Don’t Blame Coronavirus, Here’s Why Neiman Marcus Is Going Bankrupt

The next shoe is purportedly set to drop at Neiman Marcus.

The Dallas-based high-end department store, which operates its namesake banner, as well as Last Call, MyTheresa and Bergdorf Goodman, is years removed from its glory days and waist-deep in debt.

Now, as it is said to be days away from pulling the trigger on a Chapter 11 filing, some reports have suggested such a move could be precipitated by the coronavirus crisis, which has decimated retail and the larger global economy.

While the pandemic could very well be the straw to break the camel’s back, Neiman Marcus’ downfall has been years in the making — and likely started when it took on a hefty debt load via a private equity buyout in 2013, noted Eric Snyder, partner at New York-based law firm Wilk Auslander and chairman of the firm’s bankruptcy department. (Neiman Marcus was saddled with about $6 billion in debt after the 2013 buyout by Ares Management and the Canada Pension Plan Investment Board.)

“We know retail [generally] has been challenged, but luxury brands ha­ve been doing well — there’s no issue with luxury,” said Snyder of Neiman Marcus, whose debt load currently sits at about $4 billion. “The problem is the debt. You can’t do much of anything with that much debt. In retail, especially in New York, where Bergdorf Goodman is, the profit margins are too small and the rent is too high. So if you’re [over-levered], you just can’t [win].”

Around 2016, Neiman Marcus made headlines when it reported a blockbuster 80% drop in profits for Q3, a decline that then-CEO Karen Katz blamed on a confluence of factors, including persistently low oil prices, which she said hindered spending for the stores’ high-end clientele, whose earnings are attached to the Texas energy industry. Katz also blamed election-year anxiety and currency fluctuations for the retailer’s struggles.

Still, with those factors in the rearview (and CEO Katz out of the picture), the company’s issues have been unrelenting and it has faced numerous other setbacks in its quest for profitability.

In August 2018, Neiman Marcus announced a four-year transformation plan that entailed investing in omnichannel and supply chain technology. Last year, the company even embraced the growing resale trend by taking a minority stake in consignment company Fashionphile.

And in 2019, it managed to reach a deal with creditors to rework some debt and avoid a bankruptcy filing at the time. It has looked into strategies for raising capital, including the potential sale or IPO of its MyTheresa e-commerce site.

The company revealed in March it would wind down its Last Call discount business, a perhaps surprising move since off-price has been one of the retail sector’s few bright spots in recent years. The department store chain said it would close the majority of its Last Call stores, leading to 750 lost jobs. The company noted that the cuts did not represent a workforce reduction because Last Call workers may be transferred to other positions within the Neiman Marcus group, and those who are laid off will be eligible for severance and outplacement services.

Now, with the escalating coronavirus pandemic forcing the company to shutter its Neiman, Last Call and Bergdorf Goodman banners over the past few weeks, the company is once again teetering, and insiders say its odds for a successful rebound — without Chapter 11 protection — are waning.

Last week, the firm reportedly skipped out on a bond payment that had come due and received a letter from hedge fund Marble Ridge Capital LP, the bondholder it owes, which warned Neiman Marcus that it would take necessary actions to protect its rights. (The retailer’s reported decision not to pay the interest loan puts it in default with its creditors.)

That, noted Snyder, is a sign that a bankruptcy filing and restructuring may be necessary to give the company a chance to save itself.

“You can’t begin to default on payments for two reasons: It’s [bad] for the company [itself], and then other companies will become [aware that] you default on your payments,” he explained. “You have to confront what’s in front of you.”

And in some ways, now may be as good a time as ever for troubled companies to tap the bankruptcy route to rein in debt.

James Thomson, partner with Buy Box Experts and former business head of Amazon Services, told FN early this month that he expects the coronavirus to speed up the restructuring process for such firms.

“If I’m an executive of a retailer that’s slowly dying, in some ways this is a blessing in disguise. It allows me to make big cuts quickly,” he explained. “And if I have to close half my stores or have to lay off, and keep laid off, more than half my employees, I can do that without there being a lot of negative PR [because of the coronavirus threat].”

At the same time, noted Snyder, creditors could be more likely to work out a deal with a bankrupt firm as other options like liquidation (as seen with Modell’s) are near impossible to execute amid the pandemic.

“The market is completely frozen — supply and demand are completely frozen,” he explained. “Neiman Marcus is not going to be able to liquidate when no stores are open. That means, if they file right now, they’ll have an agreement with creditors, debtor-in-possession financing and everything they need to stay in business for a couple of months until things are finalized.”

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