Byline: David Moin / With contributions from Jennifer Weitzman / Melanie Kletter / Marc Karimzadeh

NEW YORK — It could be a tough haul for Barneys New York, particularly if there is no pickup in the luxury sector next year, and with significant debt coming due in 2004.
For now, however, the company appears to weathering the tough times. It’s getting breathing room from its primary lender, Citibank, through a revised working capital agreement expected to be announced shortly, and then there’s continued support from vendors.
Moreover, Barneys executives say the firm is liquid, servicing its debt and meeting payments to suppliers.
“If you walk into our stores, you’ll see spring and resort merchandise there. We are continually getting fresh goods, and they’re selling very nicely,” Howard Socol, Barneys chairman and chief executive, told WWD last Friday. “We are in a very good inventory position and receiving fresh goods, and have fresh open-to-buy for the balance of spring.
“I am pleased, given the difficulty in sales,” Socol continued. “We’ve been able to control our inventory to receive fresh merchandise and reduce our expenses, so when the economy turns around we will have profits at the appropriate level.”
According to David Strum-
wasser, managing director of Whippoorwill Associates Inc., a principal shareholder of Barneys, “Management has done an excellent job keeping Barneys on its inventory plan.”
Like some other upscale retailers, Barneys has been dogged by all sorts of speculation about its fate, from buckling under the weight of debt and weak sales, to being sold. None of that appears valid at this juncture.
A “comprehensive announcement” encompassing the new bank agreement and third-quarter results, will be issued soon, possibly this week, according to people close to the company. That should ease concerns.
“We approve shipments to Barneys on an order-to-order basis. We are confident the bank agreement will be done within a week,” said Bob Carbonell, director of credit for Bernard Sand, a credit-reporting firm.
Barneys had to renegotiate with Citibank after missing its sales and earnings plan, putting it in violation of bank covenants. A new agreement reflects bankers being reasonably confident in the new Barneys management, as well as the company’s ability to service debt, capital improvements such as the new restaurant on the ninth floor of the Madison Avenue flagship, and the transformation of the basement for cosmetics selling, as well as new systems and expense cuts. Bankers would also consider the impact of Sept. 11, and recent business trends. According to Socol, there has been some pickup in sales in the past few weeks. Down the road, cash flow and liquidity are crucial to servicing debt.
Last year, when the economy was stronger, the company posted about $30 million in earnings before interest, taxes, depreciation and amortization [EBITDA.] Not surprisingly, this year, the store won’t come close to that. Sources said there’s a big gap between projected earnings and sales and actual results. For the first six months of 2001, Barneys’ loss widened to $7.2 million from a loss of $4.5 million a year earlier. EBITDA slumped 23.7 percent to $7.8 million from $10.2 million and sales eased 0.9 percent to $179.2 million. Same-store sales dropped 2.7 percent.
Barneys, which did around $400 million in sales last year, has been hurt by the recession as much as other upscale chains. Barneys three flagships are in New York, Beverly Hills and Chicago, where there’s been a sharp downturn in consumer spending and tourism post-Sept. 11. Barneys also operates three smaller stores, in Chestnut Hill, Mass.; Manhasset, N.Y., Seattle, and the Co-op in Chelsea, as well as 10 outlets and two semiannual warehouse sales. The World Financial Trade Center store has not operated since Sept. 11, and no decision on whether to reopen it has been made yet, the company said.
The firm’s debt load totals $110 million. It consists of the secured “exit loan” from Citibank for working capital, which runs between $30 million and $40 million, depending on the season. Inventory and receivables are pledged against the exit loan established when the company emerged from bankruptcy in January 1999.
It also consists of $72 million in debt due in 2004, stemming from the Chapter 11 reorganization. When Barneys emerged from court proceedings, it didn’t have money to give creditors; instead, subordinated notes were distributed. About $22 million went to Isetan, Barneys’ former landlord and partner in expansion. Another $35 million went to equipment lessors. And Barneys also has about $15 million in annual rent for its Madison Avenue, Beverly Hills and Chicago stores, of which it has been paying about $12 million annually. That means Barneys owes another $15 million by 2004 in back rent.
One source close to the company said, “2004 is not a today issue. At the end of next year, we will look at the debt and put together a refinancing.”
Taking the revolver from Citibank and the long-term debt to creditors together, Barneys reportedly has a “blended” rate of about 9 percent, or roughly $9 million in interest, of the $110 million in total debt.
In addition, Barneys has earmarked about $12 million for capital expenditures over a two-year period, which is drawn from the revolving credit and proceeds from the exercise of options and warrants granted to Whippoorwill and Bay Harbour. The capital expenditures budget for fiscal 2001 was $7.75 million.
To meet financial obligations of being leveraged, cap-ex is one area that could be adjusted, or the owners could decide to sink more money into the company. Issuing more stock would be difficult and increased bank borrowing would also seem too challenging under the current business climate. For the same reason, the possibility of trying to sell Barneys, which Bay Harbour and Whippoorwill want to eventually do, would also seem difficult presently, and sources close to the company say Barneys is not being marketed. Barneys would also have to demonstrate more growth to encourage potential buyers, though it is believed that Barneys may be scouting for some sites, possibly Co-op units.
Of greater concern is servicing the debt, in light of weak sales. Higher-priced and luxury stores nationwide have been posting comp-store declines in the 5 to 10 percent range this fall.
Asked about the debt, Douglas Teitelbaum, principal of Bay Harbour Management, which along with Whippoorwill owns about 80 percent of Barneys, replied: “When the company lost money during its bankruptcy, it had buyers willing to pay in the range of $300 million. We have since improved the company tremendously, and for fiscal year 2000, the company had $30 million in EBITDA, significant cap-ex, and moved towards standard business disciplines. So, it seems unreasonable to me to say that we have too much debt, when it amounts to one third of where the company was valued when it did negative EBITDA.
“Relative to the economy, we are very happy with our corporate performance and not fearful or worried about our debt load — and we will take any necessary steps to continue to address the business and make sure its has ample liquidity,” Teitelbaum noted.
That seems to be the case, judging from what vendors reported last Friday. For example, Cynthia O’Connor, owner of the showroom bearing her name and representing Me & Ro jewelry, said she hasn’t had payment problems with Barneys. Still, she did reduce her level of business with the chain. “My business used to rise and fall according to Barneys, but not anymore,” O’Connor said. “Now I do very little business with them and have built my business with retailers such as Bergdorf Goodman, Saks Fifth Avenue and Henri Bendel.” She added that at Barneys, it became difficult to meet the store’s demand for exclusive products.
Alisa Greenspan, owner of Capital A showroom, represents lines that sell in Barneys Co-op contemporary department. She also said she hasn’t experienced payment problems, even though she ships product at least once a week to Barneys. “We do consistent business with our Beth Frank belt line and other collections,” she said.
“We have a number of designers who sell to Barneys, including Jane Diaz, Rona Pfeiffer, Dana Kellin, and everyone has been getting paid on time,” said Janet Goldman, president at multi-line showroom Fragments. “My only advice is to make sure you get paid before shipping anything big, but that’s general business advice. We have not had any problems or order cancellations with Barneys.”
“I get reorders from Barneys all the time,” said Karen Erickson, co-owner of Showroom Seven, who sells such merchandise as jewelry by Erickson Beamon, handbags by Kazuyo Nakano and ready-to-wear by Imitation of Christ to the store. “I didn’t have one order canceled after Sept. 11 from Barneys and we are getting reorders for holiday merchandise, so that means their holiday business must be good,” Erickson added. “If their invoice is due on a Friday, I will have the check by Tuesday prior.”

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