Neiman Marcus is weighing all of its options to ensure its “financial strength,” according to a statement by the luxury retailer, as it grapples with the cost of doing business during a pandemic.
The statement from the company was in response to whether it is considering a bankruptcy filing. The financially strapped department store chain is reportedly in discussions with lenders about filing for bankruptcy, according to Bloomberg News.
“Most businesses today are facing some degree of disruption from the unprecedented global economic environment resulting from the COVID-19 pandemic,” the company said.
Neiman Marcus made the decision to indefinitely close its stores, which includes Bergdorf Goodman in New York, in response to the coronavirus outbreak, and the move couldn’t have come at a worse time.
Already distressed, Neiman Marcus has been marked since early 2017 by rating agencies as having a high probability of default. If the company ends up filing, it could be one of the first retail casualties of the social distancing efforts intended to contain the spread of the coronavirus.
“We are evaluating all courses of action to preserve our financial strength so that we may continue serving our customers and associates, and being a great partner to luxury brands globally,” the company added. “Our priority has been, and will always be, to ensure stability for our associates and brand partners.”
Neiman Marcus successfully extended the maturity date on its term loan last year, along with issuing new debt and completing an exchange offer for its senior unsecured notes, giving the retailer more time to turn around the business, according to ratings agency Moody’s.
But the company continued to carry what Moody’s has characterized as an unsustainable debt load, which is about $4.3 billion, as well as negative cash flow. Neiman Marcus had revenue of $4.7 billion for the 12 months ended April 27, 2019.
That debt was the result of a leveraged buyout in 2013 by private equity firms Ares Management and the Canada Pension Plan Investment Board for about $6 billion.
It doesn’t help that the retailer closed its stores heading into what should be its peak full-price selling season, said Steven Dennis, president of SageBerry Consulting and a former Neiman Marcus executive.
Even with about a third of its revenue generated online, a positive for the chain, luxury purchases are something that can be deferred, Dennis noted, adding that the luxury market is also highly correlated to the stock market.
To add to the company’s woes, event cancellations ranging from weddings to galas and graduations is also cutting into sales, as customers will no longer be looking to buy clothing for special occasions, Dennis said.
Neiman Marcus has a “distinctive” brand and a “reason for being,” he said, in addition to being well-operated. But Dennis, who is the author of the upcoming book Remarkable Retail, said the excessive debt on its balance sheet combined with the fact it is already a mature business created a difficult situation for the retailer to extricate itself from.
“Irrespective of the crisis, [Neiman Marcus] wasn’t going to grow themselves out of that debt,” Dennis said.
Since luxury businesses depend on attributes such as a beautiful store environment, free valet parking and customer service, it’s difficult for them to cut costs without damaging the business, he noted.
Neiman Marcus was already taking steps to cut costs and streamline the business, announcing on March 11 that it would focus more on full-price selling by closing most of its off-price Last Call stores by its fiscal first quarter in 2021. The company also initiated the sale process of two of its Texas distribution centers.