Pressure is mounting on the Neiman Marcus Group.
This month NMG owes more than $120 million in interest on bonds, which could trigger a reorganization, and a missed payment could trigger a bankruptcy filing, according to financial sources. Having all NMG stores temporarily closed due to the coronavirus — and minimal revenue coming in — raises the likelihood.
The company also had a payment on a term loan due late last month, but sources said Neiman’s has been in talks with term-loan lenders on obtaining debtor-in-possession financing for a potential bankruptcy. The company pays interest on bonds semiannually, and bank interest quarterly.
Last month, the Dallas-based luxury retailer said it had begun evaluating “all courses of action to preserve our financial strength to continue serving customers and associates.” This included a possible Chapter 11 filing. This week, the company said it “fully” furloughed about one third of its workforce, leaving about two thirds of its 13,700 employees still working, either full or part-time. All of the retailer’s stores are temporarily closed.
One source said NMG plans to file for bankruptcy on April 19, but that could not be confirmed. NMG is not commenting on the bankruptcy rumors, or on its interest payments.
It is believed that $5.6 million in interest due April 15 is tied to $138 million in bonds due 2021 not exchanged as part of a financing that pushed back the due date on the rest of the debt to 2024. The $115 million in interest due later in April stems from the 2024 bonds.
NMG has been paying around $300 million in annual interest expense, dragging down its profitability and resulting in losses. 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 luxury web site, the Horchow direct-to-consumer business and Last Call outlets.
Neiman Marcus Group is owned by Ares Management LLC and the Canada Pension Plan Investment Board, which together bought the business for $6 billion in 2013, bringing long-term debt up to $4.46 billion.
Even before the coronavirus outbreak, there was speculation that Neiman’s could be a bankruptcy candidate. The retailer did show some improved selling trends last year, but then stopped publicly reporting its quarterly results.
A Neiman’s bankruptcy would be an opportune time for Hudson’s Bay Co. — operator of Saks Fifth Avenue, Saks Off 5th and Hudson’s Bay — to pursue a takeover. It’s no secret that Richard Baker, executive chairman and chief executive officer of HBC, has long been interested in combining Saks and Neiman’s to create a dominant North American luxury retailer. Saks itself said Thursday it had furloughed an unspecified number of employees in corporate, its U.S. stores and the distribution center due to the pandemic.
“The COVID-19 pandemic is having a severe impact on the world, our communities and our business. Due to this, we have made the difficult decision to temporarily reduce our workforce in the U.S. Our furloughed associates will retain their health benefits, and the company will cover the associates’ premiums,” said a Saks Fifth Avenue spokeswoman.
Saks will continue to have small teams in place to support the business with essential functions, including its e-commerce business, she said. Saks declined to disclose how long the furloughs would last. The company said those who have been furloughed will be paid through April 4. According to sources, Saks plans to institute some salary cuts among retained employees.
Given the state of the market, and that HBC has its own operating issues and has been losing money, it would seem tough for Baker to pull off a deal for NMG. However, sources note that he’s an innovative dealmaker with a lot of valuable real estate, and would be able to come up with some money and some partnerships and real estate arrangements to take control of NMG. The current owners of NMG could retain some equity in the business. Baker could also close some stores and consolidate duplicate functions to save money and help reduce the cost of an acquisition.
It is understood the two retailers were very close to a deal last year but talks broke down. One issue for Baker would be that NMG doesn’t have as much real estate value as other retailers that were purchased by HBC, such as Saks Fifth Avenue with its Manhattan flagship. Baker has generated billions of dollars by monetizing a lot of HBC’s property.
Given the challenge of the pandemic, Neiman’s lenders might be willing to be forgiving and allow the retailer more time to pay off its debt and see if Neiman’s, post-pandemic, could improve business performance. But most financial and retail experts believe this scenario is unlikely and expect a bankruptcy.
Neiman’s isn’t the only retailer in dire straits. As reported this week in WWD, Lord & Taylor is said to have fired many of its executives from the top on down, while also furloughing many workers who could man the stores in a liquidation once the pandemic subsides and stores can be reopened. Le Tote, which owns Lord & Taylor, did not return inquiries regarding the firings and liquidation. HBC sold L&T to Le Tote last year, but retains a stake in the department store.
J.C. Penney Co. Inc. is also among the major retailers in a precarious financial position.
The impact of the pandemic on business is often compared to the Great Recession. During those years NMG saw its volume sink by about one-third. As the stock market goes, so goes the spending at Neiman’s, Bergdorf’s and other luxury retailers. Affluent consumers do curtail their high-end shopping when Wall Street tanks.
NMG, led by ceo Geoffroy van Raemdonck, is in the midst of a four-year “transformation” plan involving creating a “luxury customer platform” involving becoming more “seamlessly” multichannel, delivering new kinds of experiences and products — fashion and nonfashion — no longer being considered primarily a department store business, sharpening the focus on full-price selling, personalization and strengthening customer relationships. The company is also streamlining by closing most of its Last Call stores, trying to sell two distribution centers, and cutting hundreds of workers.
NMG has also been exploring strategic alternatives for its Mytheresa luxury web site based in Munich, including selling it. In a bankruptcy, Mytheresa would be a point of contention.
“Neiman Marcus’ financial difficulties are a surprise to no one. Most definitively the private equity owners stripped the $1 billion MyTheresa asset from the company without paying a dime and left a carcass of a company for its creditors. If this storied brand files for bankruptcy as press reports speculate, MyTheresa will take center stage,” said Dan Kamensky, managing partner of Marble Ridge Capital, a creditor of NMG’s.
In December 2018, Marble Ridge filed a lawsuit against NMG alleging the fraudulent transfer of the MyTheresa assets to Ares Management and the Canada Pension Plan Investment Board “for no consideration” and arguing that the MyTheresa assets were being placed beyond the reach of creditors to hinder creditor recovery. Neiman’s followed with counterclaims against Marble Ridge seeking damages from what Neiman’s termed “a series of false statements” about the company and its financial condition. Marble Ridge’s lawsuit was dismissed by a Dallas judge.
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