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How Neiman Marcus Readied Itself for Potential Sale

The Dallas-based retailer restructured its considerable debt to appeal to buyers after yet another disappointing quarter.
Neiman Marcus in Natick, Massachusetts | Source: Neiman Marcus
By
  • Chantal Fernandez

NEW YORK, United States — The Neiman Marcus Group has announced that it is exploring a sale of the company after "changing its corporate structure to enhance its financial flexibility," chief executive Karen Katz told reporters on Tuesday's second quarter earnings call.

The Dallas-based retailer has been working with investment bank Lazard Ltd to restructure its $4.9 billion in debt in order to prepare for such a sale, as reported by Reuters last week.

Neiman Marcus — which also owns luxury department store Bergdorf Goodman, online retailer MyTheresa and off-price chain Last Call — saw sales drop 6.1 percent to $1.4 billion in the three months ending January 28, 2017, after steady declines in its last fiscal year. It abandoned plans to go public in January.

Like most American department stores, Neiman Marcus has gone through a long series of owners since its foudning in 1907. In 2013, it was sold to private investors Ares Management LLC and the Canada Pension Plan Investment Board for $6 billion. Since then, US department stores have steadily struggled to deliver sales and attract foot traffic as shoppers turn online and the instantaneous release of runway images online undercuts the anticipation to shop luxury goods.

Katz also explained that onboarding Neiman Marcus, Last Call and Bergdorf Goodman to a unified inventory management system has been riddled with problems, and resulted in unrealised revenues of $55 to $65 million in the fiscal 2017 year to date.

The company announced in its second quarter earnings report that it is exploring strategic capital restructuring alternatives. One way it is doing that is by designating some of its subsidiaries — such as MyTheresa and property holdings in San Antonio and Longview, Texas, and McLean, Virginia — as “Unrestricted.” That means it can pursue revised loan agreements that allow for non-cash interest payments. It also allows the company to pursue revised loan agreements for the rest of the business. Interim chief financial officer Michael Fung said the company tested assets for any impairment in value, and recorded $153.8 million in non-cash impairment charges in the second quarter. The company finished the quarter with $48 million in cash and $686 million in liquidity.

In addition to considerable financial debt, the company is locked into long-term store leases at different stages of maturation across the country that it is understood Lazard helped renegotiate. The name sake chain also has a $20-billion-plus development in the works at Hudson Yards in New York City.

A rumoured buyer for Neiman Marcus is Hudson's Bay Company (HBC), whose executive chairman, the real estate developer Richard Baker, has led a a slew of retail acquisitions over the past decade. He first acquired Lord & Taylor from what was then known as Federated Department Stores in 2006, then Hudson's Bay in 2008, borrowing more than $1 billion to finance the deals. In 2013, HBC bought Saks Fifth Avenue for $2.4 billion, financing the deal with mostly new equity and debt. Under HBC's ownership, Saks Fifth Avenue has implemented a multi-pronged plan to refresh the brand identity and bring back luxury consumers.

"HBC owns a real estate portfolio that allows us to have low-cost financing and resources that other retailers don't have," Baker told BoF in September 2016. "It gives us tremendous access to capital. We can make commitments that our competitors can't because we have financial strength and flexibility."

Neiman Marcus's announcement comes at a challenging time for many US department stores. In January, Macy's announced plans to close 68 of its 730 stores, eliminating more than 10,000 jobs along the way, many of them management positions. The troubled chain saw comparable store sales fall 2.1 percent during November and December 2016 after seven straight quarters of decline. Reports surfaced in February that HBC was courting Macy's for a takeover, despite its nearly $7 billion in debt, but it was unable to secure the financing to complete the deal.

And Nordstrom has significantly ramped up its discounted offerings in order to combat declining footfall at its mainline locations, adding 27 of its Nordstrom Rack stores in 2015, and a further 21 stores last year.

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