Monday, April 27, 2020

The Case Study of Neiman Marcus and the Fate of Other Department Stores

By Bill Siegel

While the notorious fashion icon, Neiman Marcus, may be the first among retailers to succumb to the economic impact of COVID-19, the virus was only the final straw in a long financial journey – a plight facing many retailers in the past 2-3 years.

 

Background

Many of our well-known retail establishments have experienced the leverage buyout (LBO), i.e. private equity buying the company’s assets and leveraging the acquisition with the debt often collateralized by the assets it was acquiring.  Neiman Marcus not only went through this once, but twice -- and has more debt than it knows what to do with -- while private equity and its advisors paid themselves handsome fees. 


In 2013, a private equity group acquired Neiman’s by closing on a $6 billion LBO that replaced old debt from another LBO in 2005.  The plan was to grow the company through international expansion.  It planned an IPO in 2017, and then halted that  because of declining interest.  Unfortunately, even with Neiman’s announcing that earnings were stabilizing and that sales were increasing, it was still posting losses related to its  debt load.  Also, even though its lenders agreed to extend debt maturities, it never took the debt off the books.  Neiman’s  even faced lawsuits from bond holders when it offered lenders an interest in “MyTheresa” (a curated collection of international luxury brands) in exchange for an extension of its debt. 

 

Losses and Lowered Ratings
Similar to other retail establishments, Neiman’s continues to post losses in the millions and now its credit is rated as junk.  What happened?  Even if one were to forget the debt load, shopping patterns have changed in recent years.  Customers started shopping online and ceased visiting the malls and shopping centers where big box retailers were located.


Retail department stores were already hurting prior to January 2020.  And now that Covid-19 has hit this country, retailers like Neiman Marcus have been forced to close stores and furlough employees.  Neiman’s and other distressed retailers are facing severe liquidity issues in terms of draining cash and being unable to generate revenue.  Even while furloughing employees, these businesses must make their debt payments and pay their landlords.  Meanwhile, with many retailers’ credit ratings rated as junk or close to junk, refinancing debt could be all but impossible or simply way too expensive.


The Neiman’s Lesson – and Future
According to Standard &Poor’s, the Neiman’s debt burden is almost $4.8 billion, a figure analysts call "onerous." Unlike other retailers who are drawing down on their revolving lines of credit to stay afloat, Neiman’s has already done this to fund their losses.  And, though time perhaps has run out on Neiman’s, it is also running out on other large box retailers.


If Neiman Marcus files bankruptcy, it will survive.  There is just too much value in the brand.  Debt will either be converted to equity at various levels and shareholders will be wiped out or severely diluted.  In the alternative, its assets will be sold with perhaps proceeds being sufficient to pay secured debt and perhaps some of it trickling down to the bond holders and vendors.


Covid-19 was unforeseen and outside of any retailer's control. The debt resulting from leveraged buyouts was also foreseen and based on forecasts which -- if not reached -- spelled disaster.  There were no “rainy day funds.”  The fees generated from the LBOs were just too enticing.  In the beginning it was all free money, and now the investors of these same PE groups will pay the price.  Of course, their advisors made out handsomely. 


Neiman’s, like these other retailers, can no longer carry on business as usual.   Covid-19 was and will be the straw that breaks the camel’s back. Bankruptcy under Chapter 11 will be their only salvation allowing these businesses to slash their tremendous debt loads while restructuring their balance sheets or simply allowing them to liquidate by auctioning and selling their assets --which in Neiman’s case and that of other highly-regarded retailers -- is their brand.

See our COVID-19 Quick Reference page for additional articles.

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