
“Aside from savings in the overhead, there are benefits to having critical mass as it relates to the Internet, buying and working with the vendor community and data analysis, and there would be some opportunities for real estate rationalization. Certain markets may not need to have both Saks and Neiman’s. There is a high degree of similarity between the businesses.”
Other sources indicated it would be extremely difficult for another private equity firm to buy Neiman’s due to its heavy debt and because synergies wouldn’t exist. They said Baker would structure his deal by reducing the debt, possibly by swapping real estate or negotiating with bondholders. Baker has been a wizard at maximizing the real estate values of his various retail holdings, especially the Saks Fifth Avenue and Lord & Taylor flagships in Manhattan. He tends to seek companies with significant real estate assets. According to its last annual report, Neiman’s leases 18 of its 42 stores and owns the rest, although most are subject to at least a partial ground leases.
As for Bergdorf’s, a highly valuable building on 57th Street and Fifth Avenue, the real estate is owned by the Goodman family and leased to NMG.
The Weston family of Canada, which owns the Selfridges Group, including Holt Renfrew; LVMH Moët Hennessy Louis Vuitton, and the Qatar Investment Authority, Qatar’s state-owned national wealth fund that owns Harrods, are said to have shown some interest in Neiman’s at one time or another, though it’s not known whether they might be currently interested.
“Hudson’s Bay is clearly positioned to be the dominant department store operator,” said William Susman, founder of Threadstone Advisors. “As a good, better, best department store operator, HBC in the U.S. could comprise Lord & Taylor, Saks and Neiman’s, or Lord & Taylor, Saks and Macy’s.”
“Neiman’s owners are desperate. They need to make a deal and Richard is a good deal-maker,” said one source who knows him. “A strategic buyer would pay the most, but at the price that it should be. Neiman’s owners know they need to do something. You can keep delaying the debt, but at some point it comes due. You’ve got to cut your losses while you can. Richard has wanted Neiman’s for years, but was never going to pay the price being asked. Now he smells the blood in the water. He will never, never over pay. If the Neiman’s people were smart, they would try to make a deal with Baker before the asset goes down further and further.”
During her conference call after releasing its second-quarter report, Karen Katz, NMG’s president and ceo, defended the company’s reputation while being forthcoming in describing its predicament.
“The Neiman Marcus Group remains at the forefront of the luxury shopping experience,” she said, noting the company continues to add technology and has invested in a new omnichannel merchandising system called NMG One, which has been challenging to implement and resulted in disruption across the chain and with vendors since the fall.
Describing changing shopping habits, Katz said, “Our customers are increasingly deliberate and thoughtful when they shop. They’re making fewer trips to the mall. They want newness, exclusivity and the best price. More and more we are seeing our customers shop multiple stores or web sites, not just ours.”
She cited other “headwinds” including the strength of the U.S. dollar, and fewer international shoppers hurting business at stores in gateway cities such as Miami, New York and Honolulu.
It’s not all bad, however. Katz noted that business has improved in Texas stores as the price of oil increased (although in recent weeks it dipped again) and the Fort Worth replacement store opened last month is tracking 53 percent ahead of its predecessor, abetted by having a beefed up array of new technologies, including memory mirrors.
She also cited some improved sales trends and positive results with Chanel accessories and furs as well as products from Loro Piana, Brunello Cucinelli, Moncler and Canada Goose.
Regarding the launch of NMG One, Katz said it has “certainly impacted performance and results. We have encountered many difficulties as we implemented the system. It touches every operating area, business unit and data management within our company.” The integration involved migrating hundreds of thousands of stock-keeping units and compressing three 40-year-old systems into one to create a common merchandising system. “The new system didn’t recognize certain sku’s. Our ability to receive inbound goods was impacted, and the ability to see inventories across channels was hampered,” Katz said.
“We believe we have made significant progress in addressing the NMG One issues. A 90-day action plan was implemented” for receiving, inventory visibility and accounts payable, Katz said. The difficulties “will take us till the end of fiscal 2017 to resolve,” she said. Neiman’s fiscal year ends at the end of July.
Due to the system problems, Neiman’s estimated a loss of at least $55 million to $65 million in revenues year to date. Once the problems are resolved, “We expect over time to recognize substantial benefits [including] higher margins, lower costs, and better omnichannel capability.”
Neiman’s putting up a “for sale” signals an attitude adjustment. Instead of Baker or others banging on Neiman’s door for a deal, the retailer is now publicly soliciting offers, a rare move for any company.
“Only two years ago, they were going to do an IPO. The realization is that the world has changed on them,” said one source. “Richard is knocking on doors all the time. What has changed now is you have a receptive listener. And bondholders may be willing to take a haircut, as opposed to taking a full loss if this thing went under. It’s a matter of cutting your losses.”
“To me, Richard Baker is the most natural player for a deal. Neiman’s is a great company with a great name and a storied history. It’s run into hard times, not that Saks is doing so much better, but the luxury department sector is in the process of coming back,” observed Craig Johnson, president of Customer Growth Partners.
Johnson believes Baker is attracted to Neiman’s for several of the same reasons that he bought Saks. “Both are strong brand names, they have defined niches, and they own some strong properties, not the least of which is the Neiman’s store on Union Square in San Francisco. Neiman’s owns several of its stores, like Tysons Galleria in Tysons Corner, Va.; Plano, Tex., and San Antonio, Tex. And they have some attractive leaseholds. So there is real estate value in addition to the operating store value. It may not be Fifth Avenue but these are still good properties.”