Photos: Neiman Marcus; Saks Fifth Avenue
Does a Neiman Marcus and Saks hookup make sense?
Mudrick Capital Management, a hedge fund and creditor to Neiman Marcus, has sent a letter to the department store retailer’s board asking it to explore a sale to or merger with Saks Fifth Avenue rather than reorganize under Chapter 11 bankruptcy.
Neiman Marcus, which has negotiated a plan with some of its creditors to shed roughly $4 billion of its approximately $5 billion in debt under a Chapter 11 application filed last week, has been weakened in recent months as extended store closures created by the novel coronavirus outbreak have hit it hard in the top and bottom lines.
Mudrick, which holds a portion of Neiman Marcus’ debt, believes that a combination of the two luxury chains would create between $2.8 billion and $4.7 billion of value for investors and avert the need to reorganize. Neiman Marcus would close at least 22 locations that currently overlap with stores operated by Saks, the theory being that the closures would eliminate cannibalization of sales between the two chains while reducing real estate, employee and other business-related expenses.
This is not the first time that a deal between Neiman Marcus and Saks has been bandied about. In March 2017, Saks’ parent, Hudson’s Bay Company (HBC), explored a deal to acquire Neiman Marcus, which was coming off six straight quarters of declining sales and struggling under its debt load.
At the time some questioned why a combination of the two chains, despite their iconic names, would make sense considering the challenges the businesses faced in reaching younger consumers and growing revenues while continuing to labor under unsustainable debt levels.
HBC was taken private earlier this year by an investors group led by CEO Richard Baker. The $2 billion deal, approved by investors in late February, happened just as the department store operator found itself dealing with the financial consequences of the novel coronavirus pandemic.
Representatives for HBC and Neiman Marcus declined to comment to Reuters, which initially broke the report of Mudrick’s letter.
Discussion Questions
DISCUSSION QUESTIONS: Does a Neiman Marcus/Saks agreement make sense if it means one or both parties avoid reorganizing under bankruptcy protection? Do you expect to see more consolidation in the industry as retailers struggle with the financial hits taken as a result of the coronavirus outbreak?
Poll
BrainTrust
Art Suriano
Chief Executive Officer, The TSi Company
Neil Saunders
Managing Director, GlobalData
All retailers have to finally address the core problem: too many products presented in too many locations chasing a finite set of consumers who want what they have to offer in terms of service and selection and at prices that can sustain the organization. This merger makes a lot of sense. Yes, both own Boomers and not Millennials but there is still value in the experience both offer. Closing stores catering to the same market that are too close to each other also makes sense. As to design, I would tip my hat to Saks and their bold initiatives to reinvent the flagship in NYC as a way forward to attract younger consumers.
Only if they both want to survive. I always thought it was a shame to have lost all the individual personalities of the many regional department stores. But I’m not sure the math would have worked if they all had stayed independent. Isn’t it possible to both consolidate AND regionalize? My Macy’s was tiny step in the right direction, but it never really got traction.
You are starting to see that in food delivery, so this is not a stretch, however the problem still will be there – people are not spending on clothing, jewelry, etc. and the old on-hand customer service touches both are known for will no longer work in our current condition. This will come back when there is a solution, but can both hang on until then? Definitely risky…
The debt is the primary problem for Neiman Marcus. It is absurdly high and crippling. Come what may it needs to be addressed and restructured. That may be painful or uncomfortable for creditors but that’s tough; lending is a risk, and the risk with Neiman Marcus was as plain as day!
Once the debt is sorted, some kind of merger with Saks is a possibility. The market doesn’t need two luxury department stores and so consolidation would, in many ways, allow this reduced demand to be addressed. There would be a lot of things to work through – not least branding and positioning – but the idea has some merit.
Definitely agree about the debt — how could anyone not? But not about the “need” for two or more stores: (most) all markets need multiple players. Competition is the essence of a functioning marketplace. What it doesn’t need, indeed can’t support, is multiple players each expecting to earn monopoly profits.
If the argument is luxury simply can’t support the department store format anymore, then the market doesn’t even need one … a merger would seem to be so much wasted effort.
The reason there isn’t a need for two luxury department stores in most markets is that competition has increased. A lot of the successful malls now have luxury wings that feature the stores of the major fashion houses. On top of that, online luxury sales direct from the brands have risen. Given that, you don’t then need two further luxury department stores — featuring many of the same brands and products.
A merger between Saks and Neiman Marcus definitely makes sense if the two companies can make the business work. Department stores are struggling and things are and will continue to be worse during this shutdown period. A merger whereby they can reduce the amount of overhead with fewer stores, fewer employees, and fewer operating expenses can help these two companies become one more robust company. Of course the problem with these deals always comes down to who runs the new company and how to run it. If we find a CEO at the helm only interested in short-term success so he or she can move on to the next job, then we’ll find a company run only on cutting costs and maintaining profit for the stockholders. That never works long-term and has destroyed many companies. If they do merge and find themselves a motivated CEO and executive team who genuinely care about reinventing the upscale department store business with a commitment to long-term success, then I see this is not only as the right thing to do but a brilliant strategy.
