New Neiman Marcus CEO Faces Steep Challenge of $4.8 Billion DebtBy and
Debt restructuring may lie ahead for ex-Ralph Lauren executive
Van Raemdonck is taking the reins from longtime CEO next month
Geoffroy van Raemdonck has spent his career at global fashion companies such as Ralph Lauren Corp. and Louis Vuitton.
But it will take more than an eye for style to fix the problems at Neiman Marcus Group Ltd., a quintessentially American luxury department-store chain hoping to relive its former glory. Van Raemdonck, who becomes chief executive officer next month, is taking over a retailer facing heavy losses, an industrywide traffic slowdown and -- worse -- nearly $5 billion in debt.
The pressure means the executive won’t have much of a honeymoon after taking the job on Feb. 12. Neiman Marcus needs to stem the red ink and hammer out a deal with creditors to restructure debt, all while navigating the broader travails of brick-and-mortar retail. Though Neiman Marcus has shown signs of reviving sales growth -- and generating more revenue from e-commerce -- it’s unclear if the just-ended holiday season was kind to department stores.
“As the rising tide lifts all, the sinking tide sinks all as well,” said Noel Hebert, a credit analyst at Bloomberg Intelligence.
In hiring van Raemdonck, Neiman Marcus picked a leader who spent much of his career at big fashion brands. He headed up Ralph Lauren’s operations in Europe, the Middle East and Africa, and held a number of roles at Louis Vuitton. He also ran St. John Knits International Inc.
Current CEO Karen Katz, in contrast, has spent decades at the luxury chain, including seven in the top job. But it’s unclear how an outside perspective will help with Neiman Marcus’s financial woes.
The company is contending with a common plight in the retail industry: the hangover of leveraged buyouts. The nearly 110-year-old business was bought for $6 billion in 2013 by Ares Management LLC and the Canada Pension Plan Investment Board. They acquired the chain from TPG Capital and Warburg Pincus LLC, which purchased Neiman Marcus for about $5 billion in a 2005 buyout.
The chain was poised for an initial public offering, but management scrapped those plans in January 2017. That was followed by speculation that Hudson’s Bay Co., the owner of Saks Fifth Avenue, would make a bid. Those hopes fizzled last summer when Katz said bluntly: “Any conversations regarding any kind of transactions are terminated.”
That left the company to fix its problems on its own, and it has made some progress. Same-store sales -- a key measure -- rose 4.2 percent last quarter. That was the first increase in more than two years. Still, the retailer reported a loss of $26.2 million in the period.
And even though this Christmas season was probably one of the best in a decade, that’s no guarantee Neiman Marcus reaped an outsized share of those benefits. Two other department-store chains, Macy’s Inc. and J.C. Penney Co., underwhelmed investors with their preliminary holiday numbers.
Even if Neiman Marcus gets a nice bump for the holidays, the Dallas-based company’s total sales are still declining -- and below the level required to maintain a roughly $4.8 billion debt load.
That means the company will need to renegotiate its terms in the next year, said S&P Global Ratings analyst Mathew Christy.
“The fourth quarter is usually the period where they pull in most of their cash flow, but we still expect the company as of right now to have overall negative sales for the full year with declining margins,” he said. “We expect the company to enter some sort of restructuring within 12 months.”
Groups of Neiman Marcus lenders and bondholders have already banded together. They’ve also hired lawyers and advisers to assist in the talks.
Neiman Marcus does have one advantage at a time when retailers are closing hundreds of underperforming locations: It only operates about 40 physical stores, and they’re generally in desirable areas.
It’s also built a solid e-commerce operation and partnered with startups like Rent the Runway to attract younger consumers. But it’s getting more expensive for retailers to maintain market share, said Moody’s Investors Service analyst Christina Boni.
“In this environment, the requirements of investment and infrastructure and the like mean that companies just can’t be as levered as they once historically were,” Boni said.
In other words, you have to be lean and nimble -- and not buried in debt. “They need to get to a point where they have a structure that gives them the financial flexibility to be able to make investments,” she said.
Neiman Marcus’s depressed bond prices reflect a consensus that creditors are likely to take a loss in any scenario, but they have rallied recently. Its $960 million of 8 percent notes due in 2021 climbed almost 4 cents Thursday to trade at 64 cents on the dollar, up from an all-time low of 51 cents in September, according to the Trace bond-price reporting data. The notes were down half a cent on the dollar Friday.
A major problem for Neiman Marcus -- and other retailers with high debt loads -- is that its terms were determined when the industry was still thriving, Hebert said. For Neiman, they were based on earnings before interest, taxes, depreciation and amortization of about $700 million.
Ebitda, on an adjusted basis, was $433.8 million in fiscal 2017 and $584.9 million the year before. That means even if creditors accept a debt exchange where they’re getting 50 or 60 cents on the dollar, that may not be enough, Hebert said.
“It still leaves them too levered,” he said.
Van Raemdonck will have to find ways to generate money from the company’s remaining assets, like real estate and subsidiaries such as the site MyTheresa, Hebert said. With its current debt levels, an outright sale of the company -- either to another private equity buyer or to a strategic partner -- seems unlikely.
“I don’t think there are a ton of buyers, honestly, unless they do something miraculous,” Hebert said.