Commentary

Neiman Marcus' 'Exploring' May Take It To Hudson's Bay

You know there’s serious trouble when a headline tails off with “… as business shrivels.” That’s how Fortune characterized the state of affairs at Neiman Marcus yesterday in following up on a Wall Street Journal report that Hudson’s Bay Co., owner of Saks Fifth Avenue and Lord & Taylor, was in talks to purchase the Dallas-based retailer’s 42-location — and online — operation.

“On Tuesday, Neiman Marcus said it hired financial advisers to explore strategic alternatives, including a potential sale or debt restructuring. It didn’t say whether it was in talks with any potential buyers, but … people familiar with the matter said Neiman Marcus’s owners had reached out to Hudson’s Bay in recent weeks,” Suzanne Kapner and Dana Cimilluca report in the WSJ.

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“Combining with Hudson’s Bay would likely yield significant savings that could help turn Neiman Marcus around, people close to the companies said. A deal could be structured in a way that would put it under a new holding company without technically changing control of Neiman Marcus, the people said,” Kapner and Cimilluca continue. “That is important because a change of control could trigger an obligation to buy back Neiman Marcus’s deeply discounted bonds at face value, which would be prohibitively expensive for Hudson’s Bay.” 

But those bondholders would have to see the advantages of going along with such a deal. 

As for Hudson’s Bay, it “declined to comment on the report but allowed that it does ‘selectively evaluate opportunities,’” writes  Fortune’s Phil Wahba, who listened in on the Neiman Marcus Q2 2017 earnings conference call during which it reported comparable sales fell 6.8% during the crucial holiday quarter.

“Neiman Marcus Group CEO Karen Katz, reading a script … but not taking questions from investors, re-iterated some of the problems that are decimating the retailer's sales: shoppers have become far less loyal, in large part because of the ease of Internet shopping and price comparisons, and want to buy items when they see them on a runway, rather than wait for months. The strong U.S. dollar is also pinching sales,” Wahba reports.

“More and more, we're seeing our customers shop multiple stores and Web sites, not just ours,” Katz said.

Those customers are graying. 

“Millennials currently account for 15% of Neiman Marcus’s shoppers, with 36% coming from Generation Xers,” write  Bloomberg’s Emma Orr, Lindsey Rupp, and Sandrine Rastello. “That means it’s still highly reliant on Baby Boomers for sales. The company also has been hit by a decline in tourism spending.”

Not that it isn't trying to skew younger. 

“Last year, Neiman Marcus teamed up with e-commerce startup Rent the Runway in a bid to attract more Millennials. The company has been opening in-store boutiques that let customers rent clothes and accessories,” Orr, Rupp and Rastello report.

But there’s a gangly financial monkey on it back.

“Saddled with debt from a $6 billion leveraged buyout in 2013,” the company, In January, cancelled plans for an IPO. “It wasn't the first time the chain had done so. Neiman first filed paperwork to go public back in June 2013, before it was purchased by Ares Management and the Canada Pension Plan Investment Board,” CNBC’s Krystina Gustafson reports.

“Last month, S&P Global Ratings downgraded its corporate credit rating on Neiman Marcus, calling the retailer's capital structure ‘unsustainable’ in the long term. The agency cited Neiman's deteriorating operating performance, including mid- to high-single-digit declines in same-store sales and ‘meaningful margin erosion.’”

The whole concept of the present-day department store may be unsustainable in the long run, as we know. In a commentary for Forbes, Triangle Capital LLC co-founder and partner Richard Kestenbaum offers several prime reasons why their future is so bleak (unless they embrace small, unique brands, he suggests). 

To begin with, “where exclusive availability of high-end product was the driver of department stores' business, those products are now available in many different places and on e-commerce. Department stores hegemony of product availability is largely over. So department stores have to compete on price and that's destructive to margins, profitability and shareholder value,” Kestenbaum writes.

Then there’s the issue of younger consumers, who are more interested in living the experience than in wearing designer labels. That yearning for adventure apparently does not include window-shopping and riding escalators any more than it does lunch at Schrafft’s and its social peers across the USA.

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