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Consensus Advisors: Should Barneys Survive?

By Michael A. O'Hara

February 21, 2012

Through a special arrangement, presented here for discussion is a summary of a current article from Consensus Advisors, a boutique investment and advisory firm specializing in the retail industry.

While rumors of Barneys' imminent restructuring began swirling in early February, it was not the first time such chatter made the rounds in recent years. When we think about restructuring strategies and tactics in retail businesses, we start with the question: does the customer still care about this business model?

The answer to this question helps determine whether to reorganize a business for the long-term benefit of its stakeholders or liquidate its assets in the most efficient manner so as to maximize immediate recoveries to the business's creditors.

U.S. bankruptcy and insolvency policies have typically been biased in favor of resuscitating troubled companies, as opposed to marshaling assets for liquidation. Notwithstanding this policy, the majority of retailer bankruptcies in recent years have resulted in liquidations instead of reorganizations, including companies as Circuit City, Linens 'n Things, Bombay Company, KB Toys and Whitehall Jewelers. Some of these liquidated retailers (e.g., Circuit City, Linens 'n Things and KB Toys) were up against bigger, less leveraged and qualitatively better operators. Others, like Whitehall, were not sufficiently differentiated from their larger, better-known peers.

Barneys, on the other hand, is differentiated from its peers. While its luxury department store peers rely heavily on large, established luxury goods houses, Barneys is comfortable leaning on the next generation of fashion designers. This is in part due to volume. Estimated at approximately $700 million, Barneys' annual revenues are dwarfed by Nordstrom ($10.5 billion), Neiman Marcus ($4.5 billion) and Saks ($3 billion). Small designers may have difficulty providing the quantities that the larger chains want or need. It may also have to do with Barneys' boutique nature. Barneys operates nine larger Barneys New York stores — including flagships in New York City, Beverly Hills, Chicago and San Francisco — as well as 17 smaller CO-OP stores even more focused on young and emerging designers.

Barneys certainly has its competition, but they tend to be smaller footprint chains like Intermix and Scoop. Against this crowd, Barneys is the 800-pound gorilla.

Barneys has carved out a niche as the largest boutique of hip fashion for affluent urbanites. Stakeholders and professionals will have to forecast the retailer's sustainable level of cash flow in this niche to assess how much debt can be recovered. But we beleive the parties should be able to move quickly beyond the question of whether there is a unique, sustainable consumer base that still cares if Barneys exists.

Discussion Questions

Discussion Questions: What factors should guide whether a debt-laden retailer should reorganize or liquidate? What appear to be the strengths and weaknesses of Barneys' business model?

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Comments:

Barney's has enjoyed strong 2011 sales but can't get past the debt load. They've already gone BK once and rumors are it will happen again.

Businesses exist to make a profit. If they can't do that, does a retail store just become a tax shelter for investors?

And if so, is that a compelling reason to exist in a crowded market subject to online pricing pressures? And how many other retailers out there are trying to put a public face of success on the dirty secret they can't make money doing what they are doing while using Wall Street dollars in some game of musical chairs hoping they will outlast the competition? I would suggest more than one.

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Bob Phibbs, President/CEO, The Retail Doctor & Associates

Barneys has re-invented itself many times since I was a kid. It wasn't always edgy and hip (I think it was originally called "Barney's Boys Town," actually). However, it sounds like what should have stayed as one large store (Bergdorf comes to mind -- 2 stores across the street from each other, but you get the point) has become a chain...and maybe that was the mistake.

I would argue that "hip fashion boutique" and "chain" are far more often oxymorons than not. The same sort of thing happened to other retailers as well. Bigger is just not always better. Filene's Basement comes to mind, but I know there were more.

So what would I do if I were the creditor/owner? Liquidate all but a single store and start all over again.

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Paula Rosenblum, Managing Partner, RSR Research

The rules governing bankruptcy, restructuring, liquidation and reorganization are what they are.

Each case is unique and the "right" approach depends on a series of complex variables from EBITA calculations, to who is holding the debt, to the value of the assets, willingness of landlords to renegotiate leases, etc., etc.

In other words -- within the strictures of a highly developed procedural orthodoxy -- there really isn't a cookie cutter answer.

Lots of people want to wave magic wands at these situations but having been close to a good number of them let me say it's dangerous to generalize without specific facts.

As for Barneys, it has a brand, a following and some nice locations. On the flip side, it is apparently consistently challenged when it comes to delivering results.

It may be that, in the end, it is neither quite fish nor fowl enough -- too big to be nimble and too small to be competitive. Without looking at the balance sheet, it's silly to guess.

In general, however, one rule seems to hold true. In an increasing number of these cases, traditional restructuring is not enough to save a company. It needs to be rethought as well as restructured.

And that, is a far, far more difficult task.

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Ryan Mathews, Founder, ceo, Black Monk Consulting

Barneys will have to be the destination for shoppers in order to survive. Maybe they have to decide who their target market is, and work toward getting them in the door. Expansion is not the answer here. Consolidation and moving forward profitably should be.

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Ed Rosenbaum, CEO, The Customer Service Rainmaker, Rainmaker Solutions

One weakness is that Barneys has been passed around to companies that couldn't help but treat it as an afterthought. Jones Group's history as a wholesale powerhouse made it a dubious choice for a parent. Jones is still trying to figure out its future and was certainly not equipped to drive Barneys' upscale brand destiny back in 2004. Dubai-based Istithmar World's diverse portfolio of holdings and inherently at-a-distance perspective isn't doing Barneys any favors either. Barneys is a boutique concept that has been treated as a scalable commodity.

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Carol Spieckerman, President, newmarketbuilders

The reorg vs. liquidate question hinges on why a business is losing money. Is it "really" losing money -- i.e. at the operating income level -- or is it only losing due to outside factors (debt service, litigation, etc.)? As for Barneys in particular, I'm not privy to their financials, so I don't know which it is; but I think much of their problem is that they are -- or maybe it's "were" -- a fad. "Boutique of hip fashion for affluent urbanites" is a business model that only works until another one comes along.

'notcom'

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