BARNEYS’ GROWTH PLAN
TOO MUCH, TOO SOON?
Byline: David Moin — With contributions from Mark Tosh
NEW YORK — Although the bankruptcy filing of Barneys New York is linked to its Japanese partner, the maneuver has renewed doubts about the chain’s dramatic and costly expansion and the performance of some of its branches.
“Comme des Garcons and Issey Miyake are hard to sell in suburban areas,” said one retailer.
“There was enormous overtime in building the Madison Avenue store,” said another source. “Gene [Pressman, co-chief executive officer] would design something and change his mind, using esoteric materials and difficult details. The stores are beautiful, but he was extravagant and arrogant.
“It came back to bite them on the butt.”
Beginning in 1989, Barneys began opening satellite units in upscale suburban locations. Currently, the chain has 14 stores and six outlets. In September 1993, Barneys made its biggest move, opening the 230,000-square-foot flagship at 660 Madison Ave. and 60th Street, and reduced the size of its original store on 17th Street to 120,000 square feet, cutting 50,000 square feet. In 1994, Barneys opened a 125,000-square-foot Beverly Hills flagship at 9570 Wilshire Blvd.
There have been rising reports about slow traffic at certain locations, including the Westport, Conn., unit, which some sources said seems to lack enough merchandise, while the Seattle and Beverly Hills units seem short on traffic. About a year ago, Barneys closed a store in Cleveland. In a group interview with top Barneys executives last September, Robert Pressman, co-ceo, insisted the Beverly Hills unit is “beating the plan, hitting about $600 per square foot.”
“Based on 100,000 square feet of selling space, that would be about $60 million,” he said. “Other sources put it at $45 million to $50 million.”
On Thursday, Charles Bunstine, Barneys president, gave Beverly Hills and the other stores a vote of confidence and declared, “There will be no operational changes. There is no intention of closing any stores.”
That’s good news for employees, who may now be fearing layoffs, although bankruptcies are generally occasions for top-to-bottom business assessments.
“We do that all the time,” Bunstine said. “They could use this as an opportunity to shed unproductive assets,” said Arnold Aronson, of Levy, Kerson, Aronson Associates, the consulting and retail search firm. “Creditors are going to demand that the company be run in the most efficient way possible.”
Barneys’ challenge is now to maintain its special character and service, while cutting expenses and improving productivity, Aronson said.
One immediate step, Bunstine noted, would be to renegotiate lease terms.
“We have a couple of very expensive leases,” he said.
In addition, the bankruptcy and the dispute with Isetan could affect the amount of capital available to get a store in Atlanta off the ground. A lease has been signed, and it’s scheduled for a February 1997 opening. At 60,000 square feet, it would be among Barneys’ largest stores. Branches generally range from 5,000 to 30,000 square feet, with some of the smaller ones recently undergoing expansions.
According to Bunstine, Barneys stores are running strong. He said sales from August to December 1995 rose 13.6 percent to $177.6 million from $156.4 million in the same period in 1994. In the fiscal year ended last July, the company’s net income was $9.5 million on sales of $291 million against $5.4 million in income on sales of $175 million the year before.
Defending the performance of the branches, Bunstine cited the Seattle unit and said it was up 18 percent over last year. Furthermore, he said that flagship and branch stores are well positioned for spring. Last Christmas season, he said, he visited all the stores and reviewed the selling floors and stockrooms.
“They are very clean,” he said.
Some vendors and retail executives agreed that Barneys does turn certain categories well, particularly accessories and men’s suits. The company doesn’t carry much in the way of major cosmetics, but does well in boutique brands.
“They have a huge Prada business and jewelry business turns,” said Dayne DuVal, an accessory designer. In New York, Barneys “prides itself on two huge floors of accessories,” he said. Even a competitor said, “I suspect their business is pretty good and the margins are okay. I don’t see any glut of merchandise. The question is how they manage their cash. They have made tremendous expenditures on physical plants — the Madison Avenue flagship and small shops around the country. They seem to managing top-line growth, but the question is whether they have the working capital to support the new locations. Is there a cash management issue? Did they overspend their checking account?”
