Consumer

Shelly Banjo is a Bloomberg Gadfly columnist covering industrial companies and conglomerates. She previously was a reporter at Quartz and the Wall Street Journal.

The families behind Neiman Marcus used to joke the retail chain was founded in 1907 "on a bad business judgment," a nod to the decision to launch the luxury department store instead of investing in an upstart soda bottler that would later become Coca-Cola Inc.

It looks like poor business decisions still plague the struggling retailer, and this time they may lead to its demise.  

Neiman Marcus on Tuesday reported its sixth straight quarterly decline in comparable sales. It's no longer bringing in enough sales to offset costs, marking another quarter of losses at a company that once set the standard for selling luxury goods in America.

Can Neiman's Stop The Bleeding?
Neiman Marcus posted its sixth straight sales decline as shopper traffic fell off

On Tuesday, Neiman Marcus said it would hire bankers to explore "strategic alternatives," including putting itself up for sale. Meanwhile, The Wall Street Journal reported Canadian department-store operator Hudson's Bay was interested in acquiring at least some of its assets.

Some see Neiman's fall from grace as indicative of the demise of American retailers. After all, if Neiman Marcus, which famously provided nylon stockings to Queen Elizabeth, can fall out of favor with consumers, then what chance do weaker competitors have to survive?

There's some truth to that. But the bigger lesson to take away from Neiman Marcus is the pitfalls of searching for salvation in the wrong places.

Neiman's  nearly $5 billion debt load shows the dangers of selling out to private equity firms that will saddle conquests with debt but fail to deliver on the other half of the investment promise: helping turn the company around. 

Private equity buyers have an especially poor record when it comes to retailers, as evidenced by recently bankrupted Sports Authority, RadioShack, and Wet Seal,  as well as teetering retailers including J. Crew, Toys R Us, and Claire's. 

Neiman Marcus was hit doubly hard, going through multiple waves of private-equity ownership. A group of PE investors led by TPG and Warburg Pincus bought it for $5.1 billion in 2005, then sold it in 2013, in a $6 billion leveraged buyout by its current owners, Ares Management and the Canada Pension Plan Investment Board. 

Borrowed Time
Neiman Marcus has been weighed down by hefty debt loads
Source: Bloomberg

The PE firms had planned to use proceeds from a proposed IPO to pay down Neiman Marcus's nearly $5 billion in long-term debt. They gave up on that idea when operational failures and technology snafus stemming from years of under-investment hindered sales and deterred shoppers who were already defecting to competitors. 

Strangely, prices of Neiman Marcus bonds, which had fallen to all-time lows recently, rallied on Tuesday.

A Closer Bond?
Neiman Marcus bonds have plunged in the past year, but started moving up Tuesday after reports of a possible Hudson's Bay takeover
Source: Bloomberg

Maybe that's a dead-cat bounce. Or perhaps it's the last-gasp optimism of investors who still hope Hudson's Bay or another suitor might finally turn around the company.

Don't count on it. Neiman Marcus might figure out how to address its debt problems. But it will still have the difficult task of upgrading its lagging technology, infrastructure, and sales force quickly enough to bring lapsed customers back.

Another sale might buy Neiman Marcus more time, but it likely won't amount to anything more in the long term than another bad decision.

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

To contact the author of this story:
Shelly Banjo in New York at sbanjo@bloomberg.net

To contact the editor responsible for this story:
Mark Gongloff at mgongloff1@bloomberg.net