May 6 (Bloomberg) -- At a time when department stores are chopping themselves into mini-malls -- J.C. Penney Co. being the most prominent example -- Barneys is doing the opposite.
Chief Executive Officer Mark Lee’s vision for Barneys New York Inc. is art gallery meets luxury emporium -- airy spaces where $1,575 Proenza Schouler bags seem like precious artifacts. The Gucci alum wants to broaden Barneys’s appeal while respecting its heritage as the most exclusive and avant-garde of America’s stores. The closely held New York-based chain is making money again and had record sales last year, said Lee, who took over the job in 2010.
“It is good to be a niche in today’s world,” said Lee, 50, who personally scours Paris ateliers for new designers.
Lee’s makeover has gotten a lift in part because resurgent stock markets have given wealthy consumers the confidence to go shopping. Nordstrom Inc.’s sales at stores open at least a year jumped 7.3 percent in 2012, more than double the 2.7 percent rate posted by discounter Target Corp. Nordstrom dropped 0.2 percent to $58.09 in New York today, while Target retreated 0.7 percent to $70.03.
Barneys has been a mirror of the U.S. society -- and economy -- since it was founded as a cut-rate men’s store in 1923. It added a women’s department in the 1970s, was the go-to store for newly rich young bankers in the 1980s, went bankrupt in the 1990s, reemerged and then expanded too abruptly in the aughts. It fell under the control of Arab wealth and then a hedge fund.
Barneys earnings before interest, tax, depreciation and amortization grew 40 percent in each of the past two years, Lee said. It was negative in 2009. His goal is to surpass Barneys’s record Ebita of 2007.
The company’s near-term sales target is $1 billion, according to a person familiar with the figures. Sales hit $800 million in 2012, exceeding 2007’s previous peak of $750 million, said the person, who requested anonymity because the matter is private.
For Lee to succeed long-term, he must appeal to a wider audience without becoming mainstream like Saks Inc. or Neiman Marcus Group Inc. So far, the strategy “seems to be working,” said Michael Appel, founder of Appel Associates LLC, a Purchase, New York-based consulting firm.
“It’s not an easy thing, as we know from J.C. Penney, to have a vision and do it,” he said.
When Lee joined Barneys, the chain was still owned by Istithmar World PJSC, a Dubai sovereign wealth fund, which had bought it from Jones Group Inc. in 2007 at the pre-recession peak of the luxury goods boom. Like Saks, also based in New York, and Dallas-based Neiman Marcus, which also owns Bergdorf Goodman, Barneys struggled in the wake of the financial crisis and recession. Making matters worse, Barneys was crippled with debt, had over-expanded and had gone two years without a CEO.
Lee arrived with 20-plus years of fashion world experience, having worked at Saks, Giorgio Armani SpA, and at Yves Saint Laurent and Gucci, both owned by France’s PPR SA. He was no stranger to Barneys and “vividly” recalls the iconic, since-closed 17th Street store when he moved to New York from San Francisco in the 1980s to study acting and cinema at New York University. He said he has a “great respect for the golden era of Barneys,” and one of his first acts as CEO was to pore over the chain’s archives.
In the first few months, Lee installed his own team, tapping, among others, another Gucci veteran, Daniella Vitale, who is in charge of women’s merchandise. He began the work of honing his designer roster.
“I am a merchant at heart,” he said.
Lee shuttered the Dallas Barneys in February, bringing the chain’s number of flagship stores down to eight from nine when he took over, and is looking for a downtown Manhattan location. He is closing the more-accessibly priced CO-OP chain, which had 17 stores, converting the best locations to the Barneys name. The main Barneys still sell CO-OP merchandise on designated floors.
Hedge-fund manager Richard Perry’s acquisition of a majority stake in Barneys about a year ago wiped out most of the chain’s $590 million in debt and allowed Lee to accelerate his plans. He speeded up the renovation of the 20-year-old, 250,000 square-foot Madison Avenue flagship, with the main floor slated for completion in the coming months. He plans to redo the Beverly Hills and Seattle stores, too.
Tired wood paneling, parquet floor and beige carpeting, all yellowed by dim lighting, are making way for gray marble floors, glass, stainless steel frames, gold scrim, and bright-white lighting.
One of Lee’s innovations is “xo,” or exclusively ours, which focuses on smallish brands with less than $1 billion in sales, such as Valextra SpA, a Milan-based design house that makes leather goods, and Walter Steiger, the Geneva-born shoe designer, who is giving Barneys a jump on a new men’s shoe line.
“Once you get to $2 billion, $3 billion, $4 billion, they are not Barneys brands,” Lee said.
You won’t find branded shop-in-shops of the type unsuccessfully touted by J.C. Penney’s recently fired CEO, Ron Johnson. You won’t see in-your-face Versace bling or Louis Vuitton logo bags. You won’t encounter often dowdy brands such as Eileen Fisher that fall between contemporary and designer collections. Rarely will you come upon a designer’s cheaper secondary line such as Michael Michael Kors.
Lee also is trying to make Barneys friendlier to couples. To make it easier for them to shop together, he has placed the men’s and women’s shoe departments next to each other on a new fifth floor at the New York flagship, and created new passageways elsewhere in the store. He showcases strong dual-gender brands like Balenciaga, Givenchy and Bottega Veneta.
He relaunched Barneys’ website in May 2012 and says it’s now Barneys’s fastest growing sales channel. Not long ago, the industry-lagging site didn’t even have a search function.
Grace Ehlers, an analyst with Robin Report, an industry newsletter, said the new Barneys is watered-down, impersonal and soulless, where it had been edgy, intimate and witty.
“It may be working from a commercial standpoint,” Ehlers said in a telephone interview. “It may not be from the long-term value of the brand.”
Lee disputes that Barneys has lost its indie cred. He makes no apologies for carrying more conspicuous leather goods --which have more than doubled the main floor’s sales per square foot to $9,000 -- and has taken pains to retain some of the old while bringing in the new.
While he replaced longtime creative director Simon Doonan in that role, he retained him as ambassador-at-large. Another case in point is the flagship’s windows, which over the years have featured such irreverent displays as a Sigmund Freud lookalike standing in for Santa Claus. Lee devoted the windows to Lady Gaga for the 2011 holidays.
“That is a big part of the DNA,” Lee said. “But it can’t be one tone. I don’t think that everything can be a laugh riot.”
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