Writedowns of more than half a billion dollars led to a $509.3 million net loss in Neiman Marcus Inc.’s second quarter, and the retailer said Wednesday it would adjust assortments, return merchandise and seek greater markdown money as the economy continues to struggle.
The loss for the three months ended Jan. 31 compares with net profits of $44.3 million in the corresponding period a year earlier. Excluding $560.1 million in impairment charges, the company’s operating loss for the quarter was $32.6 million versus operating income of $134.3 million in the second quarter of last year. Adjusted earnings before interest, taxes, depreciation and amortization was $24.6 million, compared with $187.3 million the previous year.
The luxury retailer’s customers, hard hit by the economy, pushed sales down 21.4 percent to $1.08 billion from $1.37 billion in last year’s same period. Comp-store sales declined 22.8 percent.
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Burton Tansky, chairman and chief executive officer of Neiman Marcus, divided customers into two categories. “The aspirational customer has a strong desire for luxury merchandise, but [her] financial capability is not as secure as it has been. A meaningful improvement in the economy will bring this customer back into stores, although she will be more discerning than before,” he said. “The core customers have seen their net worth diminish, some very substantially. They are heavily invested in the stock market and this has impacted their desire to spend.”
Tansky has been vigorously defending the luxury business model, but on Wednesday he acknowledged consumers might never regain the same robust taste for shopping they’ve had for a few years. “A meaningful improvement in the economy will bring [the aspirational] customer back into stores, although she will be more discerning than before,” he said. Once the economy improves, the core customer’s shopping will become more normal.”
Like other luxury retailers such as Saks Fifth Avenue, Neiman Marcus has seen demand wane as consumers become more reticent about spending. Tansky admitted Neiman’s was promotional during the holiday season and still was left with a surplus. “We will still be under pressure, which could create a challenge for us to get inventory in line for the spring season,” he said during a conference call with Wall Street analysts. “Our strategy is based on full-price selling. We believe in the long run that it’s critical to maintain pricing integrity. In the short term, we will continue to take appropriate actions to adjust our inventory conditions to get them more in line with demand.”
Those actions include canceling orders, returning merchandise and asking vendors for markdown money, Tansky admitted. At the same time, Neiman Marcus is rebalancing assortments or looking for a broader range of price points within individual brands. “We may now buy more in the middle third,” said James Skinner, executive vice president and chief financial officer of Neiman Marcus, in an interview.
“With each new season comes the opportunity to start fresh,” Tansky said. “As we develop our plans for the coming fall, we are carefully evaluating our merchandise assortment. The range of price points won’t change, however, we will analyze the opportunity of the allocation of price points. This will likely result in the elimination of many of our vendors.”
The criteria for elimination will, for the most part, be sales, said a spokeswoman. “They would have had to have been sort of marginal anyway. When business is really good you can have some marginal [lines]. However, if sales are marginal, but workmanship is terrific, a number of decisions will have to be made.”
Skinner said the company chose not to do heavy markdowns on men’s clothing and jewelry, which will take a while to sell off. He compared the actions taken to reduce inventory with moves taken after the 9/11 terrorist attacks, when consumers pulled away from shopping for emotional reasons.
Tansky stressed the firm’s loyalty program, InCircle, drives sales and creates loyalty. The company has made changes to make the program more inclusive and provide more recognition as the level of spending increases. He said there are a “number of ideas that will bring positive results, but for competitive reasons, we aren’t going to provide more details about other marketing plans.”
Neiman’s is analyzing every cost and maintaining only essential expenditures, he said. A thorough evaluation of the business that began 15 months ago has taken on new urgency. “We’ve implemented many changes to date, such as consolidated alterations,” Tansky said. “We reviewed entire store organization and design and made several process changes in back offices. In addition, we’ve combined managerial responsibilities for units in multistore markets. The changes will improve our operational efficiency and expense structure.”
In mid-February, the retailer laid off 450 employees from the vice president level on down and reduced salaries for some personnel. In January, Neiman’s eliminated 375 jobs, many of which were on the cosmetics sales floor in a realignment of responsibilities in that area. Company-wide, the number of employees is down 15 percent from a year ago and 20 percent from two years ago, the spokeswoman said, noting the eliminations include reorganizations and not filling open positions. “The eye is always to maintain the customer service experience,” she said.
“We’ve made some very hard decisions as a company,” Tansky said, “the termination of some of our associates and pay reductions for all salary employees.”
The company is reining in capital expenditure. “It’s important to invest in our stores,” Tansky said. “Not surprisingly, all proposed investments are being analyzed to a heightened degree. Our capital plan has been reduced for the year by 30 percent. We eliminated some projects.”
In terms of new stores, Neiman’s opened a unit in Topanga, Calif, last September. The next store opening is slated for this September, with a 125,000-square-foot unit in Bellevue, Wash. The remaining stores on the roster include Walnut Creek and San Jose, Calif.; Sarasota, Fla.; Princeton, N.J., and Oyster Bay, N.Y. As for future stores, the spokeswoman said, “Right now, we’d have to have some indication that people are shopping in that market. Do people go to events? Do they dress up? It’s not purely real estate. It has to be a market that could maintain a Neiman Marcus.”
Gross margins in the quarter fell 960 basis points to 23.9 percent from 33.5 percent in the prior year.
In the first half of its fiscal year, Neiman Marcus recorded a net loss of $496.4 million compared with a profit of $123.1 million a year earlier. This includes the impairment charges and a $32.5 million pension curtailment gain. Adjusted EBITDA was $162.8 million, compared with $397.7 million a year earlier. Sales for the six months fell 17.6 percent to $2.07 billion from $2.51 billion.