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Analysis: Neiman Marcus’ debt burden ‘completely unsustainable’ for firm of its scale


Neil Saunders, CEO of Conlumino, comments on Neiman Marcus’ first quarter results below:

"After ending its prior fiscal on a low note, Neiman Marcus has opened its new year with an even worse set of figures. Total revenue declined by 7.4%, while comparable sales slipped by 8.0%. Both figures are sequentially worse than the prior quarter and come off the back of a very weak set of numbers in the previous year – particularly so for comparable sales which fell by 5.6% in first quarter of last fiscal year.

The serious weakness on the topline did nothing to help the bottom line numbers where operating profit was compressed by almost 54%, and net losses more than doubled to $23.5 million from $10.5 million in the prior year. This is a highly unsatisfactory position for a company with $4.4 billion of long term debt, and almost $5 billion of debt when short term credit facilities are included.

In our view, such a debt burden is completely unsustainable for a company of Neiman Marcus’ scale. Indeed, even if all interest was frozen and the entirety of operating profit was to be directed to the purpose of paying down the debt, it would take well over 40 years to remove it from the balance sheet.

Such a position underlines the fragile nature of the company’s finances, something that hits home when the $72 million quarterly interest payments are appreciated. This acts as a major barrier to the company being sold and makes an IPO far less attractive. It also guarantees that without a significant rise in sales, the company will remain loss making.

Generating that increase in sales will be extremely challenging given that there are host of pressures acting as a brake on retail growth. Weaker traffic in malls and weaker tourist spending are foremost among these, and both are likely to persist well into next year. The rise of direct selling by luxury brands is also a negative trend for Neiman Marcus and, longer term, has the potential to undermine its reason for existence as a destination for high-end product.

A dip in customer traffic and spend from affluent, but not highly affluent, shoppers is also a factor in diluting sales. While not core customers, these consumers form an important part of Neiman Marcus’ shopper base and are now much more reluctant to spend. Against this trend Neiman Marcus has become a rather expensive niche player; in our view if it does not remedy this it will become an increasingly irrelevant player as well.

In many ways, all of this is a shame. Neiman Marcus invests a lot in its stores, in customer service, and in its omnichannel offer. However, these things amount to very little if consumers are not willing to bear the prices charged, or can find the product elsewhere. In short the company now needs to rebuild its relevance."
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