Neiman Marcus kicks the can down the road. So now what? — Steve Dennis
Last week brought two big pieces of Neiman Marcus news. The day started with the announcement that the company had successfully extended the maturities on some $4.6 billion in debt. Then, a few hours later, Neiman’s reported quarterly results, which were concerning. After six consecutive quarters of growth, comparable sales were down 1.5%, and the luxury retailer posted a net loss of $31.2 million for the quarter. This compares with a net loss of $19.9 million a year earlier.
Restructuring the company’s debt provides important breathing room. When the company went through its second private-equity-led leveraged buyout in 2013 (note: I was the head of strategy and multichannel marketing during the first, in 2005), the new owners clearly overpaid and saddled the company with interest payments that constrain the company’s ability to execute a long overdue transformation. In recent months, as maturities loomed, Neiman’s tepid performance and crushing debt load made it impossible to go public or get bought out at a price that wouldn’t devastate current equity and bondholders’ interests.
Now that the struggling purveyor of finer things has bought some time, it’s reasonable to ask: What needs to be materially different in three years or so when the bell will toll once again? Well, one thing that seems apparent is the same set of exit strategies will likely be on the table. While it’s impossible to predict market conditions, I find it hard to imagine that the timing for a public offering will be a heck of a lot better than it is right now, nor is it likely that a totally new set of acquirers will emerge willing to pay a hefty price for what will still be a highly leveraged company. That means, barring a miracle, the company will have to grow far faster than it has in some time and be meaningfully more profitable. That’s a tall order.
A mature brand
When I left the Neiman Marcus Group in 2008 (luckily, as it turns out, right before the financial crisis), it was becoming clear that the brand was rapidly maturing. There were only a handful of new store opportunities on the horizon and, while the e-commerce business was growing rapidly, it was clear that much of that growth was increasingly a transfer from physical stores to online, not actually incremental. We had a couple of new concept ideas in the works, but they were unproven. Overall customer growth was modest at best. In the intervening decade or so not much has changed, except that one of the new concepts (Cusp) was successfully absorbed into the mall format and the once promising off-price strategy ended up being massively bungled. Only five new full-line stores have been added (the most recent at New York City’s Hudson Yards). E-commerce now accounts for a segment leading 30%, but growth has slowed to well below industry averages. Overall company revenues have barely kept up with inflation and margins have been a mixed bag.
Innovating to parity
While late getting started, and hitting many unfortunate speed bumps along the way, Neiman’s did finally complete its NMG One systems integration, which allows for better omnichannel (what I prefer to call “Harmonized Retail”) execution. In press comments, newish CEO Geoffroy Van Raemdonck is now also making a big deal of the company becoming “data driven,” which is pretty rich given that Neiman’s has been among the most data-driven retailers for many, many years. If they are doing anything really new it certainly is not yet showing up in the results. Neiman’s is also trying a number of new things, including “experiential” elements in their new Hudson Yards store and an investment in luxury reseller Fashionphile-but none of these feel like real game-changers. Most of what’s being done is pretty much becoming table stakes for much of retail.
Where’s the growth?
While I do not have access to Neiman’s internal data, I’m going to hazard an educated guess that customer counts and average customer transactions per year have, for all intents and purposes, gone nowhere for years. This is what I have often referred to as luxury retail’s dirty little secret. To the extent many luxury brands have seen comparable sales growth they have largely done it through raising average unit retail prices. For Neiman’s, with virtually no new stores on the horizon and a rapidly decelerating e-commerce segment, where’s the core business growth going to come from, particularly in an era where luxury is being redefined and up-and-coming generations tend to value experiences over owning material things?
Of course, in theory, Neiman’s could come up with new, material areas of incremental growth through new concepts, acquisitions, strategic alliances and/or international expansion. Those avenues have been pursued by prior leadership teams and it’s definitely easier said than done.
Under any scenario, it seems clear that if Neiman’s is going to accelerate its sales growth and materially expand its profits to put it in a meaningfully better strategic and capital markets position than it finds itself in today, the storied retailer is going to have to do something it hasn’t done so well in recent memory: grow a lot more customers and sell a fair amount of more stuff (or services) to each of them. That’s going to take more than doing the same old things a wee bit better. And it comes at a time when the business has poor momentum.
You say you want a revolution? Well, we’d all love to see the plan.
A version of this story appeared at Forbes, where I am a retail contributor. You can check out more of my posts here.
Next week I’ll be doing a keynote at RetailX in Chicago. If you are around please say “hi.”
Originally published at https://stevenpdennis.com on June 17, 2019.