One vendor said he’s not surprised that Barneys is clean on inventory, saying, “It isn’t much of a reorder store. Their idea of reordering is the next season.”
Aronson added,”One would have to suppose that other issues like branch store performance and the support structure, sales support, operating systems of the company, were not performing as well as they might. Beverly Hills represented a huge financial investment, and whether it was returning an adequate return is open to question.
“They probably needed a lot more volume than they anticipated. The other part is with the huge undertakings of Madison Avenue and Beverly Hills, there might have been a lack of focus on other parts of the business, like branch stores.”
One fashion executive described Barneys merchandise as “pure and fashionable.”
“Nothing is in questionable taste,” the executive said. “I admire them for that. But in today’s world you have to appeal to more than one customer. Rarefied merchandise looks and sounds good, but there’s not much salability.”
He said he thought the private label was “a little overpriced” because there’s no competition with it.
“I was in the Seattle store three times and never saw a customer,” said Michael Ratner, president of Richter & Ratner, a contractor that built most Barneys branches. “It’s a sad day,” said Isaac Lagnado, publisher of Tactical Retail Monitor. He blamed Barneys’ troubles on rapid expansion, high-priced assortments and a core customer who is too young.
Lagnado said Barneys also invested heavily in its Madison Avenue flagship — reportedly up to $185 million.
Another concern stemming from the Barneys filing, Lagnado said, is whether it will create “a ripple in terms of the luxury market.”
“I think the factors and everybody else could begin to tighten up,” he said, something that could mean more scrutiny to all retailers under financial pressure.
“It could presage something negative about the luxury designer market,” Lagnado added, noting that recently there have been high expectations, big commitments and major expansion plans among the luxury goods companies. Neiman Marcus and Saks Fifth Avenue have recently reported strong numbers.
R. Fulton Macdonald, president of International Business Development, said he was not surprised by Barneys’ filing, noting that its assortments were “too thin, too pricy and far too eclectic.” He said management also overlooked the fundamentals of retailing to focus on “fancy things” like windows and store design.
For example, he said, the merchandise assortments are so deep at Nordstrom that “you practically can’t walk through the store because you’re tripping over goods.”
“Barneys you can run a bowling alley down it and hardly hit a mannequin,” he added. “It was set up like a museum.”
Unlike upscale retailers like Saks, Macdonald said, Barneys didn’t offer preferred customers perks such as discounts or special mailings.
“We’re in a new era where people want to see value even if they have the money and are willing to spend it,” he said. “They have to believe they are getting value. You didn’t get that sense from Barneys.”
In the interview last September, Robert Pressman estimated that Barneys will do about $180 million in the 230,000-square-foot Madison Avenue store in the current fiscal year. He said the downtown store did about $90 million at its height, but since the opening of the Madison Avenue store, sales have dropped to about $60 million.
According to a former Barneys executive, the company did $150 million on Madison Avenue in the year ending last July.
The filing could knock out some ambitious plans. Barneys executives were looking to expand in San Franciso and Europe, though they acknowledged the strategy was shifting to expanding existing stores.
“Where we open large stores we do the best,” said Gene Pressman during the September interview. “Barneys doesn’t want to be in a lot of locations anymore. Opening Barneys in a 5,000-square-foot space definitely raises some questions. How do you show the breadth? We don’t want to open small stores anymore.”
Stores Barneys had tabbed for expansion are in Chicago, Dallas, Seattle, Troy, Mich., and Costa Mesa, Calif.
Barneys executives also noted the chain plans to expand private label bridge, which accounts for about 25 percent of women’s sales. The long term goal is for it to reach 40 percent.
“Designer now represents more than 50 percent of our women’s business,” Bunstine said Thursday. “The growth of the private label business will grow as the designer business grows. However, the potential for growth is bigger in the private label area.”