Neiman Marcus IPO Will Stay on the Shelf

The luxury retailer's problems keep getting worse.

Shares of Neiman Marcus aren't likely to go on sale anytime soon. 

Sales Slump

Year Over Year Change In Neiman Marcus Sales At Established Stores

Source: Company filings

The luxury retailer in August announced plans to go public, but in October said it would delay its IPO until 2016 due to "jitters in the stock market," people familiar with the company told Reuters. Now it looks like the real jitters stem from the company's own missteps and that IPO plans will be shelved for even longer.

Neiman Marcus on Monday reported its first quarterly sales drop in six years. The 5.6 percent year-over-year decline in established stores for the quarter ended Oct. 31 capped off a full year of slowing sales growth, culminating in a quarterly loss of $10.5 million, compared with a $196,000 profit the year before. The company's effort to grow sales by attracting younger and less-affluent customers has fallen flat. 

The luxury department store chain, which was acquired in a $6 billion leveraged buyout by Ares Management and the Canada Pension Plan Investment Board two years ago, planned to use proceeds from an IPO to pay down its nearly $5 billion in long-term debt. That debt is 7.1 times Ebitda, according to Moody's, compared to the 1.9 median debt-to-Ebitda ratio of North American department stores covered by Bloomberg Intelligence. 

The Dallas-based company said the strengthening dollar is driving tourists away and that falling energy prices are causing shoppers with oil and gas investments to pull back spending. Sagging demand drove quarterly inventory levels up 5 percent from a year earlier, with merchandise piling up much faster than sales growth, and the company asked vendors if it could return some items. Higher markdowns led gross margins to decline by 1.8 percent from the year before.

Neiman Marcus, which brings in 27 percent of its sales online, suffered an even bigger blow over Thanksgiving weekend, when its website buckled under heavier traffic and promotions. The company was forced to extend its discounts and said it added a special offer as "a way to apologize." It was a reminder of the company's ongoing technology struggles, including a massive data breach during the holiday season two years ago. 

Meanwhile, the company had tapped its revolving credit line for $340 million to fund what it called "seasonal working capital requirements." And it said it plans to continue plunging money into new store openings, as well as dressing up its e-commerce operations. CEO Karen Katz said the company is "comfortable" with its access to cash, but the comfort might not last for long. 

Prices of the company's bonds have tumbled in recent weeks by more than 34 per cent, landing the $960 million of debt maturing in 2021 in distressed territory, with yields above 15 percent. That could make borrowing money at reasonable prices more difficult, especially as junk bonds fall further out of favor with investors

Bond Bust

Neiman Marcus bonds are down by 34% so far this year.

Source: Bloomberg

The heavy debt load could also make it more difficult for a potential strategic buyer, such as Saks Fifth Avenue owner Hudson's Bay company, to make a financial case for buying the company. 

In October, Moody's rated Neiman Marcus debt as speculative, meaning its bonds face a higher risk of default than those of its more credit-worthy rivals. But the rating agency said the high leverage is partly mitigated by Moody's view that the department store operator's luxury consumer is insulated from certain economic pressures such as weak wage growth and stock-market declines. Moody's also said it figured Neiman Marcus could deleverage through earnings growth. 

Those assumptions may no longer be true. Earnings growth is not happening. Katz suggested on Monday that the company wasn't just having some "bad weeks," but that business is "definitely changing." The effects of a strong dollar and weak energy prices are unlikely to turn anytime soon. Neiman Marcus estimated it would take "several quarters" to push through all its excess inventory and said it would keep discounting to spur sales -- a trick Katz said she learned during the recession that is equally useful now. 

Katz, who joined the company back in 1985, might also recall how the company's previous owners held it for eight years, well past private equity's typical three-to-five-year window. Back then, it struggled to find a buyer and shelved an IPO amid slowing sales. There's no indication this time will be any different. 

Update: An earlier version of this story incorrectly said that holiday weekend markdowns had caused a 1.8 percent decline in gross margins in the company's latest quarter. The quarter did not include the holiday weekend. 

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

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    Shelly Banjo in New York at

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    Mark Gongloff at

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