May 2 (Bloomberg) -- Neiman Marcus Group Inc., the department-store chain that sells $4,800 Gucci purses, agreed to be purchased by two buyout firms for about $5.1 billion, people familiar with the matter said.

Texas Pacific Group and Warburg Pincus LLC will pay about $100 a share for Dallas-based Neiman Marcus, they said, which operates 37 stores including two Bergdorf Goodman locations in New York.

The acquisition of the Neiman Marcus, whose sales gains have outpaced those of most department stores, expands the trend of private equity firms paying premiums for retailers. Analysts said store expansion is the only growth opportunity for the luxury chain, whose operating margins have peaked.

The price for the retailer ``is toward the high end,'' said Touk Sinantha, an analyst at Chicago-based Ariel Capital Management, whose $21 billion in assets includes 5.7 million Neiman Marcus shares. ``There's not a huge cost-cutting opportunity because Neiman is a very well-run company. There is definitely room for expansion.''

Neiman Marcus spokesperson Ginger Reeder declined to comment.

Shares of Neiman Marcus rose 12 cents to $98.32 in New York Stock Exchange composite trading on April 29. The stock has jumped 23 percent since March 15, the day before Neiman announced it had hired Goldman Sachs Group Inc. as a financial advisor to explore strategic alternatives, including the sale of the company.

Smith Family

Texas Pacific Group, based in San Francisco, has invested in retailers including in J. Crew Group Inc. and Pets.com as well as Burger King Corp, Continental Airlines Inc. and Oxford Health Plans Inc. New York-based Warburg Pincus has invested in businesses ranging from toymaker Mattel Inc. and Indian mobile phone operator Bharti Tele-Ventures Ltd. to radio stations in Moscow and St. Petersburg.

The family of Neiman Marcus Chairman Richard Smith, which held a 12.7 percent stake at the end of November, is selling as many financial buyers compete for retailers.

In March, buyout firm Kohlberg Kravis Robert & Co., Bain Capital Partners and a real estate trust agreed to purchase Toys ``R'' Us Inc. for $6.6 billion. Cerberus Capital Management LP was among private equity firms that bought Mervyn's stores last year. In February Highfields Capital Management bid $17 a share for Circuit City Co.

Equity firms have between $90 billion and $100 billion in funds, which is spurring the investments in retailers, wrote New York-based Bill Dreher, an analyst with Deutsche Bank. If a private equity fund doesn't invest its cash it usually must forgo its 2 percent management fee, and in some cases, returned the money to investors, Dreher wrote.

`Crown Jewel'

Demand for luxury items, such as $2,800 Manolo Blahnik alligator pumps at Neiman Marcus, has soared for more than two years. Neiman's same-store sales gain averaged 8 percent the past eight quarters compared with 4 percent for U.S. retailers.

The luxury chain is ``a crown jewel, a franchise far superior to any asset in the department store sector, including Saks Fifth Avenue, and one that would be hard to replicate,'' wrote Dreher, who rates the shares ``hold.''

Neiman's sales per square foot hit a high of $555 in the year ended in January, up 32 percent from 1997, Chief Financial Officer James Skinner told investors at a conference on March 22. That compared with sales in a range of $350 to $375 for Birmingham, Alabama-based Saks Inc. and Seattle-based Nordstrom Inc., Skinner said.

The company's second-quarter operating margin of 10.6 percent was its highest for that quarter in its history, Greg Fowlkes, an analyst with Morgan Stanley, wrote. The issue for the new owner is that Neiman Marcus leaves little room for improvement.

Herbert Marcus

``Given the relative strength of the ultra high-end consumer, NMG has been able to achieve peak levels of operating performance,'' wrote Fowlkes, who rates the shares ``underweight.'' ``This is going to be hard to top.''

Saks, owner of Saks Fifth Avenue, agreed to sell its Proffitt's and McRae's stores to Belk Inc. for $622 million last week to focus on its more profitable luxury chain.

Neiman Marcus was founded in Dallas by Herbert Marcus, his sister and her husband A.L. Neiman in 1907. Marcus bought out the Neimans in 1928 and his son Stanley ran the stores from 1952 to 1979. Stanley's son Richard then became chief executive until 1988, when he resigned, ending 81 years of family management of the chain.

Richard Smith, 80, acquired his stake in 1984 and was CEO from 1987 to 1991 and 1996 to 1999. Burton Tansky, who became Bergdorf's CEO in 1990, was appointed the head of Neiman in 2001.

Tansky

Tansky, 67, has pursued a strategy of slow growth, aiming for same-store sales gains below 10 percent, Skinner said.

The retailer's square footage, which has been growing at 2 to 3 percent a year, will expand 4 to 5 percent in the next seven years as it opens at least seven stores, Skinner said.

``I can see them getting up to 50 stores and that wouldn't be pushing it,'' said Sinantha of Ariel Capital Management.

Neiman has focused on trimming inventory and accelerating deliveries of new fashions to lure higher-income shoppers, Tansky said on a conference call in early December. Customers, typically women age 45 to 65 with a median income of $285,000, care about newness and brands, not about price.

``They maintain the ability to make purchases throughout the economic cycle,'' Skinner said. ``They need nothing.''

Saks, Nordstrom

Analysts credit Tansky for not bringing in lower-priced goods after the 2001 terrorist attacks in New York and Washington D.C. hurt demand for high-end fashion. Saks Fifth Avenue expanded its offerings in late 2001 to appeal to less wealthy shoppers, lost some customers, and now has reversed course again, said Walter Loeb, president of the retail consulting firm Loeb Associates in New York.

More recently Neiman has been boosting prices. It worked with the makers of ``7 for all mankind'' jeans to add features to increase the price of a pair to $175 from $125.

The Smith family owned 31.1 percent of the 19.4 million Class B shares as of Nov 5., according to the company's proxy statement. Class B holders have the right to elect at least 82 percent of the 11-member board. The family owns less than 1 percent of the 29.3 million Class A shares. Holders of these shares elect the remaining 18 percent of the board.

Earnings

Neiman Marcus's net income in the year ended in July jumped 87 percent on the strongest sales gains in four years. Nordstrom's profit rose 62 percent in the fiscal year ended in January. Saks posted a 24 percent decline in the most recent year because of charges related to store closings.

The continued concentration of wealth and aging of the population ``bodes well for us as we go forward in the next 10 years,'' Skinner said.

Sinantha said Neiman is worth as much as $99 a share while Smith Barney analyst Deborah Weinswig put the value at about $102. Daniel Brewer, senior portfolio manager in Seattle at Rainier Investment Management, which manages $5.6 billion in assets and owns 489,000 Neiman shares, said a fair price was between $95 to $100 a share.

The company also operates 14 clearance center stores known as Last Call. It owns the Horchow home furnishings and accessories catalog.

To contact the reporter on this story: Cotten Timberlake in New York at ctimberlake@bloomberg.net.

Last Updated: May 2, 2005 07:16 EDT