The Fall of Neiman Marcus
Neiman Marcus might soon file for bankruptcy. But this does not come as a surprise. The company, which also operates the MyTheresa and Bergdorf Goodman brands, has been struggling for the past few years. The rise of discount retailers and the shift to online luxury shopping has definitely taken a toll on Neiman. Moreover, its debt level has proven to be unsustainable.
In 2013, Neiman was acquired by Ares Management and Canada Pension Plan Investment Board, or CPPIB, for 6 billion dollars. At the time, it made sense to buy a growing business in the midst of economic stability. And it was a typical textbook case: A leveraged buyout transaction.
In 2015, sales grew to 5.1 billion dollars and Neiman filed to go public but withdrew its application in January 2017 amid falling sales. They were even in talks with Hudson’s Bay about a potential acquisition but that led to nowhere. The debt-ridden Neiman tried to push off interest expenses by opting for in-kind payments instead on a 600-million-dollar loan in April 2017[1]. And that was the beginning of the end.
The owners of Neiman knew that the business could not sustain that amount of debt in the current environment. To protect themselves, they engaged in what is called collateral stripping. Neiman transferred the assets of MyTheresa, totalling around 1 billion dollars[2], to a holding company owned by Ares and CPPIB. This meant that in case of a bankruptcy, MyTheresa would be out of reach to Neiman’s creditors[3].
Marble Ridge, one of Neiman’s creditors, contested the move but the case was dismissed due to lack of standing. At that point, many thought Neiman was insolvent or close to being so. But Neiman stated that it was within its rights to do so, as MyTheresa was not used as collateral for the bonds[4]. Asset transfers in general are not good omens.
In March 2019, Neiman secured an extension on its debt maturities by three years[5]. Neiman laid out a turnaround plan called Project Rolex and believed that the extensions would give it sufficient runway to execute the plan. The aim was to deliver 5 billion dollars in sales and 700 million dollars in adjusted EBITDA within five years[6]. That might have been wishful thinking.
Neiman currently has around 4.8 billion dollars in long term debt, which mostly comes from the hungover debt from previous leveraged buyout transactions. On April 16 2020, Marble Ridge stated that Neiman failed to make an interest payment, thus triggering a 30-day grace period before a formal event of default takes effect[7]. Since Neiman is already saddled with debt, it is unlikely that it secures a loan to weather the trying Covid-19 times.
But can Neiman still be saved? In light of weaker economic activity and lower consumer spending, there’s a low probability that Neiman could survive. It could try a debt restructuring of some sorts.
The economic repercussions of Covid-19 might be the nail to the coffin for most retailers. We are indeed in the midst of a retail apocalypse. What do you think about the future of retail? Is there a future? And what would that look like?
Here is the video from this transcript: YouTube
