Can Neiman Marcus Survive Bankruptcy?

NEW YORK, United States — Neiman Marcus Group filed for Chapter 11 bankruptcy Thursday in Texas, becoming the highest-profile retail casualty of the coronavirus pandemic so far.

The Dallas-based group, which also owns Bergdorf Goodman in New York and the e-commerce site MyTheresa, aims to get rid of the bulk of its $5 billion in debt, with its creditors becoming the majority owners. The retailer plans to exit bankruptcy in the fall and does not intend to conduct liquidation sales or mass closures among its 40-plus stores. Mytheresa is not a part of the bankruptcy, and will continue to operate independently, the company said.

The Wall Street Journal reported last month that Hudson's Bay Co., which owns Saks Fifth Avenue, could offer to buy the retailer in bankruptcy, citing a person familiar with the situation.

To finance the bankruptcy, Neiman has attained a $675 million in debtor-in-possession loan from its creditors, who will also provide $750 million in exit financing.

The filing Thursday ended months of speculation that the luxury department store would use a Chapter 11 filing to manage its debt and reorganise its business. Neiman Marcus had restructured its debt last year to postpone its next large payments until 2023. Still, the retailer operated in the red, struggling to drive enough sales to pay interest and post a profit at the same time.

The pandemic, which forced Neiman Marcus to close its stores and rely solely on e-commerce for revenue, exacerbated an already-precarious financial situation. The retailer missed an interest payment in April, starting a 30-day clock to default.

"Prior to Covid-19, Neiman Marcus Group was making solid progress on our journey to long-term profitable and sustainable growth," Chief Executive Geoffroy van Raemdonck said in the bankruptcy announcement. "However, like most businesses today, we are facing unprecedented disruption caused by the Covid-19 pandemic, which has placed inexorable pressure on our business."

Neiman Marcus is unlikely to be the last retailer forced into bankruptcy in the coming months. J.Crew filed for bankruptcy last week, while J.C. Penney, the once-dominant budget department store chain, has also missed an interest payment and is reportedly in advanced talks with creditors about bankruptcy financing. Lord & Taylor is expected to liquidate once its store can reopen, according to Reuters.

Even if Neiman Marcus emerges from bankruptcy with a lighter debt load, its long-term survival rests on regaining some of the lustre that made Neiman Marcus one of the most storied names in American luxury in the final decades of the 20th century. That means offering a slate of products and services that make it a destination in a digital age, even if it means courting younger consumers with lower prices, analysts say.

“If you look at true high-end luxury retail in the US, the market … [has] been pretty flat for a while,” said Steve Dennis, a retail consultant and former senior vice president of strategy at Neiman Marcus, who left the company in 2008. “With Neiman, Saks and even Barneys, there was a distorted reliance on older customers and as they retire — or literally die — they haven’t been replaced by younger customers.”

With Neiman, Saks and even Barneys, there was a distorted reliance on older customers.

Founded in 1907 by the Marcus family in Dallas, the specialty store began expanding across Texas and beyond in the 1970s, cementing its status as an arbiter of luxury. Every year, customers eagerly anticipated its extravagant Christmas catalogue, which often featured custom sports cars and high-end travel packages alongside couture and rare jewels.

Neiman Marcus purchased Bergdorf Goodman in 1972. In 2005, the company was acquired by private equity firms Texas Pacific Group and Warburg Pincus for $5 billion, a deal based on the assumption that the luxury stalwart would grow its base of affluent shoppers as wealthy Americans got even richer. Their hypothesis was only half-correct. Widening inequality in the US has resulted in the rich getting richer, but the market splintered among a growing field of luxury retailers.

Texas Pacific and Warburg Pincus sold the chain to private equity firm Ares Management and the Canada Pension Plan Investment Board for $6 billion in 2013. Both buyouts saddled Neiman Marcus with billions of dollars of debt in the span of a decade.

In the 21st century, Neiman Marcus was a pioneer in e-commerce. It made headlines last year when it became the first luxury multi-brand retailer to invest in resale with its purchase of online secondhand shop Fashionphile.

Under Van Raemdonck, Neiman doubled down on its core luxury business, catering to its most loyal, highest-spending customers. Last month, the company announced it would close most of its off-price Last Call stores. It will also cut a number of “non-selling” store employees, such as managers and back-of-the-store associates, instead creating new roles to help drive repeat purchases.

“In a time of uncertainty, you should put your efforts toward your core business,” Van Raemdonck told BoF at the time.

It’s unclear whether the strategy would have worked, had the pandemic not hit. The company stopped reporting financial results last year, but through the first half of 2019, Neiman Marcus was pulling in revenue of more than $1 billion per quarter and $125 million in earnings before interest, taxes, depreciation and amortisation. However, interest payments took up about two thirds of that, with little, if anything, left over to invest in the business.

“The reason they’re in trouble is because the private equity guys paid a stupid price, presuming it would grow, which was fundamentally erroneous and then they put a ridiculous amount of debt on top of it,” Dennis said.

In its last quarterly filing, published June 2019, Neiman Marcus saw comparable sales decrease 1.5 percent and revenue dip 0.7 percent, ending a six-quarter streak of growth.

If you're going to focus on a very exclusive number of customers, then why do you need so many big stores?

Part of the issue, analysts say, is that the US luxury sector is too fragmented, with too many stores competing for the same customers.

Most big luxury labels look to Asia and the Middle East for growth, not the US. For Neiman to tap into these growing economies will require extensive capital investments — an unlikely scenario considering its cash-strapped status. A modified version of the retailer’s current strategy of focusing on a core group of customers is another option.

“If you’re going to focus on a very exclusive number of customers, then why do you need so many big stores?” said Neil Saunders, managing director of GlobalData Retail.

He pointed to his local mall in Scottsdale, Arizona, which has a Neiman Marcus on one end, and a recently refurbished wing on the other side where many of the department store’s top brands operate shops of their own.

Luxury retailers are over-stored in the US, period, Dennis said.

“In cities like Boston and DC, Saks and Neiman are right across the street from each other,” he said. A merger between the two that would see some of these neighbouring stores close — a persistent rumour in recent years — could solve that.

Neiman Marcus also needs new customers, which means offering exclusive products and services, said retail consultant Robert Burke.

“The big issue with the stores is that so many of them have so much of the same products that they start to look alike,” he said. “But there is a reason for department stores to exist, if they… can offer newness.”

The big issue with the stores is that so many of them have so much of the same products that they start to look alike.

Burke pointed to Selfridges in London and LVMH-owned Le Bon Marché in Paris, which are adept at offering store concepts and exciting new labels every season. These European stores often work with brands on a concession model, where labels set up shop-in-shops and employ their own associates, with the retailer taking a fraction of the purchase. They also have merchants who are always looking for new brands, Burke added — a strategy that US retailers have not been able to fully pursue because of their financial restraints.

“Neiman Marcus has always kept a very loyal customer, and they’ve been good at catering to that loyal customer,” Burke said. “But they haven’t brought in many new customers, and that’s what freshness is for.”

French conglomerate LVMH also considered the purchase of Bergdorf Goodman, according to multiple sources familiar with the matter. Both Bergdorf and MyTheresa could fetch separate buyers, they said. LVMH did not respond to a request for comment.

"Bergdorf Goodman does make a lot of sense for LVMH," said Elsa Berry, founder of luxury M&A advisory firm Vendôme Global Partners based in New York. "It's luxury, it's prestigious, and it has a long history... LVMH just spent significant time and funds to reinvent and reopen [department store] La Samaritaine in Paris."

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