Tuesday morning the Neiman Marcus Group reported another quarter of disappointing financial results and announced that it was going to “explore strategic alternatives.”
To be sure, some of Neiman’s problems are idiosyncratic, largely owing to a botched systems implementation and a now crushing debt load taken on in a 2013 private equity buyout. Yet the brand’s continuing struggles also underscore how luxury retail has hit the wall and how it now seems increasingly likely that the storied company may need to run into the arms of yet another owner.
Recent reports have suggested that the Hudson’s Bay Company was hot on the trail of Macy’s. Yet to many, the notion that HBC would acquire a badly wounded company several times its size, seemed a bit crazy. But the rationale for HBC–the owner of Saks Fifth Avenue and Gilt–to acquire Neiman’s seems, at least at face value, more strategically sound and (perhaps) more easily financed.
When I worked for Neiman Marcus as the head of strategy and corporate marketing we took a hard look at acquiring Saks. Years later, many of the pros and cons of combining the #1 and #2 luxury department stores remain the same.
The Case For
It seems increasingly obvious that the luxury department store sector is quite mature. While e-commerce is growing (now representing 31% of Neiman’s total revenues), most of that is now merely channel shift. Moreover, there are virtually no new full-line store opportunities for either Saks or Neiman’s, and the jury remains out whether or not US brands can find a meaningful number of store openings outside their home markets. Shifting demographics also do not bode well for long-term sector growth.
Faced with this reality, consolidation makes a lot of sense. If Saks were to merge with Neiman’s there would be considerable cost savings from combining many areas of operations. Rationalization of the supply chain would yield material savings as well. Managing the two brands as a cohesive portfolio would allow for optimization of marketing spending and promotional activity. There might even be some benefits from combining buying power to extract greater margins from vendors. Less tangible, but potentially meaningful, is the ability to cascade best practices from each organization.
The more interesting benefits could come from addressing store overlaps. As the market matures and more sales move online, there will be a growing number of trade areas (and specific mall locations) where Saks and Neiman’s going head-to-head only waters down the profitability of each respective location. Selectively closing stores and redeploying that real estate could drive up the remaining locations’ profitability dramatically, while unlocking the underlying real estate value of certain locations. All of which certainly plays into Richard Baker’s (HBC’s Chairman) strengths.
The Case Against
By far the most challenging element of any buyout of Neiman’s by HBC (or by anyone for that matter) would be the price and the related financing. Neiman’s was sold in 2013 for $6 billion dollars and still carries about $5 billion in debt. Since the buyout the company’s EBITDA has gone south, with no prospect for an imminent major turnaround. Given the maturity of the sector and the company’s recent weak operating performance, it’s hard to see why anyone would pay the sort of multiple that would make the current equity and/or debt owners whole.
Unless the real estate value can be unlocked in a transformative way, the only rationale for a merger hinges on the ability to generate operational efficiencies and optimize trade area by trade area market performance. With regard to the former, this isn’t trivial. The Saks and Neiman’s cultures are very different. To say one is very New York and the other is very Texas merely hints at the challenges. It’s easy to sketch out the synergies on paper. Making them actually happen is another thing entirely.
With regard to the latter, the fact is that Saks and Neiman’s are very similar concepts (though Neiman’s historically has been operated far better). When I was at Neiman’s we struggled with how we would operate two virtually identical brands often operating in the same mall–or in places like San Francisco, Beverly Hills, Boston and Chicago–just down the street. Even if we could get out of a lease (or sell the store), would closing a shared location actually be accretive to earnings? If we continued to go head-to-head could we shift the positioning of each brand enough to actually grow market share and profits. Ultimately, other issues trumped this particular concern, but this issue isn’t trivial either and the degree to which it is important mostly comes back to the ultimate price to get a deal done.
Without access to proprietary data it’s impossible to completely assess the likelihood of an HBC/Neiman’s deal. But it seems increasingly likely that something dramatic needs to happen with Neiman’s capital structure and it’s difficult to imagine how another leveraged buyout gets done with private equity sponsors. And it’s hard to see another strategic buyer that makes much sense. More and more, HBC looks like the only game in town.
A version of this story appeared at Forbes, where I am a retail contributor. You can check out more of my posts here.