The new CEO of Neiman Marcus will be settling in Dallas this week, but he won't have much of a honeymoon. Geoffroy van Raemdonck will succeed retiring CEO Karen Katz and step into a situation that will be challenging.
Debt analysts say Neiman Marcus' $5 billion in debt after two leveraged buyouts is unsustainable. To preserve cash and a line of credit, it's making interest payments by taking out more debt. The retail environment has been rapidly changing and hasn't provided many tailwinds.
Van Raemdonck, 45, comes to Neiman's from Ralph Lauren. He has already been making the rounds, visiting with staffers in Dallas in January and later in New York at Bergdorf Goodman, the luxury stores also owned by Neiman's.
So far, van Raemdonck has declined to be interviewed. In a prepared statement last month, he called Neiman Marcus "one of the most iconic brand portfolios in fashion retailing" and referenced engaging customers "in new ways."
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But van Raemdonck will have more than selling fashion to worry about as the credit markets have reduced their confidence in Neiman Marcus' ability to grow itself out of a debt crisis. A tight range of options to a more stable capital structure all require a restructuring of debt that's at a level that exceeds its annual sales of $4.7 billion last year.
Last year, Neiman Marcus hired investment banking firm Lazard Ltd. to help it restructure its debt stemming from the highly leveraged $6 billion buyout of Neiman Marcus in 2013 by Ares Management LLC and the Canada Pension Plan Investment Board.
Neiman Marcus isn't the only retailer that's dealing with the debt left over from a private equity buying spree of store brands in the last dozen years. But the venerable 110-year-old Dallas-based luxury retailer is one of the most strained, even as it's considered a jewel in an industry that's seen dozens of names disappear.
"Luxury retailing has been hit with major changes independent of some of the internal issues at the company," says Tom Lind, who's retiring as Neiman's senior vice president of real estate. "You add all that up, and it's not something any of us would want to repeat."
The good news is that Neiman's has a somewhat protected business model, a report last week from Fitch Ratings said. The company's luxury positioning, real estate portfolio, customer and vendor relationships, and strong e-commerce business should enable it to be somewhat insulated from, but not immune to, broader market shifts, Fitch said. It also has enough liquidity, about $500 million to $600 million, to get it through the next two years.
But for credit markets to look kindly on the company as debt maturities approach in 2020, Neiman's also needs to show some growth in sales and operating income, some evidence of a turnaround.
Fitch found it relevant to take on the onerous task of analyzing whether the company is worth more broken up: The company is worth more as a going concern ($2.7 billion) than the value of its assets ($2 billion) if liquidated.
Since Neiman's owes lenders $4.89 billion, that means Ares and the Canadian pension fund have already seen a sizable chunk of their equity evaporate. Those numbers make it unlikely that the retailer will be sold without a debt restructuring. The company tried to sell itself last year, but there were no takers.
The better it performs over the next 18 months, the more options it will have. Any restructuring will happen way in advance of October 2020, when a $2.8 billion term loan comes due.
What are Neiman's options? Here's how other companies in a similar situation with highly leveraged buyout debt have proceeded. All three examples are companies that have also hired Lazard, which declined to be interviewed for this story.
Once a high-flying specialty apparel retailer, J.Crew recently gave itself a short fix, or some "runway" as they say on Wall Street. It's still trying to fashion a turnaround. The company entered into a distressed debt exchange, but its capital structure is still unsustainable, according to Fitch. In July, J. Crew exchanged its $567 million of senior notes due in 2019 for a mix of $250 million in secured notes due in 2021 plus preferred and common equity. It still has $1.7 billion due in 2021.
Toys R Us
Last September, Toys R Us rehired a Lazard managing director in its debt restructuring practice to be its senior finance director. The same day, the only big box category killer in the toy business left standing ended up filing for bankruptcy. The move had been rumored, but taking the step before Christmas was a surprise to the industry. Toys R Us is in the process of closing about 180 stores, but it's expected to come out of bankruptcy. Toy makers are happy about that, but creditors are investigating the complex private equity fees and dividends. Toys R Us was purchased for $6.6 billion in 2005 and entered bankruptcy with $5.3 billion, unchanged from when it was taken private in that leveraged buyout by Bain Capital and KKR & Co. and Vornado Realty Trust.
Little girls and tweens love Claire's, which sells low-cost jewelry and accessories. It's a strong brand, but it's reliant on mall traffic, which doesn't bode well for a chain that's all about impulse shopping. It has seen declining results, and its debt load is its biggest challenge. A restructuring of its balance sheet "is imminent," according to Fitch. In late 2016, it entered into a distressed debt exchange and pushed out some maturities much like J. Crew. But now it's facing $1.5 billion in debt that's due this time next year, too close for flexibility. It hired Lazard in January.
Staff Writer Cheryl Hall contributed to this report.