June 22, 2009
Neiman Marcus: When is 'less bad' good?
When is "less bad" actually good? It would appear that this is the case with Neiman Marcus. The company
on June 10 announced that EBITDA and same-store sales during the third quarter were down 48% and 25%
from the previous year. One might expect that performance like this would send Neiman Marcus bank debt
and bonds lower. But the loan gained three points while the bonds rose five points.
The reason is that expectations for Neiman Marcus this quarter were so negative that investors were happy
that the results were not as bad as feared.
However, despite these “good” results, the company faces many challenges. The following analysis covers
these challenges and presents various enterprise valuation scenarios, given the company’s current operating
environment, which is very different today than it was in years past.
Key financial data from the company's third quarter:
Sales 3Q
GPM 3Q
EBITDA 3Q
LTM adj. EBITDA
5/2/09
$810.1M
36.4%
$105.3M
$354.2M
Sr. debt: $0 o/s on ABL $1,625M
Total debt
$2,963.3M
LTM interest expense $237.1M
4/26/08
$1,062.2M
40%
$202M
$696.44M
Change
-23.7%
-48.0%
-49.1%
$1,625M
$2,946.1M
$246.1M
Sr. debt/EBITDA
4.6
2.3
Total debt/EBITDA
8.4
4.2
EBITDA/interest exp. 1.5
2.8
Fiscal years ended
Aug. 2, 2008 July 28, 2007 July 29, 2006
EBITDA
$687M
$686M
$515M
Store Count
65
60
56
Source: Standard & Poor's LCD
A closer review of the company’s 10-Q and earnings call reveals the following:
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During the third quarter and May 2009, same-store sales were down 25.1% and 23.3%. Key
competitors such as Saks were down 27.6% and 26.6%, while Nordstrom was down 13.2% and
13.1%. Neiman’s sales per square foot in the third quarter decreased to $511, from $639 in 3Q
2008.
The company announced a change in its merchandising strategy in that it will attempt to stock
more mid-priced merchandise to attract more cost-conscious customers. However, the company
was quick to point out that it is not vacating the high fashion/luxury goods price points.
LCD Distressed Issuer Report – Neiman Marcus
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Page 2 of 3
Inventory in total was $866 million at May 2, versus $958.9 million a year earlier. The company
noted that it has reduced new receipts of inventory by 25% to reflect the decrease in demand.
However, it also noted that, on a comparable basis, inventory declined 12.8%.
Gross margin declined due to higher net markdowns and promotional costs, and the deleveraging
of fixed buying and occupancy costs.
Capex was $81 million for the 39-week period ended May 2, versus $133 million a year ago.
Capex for 2010 is expected to be $82.5 million on a gross basis.
Fixed SG&A and buying and occupancy costs decreased by $30 million in 3Q 2009 and have
declined by $70 million YTD. Neiman Marcus estimates that 25% of SG&A is variable.
Key issues
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Leverage: The company is now highly levered, at over 8x total debt. With the recession and with
EBITDA decreasing 49% in one year, the company’s leverage has increased from 4.2x in 2008 to
8.4x in 2009. Given the economy and the availability of consumer credit, it may be a long time
before gross margins and EBITDA return to 2007-08 levels.
Minimal historical cashflow: Over the past three years the company has generated a minimal
amount of cashflow, versus almost $3 billion in debt. However, the key point here is that even
with $400 million in EBITDA (versus $354 million for the LTM period ended May 2009),
cashflow would be approximately $110 million assuming: 1) $210 million in interest; 2) $70
million in Capex; and 3) $10 million cash taxes.
Competition: There are numerous competitors in this industry, such as Saks, Nordstrom,
Bloomingdales and the retail stores of luxury goods designers. In addition, as Neiman introduces
mid-priced merchandise, there are additional competitors that include department stores and
specialty chains.
Strong brand name: The Neiman Marcus and Bergdorf Goodman brand names are well known in
the luxury goods marketplace. However, it remains to be seen what, if any, impact the company’s
new mid-price strategy will have on the brand. For example, core affluent customers could
become disillusioned and shop elsewhere (designers’ private label stores) if the brand loses its
high-quality image.
Strong customer base: There will always be affluent customers who will shop at Neiman Marcus
(as long as the brand is not diminished) and who will desire the latest fashions. However, the
customer base includes middle class customers who purchased items at full price only
occasionally (by using credit cards and home equity lines of credit, for example) who might not be
able to return even when the economy recovers. These customers, which we refer to as
incremental customers, are the ones that Neiman hopes to win back with the mid-priced line. But
it remains to seen if this strategy will be successful. If not, it may be difficult to increase sales for
the longer term.
Liquidity: The company’s liquidity is good, as it has over $500 million in ABL availability.
Market Pricing and Valuation
Market-view
As LCD reported, the company’s covenant-lite term loan (L+200) gained to bracket 80, from 76.5/77.25
before the earnings announcement. In the bond market, the PIK toggle notes due 2015 and the 10.375%
notes due 2015 rose five points, to 65/67, sources said. However, last week both the loans and the bonds
traded off of those highs in light of the overall decline in the market.
Valuation
The following presents a DCF valuation and the related recovery expectations for each tranche of debt
under bear/mid/bull scenarios. For purposes of this analysis, LCDD assumes that EBITDA does not get
substantially worse from the LTM period for the bear case and that only under the bull case does EBITDA
eventually approach the previous high for EBITDA, which was $686 million in 2007. Essentially, we are
assuming that the core customer is stable, which limits the downside, but that competition, availability of
Copyright 2009 Standard & Poor’s, a division of The McGraw-Hill Companies, Inc.
LCD Distressed Issuer Report – Neiman Marcus
Page 3 of 3
credit, cost conscious incremental customers and merchandising/inventory issues limit the upside from the
current LTM. This table details key assumptions:
Projected Highest EBITDA Highest Cost of
EV
09 EBITDA Achieved
Capex capital
Bear $300M
$415M
$100M 12%
$1,873M
Mid 340
535
90
12
2,489
Bull 350
650
85
12
3,022
Recovery
Amount Bear Mid Bull
ABL (currently unfunded) $100M Par Par Par
TL: L+225
1,625 Par Par Par
2028 sr debs.
121 Par Par Par
Sr PIK notes: 9%/9.75%
717
90% Par
Sr sub: 10.375%
500
92%
Per these numbers, it appears that the senior debt issues are covered by the enterprise value even in the bear
scenario. The unsecured tranches might also be covered if the more bullish scenarios are realized. In both
cases, EBITDA does not have to reach 2007 levels over the next few years for the bonds to realize
substantial value. So, while the company might struggle to increase sales and EBITDA, it does not have to
increase them to 2007 levels quickly for the loans and bonds to realize value.
Please note that it is assumed here that the ABL is funded only slightly higher than where it was funded at
the end of 1Q 2009. If the company was faced with a liquidity issue – that is not assumed for the purposes
of this analysis – the outstanding ABL could be significantly higher, which would obviously negatively
impact the recovery expectation of the unsecured debt. As noted, the company has over $500 million in
availability.
Conclusion
The company had a difficult quarter and is faced with several challenges, including leverage, cashflow and
merchandising. However, even under the bear scenario, the bank debt is well covered, and under the mid
and bull cases the unsecured debt is covered, as well. Basically, while it might take several years for
EBITDA to approach the peak EBITDA of 2007, loan and bond investors do not necessarily need that to
occur to be covered by the enterprise value. – Mike Audino
For more information on LCDD or LCD News or Research contact Marc Auerbach at 212 438-2703.
Copyright 2009 Standard & Poor’s, a division of The McGraw-Hill Companies, Inc.