Given the similarities in their value propositions, overlapping physical store footprint, potential operating synergies and the need to take capacity out of the market to allow for reasonable financial returns, absolutely. And I say this having looked at this before as both an executive at Neiman’s and as a consultant.
The Mudrick analysis on store closings is overly simplistic and suggests more closings than would make sense–and there are plenty of integration issues–but for both brands to survive, much less thrive, a merger is almost certainly inevitable.
I’ll have a more detailed analysis up on Forbes later today.
Here’s my Forbes piece.
Maybe I missed it, but does the proposal involve keeping both nameplates alive? A new brand (like “Saks Neiman Marcus”)? Or simply a play for N-M sites? The answer to that question would help answer the bigger question of whether this is a viable move.
Meanwhile, Saks itself is struggling right now, although not to the degree of Neiman. The retail landscape has for many years been littered with the bones of weak stores who decided to merge (under a heavy debt load), so there is no guarantee of success here. Even the mighty Nordstrom is in a position where it plans to close over a dozen of its full-line stores this year.
Ricardo points out that NMG has more brand equity in some regions and markets, Saks in others. Maybe the answer is “one operation, two nameplates” (depending on the region) and where possible get rid of the overlapping real estate.
Today’s luxury retail apparel market just doesn’t support two competing brands, especially in the same regional markets. So yes, this merger does, on the surface, make sense if the financials and debt loads can be rationalized. I don’t see how closing 22 Neiman Marcus stores is the answer, however, as I suspect there are many metro areas where both brands exist today where Neiman Marcus has more brand equity and customers than Saks and vice versa. A proper analysis market by market would need to be done to see which brand would close its doors. Consolidation like this is likely going to increase as the pandemic lingers on and shows us ongoing repercussions to retail, even as stores open back up for business in the hopes that customers will come through their doors.
This is a plan for survival not a plan to move forward. The assets of Neiman Marcus are basically worthless in dollar terms. Saks can pick up the trash for pennies and get some return for that.
However, this combination doesn’t change the long term department store trends. They only have revenue generated by department stores and it is declining. They will not create new customers or grow revenue out of thin air.
In the short-term the combination may extend the death of this entity, but in the long-term the writing remains on the wall. Unless I was a private equity fund and could guarantee my returns going in, I would not personally touch this deal with any of my investments.
How do you figure the assets are basically zero? Going into the pandemic the business was generating over $400mm EBITDA. Love to see how you came to that estimate as I can easily get to over $3 billion.
Mergers tend not to work very well. Maybe this would work as a half a Neiman Marcus and a half a Saks — streamlined but not merged? I suspect that cost savings and capitalization needs will drive the merger, yes. It’s a hell of a time to try a merger. The luxury end of the market tends to be OK (as in not great, but not decimated) in a recession, as those customers seem to hang in there.
Well, I long argued for merger of Saks and L&T — tho admittedly a lot of that had to do with saving the heritage of the latter — and they were owned by the same people, so it couldn’t have been easier, and where did that go?
I’m not a fan of mergers unless I see some obvious advantage, e.g. geographic expansion, and I don’t see it here. Indeed any post that begins with the fated words “hedge funds” and then devolves into excited talk about creating value for investors — not a word about what advantage it offers customers — leaves me cold.
As for mergers in general: yes I think we’ll see a few, but this time around I think we’ll see a lot more outright liquidations.
The problem here, as already noted by Mr. Saunders, is the crushing debt load upon Neiman’s. Also, while not horrible, the luxury market is NOT what it used to be and as mentioned by several others, there may not be need for two near-by players in this arena. Having said all of that, as noted, the debt is crushing and must be sorted out, if possible.
If I were advising Mr. Baker, or HBC, I would advise not to even consider this until the debt is already sorted out through Chapter 11. As stated by Mr. Detroyer, Saks could more easily pick up locations much more economically if and when Neiman’s was to fail. Both companies enjoy fantastic reputations and brand value so there is no need to think in terms of one being better than the other, so acquisition or merger is not required by Saks.
If the two did merge, both nameplates should probably go forward, with an attempt for the two to maintain their own different culture and aesthetics. (Example: Macy’s ridding itself of all the acquired nameplates may not have been the best move, in retrospect.) Market review would need to be truthfully performed and the more productive nameplate should continue with closure of a nearby alternate, across the country. The maintained differences between the two would drive visits to “the other” when customers were in proximity of a different offering.
It will be interesting to watch this play out.
Let’s not confuse value realization for hedge funds with profitably operating a combination facing high debt levels, uncertainty around future consumer demand and timing, increased operating costs for physical stores, and changing supply chain networks. All these macro issues overlay the core merchandising decisions that have to be meticulously planned and flawlessly executed. For me this goes in the high risk, low reward quadrant.
The market is just not big enough or strong enough right now to support both these luxury retailers, so working together may be their only hope of staying afloat. There will definitely be further consolidation over the next few months as everyone tries to recover from the recent difficulties and decreased demand.